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 YEAR ENDED JUNE 30, 1999
[ ] TRANSITIION 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)
June 30, December 31,
1999 1998
------------------------------
ASSETS
Equipment held for operating lease, at cost $ 95,702 $ 96,890
Less accumulated depreciation (76,067) (73,580)
---------------------------------------
Net equipment 19,635 23,310
Cash and cash equivalents 3,292 3,429
Accounts receivable, net of allowance for doubtful
accounts of $1,447 in 1999 and $1,469 in 1998 1,649 1,164
Investments in unconsolidated special-purpose entities 2,782 4,974
Deferred charges, net of accumulated
amortization of $466 in 1999 and $403 in 1998 78 141
Prepaid expenses and other assets 17 50
---------------------------------------
Total assets $ 27,453 $ 33,068
=======================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 695 $ 1,234
Due to affiliates 168 155
Lessee deposits and reserves for repairs 1,282 1,057
Note payable 14,956 18,540
---------------------------------------
Total liabilities 17,101 20,986
---------------------------------------
Partners' capital:
Limited partners (9,871,073 depositary units as
of JUNE 30, 1999 and December 31, 1998) 10,352 12,082
General Partner -- --
---------------------------------------
Total partners' capital 10,352 12,082
---------------------------------------
Total liabilities and partners' capital $ 27,453 $ 33,068
=======================================
See accompanying notes to financial statements.
-1-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP) STATEMENTS OF INCOME
(in thousands of dollars, except weighted-average unit amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------------------------------------- -------------------------------
REVENUES
Lease revenue $ 3,437 $ 4,275 $ 6,882 $ 8,557
Interest and other income 46 56 114 114
Net gain on disposition of equipment 453 3,734 466 3,725
-------------------------------------------- ------------------------------
Total revenues 3,936 8,065 7,462 12,396
-------------------------------------------- ------------------------------
EXPENSES
Depreciation and amortization 1,776 2,411 3,559 4,807
Repairs and maintenance 603 719 1,072 1,329
Insurance expense to affiliate -- (42 ) -- (42)
Other insurance expense 30 125 61 208
Management fees to affiliate 191 265 386 507
Interest expense 245 514 561 1,043
General and administrative expenses to affiliates 111 144 237 299
Other general and administrative expenses 269 214 631 318
Recovery of bad debts (13 ) (491) (22) (364)
------------------------------------------ -------------------------------
Total expenses 3,212 3,859 6,485 8,105
------------------------------------------- -------------------------------
Equity in net income (loss) of unconsolidated
special-purpose entities 3 (35) 1,450 (40)
------------------------------------------- -------------------------------
Net income $ 727 $ 4,171 $ 2,427 $ 4,251
=========================================== ===============================
PARTNERS' SHARE OF NET INCOME
Limited partners $ 623 $ 4,041 $ 2,219 $ 3,991
General Partner 104 130 208 260
--------------------------------------------
-------------------------------
Total $ 727 $ 4,171 $ 2,427 $ 4,251
=========================================== ===============================
Net income per weighted-average depositary unit $ 0.06 $ 0.41 $ 0.22 $ 0.40
=========================================== ===============================
Cash distribution $ 2,079 $ 2,607 $ 4,157 $ 5,204
============================================ ===============================
Cash distribution per weighted-average
depositary unit $ 0.20 $ 0.25 $ 0.40 $ 0.50
============================================ ===============================
See accompanying notes to financial statements.
-2-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Period from December 31, 1997 to JUNE 30, 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 2,219 208 2,427
Cash distribution (3,949) (208) (4,157)
-----------------------------------------------------
Partners' capital as of JUNE 30, 1999 $ 10,352 $ -- $ 10,352
=====================================================
See accompanying notes to financial statements.
-3-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Six Months
Ended June 30,
1999 1998
----------------------------
OPERATING ACTIVITIES
Net income $ 2,427 $ 4,251
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,559 4,807
Net gain on disposition of equipment (466) (3,725)
Equity in net (income) loss from unconsolidated special-purpose entities (1,450) 40
Changes in operating assets and liabilities:
Accounts receivable, net (472) (184)
Prepaid expenses and other assets 33 47
Accounts payable and accrued expenses (539) (180)
Due to affiliates 13 (2,069)
Lessee deposits and reserves for repairs 225 207
--------------------------------
Net cash provided by operating activities 3,330 3,194
--------------------------------
INVESTING ACTIVITIES
Payments for capitalized improvements (2) (34)
Payments for capitalized improvements in unconsolidated special-purpose entity -- (1,198)
Distributions from unconsolidated special-purpose entities 94 --
Distributions from liquidation of unconsolidated special-purpose entity 3,548 2,318
Proceeds from disposition of equipment 634 11,461
---------------------------------
Net cash provided by investing activities 4,274 12,547
--------------------------------
FINANCING ACTIVITIES
Principal payments on note payable (3,584) (10,750)
Due from affiliates -- (1,556)
Cash distributions paid to limited partners (3,949) (4,944)
Cash distributions paid to General Partner (208) (260)
--------------------------------
Net cash used in financing activities (7,741) (17,510)
--------------------------------
Net decrease in cash and cash equivalents (137) (1,769)
Cash and cash equivalents at beginning of period 3,429 4,239
--------------------------------
Cash and cash equivalents at end of period $ 3,292 $ 2,470
================================
SUPPLEMENTAL INFORMATION
Interest paid $ 561 $ 1,049
================================
See accompanying notes to financial statements.
-4-
-5-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1999 and December 31, 1998, the
statements of income for the three months and six months ended June 30,
1999 and 1998, the statements of changes in partners' capital for the
period from December 31, 1997 to June 30, 1999, and the statements of cash
flows for the six months ended June 30, 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 liquidation 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 that are considered to represent a return of capital. For the
six months ended June 30, 1999 and 1998, cash distributions totaled $4.2
million and $5.2 million, respectively. For the three months ended June 30,
1999 and 1998, cash distributions totaled $2.1 million and $2.6 million,
respectively. Cash distributions to the limited partners of $1.7 million
and $1.0 million for the six months ended June 30, 1999
and 1998, respectively, were deemed to be a return of capital.
Cash distributions related to the results from the second quarter of 1999,
of $2.1 million, will be paid during August 1999.
4. Transactions with General Partner and Affiliates
The balance due to affiliates as of June 30, 1999 and December 31, 1998
included $0.2 million due to FSI and its affiliate for management fees.
The Partnership's proportional share of USPE-affiliated management fees, of
$18,000 and $10,000, were payable as of June 30, 1999 and December 31,
1998, respectively.
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------------------------------------------------------------
Management fees $ 13 $ 33 $ 26 $ 60
Data processing and administrative
expenses 3 12 9 26
Insurance expense -- 10 6 12
5. Equipment
The components of owned equipment were as follows (in thousands of
dollars):
June 30, December 31,
1999 1998
-------------------------------------
Aircraft $ 52,028 $ 52,028
Railcars 33,612 33,999
Trailers 5,137 5,257
Marine containers 4,925 5,606
------------------------------------------
95,702 96,890
Less accumulated depreciation (76,067) (73,580)
----------------------------------------
Net equipment $ 19,635 $ 23,310
========================================
As of June 30, 1999, all equipment in the Partnership portfolio was either
on lease or operating in PLM-affiliated short-term trailer rental
facilities, except for 79 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 $2.1 million and $2.4
million as of June 30, 1999 and December 31, 1998, respectively.
Capital improvements to the Partnership's equipment of $2,000 and $34,000
were made during the six months ended June 30, 1999 and June 30, 1998,
respectively.
During the six months ended June 30, 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 $0.6 million.
During the six months ended June 30, 1998, the Partnership sold or disposed
of marine containers, trailers, railcars, and a mobile offshore drilling
unit, with an aggregate net book value of $7.8 million, for aggregate
proceeds of $11.5 million.
-6-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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):
June 30, December 31,
1999 1998
--------------------------------
56% interest in an entity owning a marine vessel $ 2,701 $ 2,814
25% interest in a trust that owned four commercial aircraft 81 106
17% interest in two trusts that owned three commercial aircraft, two
aircraft engines, and a portfolio of rotable components -- 2,054
-------------------------------------
Net investments $ 2,782 $ 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 five different segments:
aircraft leasing, railcar leasing, trailer leasing, marine container
leasing, and mobile offshore drilling unit (MODU) 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 Trailer Container
For the quarter ended June 30, 1999 Leasing Leasing Leasing Leasing All Other<F1>1 Total
- ----------------------------------- ------- ------- ------- ------- --------- -----
REVENUES
Lease revenue $ 1,509 $ 1,712 $ 182 $ 34 $ -- $ 3,437
Interest income and other 5 -- -- -- 41 46
Net gain on disposition of
equipment -- 353 1 99 -- 453
Total revenues 1,514 2,065 183 133 41 3,936
Costs and Expenses
Operations support 115 459 48 1 10 633
Depreciation and amortization 1,202 442 88 29 15 1,776
Interest expense -- -- -- -- 245 245
Management fees 61 118 10 2 -- 191
General and administrative expenses 142 57 30 1 150 380
(Recovery of) provision for bad debts -- (16) 3 -- -- (13)
Total costs and expenses 1,520 1,060 179 33 420 3,212
Equity in net income (loss) of USPEs 4 -- -- -- (1 ) 3
Net income (loss) $ (2) $ 1,005 $ 4 $ 100 $ (380 ) $ 727
====================================================================
Total assets as of JUNE 30, 1999 $ 11,214 $ 7,230 $ 2,058 $ 481 $ 6,470 $ 27,453
====================================================================
<FN>
--------------------------
<F1> 1 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.
-7-
</FN>
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
7. Operating Segments (continued)
Marine
Aircraft Railcar Trailer Container MODU
For the quarter ended June 30, 1998 Leasing Leasing Leasing Leasing Leasing All Other<F1>1 Total
- ----------------------------------- ------- ------- ------- ------- ------- --------- -----
REVENUES
Lease revenue $ 1,736 $ 1,826 $ 312 $ 50 $ 351 $ -- $ 4,275
Interest income and other 3 -- -- -- -- 53 56
Net gain (loss) on disposition of
equipment -- 142 (57) 30 3,619 -- 3,734
Total revenues 1,739 1,968 255 80 3,970 53 8,065
COSTS AND EXPENSES
Operations support 19 669 67 2 9 36 802
Depreciation and amortization 1,506 461 129 54 205 56 2,411
Interest expense -- -- -- -- -- 514 514
Management fees 101 124 20 2 18 -- 265
General and administrative expenses 48 72 45 1 -- 192 358
(Recovery of) provision for bad debts (483) (18) 10 11 -- (11) (491 )
Total costs and expenses 1,191 1,308 271 70 232 787 3,859
Equity in net loss of USPEs (30) -- -- -- -- (5) (35 )
Net income (loss) $ 518 $ 660 $ (16) $ 10 $ 3,738 $ (739) $ 4,171
===============================================================================
Total assets as of June 30, 1998 $ 20,194 $ 9,033 $ 2,731 $ 1,117 $ -- $ 6,366 $ 39,441
===============================================================================
Marine
Aircraft Railcar Trailer Container
For the six months ended JUNE 30, 1999Leasing Leasing Leasing Leasing All Other<F1>1 Total
Revenues
Lease revenue $ 3,019 3,469 323 71 -- 6,882
Interest income and other 10 -- -- -- 104 114
Net gain (loss) on disposition of
equipment 2 370 (6) 100 -- 466
Total revenues 3,031 3,839 317 171 104 7,462
Costs and Expenses
Operations support 209 809 94 1 20 1,133
Depreciation and amortization 2,405 885 177 62 30 3,559
Interest expense -- -- -- -- 561 561
Management fees 124 240 19 3 -- 386
General and administrative expenses 333 123 56 4 352 868
(Recovery of) provision for bad debts (20) 29 (31) -- -- (22)
Total costs and expenses 3,051 2,086 315 70 963 6,485
Equity in net income (loss) of USPEs 1,477 -- -- -- (27 ) 1,450
Net income (loss) $ 1,457 1,753 2 101 (886 ) 2,427
====================================================================
Total assets as of JUNE 30, 1999 $ 11,214 $ 7,230 $ 2,058 $ 481 $ 6,470 $ 27,453
====================================================================
<FN>
--------------------------
<F1> 1 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-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
7. Operating Segments (continued)
Marine
Aircraft Railcar Trailer Container MODU
For the six months ended June 30, 1998Leasing Leasing Leasing Leasing Leasing All Other<F1>1 Total
REVENUES
Lease revenue $ 3,348 3,656 630 167 756 -- 8,557
Interest income and other 6 -- -- -- -- 108 114
Net gain (loss) on disposition of
equipment (14) 158 (70) 32 3,619 -- 3,725
Total revenues 3,340 3,814 560 199 4,375 108 12,396
COSTS AND EXPENSES
Operations support 74 1,188 120 3 19 91 1,495
Depreciation and amortization 2,868 928 270 150 512 79 4,807
Interest expense -- -- -- -- -- 1,043 1,043
Management fees 170 251 40 8 38 -- 507
General and administrative expenses 60 140 98 3 -- 316 617
(Recovery of) provision for bad debts (358) (15) 9 -- -- -- (364 )
Total costs and expenses 2,814 2,492 537 164 569 1,529 8,105
Equity in net income (loss) of USPEs 43 -- -- -- -- (83) (40 )
Net income (loss) $ 569 1,322 23 35 3,806 (1,504) 4,251
===============================================================================
Total assets as of June 30, 1998 $ 20,194 $ 9,033 $ 2,731 $ 1,117 $ -- $ 6,366 $ 39,441
===============================================================================
- --------------------------
<FN>
<F1> 1 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. Debt
During the first six months of 1999, the Partnership repaid $3.6 million of
the outstanding note balance from the proceeds of asset sales.
9. 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 and six months ended June 30, 1999 and 1998 was 9,871,073.
10. Contingencies
The Partnership, together with affiliates, has initiated litigation in
various official forums in India against a defaulting Indian airline lessee
to repossess Partnership property and to recover damages for failure to pay
rent and failure to maintain such property in accordance with relevant
lease contracts. The Partnership has repossessed all of its property
previously leased to such airline, and the airline has ceased operations.
In response to the Partnership's collection efforts, the airline filed
counter-claims against the Partnership in excess of the Partnership's
claims against the airline. The General Partner believes that the airline's
counterclaims are completely without merit, and the General Partner will
vigorously defend against such counterclaims. The General Partner believes
an unfavorable outcome from the counterclaims is remote.
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.
-9-
PLM EQUIPMENT GROWTH FUND III
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
11. Subsequent Event
The Partnership repaid $0.7 million of the outstanding note balance on July
2, 1999.
(this space is intentionally left blank)
-10-
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 June 30, 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 June 30, 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 June 30,
1999 1998
----------------------------------
Aircraft $ 1,394 $ 1,717
Railcars 1,253 1,157
Trailers 134 245
Marine containers 33 48
Mobile offshore drilling unit -- 342
Other -- (22)
Aircraft: Aircraft lease revenues and direct expenses were $1.5 million and $0.1
million, respectively, for the quarter ended June 30, 1999, compared to $1.7
million and $18,000, respectively, during the same period of 1998. Lease
revenues decreased $0.2 million during the quarter ended June 30, 1999 when
compared to the same period in 1998 due to one aircraft being offlease in the
second quarter of 1999 which was on lease and had $0.4 million of lease revenues
during the same period of 1998. The decrease in lease revenue was partially
offset by the increase in lease revenue of $0.2 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 $1.7 million and $0.5
million, respectively, for the quarter ended June 30, 1999, compared to $1.8
million and $0.6 million, respectively, during the same period of 1998. The
decrease in leases revenues and direct expenses resulted from dispositions of
railcars during 1999 and 1998.
Trailers: Trailer lease revenues and direct expenses were $0.2 million and
$48,000, respectively, for the quarter ended June 30, 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
$34,000 and $1,000 respectively, for the quarter ended June 30, 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 has been a decrease
in marine container contribution.
Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and
direct expenses were $0.4 million and $9,000, respectively, for the quarter
ended June 30, 1998. The Partnership sold its mobile offshore drilling unit in
June of 1998.
-11-
(B) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $2.6 million for the quarter ended June 30, 1999
decreased from $3.1 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 $0.3 million in interest expense was due to a lower
average debt outstanding during the three months ended June 30, 1999,
compared to the same period in 1998.
(iii)A decrease of $0.1 million in management fees to affiliate from 1998
levels was due to lower lease revenue in the second quarter of 1999,
compared to the same period of 1998.
(iv) An increase of $0.5 million in bad debt expense from 1998 due to the
collection of $0.5 million during the second quarter of 1998 from past
due receivables that had previously been reserved for as a bad debt. A
similar collection was not made in 1999.
(C) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of owned equipment for the second quarter of
1999 was $0.5 million, resulting from the disposition of marine containers,
railcars, and trailers, with an aggregate net book value of $0.1 million, for
aggregate proceeds of $0.6 million. The net gain on the disposition of owned
equipment for the second quarter of 1998 was $3.7 million, which resulted from
the disposition of marine containers, trailers, railcars, and a mobile offshore
drilling unit with an aggregate net book value of $7.6 million, for aggregate
proceeds of $11.3 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 June 30,
1999 1998
------------------------------------
Aircraft, aircraft engines, and rotables $ 4 $ (30)
Marine vessel (1) (5)
------------------------------------
Equity in net income (loss) of USPEs $ 3 $ (35)
====================================
Aircraft, aircraft engines, and rotables: As of June 30, 1998, the Partnership
had an interest in two trusts that owned six 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 June 30, 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 $1,000 and a credit of $3,000 respectively,
for the quarter ended June 30, 1999, compared to $0.4 million and $0.4 million,
respectively, during the same period of 1998. The decrease in revenues was 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 June 30, 1999 and 1998, the Partnership had an interest in
an entity that owns a marine vessel. The Partnership's share of revenues and
expenses for the marine vessel was $0.3 million and $0.3 million, respectively,
for the quarter ended June 30, 1999, compared to $0.4 million and $0.4 million,
respectively, for the same period of 1998. The decrease in revenues was due to
lower lease rates in the second quarter of 1999 when compared to the same
quarter of 1988. The decrease in direct expenses was due to $0.1 million
decrease in marine operating expenses and $24,000 decrease in depreciation
expenses.
(E) Net Income
As a result of the foregoing, the Partnership had a net income of $0.7 million
in the second quarter of 1999 compared to net income of $4.2 million in the
second 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 JUNE 30, 1999 is not necessarily indicative of future periods. In the
second quarter of 1999, the Partnership distributed $2.0 million to the limited
partners, or $0.20 per weighted-average depositary unit.
Comparison of the Partnership's Operating Results for the Six Months Ended June
30, 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 six months ended June 30, 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 Six Months
Ended June 30,
1999 1998
-----------------------------------
Aircraft $ 2,810 $ 3,274
Railcars 2,660 2,468
Trailers 229 510
Marine containers 70 164
Mobile offshore drilling unit -- 737
Other -- (63)
Aircraft: Aircraft lease revenues and direct expenses were $3.0 million and $0.2
million, respectively, for the six months ended June 30, 1999, compared to $3.4
million and $0.1 million, respectively, during the same period of 1998. Lease
revenues decreased $0.4 million during the six months ended June 30, 1999, when
compared to the same period in 1998 due to one aircraft being offlease during
the first six months of 1999 which was on lease and had $0.8 million of lease
revenues during the same period of 1998. The decrease in lease revenue was
partially offset by the increase in lease revenue of $0.4 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 $3.5 million and $0.8
million, respectively, for the six months ended June 30, 1999, compared to $3.7
million and $1.2 million, respectively, during the same period of 1998. The
decrease in leases revenues and direct expenses resulted from dispositions of
railcars during 1999 and 1998.
Trailers: Trailer lease revenues and direct expenses were $0.3 million and $0.1
million, respectively, for the six months ended June 30, 1999, compared to $0.6
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 $0.1
million and $1,000, respectively, for the six months ended June 30, 1999,
compared to $0.2 million and $3,000, 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 is a
decrease in marine container net contribution.
Mobile offshore drilling unit: Mobile offshore drilling unit lease revenues and
direct expenses were $0.8 million and $19,000, respectively, for the six months
ended June 30, 1998. The Partnership sold its mobile offshore drilling unit in
June of 1998.
(B) Indirect Operating Expenses Related to Owned Equipment Operations
Total indirect expenses of $5.4 million for the six months ended June 30, 1999
decreased from $6.6 million for the same period of 1998. Significant variance is
explained as follows:
(i) A decrease in depreciation and amortization expenses of $1.2 million
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 $0.5 million in interest expense was due to lower
average debt outstanding during the six months ended June 30, 1999
when compared to the same period of 1998.
(iii)A decrease of $0.1 million in management fees to affiliate from 1998
levels was due to lower lease revenue during the six months ended June
30, 1999, compared to the same period of 1998.
An increase of $0.3 million in bad debt expense from 1998 due to the collection
of $0.5 million during the six months ended June 30, 1998 from past due
receivables that had previously been reserved for as a bad debt. The increase
was also due to the General Partner's evaluation of the collectability of
receivables due from certain lessees.
An increase of $0.3 million in general and administrative expenses from 1998
levels was primarily due to increases in repositioning and inspection costs to
prepare an aircraft for re-lease.
(C) Net Gain on Disposition of Owned Equipment
The net gain on the disposition of equipment was $0.5 million for the six months
ended June 30, 1999, resulting from the disposition of marine containers,
trailers, and railcars with an aggregate net book value of $0.1 million, for
aggregate proceeds of $0.6 million. For the six months ended June 30, 1998, the
net gain of $3.7 million resulting from the disposition of marine containers,
trailers, railcars, and a mobile offshore drilling unit with an aggregate net
book value of $7.8 million, for aggregate proceeds of $11.5 million.
(D) Equity in Net Income (Loss) of Unconsolidated Special-Purpose Entities
Net income (loss) generated from the operation of jointly-owned assets accounted
for under the equity method is shown in the following table by equipment type
(in thousands of dollars):
For the Six Months
Ended June 30,
1999 1998
---------------------------------
Aircraft, aircraft engines, and rotables $ 1,477 $ 43
Marine vessel (27) (83)
Equity in net income (loss) $ 1,450 $ (40)
=================================
Aircraft, aircraft engines, and rotables: As of June 30, 1998, the Partnership
had an interest in two trusts that owned six 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 June 30, 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 six months ended June 30, 1999, compared to $0.8 million and $0.8
million, respectively, during the same period of 1998. The $1.6 million
represented 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 six months
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 June 30, 1999 and 1998, the Partnership had an interest in
an entity that owns a marine vessel. The Partnership's share of revenues and
expenses for the marine vessel was $0.5 million and $0.5 million, respectively,
for the six months ended June 30, 1999, compared to $0.7 million and $0.7
million for the six months ended June 30, 1998. The decrease in revenues was due
to lower lease rates for the six months ended June 30, 1999 when compared to the
same period of 1998. The decrease in direct expenses was due to $0.1 million
decrease in marine operating expenses and $0.1 million decrease in depreciation
expenses.
(E) Net Income
As a result of the foregoing, the Partnership had net income of $2.4 million for
the six months ended June 30, 1999, compared to a net income of $4.3 million in
the same period of 1998. The Partnership's ability to operate, or liquidate
assets, secure leases, and re-lease those assets whose leases expire is subject
to many factors. Therefore, the Partnership's performance in the six months
ended June 30, 1999 is not necessarily indicative of future periods. The
Partnership distributed $3.9 million to the limited partners, or $0.40 per
weighted-average depositary unit in the six months ended JUNE 30, 1999.
(II) FINANCIAL CONDITION -- CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS
For the six months ended June 30, 1999, the Partnership generated operating cash
of $3.4 million (net cash provided by operating activities, plus non-liquidating
distributions from USPEs) to meet its operating obligations and to make
distributions (total for six months ended June 30, 1999 of approximately $4.2
million) to the partners but also used undistributed available cash from prior
periods and asset sale proceeds of approximately $0.8 million.
During the six months ended June 30, 1999, the Partnership sold owned equipment
and investments in USPEs and received aggregate proceeds of $4.2 million.
Lessee deposits and reserve for repairs increased $0.2 million during the six
months ended June 30, 1999 compared to December 31, 1998 due to an increase of
$0.1 million in reserve for repairs and an increase of $0.1 million in prepaid
lease revenue.
During the first six months of 1999, the Partnership repaid $3.6 million of the
outstanding note balance from the proceeds of asset sales. The Partnership
repaid $0.7 million on July 2, 1999. As of July 29, 1999, the outstanding note
balance was $14.3 million.
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 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 those of 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 possibility commonly known as the "Year 2000" or "Y2K" problem.
As 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 business systems in order to
determine whether such systems will retain functionality after December 31,
1999. As of June 30, 1999, the General Partner has completed inventory,
assessment, remediation and testing stages of its Year 2000 review of its core
business information systems. Specifically, the General Partner (a) has
integrated 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
been made Year 2000 compliant. In addition, numerous other software systems
provided by vendors and service providers have been replaced with systems
represented by the vendor or service provider to be Year 2000 functional. These
systems will be fully tested September by 30, 1999 and are expected to be
compliant.
As of June 30, 1999, the costs incurred and allocated to the Fund to become Year
2000 compliant have not been material and does not anticipate any additional
Year 2000-compliant expenditures.
Some risks associated with the Year 2000 problem are beyond the ability of the
Partnership or General Partner 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
readiness of such parties and the extent to which the Partnership is vulnerable
to any third-party Year 2000 issues. As part of this process, vendors and
service providers were ranked in terms of the relative importance of the service
or product provided. All service providers and vendors who were identified as
medium to high relative importance were surveyed to determine Year 2000 status.
The General Partner has received satisfactory responses to Year 2000 readiness
inquiries from surveyed service providers and vendors.
It is possible that certain of the Partnership's equipment lease portfolio may
not be Year 2000 compliant. The General Partner has contacted equipment
manufacturers of the portion of the Partnership's leased equipment portfolio
identified as date sensitive to assure Year 2000 compliance or to develop
remediation strategies. The Partnership does not expect that non-Year 2000
compliance of its leased equipment portfolio will have an adverse material
impact on its financial statements. The General Partner has surveyed the
majority of its lessees and the majority of those surveyed have responded
satisfactorily to Year 2000 readiness inquiries.
There can be no assurance that the software systems of such parties will be
converted or made Year 2000 compliant in a timely manner. 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 of the Partnership. The General Partner has
made and will continue an ongoing effort to recognize and evaluate potential
exposure relating to third party Year 2000 noncompliance. The General Partner
will implement a contingency plan if the General Partner determines that
third-party noncompliance would 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 or vendors or service providers due to Year 2000
problems. For the purpose of such contingency planning, a reasonably likely
worst case scenarios primarily anticipate a) an inability to access systems and
data on a temporary basis resulting in possible delay in reconciliation of funds
received or payment of monies owed, or b) an inability to continuously employ
equipment assets due to temporary Year 2000 related failure of external
infrastructure necessary to the ongoing operation of the equipment. The General
Partner is evaluating whether there are additional scenarios, which have not
been identified. Contingency planning will encompass strategies up to and
including manual processes. The General Partner anticipates that these plans
will be completed by September 30, 1999.
(IV) ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," 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.
FASB Statement No. 137, "Accounting for Derivatives, Instruments, and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133," issued in June 1999, defers the effective
date of Statement No. 133. Statement No. 133, as amended, is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. As of
June 30, 1999, the Company is reviewing the effect SFAS No. 133 will have on the
Company's consolidated financial
statements.
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(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.
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. Other factors affecting the Partnership's
contribution in 1999 and beyond include:
1. The Partnership is experiencing difficulty in releasing and selling its older
aircraft.
2. Decrease in demand of available marine container has lead to a decline in
lease rates.
3. Depressed economic conditions in Asia have led to declining freight rates
through the early part of 1999 for drybulk vessels. The market has stabilized
and is expected to improve over the next 2-3 years in the absence of new
additional orders.
4. Railcar loading in North America have continued to be high, however a
softening in the market is expected in the second half of 1999, which may lead
to lower utilization and lower contribution to the Partnership.
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 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.
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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 $61,000 in the remaining two 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 $121,000 in the remaining two
quarters of 1999 and $49,000 in 2000.
During the six months ended June 30, 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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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: July 29, 1999 By: /s/ Richard K Brock
-------------------------------------------
Richard K Brock
Vice President and
Corporate Controller
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