10-Q 1 f10q_2qtr2001-egf3.txt 2Q 2001 PLM EGF3 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, 2001 [ ] 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.) 120 Montgomery Street Suite 1350, San Francisco, CA 94104 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code: (415) 445-3201 ----------------------- 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)

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)

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, 1999 to June 30, 2001 (in thousands of dollars)

See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) STATEMENTS OF CASH FLOWS (in thousands of dollars)

See accompanying notes to financial statements. PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2001 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, 2001 and December 31, 2000, the statements of income for the three months and six months ended June 30, 2001 and 2000, the statements of changes in partners' capital for the period from December 31, 1999 to June 30, 2001, and the statements of cash flows for the six months ended June 30, 2001 and 2000. 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, 2000, on file at the Securities and Exchange Commission. 2. SCHEDULE OF PARTNERSHIP PHASES The Partnership, in accordance with its limited partnership agreement, entered its liquidation phase on January 1, 2000 and has commenced an orderly liquidation of the Partnership's assets. During the liquidation phase, the Partnership's assets will continue to be reported at the lower of carrying amount or fair value less cost to sell. The General Partner filed a certificate of dissolution on behalf of the Partnership with the Secretary of State for the State of California on December 31, 2000, and following completion of the liquidation of the Partnership which is anticipated to occur in 2001, will file a certificate of cancellation. 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 three and six months ended June 30, 2001, cash distributions were $0.6 million. There were no cash distributions for the three and six months ended June 30, 2000. None of the cash distributions in the six months ended June 30, 2001 were considered a return of capital. 4. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES The balance due to affiliates as of June 30, 2001 and December 31, 2000 included $0.1 million due to FSI and its affiliate for management fees and administrative expenses. There was no Partnership's proportional share of USPE-affiliated management fees payable as of June 30, 2001. The Partnership's proportional share of USPE-affiliated management fees payable as of December 31, 2000 was $10,000. The Partnership's proportional share of the affiliated expenses incurred by the unconsolidated special-purpose entities during 2001 and 2000 is listed in the following table (in thousands of dollars):

PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2001 5. EQUIPMENT The components of owned equipment were as follows (in thousands of dollars):

As of June 30, 2001, all equipment in the Partnership portfolio was on lease except for 77 railcars. As of December 31, 2000, all owned equipment in the Partnership portfolio was on lease except for 88 railcars, 25 trailers, and an aircraft. The net book value of the equipment off lease was $0.3 million and $0.6 million as of June 30, 2001 and December 31, 2000, respectively. Capital improvements to the Partnership's equipment of $54,000 were made during the six months ended June 30, 2001. Capital improvements to the Partnership's equipment of $11,000 were made during the six months ended June 30, 2000. During the six months ended June 30, 2001, the Partnership sold or disposed of aircraft, marine containers, trailers, and railcars, with an aggregate net book value of $1.6 million, for aggregate proceeds of $5.6 million. The aircraft was reported as equipment held for sale as of December 31, 2000. During the six months ended June 30, 2000, the Partnership disposed of marine containers, trailers, and railcars, with an aggregate net book value of $0.2 million, for aggregate proceeds of $0.2 million. During the six months ended June 30, 2000, the Partnership reduced the carrying value of refrigerated and dry trailers by $0.2 million to the equipment's estimated realizable value. There were no revaluations of equipment required in the six months ended June 30, 2001. 6. INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITY The net investment in USPE's included the following jointly-owned equipment (and related assets and liabilities) (in thousands of dollars):

PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2001 7. OPERATING SEGMENTS The Partnership operates or operated in five different segments: aircraft leasing, railcar leasing, marine vessel leasing, marine container leasing, and trailer 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):

PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2001 7. OPERATING SEGMENTS (continued)

PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2001 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 and six months ended June 30, 2001 and 2000 was 9,871,210. 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 contract. 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 Partnership believes the likelihood of an unfavorable outcome from the counterclaims is remote. The Partnership is involved as plantiff or defendant in various 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. 10. LIQUIDATION AND SPECIAL DISTRIBUTIONS On January 1, 2000, the General Partner began the liquidation phase of the Partnership and commenced an orderly liquidation of the Partnership assets. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing sale proceeds. As sale proceeds are received the General Partner intends to periodically declare special distributions to distribute the sale proceeds to the partners. During the liquidation phase of the Partnership the equipment will continue to be leased under operating leases until sold. Operating cash flows, to the extent they exceed Partnership expenses, will continue to be distributed. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio continues to be carried at the lower of depreciated cost or fair value less cost to dispose. Although the General Partner estimates that there will be distributions after liquidation of assets and liabilities, the amounts cannot be accurately determined prior to actual liquidation of the equipment. Any excess proceeds over expected Partnership obligations will be distributed to the Partners throughout the liquidation period. Upon final liquidation, the Partnership will be dissolved. The Partnership is not permitted to reinvest proceeds from sales or liquidations of equipment. These proceeds, in excess of operational cash requirements, are periodically paid out to limited partners in the form of special distributions. No special distributions were paid in the first and second quarters of 2001 and 2000. The sales and liquidations occur because of certain damaged equipment, the determination by the General Partner that it is the appropriate time to maximize the return on an asset through sale of that asset, and, in some cases, the ability of the lessee to exercise purchase options. 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, 2001 AND 2000 (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, 2001 when compared to the same period of 2000. 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):

Railcars: Railcar lease revenues and direct expenses were $1.6 million and $0.5 million, respectively, for the quarters ended June 30, 2001 and 2000. Trailers: Trailer lease revenues and direct expenses were $0.1 million and $0.1 million, respectively, for the quarters ended June 30, 2001 and 2000. The decrease in trailer contribution in the second quarter of 2001 was due to the disposition of trailers in 2000 and 2001. Marine containers: Marine container lease revenues and direct expenses were $11,000 and $-0- respectively, for the quarter ended June 30, 2001, compared to $21,000 and $1,000, respectively, during the same period of 2000. The decrease in marine container contribution in the second quarter of 2001 was due to the disposition of marine containers in 2000 and 2001. Aircraft: Aircraft lease revenues and direct expenses were $0 and $2,000, respectively, for the quarter ended June 30, 2001, compared to $1.2 million and $0.2 million, respectively, during the same period of 2000. Lease revenues decreased $1.2 million during the three months ended June 30, 2001 compared to the same period in 2000 due to the sale of the Partnership's remaining wholly-owned aircraft during the first quarter of 2001. (B) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $1.0 million for the quarter ended June 30, 2001 decreased from $2.1 million for the same period of 2000. Significant variances are explained as follows: (i) A decrease of $0.9 million in depreciation and amortization expenses from 2000 levels due to the sale or disposition of Partnership assets during 2001 and 2000. (ii) Loss on revaluation of equipment decreased $0.2 million during the three months ended June 30, 2001 and resulted from the Partnership reducing the carrying value of trailers to their estimated net realizable value during the three months ended June 30, 2000. There was no revaluation of equipment required during the same period of 2001. (iii) A decrease of $0.1 million in interest expense was due to the repayment of the Partnership's debt during 2000. (iv) A $0.1 million increase in bad debt expense from the second quarter of 2000 was due to the General Partner's evaluation of the collectability of receivables due from certain lessees and a $43,000 increase was due to the recovery of a bad debt previously reserved for. A similar recovery did not occur in the first quarter of 2001. (C) Net Gain on Disposition of Owned Equipment The net gain on the disposition of owned equipment for the second quarter of 2001 was $0.1 million, resulting from the disposition of marine containers and railcars, with an aggregate net book value of $48,000, for aggregate proceeds of $0.2 million. The net gain on the disposition of owned equipment for the second quarter of 2000 was $8,000, 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. (D) Equity in Net Loss of Unconsolidated Special-Purpose Entities (USPE's) Net 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):

Marine vessel: As of June 30, 2001, the Partnership had no remaining interest in entities that owned marine vessels. The Partnership's share of revenues and expenses of marine vessels was $0 for the quarter ended June 30, 2001, compared to $0.3 million and $0.3 million, respectively, for the same period of 2000. The decrease in revenues and expenses of marine vessels in the second quarter of 2001 compared to the same period of 2000 was due to the sale of the Partnership's interest in an entity that owned a marine vessel during the third quarter of 2000. (E) Net Income As a result of the foregoing, the Partnership had a net income of $0.4 million in the second quarter of 2001 compared to net income of $0.2 million in the second quarter of 2000. 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, 2001 is not necessarily indicative of future periods. In the second quarter of 2001, the Partnership distributed $0.6 million to the limited partners, or $0.06 per weighted-average depository unit. COMPARISON OF THE PARTNERSHIP'S OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (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, 2001 when compared to the same period of 2000. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):

Railcars: Railcars lease revenues and direct expenses were $3.3 million and $1.0 million, respectively, for the six months ended June 30, 2001, compared to $3.4 million and $0.9 million, respectively, during the same period of 2000. The decrease in railcar contribution in the six months ended June 30, 2001 was due to a decrease in railcar utilization in 2001, compared to the same period in 2000. Aircraft: Aircraft lease revenues and direct expenses were $0.2 million and $27,000, respectively, for the six months ended June 30, 2001, compared to $2.4 million and $0.2 million, respectively, during the same period of 2000. The $2.1 decrease in aircraft contribution during the six months ended June 30, 2001 compared to the same period in 2000 is due to the sale of an aircraft during the first quarter of 2001. Trailers: Trailer lease revenues and direct expenses were $0.2 million and $0.1 million, respectively, for the six months ended June 30, 2001, compared to $0.3 million and $0.1 million, respectively, during the same period of 2000. 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 $23,000 and $0, respectively, for the six months ended June 30, 2001, compared to $0.1 million and $1,000, respectively, during the same period of 2000. 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 contribution. (B) Indirect Operating Expenses Related to Owned Equipment Operations Total indirect expenses of $2.3 million for the six months ended June 30, 2001 decreased from $4.2 million for the same period of 2000. Significant variances are explained as follows: (i) A decrease of $1.7 million in depreciation and amortization expenses from 2000 levels due to the disposition of Partnership assets during 2001 and 2000. (ii) A decrease of $0.3 million in interest expense was due to the repayment of the Partnership's debt during 2000. (iii) Loss on revaluation of equipment decreased $0.2 million during the six months ended June 30, 2001 and resulted from the Partnership reducing the carrying value of trailers to their estimated net realizable value during the six months ended June 30, 2000. There was no revaluation of equipment required during the same period of 2001. (iv) A decrease of $0.1 million in management fees to affiliate from 2000 levels was due to lower lease revenues during the six months ended June 30, 2001, compared to the same period of 2000. (v) A increase of $0.2 million in general and administrative expenses was due to an increase of $0.1 million in legal fees related to aircraft litigation. Allocations by the General Partner also increased $0.1 million, of which $30,000 was due to severance costs related to staff reductions. (vi) A increase of $0.2 million in bad debt expense from 2000. A $0.1 million increase was due to the General Partner's evaluation of the collectability of receivables due from certain lessees and a $0.1 million increase was due to recovery of bad debt previously reserved for during the six months of 2000. A similar recovery did not occur in the six months ended June 30, 2001. (C) Net Gain on Disposition of Owned Equipment The net gain on the disposition of equipment was $4.0 million for the six months ended June 30, 2001, resulting from the disposition of aircraft, marine containers, trailers, and railcars with an aggregate net book value of $1.6 million, for aggregate proceeds of $5.6 million. The net gain on the disposition of equipment was $45,000 for the six months ended June 30, 2000, resulting from the disposition of marine containers, trailers, and railcars with an aggregate net book value of $0.2 million, for aggregate proceeds of $0.2 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):

Aircraft, aircraft engines, and rotables: As of June 30, 2001, the Partnership had no remaining interests in entities that owned aircraft, aircraft engines, or rotables. The Partnership had no revenues or expenses in USPE's that owned aircraft, aircraft engines, or rotables in the six months ended June 30, 2001. The Partnership's share of aircraft revenues and expenses were $22,000 and zero, respectively, for the six months ended June 30, 2000. The $22,000 of aircraft revenues for the six months ended June 30, 2000 represented interest income earned during the first six months of 2000 on accounts receivable. Marine vessel: As of June 30, 2001, the Partnership's had no remaining interest in entities that owned marine vessels. The Partnership's share of revenues and expenses of marine vessels was $6,000 and $16,000, respectively, for the six months ended June 30, 2001, compared to $0.5 million and $0.6 million, respectively, for the same period of 2000. The decrease in revenues and expenses of marine vessels for the six months ended June 30, 2001 compared to the same period of 2000 was due to the sale of the Partnership's interest in an entity that owned a marine vessel during the third quarter of 2000. (E) Net Income As a result of the foregoing, the Partnership had net income of $4.3 million for the six months ended June 30, 2001, compared to a net income of $0.8 million in the same period of 2000. 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, 2001 is not necessarily indicative of future periods. In the six months ended June 30, 2001, the Partnership distributed $0.6 million to the limited partners or $0.06 per weighted average depository unit. (II) FINANCIAL CONDITION -- CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS For the six months ended June 30, 2001, the Partnership generated operating cash of $1.5 million (net cash provided by operating activities, plus non-liquidating distributions from USPE's) to meet its operating obligations and make distributions to the partners (total of $0.6 million the six months ended June 30, 2001). During the six months ended June 30, 2001, the Partnership sold owned equipment and received aggregate proceeds of $5.6 million. During the six months ended June 30, 2001, accounts receivable decreased $0.3 million, due to the timing of cash receipts and the increase in Allowance for Doubtful Accounts. During the six months ended June 30, 2001, accounts payable and accrued expenses decreased $0.2 million due to the reduction of the size of the Partnership's equipment portfolio. During the six months ended June 30, 2001, lessee deposits and reserves for repairs decreased $0.2 million. This reflects a decrease of $0.1 million in lessee deposits due to the return of security deposits to the buyers who purchased an aircraft during the first quarter of 2001. Additionally, a decrease of $0.1 million in prepaid aircraft revenue was due to the sale of an aircraft. 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. The Partnership is in its active 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. Significant asset sales may result in potential special distributions to the partners. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio that is actively being marketed for sale by the General Partner continues to be carried at the lower of depreciated cost or fair value less cost of disposal. Although the General Partner estimates that there will be distributions to the partners after final disposal of assets and settlement of liabilities, the amounts cannot be accurately determined prior to actual disposal of the equipment. (III) OUTLOOK FOR THE FUTURE The Partnership entered its liquidation phase on January 1, 2000. 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 filed a certificate of dissolution on behalf of the Partnership with the Secretary of State for the State of California in December 2000, and following completion of the liquidation of the Partnership which is anticipated to occur in 2001, the General Partner will file a certificate of cancellation. Several factors may affect the Partnership's operating performance in the remainder of 2001, including changes in the markets for the Partnership's equipment and changes in the regulatory environment in which that equipment operates. Liquidation of the Partnership's equipment will cause 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 the year 2001 include: 1. The cost of new marine containers have been at historical lows for the past several years which has caused downward pressure on the per diem lease rates for this type of equipment. 2. Railcar loadings in North America for the six months ending 2001 were below those of 2000. This decrease has led to lower utilization and lower contribution to the Partnership as existing leases expire and renewal leases are negotiated. The ability of the Partnership to realize acceptable lease rates on its equipment in the different equipment markets is contingent on many factors, such as specific market conditions and economic activity, technological obsolescence, and government or other regulations. The unpredictability of these factors, or of their occurrence, makes it difficult for the General Partner to clearly define trends or influences that may impact the performance of the Partnership's equipment. The General Partner continually monitors both the equipment markets and the performance of the Partnership's equipment in these markets. The General Partner may decide to reduce the Partnership's exposure to those equipment markets in which it determines that it cannot operate equipment and achieve acceptable rates of return. The Partnership intends to use cash flow from operations and proceeds from disposition of equipment and cash currently held to satisfy its operating requirements, maintain working capital reserves, and to pay cash distributions to the unitholders. (IV) FORWARD-LOOKING INFORMATION Except for the historical information contained herein 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 exposure is currency devaluation risk. During the six months ended June 30, 2001, 76% 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. 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: August 13, 2001 By: /s/ Stephen M. Bess ---------------------------------------- Stephen M. Bess President and Current Chief Accounting Officer

PLM EQUIPMENT GROWTH FUND III 10-Q