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 1934 FOR THE FISCAL QUARTER ENDED MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10813 ----------------------- PLM EQUIPMENT GROWTH FUND III (Exact name of registrant as specified in its charter) CALIFORNIA 68-0146197 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE MARKET, STEUART STREET TOWER SUITE 800, SAN FRANCISCO, CA 94105-1301 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (415) 974-1399 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) BALANCE SHEETS (in thousands of dollars, except unit amounts) March 31, December 31, 1999 1998 ------------------------------------ ASSETS Equipment held for operating lease, at cost $ 96,610 $ 96,890 Less accumulated depreciation (75,124 ) (73,580 ) ------------------------------------ Net equipment 21,486 23,310 Cash and cash equivalents 2,701 3,429 Accounts receivable, net of allowance for doubtful accounts of $1,460 in 1999 and $1,469 in 1998 1,713 1,164 Investments in unconsolidated special-purpose entities 2,889 4,974 Deferred charges, net of accumulated amortization of $435 in 1999 and $403 in 1998 109 141 Prepaid expenses and other assets 33 50 ------------------------------------ Total assets $ 28,931 $ 33,068 ==================================== LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued expenses $ 844 $ 1,234 Due to affiliates 201 155 Lessee deposits and reserves for repairs 1,226 1,057 Note payable 14,956 18,540 ------------------------------------ Total liabilities 17,227 20,986 ------------------------------------ Partners' capital: Limited partners (9,871,073 depositary units as of March 31, 1999 and December 31, 1998) 11,704 12,082 General Partner -- -- ------------------------------------ Total partners' capital 11,704 12,082 ------------------------------------ Total liabilities and partners' capital $ 28,931 $ 33,068 ==================================== See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME (in thousands of dollars, except weighted-average unit amounts) For the Three Months Ended March 31, 1999 1998 --------------------------- REVENUES Lease revenue $ 3,445 $ 4,282 Interest and other income 68 59 Net gain (loss) on disposition of equipment 13 (10 ) --------------------------- Total revenues 3,526 4,331 --------------------------- EXPENSES Depreciation and amortization 1,783 2,395 Repairs and maintenance 464 570 Equipment operating expenses 5 40 Insurance expense 31 83 Management fees to affiliate 195 242 Interest expense 316 529 General and administrative expenses to affiliates 126 155 Other general and administrative expenses 362 105 Provision for (recovery of) bad debts (9 ) 127 --------------------------- Total expenses 3,273 4,246 --------------------------- Equity in net income (loss) of unconsolidated special-purpose entities 1,447 (5 ) --------------------------- Net income $ 1,700 $ 80 =========================== PARTNERS' SHARE OF NET INCOME (LOSS) Limited partners $ 1,596 $ (50 ) General Partner 104 130 --------------------------- Total $ 1,700 $ 80 =========================== Net income (loss) per weighted-average depositary unit $ 0.16 $ (0.01 ) =========================== Cash distribution $ 2,078 $ 2,597 =========================== Cash distribution per weighted-average depositary unit $ 0.20 $ 0.25 =========================== See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIOD FROM DECEMBER 31, 1997 TO MARCH 31, 1999 (in thousands of dollars) Limited General Partners Partner Total ------------------------------------------------ Partners' capital as of December 31, 1997 $ 19,559 $ -- $ 19,559 Net income 2,397 520 2,917 Cash distribution (9,874 ) (520 ) (10,394 ) ------------------------------------------------- Partners' capital as of December 31, 1998 12,082 -- 12,082 Net income 1,596 104 1,700 Cash distribution (1,974 ) (104 ) (2,078 ) ------------------------------------------------- Partners' capital as of March 31, 1999 $ 11,704 $ -- $ 11,704 ================================================= See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (in thousands of dollars) For the Three Months Ended March 31, 1999 1998 ----------------------------- OPERATING ACTIVITIES Net income $ 1,700 $ 80 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,783 2,395 Net (gain) loss on disposition of equipment (13 ) 10 Equity in net (income) loss from unconsolidated special-purpose entities (1,447 ) 5 Changes in operating assets and liabilities: Accounts receivable, net (549 ) 599 Prepaid expenses and other assets 17 25 Accounts payable and accrued expenses (390 ) (500 ) Due to affiliates 11 (288 ) Lessee deposits and reserves for repairs 169 94 --------------------------- Net cash provided by operating activities 1,281 2,420 --------------------------- INVESTING ACTIVITIES Payments for capitalized improvements (2 ) (26 ) (Additional investments in) distributions from unconsolidated special-purpose (15 ) 1,732 entities Distributions from liquidation of unconsolidated special-purpose entities 3,547 -- Proceeds from disposition of equipment 88 254 Due to affiliate 35 -- --------------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 3,653 1,960 --------------------------- FINANCING ACTIVITIES Principal payments on note payable (3,584 ) -- Payment due to affiliate -- (1,792 ) Cash distributions paid to limited partners (1,974 ) (2,467 ) Cash distributions paid to General Partner (104 ) (130 ) --------------------------- Net cash used in financing activities (5,662 ) (4,389 ) --------------------------- Net decrease in cash and cash equivalents (728 ) (9 ) Cash and cash equivalents at beginning of period 3,429 4,239 --------------------------- Cash and cash equivalents at end of period $ 2,701 $ 4,230 =========================== SUPPLEMENTAL INFORMATION Interest paid $ 316 $ 529 =========================================================================================================================== See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 1. Opinion of Management In the opinion of the management of PLM Financial Services, Inc. (FSI or 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 March 31, 1999 and December 31, 1998, the statements of income for the three months ended March 31, 1999 and 1998, the statements of changes in partners' capital for the period from December 31, 1997 to March 31, 1999, and the statements of cash flows for the three months ended March 31, 1999 and 1998. Certain information and note 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, 1998, on file at the Securities and Exchange Commission. 2. Schedule of Partnership Phases In accordance with the limited partnership agreement, the Partnership 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. 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 partners. 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. 3. Cash Distributions Cash distributions are recorded when paid and may include amounts in excess of net income. Operating cash distributions were $2.1 million and $2.6 million for the three months ended March 31, 1999 and 1998, respectively. Cash distributions to limited partners in excess of net income are considered to represent a return of capital. Cash distributions to limited partners of $0.4 million and $2.5 million for the three months ended March 31, 1999 and 1998, respectively, were deemed to be a return of capital. Cash distributions related to the results from the first quarter of 1999, of $2.1 million, will be paid during the second quarter of 1999. 4. Transactions with General Partner and Affiliates The balance due to affiliates as of March 31, 1999 included $0.2 million due to FSI and its affiliate for management fees, and $35,000 due to affiliated unconsolidated special-purpose entities (USPEs). The balance due to affiliates as of December 31, 1998 includes $0.2 million due to FSI and its affiliates for management fees. The Partnership's proportional share of USPE-affiliated management fees, of $12,000 and $10,000, were payable as of March 31, 1999 and December 31, 1998, respectively. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 4. Transactions with General Partner and Affiliates (continued) The Partnership's proportional share of the affiliated expenses incurred by the unconsolidated special-purpose entities during 1999 and 1998 is listed in the following table (in thousands of dollars): For the Three Months Ended March 31, 1999 1998 --------------------------------- Management fees $ 13 $ 28 Data processing and administrative expenses 7 15 Insurance expense 6 2 5. Equipment The components of owned equipment were as follows (in thousands of dollars): March 31, December 31, 1999 1998 -------------------------------------- Aircraft $ 52,028 $ 52,028 Railcars 33,953 33,999 Marine containers 5,459 5,606 Trailers 5,170 5,257 --------------------------------------------------------------------------------------------------- 96,610 96,890 Less accumulated depreciation (75,124 ) (73,580 ) ------------------------------------- ===================================== Net equipment $ 21,486 $ 23,310 ===================================== As of March 31, 1999, all equipment in the Partnership portfolio was either on lease or operating in PLM-affiliated short-term trailer rental facilities, except for 38 railcars, 21 marine containers, and an aircraft. As of December 31, 1998, all equipment in the Partnership portfolio was either on lease or operating in PLM-affiliated short-term rental facilities, except for 69 railcars, 25 marine containers, and an aircraft. The net book value of the equipment off lease was $1.9 million and $2.4 million as of March 31, 1999 and December 31, 1998, respectively. Capital improvements to the Partnership's equipment of $2,000 and $26,000 were made during the three months ended March 31, 1999 and March 31, 1998, respectively. During the three months ended March 31, 1999, the Partnership sold or disposed of marine containers, trailers, and railcars, with an aggregate net book value of $0.1 million, for aggregate proceeds of $0.1 million. During the three months ended March 31, 1998, the Partnership sold or disposed of marine containers, trailers, and a railcar, with an aggregate net book value of $0.3 million, for aggregate proceeds of $0.3 million. PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 6. Investments in Unconsolidated Special-Purpose Entities The net investment in USPEs included the following jointly-owned equipment (and related assets and liabilities) (in thousands of dollars): March 31, December 31, 1999 1998 --------------------------------- 56% interest in an entity owning a marine vessel $ 2,797 $ 2,814 25% interest in a trust that owned four commercial aircraft 92 106 17% interest in two trusts that owned three commercial aircraft, two aircraft engines, and a portfolio of rotable components -- 2,054 --------------------------------- Net investments $ 2,889 $ 4,974 ================================= The Partnership sold its 17% interest in the two trusts that owned three commercial aircraft, two aircraft engines, and a portfolio of rotable components during the first quarter of 1999 for proceeds of $3.5 million and had a gain of $1.6 million. 7. Operating Segments The Partnership operates or operated primarily in six different segments: aircraft leasing, railcar leasing, marine container leasing, trailer leasing, mobile offshore drilling unit (MODU) leasing, and marine vessel leasing. Each equipment leasing segment engages in short-term and mid-term operating leases to a variety of customers. The following tables present a summary of the operating segments (in thousands of dollars): Marine Aircraft Railcar Container Trailer All For the quarter Ended March 31, 1999 Leasing Leasing Leasing Leasing Other<F1> Total ------------------------------------ ------- ------- ------- ------- ---- ----- REVENUES Lease revenue $ 1,509 $ 1,758 $ 37 $ 141 $ -- $ 3,445 Interest income and other 5 -- -- -- 63 68 Net gain (loss) on disposition of Equipment 1 17 2 (7 ) -- 13 ------------------------------------------------------------- Total revenues 1,515 1,775 39 134 63 3,526 COSTS AND EXPENSES Operations support 94 350 -- 46 10 500 Depreciation and amortization 1,203 443 33 89 15 1,783 Interest expense -- -- -- -- 316 316 Management fees 62 121 2 10 -- 195 General and administrative expenses 192 66 2 25 203 488 Provision for (recovery of) bad (21 ) 46 -- (34 ) -- (9 ) debts ------------------------------------------------------------- Total costs and expenses 1,530 1,026 37 136 544 3,273 ------------------------------------------------------------- Equity in net income (loss) of USPEs 1,474 -- -- -- (27 ) 1,447 ------------------------------------------------------------- ============================================================= Net income (loss) $ 1,459 $ 749 $ 2 $ (2 ) $ (508 )$ 1,700 ============================================================= Total assets as of March 31, 1999 $ 12,484 $ 7,783 $ 555 $ 2,143 $ 5,966 $ 28,931 ============================================================= <FN> <F1> Includes revenues and costs not identifiable to a particular segment such as interest expense, certain amortization expenses, certain interest income and other, operations support and general and administrative expenses. Also includes loss from an investment in an entity owning a marine vessel. </FN> PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 7. Operating Segments (continued) Marine Aircraft Railcar Container Trailer MODU All For the quarter Ended March 31, 1998 Leasing Leasing Leasing Leasing Leasing Other<F1> Total ------------------------------------ ------- ------- ------- ------- ------- ---- ----- REVENUES Lease revenue $ 1,612 $ 1,828 $ 118 $ 319 $ 405 $ -- $ 4,282 Interest income and other 3 -- -- -- -- 56 59 Net gain (loss) on disposition of Equipment (14 ) 16 1 (13 ) -- -- (10 ) ------------------------------------------------------------------------ Total revenues 1,601 1,844 119 306 405 56 4,331 COSTS AND EXPENSES Operations support 55 516 2 54 10 56 693 Depreciation and amortization 1,361 467 96 141 315 15 2,395 Interest expense -- -- -- -- -- 529 529 Management fees 69 127 6 20 20 -- 242 General and administrative expenses 11 66 2 52 -- 129 260 Provision for (recovery of) bad 125 3 (11 ) (1 ) -- 11 127 debts ------------------------------------------------------------------------ Total costs and expenses 1,621 1,179 95 266 345 740 4,246 ------------------------------------------------------------------------ Equity in net income (loss) of USPEs 73 -- -- -- -- (78 ) (5 ) ------------------------------------------------------------------------ ======================================================================== Net income (loss) $ 53 $ 665 $ 24 $ 40 $ 60 $ (762 ) $ 80 ======================================================================== Total assets as of March 31, 1998 $ 19,372 $ 9,589 $ 1,356 $ 3,247 $ 41 $ 14,578 $ 48,183 ======================================================================== <FN> <F1> Includes revenues and costs not identifiable to a particular segment such as interest expense, certain amortization expenses, certain interest income and other, operations support and general and administrative expenses. Also includes loss from an investment in an entity owning a marine vessel. </FN> 8. Net Income Per Weighted-Average Partnership Unit Net income per weighted-average Partnership unit was computed by dividing net income attributable to limited partners by the weighted-average number of Partnership units deemed outstanding during the period. The weighted-average number of Partnership units deemed outstanding during the three months ended March 31, 1999 and 1998 was 9,871,073. 9. Contingencies The Partnership, together with affiliates, has initiated litigation in various official forums in India against a defaulting Indian airline lessee to repossess Partnership property and to recover damages for failure to pay rent and failure to maintain such property in accordance with relevant lease contracts. The Partnership has repossessed all of its property previously leased to such airline, and the airline has ceased operations. In response to the Partnership's collection efforts, the airline filed counter-claims against the Partnership in excess of the Partnership's claims against the airline. The General Partner believes that the airline's counterclaims are completely without merit, and the General Partner will vigorously defend against such counterclaims. The Partnership is involved as plaintiff or defendant in various other legal actions incident to its business. Management does not believe that any of these actions will be material to the financial condition of the Partnership. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (I) RESULTS OF OPERATIONS Comparison of PLM Equipment Growth Fund III's (the Partnership's) Operating Results for the Three Months Ended March 31, 1999 and 1998 (A) Owned Equipment Operations Lease revenues less direct expenses (defined as repairs and maintenance, equipment operating and asset-specific insurance expenses) on owned equipment decreased during the three months ended March 31, 1999 when compared to the same period of 1998. Gains or losses from the sale of equipment, interest and other income, and certain expenses such as depreciation and amortization and general and administrative expenses relating to the operating segments (see Note 7 to the financial statements), are not included in the owned equipment operation discussion because these expenses are indirect in nature, not a result of operations but 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 Three Months Ended March 31, 1999 1998 ------------------------------------ Aircraft $ 1,415 $ 1,557 Railcars 1,408 1,312 Trailers 95 265 Marine containers 37 116 Mobile offshore drilling unit -- 395 Aircraft: Aircraft lease revenues and direct expenses were $1.5 million and $0.1 million, respectively, for the quarter ended March 31, 1999, compared to $1.6 million and $0.1 million, respectively, during the same period of 1998. Lease revenues decreased $0.4 million during the three months ended March 31, 1999 when compared to the same period in 1998 due to one aircraft being offlease since the third quarter of 1998. The decrease in lease revenue was partially offset by the incremental lease revenue of $0.3 million from an aircraft that was transferred into the Partnership's owned equipment portfolio from a trust during the second quarter of 1998. Railcars: Railcars lease revenues and direct expenses were $1.8 million and $0.4 million, respectively, for the quarter ended March 31, 1999, compared to $1.8 million and $0.5 million, respectively, during the same period of 1998. The decrease in direct expenses resulted from running repairs required on certain railcars in the fleet during the first quarter of 1998, which were not needed during the same period of 1999. Trailers: Trailer lease revenues and direct expenses were $0.1 million and $46,000, respectively, for the quarter ended March 31, 1999, compared to $0.3 million and $0.1 million, respectively, during the same period of 1998. The number of trailers owned by the Partnership has been declining due to sales and dispositions. The result of this declining fleet is a decrease in trailer contribution. Marine containers: Marine container lease revenues and direct expenses were $37,000 and $1,000, respectively, for the quarter ended March 31, 1999, compared to $0.1 million and $2,000, respectively, during the same period of 1998. The number of marine containers owned by the Partnership has been declining due to sales and dispositions. The result of this declining fleet and a decrease in utilization has been a decrease in marine container contribution. Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and direct expenses were zero for the quarter ended March 31, 1999, compared to $0.4 million and $10,000, respectively, for the quarter ended March 31, 1998. The Partnership sold its mobile offshore drilling unit in June of 1998. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $2.8 million for the quarter ended March 31, 1999 decreased from $3.6 million for the same period of 1998. Significant variances are explained as follows: (i) A decrease of $0.6 million in depreciation and amortization expenses from 1998 levels reflects the sale or disposition of certain Partnership assets during 1999 and 1998 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 $0.2 million in interest expense was due to a lower average debt outstanding during the three months ended March 31, 1999, compared to the same period in 1998. (iii) A decrease of $0.1 million in bad debt from 1998 due to the collection of $40,000 from past due receivables 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)An increase of $0.2 million in general and administrative expenses was primarily due to increases in repositioning and inspection costs to prepare an aircraft for re-lease. (C) Net Gain (loss) on Disposition of Owned Equipment The net gain on the disposition of owned equipment for the first quarter of 1999 was $13,000, resulting from the disposition of marine containers, railcars, and trailers, with an aggregate net book value of $0.1 million, for aggregate proceeds of $0.1 million. The net loss on the disposition of owned equipment for the first quarter of 1998 was $10,000, which resulted from the disposition of marine containers, trailers, and a railcar, with an aggregate net book value of $0.3 million, for aggregate proceeds of $0.3 million. (D) 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 equipment type (in thousands of dollars): For the Three Months Ended March 31, 1999 1998 ------------------------------------- Aircraft, aircraft engines, and rotables $ 1,474 $ 73 Marine vessel (27 ) (78 ) ===================================== Equity in net income (loss) of USPEs $ 1,447 $ (5 ) ===================================== Aircraft, aircraft engines, and rotables: As of March 31, 1998, the Partnership had an interest in two trusts that owned three commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables. The Partnership sold these two trusts during the first quarter of 1999. As of March 31, 1998, the Partnership had 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 Partnership's share of aircraft revenues and expenses was $1.6 million and $0.1 million, respectively, for the quarter ended March 31, 1999, compared to $0.5 million and $0.4 million, respectively, during the same period of 1998. The $1.6 million of aircraft revenues was the gain from the sale of the equipment in the two trusts during the first quarter of 1999. No lease revenues were earned during the first quarter of 1999 due to the sale of the equipment in the two trusts and an aircraft that was transferred out of a trust into the Partnership's owned equipment portfolio. Aircraft expenses decreased as a result of the sales and the transfer. Marine vessel: As of March 31, 1999 and 1998, the Partnership had an interest in an entity that owns a marine vessel. The Partnership's share of revenues and expenses of marine vessels was $0.3 million and $0.3 million, respectively, for the quarter ended March 31, 1999, compared to $0.3 million and $0.4 million, respectively, for the same period of 1998. The decrease in direct expenses was due to lower marine operating expenses and depreciation expenses. (E) Net Income As a result of the foregoing, the Partnership had a net income of $1.7 million in the first quarter of 1999 compared to net income of $0.1 million in the first quarter of 1998. The Partnership's ability to operate and liquidate assets, secure leases, and re-lease those assets whose leases expire is subject to many factors. Therefore, the Partnership's performance in the three months ended March 31, 1999 is not necessarily indicative of future periods. In the first quarter of 1999, the Partnership distributed $2.0 million to the limited partners, or $0.20 per weighted-average depositary unit. (II) FINANCIAL CONDITION -- CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS For the three months ended March 31, 1999, the Partnership generated operating cash of $1.3 million (net cash provided by operating activities, plus non-liquidating distributions from USPEs) to meet its operating obligations and to make distributions (total for three months ended March 31, 1999 of approximately $2.1 million) to the partners but also used undistributed available cash from prior periods of approximately $0.8 million. During the three months ended March 31, 1999, the Partnership sold owned equipment and investments in USPEs and received aggregate proceeds of $3.6 million. During the first three months of 1999, the Partnership paid down $3.6 million of the outstanding note balance from the proceeds of asset sales. PLM Financial Services, Inc. (FSI or the General Partner) has not planned any expenditure, nor is it aware of any contingencies that would cause the Partnership to require any additional capital to that mentioned above. The Partnership is in its passive liquidation phase. As a result, 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 the partners. (III) 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. (IV) 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 March 31, 1999, the General Partner is reviewing the effect this standard will have on the Partnership's financial statements. (V) OUTLOOK FOR THE FUTURE The Partnership is its passive liquidation phase. The General Partner is seeking to selectively re-lease or sell assets as the existing leases expire. Sale decisions will cause the operating performance of the Partnership to decline over the remainder of its life. The General Partner anticipates that the liquidation of Partnership assets will be completed by the scheduled termination of the Partnership at the end of the year 2000. 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 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 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 continually monitors both the equipment markets and the performance of the Partnership's equipment in these markets. The General Partner may make an evaluation to reduce the Partnership's exposure to 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 and proceeds from disposition of equipment to satisfy its operating requirements, pay loan principal and interest on debt, and pay cash distributions to the partners. (VI) FORWARD-LOOKING INFORMATION Except for the historical information contained herein, in this Form 10-Q 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-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. The Partnership's actual results could differ materially from those discussed here. ITEM 3. 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 note payable 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 the remaining three quarters of 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 $0.2 million in the remaining three quarters of 1999 and $0.1 million in 2000. During the first quarter of 1999, 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. (this space intentionally left blank) PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. (this space intentionally left blank) 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: April 30, 1999 By: /s/ Richard K Brock ------------------------------------------- Richard K Brock Vice President and Corporate Controller