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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, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-10813
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PLM EQUIPMENT GROWTH FUND III
(Exact name of registrant as specified in its charter)
California 68-0146197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Market, Steuart Street Tower
Suite 800, San Francisco, CA 94105-1301
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (415) 974-1399
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock: N/A
Indicate the number of units outstanding of each of the issuer's classes of
depositary units, as of the latest practicable date:
Class Outstanding at March 17, 1999
Limited partnership depositary units: 9,871,073
General Partnership units: 1
An index of exhibits filed with this Form 10-K is located at page 26.
Total number of pages in this report: 48.
PART I
ITEM 1. BUSINESS
(A) Background
On October 27, 1987, PLM Financial Services, Inc. (FSI or the General Partner),
a wholly-owned subsidiary of PLM International, Inc. (PLM International or
PLMI), filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission with respect to a proposed offering of 10,000,000 depositary
units (the units) in PLM Equipment Growth Fund III, a California limited
partnership (the Partnership, the Registrant, or EGF III). The Partnership's
offering became effective on March 21, 1988. FSI, as General Partner, owns a 5%
interest in the Partnership. The Partnership engages in the business of
investing in diversified equipment portfolio consisting primarily of used,
long-lived, low-obsolescence capital equipment that is easily transportable by
and among prospective users.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of long-lived, low-obsolescence,
high residual-value equipment which were purchased with the net proceeds of the
initial partnership offering, supplemented by debt financing, and surplus
operating cash during the investment phase of the Partnership. All transactions
over $1.0 million must be approved by the PLM International Credit Review
Committee (the Committee), which is made up of members of PLM International
Senior Management. In determining a lessee's creditworthiness, the Committee
will consider, among other factors, the lessee's financial statements, internal
and external credit ratings, and letters of credit;
(2) to generate sufficient net operating cash flow from lease operations to
meet liquidity requirements and to generate cash distributions to the limited
partners until such time as the General Partner commences the orderly
liquidation of the Partnership assets or unless the Partnership is terminated
earlier upon sale of all Partnership property or by certain other events;
(3) To selectively sell equipment when the General Partner believes that,
due to market conditions, market prices for equipment exceed inherent equipment
values or that expected future benefits from continual ownership of a particular
asset will have an adverse affect on the Partnership. Proceeds from these sales,
together with excess net cash flow from operations (net cash provided by
operating activities plus distributions from unconsolidated special-purpose
entities (USPEs)), are used for distributions to the partners or for repayment
of outstanding debt;
(4) To preserve and protect the value of the portfolio through quality
management, maintaining diversity, and constantly monitoring equipment markets.
The offering of the units of the Partnership closed on May 11, 1989. The General
Partner contributed $100 for its 5% general partner interest in the Partnership.
On August 16, 1991, the units of the Partnership began trading on the American
Stock Exchange (AMEX). Thereupon each unitholder received a depositary receipt
representing ownership of the number of units owned by such unitholder. The
General Partner delisted the Partnership's depositary units from the AMEX on
April 8, 1996. The last day for trading on the AMEX was March 22, 1996.
As of December 31, 1998, there were 9,871,073 depositary units outstanding.
Beginning in the Partnership's eighth year of operations, which began January 1,
1997, the General Partner stopped reinvesting cash flow and surplus funds,
which, if any, less reasonable reserves, will be distributed to the partners. In
the eleventh year of operations of the Partnership, which commences on January
1, 2000, the General Partner will begin the dissolution and liquidation the
assets of the Partnership in an orderly fashion. The Partnership will terminate
on December 31, 2000, unless the Partnership is terminated earlier upon sale of
all of the Partnership's equipment or by certain other events.
Table 1, below, lists the equipment and the cost of the equipment in the
Partnership's portfolio, and the cost of investments in unconsolidated
special-purpose entities, as of December 31, 1998 (in thousands of dollars):
TABLE 1
Units Type Manufacturer Cost
- ----------------------------------------------------------------------------------------------------------------------
Owned equipment held for operating leases:
3 737-200 Stage II commercial aircraft Boeing $ 30,506
1 DC-9-32 Stage II commercial aircraft McDonnell Douglas 10,028
1 Dash 8-300 Stage II commuter aircraft Dehavilland 5,748
1 737-200 Stage III commercial aircraft Boeing 5,746
739 Non-pressurized tank railcars Various 17,794
477 Pressurized tank railcars Various 11,417
119 Coal railcars Various 4,788
355 Marine containers Various 5,606
85 Over-the-road refrigerated trailers Various 2,670
162 Intermodal trailers Various 2,503
16 Over-the-road dry trailers Stoughton and Strick 84
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Total owned equipment held for operating leases $ 96,890
==============
Investments in unconsolidated special-purpose entities:
0.56 Bulk carrier marine vessel Naikai Zosen $ 7,163
0.17 Two trusts comprised a total of:
three 737-200 Stage II commercial aircraft, Boeing 4,706
two Stage II aircraft engines, and a Pratt Whitney 195
portfolio of rotable components Various 325
--------------
Total investments in unconsolidated special-purpose entities $ 12,389
==============
Includes equipment and investments purchased with the proceeds from capital
contributions, undistributed cash flow from operations, and Partnership
borrowings. Includes costs capitalized subsequent to the date of
acquisition, and equipment acquisition fees paid to PLM Transportation
Equipment Corporation. All equipment was used equipment at the time of
purchase, except for 50 marine containers and 164 dry piggyback trailers.
Jointly owned: EGF III (56%) and an affiliated program.
Jointly owned: EGF III (17%) and three affiliated programs.
The equipment is generally leased under operating leases with terms of one to
six years. All of the Partnership's marine containers are leased to operators of
utilization-type leasing pools, that include equipment owned by unaffiliated
parties. In such instances, revenues received by the Partnership consist of a
specified percentage of revenues generated by leasing the pooled equipment to
sublessees, after deducting certain direct operating expenses of the pooled
equipment.
As of December 31, 1998, approximately 38% of the Partnership's trailer
equipment is operated in rental yards owned and maintained by PLM Rental, Inc.,
the short-term trailer rental subsidiary of PLM International doing business as
PLM Trailer Leasing. 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 indirect expenses of the rental yard
operations is charged to the Partnership monthly. The remaining trailer fleet
operated with a short-line railroad system.
The lessees of the equipment include but are not limited to: Continental
Airlines, Inc., Canadian Airlines International, Varig S.A. (Viaco Aerea Rio -
Grandense), Time Air, Inc., and Terra Nitrogen.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM
Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the
management of the Partnership's equipment. The Partnership's management
agreement with IMI is to co-terminate with the dissolution of the Partnership,
unless the limited partners vote to terminate the agreement prior to that date
or at the discretion of the General Partner. IMI has agreed to perform all
services necessary to manage the equipment on behalf of the Partnership and to
perform or contract for the performance of all obligations of the lessor under
the Partnership's leases. In consideration for its services and pursuant to the
Partnership agreement, IMI is entitled to a monthly management fee (see Notes 1
and 2 to the financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
Generally, the equipment owned or invested in by the Partnership is leased out
on an operating lease basis wherein the rents received during the initial
noncancelable term of the lease are insufficient to recover the Partnership's
purchase price of the equipment. The short to mid-term nature of operating
leases 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 an operating lease need not be capitalized
on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize
full payout leases on new equipment, i.e. leases that have terms equal to the
expected economic life of the equipment. While some lessees prefer the
flexibility offered by a shorter-term operating lease, other lessees prefer the
rate advantages possible with a full payout lease. Competitors may write full
payout leases at considerably lower rates and for longer terms than the
Partnership offers, or larger competitors with a lower cost of capital may offer
operating leases at lower rates, which may put the Partnership at a competitive
disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases. Manufacturers may provide ancillary services that the
Partnership cannot offer, such as specialized maintenance service (including
possible substitution of equipment), training, warranty services, and trade-in
privileges.
The Partnership also competes with many equipment lessors, including ACF
Industries, Inc. (Shippers Car Line Division), GATX Corp., General Electric
Railcar Services Corporation, General Electric Capital Aviation Services
Corporation, XTRA Corporation, and other investment programs that lease the same
types of equipment.
(D) Demand
The Partnership operates or operated in six primary operating segments: aircraft
leasing, mobile offshore drilling unit leasing, marine vessel leasing, marine
container leasing, railcar leasing, and trailer leasing. Each equipment leasing
segment engages in short-term to mid-term operating leases to a variety of
customers. Except for those aircraft leased to passenger air carriers, the
Partnership's transportation equipment is used to transport materials and
commodities, rather than people.
The following section describes the international and national markets in which
the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial aircraft
The world's major airlines experienced a fourth consecutive year of profits,
showing a combined marginal net income (net income measured as a percentage of
revenue) of 6%, compared to the industry's historical annual rate of 1%.
Airlines recorded positive marginal net annual income of 2% in 1995, 4% in 1996,
6% in 1997, and 6% in 1998. The two factors that have led to this increase in
profitability are improvements in yield management systems and reduced operating
costs, particularly lowered fuel costs. These higher levels of profitability
have allowed many airlines to re-equip their fleets with new aircraft, resulting
in a record number of orders for manufacturers.
Major airlines increased their fleets from 7,181 aircraft in 1997 to 7,323 in
1998, which has resulted in more used aircraft available on the secondary
market. Despite these increases, the number of Stage II aircraft in these fleets
(similar to those owned by the Partnership) decreased by 26% from 1997 to 1998,
and sharper decreases are expected in 1999. This trend is due to Federal
Aviation Regulation section C36.5, which requires airlines to convert 100% of
their fleets to Stage III aircraft, which have lower noise levels than Stage II
aircraft, by the year 2000 in the United States and the year 2002 in Canada and
Europe. Stage II aircraft can be modified to Stage III with the installation of
a hushkit that significantly reduces engine noise. The cost of hushkit
installation ranges from $1.0 to $2.0 million for the types of aircraft owned by
the Partnership.
Orders for new aircraft have risen rapidly worldwide in recent years: 691 in
1995, 1,182 in 1996, 1,328 in 1997, and an estimated 1,500 in 1998. As a result
of this increase in orders, manufacturers have expanded their production, and
new aircraft deliveries have increased from 482 in 1995, 493 in 1996, and 674 in
1997, to an estimated 825 in 1998.
The industry now has in place two of the three conditions that led to financial
problems in the early 1990s: potential excess orders and record deliveries. The
missing element is a worldwide recession. Should a recession occur, the industry
will experience another period of excess aircraft capacity and surplus aircraft
on the ground.
The Partnership's fleet consists of several late-model Stage II narrowbody
(single-aisle) commercial aircraft and one Stage III 1980 B737-200. The Stage II
aircraft are either positioned with air carriers that are outside Stage
III-legislated areas or anticipated to be sold or leased outside of Stage III
areas before the year 2000. The Partnership has scheduled one owned Stage II
narrowbody aircraft for sale during 1999. The Partnership's 17% interest in two
trusts that comprised of a total of three Stage II narrowbody aircraft, two
Stage II aircraft engines, and a portfolio of rotable components are also
scheduled for sale during 1999.
(b) Commuter Aircraft
Major changes have occurred in the commuter market due to the 1993 introduction
of small regional jets. The original concept for regional jets was to take over
the North American hub-and-spoke routes served by the large turboprops, but they
are also finding successful niches in point-to-point routes. The introduction of
this smaller aircraft has allowed major airlines to shift the regional jets to
those marginal routes previously operated by narrowbody (single-aisle) aircraft,
allowing larger-capacity aircraft to be more efficiently employed in an
airline's route system.
The Partnership leases commuter turboprops containing from 36 to 50 seats. These
aircraft all fly in North America, which continues to be the fastest-growing
market for commuter aircraft in the world. The Partnership's aircraft possess
unique performance capabilities, compared to other turboprops, which allow them
to readily operate at maximum payloads from unimproved surfaces, hot and high
runways, and short runways. However, the growing use of regional jets in the
commuter market has resulted in an increase in demand for regional jets at the
expense of turboprops. Several major turboprop programs have been terminated and
all turboprop manufacturers are cutting back on production due to reduced
demand.
(c) Aircraft Engines
Availability has decreased over the past two years for the Pratt & Whitney Stage
II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft. This decrease in supply is due primarily to the limited production of
spare parts to support these engines. The demand for this type of aircraft
engines currently exceeds supply. The partnership expects to sell its JT8D
engines in 1999 that were part of the Partnership's 17% interest in two trusts
that own a total of three Stage II aircraft, two Stage II JT8D engines, and a
portfolio of aircraft rotables.
(d) Rotables
Aircraft rotables, or components, are replacement spare parts held in an
airline's inventory. They are recycled parts that are first removed from an
aircraft or engine, overhauled, and then recertified, returned to an airline's
inventory, and ultimately refit to an aircraft in as-new condition. Rotables
carry identification numbers that allow them to be individually tracked during
their use.
The types of rotables owned and leased by the Partnership include landing gear,
certain engine components, avionics, auxiliary power units, replacement doors,
control surfaces, pumps, and valves. The market for the Partnership's rotables
remains stable.
The Partnership expects to sell the rotables used on its Stage II aircraft
during 1999 as part of the Partnership's 17% interest in two trusts that own a
total of three Stage II aircraft, two Stage II engines, and rotables jointly
owned by the Partnership and three affiliated programs.
(2) Railcars
(a) Nonpressurized, General Purpose Tank Cars
Tank cars that do not require pressurization are used to transport a variety of
bulk liquid commodities and chemicals, including certain petroleum fuels and
products, liquified asphalt, lubricating and vegetable oils, molten surfur, and
corn syrup. The largest consumers of chemical products are the manufacturing,
automobile, and housing sectors. Because the bulk liquid industry is so diverse,
its overall health is reflected by such general indicators as changes in the
Gross Domestic Product, personal consumption expenditures, retail sales,
currency exchange rates, and national and international economic forecasts.
In North America, railcar loadings for the commodity group that includes
chemicals and petroleum products remained essentially unchanged, compared to
1997. The Partnership's general purpose cars continue to be in high demand, with
utilization over 98% in 1998.
(b) Pressurized Tank Railcars
Pressurized tank cars transport primarily two chemicals: liquefied petroleum gas
(natural gas) and anhydrous ammonia (fertilizer). Natural gas is used in a
variety of ways in businesses, electric plants, factories, homes, and now even
cars. The demand for fertilizer is driven by a number of factors, including
grain prices, the status of government farm subsidy programs, the amount of
farming acreage and mix of crops planted, weather patterns, farming practices,
and the value of the U.S. dollar.
In North America, 1998 carload originations of both chemicals and petroleum
products remained relatively constant, compared to 1997. The 98% utilization
rate of the Partnership's pressurized tank cars was consistent with this
statistic.
(c) Coal Railcars
Since most coal is shipped to domestic electric utilities, demand for coal is
greatly influenced by summer air conditioning and, to a lesser extent, winter
heating requirements. Coal car loadings in North America in 1998 increased 3%
from 1997.
Coal cars owned by the Partnership are on long-term leases and operated at 100%
utilization during 1998.
(3) Marine Containers
The marine container market began 1998 with industrywide utilization in the low
80% range. This percentage eroded somewhat during the year, while per diem
rental rates remained steady. One factor affecting the market was the
availability of historically low-priced marine containers from Asian
manufacturers. This trend is expected to remain in 1999, and will continue to
put pressure on economic results fleetwide.
The trend toward industrywide consolidation continued in 1998, as the U.S.
parent company of one of the industry's top ten container lessors announced that
it would be outsourcing the management of its container fleet to a competitor.
While this announcement has yet to be finalized, over the long term, such
industrywide consolidation should bring more rationalization to the container
leasing market and result in both higher fleetwide utilization and per diem
rates.
(4) Trailers
(a) Over-the-Road Refrigerated Trailers
The temperature-controlled over-the-road trailer market remained strong in 1998
as freight levels improved and equipment oversupply was reduced. Many
refrigerated equipment users retired older trailers and consolidated their
fleets, making way for new, technologically improved units. Production of new
equipment is backlogged into the third quarter of 1999. In light of the current
tight supply of trailers available on the market, it is anticipated that
trucking companies and other refrigerated trailer users will look outside their
own fleets more frequently by leasing trailers on a short-term basis to meet
their equipment needs.
This leasing trend should benefit the Partnership, which makes most of its
trailers available for short-term leasing from rental yards owned and operated
by a PLM International subsidiary. The Partnership's utilization of refrigerated
trailers showed improvement in 1998, with utilization rates approaching 70%,
compared to 60% in 1997.
(b) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to ship goods either by truck or by
rail. Activity within the North American intermodal trailer market declined
slightly in 1998, with trailer shipments down 4% from 1997 levels, due primarily
to rail service problems associated with the mergers in this area. Utilization
of the intermodal per diem rental fleet, consisting of approximately 170,000
units, was 73%. Intermodal utilization in 1999 is expected to decline another 2%
from 1998 levels, due to a slight leveling off of overall economic activity in
1999, after a robust year in 1998.
The General Partner has initiated expanded marketing and asset management
efforts for its intermodal trailers, from which it expects to achieve, improved
trailer utilization and operating results. During 1998, average utilization
rates for the Partnership's intermodal trailer fleet approached 80%.
(c) Over-the-Road Dry Trailers
The U.S. over-the-road nonrefrigerated (dry) trailer market continued to recover
in 1998, with a strong domestic economy resulting in heavy freight volumes. The
leasing outlook continues to be positive, as equipment surpluses of recent years
are being absorbed by a buoyant market. In addition to high freight volumes,
declining fuel prices have led to a strong trucking industry and improved
equipment demand.
The Partnership's nonrefrigerated van fleet experienced strong utilization
throughout 1998, with utilization rates remaining well above 70% throughout the
year.
(5) Marine Vessel
The Partnership has investment with another affiliated program in small-sized
dry bulk vessel that is traded in worldwide markets and carry commodity cargoes.
Demand for commodity shipping closely follows worldwide economic growth
patterns, which can alter demand by causing changes in volume on trade routes.
The General Partner operates the Partnership's vessel through period charter, an
operating approach that provides the flexibility to adapt to changing market
situations.
Freight rates for dry bulk vessels decreased for all ship sizes in 1998, with
the largest vessels experiencing the greatest declines. After a relatively
stable year in 1997, rates declined due to a decrease in cargo tonnage moving
from the Pacific Basin and Asia to western ports. The size of the overall dry
bulk carrier fleet decreased by 3%, as measured by the number of vessels, but
increased by 1%, as measured by deadweight (dwt) tonnage. While scrapping of
ships was a significant factor in 1998 (scrapping increased by 50% over 1997)
overall there was no material change in the size of the dry bulk vessel fleet,
as deliveries and scrapings were nearly equal.
Total dry trade (as measured in deadweight tons) was flat, compared to a 3%
growth in 1997. As a result, the market had no foundation for increasing freight
rates, and charter rates declined as trade not only failed to grow, but actually
declined due to economic disruptions in Asia. Overall activity is expected to
remain flat in 1999, with trade in two of the three major commodities static or
decreasing in volume. Iron ore volume is expected to decrease, and grain trade
is anticipated to be flat, while a bright spot remains in an estimated increase
in steam coal trade.
Ship values experienced a significant decline in 1998, as expectations for trade
growth were dampened. The decline in ship values was also driven by bargain
pricing for newbuilding in Asian yards.
The uncertainty in forecasts is the Asian economic situation; if there is some
recovery from the economic shake-up that started in the second half of 1997,
then 1999 has prospects for improvement. The delivery of ships in 1999 is
expected to be less than in 1998, and high scrapping levels should continue. Dry
bulk shipping is a cyclical business -- inducing capital investment during
periods of high freight rates and discouraging investment during periods of low
rates. The current environment thus discourages investment. However, the history
of the industry implies that this period will be followed by one of increasing
rates and investment in new ships, driven by growth in demand. Over time, demand
grows at an average of 3% a year, so when historic levels of growth in demand
resume, the industry is expected to experience a significant increase in freight
rates and ship values.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal,
state, local, or foreign government authorities. Such regulations may impose
restrictions and financial burdens on the Partnership's ownership and operation
of equipment. Changes in government regulations, industry standards, or
deregulation may also affect the ownership, operation, and resale of the
equipment. Substantial portions of the Partnership's equipment portfolio are
either registered or operated internationally. Such equipment may be subject to
adverse political, government, or legal actions, including the risk of
expropriation or loss arising from hostilities. Certain of the Partnership's
equipment is subject to extensive safety and operating regulations, which may
require its removal from service or extensive modification to meet these
regulations, at considerable cost to the Partnership. Such regulations include
but are not limited to:
(1) the U.S. Oil Pollution Act of 1990, which established liability for
operators and owners of vessels and mobile offshore drilling units that
create environmental pollution. This regulation has resulted in higher
oil pollution liability insurance. The lessee of the equipment
typically reimburses the Partnership for these additional costs;
(2) the U.S. Department of Transportation's Aircraft Capacity Act of 1990,
which limits or eliminates the operation of commercial aircraft in the
United States that do not meet certain noise, aging, and corrosion
criteria. In addition, under United States Federal Aviation
Regulations, after December 31, 1999, no person may operate an aircraft
to or from any airport in the contiguous United States unless that
aircraft has been shown to comply with Stage III noise levels. The
Partnership has Stage II aircraft that do not meet Stage III
requirements. The cost to husk-kit a Stage II aircraft is approximately
$1.5 million, depending on the type of aircraft. The Partnership's
Stage II aircraft are either positioned with air carriers that are
outside Stage III-legislated areas or anticipated to be sold or leased
outside of Stage III areas before the year 2000. The Partnership has
scheduled one owned Stage II narrowbody aircraft for sale during 1999.
The Partnership's 17% interest in two trusts that comprised of a total
of three Stage II narrowbody aircraft, two Stage II aircraft engines,
and a portfolio of rotable components are also scheduled for sale
during 1999;
(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 to the stratospheric ozone
layer and which are used extensively as refrigerants in refrigerated
marine cargo containers and over-the-road refrigerated trailers;
(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 railcars.
As of December 31, 1998, the Partnership was in compliance with the above
government regulations. Typically, costs related to extensive equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment
it has purchased its interests in entities that own equipment for leasing
purposes. As of December 31, 1998, the Partnership owned a portfolio of
transportation and related equipment and investments in equipment owned by USPEs
as described in Item 1, Table 1. The Partnership acquired equipment with the
proceeds of the Partnership offering of $199.7 million, proceeds from debt
financing of $41.9 million, and by reinvesting a portion of its operating cash
flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street
Tower, Suite 800, San Francisco, California 94105-1301. All office facilities
are provided by FSI without reimbursement by the Partnership.
ITEM 3. LEGAL PROCEEDINGS
The Partnership, together with affiliates, has initiated litigation in various
official forums in India against a defaulting Indian airline lessee to repossess
Partnership property and to recover damages for failure to pay rent and failure
to maintain such property in accordance with relevant lease contracts. The
Partnership has repossessed all of its property previously leased to such
airline, and the airline has ceased operations. In response to the Partnership's
collection efforts, the airline filed counter-claims against the Partnership in
excess of the Partnership's claims against the airline. The General Partner
believes that the airline's counterclaims are completely without merit, and the
General Partner will vigorously defend against such counterclaims.
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, 1998.
(This space intentionally left blank)
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT
MATTERS
As of March 17, 1999, there were 9,871,073 depositary units outstanding. There
are 8,499 depositary unitholders of record as of the date of this report.
There are several secondary market facilitate sales and purchases of depositary
units. Secondary markets are characterized as having few buyers for depositary
units and therefore are generally viewed as inefficient vehicles for the sale of
depositary units. Presently, there is no public market for the depositary units
and none is likely to develop.
To prevent the units from being considered publicly traded and thereby to avoid
taxation of the Partnership as an association treated as a corporation under the
Internal Revenue Code, the depositary units will not be transferable without the
consent of the General Partner, which may be withheld in its absolute
discretion. The General Partner intends to monitor transfers of units in an
effort to ensure that they do not exceed the percentage or number permitted by
certain safe harbors promulgated by the Internal Revenue Service. A transfer may
be prohibited if the intended transferee is not an U.S. citizen or if the
transfer would cause any portion of the depositary units of a "Qualified Plan"
as defined by the Employee Retirement Income Security Act of 1974 and Individual
Retirement Accounts to exceed the allowable limit.
On January 14, 1999, the General Partner announced that it will begin to
recognize transfers involving trading of units in the partnership for the 1999
calendar year. The partnership is listed on the OTC Bulletin Board under the
symbols GFZPZ.
In making the announcement, the General Partner noted that, as in previous
years, it will continue to monitor the volume of such trades to ensure that the
Partnership remain in compliance with Internal Revenue Service (IRS) Notice
88-75 and IRS Code Section 7704. These IRS regulations contain safe harbor
provisions stipulating the maximum number of partnership units that can be
traded during a calendar year in order for a partnership not to be deemed a
publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on in
1999, the General Partner will, at that time, cease to recognize any further
transfers involving trading of Partnership units. Transfers specifically
excluded from the safe harbor limitations, referred to in the regulations as
"transfers not involving trading," which include transfers at death, transfers
between family members, and transfers involving distributions from a qualified
retirement plan, will continue to be recognized by the General Partner
throughout the year.
Pursuant to the terms of the partnership agreement, the General Partner is
generally entitled to a 5% interest in the profits and losses and distributions
of the Partnership subject to certain special allocation provisions.
The Partnership engaged in a plan to repurchase up to 250,000 depositary units.
There were no repurchases of depositary units in 1998 and 1997. As of December
31, 1998, the Partnership had purchased a cumulative total of 128,853 depositary
units at a total cost of $0.9 million. The General Partner does not plan any
future repurchase of depositary units on behalf of the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
TABLE 2
For the Years Ended December 31,
(In thousands of dollars, except weighted-average depositary unit amounts)
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
Operating results:
Total revenues $ 19,999 $ 26,066 $ 25,886 $ 28,055 $ 40,247
Net gain on disposition
of equipment 3,808 5,629 6,450 2,936 2,863
Loss on revaluation of
equipment -- -- -- -- (1,082 )
Equity in net income of unconsolidated
special-purpose entities 76 485 6,864 -- --
Net income 2,917 1,937 9,760 2,706 252
At year-end:
Total assets $ 33,068 $ 53,186 $ 78,651 $ 83,317 98,779
Total liabilities 20,986 33,627 50,638 52,980 54,028
Note payable 18,540 29,290 40,284 41,000 41,000
Cash distribution $ 10,394 $ 10,391 $ 11,964 $ 16,737 16,811
Cash distribution representing a return
of capital to the limited partners $ 7,477 $ 8,454 $ 2,204 $ 14,031 15,970
Per weighted-average depositary unit:
Net income (loss) $ 0.24 $ 0.14 $ 0.93 $ 0.19 (0.06)
Cash distribution $ 1.00 $ 1.00 $ 1.15 $ 1.60 1.60
Cash distribution representing a return
of capital to the limited partners $ 0.76 $ 0.86 $ 0.22 $ 1.41 1.60
After reduction of $0.4 million ($0.04 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 consolidated
financial statements).
After reduction of $0.1 million ($0.01 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 consolidated
financial statements).
After reduction of $0.7 million ($0.07 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 consolidated
financial statements).
After reduction of $0.8 million ($0.08 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 consolidated
financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of
operations relates to the financial statements of PLM Equipment Growth Fund III
(the Partnership). The following discussion and analysis of operations focuses
on the performance of the Partnership's equipment in the various segments in
which it operates and its effect on the Partnership's overall financial
condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk
occurs whenever the leases for the equipment expire or are otherwise terminated
and the equipment must be remarketed. Major actors influencing the current
market rate for Partnership's equipment include, supply and demand for similar
or comparable types of transport capacity, desirability of the equipment in the
leasing market, market conditions for the particular industry segment in which
the equipment is to be leased, overall economic conditions, and various
regulations of concerning the use of the equipment. Equipment that is idle or
out of service between the expiration of one lease and the assumption of a
subsequent lease can result in a reduction of contribution to the Partnership.
The Partnership experienced re-leasing or repricing activity in 1998 primarily
in its aircraft, marine containers, trailers, and railcars.
(a) Aircraft: One Boeing 737-200 Stage III commercial aircraft came
off-lease during the third quarter of 1998. This aircraft is currently being
marketed for sale or re-lease.
(b) Marine containers: All 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 saw lower re-lease rates and lower
utilization on the remaining marine containers fleet during 1998.
(c) Trailers: All of the Partnership's trailer portfolio operates in
short-term rental facilities or short-line railroad systems. The relatively
short duration of most leases in these operations exposes the trailers to
considerable re-leasing activity.
(d) Railcars: While this equipment experienced some re-leasing activity,
lease rates in this market remain relatively constant.
(2) Equipment Liquidations
Liquidation of Partnership equipment and investments in USPEs represents a
reduction in the size of the equipment portfolio and may result in a reduction
of contribution to the Partnership. 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 contribution,
but also may require the Partnership to assume additional costs to protect its
interests under the leases, such as repossession or legal fees. The Partnership
experienced the following in 1998:
During 1998, the Partnership disposed of owned equipment that included marine
containers, trailers, railcars, and a mobile offshore drilling unit for total
proceeds of $12.1 million.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the General Partner reviews the carrying value of the
Partnership's equipment portfolio at least quarterly in relation to expected
future market conditions for the purpose of assessing the recoverability of the
recorded amounts. If projected undiscounted future lease revenues plus residual
values are less than the carrying value of the equipment, a loss on revaluation
is recorded. No reductions to the carrying values of equipment were required
during either 1998, 1997, or 1996.
As of December 31, 1998, the General Partner estimated the current fair market
value of the Partnership's equipment portfolio, including the Partnership's
interest in equipment owned by USPEs, to be $64.6 million. This estimate is
based on recent market transactions for equipment similar to the Partnership's
equipment portfolio and the Partnership's interest in equipment owned by USPEs.
Ultimate realization of fair market value by the Partnership may differ
substantially from the estimate due to specific market conditions, technological
obsolescence, and government regulations, among other factors that the General
Partner cannot accurately predict.
(C) Financial Condition -- Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with
capital raised from its initial equity offering of $199.7 million and permanent
debt financing of $41.9 million. No further capital contributions from the
limited partners are permitted under the terms of the Partnership's limited
partnership agreement. In addition, the Partnership, under its current loan
agreement, does not have the capacity to incur additional debt. 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, 1998, the Partnership generated $11.4 million in
operating cash (net cash provided by operating activities plus non-liquidating
cash distributions from USPES) to meet its operating obligations and to make
distributions (total of $10.4 million in 1998) to the partners but also used
undistributed available cash from prior periods of approximately $0.8 million.
The Partnership's note payable, which bears interest at 1.5% over LIBOR, had an
outstanding balance of $18.5 million as of December 31, 1998 and March 17, 1999.
Commencing October 1, 1997, the loan required quarterly principal payments equal
to the net proceeds from asset sales from that quarter, or maintain the minimum
of the facility balance specified in the loan agreement. During 1998, the
Partnership paid $10.8 million of the outstanding loan balance as a result of
asset sales.
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.
(This space intentionally left blank)
(D) Results of Operations -- Year-to-Year Detailed Comparison
(1) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1998 and 1997
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating and asset-specific insurance expenses) on owned equipment
decreased for the year ended December 31, 1998 when compared to the same period
of 1997. Certain expenses such as depreciation and amortization and general and
administrative expenses relating to the operating segments (see Note 5 to the
audited financial statements), are not included in the owned equipment operation
discussion because these expenses are more indirect in nature, not a result of
operations but more the result of owning a portfolio of equipment. The following
table presents lease revenues less direct expenses by segment (in thousands of
dollars):
For the Years
Ended December 31,
1998 1997
----------------------------------------------------------------------------------
Aircraft $ 5,150 $ 6,499
Rail equipment 4,768 5,319
Trailers 1,035 1,539
Mobile offshore drilling unit 738 1,612
Marine containers 272 1,077
Marine vessels (54 ) (160 )
Aircraft: Aircraft lease revenues and direct expenses were $6.5 million and $1.3
million, respectively, for 1998, compared to $7.9 million and $1.4 million,
respectively, during 1997. Lease revenues decreased $1.4 million for 1998, when
compared to 1997 due to the sale of a total of two aircraft during the third and
fourth quarters of 1997 and one aircraft that went offlease during the third
quarter of 1998. The decrease in lease revenue was partially offset by the
incremental lease revenue from an aircraft that was transferred into the
Partnership's owned equipment portfolio from a trust during the second quarter
of 1998.
Rail equipment: Railcar lease revenues and direct expenses were $7.1 million and
$2.4 million, respectively, for 1998, compared to $7.5 million and $2.2 million,
respectively, during 1997. The decrease in lease revenues was due to the
disposition of rail equipment during 1998 and 1997 and more rail equipment being
off lease during 1998 when compared to the same period of 1997. The increase in
direct expenses resulted from running repairs required on certain rail equipment
in the fleet during 1998 that were not needed during 1997.
Trailers: Trailer lease revenues and direct expenses were $1.3 million and $0.2
million, respectively, for 1998, compared to $1.8 million and $0.3 million,
respectively, during 1997. The number of trailers owned by the Partnership has
been declining due to sales and dispositions. The result of this declining fleet
has been a decrease in trailers net contribution.
Mobile offshore drilling unit: Mobile offshore drilling unit (MODU) lease
revenues and direct expenses were $0.8 million and $19,000, respectively, for
1998, compared to $1.6 million and $31,000, respectively, during 1997. The
decrease in contribution was due to the sale of the Partnership's MODU in June
of 1998.
Marine containers: Marine containers lease revenues and direct expenses were
$0.3 million and $6,000, respectively, for 1998, compared to $1.1 million and
$10,000, respectively, during 1997. The number of marine containers owned by the
Partnership has been declining due to sales and dispositions. The result of this
declining fleet has been a decrease in marine container net contribution.
Marine vessels: Marine vessel lease revenues and direct expenses were zero and
$0.1 million, respectively, 1998, compared to zero and $0.2 million,
respectively, during 1997. The decrease of net contribution was due to the sale
of all the Partnership's marine vessels during 1996. The direct expense of $0.1
million for 1998 was due to additional supplemental liability insurance charged
to the Partnership for sold vessels by the former insurance company. This
expense was partially offset by loss of hire insurance refund received during
the second quarter of 1998 from Transportation Equipment Indemnity Company Ltd.
(TEI), an affiliate of the General Partner, due to lower claims from the insured
Partnership and other insured affiliated partnerships. The direct expense of
$0.2 million in 1997 was primarily due to uncollectible port costs for a sold
vessel that were formerly borne by the lessee.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $13.2 million for 1998 decreased from $20.5 million
for 1997. Significant variances are explained as follows:
(i) A decrease of $4.5 million in depreciation and amortization expense
from 1997 levels reflects the sale or disposition of certain Partnership assets
during 1998 and 1997 and the Partnership's use of the double-declining balance
method of depreciation which results in greater depreciation in the first years
an asset is owned.
(ii)A decrease of $1.5 million in interest expense was due to lower average
debt outstanding during 1998 when compared to 1997.
(iii) A decrease of $0.8 million in bad debt expense from 1997 due to the
collection of $0.4 million from past due receivables during 1998 that had
previously been reserved for as a bad debt and the General Partner's evaluation
of the collectability of receivables due from certain lessees.
(iv)A decrease of $0.3 million in general and administrative expenses was
primarily due to reduced legal fees to collect outstanding receivables due from
an aircraft lessee.
(v) A decrease of $0.2 million in management fees was due to lower lease
revenues in 1998, compared to 1997.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $3.8 million for 1998 and resulted
from the disposition of marine containers, trailers, railcars, and a mobile
offshore drilling unit. These assets had an aggregate net book value of $8.3
million and were sold or liquidated for proceeds of $12.1 million. The net gain
on disposition of equipment totaled $5.6 million for 1997 and resulted from the
disposition of marine containers, trailers, railcars, and aircraft. These assets
had an aggregate net book value of $6.5 million and were sold or liquidated for
proceeds of $12.1 million.
(d) Interest and Other Income
Interest and other income decreased by $0.2 million for 1998 compared to 1997
primarily due to lower cash balances available for investment.
(e) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
(USPEs)
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by segment (in
thousands of dollars):
For the Years
Ended December 31,
1998 1997
-------------------------------------
Aircraft, aircraft engines, and rotables $ 49 $ 857
Marine vessels 27 (372 )
=====================================
Equity in net income of USPEs $ 76 $ 485
=====================================
Aircraft, aircraft engines, and rotables: The Partnership's share of aircraft
revenues and expenses were $1.2 million and $1.2 million, respectively, for
1998, compared to $2.8 million and $1.9 million, respectively, during 1997. As
of December 31, 1998 and 1997, the Partnership had an interest in two trusts
that own a total of three commercial aircraft, two aircraft engines, and a
portfolio of aircraft rotables. As of December 31, 1997, the Partnership also
owned an interest in a trust that owned four commercial aircraft. The aircraft
in this trust was transferred out of the trust into the Partnership's owned
equipment portfolio in the second quarter of 1998. The decrease in lease
revenues was due to the renewal of the leases in 1998 for three commercial
aircraft, two aircraft engines, and a portfolio of aircraft rotables at a lower
rate than was in place during the same period of 1997. In addition, the lease
revenues decreased because of the aircraft that was transferred out of a trust
into the Partnership's owned equipment portfolio went offlease during the second
quarter of 1998. Depreciation, direct expenses, and administrative expenses
decreased as a result of this transfer and due to the double-declining balance
method of depreciation, which results in greater depreciation in the first years
an asset is owned.
Marine vessel: The Partnership's share of revenues and expenses of marine
vessels was $1.4 million and $1.4 million, respectively, for 1998, compared to
$1.4 million and $1.8 million, respectively, for 1997. As of December 31, 1998
and 1997, the Partnership had a 56% interest in an entity that owns a
bulk-carrier marine vessel. The net income of $27,000 in 1998, compared to the
net loss of $0.4 in 1997, was due to lower insurance and depreciation expenses
in 1998 than in 1997.
(f) Net Income
As a result of the foregoing, the Partnership's net income for 1998 was $2.9
million, compared to net income of $1.9 million during 1997. The Partnership's
ability to operate, liquidate assets, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance during the
year ended December 31, 1998 is not necessarily indicative of future periods. In
the year ended December 31, 1998 and 1997, the Partnership distributed $9.9
million to the limited partners, or $1.00 per weighted-average depositary unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended
December 31, 1997 and 1996
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance,
equipment operating and asset-specific insurance expenses) on owned equipment
increased for the year ended December 31, 1997 when compared to the same period
of 1996. Certain expenses such as depreciation and amortization and general and
administrative expenses relating to the operating segments (see Note 5 to the
audited financial statements), are not included in the owned equipment operation
discussion because these expenses are more indirect in nature, not a result of
operations but more the result of owning a portfolio of equipment. The following
table presents lease revenues less direct expenses by segment (in thousands of
dollars):
For the Years
Ended December 31,
1997 1996
----------------------------------------------------------------------------------
Aircraft and aircraft engines $ 6,499 $ 3,688
Rail equipment 5,319 4,976
Mobile offshore drilling unit 1,612 701
Trailers 1,539 1,748
Marine containers 1,077 1,482
Marine vessels (160 ) 926
Aircraft and aircraft engines: Aircraft lease revenues and direct expenses were
$7.9 million and $1.4 million, respectively, for 1997, compared to $5.0 million
and $1.3 million, respectively, during 1996. The increase in net contribution
was due to three aircraft acquired during the second and third quarter of 1996,
one aircraft that was off lease for part of 1996 and went back on lease during
the first quarter of 1997, partially offset by disposition of two aircraft
during the third and fourth quarter of 1997.
Rail equipment: Railcar lease revenues and direct expenses were $7.5 million and
$2.2 million, respectively, for 1997, compared to $7.8 million and $2.8 million,
respectively, during 1996. The increase in railcar contribution resulted from
running repairs required on certain railcars in the fleet in 1996 that were not
needed during 1997. The increase in contribution caused by lower repairs was
partially offset by a decrease in railcar revenue due to lower average lease
rate in 1997 when compared to 1996.
Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and
direct expenses were $1.6 million and $31,000, respectively, for 1997, compared
to $0.7 million and $19,000, respectively, during 1996. The increase in
contribution was due to a full year of revenue earned on the rig in 1997,
compared to five months in 1996.
Trailers: Trailer lease revenues and direct expenses were $1.8 million and $0.3
million, respectively, for 1997, compared to $2.1 million and $0.4 million,
respectively, during 1996. The number of trailers owned by the Partnership has
been declining due to sales and dispositions. The result of this declining fleet
has been a decrease in trailers net contribution.
Marine containers: Marine container lease revenues and direct expenses were $1.1
million and $10,000, respectively, for 1997, compared to $1.5 million and
$12,000, respectively, during 1996. The number of marine containers owned by the
Partnership has been declining due to sales and dispositions. The result of this
declining fleet has been a decrease in marine container net contribution.
Marine vessels: Marine vessel lease revenues and direct expenses were zero and
$0.2 million, respectively, for 1997, compared to $1.4 million and $0.5 million,
respectively, during 1996. The decrease of net contribution was due to the sale
of all the Partnership's marine vessels during 1996. The $0.2 million net loss
in 1997 was primarily due to uncollectible port costs for a sold vessel that
were formerly borne by the lessee.
(b) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $20.5 million for 1997 increased from $18.1 million
for 1996. Significant variances are explained as follows:
(i) An increase of $2.9 million in depreciation and amortization expense
from 1996 levels reflects the Partnership's entire year of depreciation on
equipment purchased in 1996, which was partially offset by the sale or
disposition of certain Partnership assets during 1997 and 1996.
(ii) An increase of $0.1 million in management fees was due to higher lease
revenues in 1997, compared to 1996.
(iii) A decrease of $0.4 million in bad debt expense from 1996 levels
primarily reflects the Partnership's evaluation of collectibility of certain
receivable balances.
(iv) A decrease of $0.3 million in general and administrative expenses was
primarily due to decreases in inspection costs and various taxes.
(c) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $5.6 million for 1997 and resulted
from the disposition of marine containers, trailers, railcars, and aircraft.
These assets had an aggregate net book value of $6.5 million and were sold or
liquidated for proceeds of $12.1 million. The net gain on disposition of
equipment totaled $6.5 million for 1996 and resulted from the disposition of
aircraft engines, marine vessels, marine containers, trailers, and railcars.
These assets had an aggregate net book value of $8.0 million and were sold or
liquidated for proceeds of $13.8 million. Included in the gain of $6.5 million
from the sale of equipment was the unused portion of accrued drydocking of $0.7
million.
(d) Interest and Other Income
Interest and other income decreased by $0.5 million for 1997 compared to 1996
primarily due to no sales-type lease income in 1997 compared to $0.5 million in
1996. The charterer exercised its option to buy the vessel which was under the
sales-type lease in July 1996.
(e) Equity in Net Income (Loss) of USPEs
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Years
Ended December 31,
1997 1996
-------------------------------------
Aircraft, aircraft engines, and rotables $ 857 $ 901
Marine vessels (372 ) (611 )
Mobile offshore drilling unit -- 6,574
=====================================
Equity in net income of USPEs $ 485 $ 6,864
=====================================
Aircraft, aircraft engines, and rotables: The Partnership's share of aircraft
revenues and expenses were $2.8 million and $1.9 million, respectively, for
1997, compared to $3.6 million and $2.7 million, respectively, during 1996. As
of December 31, 1997, the Partnership had a partial beneficial interest in three
trusts that hold seven commercial aircraft, two aircraft engines, and a package
of rotable components. The decrease in net contribution was due to the
Partnership's liquidation of its 50% investment in an entity that owned an
aircraft engine in the third quarter of 1996, resulting in $0.7 million in net
gains on sale.
Marine vessel: The Partnership's share of revenues and expenses of marine
vessels was $1.4 million and $1.8 million, respectively, for 1997, compared to
$1.4 million and $2.0 million, respectively, for 1996. As of December 31, 1997,
the Partnership had a 56% interest in an entity that owns a bulk-carrier marine
vessel. The decrease in net loss in 1997, when compared to 1996, was due to
lower repairs and maintenance and lower marine operating expenses in 1997 than
in 1996.
Mobile offshore drilling unit: The Partnership's share of revenues and expenses
of the mobile offshore drilling unit was zero for 1997, compared to $7.2 million
and $0.6 million, respectively, for 1996. The income of $6.6 million for the
twelve months ended December 31, 1996 was primarily due to the sale, in the
third quarter of 1996, of the Partnership's investment in an entity that owns a
mobile offshore drilling unit, for a gain of which the Partnership's share was
$6.5 million.
(f) Net Income
As a result of the foregoing, the Partnership's net income for 1997 was $1.9
million, compared to net income of $9.8 million during 1996. The Partnership's
ability to operate, liquidate assets, and re-lease those assets whose leases
expire is subject to many factors, and the Partnership's performance during the
year ended December 31, 1997 is not necessarily indicative of future periods. In
the year ended December 31, 1997, the Partnership distributed $9.9 million to
the limited partners, or $1.00 per weighted-average depositary unit.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets.
Although these operations expose the Partnership to certain currency, political,
credit, and economic risks, the General Partner believes that these risks are
minimal or has implemented strategies to control the risks. Currency risks are
at a minimum because all invoicing, with the exception of a number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
by avoiding operations in countries that do not have a stable judicial system
and established commercial business laws. Credit support strategies for lessees
range from letters of credit supported by 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 Note 6 to the audited financial
statements for information on the revenues, net income (loss), and net book
value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time
period the asset is owned and the useful life ascribed to the asset for
depreciation purposes. Net income (loss) from equipment is significantly
impacted by depreciation charges, which are greatest in the early years of
ownership due to the use of the double-declining balance method of depreciation.
The relationships of geographic revenues, net income (loss), and net book value
of equipment are expected to change significantly in the future, as assets come
off lease and decisions are made to either redeploy the assets in the most
advantageous geographic location or sell the assets.
The Partnership's owned equipment on lease to the United States (U.S.)-domiciled
lessees consisted of railcars, trailers, and an aircraft. During 1998, U.S.
lease revenues accounted for 27% of the lease revenues generated by wholly-and
partially-owned equipment, while these operations accounted for $1.5 million in
net income of the Partnership's total aggregate net income of $2.9 million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees
consisted of railcars and an aircraft that was transferred into the
Partnership's owned equipment portfolio from a trust during the second quarter
of 1998. Canadian lease revenues accounted for 32% of total lease revenues
generated by wholly-and partially-owned equipment, while these operations
accounted for $1.6 million in net income of the Partnership's total aggregate
net income of $2.9 million.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to Europe consisted of three owned aircraft and an interest in two trusts
that own three aircraft, two aircraft engines, and aircraft rotable components.
During 1998, the lease revenues for these operations accounted for 24% of total
lease revenues generated by wholly-and partially-owned equipment and accounted
for a loss of $0.5 million in 1998 of the Partnership's total aggregate net
income of $2.9 million.
The Partnership's owned equipment on lease to Asian-domiciled lessees consisted
of an aircraft which accounted for 5% of total lease revenue generated by
wholly-and partially-owned equipment. During 1998, the net loss generated by
this operation was $1.1 million of the Partnership's total aggregate net income
of $2.9 million. The net loss of $1.1 million in 1998 was due to $1.2 million of
repairs and maintenance expenses to prepare the aircraft for re-lease.
The Partnership's owned equipment and investments in equipment owned by USPEs on
lease to lessees in the rest of the world consisted of marine containers, one
mobile offshore drilling unit, and a partially owned marine vessel. During 1998,
lease revenues for these operations accounted for 13% of the total lease revenue
generated by wholly-and partially-owned equipment, while these operations
accounted for $3.9 million in net income of the Partnership's total aggregate
net income of $2.9 million. The mobile offshore drilling unit was sold in June
of 1998 with a gain of $3.6 million.
(F) Effects of Year 2000
It is possible that the General Partner's currently installed computer systems,
software products, and other business systems, or the Partnership's vendors,
service providers, and customers, working either alone or in conjunction with
other software or systems, may not accept input of, store, manipulate, and
output dates on or after January 1, 2000 without error or interruption (a
problem commonly known as the "Year 2000" problem). Since the Partnership relies
substantially on the General Partner's software systems, applications, and
control devices in operating and monitoring significant aspects of its business,
any Year 2000 problem suffered by the General Partner could have a material
adverse effect on the Partnership's business, financial condition, and results
of operations.
The General Partner has established a special Year 2000 oversight committee to
review the impact of Year 2000 issues on its software products and other
business systems in order to determine whether such systems will retain
functionality after December 31, 1999. The General Partner (a) is currently
integrating Year 2000-compliant programming code into its existing internally
customized and internally developed transaction processing software systems and
(b) the General Partner's accounting and asset management software systems have
either already been made Year 2000-compliant or Year 2000-compliant upgrades of
such systems are planned to be implemented by the General Partner before the end
of fiscal 1999. Although the General Partner believes that its Year 2000
compliance program can be completed by the beginning of 1999, there can be no
assurance that the compliance program will be completed by that date. To date,
the costs incurred and allocated to the Partnership to become Year 2000
compliant have not been material. Also, the General Partner believes the future
cost allocable to the Partnership to become Year 2000 compliant will not be
material.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner is currently contacting
equipment manufacturers of the Partnership's leased equipment portfolio to
assure Year 2000 compliance or to develop remediation strategies. The General
Partner does not expect that non-Year 2000 compliance of its leased equipment
portfolio will have an adverse material impact on its financial statements.
Some risks associated with the Year 2000 problem are beyond the ability of the
General Partner or Partnership to control, including the extent to which third
parties can address the Year 2000 problem. The General Partner is communicating
with vendors, services providers, and customers in order to assess the Year 2000
compliance readiness of such parties and the extent to which the Partnership is
vulnerable to any third-party Year 2000 issues. There can be no assurance that
the software systems of such parties will be converted or made Year 2000
compliant in a timely manner. Any failure by the General Partner or such other
parties to make their respective systems Year 2000 compliant could have a
material adverse effect on the business, financial position, and results of
operations from the Partnership. The General Partner will make an ongoing effort
to recognize and evaluate potential exposure relating to third-party Year 2000
non-compliance, and will develop a contingency plan if the General Partner
determines that third-party non-compliance will have a material adverse effect
on the Partnership's business, financial position, or results of operation.
The General Partner is currently developing a contingency plan to address the
possible failure of any systems due to the Year 2000 problems. The General
Partner anticipates these plans will be completed by September 30, 1999.
(G) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of December 31, 1998,
the General Partner is reviewing the effect this standard will have on the
Partnership's consolidated financial statements.
(H) Inflation
Inflation had no significant impact on the Partnership's operations during 1998,
1997, or 1996.
(I) 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.
(J) Outlook for the Future
The Partnership will enter its liquidation phase beginning January 1, 2000. 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 that the liquidation of Partnership assets will be completed by the
scheduled termination of the Partnership at the end of the year 2000.
Several factors may affect the Partnership's operating performance in 1999 and
beyond, including changes in the markets for the Partnership's equipment and
changes in the regulatory environment in which that equipment operates.
The Partnership's operation of a diversified equipment portfolio in a broad base
of markets is intended to reduce its exposure to volatility in individual
equipment sectors.
The ability of the Partnership to realize acceptable lease rates on its
equipment in the different equipment markets is contingent on many factors, such
as specific market conditions and economic activity, technological obsolescence,
and government or other regulations. The unpredictability of these factors, or
of their occurrence, makes it difficult for the General Partner to clearly
define trends or influences that may impact the performance of the Partnership's
equipment. The General Partner continually monitors both the equipment markets
and the performance of the Partnership's equipment in these markets. The General
Partner may decide to reduce the Partnership's exposure to those equipment
markets in which it determines that it cannot operate equipment and achieve
acceptable rates of return.
The Partnership intends to use cash flow from operations to satisfy its
operating requirements, pay loan principal on debt, and pay cash distributions
to the investors.
(1) Repricing Risk
Certain of the Partnership's aircraft, railcars, trailers, and containers will
be remarketed in 1999 as existing leases expire, exposing the Partnership to
some repricing risk/opportunity. Additionally, the General Partner may elect to
sell certain underperforming equipment or equipment whose continued operation
may become prohibitively expensive. In either case, the General Partner intends
to re-lease or sell equipment at prevailing market rates; however, the General
Partner cannot predict these future rates with any certainty at this time, and
cannot accurately assess the effect of such activity on future Partnership
performance.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with
current applicable regulations (see Item 1, Section E, Government Regulations).
However, the continuing implementation of new or modified regulations by some of
the authorities mentioned previously, or others, may adversely affect the
Partnership's ability to continue to own or operate equipment in its portfolio.
Additionally, regulatory systems vary from country to country, which may
increase the burden to the Partnership of meeting regulatory compliance for the
same equipment operated between countries. Currently, the General Partner has
observed rising insurance costs to operate certain vessels in U.S. ports,
resulting from implementation of the U.S. Oil Pollution Act of 1990. Ongoing
changes in the regulatory environment, both in the United States and
internationally, cannot be predicted with accuracy, and preclude the General
Partner from determining the impact of such changes on Partnership operations,
purchases, or sale of equipment. Under U.S. Federal Aviation Regulations, after
December 31, 1999, no person may operate an aircraft to or from any airport in
the contiguous United States unless that aircraft has been shown to comply with
Stage III noise levels. The Partnership has Stage II aircraft that do not meet
Stage III requirements. The cost to husk-kit a Stage II aircraft is
approximately $1.5 million, depending on the type of aircraft. The Partnership's
Stage II aircraft are either positioned with air carriers that are outside Stage
III-legislated areas or anticipated to be sold or leased outside of Stage III
areas before the year 2000. The Partnership has scheduled one owned Stage II
narrowbody aircraft for sale during 1999. The Partnership's 17% interest in two
trusts that comprised of a total of three Stage II narrowbody aircraft, two
Stage II aircraft engines, and a portfolio of rotable components are also
scheduled for sale during 1999.
(3) Distributions
During the passive liquidation phase, the Partnership will use operating cash
flow and proceeds from the sale of equipment to meet its operating obligations,
make loan principal and interest payments on debt, and make distributions to the
partners. Although the General Partner intends to maintain a sustainable level
of distributions prior to final liquidation of the Partnership, actual
Partnership performance and other considerations may require adjustments to
existing distribution levels. In the long term, changing market conditions and
used equipment values precludes the General Partner from accurately determining
the impact of future re-leasing activity and equipment sales on Partnership
performance and liquidity.
The Partnership will enter the active liquidation phase beginning January 1,
2000. During this phase, the size of the Partnership's remaining equipment
portfolio and, in turn, the amount of net cash flows from operations will
continue to become progressively smaller as assets are sold. Although
distribution levels may be reduced, significant asset sales may result in
potential special distributions to unitholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposures are that of interest rate and
currency devaluation risk. The Partnership's senior secured note is a variable
rate debt. The Partnership estimates a one percent increase or decrease in the
Partnership's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.1 million in 1999, and $25,000 in 2000.
The Partnership estimates a two percent increase or decrease in the
Partnership's variable rate debt would result in an increase or decrease,
respectively, in interest expense of $0.3 million in 1999 and $49,000 in 2001.
During 1998, 73% of the Partnership's total lease revenues from wholly-and
partially-owned equipment came from non-United States domiciled lessees. Most of
the Partnership's leases require payment in United States (U.S.) currency. If
these lessees currency devalues against the U.S. dollar, the lessees could
potentially encounter difficulty in making the U.S. dollar denominated lease
payments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to
Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(This space is intentionally left blank)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL
AND PLM FINANCIAL SERVICES, INC.
As of the date of this annual report, the directors and executive officers of
PLM International and of PLM Financial Services, Inc. (and key executive
officers of its subsidiaries) are as follows:
Name Age Position
- ---------------------------------------- ------------------ -------------------------------------------------------
Robert N. Tidball 60 Chairman of the Board, Director, President, and Chief
Executive Officer, PLM International, Inc.; Director,
PLM Financial Services, Inc.; Vice President, PLM
Railcar Management Services, Inc.; President, PLM
Worldwide Management Services Ltd.
Randall L.-W. Caudill 51 Director, PLM International, Inc.
Douglas P. Goodrich 52 Director and Senior Vice President, PLM
International, Inc.; Director and President, PLM
Financial Services, Inc.; President, PLM
Transportation Equipment Corporation; President, PLM
Railcar Management Services, Inc.
Warren G. Lichtenstein 33 Director, PLM International, Inc.
Howard M. Lorber 50 Director, PLM International, Inc.
Harold R. Somerset 63 Director, PLM International, Inc.
Robert L. Witt 58 Director, PLM International, Inc.
J. Michael Allgood 50 Vice President and Chief Financial Officer, PLM
International, Inc. and PLM Financial Services, Inc.
Robin L. Austin 52 Vice President, Human Resources, PLM International,
Inc. and PLM Financial Services, Inc.
Stephen M. Bess 52 President, PLM Investment Management, Inc.; Vice
President and Director, PLM Financial Services, Inc.
Richard K Brock 36 Vice President and Corporate Controller, PLM
International, Inc. and PLM Financial Services, Inc.
James C. Chandler 50 Vice President, Planning and Development, PLM
International, Inc. and PLM Financial Services, Inc.
Susan C. Santo 36 Vice President, Secretary, and General Counsel, PLM
International, Inc. and PLM Financial Services, Inc.
Janet M. Turner 42 Vice President, Investor Relations and Corporate
Communications, PLM International, Inc. and PLM
Investment Management, Inc.
Robert N. Tidball was appointed Chairman of the Board in August 1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment as President and Chief Executive Officer, he was
Executive Vice President of PLM International. Mr. Tidball became a director of
PLM International in April 1989. Mr. Tidball was appointed a Director of PLM
Financial Services, Inc. in July 1997 and was elected President of PLM Worldwide
Management Services Limited in February 1998. He has served as an officer of PLM
Railcar Management Services, Inc. since June 1987. Mr. Tidball was Executive
Vice President of Hunter Keith, Inc., a Minneapolis-based investment banking
firm, from March 1984 to January 1986. Prior to Hunter Keith, he was Vice
President, General Manager, and Director of North American Car Corporation and a
director of the American Railcar Institute and the Railway Supply Association.
Randall L.-W. Caudill was elected to the Board of Directors in September 1997.
He is President of Dunsford Hill Capital Partners, a San Francisco-based
financial consulting firm serving emerging growth companies. Prior to founding
Dunsford Hill Capital Partners, Mr. Caudill held senior investment banking
positions at Prudential Securities, Morgan Grenfell Inc., and The First Boston
Corporation. Mr. Caudill also serves as a director of Northwest Biotherapeutics,
Inc., VaxGen, Inc., SBE, Inc., and RamGen, Inc.
Douglas P. Goodrich was elected to the Board of Directors in July 1996,
appointed Senior Vice President of PLM International in March 1994, and
appointed Director and President of PLM Financial Services, Inc. in June 1996.
Mr. Goodrich has also served as Senior Vice President of PLM Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services, Inc. since September 1992, having been a Senior Vice President since
June 1987. Mr. Goodrich was an executive vice president of G.I.C. Financial
Services Corporation of Chicago, Illinois, a subsidiary of Guardian Industries
Corporation, from December 1980 to September 1985.
Warren G. Lichtenstein was elected to the Board of Directors in December 1998.
Mr. Lichtenstein is the Chief Executive Officer of Steel Partners II, L.P.,
which is PLM International's largest shareholder, currently owning 16% of the
Company's common stock. Additionally, Mr. Lichtenstein is Chairman of the Board
of Aydin Corporation, a NYSE-listed defense electronics concern, as well as a
director of Gateway Industries, Rose's Holdings, Inc., and Saratoga Beverage
Group, Inc. Mr. Lichtenstein is a graduate of the University of Pennsylvania,
where he received a Bachelor of Arts degree in economics.
Howard M. Lorber was elected to the Board of Directors in January 1999. Mr.
Lorber is President and Chief Operating Officer of New Valley Corporation, an
investment banking and real estate concern. He is also Chairman of the Board and
Chief Executive Officer of Nathan's Famous, Inc., a fast food company.
Additionally, Mr. Lorber is a director of United Capital Corporation and Prime
Hospitality Corporation and serves on the boards of several community service
organizations. He is a graduate of Long Island University, where he received a
Bachelor of Arts degree and a Masters degree in taxation. Mr. Lorber also
received charter life underwriter and chartered financial consultant degrees
from the American College in Bryn Mawr, Pennsylvania. He is a trustee of Long
Island University and a member of the Corporation of Babson College.
Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994. From February 1988 to December 1993, Mr. Somerset was President and
Chief Executive Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a subsidiary of Alexander & Baldwin, Inc. Mr. Somerset joined C&H Sugar in 1984
as Executive Vice President and Chief Operating Officer, having served on its
Board of Directors since 1978. Between 1972 and 1984, Mr. Somerset served in
various capacities with Alexander & Baldwin, Inc., a publicly held land and
agriculture company headquartered in Honolulu, Hawaii, including Executive Vice
President of Agriculture and Vice President and General Counsel. Mr. Somerset
holds a law degree from Harvard Law School as well as a degree in civil
engineering from the Rensselaer Polytechnic Institute and a degree in marine
engineering from the U.S. Naval Academy. Mr. Somerset also serves on the boards
of directors for various other companies and organizations, including Longs Drug
Stores, Inc., a publicly held company.
Robert L. Witt was elected to the Board of Directors in June 1997. Since 1993,
Mr. Witt has been a principal with WWS Associates, a consulting and investment
group specializing in start-up situations and private organizations about to go
public. Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel Corporation, an international advanced materials company with sales
primarily in the aerospace, transportation, and general industrial markets. Mr.
Witt also serves on the boards of directors for various other companies and
organizations.
J. Michael Allgood was appointed Vice President and Chief Financial Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services, Inc. in December 1992. Between July 1991 and October
1992, Mr. Allgood was a consultant to various private and public-sector
companies and institutions specializing in financial operations 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.
Robin L. Austin became Vice President, Human Resources of PLM Financial
Services, Inc. in 1984, having served in various capacities with PLM Investment
Management, Inc., including Director of Operations, from February 1980 to March
1984. From June 1970 to September 1978, Ms. Austin served on active duty in the
United States Marine Corps and served in the United States Marine Corp Reserves
from 1978 to 1998. She retired as a Colonel of the United States Marine Corps
Reserves in 1998. Ms. Austin has served on the Board of Directors of the
Marines' Memorial Club and is currently on the Board of Directors of the
International Diplomacy Council.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July
1997. Mr. Bess was appointed President of PLM Investment Management, Inc. in
August 1989, having served as Senior Vice President of PLM Investment
Management, Inc. beginning in February 1984 and as Corporate Controller of PLM
Financial Services, Inc. beginning in October 1983. Mr. Bess served as Corporate
Controller of PLM, Inc. beginning in December 1982. Mr. Bess was Vice
President-Controller of Trans Ocean Leasing Corporation, a container leasing
company, from November 1978 to November 1982, and Group Finance Manager with the
Field Operations Group of Memorex Corporation, a manufacturer of computer
peripheral equipment, from October 1975 to November 1978.
Richard K Brock was appointed Vice President and Corporate Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting manager beginning in September 1991 and as Director of Planning and
General Accounting beginning in February 1994. Mr. Brock was a division
controller of Learning Tree International, a technical education company, from
February 1988 through July 1991.
James C. Chandler became Vice President, Planning and Development of PLM
International in April 1996. From 1994 to 1996 Mr. Chandler worked as a
consultant to public companies, including PLM, in the formulation of business
growth strategies. Mr. Chandler was Director of Business Development at Itel
Corporation from 1987 to 1994, serving with both the Itel Transportation Group
and Itel Rail.
Susan C. Santo became Vice President, Secretary, and General Counsel of PLM
International and PLM Financial Services, Inc. in November 1997. She has worked
as an attorney for PLM International since 1990 and served as its Senior
Attorney since 1994. Previously, Ms. Santo was engaged in the private practice
of law in San Francisco. Ms. Santo received her J.D. from the University of
California, Hastings College of the Law.
Janet M. Turner became Vice President of Investor Services of PLM International
in 1994, having previously served as Vice President of PLM Investment
Management, Inc. since 1990. Before 1990, Ms. Turner held the positions of
manager of systems development and manager of investor relations at the Company.
Prior to joining PLM in 1984, she was a financial analyst with The
Toronto-Dominion Bank in Toronto, Canada.
The directors of PLM International, Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified. No family relationships exist
between any director or executive officer of PLM International Inc. or PLM
Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment
Management, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no
pension, profit sharing, retirement, or similar benefit plan in effect as of
December 31, 1998.
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 distributions of the Partnership subject to
certain special allocations of income. In addition to its General
Partner interest, FSI owned 8,000 units in the Partnership as of
December 31, 1998. As of December 31, 1998, no investor was known by
the General Partner to beneficially own more than 5% of the depositary
units of the Partnership.
(B) Security Ownership of Management
Table 3, below, sets forth, as of the date of this report, the amount
and percent of the Partnership's outstanding depositary units
beneficially owned by each of the directors and executive officers and
all directors and executive officers as a group of the General Partner
and its affiliates:
TABLE 3
Name Depositary Units Percent of Units
Robert N. Tidball 2,000 *
All directors and officers
As a group (1 person) 2,000 *
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 1998, the Partnership paid or accrued the following fees to FSI
or its affiliates: management fees, $0.9 million; equipment acquisition
fees, $0.1 million; and lease negotiation fees, $12,000. The
Partnership reimbursed FSI or its affiliates $0.6 million for
administrative and data processing services performed on behalf of the
Partnership during 1998. The Partnership also paid Transportation
Equipment Indemnity Company Ltd. (TEI) a wholly owned, Bermuda-based
subsidiary of PLM International, $4,000 for insurance coverages during
1998; these amounts were paid substantially 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 arrangement funds are either paid out to cover applicable
losses or refunded pro rata by TEI. The Partnership received a refund
of $55,000 from TEI during 1998 due to lower loss-of-hire and hull and
machinery damage claims from a previous year.
During 1998, the USPEs paid or accrued the following fees to FSI or its
affiliates (based on the Partnership's proportional share of
ownership): management fees, $0.1 million, and administrative and data
processing services, $43,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K.
(B) Reports on Form 8-K
None.
(C) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated
by reference to the Partnership's Registration Statement on
Form S-1 (Reg. No. 33-18104), which became effective with
the Securities and Exchange Commission on March 25, 1988.
4.1 Amendment, dated November 18, 1991, to Limited Partnership
Agreement of Partnership. Incorporated by reference to the
Partnership's Annual Report on Form 10-K 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: March 17, 1999 PLM EQUIPMENT GROWTH FUND III
PARTNERSHIP
By: PLM Financial Services, Inc.
General Partner
By: /s/ Douglas P. Goodrich
--------------------------
Douglas P. Goodrich
President & Director
By: /s/ Richard K Brock
--------------------------
Richard K Brock
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
*___________________
Robert N. Tidball Director, FSI March 17, 1999
*___________________
Douglas P. Goodrich Director, FSI March 17, 1999
*___________________
Stephen M. Bess Director, FSI March 17, 1999
*Susan C. Santo, by signing her name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo
- ------------------------
Susan C. Santo
Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
(Item 14(a))
Page
Independent auditors' report 29
Balance sheets as of December 31, 1998 and 1997 30
Statements of income for the years ended December 31,
1998, 1997, and 1996 31
Statements of changes in partners' capital for
the years ended December 31, 1998, 1997, and
1996 32
Statements of cash flows for the years ended December 31,
1998, 1997, and 1996 33
Notes to financial statements 34-44
All other financial statement schedules have been omitted because the required
information is not pertinent to the registrant or is not material, or because
the information required is included in the financial statements and notes
thereto.
INDEPENDENT AUDITORS' REPORT
The Partners
PLM Equipment Growth Fund III:
We have audited the accompanying financial statements of PLM Equipment Growth
Fund III (the Partnership) as listed in the accompanying index to financial
statements. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, PLM Equipment Growth Fund
III, in accordance with the limited partnership agreement, entered its passive
phase on January 1, 1997 and as a result, the Partnership is not permitted to
reinvest in equipment. On January 1, 2000 the Partnership will enter the
liquidation phase and commence an orderly liquidation of the Partnership assets.
The Partnership will terminate on December 31, 2000, unless terminated earlier
upon sale of all equipment or by certain other events.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PLM Equipment Growth Fund III
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
- ------------------------
SAN FRANCISCO, CALIFORNIA
March 12, 1999
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
BALANCE SHEETS
December 31,
(in thousands of dollars, except unit amounts)
1998 1997
-----------------------------------
Assets
Equipment held for operating leases, at cost $ 96,890 $ 105,308
Less accumulated depreciation (73,580 ) (67,234 )
---------------------------------
Net equipment 23,310 38,074
Cash and cash equivalents 3,429 4,239
Accounts receivable, net of allowance for doubtful
accounts of $1,469 in 1998 and $1,837 in 1997 1,164 1,316
Investments in unconsolidated special-purpose entities 4,974 9,179
Lease negotiation fees to affiliates, net of accumulated
amortization of $155 in 1998 and $161 in 1997 50 155
Debt issuance costs, net of accumulated
amortization of $248 in 1998 and $187 in 1997 91 152
Prepaid expenses and other assets 50 71
---------------------------------
Total assets $ 33,068 $ 53,186
=================================
Liabilities and partners' capital
Liabilities
Accounts payable and accrued expenses $ 1,234 $ 1,294
Due to affiliates 155 2,208
Lessee deposits and reserve for repairs 1,057 835
Note payable 18,540 29,290
---------------------------------
Total liabilities 20,986 33,627
---------------------------------
Partners' capital
Limited partners (9,871,073 depositary units
as of December 31, 1998 and 1997) 12,082 19,559
General Partner -- --
---------------------------------
Total partners' capital 12,082 19,559
---------------------------------
Total liabilities and partners' capital $ 33,068 $ 53,186
=================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF INCOME
For the Years Ended December 31,
(in thousands of dollars, except weighted-average unit amounts)
1998 1997 1996
--------------------------------------------
Revenues
Lease revenue $ 15,905 $ 19,989 $ 18,459
Interest and other income 286 448 977
Net gain on disposition of equipment 3,808 5,629 6,450
-------------------------------------------
Total revenues 19,999 26,066 25,886
-------------------------------------------
Expenses
Depreciation and amortization 9,447 13,959 11,047
Repairs and maintenance 3,785 3,707 4,475
Equipment operating expenses 28 248 176
Insurance expense to affiliate (52 ) 6 --
Other insurance expenses 287 211 359
Management fees to affiliate 923 1,153 1,004
Interest expense 1,706 3,164 3,078
General and administrative expenses to affiliates 557 777 747
Other general and administrative expenses 813 931 1,276
Provision for (recovery of) bad debts (336 ) 458 828
-------------------------------------------
Total expenses 17,158 24,614 22,990
-------------------------------------------
Equity in net income of unconsolidated
special-purpose entities 76 485 6,864
-------------------------------------------
Net income $ 2,917 $ 1,937 $ 9,760
===========================================
Partners' share of net income
Limited partners $ 2,397 $ 1,417 $ 9,162
General Partner 520 520 598
-------------------------------------------
Total $ 2,917 $ 1,937 $ 9,760
===========================================
Net income per weighted-average depositary unit $ 0.24 $ 0.14 $ 0.93
===========================================
Cash distribution $ 10,394 $ 10,391 $ 11,964
===========================================
Cash distribution per weighted-average depositary unit $ 1.00 $ 1.00 $ 1.15
===========================================
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, 1998, 1997, and 1996
(in thousands of dollars)
Limited General
Partners Partner Total
------------------------------------------------
Partners' capital as of December 31, 1995 $ 30,337 $ -- $ 30,337
Net income 9,162 598 9,760
Repurchase of depositary units (120 ) -- (120 )
Cash distribution (11,366 ) (598 ) (11,964 )
------------------------------------------------
Partners' capital as of December 31, 1996 28,013 -- 28,013
Net income 1,417 520 1,937
Cash distribution (9,871 ) (520 ) (10,391 )
------------------------------------------------
Partners' capital as of December 31, 1997 19,559 -- 19,559
Net income 2,397 520 2,917
Cash distribution (9,874 ) (520 ) (10,394 )
------------------------------------------------
Partners' capital as of December 31, 1998 $ 12,082 $ -- $ 12,082
================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(In thousands of dollars)
1998 1997 1996
---------------------------------------------
Operating activities
Net income $ 2,917 $ 1,937 $ 9,760
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 9,447 13,959 11,047
Net gain on disposition of equipment (3,808 ) (5,629 ) (6,450 )
Equity in net income from unconsolidated special-
purpose entities (76 ) (485 ) (6,864 )
Income from sales-type lease -- -- (1,885 )
Changes in operating assets and liabilities:
Restricted cash and marketable securities -- 5,966 (306 )
Accounts and notes receivable, net 169 205 727
Prepaid expenses and other assets 21 (7 ) 10
Accounts payable and accrued expenses (60 ) (211 ) 150
Due to affiliates (261 ) (881 ) (202 )
Lessee deposits and reserves for repairs 222 (6,717 ) (914 )
--------------------------------------------
Net cash provided by operating activities 8,571 8,137 5,073
--------------------------------------------
Investing activities
Payments for purchase of equipment -- -- (28,540 )
Equipment purchased and placed in unconsolidated special-
purpose entities (1,198 ) -- --
Payment of capitalized repairs (126 ) (248 ) (728 )
Payments of acquisition fees to affiliate (54 ) -- (1,284 )
Payments of lease negotiation fees to affiliate (12 ) - (285 )
Payments received on sales-type lease -- -- 6,403
Proceeds from disposition of equipment 12,077 12,085 13,786
Liquidation distribution from unconsolidated
special-purpose entities -- -- 13,711
Distribution from unconsolidated
special-purpose entities 2,868 2,444 2,835
-------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,555 14,281 5,898
--------------------------------------------
Financing activities
(Repayments to) net receipts from - affiliate (1,792 ) 1,792 --
Proceeds from notes payable -- -- 19,148
Principal payments on notes payable (10,750 ) (10,994 ) (19,864 )
Repurchase of depositary units -- -- (120 )
Cash distribution paid to limited partners (9,874 ) (9,871 ) (11,366 )
Cash distribution paid to General Partner (520 ) (520 ) (598 )
-------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,936 ) (19,593 ) (12,800 )
--------------------------------------------
Net (decrease) increase in cash and cash equivalents (810 ) 2,825 (1,829 )
Cash and cash equivalents at beginning of year 4,239 1,414 3,243
--------------------------------------------
Cash and cash equivalents at end of year $ 3,429 $ 4,239 $ 1,414
============================================
Supplemental information
Interest paid $ 1,712 $ 3,339 $ 2,957
===================================================================================================================
See accompanying notes to financial
statements.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
Organization
PLM Equipment Growth Fund III, a California limited partnership (the
Partnership), was formed on October 15, 1987 to engage in the business of
owning, leasing, or otherwise investing in predominately used
transportation and related equipment. PLM Financial Services, Inc. (FSI) is
the General Partner of the Partnership. FSI is a wholly-owned subsidiary of
PLM International, Inc. (PLM International).
The Partnership will terminate on December 31, 2000, unless terminated
earlier upon sale of all equipment or by certain other events. Beginning in
the Partnership's eighth year of operations, which commenced on January 1,
1997, the General Partner stopped reinvesting excess cash, if any, which,
less reasonable reserves, will be distributed to the Partners. Beginning in
the Partnership's eleventh year of operations which commences on January 1,
2000, the General Partner intends to begin an orderly liquidation of the
Partnership's assets. During the liquidation phase, the Partnership's
assets will continue to be recorded at the lower of carrying amount or fair
value less cost to sell.
FSI manages the affairs of the Partnership. The net income (loss) and cash
distributions of the Partnership are generally allocated 95% to the limited
partners and 5% to the General Partner, (see Net Income (Loss) and
Distributions per Limited Partnership Unit, below). The General Partner is
also entitled to receive a subordinated incentive fee after the limited
partners receive a minimum return on, and a return of, their invested
capital.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operations
The equipment owned by the Partnership is managed, under a continuing
management agreement by PLM Investment Management, Inc. (IMI), a
wholly-owned subsidiary of FSI. IMI receives a monthly management fee from
the Partnership for managing the equipment (see Note 2). FSI, in
conjunction with its subsidiaries, sells equipment to investor programs and
third parties, manages pools of equipment under agreements with the
investor programs, and is a general partner of other programs.
Accounting for Leases
The Partnership's leasing operations 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 were capitalized and amortized over the term of the lease.
Depreciation and Amortization
Depreciation of transportation equipment, held for operating leases, is
computed on the double-declining balance method, taking a full month's
depreciation in the month of acquisition, based upon estimated useful lives
of 15 years for railcars and 12 years for most other types of equipment.
Certain aircraft are depreciated under the double-declining balance method
over the lease term. The depreciation method is changed to straight-line
method when annual depreciation expense using the straight-line method
exceeds that calculated by the double-declining balance method. Acquisition
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Depreciation and Amortization (continued)
fees have been capitalized as part of the cost of the equipment and
amortized over the equipment's depreciable life. Lease negotiation fees are
amortized over the initial equipment lease term. Debt placement fees are
amortized over the term of the related loan. Major expenditures that are
expected to extend the useful lives or reduce future operating expenses of
equipment are capitalized and amortized over the estimated remaining life
of the equipment.
Transportation Equipment
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the General Partner reviews the carrying value
of the Partnership's equipment portfolio at least quarterly in relation to
expected future market conditions for the purpose of assessing the
recoverability of the recorded amounts. If projected undiscounted future
lease revenues plus residual values are less than the carrying value of the
equipment, a loss on revaluation is recorded. No reductions to the carrying
values of equipment were required during either 1998, 1997, or 1996.
Investments in Unconsolidated Special-Purpose Entities
The Partnership has interests in unconsolidated special-purpose entities
(USPEs) that own transportation equipment. These interests are accounted
for using the equity method.
The Partnership's investment in USPEs includes acquisition and lease
negotiation fees paid by the Partnership to PLM Transportation Equipment
Corporation (TEC), a wholly-owned subsidiary of FSI. The Partnership's
interests in USPEs are managed by IMI. The Partnership's equity interest in
the net income (loss) of USPEs is reflected net of management fees paid or
payable to IMI and the amortization of acquisition and lease negotiation
fees paid to TEC or WMS.
Repairs and Maintenance
Repair and maintenance costs for railcars, marine vessels, and the
trailers, are usually the obligation of the Partnership. Maintenance costs
of most of the other equipment are the obligation of the lessee. If they
are not covered by the lessee, they are generally charged against
operations as incurred. To meet the maintenance requirements of certain
aircraft airframes and engines, reserve accounts are prefunded by the
lessee. Estimated costs associated with marine vessel dry docking are
accrued and charged to income ratably over the period prior to such
dry-docking. The reserve accounts are included in the balance sheet as
lessee deposits and reserve for repairs.
Net Income (Loss) and Distributions Per Depositary Unit
The net income (loss) of the Partnership is generally allocated 95% to the
limited partners and 5% to the General Partner. Special allocations of
income are made to the General Partner equal to the deficit balance, if
any, in the capital account of the General Partner. Cash distributions of
the Partnership are generally allocated 95% to the limited partners and 5%
to the General Partner and may include amounts in excess of net income. The
limited partners' net income (loss) is allocated among the limited partners
based on the number of limited partnership units owned by each limited
partner and on the number of days of the year each limited partner is in
the Partnership. The General Partner received a special allocation in the
amount of $0.4 million, $0.4 million, and $0.1 million from the gross gain
on disposition of equipment for the years ended December 31, 1998, 1997,
and 1996, 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.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation (continued)
Net Income (Loss) and Distributions per Depositary Unit (continued)
Cash distributions are recorded when paid. Cash distributions to investors
in excess of net income are considered a return of capital. Cash
distributions to the limited partners of $7.5 million, $8.5 million, and
$2.2 million for the years ended December 31, 1998, 1997, and 1996,
respectively, were deemed to be a return of capital.
Cash distributions relating to the fourth quarter of 1998, 1997, and 1996,
of $2.1 million, $2.6 million, and $2.6 million, respectively, were paid
during the first quarter of 1999, 1998, and 1997.
Net Income (Loss) Per Weighted-Average Depositary Unit
Net income (loss) per weighted-average depositary unit was computed by
dividing net income (loss) attributable to limited partners by the
weighted-average number of depositary units deemed outstanding during the
period. The weighted-average number of depositary units deemed outstanding
during the years ended December 31, 1998, 1997, and 1996 was 9,871,073,
9,871,073, and 9,873,821, respectively.
Comprehensive Income
During 1998, the Partnership adopted Financial Accounting Standards Board's
Statement No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in
equity from nonowner sources. The Partnership's net income (loss) is equal
to comprehensive income for the years ended December 31, 1998, 1997, and
1996.
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.
Restricted Cash
Lessee security deposits and required reserves held by the Partnership are
considered restricted cash.
Reclassification
Certain amounts in 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
2. General Partner and Transactions with Affiliates
An officer of FSI, a wholly-owned subsidiary of the General Partner,
contributed $100 of the Partnership's initial capital. Under the equipment
management agreement, IMI, subject to certain reductions, receives a
monthly management fee attributable to either owned equipment or interests
in equipment owned by the USPEs equal to the lesser of (a) the fees that
would be charged by an independent third party for similar services for
similar equipment or (b) the sum of (i) 5% of the gross lease revenues
attributable to equipment that is subject to operating leases, (ii) 2% of
the gross lease revenues attributable to equipment that is subject to full
payout net leases, and (iii) 7% of the gross lease revenues attributable to
equipment for which IMI provides both management and additional
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. General Partner and Transactions with Affiliates (continued)
services relating to the continued and active operation of program
equipment, such as on-going marketing and re-leasing of equipment, hiring
or arranging for the hiring of crew or operating personnel for equipment,
and similar services. The Partnership's proportional share of USPE
management fees of $10,000 and $0.1 million were payable as of December 31,
1998 and 1997, respectively. The Partnership's proportional share of USPEs
management fee expense during 1998, 1997, and 1996 was $0.1 million, $0.2
million, and $0.2 million, respectively. The Partnership reimbursed FSI and
its affiliates $0.6 million, $0.8 million, and $0.7 million for
administrative and data processing services performed on behalf of the
Partnership in 1998, 1997, 1996, respectively.
The Partnership's proportional share of USPEs administrative and data
processing services reimbursed to FSI was $43,000, $0.1 million and $0.1
million during 1998, 1997, and 1996, respectively.
The Partnership paid $6,000 to Transportation Equipment Indemnity Company
Ltd. (TEI), an affiliate of the General Partner, that provides marine
insurance coverage and other insurance brokerage services in 1997. No fees
for owned equipment were paid to TEI in 1998 or 1996. No fees for the
Partnership's share of USPE were paid to TEI in 1998. The Partnership's
proportional share of USPE marine insurance coverage paid to TEI was $0.1
million, and $0.1 million during 1997 and 1996. A substantial portion of
this amount was paid to third-party reinsurance underwriters or placed in
risk pools managed by TEI on behalf of affiliated programs and PLM
International, which provide threshold coverages on marine vessel loss of
hire and hull and machinery damage. All pooling arrangement funds are
either paid out to cover applicable losses or refunded pro rata by TEI. The
Partnership's proportional share of a refund of $18,000 was received during
1998, from lower loss-of-hire insurance claims from the insured USPEs and
other insured affiliated programs. No similar refund was received during
1997 and 1996. TEI did not provide the same level of insurance coverage
during 1998 as had been provided during previous years. These services were
provided by an unaffiliated third party. PLM International plans to
liquidate TEI in 1999.
The Partnership paid lease negotiation and equipment acquisition fees of
$0.1 and $1.6 million to TEC and PLM Worldwide Management Services Ltd.
(WMS) during 1998 and 1996. No lease negotiation and equipment acquisition
fees were paid to TEC or WMS during 1997.
As of December 31, 1998, approximately 38% of the Partnership's trailer
equipment was in rental facilities operated by PLM Rental, Inc., an
affiliate of the General Partner, doing business as PLM Trailer Leasing.
Revenues 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 indirect expenses of the
rental yard operations is charged to the Partnership monthly.
The Partnership owned certain equipment in conjunction with affiliated
programs during 1998, 1997, and 1996 (see Note 4).
The balance due to affiliates as of December 31, 1998 included $0.2 million
due to FSI and its affiliates for management fees. The balance due to
affiliates as of December 31, 1997 included $0.4 million due to FSI and its
affiliates for management fees and $1.8 million due to an affiliated USPEs.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Equipment
The components of owned equipment as of December 31, are as follows (in
thousands of dollars):
Equipment Held for Operating Leases: 1998 1997
--------------------------------
Aircraft $ 52,028 $ 46,282
Rail equipment 33,999 34,859
Marine containers 5,606 7,421
Trailers 5,257 7,080
Mobile offshore drilling unit -- 9,666
--------------------------------
96,890 105,308
Less accumulated depreciation (73,580 ) (67,234 )
--------------------------------
Net equipment $ 23,310 $ 38,074
================================
Revenues are earned by placing the equipment under operating leases. All of
the Partnership's marine containers and marine vessel are leased to
operators of utilization-type leasing pools, which include equipment owned
by unaffiliated parties. In such instances, revenues received by the
Partnership consist of a specified percentage of revenues generated by
leasing the pooled equipment to sublessees, after deducting certain direct
operating expenses of the pooled equipment. 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, 1998, all owned equipment in the Partnership portfolio
was on lease or operating in PLM-affiliated short-term trailer rental
yards, except for 25 marine containers, 69 railcars, and an aircraft. As of
December 31, 1997, all owned equipment in the Partnership portfolio was on
lease or operating in PLM-affiliated short-term trailer rental yards,
except for 28 marine containers and 41 railcars. The aggregate net book
value of equipment off lease was $2.4 million and $0.3 million as of
December 31, 1998 and 1997, respectively.
During 1998, a commercial aircraft, which was in a trust which the
Partnership had a 25% interest in, was transferred out of the trust into
the Parntership's owned equipment portfolio (See Note 4).
During 1998, the Partnership sold or disposed of marine containers,
trailers, railcars, and a mobile offshore drilling unit with an aggregate
net book value of $8.3 million for proceeds of $12.1 million.
During 1997, the Partnership sold or disposed of marine containers,
trailers, railcars, and aircraft with an aggregate net book value of $6.5
million for proceeds of $12.1 million.
In the fourth quarter of 1996, the Partnership ended its investment phase
in accordance with the limited partnership agreement; therefore, no
equipment was purchased during 1998 and 1997. Capital improvements to the
Partnership's existing equipment of $0.1 million and $0.2 million were made
during 1998 and 1997, respectively.
All leases for owned equipment are being accounted for as operating leases.
Future minimum rentals under noncancelable leases for owned equipment as of
December 31, 1998 during each of the next five years are approximately
$12.2 million in 1999, $9.4 million in 2000, $6.7 million in 2001, $2.2
million in 2002, $1.1 million in 2003, and $0.6 million thereafter.
Contingent rentals based upon utilization were $0.3 million, $0.9 million,
and $1.5 million in 1998, 1997, and 1996, respectively.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investments in Unconsolidated Special Purpose Entities
The net investments in USPEs include the following jointly-owned equipment
(and related assets and liabilities) as of December 31, (in thousands of
dollars):
1998 1997
---------------------------------------------------------------------------------------------------------
56% interest in an entity owning a bulk-carrier marine vessel $ 2,814 $ 3,104
17% interest in two trusts owning a total of three 737-200
Stage II commercial aircraft, two Stage II aircraft engines,
and a portfolio of aircraft rotables 2,054 4,021
25% interest in a trust that owned four 737-200 Stage II
commercial aircraft 106 2,054
---------------------------------------------------------------------------------- -----------
Net investments $ 4,974 $ 9,179
=========== ===========
During 1998, the Partnership increased its investment in a trust owning
four commercial aircraft by funding the installation of a hushkit on an
aircraft assigned to the Partnership in the trust for $1.2 million. The
Partnership paid a total of $0.1 million lease negotiation and equipment
acquisition fees to TEC for the installation of the hushkit. The
Partnership was required to install hushkit per the Partnership agreement.
In this Trust, all of the commercial aircraft except the commercial
aircraft designated to the Partnership were sold by the affiliated
programs. The aircraft, designated to the Partnership, was transferred out
of the Trust into the Partnership's owned equipment portfolio (see Note 3).
As of December 31, 1998, the Partnership's remaining interest in the Trust
were $0.1 million of receivables from the former lessee.
The following summarizes the financial information for the USPEs and the
Partnership's interests therein as of and for the years ended December 31,
(in thousands of dollars):
1998 1997 1996
----------- ----------- ---------
Net Net Net
Total Interest Total Interest Total Interest
USPEs of USPEs of USPEs of
Partnership Partnership Partnership
--------------------------- --------------------------- ---------------------------
Net Investments $ 17,606 $ 4,974 $ 45,015 $ 9,179 $ 49,985 $ 11,138
Lease revenues 8,787 2,633 18,882 4,199 22,146 5,065
Net income (loss) 9,262 76 11,077 485 15,930 6,864
All leases for the partially owned equipment are being accounted for as
operating leases. Future minimum rentals under noncancelable leases for
partially owned equipment as of December 31, 1998 during each of the next
five years are approximately $1,000 in 1999 and $0 thereafter.
5. Operating Segments
The Partnership operates or operated primarily in six different segments:
aircraft leasing, marine container leasing, mobile offshore drilling unit
(MODU) leasing, marine vessel leasing, trailer leasing, and railcar
leasing. Each equipment leasing segment engages in short-term to mid-term
operating leases to a variety of customers.
The General Partner evaluates the performance of each segment based on
profit or loss from operations before allocation of general and
administrative expenses, interest expense, and certain other expenses. The
segments are managed separately due to different business strategies for
each operation.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
The following tables present a summary of the operating segments (in
thousands of dollars):
Marine
Aircraft Container MODU Trailer Railcar All
For the Year Ended December 31, 1998 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 6,471 $ 278 $ 756 $ 1,256 $ 7,144 $ -- $ 15,905
Interest income and other 23 -- -- -- 78 185 286
Net gain (loss) on disposition of
equipment (14 ) 60 3,619 (123 ) 266 -- 3,808
------------------------------------------------------------------------
Total revenues 6,480 338 4,375 1,133 7,488 185 19,999
Expenses
Operations support 1,321 6 18 221 2,376 106 4,048
Depreciation and amortization 6,240 240 512 496 1,849 110 9,447
Interest expense -- -- -- -- -- 1,706 1,706
General and administrative expenses 509 19 44 263 782 676 2,293
Provision for bad debts (358 ) -- -- 44 (22 ) -- (336 )
------------------------------------------------------------------------
Total costs and expenses 7,712 265 574 1,024 4,985 2,598 17,158
------------------------------------------------------------------------
Equity in net income of USPEs 49 -- -- -- -- 27 76
------------------------------------------------------------------------
========================================================================
Net income (loss) $ (1,183 )$ 73 $ 3,801 $ 109 $ 2,503 $ (2,386 ) $ 2,917
========================================================================
As of December 31, 1998
Total assets $ 14,788 $ 512 $ -- $ 2,148 $ 8,072 $ 7,548 $ 33,068
========================================================================
Includes costs not identifiable to a particular segment such as interest
expense, certain amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses. Also
includes income from an investment in an entity owning a marine vessel.
Marine
Aircraft Container MODU Trailer Railcar All
For the Year Ended December 31, 1997 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 7,873 $ 1,087 $ 1,642 $ 1,850 $ 7,537 $ -- $ 19,989
Interest income and other 45 17 -- -- 82 304 448
Net gain on disposition of
equipment 5,493 48 -- 51 37 -- 5,629
------------------------------------------------------------------------
Total revenues 13,411 1,152 1,642 1,901 7,656 304 26,066
Expenses
Operations support 1,374 10 30 311 2,218 229 4,172
Depreciation and amortization 8,943 753 1,487 725 1,941 110 13,959
Interest expense 12 -- -- -- -- 3,152 3,164
General and administrative expenses 532 62 104 408 801 954 2,861
Provision for bad debts 379 1 -- 5 71 2 458
------------------------------------------------------------------------
Total costs and expenses 11,240 826 1,621 1,449 5,031 4,447 24,614
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 857 -- -- -- -- (372 ) 485
------------------------------------------------------------------------
========================================================================
Net income (loss) $ 3,028 $ 326 $ 21 $ 452 $ 2,625 $ (4,515 ) $ 1,937
========================================================================
As of December 31, 1997
Total assets $ 22,249 $ 1,168 $ 7,422 $ 3,434 $ 10,031 $ 8,882 $ 53,186
========================================================================
Includes costs not identifiable to a particular segment such as interest
expense, certain amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses. Also
includes income from an investment in an entity owning a marine vessel.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
5. Operating Segments (continued)
Marine Marine
Aircraft Container Vessel Trailer Railcar All
For the Year Ended December 31, 1996 Leasing Leasing Leasing Leasing Leasing Other Total
------------------------------------ ------- ------- ------- ------- ------- ---- -----
Revenues
Lease revenue $ 5,014 $ 1,494 $ 1,368 $ 2,073 $ 7,790 $ 720 $ 18,459
Interest income and other 27 -- 504 -- 10 436 977
Net gain (loss) on disposition of
equipment (110 ) 211 5,317 (3 ) 1,035 -- 6,450
------------------------------------------------------------------------
Total revenues 4,931 1,705 7,189 2,070 8,835 1,156 25,886
Expenses
Operations support 1,326 12 442 325 2,814 91 5,010
Depreciation and amortization 5,787 927 395 894 2,148 896 11,047
Interest expense -- -- -- -- -- 3,078 3,078
General and administrative expenses 523 81 71 461 974 917 3,027
Provision for bad debts 935 9 -- 21 (137 ) -- 828
------------------------------------------------------------------------
Total costs and expenses 8,571 1,029 908 1,701 5,799 4,982 22,990
------------------------------------------------------------------------
Equity in net income (loss) of USPEs 901 -- (611 ) -- -- 6,574 6,864
------------------------------------------------------------------------
========================================================================
Net income (loss) $ (2,739 )$ 676 $ 5,670 $ 369 $ 3,036 $ 2,748 $ 9,760
========================================================================
As of December 31, 1996
Total assets $ 42,315 $ 3,562 $ 4,128 $ 4,331 $ 12,055 $ 12,260 $ 78,651
========================================================================
Includes costs not identifiable to a particular segment such as interest
expense, certain amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses. Also
includes income from an investment in an entity owning a marine vessel.
Includes costs not identifiable to a particular segment such as interest
expense, amortization expense, certain interest income and other,
operations support expenses and general and administrative expenses. Also
includes income from an investment in an entity owning a mobile offshore
drilling unit.
6. Geographic Information
The Partnership owns certain equipment that is leased and operated
internationally. A limited number of the Partnership's transactions are
denominated in a foreign currency. Gains or losses resulting from foreign
currency transactions are included in the results of operations and are not
material.
The Partnership leases or leased its aircraft, railcars, and trailers to
lessees domiciled in four geographic regions: the United States, Canada,
Europe, and Asia. The marine vessels, mobile offshore drilling unit, and
marine containers are leased to multiple lessees in different regions that
operate this equipment worldwide.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Geographic Information (continued)
The table below set forth lease revenue by geographic region for the
Partnership's owned equipment and investments in USPEs grouped by domicile
of the lessee as of and for the years ended December 31, (in thousands of
dollars):
Region Owned Equipment Investments in USPES
--------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- -------------------------------------
United States $ 4,917 $ 5,227 $ 7,749 $ -- $ -- $ --
Canada 5,474 5,479 3,434 449 1,019 1,083
Europe 3,619 3,620 1,120 780 1,766 1,869
Asia 861 2,558 2,069 -- -- --
Rest of the world 1,034 3,105 4,087 1,404 1,414 2,113
=================================== =====================================
Lease revenues $ 15,905 $ 19,989 $ 18,459 $ 2,633 $ 4,199 $ 5,065
=================================== =====================================
The following table sets forth net income (loss) information by region for
the owned equipment and investments in USPEs for the years ended December
31, (in thousands of dollars):
Region Owned Equipment Investments in USPEs
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------------- ------------------------------------
United States $ 1,513 $ 1,130 $ 1,639 $ -- $ -- $ --
Canada 1,556 3,340 2,591 10 84 (307 )
Europe (551 ) (2,662 ) (1,728 ) 39 773 1,209
Asia (1,138 ) 3,771 (2,821 ) -- -- --
Rest of the world 3,836 941 6,858 27 (372 ) 5,962
------------------------------------- ------------------------------------
Regional income 5,216 6,520 6,539 76 485 6,864
Administrative and other net loss (2,375 ) (5,068 ) (3,643 ) -- -- --
------------------------------------- ------------------------------------
Net income $ 2,841 $ 1,452 $ 2,896 $ 76 $ 485 $ 6,864
===================================== ====================================
The net book value of these assets as of December 31, were as follows (in
thousands of dollars):
Region Owned Equipment Investments in USPEs
---------------------------- ------------------------------------- --------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------------- -------------------------------------
United States $ 6,475 $ 8,639 $ 10,862 $ -- $ -- $ --
Europe 7,258 11,175 17,399 2,054 4,021 4,564
Canada 7,114 6,866 8,136 106 2,054 2,575
Asia 1,951 2,852 8,067 -- -- --
Rest of the world 512 8,542 13,599 2,814 3,104 3,999
------------------------------------- -------------------------------------
===================================== =====================================
Net book value $ 23,310 $ 38,074 $ 58,063 $ 4,974 $ 9,179 $ 11,138
===================================== =====================================
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
7. Note Payable
The Partnership had a note outstanding with a face amount of $18.5 million
as of December 31, 1998, with interest computed at LIBOR plus 1.5% per
annum. The note had different maturities based on the General Partner's
ability to select various LIBOR maturities (one month, two months, or three
months). Rates are set when the note matures and are reset (6.8% as of
December 31, 1998 and 7.4% as of December 31, 1997). During the first 15
months following conversion to a term loan on September 30, 1996, quarterly
principal payments equal to 75% of net proceeds from asset sales was due.
Commencing October 1, 1997, quarterly principal payments will be equal to
75% of net proceeds from asset sales from that quarter, or to maintain the
minimum facility balance specified on the loan agreements. During 1998, the
Partnership paid $10.8 million of the outstanding loan balance as a result
of asset sales.
The General Partner believes that the book value of the debt approximates
fair market value due to its variable interest rate. The Partnership is
prohibited from incurring any new indebtedness when it is in the holding
phase or liquidation phase.
8. Concentrations of Credit Risk
No single lessee accounted for more than 10% of total consolidated revenues
for the year ended December 31, 1998, 1997, and 1996. However, R & B Falcon
Drilling, Inc. purchased a mobile offshore drilling unit from the
Partnership and the gain from the sale accounted for 16.0% of total
consolidated revenues from wholly-and partially-owned equipment during
1998. Aramco Associated Co. purchased an aircraft from the Partnership and
the gain from the sale accounted for 16.3% of total consolidated revenues
from wholly-and partially-owned equipment during 1997. Electricite et Eaux
de Madagascar purchased an entity that owned a marine vessel from the
Partnership and the gain from the sale accounted for 17.1% of total
consolidated revenues from wholly-and partially-owned equipment during
1996.
As of December 31, 1998 and 1997, the General Partner believes the
Partnership had no significant concentrations of credit risk that could
have a material adverse effect on the Partnership.
9. Income Taxes
The Partnership is not subject to income taxes, as any income or loss is
included in the tax returns of the individual partners. Accordingly, no
provision for income taxes has been made in the financial statements of the
Partnership.
As of December 31, 1998, there were temporary differences of approximately
$33.1 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,
equipment reserves, provision for bad debt, prepaid deposits, and the tax
treatment of underwriting commissions and syndication costs.
10. Contingencies
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against a defaulting Indian airline lessee
to repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant
lease contracts. The Partnership has repossessed all of its property
previously leased to such airline, and the airline has ceased operations.
In response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims.
PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
11. Subsequent Event
On January 14, 1999, the General Partner for the Partnership announced that
it will begin to recognize transfers involving trading of units in 1999.
The Partnership is listed on the OTC Bulletin Board under the symbols
GFZPZ.
In making the announcement, the General Partner noted that, as in previous
years, it will continue to monitor the volume of such trades to ensure that
the Partnership remain in compliance with Internal Revenue Service (IRS)
Notice 88-75 and IRS Code Section 7704. These IRS regulations contain safe
harbor provisions stipulating the maximum number of partnership units that
can be traded during a calendar year in order for a partnership not to be
deemed a publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on
in 1999, the General Partner will, at that time, cease to recognize any
further transfers involving trading of Partnership units. Transfers
specifically excluded from the safe harbor limitations, referred to in the
regulations as "transfers not involving trading," which include transfers
at death, transfers between family members, and transfers involving
distributions from a qualified retirement plan, will continue to be
recognized by the General Partner throughout the year.
During February and March 1999, the Partnership sold part of its interest
in two trusts that owned a total of three stage II commercial aircraft with
a net book value of $1.7 million for proceeds of $3.0 million. The
Partnership expects to sell its remaining interest in the two trust that
still own two stage II aircraft engines and a portfolio of aircraft
rotables before the end of March 1999.
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PLM EQUIPMENT GROWTH FUND III
INDEX OF EXHIBITS
Exhibit Page
4. Limited Partnership Agreement of Partnership. *
4.1 Amendment, dated November 18, 1991, to Limited Partnership *
Agreement of Partnership.
10.1 Management Agreement between Partnership and PLM Investment *
Management, Inc.
10.2 $41,000,000 Credit Agreement dated as of December 13, 1994 with *
First Union National Bank of North Carolina.
24. Powers of Attorney. 46-48
* Incorporated by reference. See page 26 of this report.