UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal quarter ended June 30, 1996. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-10813 ----------------------- 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 900, San Francisco, CA 94105-1301 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code (415) 974-1399 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) BALANCE SHEETS (in thousands of dollars) ASSETS June 30, December 31, 1996 1995 --------------------------------- Equipment held for operating leases $ 113,929 $ 130,132 Less accumulated depreciation (72,762 ) (84,207 ) ---------------------------------- 41,167 45,925 Equipment held for sale 4,039 475 ---------------------------------- Net equipment 45,206 46,400 Cash and cash equivalents 759 3,243 Restricted cash and marketable securities 5,813 5,660 Investments in unconsolidated special purpose entities 19,024 20,820 Accounts and note receivable, net of allowance for doubtful accounts of $1,196 in 1996 and $569 in 1995 1,987 2,242 Net investment in sales-type lease 4,192 4,518 Prepaid expenses 254 74 Deferred charges, net of accumulated amortization of $2,206 in 1996 and $2,159 in 1995 356 360 ---------------------------------- Total assets $ 77,591 $ 83,317 ================================== LIABILITIES Liabilities: Accounts payable and accrued expenses $ 2,499 $ 1,355 Due to affiliates 1,828 1,499 Notes payable 40,914 41,000 Prepaid deposits and reserves for repairs 9,206 9,126 ---------------------------------- Total liabilities 54,447 52,980 Partners' capital: Limited Partners (9,871,873 Depositary Units at June 30, 1996 and 9,899,573 Depositary Units at December 31, 1995) 23,144 30,337 General Partner -- -- ---------------------------------- Total partners' capital 23,144 30,337 ---------------------------------- Total liabilities and partners' capital $ 77,591 $ 83,317 ================================== See accompanying notes to these financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) STATEMENTS OF OPERATIONS (in thousands of dollars except per unit amounts) For the three months For the six months ended June 30, ended June 30, 1996 1995 1996 1995 ------------------------------------------------------------ Revenues: Lease revenue $ 4,488 $ 5,270 $ 8,971 $ 11,398 Interest and other income 313 495 647 834 Net gain (loss) on disposition of equipment 19 (41 ) 852 2,014 -------------------------- -------------------------- Total revenues 4,820 5,724 10,470 14,246 Expenses: Depreciation and amortization 2,042 2,911 4,090 5,923 Management fees to affiliate 306 269 507 564 Repairs and maintenance 2,101 804 2,740 2,027 Interest expense 757 886 1,637 1,769 Insurance expense to affiliates -- 56 -- 217 Other insurance expense 71 102 136 219 Bad debt expense (89 ) 127 629 185 Marine equipment operating expenses 56 (9 ) 86 680 General and administrative expenses to affiliates 187 179 369 390 Other general and administrative expenses 281 315 518 529 -------------------------- -------------------------- Total expenses 5,712 5,640 10,712 12,503 Equity in net income (loss) of unconsolidated special purpose entities 6 -- (62 ) -- -------------------------- -------------------------- Net income (loss) $ (886 ) $ 84 $ (304 ) $ 1,743 ========================== ========================== Partners' share of net income (loss): Limited Partners $ (1,016 ) $ (125 ) $ (643 ) $ 1,324 General Partner 130 209 339 419 -------------------------- -------------------------- Total $ (886 ) $ 84 $ (304 ) $ 1,743 ========================== ========================== Net income (loss) per Depositary Unit (9,871,873 Units at June 30, 1996 and 9,918,826 Units at June 30, 1995) $ (0.10 ) $ (0.01 ) $ (0.07 ) $ 0.13 ========================== ========================== Cash distributions $ 2,600 $ 4,188 $ 6,769 $ 8,384 ========================== ========================== Cash distributions per Depositary Unit $ 0.25 $ 0.40 $ 0.65 $ 0.80 ========================== ========================== See accompanying notes to these financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) STATEMENT OF CHANGES IN PARTNERS' CAPITAL For the period from December 31, 1994 to June 30, 1996 (in thousands of dollars) Limited General Partners Partner Total ------------------------------------------------ Partners' capital at December 31, 1994 $ 44,751 $ -- $ 44,751 Net income 1,869 837 2,706 Repurchase of Depositary Units (383 ) -- (383 ) Cash Distributions (15,900 ) (837 ) (16,737 ) ----------------------------------------------- Partners' capital at December 31, 1995 30,337 -- 30,337 Net income (643 ) 339 (304 ) Repurchase of Depositary Units (120 ) -- (120 ) Cash distributions (6,430 ) (339 ) (6,769 ) ----------------------------------------------- Partners' capital at June 30, 1996 $ 23,144 $ -- $ 23,144 =============================================== See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) STATEMENTS OF CASH FLOWS (thousands of dollars) For the six months ended June 30, 1996 1995 ---------------------------- Cash flows from operating activities: Net (loss) income $ (304 ) $ 1,743 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,090 5,923 Net gain on disposition of equipment (852 ) (2,014 ) Cash distribution from unconsolidated special purpose entities in excess of income 1,796 -- Sales-type lease income (398 ) -- Changes in operating assets and liabilities: Accounts and note receivable, net 255 597 Prepaid expenses (180 ) 175 Restricted cash and marketable securities (153 ) (154 ) Accounts payable and accrued expenses 1,144 388 Due to affiliates 329 476 Prepaid deposits and reserves for repairs 80 88 ---------------------------- Cash provided by operating activities 5,807 7,222 ---------------------------- Investing activities: Payments for purchase of equipment (5,500 ) (608 ) Payments for capitalizable repairs (587 ) (831 ) Payments of acquisition-related fees to affiliate (303 ) (33 ) Payments received on sales-type lease 724 -- Proceeds from disposition of equipment 4,350 1,481 ---------------------------- Cash provided by investing activities (1,316 ) 9 ---------------------------- Financing activities: Cash distributions paid to General Partner (339 ) (419 ) Cash distributions paid to Limited Partners (6,430 ) (7,965 ) Repurchase of depositary units (120 ) (274 ) Proceeds from notes payable 4,600 -- Principal payments on notes payable (4,686 ) (3,032 ) ---------------------------- Cash used in financing activities (6,975 ) (11,690 ) ---------------------------- Cash and cash equivalents: Net decrease in cash and cash equivalents (2,484 ) (4,459 ) Cash and cash equivalents at beginning of period 3,243 14,885 ---------------------------- Cash and cash equivalents at end of period $ 759 $ 10,426 ============================ Supplemental information: Interest paid $ 711 $ 1,136 ============================ See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 1996 1. Opinion of Management In the opinion of the management of PLM Financial Services, Inc. (FSI), the General Partner, the accompanying unaudited financial statements contain all adjustments necessary, consisting primarily of normal recurring accruals, to present fairly the financial position of PLM Equipment Growth Fund III (the Partnership) as of June 30, 1996, the statements of operations for the three months and six months ended June 30, 1996 and 1995, and the statement of changes in Partners' capital for the period December 31, 1994 to June 30, 1996 and the statements of cash flows for the three months ended June 30, 1996 and 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the accompanying financial statements. For further information, reference should be made to the financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995, on file at the Securities and Exchange Commission. 2. Investments in Unconsolidated Special Purpose Entities During the second half of 1995, the Partnership began to increase the level of its participation in the ownership of large-ticket transportation assets to be owned and operated jointly with affiliated programs. This trend has continued in the first quarter of 1996. Prior to 1996, the Partnership accounted for operating activities associated with joint ownership of rental equipment as undivided interests, including its proportionate share of each asset with similar wholly-owned assets in its financial statements. Under generally accepted accounting principles, the effects of such activities, if material, should be reported using the equity method of accounting. Therefore, effective January 1, 1996, the Partnership adopted the equity method to account for its investment in such jointly-held assets. The principle differences between the previous accounting method and the equity method relates to the presentation of activities relating to these assets in the statement of operations. Whereas, under equity accounting the Partnership's proportionate share is presented as a single net amount, "equity in net income (loss) of unconsolidated special purpose entities", under the previous method, the Partnership's income statement reflected its proportionate share of each individual item of revenue and expense. Accordingly, the effect of adopting the equity method of accounting has no cumulative effect on previously reported partner's capital or on the Partnership's net income (loss) for the period of adoption. Because the effects on previously issued financial statements of applying the equity method of accounting to investments in jointly-owned assets are not considered to be material to such financial statements taken as a whole, previously issued financial statements have not been restated. However, certain items have been reclassified in the previously issued balance sheet to conform to the current period presentation. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 1996 2. Investments in Unconsolidated Special Purpose Entities (continued) The net investment in unconsolidated special purpose entities includes the following jointly-owned equipment (and related assets and liabilities) (in thousands): June 30, December 31, % Equipment 1996 1995 Ownership - ---------------------------------------------------------------------------------------------------------------- 56% Marine vessel $ 4,871 $ 4,821 45% Mobile offshore drilling unit 6,052 6,093 50% Aircraft engine 541 656 17% Three commercial aircraft, two aircraft engines, and portfolio of aircraft rotables 4,196 5,302 14% Seven commercial aircraft 3,364 3,948 --------------------------------- Investments in unconsolidated special purpose entities $ 19,024 $ 20,820 ================================= At June 30, 1996 and December 31, 1995, a jointly-owned mobile offshore drilling unit was subject to a pending sale contract. At June 30, 1996, a jointly-owned aircraft engine was subject to a pending sale contract. (See Note 7) 3. Cash Distributions Cash distributions are recorded when paid and totaled $6.8 million and $8.4 million for the six months ended June 30, 1996 and 1995. Cash distributions to unitholders in excess of net income are considered to represent a return of capital. Cash distributions to unitholders of $6.8 million and $6.6 million during the six months ended June 30, 1996 and 1995, were deemed to be a return of capital. Cash distributions of $0.25 per Depositary Unit were declared on July 30, 1996, and are to be paid on August 15, 1996, to the Unitholders of record as of June 30, 1996. This cash distribution will amount to $2.5 million. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 1996 4. Equipment Owned equipment held for operating leases is stated at cost. Equipment held for sale is stated at the lower of the equipment's depreciated cost or estimated net realizable value and is subject to a pending contract for sale. The components of owned equipment are as follows (in thousands): June 30, December 31, 1996 1995 ------------------------------------ Equipment held for operating leases: Rail equipment $ 36,170 $ 35,761 Marine containers 14,009 15,015 Marine vessels -- 15,463 Aircraft and aircraft engines 56,205 56,269 Trailers 7,545 7,624 ------------------------------------ 113,929 130,132 Less accumulated depreciation (72,762 ) (84,207 ) ------------------------------------ 41,167 45,925 Equipment held for sale 4,039 475 ==================================== Net equipment $ 45,206 $ 46,400 ==================================== Revenues are earned by placing the equipment under operating leases which are generally billed monthly or quarterly. Certain of the Partnership's marine vessels and marine containers are leased to operators of utilization-type leasing pools which include equipment owned by unaffiliated parties. In such instances revenues received by the Partnership consist of a specified percentage of revenues generated by leasing the 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. At June 30, 1996, equipment held for sale included two vessels with a net book value of $4.0 million subject to a pending contract for sale for $8.7 million. At December 31, 1995, equipment held for sale included 110 coalcars with a net book value of $0.5 million, which were sold in March 1996, for $1.3 million. As of June 30, 1996, all owned equipment in the Partnership portfolio was either on lease or operating in PLM-affiliated short-term trailer rental facilities, with the exception of 51 railcars, 196 marine containers. The aggregate carrying value of equipment off-lease was $1.3 million at June 30, 1996. At December 31, 1995, 53 marine containers, 18 tank cars and 2 aircraft engines were off-lease, with an aggregate carrying value of $3.1 million. During the six months ended June 30, 1996, the Partnership disposed of 222 marine containers, 118 railcars of which 110 cars were held for sale at December 31, 1995, two aircraft engines, and seven trailers, with a combined net carrying value of $3.5 million for combined proceeds of $4.4 million. During the six months ended June 30, 1995, the Partnership sold 222 marine containers and 80 railcars with a combined net carrying value of $0.7 million for combined proceeds of $1.4 million. Additionally, the Partnership entered into a sales-type lease related to one marine vessel with a carrying value, net of drydock and estimated selling expenses, of $3.7 million for a sales price equal to the present value of the future lease payments, of $5.0 million. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 1996 5. Repurchase of Depositary Units On December 28, 1992, the Partnership, which is traded on the American Stock Exchange under the symbol GFZ, engaged in a program to repurchase up to 250,000 Depository Units. In the six months ended June 30, 1996, the Partnership repurchased and canceled 27,700 Depositary Units at a cost of $0.12 million. As of June 30, 1996, the Partnership has repurchased a cumulative total of 128,053 Depositary Units at a total cost of $0.92 million. 6. Debt The General Partner has entered into a joint $35 million credit facility (the "Committed Bridge Facility") on behalf of the Partnership, PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI , PLM Equipment Growth & Income Fund VII and Professional Lease Management Income Fund I ("Fund I"), all affiliated investment programs, TEC Acquisub, Inc. ("TECAI"), an indirect wholly-owned subsidiary of the General Partner, and American Finance Group, Inc. ("AFG"), a wholly-owned subsidiary of PLM International Inc., which may be used to provide interim financing of up to (i) 70% of the aggregate book value or 50% of the aggregate net fair market value of eligible equipment owned by the Partnership or Fund I, plus (ii) 50% of unrestricted cash held by the borrower. The Committed Bridge Facility became available on December 20, 1993, and was amended and restated on May 31, 1996, to expire on September 30, 1997. The Committed Bridge Facility also provides for a $5 million Letter of Credit Facility for the eligible borrowers. Outstanding borrowings by Fund I, TECAI, AFG, or PLM Equipment Growth Funds III through VII reduce the amount available to each other under the Committed Bridge Facility. Individual borrowings may be outstanding for no more than 179 days, with all advances due no later than May 23, 1997. The Committed Bridge Facility prohibits the Partnership from incurring any additional indebtedness. Interest accrues at either the prime rate or adjusted LIBOR plus 2.5% at the borrowers option and is set at the time of an advance of funds. Borrowings by the Partnership are guaranteed by the General Partner. As of August 9, 1996, the PLM Equipment Growth Fund VI had $9,000,000 in outstanding borrowings under the Committed Bridge Facility, TECAI had $22,587,000 in outstanding borrowings and neither the Partnership nor any of the other programs had any outstanding borrowings. 7. Subsequent Event On July 19, 1996, the General Partner sold a mobile offshore drilling unit (rig), in which the Partnership holds an investment of 45%. The Partnership received $12.4 million for its $6.1 million investment in the rig. The investment is included in "Investment in unconsolidated special purpose entities" at June 30, 1996. On July 22, 1996, the Partnership sold a vessel for $6.3 million which was classified as assets held for sale at June 30, 1996. The net book value of the vessel was $2.7 million. On July 26, 1996, the Charterer exercised its option to buy the vessel which was under the sales-type lease for $4.2 million. On July 31, 1996, the General Partner sold an aircraft engine, in which the Partnership holds an investment of 50%. The Partnership received $1.3 million for its $0.5 million investment in the aircraft engine. The investment is included in "Investment in unconsolidated special purpose entities" at June 30, 1996. On August 2, 1996, the Partnership sold a vessel for $2.2 million which was classified as assets held for sale at June 30, 1996. The net book value of the vessel was $1.3 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (I) Results of Operations Comparison of the Partnership's Operating Results for the Three Months Ended June 30, 1996 and 1995 (A) Owned equipment operations Lease revenues less direct expenses (defined as repairs and maintenance, marine equipment operating, and asset specific insurance expenses) on owned equipment decreased during the second quarter of 1996 when compared to the same quarter of 1995. The following table presents lease revenues less direct expenses by owned equipment type (in thousands): For the three months ended June 30, 1996 1995 ---------------------------- Aircraft and aircraft engines $ (40 ) $ 1,152 Marine vessels 365 450 Trailers 425 249 Rail equipment 1,120 1,441 Marine containers 402 504 Aircraft: Aircraft lease revenues and direct expenses were $1.1 million and $1.2 million, respectively, for the three months ended June 30, 1996, compared to $1.18 million and $0.03 million, respectively during the same quarter of 1995. The decrease in net contribution was due to extensive repairs of $1.1 million needed on one aircraft before it can be re-leased; Marine vessels: Marine vessel lease revenues and direct expenses were $0.5 million and $0.1 million, respectively, for the three months ended June 30, 1996, compared to $0.48 million and $0.03 million, respectively during the same quarter of 1995. The decrease in net contribution was due to higher marine operating expenses in the second quarter of 1996 related to higher drydocking expenses on one marine vessel, offset by a slightly higher lease rate earned in the second quarter of 1996; Trailers: Trailer lease revenues and direct expenses were $0.5 million and $0.1 million, respectively, for the three months ended June 30, 1996, compared to $0.3 million and $0.1 million, respectively during the same quarter of 1995. The trailer fleet remained virtually the same for both periods, however, over the past twelve months the number of trailers in the PLM affiliated short-term rental yards has increased due to term leases which expired. These trailers are now earning a higher lease rate while in the rental yard compared to the fixed term lease; Rail equipment: Railcar lease revenues and direct expenses were $1.9 million and $0.8 million, respectively, for the three months ended June 30, 1996, compared to $2.0 million and $0.6 million, respectively during the same quarter of 1995. The decrease of net contribution was due to the sale of 124 railcars during the last two quarters of 1995 and 118 railcars in the first and second quarters of 1996; Marine containers: Marine container lease revenues and direct expenses were $0.4 million and $2,852, respectively, for the three months ended June 30, 1996, compared to $0.5 million and $3,465, respectively during the same quarter of 1995. The number of marine containers owned by the Partnership has been declining due to sales and dispositions. The result of this declining fleet is a decrease in marine container net contribution. (B) Indirect expenses related to owned equipment Total indirect expenses of $3.5 million for the three months ended June 30, 1996, decreased from $4.1 million for the same period of 1995. The variance is explained as follows: (a) a decrease in depreciation and amortization expense of $0.3 million from 1995 levels reflecting the Partnership's double-declining balance depreciation method, and the sale or disposition of certain Partnership assets during the last two quarters of 1995 and the first and second quarter of 1996; (b) a decrease of $0.2 million in bad debt expenses from 1995 levels primarily reflecting the General Partner's evaluation of the collectibility of certain receivables; (c) a decrease of $0.1 million in interest expense due to the paydown of debt principle. (C) Net gain on disposition of equipment was $0.02 million in the second quarter of 1996, from the disposition of two aircraft engines, 109 marine containers, seven railcars and four trailers, compared to a loss of $0.04 million in the second quarter of 1995, from the disposition of 91 marine containers and 11 railcars. (D) Interest and other income Interest and other income decreased $0.2 million during the second quarter of 1996 due primarily to lower cash balances available for investments when compared to the same period of 1995. (E)Equity in net income (loss) of unconsolidated special purpose entities Equity in net income (loss) of unconsolidated special purpose entities represents the net income (loss) generated from jointly-owned assets accounted for under the equity method (see Note 2 to financial statements) (in thousands). For the three months ended June 30, ---------------------------- 1996 1995 ---------------------------- Aircraft and aircraft engines $ 91 $ 23 Mobile offshore drilling unit (84 ) (34 ) Marine vessel (0.4 ) (62 ) Aircraft: As of June 30, 1996, the Partnership has a partial beneficial interest in two trusts which hold four commercial aircraft, two aircraft engines, and a package of aircraft rotables. The Partnership's share of revenues earned by these trusts of $0.7 million were offset by depreciation expense of $0.6 million during the second quarter of 1996. Marine vessels: The increase in the loss related to marine vessels was due to higher repairs and maintenance expenses. Mobile offshore drilling unit: The decrease in mobile offshore drilling unit loss was due to lower depreciation expense in the second quarter of 1996 as a result of the double declining balance method used. (F) Net Income (loss) The Partnership's net loss of $0.9 million in the second quarter of 1996, decreased from net income of $0.1 million in the second quarter of 1995. The Partnership's ability to acquire, operate, or liquidate assets, secure leases, and re-lease those assets whose leases expire during the duration of the Partnership is subject to many factors, therefore, the Partnership's performance for the three months ended June 30, 1996 is not necessarily indicative of future periods. In the second quarter of 1996, the Partnership distributed $2.5 million to the Limited Partners, or $0.25 per Depositary Unit. Comparison of the Partnership's Operating Results for the Six Months Ended June 30, 1996 and 1995 (A) Owned equipment operations Lease revenues less direct expenses (repairs and maintenance, marine equipment operating expense, and asset specific insurance on owned equipment decreased for the six months ended 1996 when compared to the same period of 1995. The following table presents results by owned equipment type (in thousands): For the six months ended June 30, ---------------------------------- 1996 1995 ---------------------------------- Aircraft and aircraft engines $ 1,034 $ 2,376 Marine vessels 760 636 Trailers 836 684 Rail equipment 2,585 2,377 Marine containers 820 945 Aircraft: Aircraft lease revenues and direct expenses were $2.3 million and $1.3 million, respectively, for the six months ended June 30, 1996, compared to $2.5 million and $0.1 million, respectively during the same quarter of 1995. The decrease of net contribution was due to extensive repairs of $1.1 million needed on one aircraft before it can be re-leased; Marine vessels: Marine vessel lease revenues and direct expenses were $1.0 million and $0.2 million, respectively, for the six months ended June 30, 1996, compared to $1.7 million and $1.1 million, respectively during the same period of 1995. The increase of net contribution was due to a decrease in repairs and maintenance, marine operating, and insurance expenses for the first six months of 1996 compared to the same period of 1995 due to the sale of one marine vessel during the second quarter of 1995; Trailers: Trailer lease revenues and direct expenses were $1.0 million and $0.2 million, respectively, for the six months ended June 30, 1996, compared to $0.8 million and $0.1 million, respectively during the same quarter of 1995. The trailer fleet remained virtually the same for both periods, however, over the past twelve months the number of trailers in the PLM affiliated short-term rental yards has increased due to term leases which expired. These trailers are now earning a higher lease rate while in the rental yards compared to the fixed term leases; Rail equipment: Railcar lease revenues and direct expenses were $3.9 million and $1.3 million, respectively, for the six months ended 1996, compared to $3.8 million and $1.4 million, respectively during the same quarter of 1995. The increase was due to the more railcars went offlease in the first six months of 1995 than compared to 1995; Marine containers: Marine container lease revenues and direct expenses were $0.8 million and $6,146, respectively, for the six months ended June 30, 1996, compared to $1.0 million and $10,301, respectively during the same quarter of 1995. The number of marine containers owned by the Partnership has been declining due to sales and dispositions. The result of this declining fleet is a decrease in marine container net contribution. (B) Indirect operating expenses related to owned equipment operations Total indirect expenses of $7.8 million for the six months ended June 30, 1996, decreased from $8.2 million for the same period of 1995. The variance is explained as follows: (a) a decrease in depreciation expense of $0.6 million from 1995 levels reflecting the Partnership's double-declining balance depreciation method, and the sale or disposition of Partnership assets; (b) a decrease of $0.1 million in interest expense due to the paydown of debt principle; (c) an increase of $0.4 million in bad debt expense from 1995 levels primarily reflecting the Partnership's evaluation of collectibility of certain receivable balances. (C) Net gain on disposition of equipment was $0.9 million for the six months ended June 30, 1996 from the disposition of two aircraft engines, 222 marine containers, seven trailers, and 118 railcars, compared to a gain of $2.0 million in the same period of 1995 from the disposition of 222 marine containers, 75 railcars, five locomotives, and one marine vessel. The sale of the vessel in the first quarter of 1995 was a sales-type lease. At June 30, 1996, the Partnership will receive future lease payments totaling $4.0 million with a balloon payment of $1.7 million at the end of the lease term. (D) Interest and other income decreased by $0.2 million in the first six months of 1996 compared to 1995 due primarily to lower cash balances available for investments when compared to the same period of 1995. (E) Equity in net income (loss) of unconsolidated special purpose entities Equity in net income (loss) of unconsolidated special purpose entities represents the net income (loss) generated from operation of jointly-owned assets accounted for under the equity method (see Note 2 to financial statements)(in thousands). For the six months ended June 30, ---------------------------------- 1996 1995 ---------------------------------- Aircraft and aircraft engines $ 174 $ 46 Marine vessels (231 ) (93 ) Mobile offshore drilling unit (5 ) 87 Aircraft: As of June 30, 1996, the Partnership has a partial beneficial interest in two trusts which hold four commercial aircraft, two aircraft engines, and a package of aircraft rotables. The Partnership's share of revenues earned by these trusts of $1.5 million were offset by depreciation expense of $1.3 million during the six months ended June 30, 1996. Marine vessels: The increase in the loss related to marine vessels for the six months ended June 30, 1996 as compared to the same period last year, was due to higher repairs and maintenance expenses. Mobile offshore drilling unit: The mobile offshore drilling unit incurred a loss for the six months ended June 30, 1996, as compared to income for the six months ended June 30, 1995, due to higher repair and maintenance expenses and lower release rates received during the six months ended June 30, 1996 when compared to the same period of 1995. (F) Net Income (loss) The Partnership's net loss of $0.3 million for the six months ended June 30, 1996, increased from net income of $1.7 million in the same period in 1995. The Partnership's ability to acquire, operate, or liquidate assets, secure leases, and re-lease those assets whose leases expire during the duration of the Partnership is subject to many factors. Therefore, the Partnership's performance in the six months ended June 30, 1996 is not necessarily indicative of future periods. The Partnership distributed $6.4 million to the Limited Partners, or $0.65 per Depositary Unit in the six months ended June 30, 1996. (II)Financial Condition - Capital Resources, Liquidity, and Distributions The Partnership purchased its initial equipment portfolio with capital raised from its initial equity offering and permanent debt financing. No further capital contributions from original partners are permitted under the terms of the Partnership's Limited Partnership Agreement. In addition the Partnership, under its current loan agreement, does not have the capacity to incur additional debt. Therefore, the Partnership relies on operating cash flow to meet its operating obligations, to make cash distributions to limited partners and increase the Partnership's equity portfolio with any remaining available surplus cash. The Partnership has one loan outstanding with a face amount of $40.9 million with interest at 1.5% over LIBOR. The loan allows the pay down and borrowing of funds in conjunction with the sale and subsequent purchase of assets during the reinvestment phase of the Partnership. During the first year following conversion to a term loan, beginning September 30, 1996, quarterly principal payments equal to 75% of net proceeds from asset sales will be due. Beginning the second year commencing December 31, 1997, quarterly principal payments will be equal to 75% of net proceeds from asset sales from September 30, 1997, or payments equal to 9.0% of the facility balance at September 30, 1997. During the first six months of 1996, the Partnership paid down $4.7 million of the outstanding loan balance and redrawn $4.6 million. The General Partner has entered into a joint $35 million credit facility (the "Committed Bridge Facility") on behalf of the Partnership, PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, PLM Equipment Growth & Income Fund VII and Professional Lease Management Income Fund I ("Fund I"), all affiliated investment programs, TEC Acquisub, Inc. ("TECAI"), an indirect wholly-owned subsidiary of the General Partner, and American Finance Group, Inc. ("AFG"), a wholly-owned subsidiary of PLM International Inc., which may be used to provide interim financing of up to (i) 70% of the aggregate book value or 50% of the aggregate net fair market value of eligible equipment owned by the Partnership or Fund I, plus (ii) 50% of unrestricted cash held by the borrower. The Committed Bridge Facility became available on December 20, 1993, and was amended and restated on May 31, 1996, to expire on September 30, 1997. The Committed Bridge Facility also provides for a $5 million Letter of Credit Facility for the eligible borrowers. Outstanding borrowings by Fund I, TECAI, AFG, or PLM Equipment Growth Funds III through VII reduce the amount available to each other under the Committed Bridge Facility. Individual borrowings may be outstanding for no more than 179 days, with all advances due no later than May 23, 1997. The Committed Bridge Facility prohibits the Partnership from incurring any additional indebtedness. Interest accrues at either the prime rate or adjusted LIBOR plus 2.5% at the borrowers option and is set at the time of an advance of funds. Borrowings by the Partnership are guaranteed by the General Partner. As of August 9, 1996, the PLM Equipment Growth Fund VI had $9,000,000 in outstanding borrowings under the Committed Bridge Facility, TECAI had $22,587,000 in outstanding borrowings and neither the Partnership nor any of the other programs had any outstanding borrowings. (III) Delisting of Partnership Units and Depositary Unit Repurchase Plan The General Partner delisted the Partnership's Depositary units from the American Stock Exchange (AMEX) under the symbol GFZ on April 8, 1996. The last day for trading on the AMEX was March 22, 1996. Under the Internal Revenue Code (the Code) the Partnership was classified as a Publicly Traded Partnership. For the past three years the Partnership has engaged in a plan to purchase up to 250,000 Depositary Units. For the six months ended June 30, 1996, the Partnership repurchased 27,700 Depositary Units at a cost of $0.12 million. As of June 30, 1996, the Partnership has repurchased a cumulative total of 128,053 Depositary Units at a total cost of $0.92 million. (IV) Trends 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. Throughout 1995 and the first part of 1996, market conditions, supply and demand equilibrium, and other factors varied in several markets. In the container and refrigerated over-the-road trailer markets, oversupply conditions, industry consolidations, and other factors resulted in falling rates and lower returns. In the dry over-the-road trailer markets, strong demand and a backlog of new equipment deliveries produced high utilization and returns. The marine vessel, rail, and mobile offshore drilling unit markets could be generally categorized by increasing rates as the demand for equipment is increasing faster than new additions net of retirements. Finally, demand for narrowbody stage II aircraft, such as those owned by the Partnership, has increased as expected savings from newer narrowbody aircraft have not materialized and deliveries of the newer aircraft have slowed down. These trends are expected to continue for the near term. These different markets have had individual effects on the performance of Partnership equipment - in some cases resulting in declining performance, and in others, in improved performance. 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, governmental or other regulations, and others. The unpredictability of some of these factors, or of their occurrence, makes it difficult for the General Partner to clearly define trends or influences that may impact the performance of the Partnership's equipment. The General Partner continuously monitors both the equipment markets and the performance of the Partnership's equipment in these markets. The General Partner may decide to reduce the Partnership's exposure to equipment markets in which it determines that it cannot operate equipment and achieve acceptable rates of return. Alternatively, the General Partner may make a determination to enter equipment markets in which it perceives opportunities to profit from supply-demand instabilities or other market imperfections. The Partnership intends to use excess cash flow, if any, after payment of expenses, loan principal, and cash distributions to acquire additional equipment during the first seven years of Partnership operations. The General Partner believes these acquisitions may cause the Partnership to generate additional earnings and cash flow for the Partnership. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits $25,000,000 Warehousing Credit Agreement dated September 27, 1995 with First Union National Bank of North Carolina. $41,000,000 Credit Agreement dated as of December 13, 1994 with First Union National Bank of North Carolina. (b) Reports on Form 8-K None. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLM EQUIPMENT GROWTH FUND III By: PLM Financial Services, Inc. General Partner Date: August 9, 1996 By: /s/ David Davis --------------- David J. Davis Vice President and Corporate Controller