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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, 1996.
[ ] 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
-----------------------
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
An index of exhibits filed with this Form 10-K is located at page 41.
Total number of pages in this report: 44
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), 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 owning and leasing transportation equipment to be operated by and/or
leased to various shippers and transportation companies.
The Partnership was formed to engage in the business of owning and managing
a diversified pool of used and new transportation-related equipment and certain
other items of equipment. The Partnership's primary objectives are:
(i)to acquire a diversified portfolio of long-lived, low obsolescence,
high residual value equipment with the net proceeds of the initial partnership
offering, supplemented by debt financing if deemed appropriate by the General
Partner. The General Partner acquires the equipment at what it believes to be
below inherent values and to place the equipment on lease, or under other
contractual agreements with creditworthy lessees and operators of equipment;
(ii)to generate sufficient net operating cash flow from lease operations to
meet existing 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;
(iii) to selectively sell and purchase other equipment to add to the
Partnership's initial equipment portfolio. The General Partner sells equipment
when it believes that, due to market conditions, market prices for equipment
exceed inherent equipment values or expected future benefits from continued
ownership of a particular asset will not equal or exceed other equipment
investment opportunities. Proceeds from these sales, together with excess net
operating cash flow from operations that remain after cash distributions have
been made to the Partners, are used to acquire additional equipment throughout
the intended seven year reinvestment phase of the Partnership;
(iv)to preserve and protect the value of the portfolio through quality
management, maintaining diversity and constantly monitoring equipment markets.
The offering of the Units of the Partnership closed on May 11, 1989. 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 under
the symbol GFZ on April 8, 1996. The last day for trading on the AMEX was March
22, 1996. As of December 31, 1996, there were 9,871,073 depositary units
(Depositary Units) outstanding. The General Partner contributed $100 for its 5%
general partner interest in the Partnership.
During the first seven years of operations, which ended on December 31,
1996, a portion of cash flow and surplus funds have been used to purchase
additional equipment and a portion will be distributed to the partners.
Beginning after the Partnership's seventh year of operations, cash flow and
surplus funds, if any, will not be reinvested and will be distributed to the
partners. Beginning in the eleventh year of operations of the Partnership, the
General Partner will commence to liquidate the assets of the Partnership in an
orderly fashion, unless the Partnership is terminated earlier upon sale of all
Partnership property or by certain other events.
Table 1, below, lists the cost of the equipment in the Partnership
portfolio, and the cost of investments in unconsolidated special purpose
entities as of December 31, 1996 (in thousands):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
Equipment held for operating leases:
1 727-100QC commercial aircraft Boeing $ 5,784
1 Dash 8-300 Dehavilland 5,748
4 737-200 commercial aircraft Boeing 49,055
1 DC-9-32 commercial aircraft McDonnell Douglas 10,028
1 Mobile offshore drilling unit Falcon Drilling Company 9,666
1,124 Marine containers Various 13,145
119 Coal cars Various 4,788
1,310 Tank cars Various 30,945
122 Over-the road dry trailers Stoughton and Strick 716
50 Refrigerated trailers Various 1,878
164 Intermodal trailers Various 2,534
112 Over-the roadrefrigerated trailers Various 2,383
--------------
Total equipment $ 136,670
==============
Investments in unconsolidated special purpose entities:
0.56 Bulk carrier marine vessel Naikai Zosen, Naikai Shpbldg. $ 7,163
0.17 Two trusts comprised of:
Three 737-200 stage II commercial aircraft, Boeing 4,706
Two aircraft engines and Pratt Whitney 195
portfolio of aircraft rotables Various 325
0.17 Trust comprised of:
Six 737-200 stage II commercial aircraft Boeing 4,494
--------------
Total investments $ 16,883
==============
Includes proceeds from capital contributions, operations and Partnership
borrowings invested in equipment. 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
time of purchase except for 50 marine containers and 164 dry piggyback
trailers.
Jointly owned: EGF III (56%) and an affiliated partnership.
Jointly owned: EGF III (17%) and three affiliated partnerships.
Jointly owned: EGF III (17%) and three affiliated partnerships.
The equipment is generally leased under operating leases with terms of one to
seven years. Some of the Partnership's marine vessels and marine containers are
leased to operators of utilization-type leasing pools which may 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 sub-lessees, after deducting certain direct
operating expenses of the pooled equipment.
At December 31, 1996, all 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. Revenues collected
under short-term rental agreements with the rental yards' customers are credited
to the owners of the related equipment as received. Direct expenses associated
with the equipment are charged directly to the Partnership. An allocation of
other direct expenses of the rental yard operations are billed to the
Partnership monthly.
The lessees of the equipment include, but are not limited to: DHL Airways,
Inc., Continental Airlines, Inc., Canadian Airlines International, and Time Air,
Inc. As of December 31, 1996, all of the equipment was on lease or in rental
yards except 32 marine containers and 67 tank cars.
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 equipment. IMI agreed to perform all services necessary to
manage the transportation 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
Financial Statement notes 1 and 2).
(C) Competition
(1) Operating Leases vs. Full Payout Leases
Generally the equipment owned by the Partnership is leased out on an operating
lease basis wherein the rents owed 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 generally 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 the operating lease need not be capitalized on the lessee's
balance sheet.
The Partnership encounters considerable competition from lessors utilizing
full payout leases on new equipment, i.e., leases which have terms equal to the
expected economic life of the equipment. Full payout leases are written for
longer terms and for lower rates than the Partnership offers. 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 of the
Partnership may write full payout leases at considerably lower rates, or larger
competitors with a lower cost of capital may offer operating leases at lower
rates, and as a result, the Partnership may be at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership also competes with equipment manufacturers who offer operating
leases and full payout leases. Manufacturers may provide ancillary services
which the Partnership cannot offer, such as specialized maintenance service
(including possible substitution of equipment), training, warranty services, and
trade-in privileges.
The Partnership competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services
Corporation, Greenbrier Leasing Company, General Electric Capital Aviation
Services Corporation, and other limited partnerships which lease the same types
of equipment.
(D) Demand
The Partnership invests in transportation-related capital equipment and in
"relocatable environments." "Relocatable environments" refers to capital
equipment constructed to be self-contained in function but transportable, an
example of which includes a mobile offshore drilling unit. A general distinction
can be drawn between equipment used for the transport of materials and
commodities or people. With the exception of aircraft leased to passenger air
carriers, the Partnership's equipment is used primarily for the transport of
materials.
The following describes the markets for the Partnership's equipment:
(1) Commercial aircraft
The market for commercial aircraft continued to improve in 1996 representing two
consecutive years of growth and profits in the airline industry. The $5.7
billion in net profits recorded by the World's top 100 airlines in 1995 grew to
over $6 billion in 1996. The profits are a result of the continued management
emphasis on costs. The demand for ever lower unit costs by airline managements
has caused a significant reduction of surplus used Stage II and Stage III
commercial aircraft. The result is a return to supply/demand equilibrium. On the
demand side, passenger traffic is improving, cargo movement is up, and load
factors are generally higher across the major markets.
These changes are reflected in the performance of the world's 62 major
airlines that operate 60% of the world airline fleet but handle 78% of world
passenger traffic. Focusing on the supply/demand for Partnership-type narrowbody
commercial aircraft, there were 213 used narrowbody aircraft available at year
end 1995. In the first ten months of 1996 this supply was reduced to 119
narrowbody aircraft available for sale or lease. Forecasts for 1997 see a
continuing supply/demand equilibrium due to air travel growth and balanced
aircraft supply.
The Partnership's narrowbody fleet is primarily late-model (post 1974)
Boeing 737-200 Advanced aircraft. There are a total of 939 Boeing 737-200
aircraft in service, with 219 built prior to 1974. Independent forecasts
estimate that 250 total 737-200's will be retired, leaving approximately 700
aircraft in service after 2003. The forecasts regarding hushkits estimate that
half of the 700 Boeing 737-200s will be hushed to meet Stage III noise levels.
The Partnership's aircraft are all prospects for Stage III hushkits due to their
age, hours, cycles, engine configurations, and operating weights.
Independent projections for the Boeing 727 aircraft indicate that there
are 1,050 in service, with 299 built prior to 1974. The Partnership has one
pre-1974 model 727-100, which is expected to be retired prior to 2003. The
current strategy is to optimize its remaining value based on the present value
of lease cash flows and projected residuals.
The Partnership's DC-9-32 is a late-model aircraft. There are 663
DC-9-30/40/50 series aircraft in service and 437 built prior to 1974.
Independent forecasts estimate that 300 older DC-9 aircraft will be retired by
the year 2003. The remaining fleet will total approximately 350 aircraft, and
most of these aircraft will be hushed to Stage III. The aircraft will remain in
active airline service. The lessees are likely to be secondary airlines
operating in markets outside the United States.
(2) Aircraft Engines
The demand for spare engines has increased as a result of the air travel
industry's expansion over the last two years. The most significant area of
increase is in the Pratt & Whitney Stage II JT8D engine which powers many of the
Partnership's Stage II commercial aircraft. Today there are over 3000 Stage II
commercial jets in service. In December 1993 there were 288 Stage II narrowbody
aircraft available for sale or lease. As of October 1996, the number of
available Stage II narrowbodies was only 107 aircraft. The increase in the Stage
II fleet has placed over 450 engines back into service. This level of demand has
placed a premium on spare JT8D engines and resulted in a good leasing market for
available engines. The Partnership's spare engines will all be re-leased or sold
over the next two years during this market cycle.
(3) Aircraft Rotables
Aircraft rotables are replacement spare parts held in inventory by an airline.
These parts are components that are removed from an aircraft or engine, undergo
overhaul, and are recertified and refit to the aircraft in an "as new"
condition. Components, or rotables, carry specific identification numbers
allowing each part to be individually tracked. The types of rotables owned and
leased by the Partnership include landing gear, certain engine components,
avionics, auxiliary power units (APUs), replacement doors, control surfaces,
pumps, valves, and other comparable equipment. Generally a rotable has a useful
life that is either measured in terms of time in service or number of cycles
(takeoffs and landings). While there are no specific guidelines that apply to
the time or cycles between overhauls for rotable equipment, there is no
limitation on the number of times a rotable may be overhauled and recertified.
The component will be overhauled until the cost of such overhaul becomes
uneconomic relative to the unit's replacement cost.
The Partnership's rotable parts will be available for sale or lease in
1997. Rotables generally reflect the market conditions of the aircraft they
support which for the Partnership, are Boeing 737-300/400/500 and the Boeing
737-200 Advanced aircraft. Independent forecasts for 1997 indicate a
supply/demand equilibrium for these aircraft types.
(4) Marine Containers
At the end of 1995, the consensus of industry sources was that 1996 would see
both higher container utilization and strengthening of per diem lease rates.
Such was not the case, as there was no appreciable cyclical improvement in the
container market following the traditional winter slowdown. Industry utilization
continues to be under pressure, with per diem rates being impacted as well.
A substantial portion of the Partnership's containers are on long-term
utilization leases which were entered into with Trans Ocean Leasing as lessee.
The industry has seen a major consolidation, as Transamerica Leasing, late in
the fourth quarter of 1996, acquired Trans Ocean Leasing. Transamerica Leasing
is the second largest container leasing company in the world. Transamerica
Leasing is the substitute lessee for Trans Ocean Leasing. Long term, such
industry consolidation should bring more rationalization to the market and
result in higher utilization and per diem rates.
(5) Pressurized Tank Cars
These cars are used primarily in the petrochemical and fertilizer industries.
They transport liquefied petroleum gas (LPG) and anhydrous ammonia. The
utilization rate on the Partnership's fleet of pressurized tank cars was over
98% during 1996. Independent forecasts show the demand for natural gas growing
during 1997 to 1999, as the developing world, former Communist countries and the
industrialized world all increase their demand for energy. The fertilizer
industry was undergoing a rapid restructuring toward the end of 1996 after a
string of major mergers, which began in 1995. These mergers reduce the number of
companies that use pressurized tank cars for fertilizer service. Whether or not
the economies of the mergers allow the total fleet size to be reduced remains to
be seen.
(6) General Purpose Tank Cars
General purpose, or nonpressurized, tank cars are used to transport a wide
variety of bulk liquid commodities such as petroleum fuels, lubricating oils,
vegetable oils, molten sulphur, corn syrup, asphalt, and specialty chemicals.
Demand for general purpose tank cars in the Partnership fleet has remained
healthy over the last two years, with utilization remaining above 98%.
Independent projections show the demand for petroleum growing during 1997 to
1999, as the developing world, former Communist countries, and the
industrialized world all increase their demand for energy. Chemical carloadings
for the first 40 weeks of 1996 were up one tenth of one percent (0.1%) as
compared to the same period in 1995.
(7) Coal Cars
The 120 aluminum-bodied coal cars are leased to the Chicago & North Western
Transportation Company (now the Union Pacific) on a net lease through the year
2001.
(8) Marine Vessels
The Partnership owns a 56% interest in an entity that owns a dry bulk vessel,
which is traded in worldwide markets and carries commodity cargoes.
The freight rates in the dry bulk shipping market are dependent on the balance
of supply and demand for shipping commodities and trading patterns for such dry
bulk commodities. In 1995, dry bulk shipping demand was robust (growing at 5%
over 1994), and there was a significant infusion of new vessel tonnage,
especially late in the year, causing some decline in freight rates after a peak
in midyear. The slide in freight rates continued in the first half of 1996, as
new tonnage was delivered and shipping demand slipped from the high growth rates
of 1995. In the third quarter of 1996, there was a significant acceleration in
the drop of freight rates, primarily caused by the lack of significant grain
shipment volumes and the infusion of new tonnage. The low freight rates induced
many ship owners to scrap older tonnage and to defer or cancel newbuilding
orders. In the fourth quarter, a strong grain harvest worldwide gave the market
new strength, and freight rates recovered to the levels experienced in early
1996, but not to 1995 levels. Overall, 1996 was a soft year for shipping, with
dry bulk demand growing only 1.8% and the dry bulk fleet growing 3% in tonnage.
The outlook for 1997 shows an expected improvement in demand, with growth at
2.4%, but a high orderbook remains. Even so, 1997 is expected to be a soft year
with relatively low freight rates; however, prospects may be strengthened by the
continued scrapping of older vessels in the face of soft rates and the deferment
or canceling of orders.
Independent forecasts show that the long-term outlook (past 1997) should bring
improvement in freight rates earned by vessels; however, this is dependent on
the supply/demand balance and stability in growth levels. The newbuilding
orderbook currently is slightly lower than at the end of 1995 in tonnage.
Shipyard capacity is booked through late 1998; however, it remains to be seen
how many of these orders will actually be fulfilled. Historically, demand has
averaged approximatley 3% annual growth, fluctuating between flat growth and 6%
annually. With predictable long-term demand growth, the long-term outlook
depends on the supply side, which is affected by interest rates, government
shipbuilding subsidy programs, and prospects for reasonable capital returns in
shipping.
(9) Mobile Offshore Drilling Unit (Rig)
Worldwide demand for rigs in 1996 increased in all sectors of the business over
the demand levels experienced in 1995 and 1994. This increase in demand spread
over all geographic regions of offshore drilling; it also affected all equipment
types in the offshore drilling sector (both jack-up rigs and floating rigs).
This increase in demand, without any increase in supply of rigs, gave increased
utilization and higher contract day rates in the market. The improvement in the
market can be attributed to a number of factors, but primarily it can be
associated with continued growth worldwide in the use of oil and natural gas for
energy. Stable prices at moderate levels have encouraged such growth, while
providing adequate margins for oil and natural gas exploration and production
development.
The jack-up rig sector, in which the General Partner has participated
for several years, comprises approximately 70% of the offshore drilling market.
Overall, demand for jack-up rigs increased approximately 4%, from 264 rig-years
in 1995 to 274 rig-years in 1996; the Gulf of Mexico accounted for approximately
123 rig-years. As measured by utilization, demand for jack-ups increased from
81% in 1995 to 89% in 1996. Higher utilization provided the impetus for jack-up
contract day rates to double for most jack-up types, which led to increased
asset values. Three jack-ups were on order at the end of 1996; however, there is
not a general trend toward ordering. The majority of capital in the industry is
being directed to upgrading existing equipment.
The most significant trend in 1996 was the continued consolidation of
the offshore drilling industry. Five major mergers of offshore drilling
contractors occurred in 1996, leading to a more controlled and stable market in
which higher levels of day rates may be maintained. The consolidation of rig
ownership into fewer hands has a recognizable effect on stabilizing day rates in
times of lower utilization and on quicker improvement in times of increasing
utilization.
Demand for jack-up rigs is projected by industry participants to
continue to increase through 1997, with no significant increases in rig supply.
Day rates are not yet at levels sufficiently high to justify the widespread
ordering of new equipment.
(10) Intermodal Trailers
The robust intermodal trailer market that began four years ago began to soften
in 1995 and reduced demand continued in 1996. Intermodal trailer loadings were
flat in 1996 from 1995's depressed levels. This lack of growth has been the
result of many factors, ranging from truckload firms aggressively recapturing
market share from the railroads through aggressive pricing to the continuing
consolidation activities and asset efficiency improvements of the major U.S.
railroads.
All of these factors helped make 1996 a year of equalizing equipment
supply, as railroads and lessors were pressured to retire older and less
efficient trailers. The two largest suppliers of railroad trailers reduced the
available fleet in 1996 by over 15%. Overall utilization for intermodal
trailers, including the Partnership's fleet, was lower in 1996 than in previous
years.
(11) Over-The-Road Dry Trailers
The over-the-road dry trailer market was weak in 1996, with utilization down
15%. The trailer industry experienced a record year in 1994 for new production,
and 1995 production levels were similar to 1994. However, in 1996, the truck
freight recession, along with an overbuilding situation, contributed to 1996's
poor performance. The year 1996 had too little freight and too much equipment
industrywide.
(12) Over-The-Road Refrigerated Trailers
The Partnership experienced fairly strong demand levels in 1996 for its
refrigerated trailers. With over 25% of the fleet in refrigerated trailers, the
Partnership, PLM, and other Partnerships combined are the largest supplier of
short-term rental refrigerated trailers in the United States.
(E) Government Regulations
The use, maintenance, and ownership of equipment is regulated by federal, state,
local and/or foreign governmental 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 action, 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 the removal from service or extensive modification of such equipment to
meet these regulations at considerable cost to the Partnership. Such regulations
include (but are not limited to):
(1) the U.S. Oil Pollution Act of 1990 (which established liability
for operators and owners of vessels, mobile offshore drilling
units, etc. that create environmental pollution).
(2) the U.S. Department of Transportation's Aircraft Capacity Act of
1990 (which limits or eliminates the operation of commercial
aircraft in the U.S. that do not meet certain noise, aging, and
corrosion criteria);
(3) the Montreal Protocol on Substances That Deplete the Ozone layer
and the U.S. 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 on
the stratospheric ozone layer and which are used extensively as
refrigerants in refrigerated marine cargo containers,
over-the-road trailers, etc.);
(4) the U.S. Department of Transportation's Hazardous Materials
Regulations (which regulate the classification of and packaging
requirements for hazardous materials and which apply particularly
to the Partnership's tank cars).
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the
equipment it has purchased for leasing purposes. At December 31, 1996, the
Partnership owned a portfolio of transportation equipment as described in Part
I, Table 1.
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
None.
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, 1996.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT
MATTERS
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) under the symbol GFZ on April 8, 1996. The last
day for trading on the AMEX was March 22, 1996. Under the Internal Revenue Code
(the Code), the Partnership was classified as a Publicly Traded Partnership. As
of February 28, 1997 there were 9,871,073 Depositary Units outstanding. There
are approximately 12,500 Depositary Unitholders of record as of the date of this
report. The Code treats all Publicly Traded Partnerships as corporations if they
remain publicly traded after December 31, 1997. Treating the Partnership as a
corporation would mean the Partnership itself would become a taxable, rather
than a "flow through" entity. As a taxable entity, the income of the Partnership
would have become subject to federal taxation at both the partnership level and
at the investor level to the extent that income would have become distributed to
an investor. In addition, the General Partner believed that the trading price of
the Depositary Units would have been distorted when the Partnership began the
final liquidation of the underlying equipment portfolio. In order to avoid
taxation of the Partnership as a corporation and to prevent unfairness to
Unitholders, the General Partner delisted the Partnership's Depositary Units
from the AMEX. While the Partnership's Depositary Units are no longer publicly
traded on a national stock exchange, the General Partner continues to manage the
equipment of the Partnership and prepare and distribute quarterly and annual
reports and Forms 10-Q and 10-K in accordance with the Securities and Exchange
Commission requirements. In addition, the General Partner continues to provide
pertinent tax reporting forms and information to Unitholders. The General
Partner anticipates an informal market for the Partnership's units may develop
in the secondary marketplace similar to that which currently exists for
non-publicly traded partnerships.
Pursuant to the terms of the Partnership Agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner also is entitled to a special allocation
of any gains from the sale of the Partnership's assets in an amount sufficient
to eliminate any negative balance in the General Partner's capital account. The
General Partner is the sole holder of such interests.
(This space intentionally left blank)
Table 2, below, sets forth the high and low reported prices of the
Partnership's Depositary Units for 1996 and 1995, as reported by the AMEX as
well as cash distributions paid per Depositary Unit.
TABLE 2
Cash
Distributions
Paid Per
Reported Trade Depositary
Prices Unit
-----------------------------------------
Calendar Period High Low
1996
1st Quarter $ 5.25 $ 3.88 $ 0.40
2nd Quarter $ -- $ -- $ 0.25
3rd Quarter $ -- $ -- $ 0.25
4th Quarter $ -- $ -- $ 0.25
1995
1st Quarter $ 8.38 $ 7.00 $ 0.40
2nd Quarter $ 8.63 $ 7.31 $ 0.40
3rd Quarter $ 8.13 $ 6.63 $ 0.40
4th Quarter $ 7.00 $ 4.56 $ 0.40
The General Partner delisted the Partnership's depositary units from the
American Stock Exchange (AMEX) under the symbol GFZ on April 8, 1996. The
last day for trading on the AMEX was March 22, 1996.
The Partnership has engaged in a plan to repurchase up to 250,000
Depositary Units. During the period from January 1, 1996, to December 31, 1996,
the Partnership repurchased 28,500 Depositary Units at a total cost of $0.12
million.
ITEM 6. SELECTED FINANCIAL DATA
Table 3, below, lists selected financial data for the Partnership:
TABLE 3
For the years ended
December 31, 1996, 1995, 1994, 1993, and 1992
(thousands of dollars, except per unit amounts)
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------
Operating results:
Total revenues $ 25,886 $ 28,055 $ 40,247 $ 42,149 $ 43,722
Net gain on disposition
of equipment 6,450 2,936 2,863 1,707 1,081
Loss on revaluation of
equipment -- -- (1,082 ) (92 ) (8,292 )
Equity in net income of unconsolidated
special purpose entities 6,864 -- -- -- --
Net income (loss) 9,760 2,706 252 (241 ) (11,248 )
At year-end:
Total assets $ 78,651 $ 83,317 $ 98,779 $ 117,531 $ 132,043
Total liabilities 50,638 52,980 54,028 56,031 53,232
Notes payable 40,284 41,000 41,000 40,866 40,865
Cash distributions $ 11,964 $ 16,737 $ 16,811 $ 16,829 $ 22,106
Cash distributions which
represent a return of capital $ 2,204 $ 14,031 $ 15,970 $ 15,988 $ 21,001
Per weighted average Depositary Unit:
Net income (loss) $ 0.93 $ 0.19 $ (0.06 ) $ (0.11 ) $ (1.24 )
Cash distributions $ 1.15 $ 1.60 $ 1.60 $ 1.60 $ 2.10
Cash distributions which
represent a return of capital $ 0.22 $ 1.41 $ 1.60 $ 1.60 $ 2.10
After reduction of $0.1 million ($.01 per weighted average Depositary Unit)
resulting from a special allocation to the General Partner relating to the
gross gain on the sale of assets. (See Note 1 to the financial statements.)
After reduction of $0.7 million ($.07 per weighted average Depositary Unit)
resulting from a special allocation to the General Partner relating to the
gross gain on the sale of assets. (See Note 1 to the financial statements.)
After reduction of $0.8 million ($.08 per weighted average Depositary Unit)
resulting from a special allocation to the General Partner relating to the
gross gain on the sale of assets. (See Note 1 to the financial statements.)
After reduction of $0.9 million ($.09 per weighted average Depositary Unit)
resulting from a special allocation to the General Partner relating to the
gross gain on the sale of assets. (See Note 1 to the financial statements.)
After reduction of $1.2 million ($0.12 per weighted average Depositary
Unit) resulting from a special allocation to the General Partner relating
to the gross gain on the sale of assets. (See Note 1 to the financial
statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and risks
focuses on the performance of the Partnership's equipment in various sectors of
the transportation industry and its effect on the Partnership's overall
financial condition.
Results of Operations - Factors Affecting Performance
(A) Re-leasing and Repricing Activity
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. Factors influencing the current market
rate for transportation equipment include supply and demand for similar or
comparable types or kinds of transport capacity, desirability of the equipment
in the lease market, market conditions for the particular industry segment in
which the equipment is to be leased, overall market conditions, regulations of
many kinds concerning the use of the equipment, and others. Equipment that is
idle or out of service between the expiration of one lease and the assumption of
a subsequent one can result in a reduction of contribution to the Partnership.
The Partnership experienced re-leasing or repricing exposure in 1996 primarily
in its aircraft, marine vessels, marine container, trailer-, and railcar.
(1) Aircraft: Aircraft contribution decreased from 1995 to 1996 due to the
off-lease status of a Boeing 737-200 aircraft that is being remarketed. All
other aircraft investments were on lease for the entire year.
(2) Marine vessels: The Partnership's partially owned marine vessel is
operated in a pooled operation. Effective in the third quarter of 1996, the
lease of this marine vessel reached the end of that period of the lease term in
which rents were paid on a fixed daily rate, and began a new portion of the
lease term in which the fixed daily rate was reduced by approximately 14%.
(3) Marine Containers: The majority of the Partnership's marine
container portfolio is operated in utilization-based leasing pools and as such
is highly exposed to repricing activity. The Partnership's marine container
contributions declined from 1995 to 1996, due to soft market conditions that
caused a decline in re-leasing activity.
(4) 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. Contribution from the Partnership's trailers
operated in short-term rental facilities and the short-line railroad system
declined from 1995 to 1996, due to soft market conditions that caused a decline
in re-leasing activity.
(5) Railcars: The majority of the Partnership's railcar equipment remained
on-lease throughout the year, and thus was not adversely affected by re-leasing
and repricing exposure.
(B) Equipment Liquidations and Nonperforming Lessees
Liquidation of Partnership equipment, represents a reduction in the size of the
equipment portfolio, and will result in a reduction of net contributions to the
Partnership. Lessees not performing under the terms of their leases, either by
not paying rent, not maintaining or operating the equipment in accordance with
the conditions of the leases, or other possible departures from the leases can
result not only in reductions in net contribution, but also may require the
Partnership to assume additional costs to protect its interests under the
leases, such as repossession, legal fees, etc.
(1) Liquidations: During 1996, the Partnership sold its 45% interest in an
entity that owns a mobile offshore drilling unit, 50% investment in an entity
that owns an aircraft engine, 397 marine containers, two aircraft eingines, two
vessels, 143 railcars, and 11 trailers. A portion of the proceeds from the sale
of this equipment was used to repay part of the Partnership's original
outstanding debt of $41 million. The other portion of the proceeds was used to
purchase three aircraft and one mobile offshore drilling unit.
(2) Nonperforming Lessees: In 1996, the General Partner repossessed an
aircraft, due to the lessee's inability to pay for outstanding receivables. The
Partnership established reserves of approximately $1.3 million against invoices
due to the General Partner's determination that ultimate collection of this rent
is uncertain. Other equipment, such as trailers and containers, experienced
minor nonperforming lessees, which had no significant impact on the performance
of the Partnership.
(C) Reinvestment Risk
During the first seven years of operations, the Partnership invested surplus
cash in additional equipment after fulfilling operating requirements and paying
distributions to the partners. Pursuant to the Partnership agreement, the
Partnership may no longer reinvest in additional equipment beginning in 1997.
Subsequent to the end of the reinvestment period which concluded on December 31,
1996, the Partnership will continue to operate for an additional three years,
then begin an orderly liquidation over an anticipated two-year period.
During the year, the Partnership received proceeds from equipment disposals
of approximately $13.8 million. In addition, the Partnership received proceeds
of approximately $16.5 million from the sale of investments in special purpose
entities which own equipment. The Partnership reinvested approximately $20.2
million in three aircraft, $9.7 million in one mobile offshore drilling unit,
and $0.7 million in capital repairs to pressure and non-pressure tank cars and
trailers.
(D) Equipment Valuation
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material as the method previously employed by the
Partnership was consistent with SFAS 121. In accordance with SFAS 121, the
General Partner reviews the carrying value of its equipment portfolio at least
annually in relation to expected future market conditions for the purpose of
assessing the recoverability of the recorded amounts. If projected future lease
revenue plus residual values are less than the carrying value of the equipment,
a loss on revaluation is recorded. No adjustments to reflect impairment of
individual equipment carrying values were required for the year ended December
31, 1996.
As of December 31, 1996, the General Partner estimated the current fair
market value of the Partnership's equipment portfolio, including equipment owned
by unconsolidated special purpose entities to be approximately $106.2 million.
Financial Condition - Capital Resources, and Liquidity
The Partnership purchased its initial equipment portfolio with capital raised
from its initial equity offering and permanent debt financing. No further
capital contributions from original partners are permitted under the terms of
the Partnership's Limited Partnership Agreement. In addition the Partnership,
under its current loan agreement, does not have the capacity to incur additional
debt. Therefore 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, 1996, the Partnership generated sufficient
funds to meet its operating obligations, but used undistributed available cash
from prior periods of approximately $4.1 million to maintain the current level
of distributions (total of $12 million in 1996) to the partners.
The Partnership has notes outstanding with a face amount of $40.3 million
with interest at 1.5% over LIBOR. The loan allowed the pay down and borrowing of
funds in conjunction with the sale and subsequent purchase of assets during the
reinvestment phase of the Partnership. During the first 15 months following
conversion to a term loan, which began on September 30, 1996, quarterly
principal payments equal to 75% of net proceeds from asset sales will be due.
Beginning the year commencing December 31, 1997, quarterly principal payments
will be equal to 75% of net proceeds from asset sales from September 30, 1997,
or payments equal to 9.0% of the facility balance at September 30, 1997. During
1996, the Partnership paid down $19.9 million of the outstanding loan balance as
a result of asset sales and redrew $19.1 million to purchase other equipment.
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.
Results of Operations - Year to Year Detail Comparison
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1996 and 1995
(A) Owned equipment operations
Lease revenues less direct expenses (repairs and maintenance, marine equipment
operating expense, and asset specific insurance) on owned equipment decreased
for the year ended 1996 when compared to the same period of 1995. The following
table presents results by owned equipment type (in thousands):
For the year ended
December 31,
--------------------------------
1996 1995
--------------------------------
Aircraft and aircraft engines $ 3,688 $ 4,809
Marine vessels 926 1,465
Trailers 1,748 1,666
Rail equipment 4,976 4,745
Marine containers 1,482 1,848
Mobile offshore drilling unit 701 --
Aircraft: Aircraft lease revenues and direct expenses were $5.0 million and $1.3
million, respectively, for the year ended December 31, 1996, compared to $4.7
million and $0.1 million, respectively during the same period of 1995. The
decrease in net contribution was due to $1.1 million in repairs on one aircraft
to prepare it for re-lease and the off-lease status of this aircraft during the
third quarter of 1996;
Marine vessels: Marine vessel lease revenues and direct expenses were $1.4
million and $0.4 million, respectively, for the year ended December 31, 1996,
compared to $2.7 million and $1.2 million, respectively during the same period
of 1995. The decrease of net contribution was due to the sale of one marine
vessel during the second quarter of 1995 and the sale of two marine vessels
during the third quarter of 1996;
Trailers: Trailer lease revenues and direct expenses were $2.1 million and $0.4
million, respectively, for the year ended December 31, 1996, compared to $1.9
million and $0.2 million, respectively during the same period of 1995. The
trailer fleet decreased as of the year ended December 31, 1996, compared to the
same period of 1995 due to the disposition of trailers during 1996. However,
over the past twelve months the number of trailers in the PLM affiliated
short-term rental yards has increased due to term leases which expired. These
trailers are now earning a higher lease rate while in the rental yards compared
to the fixed term leases thus increasing net contribution;
Rail equipment: Railcar lease revenues and direct expenses were $7.8 million and
$2.8 million, respectively, for the twelve months ended 1996, compared to $7.8
million and $3.1 million, respectively during the same quarter of 1995. The
increase in railcar contribution resulted from running repairs required on
certain railcars in the fleet during 1995 which were not needed during 1996;
Marine containers: Marine container lease revenues and direct expenses were $1.5
million and $12,144, respectively, for the twelve months ended December 31,
1996, compared to $1.9 million and $27,185, respectively during the same quarter
of 1995. The number of marine containers owned by the Partnership has been
declining due to sales and dispositions. The result of this declining fleet is a
decrease in marine container net contribution.
Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and
direct expenses were $0.7 million and $18,606, respectively, for the year ended
December 31, 1996. The Partnership acquired and placed into lease service one
mobile offshore drilling unit in the third quarter of 1996.
(B) Indirect operating expenses related to owned equipment operations
Total indirect expenses of $18.1 million for the twelve months ended December
31, 1996, increased from $16.1 million for the same period of 1995. The variance
is explained as follows:
(a) an increase of $1.8 million in depreciation and amortization expense
from 1995 levels reflecting the Partnership's depreciation on the purchase of
$28.5 million of new equipment, offset by the sale or disposition of certain
Partnership assets during 1995 and 1996;
(b) an increase of $0.4 million in bad debt expense from 1995 levels
primarily reflecting the Partnership's evaluation of collectibility of certain
receivable balances;
(c) an increase of $0.1 million in aircraft inspection expense on one
aircraft before it can be re-leased;
(d) a decrease of $0.4 million in interest expense due to the paydown of
debt principal due to the sale of assets.
(C) Net gain on disposition of equipment was $6.5 million for the year ended
December 31, 1996, from the disposition of two aircraft engines, two marine
vessels, 397 marine containers, 11 trailers, and 143 railcars. These assets had
an aggregate net book value of $8 million and were sold or liquidated for
proceeds of $14.5 million. Net gain on disposition of equipment totaled $2.9
million in the same period of 1995 from the disposition of 462 marine
containers, 204 railcars, and 1 marine vessel. These assets had an aggregate net
book value of $5.5 million and were sold or liquidated for proceeds of $8.4
million which included proceeds of $5 million from a marine vessel related to
the sales-type lease.
(D) Interest and other income decreased by $0.8 million for the year ended
December 31, 1996 compared to 1995 due primarily to lower cash balances
available for investments when compared to the same period of 1995.
(E) Equity in net income (loss) of unconsolidated special purpose entities
Equity in net income (loss) of unconsolidated special purpose entities
represents the net income (loss) generated from operation of jointly-owned
assets accounted for under the equity method (see Note 3 to financial
statements)(in thousands).
For the twelve months
ended December 31,
----------------------------------
1996 1995
----------------------------------
Aircraft and aircraft engines $ 901 $ (154 )
Marine vessels (611 ) 13
Mobile offshore drilling unit 6,574 1
Aircraft and aircraft engines: The Partnership's share of aircraft revenues and
expenses were $3.6 million and $2.7 million, respectively, for 1996, compared to
$1.1 million and $1.2 million, respectively, during 1995. As of December 31,
1996, the Partnership has a partial beneficial interest in three trusts which
hold nine commercial aircraft, two aircraft engines, and a package of aircraft
rotables. The increase in income to $0.9 million for the year ended December 31,
1996 compared to a loss of $0.15 million for the year ended December 31, 1995,
was due to the Partnership's sale of its 50% investment in an entity which owns
an aircraft engine in the third quarter of 1996, resulting in $0.7 million in
net gains, and $0.7 million of net income. In addition, the Partnership's share
of revenue was higher in the year ended December 31, 1996, as compared to 1995
levels due to the three trusts having been acquired in September of 1995.
Marine vessels: The Partnership's share of revenues and expenses of marine
vessels was $1.4 million and $2.0 million, respectively, for the year ended
December 31, 1996, compared to $1.9 million and $1.9 million, respectively, for
the same period in 1995. The loss of $0.6 milion for the year ended December 31,
1996, related to marine vessels was caused by lower revenue for the year ended
December 31, 1996, due to lower charter rates when compared to 1995 levels and
higher marine operating expenses for the year ended December 31, 1996, when
compared to 1995 levels.
Mobile offshore drilling unit: The Partnership's share of revenues and expenses
of the mobile offshore drilling unit was $7.2 million and $0.6 million,
respectively, for the year ended December 31, 1996, compared to $1.3 million and
$1.3 million, respectively, for the same period of 1995. The increase in income
to $6.6 million for the twelve months ended December 31, 1996 was due to the
sale of the Partnership's investment in an entity which owns a mobile offshore
drilling unit in the third quarter of 1996 for a gain of which the Partnership's
share was $6.5 million.
(F) Net Income
The Partnership's net income of $9.8 million for the year ended December 31,
1996, increased from net income of $2.7 million in the same period in 1995. The
Partnership's ability to acquire, operate, or liquidate assets, secure leases,
and re-lease those assets whose leases expire during the duration of the
Partnership is subject to many factors. Therefore, the Partnership's performance
in the year ended December 31, 1996, is not necessarily indicative of future
periods. The Partnership distributed $11.4 million to the Limited Partners, or
$1.15 per weighted average Depositary Unit in the twelve months ended December
31, 1996.
Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1995 and 1994
(A) Revenues
Total revenues for the years ended December 31, 1995, and 1994, were $28.1
million and $40.2 million, respectively. The decrease in 1995 revenues was
attributable primarily to decreases in lease revenue partially offset by higher
interest earned in 1995 compared to 1994. The Partnership's ability to acquire
or liquidate assets, secure leases, and re-lease those assets whose leases
expire during the duration of the Partnership is subject to many factors, and
the Partnership's performance in 1995 is not necessarily indicative of future
periods.
(1) Lease revenue decreased to $23.4 million in 1995 from $36.2 million in
1994. The decline was due to the following (in thousands):
For the year ended December
31,
1995 1994
------------------------------
Marine vessels $ 4,619 $ 15,210
Rail equipment 7,832 7,990
Aircraft 5,799 7,504
Trailers and tractors 1,944 1,502
Mobile offshore drilling unit 1,299 1,727
Marine containers 1,875 2,292
===============================
$ 23,368 $ 36,225
===============================
(a) Marine vessel revenue decreased by $10.6 million due primarily to the
sale of one vessel in the first quarter of 1995 and two vessels in the fourth
quarter of 1994;
(b) Aircraft revenue decreased by $1.7 million due to the off-lease status
of two aircraft engines in 1995 and the sale of two aircraft during 1994,
partially offset by the revenues earned on aircraft and aircraft spare parts
acquired in 1995;
(c) Marine container revenue decreased by $0.4 million resulting from the
disposal of 462 marine containers during 1995;
(d) Decline in mobile offshore drilling unit revenues of $0.4 million due
to lower daily lease rates when compared to the same period in 1994;
(e) Rail revenue decreased by $0.2 million primarily due to lower re-lease
rates on a fleet of 297 gondolas and the sale of five locomotives and 199
coalcars during 1995;
(f) Trailer revenues increased due to the acquisition of 164 trailers in
1994 which were placed in the short-term intermodal trailer leasing operation
and earned approximately $0.4 million in 1995.
(2) Interest and other income increased by $0.6 million primarily due to an
insurance recovery on one of the Partnership vessels related to an insurance
claim from 1992 and higher interest income earned on 1995 cash balances versus
1994 balances.
(3) Net gain on disposition of equipment of $2.9 million was realized on the
sale of 204 railcars and locomotives, 1 marine vessel, and the disposal of 462
marine containers. These assets had an aggregate net book value of $5.5 million
and were sold or liquidated for proceeds of $8.4 million which included proceeds
of $5 million from a marine vessel related to the sales-type lease. Net gain on
disposition of equipment totaled $2.9 million in 1994 and was realized on the
sale or liquidation of 33 railcars, 2 aircraft, 57 trailers, 811 marine
containers, and 2 marine vessels. These assets had an aggregate net book value
of $13.7 million and were sold or liquidated for proceeds of $16.7 million.
(B) Expenses
The Partnership's total expenses for the years ended December 31, 1995, and
1994, were $25.3 million and $40.0 million, respectively. The decrease was
primarily attributable to decreases in depreciation expense, repairs and
maintenance expense, and marine equipment operating expenses.
(1) Direct operating expenses (defined as repairs and maintenance, insurance,
and marine equipment operating expenses, and repositioning expense) decreased to
$5.6 million in 1995 from $16.0 million in 1994. This change resulted from:
(a) A decrease of $2.0 million in repairs and maintenance expenses from
1994 levels due to the sale of two marine vessels during 1994, and the sale of
one vessel in the first quarter of 1995, coupled with a fleet of coal cars
converting to a net lease, where the lessee is responsible for payment of the
repairs, during 1994;
(b) A decrease of $6.9 million in marine equipment operating expenses due
to the sale of two vessels in the fourth quarter of 1994 and the sale of one
vessel in the first quarter of 1995;
(c) A decrease in insurance expense of $0.7 million relating to the sale of
two marine vessels in 1994 and one vessel in the first quarter of 1995, offset
partially by the acquisition of one aircraft during 1995.
(2) Indirect operating expenses (defined as depreciation and amortization
expense, management fees, interest expense, and general and administrative
expenses) decreased to $19.7 million in 1995 from $22.9 million in 1994.
This change resulted primarily from:
(a) A decrease in depreciation expense of $3.6 million from 1994 levels
reflecting the Partnership's double-declining balance depreciation method and
the sale or disposition of $22.0 million in assets during 1995, offset partially
by the acquisition of $11.4 million in equipment;
(b) A decrease of $0.7 million in management fee expense reflecting lower
lease rates in 1995;
(c) An increase of 0.5 million in interest expense reflecting higher
interest rates in 1995;
(d) a decrease of $0.5 million in general and administrative expenses from
1994 levels primarily reflecting less professional services required by the
Partnership relating to leasing or re-leasing equipment during 1995.
(3) Loss on revaluation of equipment in 1994 was the result of the write-downs
on 5 locomotives, 77 marine containers, and 2 aircraft engines to their
estimated net realizable values. There were no losses on revaluation of
equipment required in 1995.
(C) Net Income
The Partnership's net income increased to $2.7 million in 1995, from a net
income of $0.3 million in 1994. The Partnership's ability to acquire, operate or
liquidate assets, secure leases, and re-lease those assets whose leases expire
during the duration of the Partnership, is subject to many factors and the
Partnership's performance in 1995 is not necessarily indicative of future
periods. For the year ended December 31, 1995, the Partnership distributed $15.9
million to the Limited Partners, or $1.60 per weighted average Depositary Unit.
Geographic Information
The Partnership operates its equipment in international markets. Although these
operations expose the Partnership to certain currency, political, credit and
economic risks, the General Partner believes these risks are minimal or has
implemented strategies to control the risks as follows: Currency risks are at a
minimum because all invoicing, with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally through the avoidance of 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 U.S. banks to
cash deposits. Although these credit support mechanisms generally 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
the Financial Statements, Note 4 for information on the revenues, income, and
assets in various geographic regions.
Revenues and net operating income by geographic region are impacted by the
time period the asset is owned and on/off-lease status 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 due to the General Partner's decision to use the 200%
declining balance method of depreciation. The relationships of geographic
revenues, net income (loss) and net book value are expected to significantly
change in the future as equipment is sold in equipment in various equipment
markets and geographic areas. An explanation of the current relationships is
presented below:
The Partnership's equipment leased to Canadian domiciled lessees consists
of railcars, and an aircraft owned by an entity in which the Partnership has an
interest. Revenues in Canada accounted for 19% of total revenues while these
operations accounted for $2.3 million of the $9.8 million of the net operating
income for the entire Partnership. The net operating income generated in Canada
was created by the railcar operations due to high utilization throughout the
year of 1996. The net operating income was partially offset by net operating
loss from the aircraft leased in Canada due to the use of an accelerated
depreciation method. As the depreciation recorded by the Partnership declines in
future periods the aircraft is expected to generate net operating income for the
Partnership.
The Partnership's equipment on lease to U.S. domiciled lessees accounted
for 33% of the revenues generated by owned and partially owned equipment while
net operating income accounted for $1.64 million in profits versus $9.8 million
for the entire Partnership. The primary reason for this relationship is the fact
that the Partnership depreciates its rail equipment over a fifteen year period
versus twelve years for other equipment types owned and leased in other
geographic regions. Since railcars make up 23% of the equipment, on an original
cost basis, and 56% of the revenues generated in the United States, it is
expected that this relationship of revenue to net operating income will continue
into the near future for this geographic region, as long as additional equipment
types are not added to the equipment mix. The trailers leased to U.S. domiciled
lessees are expected to become profitable in the near future, as the revenue
from the trailers exceeds the operating costs, and the depreciation recorded by
the Partnership declines in future periods.
European operations consist of three owned aircraft and an interest in two
trusts that own three aircraft, two aircraft engines and aircraft rotables that
are generating revenues, which accounted for 13% of combined equipment revenues.
The net loss generated by this equipment accounted for $0.5 million in 1996 due
to shorter depreciation life. As the depreciation recorded by the Partnership
declines in future periods the aircraft is expected to generate net operating
income for the Partnership.
Asian operations consist of two aircraft at the end of 1996. During 1996,
revenues of these aircraft and the two sold aircraft engines accounted for 9% of
total revenues while these operations accounted for $2.8 million net operating
loss versus $9.8 million of the net operating income for the entire Partnership.
The net operating loss incurred was due to one aircraft being off-lease since
the third quarter of 1996 and the establishment of reserves of approximately
$1.3 million against invoices for this aircraft due to the General Partner's
determination that ultimate collection of this rent is uncertain. The
Partnership is in the process of repossessing this aircraft and it will be
marketed for re-lease. In addition, two aircraft engines were sold during 1996
for a loss of $0.1 million to the Partnership.
The partially owned marine vessel and the two sold marine vessels, which
were leased in various regions accounted for 12% of the revenues and 57% of the
net operating income for 1996. During 1996, the Partnership sold two vessels and
generated gains of $5.3 million. The Partnership's 56% investment in an entity
which owns a marine vessel earned revenues of $1.4 million in 1996 and generated
$0.6 million in net loss.
The mobile offshore drilling units, which were leased in various regions in
1996 accounted for 6% of the revenues and $6.4 million of the net operating
income. The net operating income generated was due to the partially owned mobile
offshore drilling unit being sold during the third quarter of 1996 for a gain of
$6.5 million. The owned mobile offshore drilling unit earned revenues of $0.72
million and generated $0.2 million in net loss primarily due to the use of an
accelerated depreciation method.
Inflation
There was no significant impact on the Partnership's operations as a result of
inflation during 1996, 1995, or 1994.
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.
Outlook for the Future
Since the Partnership is in its holding or passive liquidation phase, the
General Partner will be 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 the liquidation of Partnership assets will be completed by the
scheduled termination of the Partnership at the end of the year 2000.
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.
(A) 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. Ongoing changes in the regulatory
environment, both in the U.S. and internationally, cannot be predicted with any
accuracy and preclude the General Partner from determining the impact of such
changes on Partnership operations, purchases, or sale of equipment.
(B) Distributions
Pursuant to the Limited Partnership Agreement, the Partnership will cease to
reinvest in additional equipment beginning 1997. The General Partner will pursue
a strategy of selectively re-leasing equipment to achieve competitive returns,
or selling equipment that is underperforming or whose operation becomes
prohibitively expensive, in the period prior to the final liquidation of the
Partnership. During this time, the Partnership will use operating cash flow and
proceeds from the sale of equipment to meet its operating obligations 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 then-existing distribution levels. In the long term, changing
market conditions and used-equipment values may preclude the General Partner
from accurately determining the impact of future re-leasing activity and
equipment sales on Partnership performance and liquidity.
As of the first quarter of 1996, the cash distribution rate was reduced to
more closely reflect current and expected net cash flows from operations.
Continued weak market conditions in certain equipment sectors and equipment
sales have reduced overall lease revenues in the Partnership to the point where
reductions in distribution levels were necessary. In addition, with the
Partnership expected to enter the active liquidation phase in the near future,
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 will be reduced,
significant asset sales may result in potential special distributions to
Unitholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements and Financial Statement Schedules included in Item
14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space intentionally left blank)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
As of the date of this Annual Report, the directors and executive
officers of PLM International (and key executive officers of its subsidiaries)
are as follows:
Name Age Position
- -------------------------------------- ------------------- -------------------------------------------------------
J. Alec Merriam 61 Director, Chairman of the Board, PLM International,
Inc.; Director, PLM Financial Services, Inc.
Douglas P. Goodrich 50 Director and Senior Vice President, PLM
International; Director and President, PLM Financial
Services, Inc.; Senior Vice President PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Walter E. Hoadley 80 Director, PLM International, Inc.
Robert L. Pagel 60 Director, Chairman of the Executive Committee, PLM
International, Inc.; Director, PLM Financial
Services, Inc.
Harold R. Somerset 62 Director, PLM International, Inc.
Robert N. Tidball 58 Director, President and Chief Executive Officer, PLM
International, Inc.
J. Michael Allgood 48 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Stephen M. Bess 50 President, PLM Investment Management, Inc.; and PLM
Securities Corp.; Vice President, PLM Financial
Services, Inc.
David J. Davis 40 Vice President and Corporate Controller, PLM
International and PLM Financial Services, Inc.
Frank Diodati 42 President, PLM Railcar Management Services Canada
Limited.
Steven O. Layne 42 Vice President, PLM Transportation Equipment
Corporation; Vice President and Director, PLM
Worldwide Management Services, Ltd.
Stephen Peary 48 Senior Vice President, General Counsel and Secretary,
PLM International, Inc.; Vice President, General
Counsel and Secretary, PLM Financial Services, Inc.,
PLM Investment Management, Inc., PLM Transportation
Equipment Corporation; Vice President, PLM
Securities, Corp.
Thomas L. Wilmore 54 Vice President, PLM Transportation Equipment
Corporation; Vice President, PLM Railcar Management
Services, Inc.
J. Alec Merriam was appointed Chairman of the Board of Directors of PLM
International in September 1990, having served as a director since February
1988. In October 1988 he became a member of the Executive Committee of the Board
of Directors of PLM International. From 1972 to 1988 Mr. Merriam was Executive
Vice President and Chief Financial Officer of Crowley Maritime Corporation, a
San Francisco area-based company engaged in maritime shipping and transportation
services. Previously, he was Chairman of the Board and Treasurer of LOA
Corporation of Omaha, Nebraska and served in various financial positions with
Northern Natural Gas Company, also of Omaha.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Director and President of PLM Financial Services in June, 1996, and
appointed Senior Vice President of PLM International in March 1994. 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, a subsidiary of Guardian Industries Corp. of Chicago,
Illinois from December 1980 to September 1985.
Dr. Hoadley joined PLM International's Board of Directors and its Executive
Committee in September, 1989. He served as a Director of PLM, Inc. from November
1982 to June 1984 and PLM Companies, Inc. from October 1985 to February 1988.
Dr. Hoadley has been a Senior Research Fellow at the Hoover Institute since
1981. He was Executive Vice President and Chief Economist for the Bank of
America from 1968 to 1981 and Chairman of the Federal Reserve Bank of
Philadelphia from 1962 to 1966. Dr. Hoadley had served as a Director of
Transcisco Industries, Inc. from February 1988 through August 1995.
Robert L. Pagel was appointed Chairman of the Executive Committee of the
Board of Directors of PLM International in September 1990, having served as a
director since February 1988. In October 1988 he became a member of the
Executive Committee of the Board of Directors of PLM International. From June
1990 to April 1991 Mr. Pagel was President and Co-Chief Executive Officer of The
Diana Corporation, a holding company traded on the New York Stock Exchange. He
is the former President and Chief Executive Officer of FanFair Corporation which
specializes in sports fans' gift shops. He previously served as President and
Chief Executive Officer of Super Sky International, Inc., a publicly traded
company, located in Mequon, Wisconsin, engaged in the manufacture of skylight
systems. He was formerly Chairman and Chief Executive Officer of Blunt, Ellis &
Loewi, Inc., a Milwaukee-based investment firm. Mr. Pagel retired from Blunt,
Ellis & Loewi in 1985 after a career spanning 20 years in all phases of the
brokerage and financial industries. Mr. Pagel has also served on the Board of
Governors of the Midwest Stock Exchange.
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), a recently-acquired subsidiary of Alexander & Baldwin, Inc.
Mr. Somerset joined C&H in 1984 as Executive Vice President and Chief Operating
Officer, having served on its Board of Directors since 1978, a position in which
he continues to serve. 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 -
Agricultures, Vice President, General Counsel and Secretary. In addition to a
law degree from Harvard Law School, Mr. Somerset also holds degrees in civil
engineering from the Rensselaer Polytechnic Institute and 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 N. Tidball was appointed President and Chief Executive Officer of
PLM International in March 1989. At the time of his appointment, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April, 1989 and a member of the Executive Committee of the
Board of Directors of PLM International in September 1990. Mr. Tidball was
elected President of PLM Railcar Management Services, Inc. in January 1986. 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,
Inc., he was Vice President, a General Manager and a Director of North American
Car Corporation, and a Director of the American Railcar Institute and the
Railway Supply Association.
J. Michael Allgood was appointed Vice President and Chief Financial Officer
of PLM International in October 1992. Between July 1991 and October 1992, Mr.
Allgood was a consultant to various private and public sector companies and
institutions specializing in financial operational systems development. In
October 1987, Mr. Allgood co-founded Electra Aviation Limited and its holding
company, Aviation Holdings Plc of London where he served as Chief Financial
Officer until July 1991. Between June 1981 and October 1987, Mr. Allgood served
as a First Vice President with American Express Bank, Ltd. In February 1978, Mr.
Allgood founded and until June 1981, served as a director of Trade Projects
International/Philadelphia Overseas Finance Company, a joint venture with
Philadelphia National Bank. From March 1975 to February 1978, Mr. Allgood served
in various capacities with Citibank, N.A.
Stephen M. Bess was appointed President of PLM Securities, Corp. in June,
1996 and 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 Corp., a manufacturer of computer peripheral equipment, from October
1975 to November 1978.
David J. Davis was appointed Vice President and Controller of PLM
International in January 1994. From March 1993 through January 1994, Mr. Davis
was engaged as a consultant for various firms, including PLM. Prior to that Mr.
Davis was Chief Financial Officer of LB Credit Corporation in San Francisco from
July 1991 to March 1993. From April 1989 to May 1991, Mr. Davis was Vice
President and Controller for ITEL Containers International Corporation which was
located in San Francisco. Between May 1978 and April 1989, Mr. Davis held
various positions with Transamerica Leasing Inc., in New York, including that of
Assistant Controller for their rail leasing division.
Frank Diodati was appointed President of PLM Railcar Management Services
Canada Limited in 1986. Previously, Mr. Diodati was Manager of Marketing and
Sales for G.E. Railcar Services Canada Limited.
Steven O. Layne was appointed Vice President, PLM Transportation Equipment
Corporation's Air Group in November 1992, and was appointed Vice President and
Director of PLM Worldwide Management Services, Ltd. in September, 1995. Mr.
Layne was its Vice President, Commuter and Corporate Aircraft beginning in July
1990. Prior to joining PLM, Mr. Layne was the Director, Commercial Marketing for
Bromon Aircraft Corporation, a joint venture of General Electric Corporation and
the Government Development Bank of Puerto Rico. Mr. Layne is a major in the
United States Air Force Reserves and senior pilot with 13 years of accumulated
service.
Stephen Peary became Vice President, Secretary, and General Counsel of PLM
International in February 1988 and Senior Vice President in March 1994. Mr.
Peary was Assistant General Counsel of PLM Financial Services, Inc. from August
1987 through January 1988. Previously, Mr. Peary was engaged in the private
practice of law in San Francisco. Mr. Peary is a graduate of the University of
Illinois, Georgetown University Law Center, and Boston University (Masters of
Taxation Program).
Thomas L. Wilmore was appointed Vice President - Rail, PLM Transportation
Equipment Corporation, in March 1994 and has served as Vice President, Marketing
for PLM Railcar Management Services, Inc. since May 1988. Prior to joining PLM,
Mr. Wilmore was Assistant Vice President Regional Manager for MNC Leasing Corp.
in Towson, Maryland from February 1987 to April 1988. From July 1985 to February
1987, he was President and Co-Owner of Guardian Industries Corp., Chicago,
Illinois and between December 1980 and July 1985, Mr. Wilmore was an Executive
Vice President for its subsidiary, G.I.C. Financial Services Corporation. Mr.
Wilmore also served as Vice President of Sales for Gould Financial Services
located in Rolling Meadows, Illinois from June 1978 to December 1980.
The directors of the General Partner are elected for a one-year term or
until their successors are elected and qualified. There are no family
relationships between any director or any executive officer of the General
Partner.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership has no
pension, profit-sharing, retirement, or similar benefit plan in effect as of
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The General Partner is generally entitled to a 5% interest in the
profits and losses and distribution of the Partnership. At December 31,
1996, 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
Neither the General Partner and its affiliates nor any officer or
director of the General Partner and its affiliates own any Units of the
Partnership as of December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
During 1996, management fees to IMI were $1.0 million. In 1996, the
Partnership paid or accrued lease negotiation and equipment acquisition
fees of $1.6 million to PLM Transportation Equipment Corporation. The
General Partner and its affiliates were reimbursed $0.7 million for
administrative and data processing services performed on behalf of the
Partnership in 1996.
During 1996, the unconsolidated special purpose entities (USPE's)
paid or accrued the following fees to FSI or its affiliates (based on
the Partnership's proportional share of ownership): management fees
-$0.2 million; administrative and data processing services - $0.1
million. The unconsolidated special purpose entities also paid TEI $0.1
million for insurance coverages during 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
None.
(d) Transactions With Promoters
None.
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.
(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 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.
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: February 28, 1997 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/ David J. Davis
-------------------------
David J. Davis
Vice President and
Corporate Controller
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
*___________________
J. Alec Merriam Director - FSI March 4, 1997
*___________________
Robert L. Pagel Director - FSI March 4, 1997
* Stephen Peary, by signing his 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/ Stephen Peary
- -------------------
Stephen Peary
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Report of Independent Auditors 27
Balance sheets as of December 31, 1996 and 1995 28
Statements of income for the years ended December 31,
1996, 1995, and 1994 29
Statements of changes in partners' capital for
the years ended December 31, 1996, 1995, and
1994 30
Statements of cash flows for the years ended December 31,
1996, 1995, and 1994 31
Notes to financial statements 32-40
All other financial statement schedules have been omitted as 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.
REPORT OF INDEPENDENT AUDITORS
The Partners
PLM Equipment Growth Fund III:
We have audited the accompanying balance sheets of PLM Equipment Growth Fund III
as of December 31, 1996 and 1995, and the related statements of income, changes
in partners' capital, and cash flows for each of the years in the three-year
period ended December 31, 1996. 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 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.
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, 1996 and 1995 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
- ----------------------------
SAN FRANCISCO, CALIFORNIA
February 28, 1997
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars)
ASSETS
1996 1995
-----------------------------------
Equipment held for operating leases, at cost $ 136,670 $ 130,132
Less accumulated depreciation (78,607 ) (84,207 )
---------------------------------
58,063 45,925
Equipment held for sale -- 475
---------------------------------
Net equipment 58,063 46,400
Cash and cash equivalents 1,414 3,243
Restricted cash and marketable securities 5,966 5,660
Investments in unconsolidated special purpose entities 11,138 20,820
Accounts and notes receivable, net of allowance for doubtful
accounts of $1,381 in 1996 and $569 in 1995 1,515 2,242
Net investment in sales-type lease -- 4,518
Prepaid expenses 64 74
Deferred charges, net of accumulated amortization
of $800 in 1996 and $2,159 in 1995 491 360
---------------------------------
Total assets $ 78,651 $ 83,317
=================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 1,505 $ 1,355
Due to affiliates 1,297 1,499
Note payable 40,284 41,000
Lessee deposits and reserves for repairs 7,552 9,126
---------------------------------
Total liabilities 50,638 52,980
Partners' capital:
Limited Partners (9,871,073 and 9,899,573
Depositary Units at December 31, 1996 and 1995) 28,013 30,337
General Partner -- --
---------------------------------
Total partners' capital 28,013 30,337
---------------------------------
Total liabilities and partners' capital $ 78,651 $ 83,317
=================================
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 per unit amounts)
1996 1995 1994
--------------------------------------------
Revenues:
Lease revenue $ 18,459 $ 23,368 $ 36,225
Interest and other income 977 1,751 1,159
Net gain on disposition of equipment 6,450 2,936 2,863
-------------------------------------------
Total revenues 25,886 28,055 40,247
Expenses:
Depreciation and amortization 11,047 12,757 16,318
Management fees to affiliate 1,004 1,137 1,788
Repairs and maintenance 4,475 4,063 6,077
Interest expense 3,078 3,474 2,938
Insurance expense to affiliate -- 268 555
Other insurance expense 359 390 789
Repositioning expense 13 (18 ) 733
Marine equipment operating expenses 176 902 7,835
General and administrative expenses
to affiliates 747 816 654
Other general and administrative expenses 1,263 1,166 1,210
Bad debt expense 828 394 16
Loss on revaluation of equipment -- -- 1,082
-------------------------------------------
Total expenses 22,990 25,349 39,995
Equity in net income of unconsolidated
special purpose entities 6,864 -- --
-------------------------------------------
Net income $ 9,760 $ 2,706 $ 252
===========================================
Partners' share of net income (loss):
Limited Partners $ 9,162 $ 1,869 $ (589 )
General Partner 598 837 841
===========================================
Total $ 9,760 $ 2,706 $ 252
===========================================
Net income (loss) per weighted average Depositary Unit (9,873,821 Units -
1996, 9,927,458 Units - 1995,
9,979,199 - 1994) $ 0.93 $ 0.19 $ (0.06 )
===========================================
Cash distributions $ 11,964 $ 16,737 $ 16,811
===========================================
Cash distribution per weighted average Depositary Unit $ 1.15 $ 1.60 $ 1.60
===========================================
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, 1996, 1995, and 1994
(in thousands)
Limited General
Partners Partner Total
------------------------------------------------
Partners' capital at December 31, 1993 $ 61,500 $ -- $ 61,500
Net income (loss) (589 ) 841 252
Repurchase of Units (190 ) -- (190 )
Cash distributions (15,970 ) (841 ) (16,811 )
------------------------------------------------
Partners' capital at December 31, 1994 44,751 -- 44,751
Net income 1,869 837 2,706
Repurchase of Units (383 ) -- (383 )
Cash distributions (15,900 ) (837 ) (16,737 )
------------------------------------------------
Partners' capital at December 31, 1995 30,337 -- 30,337
Net income 9,162 598 9,760
Repurchase of Units (120 ) -- (120 )
Cash distributions (11,366 ) (598 ) (11,964 )
------------------------------------------------
Partners' capital at December 31, 1996 $ 28,013 $ -- $ 28,013
================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31,
(thousands of dollars)
1996 1995 1994
---------------------------------------------
Operating activities:
Net income $ 9,760 $ 2,706 $ 252
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11,047 12,757 16,318
Net gain on disposition of equipment (6,450 ) (2,936 ) (2,863 )
Loss on revaluation of equipment -- -- 1,082
Equity in net income from unconsolidated special
purpose entities (6,864 ) -- --
Sales-type lease income (1,885 ) -- --
Changes in operating assets and liabilities:
Accounts and notes receivable, net 727 202 1,031
Prepaid expenses 10 111 13
Restricted cash and marketable securities (306 ) (307 ) (272 )
Accounts payable and accrued expenses 150 43 375
Due (to) from affiliates (202 ) 1,050 (324 )
Prepaid deposits and reserves for repairs (914 ) (302 ) (1,892 )
--------------------------------------------
Cash provided by operating activities 5,073 13,324 13,720
--------------------------------------------
Investing activities:
Payments for purchase of equipment (28,540 ) (9,961 ) (2,417 )
Payment of capitalized repairs (728 ) (1,008 ) (1,564 )
Payments of acquisition fees to affiliate (1,284 ) (447 ) (129 )
Payments received on sales-type lease 6,403 482 --
Proceeds from disposition of equipment 13,786 3,389 16,748
Liquidation distributions from unconsolidated
special purpose entities 13,711 -- --
Distributions from unconsolidated
special purpose entities 2,835 -- --
Payments of lease negotiation fees to affiliate (285 ) (99 ) (30 )
--------------------------------------------
Net cash provided by (used in) investing activities 5,898 (7,644 ) 12,608
--------------------------------------------
Financing activities:
Payments for debt placement fees -- -- (339 )
Proceeds from notes payable 19,148 -- 41,000
Principal payments on notes payable (19,864 ) -- (40,866 )
Repurchase of Depositary Units (120 ) (383 ) (190 )
Cash distributions paid to limited partners (11,366 ) (15,900 ) (15,970 )
Cash distributions paid to general partner (598 ) (837 ) (841 )
--------------------------------------------
Net cash used in financing activities (12,800 ) (17,120 ) (17,206 )
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,829 ) (11,440 ) 9,122
Cash and cash equivalents at beginning of year( See note 3) 3,243 14,885 5,763
--------------------------------------------
Cash and cash equivalents at end of year $ 1,414 $ 3,445 $ 14,885
============================================
Supplemental information:
Interest paid $ 3,078 $ 2,611 $ 2,587
============================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation
Organization
PLM Equipment Growth Fund III, a California limited partnership (the
Partnership), was formed on October 15, 1987. The Partnership engages
in the business of owning and leasing primarily used transportation
equipment. The Partnership offering became effective on March 25, 1988.
The Partnership commenced significant operations in September 1988. PLM
Financial Services, Inc. (FSI) is the General Partner. FSI is a
wholly-owned subsidiary of PLM International, Inc. (PLM International).
The Partnership will terminate on December 31, 2000, unless
terminated earlier upon sale of all equipment or by certain other
events. Beginning after the Partnership's seventh year of operations,
the General Partner will stop reinvesting excess cash, all of which,
less reasonable reserves, will be distributed to the Partners.
Beginning in the Partnership's eleventh year of operations, the General
Partner intends to begin an orderly liquidation of the Partnership's
assets.
FSI manages the affairs of the Partnership. The net income (loss)
and distributions of the Partnership are generally allocated 95% to the
Limited Partners and 5% to the General Partner (see, Net Income (Loss)
per Depositary Unit, below). The General Partner is entitled to a
subordinated incentive fee equal to 7.5% of "Surplus Distributions", as
defined in the 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 and
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 of 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 transportation equipment to
investor programs and third parties, manages pools of transportation
equipment under agreements with the investor programs, and is a General
Partner of other Limited Partnerships.
Accounting for Leases
The Partnership's leasing operations generally 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 are capitalized and amortized over the term of
the lease.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Depreciation and Amortization
Depreciation of equipment held for operating leases is computed on the
200% declining balance method taking a full month's depreciation in the
month of acquisition, based upon estimated useful lives of 12 years for
aircraft, marine containers, and marine vessels, and 15 years for
railcars. Certain aircraft are depreciated under the double-declining
balance depreciation method based over the lease term. The depreciation
method is changed to straight line when annual depreciation expense
using the straight line method exceeds that calculated by the 200%
declining balance method. Acquisition fees have been capitalized as
part of the cost of the equipment. Organization costs are amortized
over a 60 month period. Lease negotiation fees are amortized over the
initial equipment lease term. Debt placement fees and issuance costs
are amortized over the term of the loan for which they were paid. Major
expenditures which are expected to extend the useful lives or reduce
future operating expenses of equipment are capitalized.
Transportation Equipment
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of" (SFAS 121). This standard is effective for years
beginning after December 15, 1995. The Partnership adopted SFAS 121
during 1995, the effect of which was not material as the method
previously employed by the Partnership was consistent with SFAS 121. In
accordance with SFAS 121, the General Partner reviews the carrying
value of its equipment portfolio at least annually in relation to
expected future market conditions for the purpose of assessing
recoverability of the recorded amounts. If projected future lease
revenue plus residual values are less than the carrying value of the
equipment, a loss on revaluation is recorded.
Equipment held for operating leases is stated at cost. Equipment
held for sale is stated at the lower of the equipment's depreciated
cost or fair value less cost to sell and is subject to a pending
contract for sale.
Investments in Unconsolidated Special Purpose Entities
The Partnership has interests in special purpose entities which own
transportation equipment. These interests are accounted for using the
equity method.
The Partnership's investment in unconsolidated special purpose
entities includes acquisition and lease negotiation fees paid by the
Partnership to TEC. The Partnership's equity interest in net income of
unconsolidated special purpose entities is reflected net of management
fees paid or payable to IMI and the amortization of acquisition and
lease negotiation fees paid to TEC.
Repairs and Maintenance
Maintenance costs are usually the obligation of the lessee. If they are
not covered by the lessee they are charged against operations as
incurred. To meet the maintenance obligations of certain aircraft
airframes and engines, escrow accounts are prefunded by the lessees.
Estimated costs associated with marine vessel drydockings are accrued
and charged to income ratably over the period prior to such drydocking.
The reserve accounts are included in the balance sheet as lessee
deposits and reserve for repairs. The prefunded amounts are included in
the balance sheet as restricted cash.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions per Depositary Unit
The net income (loss) and distributions of the Partnership are
generally allocated 95% to the Limited Partners and 5% to the General
Partner. Gross gain on disposition of equipment in each year is
specially allocated to the General Partner to the extent, if any,
necessary to cause the capital account balance of the General Partner
to be zero as of the close of such year. The General Partner received a
special allocation in the amount of $0.1 million, $0.7 million, and
$0.8 million from the gross gain on disposition of equipment for the
years ended December 31, 1996, 1995, and 1994, 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 of $12.0 million, $16.7 million,
and $16.8 million were declared on December 31, 1996, 1995, and 1994
and paid on February 15, 1997, 1996, and 1995, respectively, to the
unitholders of record as of December 31, 1996, 1995, and 1994,
respectively. Cash distributions to investors in excess of net income
are considered to represent a return of capital. Distributions of $2.2
million and $14 million were deemed a return of capital in 1996 and
1995, respectively. All cash distributions to Limited Partners in 1993
were deemed to be a return of capital.
On January 29 1997, the Partnership declared quarterly distributions of
$0.25 per outstanding depositary unit, payable Febuary 15, 1997 to
Unitholders of record as of December 31, 1996.
Marketable Securities
Marketable Securities include a $6 million zero coupon bond maturing
November 15, 1997, which is reflected at its discounted value, which
approximates market value.
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. Lessee security deposits
and required reserves held by the Partnership are considered restricted
cash.
2. General Partner and Transactions with Affiliates
An officer of FSI contributed $100 of the Partnership's initial
capital. Under the equipment management agreement, IMI receives a
monthly fee attributable to either owned equipment or interests in
equipment owned by the USPE's equal to the lesser of (i) the fees which
would be charged by an independent third party for similar services for
similar equipment or (ii) the sum of (A) 5% of the Gross Lease Revenues
(as defined in the agreement) attributable to equipment which is
subject to operating leases and (B) 2% of the Gross Lease Revenues
attributable to equipment which is subject to full payout leases.
Partnership's management fees of $1.3 million and $1.6 million and were
payable to IMI as of December 31, 1996, and 1995, respectively. The
Partnership's proportional share of USPE's management fees of $0.02,
and $0 were payable as of December 31, 1996, 1995, respectively. The
Partnership's proportional share of USPE's management fees expense
during 1996 was $0.2 million. Additionally, the Partnership reimbursed
FSI and its affiliates $0.7 million, $0.8 million, and $0.7 million for
administrative and data processing services performed on behalf of the
Partnership in 1996, 1995, and 1994, respectively. The Partnership's
proportional share of USPE's administrative and data processing
services was $0.1 million during 1996.
The Partnership and unconsolidated special entities paid or
accrued lease negotiation and equipment acquisition fees of $1.6
million, $0.5 million, and $0.2 million to PLM Transportation Equipment
Corporation (TEC) and WMS during 1996, 1995 and 1994, respectively. TEC
is a
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
2. General Partner and Transactions with Affiliates (continued)
wholly-owned subsidiary of the General Partner. WMS is a wholly -owned
subsidiary of PLM international. The Partnership paid $0.3 million, and
$0.6 million to Transportation Equipment Indemnity Company Ltd. (TEI)
during 1995 and 1994, respectively. TEI provides marine insurance
coverage and other insurance brokerage services. The Partnership did
not pay any marine insurance coverage paid to TEI in 1996. The
Partnership's proportional share of unconsolidated special purpose
entities' marine insurance coverage paid to TEI was $0.1 million during
1996. TEI is an affiliate of the General Partner. A substantial portion
of these amounts were paid to third party reinsurance underwriters or
placed in risk pools managed by TEI on behalf of affiliated
partnerships and PLM International which provide threshold coverages on
marine vessel loss of hire and hull and machinery damage. All pooling
management funds are either paid out to cover applicable losses or
refunded pro rata by TEI.
At December 31, 1996, all 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. Revenues
collected under short-term rental agreements with the rental yards'
customers are credited to the owners of the related equipment as
received. Direct expenses associated with the equipment are charged
directly to the Partnership. An allocation of other direct expenses of
the rental yard operations are billed to the Partnership monthly.
The Partnership has interests in certain equipment for lease in
conjunction with affiliated partnerships which are included in
unconsolidated special purpose entities. In 1996, this equipment
included a marine vessel (56%), two trusts that own three commercial
aircraft, two aircraft engines, and portfolio of aircraft rotables
(17%), and a trust that owns six commercial aircraft (17%).
The net balance due to FSI and its affiliates was $1.3 million and
$1.6 million at December 31, 1996 and 1995, respectively.
3. Investments in Unconsolidated Special Purpose Entities
During the second half of 1995, the Partnership began to increase the
level of its participation in the ownership of large-ticket
transportation assets to be owned and operated jointly with affiliated
programs. Prior to 1996, the Partnership accounted for operating
activities associated with joint ownership of rental equipment as
undivided interests, including its proportionate share of each asset
with similar wholly-owned assets in its financial statements. Under
generally accepted accounting principles, the effects of such
activities, if material, should be reported using the equity method of
accounting. Therefore, effective January 1, 1996, the Partnership
adopted the equity method to account for its investment in such
jointly-held assets.
The principle differences between the previous accounting method
and the equity method relate to the presentation of activities relating
to these assets in the statement of operations. Whereas, under equity
accounting the Partnership's proportionate share is presented as a
single net amount, "equity in net income (loss) of unconsolidated
special purpose entities", under the previous method, the Partnership's
income statement reflected its proportionate share of each individual
item of revenue and expense. Accordingly, the effect of adopting the
equity method of accounting has no cumulative effect on previously
reported partner's capital or on the Partnership's net income (loss)
for the period of adoption. Because the effects on previously issued
financial statements of applying the equity method of accounting to
investments in jointly-owned assets are not considered to be material
to such financial statements taken as a whole, previously issued
financial statements have not been restated. However, certain items
have been reclassified in the previously issued balance sheet to
conform to the current period presentation. The beginning cash and cash
equivalents for 1996 is different from the ending cash and cash
equivalents for 1995 on statements of cash flows due to the
reclassification.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
3. Investments in Unconsolidated Special Purpose Entities (continued)
The following summarizes the financial information for the
unconsolidated special purpose entities (USPE) and the Partnership's
interests therein as of and for the year ended December 31, 1996 (in
thousands):
Net Interest
Total USPE of Partnership
------------------------------------
Net Assets $ 49,985 $ 11,138
Revenues 22,146 5,065
Net Income 15,930 6,864
The net investment in USPE's includes the following jointly-owned
equipment (and related assets and liabilities) (in thousands):
% December 31, December 31,
Ownership Equipment 1996 1995
------------------------------------------------------------------------------------------------------------
56% Marine vessel $ 3,999 $ 4,821
45% Mobile offshore drilling unit -- 6,093
50% Aircraft engine -- 656
17% Two trusts that own three commercial aircraft, two aircraft
engines, and portfolio of aircraft rotables 4,564 5,302
14% Trust that owns seven commercial aircraft -- 3,948
17% Trust that owns six commercial aircraft 2,575 --
-------------------------------
Investments in unconsolidated special purpose entities $ 11,138 $ 20,820
===============================
During the twelve months ended December 31, 1996, the Partnership
sold its 45% investment in an entity which owns a mobile offshore
drilling unit, and its 50% investment in an entity which owns an
aircraft engine for $13.7 million.
The Partnership has a beneficial interest in a certain USPE's that
owns multiple aircraft (the Trust). This Trust contains provisions,
under certain circumstances, for allocating specific aircraft to the
beneficial owners. During September 1996, PLM Equipment Growth Fund V,
an affiliated partnership which also has a beneficial interest in the
Trust, renegotiated its senior loan agreement and was required, for
loan collateral purposes, to withdraw the aircraft designated to it
from the Trust. The result was to restate the percentage ownership of
the remaining beneficial owners of the Trust beginning September 30,
1996. This change has no effect on the income or loss recognized in the
third quarter 1996.
4. Equipment
Owned equipment held for operating leases is stated at cost. Equipment
held for sale is stated at the lower of the equipment's depreciated
cost or estimated fair value less cost to sell and is subject to a
pending contract for sale.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
The components of owned equipment at December 31, 1996 and 1995
are as follows (in thousands):
Equipment held for operating leases: 1996 1995
--------------------------------
Rail equipment $ 35,733 $ 35,761
Marine containers 13,146 15,015
Marine vessels -- 15,463
Aircraft and aircraft engines 70,615 56,269
Trailers 7,510 7,624
Mobile offshore drilling unit 9,666 --
--------------------------------
136,670 130,132
Less accumulated depreciation (78,607 ) (84,207 )
--------------------------------
58,063 45,925
Equipment held for sale: -- 475
--------------------------------
Net equipment $ 58,063 $ 46,400
================================
Revenues are earned by placing the equipment under operating
leases which are billed monthly or quarterly. Some of the Partnership's
marine vessels and 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 equipment to sublessees, after deducting certain direct
operating expenses of the pooled equipment. Rents for railcars are
based on mileage traveled or a fixed rate; rents for all other
equipment are based on fixed rates.
As of December 31, 1996, all equipment in the Partnership
portfolio was on lease, except one aircraft, 32 marine containers and
67 railcars. The aggregate net book value of equipment off-lease was
$4.3 million and $3.1 million at December 31, 1996 and 1995,
respectively.
One commercial aircraft is on lease to Continental Airlines Inc.
(Continental). Continental filed for protection under Chapter 11 of the
U.S. Bankruptcy code in December 1990. Unpaid past due rent payments
totaling $1.4 million were converted into two promissory notes by the
Bankruptcy Court with interest accruing at the rate of 8.64% and 12%
per annum over 42 and 48 equal monthly installments. As of December 31,
1996 and 1995, $28,545 and $324,000 were outstanding on these
promissory notes, respectively. Continental remains current on all
payments due under the promissory notes.
During 1996, the Partnership sold or disposed of 397 marine
containers, two aircraft engines, two vessels, 11 trailers, and 143
railcars with aggregate net book value of $8.0 million for aggregate
proceeds of $14.5 million.
During 1995, the Partnership sold or disposed of 462 marine
containers with a net book value of $0.7 million for $0.8 million. The
Partnership also sold one vessel with a net book value of $3.7 million
for $5 million related to a sales-type lease. In addition, 199 railcars
and 5 locomotives were sold with a net book value of $1.1 million for
$2.5 million.
During 1996, the Partnership purchased three commercial aircraft
and a mobile offshore drilling unit for $28.5 million, and paid
acquisition fees of $1.3 million to PLM Transportation Equipment
Corporation, a wholly-owned subsidiary of the General Partner.
At December 31, 1996, the Partnership had no outstanding purchase
commitments.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
All leases for owned and partially owned equipment are being
accounted for as operating leases. Future minimum rentals under
noncancelable leases for owned and partially owned equipment at
December 31, 1996, during each of the next five years are approximately
$19.5 million - 1997; $14.0 million in 1998; $10.8 million in 1999,
$7.6 million in 2000 and $5.3 million - 2001. Contingent rentals based
upon utilization were $1.5 million, $1.9 million, and $2.3 million in
1996, 1995, and 1994, respectively.
The Partnership owns certain equipment which is leased and
operated internationally. A limited number of the Partnership's
transactions are denominated in a foreign currency. The Partnership's
asset and liability accounts denominated in a foreign currency were
translated into U.S. dollars at the rates in effect at the balance
sheet dates, and revenue and expense items were translated at average
rates during the year. Gains or losses resulting from foreign currency
transactions are included in the results of operations and are not
material.
The Partnership leases its aircraft, railcars, mobile offshore
drilling unit, and trailers to lessees domiciled in six geographic
regions: Canada, United States, Europe, Asia, South Asia, and Southeast
Asia. The marine vessels and marine containers are leased to multiple
lessees in different regions who operate the marine vessels and marine
containers worldwide. The tables below set forth geographic information
about the Partnership's owned and partially owned equipment grouped by
domicile of the lessee as of and for the years ended December 31, 1996,
1995, and 1994 (in thousands):
Revenues:
Investments in Owned
USPE Equipment Total equipment
Region 1996 1996 1995 1994
-------------------------------------------------------------------------------------------
Various $ 2,113 $ 4,087 $ 6,998 $ 18,475
Canada 1,083 3,434 5,098 5,515
United States -- 7,749 7,542 6,440
Europe 1,869 1,120 826 1,558
Asia -- 1,200 1,200 1,200
South Asia -- 869 1,512 2,096
Southeast Asia -- -- 192 941
=============================================================
Total lease revenues $ 5,065 $ 18,459 $ 23,368 $ 36,225
=============================================================
The following table below sets forth identifiable income (loss)
information by region (in thousands):
Investments in USPE Owned
equipment Total equipment
1996 1996 1995 1994
--------------------------------------------------------------
Net income (loss):
Various $ 5,962 $ 6,858 $ 3,193 $ 4,101
Canada (307 ) 2,591 1,869 2,830
United States -- 1,639 1,818 (787 )
Europe 1,209 (1,728 ) 107 (1,061 )
Asia -- 93 69 (181 )
South Asia -- (2,739 ) (71 ) (281 )
Southeast Asia -- (175 ) (474 ) (772 )
-------------------------------------------------------------
Total identifiable net income 6,864 6,539 6,511 3,849
Administrative and other net loss -- (3,643 ) (3,805 ) (3,597 )
-------------------------------------------------------------
Total net income (loss) $ 6,864 $ 2,896 $ 2,706 $ 252
=============================================================
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
4. Equipment (continued)
The net book value of these assets at December 31, 1996 ,1995, and
1994, are as follows (in thousands):
Investments in USPE Owned Equipment
Region 1996 1995 1996 1995 1994
----------------------------------------------------------------------------------------------------
Various $ 3,999 $ 4,821 $ 13,599 $ 11,035 $ 24,475
Canada 2,575 3,948 8,136 10,019 10,069
United States -- 6,093 10,862 12,157 23,866
Europe 4,564 5,958 17,399 -- 871
Asia -- -- 4,314 5,349 6,419
South Asia -- -- 3,753 4,653 5,585
Southeast Asia -- -- -- 2,712 3,253
------------------------------------------------------------------
Total equipment held for
operating leases 11,138 20,820 58,063 45,925 74,538
Railcars held for sale -- -- -- 475 --
==================================================================
Total Equipment $ 11,138 $ 20,820 $ 58,063 $ 46,400 $ 74,538
==================================================================
No lessees comprised more than 10% of total revenues in 1996,
1995, or 1994.
5. Notes Payable
The Partnership has notes outstanding with a face amount of $40.3
million with interest computed at LIBOR plus 1.5% per annum. The notes
have three tranches with different maturities based on the General
Partner's ability to select various LIBOR maturities (one month, two
months or six months ) for tranches of the notes. Rates are set when
the tranches mature and are re-set. (7%, 7.1 % and 7.25% at December
31, 1996 and 7%, 7.3% and 7.375% at December 31, 1995) During the first
15 months following conversion to a term loan, beginning September 30,
1996, quarterly principal payments equal to 75% of net proceeds from
asset sales was due. Beginning the second year commencing December 31,
1997, quarterly principal payments will be equal to 75% of net proceeds
from asset sales from September 30, 1997, or payments equal to 9.0% of
the facility balance at September 30, 1997. During 1996, the
Partnership paid down $19.9 million of the outstanding loan balance as
a result of asset sales and redrew $19.1 million to purchase other
equipment.
The General Partner believes that the book value of the debt
approximates fair value due to its variable interest rate.
In October 1996, the General Partner revised its short term loan
facility (the "Committed Bridge Facility") and PLM Equipment Growth
Fund III is no longer included as a borrower.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
6. 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, 1996, there were temporary differences of
approximately $20.7 million between the financial statement carrying
values of certain assets and liabilities and the income tax basis of
such assets and liabilities, primarily due to differences in
depreciation methods and equipment reserves.
7. Repurchase of Depositary Units
On December 28, 1992, the Partnership engaged in a program to
repurchase up to 250,000 Depository Units. In the 12 months ended
December 31, 1996, the Partnership repurchased 28,500 Depositary Units
at a cost of $0.12 million. As of December 31, 1996, the Partnership
has repurchased a cumulative total of 128,853 Depositary Units at a
total cost of $0.92 million.
8. Delisting of Partnership Units
The General Partner delisted the Partnership's depositary units from
the American Stock Exchange (AMEX) under the symbol GFZ on April 8,
1996. The last day for trading on the AMEX was March 22, 1996. Under
the Internal Revenue Code (the Code), the Partnership was classified as
a Publicly Traded Partnership. The Code treats all Publicly Traded
Partnerships as corporations if they remain publicly traded after
December 31, 1997. Treating the Partnership as a corporation would mean
the Partnership itself would become a taxable, rather than a "flow
through" entity. As a taxable entity, the income of the Partnership
would have become subject to federal taxation at both the partnership
level and at the investor level to the extent that income would have
become distributed to an investor. In addition, the General Partner
believed that the trading price of the Depositary Units would have been
distorted when the Partnership began the final liquidation of the
underlying equipment portfolio. In order to avoid taxation of the
Partnership as a corporation and to prevent unfairness to Unitholders,
the General Partner delisted the Partnership's Depositary Units from
the AMEX. While the Partnership's Depositary Units are no longer
publicly traded on a national stock exchange, the General Partner
continues to manage the equipment of the Partnership and prepare and
distribute quarterly and annual reports and Forms 10-Q and 10-K in
accordance with the Securities and Exchange Commission requirements. In
addition, the General Partner continues to provide pertinent tax
reporting forms and information to Unitholders. The General Partner
anticipates an informal market for the Partnership's units may develop
in the secondary marketplace similar to that which currently exists for
non-publicly traded partnerships.
9. Net Investment in Sales-type Lease
In the third quarter of 1996, the charterer exercised his option to buy
the marine vessel for $4.2 million.
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 *
25. Powers of Attorney. 42-44
* Incorporated by reference. See page 24 of this report.