10-Q 1 f10q_3qtr2001-egf1.txt Q3 2001 PLM EQUIPMENT GROWTH FUND 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 September 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 0-15436 ------------------- PLM EQUIPMENT GROWTH FUND (Exact name of registrant as specified in its charter) California 94-2998816 (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 (A Limited Partnership) CONDENSED BALANCE SHEETS (in thousands of dollars, except unit amounts) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND (A Limited Partnership) CONDENSED STATEMENTS OF INCOME (in thousands of dollars, except weighted-average unit amounts) (unaudited)

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND (A Limited Partnership) CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the period from December 31, 1999 to September 30, 2001 (in thousands of dollars) (unaudited)

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

See accompanying notes to unaudited condensed financial statements. PLM EQUIPMENT GROWTH FUND (A Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 1. OPINION OF MANAGEMENT In the opinion of the management of PLM Financial Services, Inc. (FSI or the General Partner), the accompanying unaudited condensed financial statements contain all adjustments necessary, consisting primarily of normal recurring accruals, to present fairly the condensed financial position of PLM Equipment Growth Fund (the Partnership) as of September 30, 2001 and December 31, 2000, the condensed statements of income for the three and nine months ended September 30, 2001 and 2000, the condensed statements of changes in Partners' capital from December 31, 1999 to September 30, 2001, and the condensed statements of cash flows for the nine months ended September 30, 2001 and 2000. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the accompanying condensed 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, 1998, and has commenced an orderly liquidation of the Partnership assets. The Partnership will terminate on December 31, 2006, unless terminated earlier upon the sale of all equipment or by certain other events. The General Partner may no longer reinvest cash flows and surplus funds in equipment. All future cash flows and surplus funds, if any, are to be used for distributions to partners, except to the extent used to maintain reasonable reserves. During the liquidation phase, the Partnership's assets will continue to be recorded at the lower of the 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 three months ended September 30, 2001 and 2000 cash distributions totaled $-0- and $1.0 million respectively. For the nine months ended September 30, 2001 and 2000, cash distributions totaled $1.7 million and $2.9 million, respectively. In addition, a $1.5 million special distribution was paid during the nine months ended September 30, 2000. There were no special distributions in the nine months ended September 30, 2001. During the nine months ended September 30, 2001, cash distributions of $0.9 million to the unitholders, were deemed to be a return of capital. During the nine months ended September 30, 2000, cash distributions and special distributions of $0.6 million to the unitholders, was deemed to be a return of capital. Cash distributions of $0.5 million, related to the results from the third quarter of 2001, will be paid during the fourth quarter of 2001. 4. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES The balance due to affiliates as of September 30, 2001 and December 31, 2000 totaled $38,000 and $36,000, respectively, and are due to FSI and its affiliate for management fees. The Partnership's proportional share of unconsolidated special-purpose entities (USPEs) affiliated management fees receivable from FSI and its affiliate was $22,000 as of September 30, 2001 The Partnership's proportional share of USPEs affiliated management fees payable to FSI and its affiliate was $26,000 as of December 31, 2000. PLM EQUIPMENT GROWTH FUND (A Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 4. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES (continued) The Partnership's proportional share of the affiliated expenses incurred by the USPE during 2001 and 2000 is listed in the following table (in thousands of dollars):

5. EQUIPMENT Owned equipment held for operating leases is stated at cost. Equipment held for sale is stated at the lower of the equipment's depreciated cost or fair value, less cost to sell, and is subject to a pending contract for sale. The components of owned equipment were as follows (in thousands of dollars):

As of September 30, 2001, all equipment in the Partnership's owned equipment portfolio was on lease, except for 26 railcars with an aggregate net book value of $42,000. As of December 31, 2000, all equipment in the Partnership's owned equipment portfolio was on lease except for 14 railcars with an aggregate net book value of $20,000. During the nine months ended September 30, 2001, the Partnership disposed of marine containers and railcars with an aggregate net book value of $25,000, for proceeds of $0.1 million. During the nine months ended September 30, 2000, the Partnership sold or disposed of marine containers, trailers, and railcars with an aggregate net book value of $0.6 million, for proceeds of $1.0 million. 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):

As of September 30, 2001 and December 31, 2000, the jointly-owned equipment in the Partnership's USPE portfolio was on lease. During 2000, the General Partner sold the Partnership's 50% interest in a Boeing 737-200A in which the Partnership had an investment of $0.4 million for proceeds of $1.8 million. PLM EQUIPMENT GROWTH FUND (A Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 7. OPERATING SEGMENTS The Partnership operates or operated in five different segments, railcar leasing, trailer leasing, marine container leasing, aircraft 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):

PLM EQUIPMENT GROWTH FUND (A Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 7. OPERATING SEGMENTS (continued)

(This space intentionally left blank) PLM EQUIPMENT GROWTH FUND (A Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) 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 nine months ended September 30, 2001 and 2000 were 5,785,725. 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 counterclaims 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 defend against such counterclaims. The General Partner believes the likelihood of an unfavorable outcome from the counterclaims is remote. During 2001, the General Partner has decided to minimize its collection efforts from the India lessee in order to save the Partnership from incurring additional expenses associated with trying to collect from a lessee that has a limited ability to pay. 10. LIQUIDATION AND SPECIAL DISTRIBUTIONS On January 1, 1998, the General Partner began the liquidation phase of the Partnership with the intent to commence an orderly liquidation of the Partnership assets. The General Partner is actively marketing the remaining equipment portfolio with the intent of maximizing lease revenues and 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 and subject to the Partnership's working capital requirements, will continue to be distributed from time to time. 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. 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 leases, the ability of the lessee to exercise purchase options. Special distributions were $1.5 million for the nine months ended September 30, 2000. There were no special distributions in the nine months ended September 30, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (I) RESULTS OF OPERATIONS COMPARISON OF PLM EQUIPMENT GROWTH FUND'S (THE PARTNERSHIP'S) OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (A) Owned Equipment Operations Lease revenues less direct expenses (defined as repairs and maintenance and asset-specific insurance expenses) on owned equipment decreased during the quarter ended September 30, 2001, 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 general and administrative expenses relating to the operating segments (see Note 7 to the unaudited condensed 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 $1.3 million and $0.3 million, respectively, for the quarter ended September 30, 2001, compared to $1.4 million and $0.4 million, respectively, for the same period of 2000. Lease revenues declined $38,000 due to lower release rates on certain of the fleet's tank railcars and declined $20,000 due to an increase in the number of railcars off-lease compared to the same period of 2000. Direct expenses decreased $0.1 million due to fewer repairs to the railcar fleet compared to the same period of 2000. Trailers: All the Partnership's trailers were sold in the third quarter of 2000. In the third quarter of 2000, trailer lease revenues and direct expenses were $0.1 million and $34,000 respectively. (B) Net Gain (Loss) on Disposition of Owned Equipment The net loss on disposition of owned equipment for the third quarter of 2001 totaled $1,000, and resulted from the sale of marine containers with an aggregate net book value of $12,000, for proceeds of $11,000. For the third quarter of 2000, the net gain on dispositions totaled $0.5 million, and resulted from the sale of marine containers, trailers, and railcars with an aggregate net book value of $0.4 million, for proceeds of $0.8 million. (C) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses were $0.6 million for the quarters ended September 30, 2001 and 2000. Significant variances are explained as follows: (i) A $0.1 million increase in the provision for bad debts was based on the General Partner's evaluation of the collectability of receivables when compared to the same period of 2000. During the third quarter of 2000, the Partnership collected $0.1 million from past due receivables that had been previously reserved for as a bad debt, a similar collection did not occur during the same quarter of 2001. (ii) A $48,000 decrease in general and administrative expenses during the third quarter 2001 compared to the same period of 2000, was due to a decrease of $19,000 in professional services and lower costs of $28,000 resulting from the sale of all of the Partnership's trailers during 2000. (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):

Marine vessel: During the three months ended September 30, 2001, lease revenues of $0.3 million were offset by depreciation expense, direct expenses, and administrative expenses of $0.6 million. During the same period of 2000, lease revenues of $0.8 million were offset by depreciation expense, direct expenses, and administrative expenses of $0.7 million, respectively. Marine vessel lease revenue decreased $0.2 million during the three months ended September 30, 2001, due to the marine vessel being off-lease for an additional 1-1/2 months during the quarter and decreased $0.3 million due to lower voyage charter lease rates earned compared to the same period of 2000. Depreciation expense, direct expenses, and administrative expenses decreased $0.1 million during the quarter ended September 30, 2001 compared to the same period of 2000. A decrease in direct expenses of $0.2 million due to the marine vessel incurring lower operating costs while off-lease, that was partially offset by an increase of $0.1 million caused by incurring higher repairs and maintenance expenses compared to the same period of 2000. (E) Net Income As a result of the foregoing, the Partnership's net income of $0.1 million for the third quarter of 2001 decreased from net income of $1.1 million during the same period 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 third quarter of 2001 is not necessarily indicative of future periods. COMPARISON OF THE PARTNERSHIP'S OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (A) Owned Equipment Operations Lease revenues less direct expenses (defined as repairs and maintenance and asset-specific insurance expenses) on owned equipment decreased during the nine months ended September 30, 2001, compared to the same period of 2000. The following table presents lease revenues less direct expenses by segment (in thousands of dollars):

Railcars: Railcar lease revenues and direct expenses were $4.0 million and $1.1 million, respectively, for the nine months ended September 30, 2001, compared to $4.2 million and $1.2 million, respectively, during the same period of 2000. Lease revenues declined $0.2 million due to lower release rates on certain of the fleet's tank railcars and declined $0.1 million due to an increase in the number of railcars off-lease compared to the same period of 2000. Direct expenses decreased $0.1 million due to fewer repairs to the railcar fleet compared to the same period of 2000. Marine containers: Marine container lease revenues and direct expenses were $46,000 and $-0-, respectively, for the nine months ended September 30, 2001, compared to $0.1 million and $-0-, respectively, during the same period of 2000. The number of marine containers owned by the Partnership has been declining over the past twelve months due to dispositions. The result of this declining fleet has been a decrease in marine container contribution. Trailers: All the Partnership's trailers were sold in the third quarter of 2000. Trailer lease revenues and direct expenses were $0.3 million and $0.1 million, respectively, for the nine months ended September 30, 2000. (B) Net Gain on Disposition of Owned Equipment Net gain on disposition of equipment for the nine months ended September 30, 2001 totaled $0.1 million and resulted from the sale of marine containers and railcars with an aggregate net book value of $25,000, for proceeds of $0.1 million. For the nine months ended September 30, 2000, the net gain on dispositions totaled $0.5 million, and resulted from the sale of marine containers, railcars, and trailers, with an aggregate net book value of $0.6 million, for proceeds of $1.0 million. (C) Indirect Expenses Related to Owned Equipment Operations Total indirect expenses of $1.8 million for the nine months ended September 30, 2001 decreased from $1.9 million for the same period in 2000. Significant variances are explained as follows: (i) A $0.1 million decrease in depreciation expenses from 2000 levels reflecting the disposition of assets during 2001 and during 2000. (ii)A $35,000 decrease in management fee expense was due to reduced cash flows from operations in 2001, compared to the same period in 2000. (iii)A $0.1 million increase in administrative expenses during the nine months ended September 30, 2001 compared to the same period of 2000 was due to an increase of $0.2 million in professional services offset, in part, by lower costs of $0.1 million resulting from the sale of all of the Partnership's trailers during 2000. (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):

Marine vessel: During the nine months ended September 30 2001, lease revenues of $1.5 million were offset by depreciation expense, direct expenses, and administrative expenses of $1.9 million. During the same period of 2000, lease revenues of $2.8 million were offset by depreciation expense, direct expenses, and administrative expenses of $2.4 million, respectively. During the nine months ended September 30, 2001, lower lease revenues of $0.5 million was caused by this marine vessel being off-lease for approximately two months while completing its dry docking and $0.2 million lower due to being off-lease for an additional 1-1/2 months. Lease revenues for this marine vessel also decreased $0.2 million due to being on a fixed rate lease for over one month before returning to voyage charter. While on voyage charter, this marine vessel earned $0.5 million less due to a decrease in the daily voyage charter lease rate compared to the rate that was in effect during the same period of 2000. Depreciation expense, direct expenses, and administrative expenses decreased $0.4 million during the nine months ended September 30, 2001 compared to the same period of 2000. A decrease in direct expenses of $0.4 million was due to the marine vessel incurring lower operating costs while in dry dock and $0.4 million was due to the marine vessel incurring lower operating costs while off-lease. The decrease in operating costs was partially offset by an increase of $0.3 million caused by incurring higher repairs and maintenance compared to the same period of 2000. Aircraft: The Partnership sold its remaining interest in a trust that owned an aircraft in the first quarter of 2000. The gain from this sale was $1.5 million, which was partially offset by depreciation expense, direct expenses, and administrative expenses of $0.2 million. (E) Net Income As a result of the foregoing, the Partnership's net income of $0.8 million for the nine months ended September 30, 2001 compared to net income of $3.7 million during the same period in 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, and the Partnership's performance in the first nine months of 2001 is not necessarily indicative of future periods. In the nine months ended September 30, 2001, the Partnership distributed $1.6 million to the limited partners, or $0.28 per weighted-average limited partnership unit. (II) FINANCIAL CONDITION -- CAPITAL RESOURCES, LIQUIDITY, AND DISTRIBUTIONS For the nine months ended September 30, 2001, the Partnership generated $1.7 million in operating cash (net cash provided by operating activities less distributions in a USPE to fund its operations) to meet its operating obligations and fund distributions (total for the nine months ended September 30, 2001 of approximately $1.7 million) to the partners. During the nine months ended September 30, 2001, the Partnership disposed of marine containers and railcars with an aggregate net book value of $25,000, for proceeds of $0.1 million. Accounts receivable increased $0.1 million during the nine months ended September 30, 2001 due to the timing of cash receipts. Investments in USPEs decreased $0.3 million during the nine months ended September 30, 2001. The loss of $0.4 million that was recorded from operations from the Partnership's equity interest in a USPE was partially offset by the Partnership's payment of $0.2 million in cash distributions to the USPE for operations. Accounts payable decreased $0.1 million during the nine months ended September 30, 2001 due to the timing of payments to vendors. Cash distributions of $0.5 million, related to the results from the third quarter of 2001, will be paid during the fourth quarter of 2001. The General Partner has not planned any expenditures, 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. Although cash distributions from operations have been reduced, significant asset sales may result in 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 if any cannot be accurately determined prior to actual disposal of the equipment. (III) OUTLOOK FOR THE FUTURE Since the Partnership is in its active liquidation phase, the General Partner is seeking to selectively re-lease or sell assets as the existing leases expire. Sale decisions may cause the operating performance of the Partnership to decline over the remainder of its life. Several factors may affect the Partnership's operating performance in the remainder of 2001 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 the Partnership's equipment 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 2001 and beyond include: 1. The cost of new marine containers have been at historic lows for the past several years which has caused downward pressure on per diem lease rates for this type of equipment. 2. Railcar loadings in North America for the nine months ending September 30, 2001 were below those of 2000. This 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 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 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 Partnership intends to use cash flow from operations, 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. The General Partner believes that due to the current state of the economy, liquidating Partnership equipment at this time is not in the best interest of the partners. The General Partner will continue to monitor the economic conditions to determine the best time to liquidate the Partnership's equipment. (IV) FORWARD-LOOKING INFORMATION Except for 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 that of currency devaluation risk. During the nine months ended September 30, 2001, 84% of the Partnership's total lease revenues from wholly- and partially-owned equipment came from non-United States domiciled lessees. Most of the 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 Report dated September 5, 2001 announcing the engagement of Deloitte & Touche LLP as the Partnership's auditors and the dismissal of KPMG, LLP. 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 By: PLM Financial Services, Inc. General Partner Date: November 9, 2001 By: /s/ Stephen M. Bess ----------------------------------- Stephen M. Bess President and Current Chief Accounting Officer

PLM EQUIPMENT GROWTH FUND 10-Q