ITEM 1. BUSINESS
(A) Background
In October 1987, PLM Financial Services, Inc. (FSI or the General Partner), a wholly-owned subsidiary of PLM International, Inc. (PLM International or PLMI), filed a Registration Statement on Form S-1 with the Securities and Exchange Commission with respect to a proposed offering of 10,000,000 depositary units (the units) in PLM Equipment Growth Fund III, a California limited partnership (the Partnership, the Registrant, or EGF III). The Partnership's offering became effective on March 21, 1988. FSI, as General Partner, owns a 5% interest in the Partnership. The Partnership engages in the business of investing in diversified equipment portfolio consisting primarily of used, long-lived, low-obsolescence capital equipment that is easily transportable by and among prospective users.
The Partnership's primary objectives are:
(1) to maintain a diversified portfolio of long-lived, low-obsolescence, high residual-value equipment with the net proceeds of the initial partnership offering, supplemented by debt financing and reinvestment of cash generated by operations. All transactions of over $1.0 million must be approved by the PLM International Credit Review Committee (the Committee), which is made up of members of PLM International Senior Management. In determining a lessee's creditworthiness, the Committee will consider, among other factors, its financial statements, internal and external credit ratings, and letters of credit.
(2) to generate sufficient net operating cash flow from lease operations to meet liquidity requirements and to generate cash distributions to the limited partners until such time as the General Partner commences the orderly liquidation of the Partnership assets or unless the Partnership is terminated earlier upon sale of all Partnership property or by certain other events;
(3) to selectively sell equipment when the General Partner believes that, due to market conditions, market prices for equipment exceed inherent equipment values or that expected future benefits from continued ownership of a particular asset will have an adverse affect on the Partnership. As the Partnership is in the liquidation phase, proceeds from these sales, together with excess net operating cash flows from operations (net cash provided by operating activities plus distributions from unconsolidated special-purpose entities (USPEs)), are used to pay distributions to the partners.
(4) To preserve and protect the value of the portfolio through quality management, maintaining diversity, and constantly monitoring equipment markets.
The offering of the units of the Partnership closed on May 11, 1989. The General Partner contributed $100 for its 5% general partner interest in the Partnership. On August 16, 1991, the units of the Partnership began trading on the American Stock Exchange (AMEX). Thereupon each unitholder received a depositary receipt representing ownership of the number of units owned by such unitholder. The General Partner delisted the Partnership's depositary units from the AMEX on April 8, 1996. The last day for trading on the AMEX was March 22, 1996.
As of December 31, 2000, there were 9,871,073 depositary units outstanding.
Beginning in the eleventh year of operations of the Partnership, which commenced on January 1, 2000, the General Partner began the dissolution and liquidation the assets of the Partnership in an orderly fashion. 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 22, 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.
Table 1, below, lists the equipment and the cost of the equipment in the Partnership's portfolio, and the cost of assets held for sale, as of December 31, 2000 (in thousands of dollars):
The Partnership's aircraft is generally leased under operating leases with terms of eight years. The Partnership's marine containers are leased to operators of utilization-type leasing pools, which include equipment owned by unaffiliated parties. In such instances, revenues received by the Partnership consist of a specified percentage of revenues generated by leasing the pooled equipment to sublessees, after deducting certain direct operating expenses of the pooled equipment. Rents for railcars are based on fixed rates with terms of two to seven years. Lease revenues for trailers that operated in rental yards owned by PLM Rental, Inc. were based on a fixed rate for a specific period of time.
Rental income related to trailers is reported as revenue in accordance with Financial Accounting Standards Board Statement No.13 "Accounting For Leases". Direct expenses associated with the equipment are charged directly to the Partnership.
The lessees of the equipment include : Time Air, Canadian Pacific Railway Corporation and Terra Nitrogen.
(B) Management of Partnership Equipment
The Partnership has entered into an equipment management agreement with PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI, for the management of the Partnership's equipment. The Partnership's management agreement with IMI is to co-terminate with the dissolution of the Partnership, unless the limited partners vote to terminate the agreement prior to that date or at the discretion of the General Partner. IMI has agreed to perform all services necessary to manage the equipment on behalf of the Partnership and to perform or contract for the performance of all obligations of the lessor under the Partnership's leases. In consideration for its services and pursuant to the Partnership agreement, IMI is entitled to a monthly management fee (see Notes 1 and 2 to the audited financial statements).
(C) Competition
(1) Operating Leases versus Full Payout Leases
The equipment owned or invested in by the Partnership is leased out on an operating lease basis wherein the rents received during the initial noncancelable term of the lease are insufficient to recover the Partnership's purchase price of the equipment. The short to mid-term nature of operating leases commands a higher rental rate than longer-term, full payout leases and offers lessees relative flexibility in their equipment commitment. In addition, the rental obligation under an operating lease need not be capitalized on the lessee's balance sheet.
The Partnership encounters considerable competition from lessors that utilize full payout leases on new equipment, i.e. leases that have terms equal to the expected economic life of the equipment. While some lessees prefer the flexibility offered by a shorter-term operating lease, other lessees prefer the rate advantages possible with a full payout lease. Competitors may write full payout leases at considerably lower rates and for longer terms than the Partnership offers, or larger competitors with a lower cost of capital may offer operating leases at lower rates, which may put the Partnership at a competitive disadvantage.
(2) Manufacturers and Equipment Lessors
The Partnership competes with equipment manufacturers who offer operating leases and full payout leases. Manufacturers may provide ancillary services that the Partnership cannot offer, such as specialized maintenance service (including possible substitution of equipment), training, warranty services, and trade-in privileges.
The Partnership also competes with many equipment lessors, including ACF Industries, Inc. (Shippers Car Line Division), General Electric Railcar Services Corporation, and other investment programs that lease the same types of equipment.
(D) Demand
The Partnership currently operates in four primary operating segments: aircraft leasing, marine container leasing, railcar leasing, and intermodal trailer leasing. Each equipment leasing segment engages in short-term to mid-term operating leases to a variety of customers. Except for those aircraft leased to passenger air carriers, the Partnership's equipment and investments are used to transport materials and commodities, rather than people.
The following section describes the international and national markets in which the Partnership's capital equipment operates:
(1) Aircraft
(a) Commercial aircraft
Both Boeing and Airbus Industries have predicted that the rate of growth in the demand for air transportation services will be relatively robust for the next 20 years. Boeing has predicted that the demand for passenger services will grow at an average rate of about 4.8% per year and the demand for cargo traffic will grow at about 6.4% per year during that period. Such growth will require a substantial increase in the numbers of commercial aircraft. According to Boeing, as of the end of 1999, the world fleet of jet powered commercial aircraft included a total of about 13,670 airplanes. That total included 11,994 passenger aircraft with 50 seats or more and 1,676 freighter aircraft. Boeing predicts that by the end of 2019 that fleet will grow to about 31,755 aircraft including 28,558 passenger aircraft with 50 seats or more and 3,197 freighter aircraft. To support this growth, Boeing received 502 new aircraft orders in the first ten months of 2000 and Airbus received 427.
Airline economics will also require aircraft to be retained in active commercial service for longer periods than previously expected. Consequently, the market for environmentally acceptable and economically viable aircraft will continue to be robust and such aircraft will command relatively high residual values. In general, aircraft values have tended to grow at about 3% per year. Lease rates should also grow at similar rates. However, such rates are subject to variation depending on the state of the world economy and the resultant demand for air transportation services. The Partnership the commercial aircraft was sold on February of 2001 for $2.3 million.
(b) Commuter aircraft
Regional jets have been well received in the commuter market. This has resulted in an increase in demand for regional jets at the expense of turboprops. Turboprop manufacturers are cutting back on production due to this reduced demand. The uncertainty of the future market for turboprops has an adverse effect on turboprop lease rates and residual values.
The Partnership leases one commuter turboprop containing 50 seats. This aircraft flies in North America, which continues to be the fastest-growing market for commuter aircraft in the world. The Partnership's aircraft possess unique performance capabilities, compared to other turboprops, which allow them to readily operate at maximum payloads from unimproved surfaces, hot and high runways, and short runways.
The Partnership;s turboprop remained on lease throughout 2000 and it lease rate was constant. However as this aircraft is to be sold by the end of 2001 the sale price will be affected due to the decrease in residual value for all turboprops.
(2) Railcars
(a) Nonpressurized, General Purpose Tank Cars
These cars are used to transport bulk liquid commodities and chemicals not requiring pressurization, such as certain petroleum products, liquefied asphalt, lubricating oils, molten sulfur, vegetable oils and corn syrup. This car type continued to be in high demand during 2000. The overall health of the market for these types of commodities is closely tied to both the United States (U.S.) and global economies, as reflected in movements in the Gross Domestic Product, personal consumption expenditures, retail sales, and currency exchange rates. The manufacturing, automobile, and housing sectors are the largest consumers of chemicals. Within North America, 2000 carloadings of the commodity group that includes chemicals and petroleum products rose 1% over 1999 levels. Utilization of the Partnership's nonpressurized tank cars remained above 98% during 2000.
(b) Pressurized Tank Cars
Pressurized tank cars are used to transport liquefied petroleum gas (natural gas) and anhydrous ammonia (fertilizer). The U.S. markets for natural gas are industrial applications (46% of estimated demand in 2000), residential use (21%), electrical generation (15%), commercial applications (15%), and transportation (3%). Natural gas consumption is expected to grow over the next few years as most new electricity generation capacity planned for is expected to be natural gas fired. Within the fertilizer industry, demand is a function of several factors, including the level of grain prices, the status of government farm subsidy programs, amount of farming acreage and mix of crops planted, weather patterns, farming practices, and the value of the U.S. dollar. Population growth and dietary trends also play an indirect role.
On an industry wide basis, North American carloadings of the commodity group that includes petroleum and chemicals increased 1% in 2000, compared to 1999. Consequently, demand for pressurized tank cars remained relatively constant during 2000, with utilization of this type of railcar within the Partnership remaining above 98%. While renewals of existing leases continue at similar rates, some cars continue to be renewed for "winter only" terms of approximately six months. As a result, there are many pressurized tank cars up for renewal in the spring of 2001.
(c) Coal Railcars
Since most coal is shipped to domestic electric utilities, demand for coal is greatly influenced by summer air conditioning and to a lesser extent, winter heating requirements. Coal car loadings in the United States in 2000 remained fairly consistent with those of 1999, decreasing by 1%.
Coal railcars owned by the Partnership are on a lease that expires on December 31, 2001.
(3) Marine Containers
The Partnership's fleet of both standard dry and specialized containers is in excess of twelve years of age, and is generally no longer suitable for use in international commerce, either due to its specific physical condition, or the lessees' preferences for newer equipment. As individual containers are returned from their specific lessees, they are being marketed for sale on an "as is, where is" basis. The market for such sales, although highly dependent upon the specific location and type of container, has continued to be strong over the last several years, as it relates to standard dry containers. The Partnership has in the last year experienced reduced residual values on the sale of refrigerated containers, due primarily to technological obsolesence associated with this equipment's refrigeration machinery.
(4) Intermodal (Piggyback) Trailers
Intermodal (piggyback) trailers are used to transport a variety of dry goods by rail on flatcars, usually for distances of over 400 miles. Over the past decade, intermodal trailers have continued to be gradually displaced by domestic containers as the preferred method of transport for such goods. This is caused by railroads offering approximately 15% lower freight rates on containers compared to trailers. During 2000, demand for intermodal trailers was more volatile than historic norms. Slow demand occurred over the second half of the year due to a slowing economy and continued customer concerns over rail service problems associated with mergers in the rail industry. Due to the decline in demand, which occurred over the latter half of 2000, overall, shipments within the intermodal trailer market declined more than expected for the year, or approximately 10.0% compared to the prior year. Average utilization of the entire intermodal fleet rose from 73% in 1998 to 77% in 1999 and then declined to 75% in 2000.
The General Partner further expanded its marketing program to attract new customers for the Partnership's intermodal trailers during 2000. These efforts resulted in average utilization for the Partnership's intermodal trailers of approximately 80% for the year, down 1% compared to 1999 levels.
The trend towards using domestic containers instead of intermodal trailers is expected to continue in the future. Overall, intermodal trailer shipments are forecast to decline by 6% -10% in 2001, compared to the prior year, due to the anticipated continued weakness of the overall economy. As such, the nationwide supply of intermodal trailers is expected to be approximately 10,000 units higher than demand for 2001. Maintenance costs have increased approximately 20% due to improper repair methods performed by the railroads and billed to owners. For the Partnership's intermodal fleet, the General Partner will continue to seek to expand its customer base while minimizing trailer downtime at repair shops and terminals. Significant efforts will also be undertaken to reduce maintenance costs and cartage costs.
(E) Government Regulations
The use, maintenance, and ownership of equipment are regulated by federal, state, local, or foreign government authorities. Such regulations may impose restrictions and financial burdens on the Partnership's ownership and operation of equipment. Changes in government regulations, industry standards, or deregulation may also affect the ownership, operation, and resale of the equipment. Substantial portions of the Partnership's equipment portfolio are either registered or operated internationally. Such equipment may be subject to adverse political, government, or legal actions, including the risk of expropriation or loss arising from hostilities. Certain of the Partnership's equipment is subject to extensive safety and operating regulations, which may require its removal from service or extensive modification of such equipment to meet these regulations, at considerable cost to the Partnership. Such regulations include but are not limited to:
(1) the U.S. Department of Transportation's Aircraft Capacity Act of 1990, which limits or eliminates the operation of commercial aircraft in the United States that do not meet certain noise, aging, and corrosion criteria. In addition, under United States Federal Aviation Regulations, after December 31, 1999, no person may operate an aircraft to or from any airport in the contiguous United States unless that aircraft has been shown to comply with Stage III noise levels. The Partnership has one Stage II aircraft that does not meet Stage III requirements. The cost to husk-kit a Stage II aircraft is approximately $2.0 million, depending on the type of aircraft. The Partnership's Stage II aircraft was classified as an asset held for sale as of December 31, 2000.
(2) the Montreal Protocol on Substances that Deplete the Ozone Layer and the U.S. Clean Air Act Amendments of 1990, which call for the control and eventual replacement of substances that have been found to cause or contribute significantly to harmful effects to the stratospheric ozone layer and which are used extensively as refrigerants in refrigerated marine cargo containers;
(3) the U.S. Department of Transportation's Hazardous Materials Regulations, which regulate the classification of and packaging requirements of hazardous materials and which apply particularly to the Partnership's tank railcars. The Federal Railroad Administration has mandated that effective July 1, 2000, all tank railcars must be re-qualified every ten years from the last test date stenciled on each railcar to insure tank shell integrity. Tank shell thickness, weld seams, and weld attachments must be inspected and repaired if necessary to re-qualify a tank railcar for service. The average cost of this inspection is $1,800 for non-jacketed tank railcars and $3,600 for jacketed tank railcars, not including any necessary repairs. This inspection is to be performed at the next scheduled tank test and every ten years thereafter. The Partnership currently owns 699 non-jacketed tank railcars and 478 jacketed tank railcars of which a total of 30 tank railcars have been inspected with no reportable defects. The Association of American Railroads (AAR) has mandated that effective October 19, 2000, certain tank cars built by Hawker Siddeley between 1961 and 1981 be inspected for improper weld attachments for body mounted brake rigging. The inspection cost is minimal. The modification will cost between $900 and $1,300 per car, if necessary. A schedule has been established by the AAR to complete the inspection and modification as follows: 50% completion by October 31, 2001, 90% completion by October 31, 2002, and 100% completion by October 31, 2003. As of December 31, 2000, none of the Partnership's railcars have been inspected.
As of December 31 2000, the Partnership was in compliance with the above government regulations. Typically, costs related to extensive equipment modifications to meet government regulations are passed on to the lessee of that equipment.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership neither owns nor leases any properties other than the equipment it has purchased for leasing purposes. As of December 31, 2000, the Partnership owned a portfolio of transportation and related equipment as described in Item 1, Table 1. The Partnership acquired equipment with the proceeds of the Partnership offering of $199.7 million, proceeds from debt financing of $41.9 million, and by reinvesting a portion of its operating cash flow in additional equipment.
The Partnership maintains its principal office at One Market, Steuart Street Tower, Suite 800, San Francisco, California 94105-1301. All office facilities are provided by FSI without reimbursement by the Partnership.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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 the likelihood of an unfavorable outcome from the counterclaims is remote.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Partnership's limited partners during the fourth quarter of its fiscal year ended December 31, 2000.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT MATTERS
As of March 2, 2001, there were 9,871,073 depositary units outstanding. There are 8,442 depositary unitholders of record as of the date of this report.
There are several secondary markets that will facilitate sales and purchases of depositary units. Secondary markets are characterized as having few buyers for depositary units and therefore are viewed as inefficient vehicles for the sale of depositary units. Presently, there is no public market for the depositary units and none is likely to develop.
To prevent the units from being considered publicly traded and thereby to avoid taxation of the Partnership as an association treated as a corporation under the Internal Revenue Code, the depositary units will not be transferable without the consent of the General Partner, which may be withheld in its absolute discretion. The General Partner intends to monitor transfers of units in an effort to ensure that they do not exceed the percentage or number permitted by certain safe harbors promulgated by the Internal Revenue Service. A transfer may be prohibited if the intended transferee is not an U.S. citizen or if the transfer would cause any portion of the depositary units of a "Qualified Plan" as defined by the Employee Retirement Income Security Act of 1974 and Individual Retirement Accounts to exceed the allowable limit.
On January 4, 2001, the General Partner for the Partnership announced that it has begun recognizing transfers involving trading of units in the partnership for the 2001 calendar year. The Partnership is listed on the OTC Bulletin Board under the symbol GFZPZ.
In making the announcement, the General Partner noted that, as in previous years, it will continue to monitor the volume of such trades to ensure that the Partnership remain in compliance with Internal Revenue Service (IRS) Notice 88-75 and IRS Code Section 7704. These IRS regulations contain safe harbor provisions stipulating the maximum number of partnership units that can be traded during a calendar year in order for a partnership not to be deemed a publicly traded partnership for income tax purposes.
Should the Partnership approach the annual safe harbor limitation later on in 2001, the General Partner will, at that time, cease to recognize any further transfers involving trading of Partnership units. Transfers specifically excluded from the safe harbor limitations, referred to in the regulations as "transfers not involving trading," which include transfers at death, transfers between family members, and transfers involving distributions from a qualified retirement plan, will continue to be recognized by the General Partner throughout the year.
Pursuant to the terms of the partnership agreement, the General Partner is entitled to a 5% interest in the profits and losses and distributions of the Partnership subject to certain special allocation provisions.
The Partnership engaged in a plan to repurchase up to 250,000 depositary units on behalf of the Partnership. There were no repurchases of depositary units in 2000 and 1999. As of December 31, 2000, the Partnership had purchased a cumulative total of 128,853 depositary units at a total cost of $0.9 million. The General Partner does not plan any future repurchase of depositary units on behalf of the Partnership.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Table 2, below, lists selected financial data for the Partnership:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(A) Introduction
Management's discussion and analysis of financial condition and results of operations relates to the financial statements of PLM Equipment Growth Fund III (the Partnership). The following discussion and analysis of operations focuses on the performance of the Partnership's equipment in the various segments in which it operates and its effect on the Partnership's overall financial condition.
(B) Results of Operations -- Factors Affecting Performance
(1) Re-leasing Activity and Repricing Exposure to Current Economic Conditions
The exposure of the Partnership's equipment portfolio to repricing risk occurs whenever the leases for the equipment expire or are otherwise terminated and the equipment must be remarketed. Major factors influencing the current market rate for Partnership's equipment include, supply and demand for similar or comparable types of transport capacity, desirability of the equipment in the leasing market, market conditions for the particular industry segment in which the equipment is to be leased, overall economic conditions, and various regulations of concerning the use of the equipment. Equipment that is idle or out of service between the expiration of one lease and the assumption of a subsequent lease can result in a reduction of contribution to the Partnership. The Partnership experienced re-leasing or repricing activity in 2000 primarily in its aircraft, marine containers, trailers, and railcars.
(a) Aircraft: One Boeing 737-200 Stage II commercial aircraft was off lease during 2000. This aircraft was reclassed to an asset held for sale as of December 31, 2000. This aircraft was sold on February of 2001 for $2.3 million.
(b) Marine containers: The Partnership's remaining marine container portfolio operates in utilization-based leasing pools and, as such, is exposed to considerable repricing activity. The Partnership's marine container contribution declined from 1999 due to equipment sales during 1999 and 2000.
(c) Trailers: All of the Partnership's trailer portfolio operates in short-line railroad systems. The relatively short duration of most leases in these operations exposes the trailers to considerable re-leasing activity.
(d) Railcars: This equipment experienced significant re-leasing activity. Lease rates in this market are showing signs of weakness and has lead to lower contribution to the Partnership as existing leases expire and renewal leases are negotiated.
(2) Equipment Liquidations
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. In 2000, the Partnership disposed of owned equipment that included marine containers, trailers, railcars, aircraft and disposed of an interest in a USPE entity that owned a marine vessel for total proceeds of $15.7 million.
(3) Equipment Valuation
In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the General Partner reviews the carrying value of the Partnership's equipment portfolio at least quarterly and whenever circumstances indicate the carrying value of an asset may not be recoverable in relation to expected future market conditions for the purpose of assessing the recoverability of the recorded amounts. If projected undiscounted future lease revenues plus residual values are less than the carrying value of the equipment, a loss on revaluation is recorded. A $0.2 million of loss on revaluation was recorded during 2000. No reductions to the carrying values of equipment were required during 1999 or 1998.
(C) Financial Condition -- Capital Resources and Liquidity
The General Partner purchased the Partnership's initial equipment portfolio with capital raised from its initial equity offering of $199.7 million. No further capital contributions from the limited partners are permitted under the terms of the Partnership's limited partnership agreement. The Partnership relies on operating cash flow to meet its operating obligations and to make cash distributions to the limited partners.
For the year ended December 31, 2000, the Partnership generated $4.8 million in operating cash (net cash provided by operating activities plus non-liquidating distributions from USPEs) to meet its operating obligations and make distributions (total of $10.9 million in 2000) to the partners, but also used undistributed available cash from prior periods and proceeds from the sale of equipment of approximately $6.1 million.
During 2000, the Partnership entered into contracts to sell the Partnership's 737-200 stage II and Dash 8-300 aircraft. Consequently, these two aircraft are reported as assets held for sale on December 31, 2000. There were no assets held for sale as of December 31, 1999.
Investment in unconsolidated special-purpose entities decreased $2.4 million. The decrease resulted from liquidating and regular distributions received from the USPEs of $3.3 million, partially offset by net income earned by the USPEs of $0.9 million.
Accounts payable and accrued expenses decreased $0.3 million due to the reduction of the equipment portfolio.
During 2000, the Partnership borrowed $4.6 million from the General Partner and repaid $5.2 million including $0.6 million that was outstanding as of December 31, 1999.
Lessee deposits and reserve for repairs decreased by $1.2 million. A $0.9 million decrease in engine reserves was due to the sale of two aircraft in 2000. A $0.4 million decrease in prepaid lease revenue was due to fewer lessee's prepaying lease receivables. The decreases were partially offset by an increase of $0.1 million in deposits for a potential aircraft transaction.
During 2000, the Partnership paid off the note payable of $7.5 million.
The Partnership is in the active liquidation phase. As a result the size of the Partnerships remaining equipment portfolio and, in turn, the amount of 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. 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 22, 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.
The General Partner has not planned any expenditures, nor is it aware of any contingencies that would cause it to require any additional capital to that mentioned above.
(D) Results of Operations -- Year-to-Year Detailed Comparison
In September 1999, PLM Financial Services, Inc. (FSI or the General Partner), amended the corporate-by-laws of certain USPEs in which the Partnership, or any affiliated program, owns an interest greater than 50%. The amendment to the corporate-by-laws provided that all decisions regarding the acquisition and disposition of the investment as well as other significant business decisions of that investment would be permitted only upon unanimous consent of the Partnership and all the affiliated programs that have an ownership in the investment (the Amendment). As such, although the Partnership may own a majority interest in a USPE, the Partnership does not control its management and thus the equity method of accounting will be used after adoption of the Amendment. As a result of the Amendment, as of September 30, 1999, all jointly owned equipment in which the Partnership owned a majority interest, which had been consolidated, were reclassified to investments in USPEs. Lease revenues and direct expenses for jointly owned equipment in which the Partnership held a majority interest were reported under the consolidation method of accounting during the nine months ended September 30, 1999 and were included with the owned equipment operations. For the three months ended December 31, 1999 and twelve months ended December 31, 2000, lease revenues and direct expenses for these entities are reported under the equity method of accounting and are included with the operations of the USPEs.
(1) Comparison of the Partnership's Operating Results for the Years Ended December 31, 2000 and 1999
(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 for the year ended December 31, 2000 when compared to the same period of 1999. Certain expenses such as depreciation and amortization and general and administrative expenses relating to the operating segments (see Note 5 to the audited financial statements), are not included in the owned equipment operation discussion because these expenses are more indirect in nature, not a result of operations but more 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 Years Ended December 31, 2000 1999 ------------------------------------------------------------------ Rail equipment $ 4,572 $ 5,100 Aircraft 3,403 4,977 Trailers 352 512 Marine containers 76 118 Marine vessel -- 660
Rail equipment: Railcar lease revenues and direct expenses were $6.6 million and $2.0 million, respectively, for 2000, compared to $6.9 million and $1.8 million, respectively, during 1999. Revenue declined as a result of lower lease rates. The increase in direct expenses of $0.2 million was a result of more repairs being required on rail equipment in 2000 than was needed during 1999.
Aircraft: Aircraft lease revenues and direct expenses were $3.9 million and $0.5 million, respectively, for 2000, compared to $5.6 million and $0.7 million, respectively, during 1999. The decrease in lease revenues and direct expenses was due to the sale of a total of four aircraft during 2000 and 1999.
Trailers: Trailer lease revenues and direct expenses were $0.6 million and $0.2 million, respectively, for 2000, compared to $0.7 million and $0.2 million, respectively, during 1999. The number of trailers owned by the Partnership has been declining due to dispositions. The result of this declining fleet has been a decrease in trailer contribution.
Marine containers: Marine containers lease revenues and direct expenses were $0.1 million and $4,000, respectively in 2000 compared to $0.1 million and $2,000 respectively in 1999. The number of containers owned by the Partnership has been declining due to dispositions. The result of this declining fleet has been a decrease in containers contribution.
Marine vessel: Marine vessel lease revenues and direct expenses were zero for 2000, compared to $1.5 million and $0.8 million respectively for 1999.
The September 30, 1999 Amendment that changed the accounting method of majority held equipment from the consolidation method of accounting to the equity method of accounting impacted the reporting of lease revenues and direct expenses of one marine vessel. As a result of the Amendment, during the year ended December 31, 2000, lease revenues decreased $1.5 million and direct expenses decreased $0.8 million when compared to the same period of 1999.
(b) Interest and Other Income
Interest and other income decreased by $0.2 million in 2000 compared to 1999 due to lower income on the railcars related to mileage charges.
(c) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $7.3 million for 2000 decreased from $11.4 million for 1999. Significant variances are explained as follows:
(i) A decrease of $2.9 million in depreciation and amortization expense from 1999 levels resulted from an approximately $2.3 million decrease due to the sale of certain assets during 2000 and 1999 and a decrease of $0.6 million was the result of the Amendment which changed the accounting method used for majority held equipment from the consolidation method of accounting to the equity method of accounting.
(ii)A decrease of $0.7 million in interest expense was due to the repayment of the Partnership's debt in 2000.
(iii) A decrease of $0.4 million in bad debt expense from 1999. A $0.3 million decrease was due to the General Partner's evaluation of the collectability of receivables due from certain lessees and a $0.1 million decrease was due to collection of $0.1 million from unpaid invoices in 2000 that had previously been reserved for as bad debts. A similar recovery did not occur in 1999.
(iv)A decrease of $0.2 million in management fees was due to lower lease revenues in 2000, compared to 1999.
(v) A decrease of $0.1 million in general and administrative expenses from 1999 levels was due to the reduction of the size of the Partnership's equipment portfolio.
(vi)An increase of $0.2 million in revaluation of equipment was due to the loss on revaluation of trailer equipment in 2000. A similar loss did not occur in 1999.
(d) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $9.7 million for 2000 and resulted from the disposition of marine containers, trailers, railcars, and aircraft. These assets had an aggregate net book value of $2.8 million and were sold or liquidated for proceeds of $12.5 million. The net gain on disposition of equipment in 1999 was $2.2 million and resulted from the disposition of marine containers, trailers, railcars, and an aircraft. These assets had an aggregate net book value of $1.6 million and were sold or liquidated for proceeds of $3.8 million.
(e) 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 segment (in thousands of dollars):
For the Years Ended December 31, 2000 1999 ----------------------------------- Marine vessel $ 895 $ (64) Aircraft, aircraft engines, and rotables 23 1,477 ----------------------------------- Equity in net income of USPEs $ 918 $ 1,413 ===================================
Marine vessel: The Partnership's share of revenues and expenses of marine vessels was $1.8 million, and $0.9 million, respectively, for 2000 compared to $0.2 million and $0.3 million, respectively, for 1999. During the third quarter of 2000, the Partnership's 56% interest in an entity owing a marine vessel was sold for a gain of $1.1 million.
An increase in marine vessel revenues of $1.1 million was due to the gain from the sale. An increase in marine vessel lease revenues of $0.5 million and depreciation expense, direct expenses, and administrative expenses of $0.6 million during the year ended December 31, 2000, was caused by the September 30, 1999 Amendment that changed the accounting method of majority held equipment from the consolidation method of accounting to the equity method of accounting for one marine vessel.
The lease revenues and depreciation expense, direct expenses, and administrative expenses for the majority owned marine vessel were reported under the consolidation method of accounting under Owned Equipment Operations during the first nine months of 1999. The lease revenues and depreciation expense, direct expenses, and administrative expenses for the majority owned marine vessel were reported under the equity method of accounting under USPE operations during the fourth quarter of 1999 and all of 2000.
Aircraft, aircraft engines, and rotables: As of December 31, 2000, the Partnership had no remaining interest in entities owning aircraft, aircraft engines, or rotables. The interest in the trust that owned this equipment was sold in 1999, for a gain of $1.6 million. The Partnership's share of aircraft, aircraft engines, and rotables lease revenue and expenses of $23,000 and zero for 2000 compared to zero and $0.1 million respectively, for 1999. The $23,000 of aircraft revenues for 2000 represented interest income earned on accounts receivable. The decrease in revenue and expenses is due to the sale of the aircraft, aircraft engines, and rotables in the first quarter of 1999.
(f) Net Income
As a result of the foregoing, the Partnership's net income for 2000 was $11.9 million, compared to net income of $4.0 million during 1999. The Partnership's ability to operate, liquidate assets, and re-lease those assets whose leases expire is subject to many factors, and the Partnership's performance during the year ended December 31, 2000 is not necessarily indicative of future periods. In the year ended December 31, 2000, the Partnership distributed $10.4 million to the limited partners, or $1.05 per weighted-average depositary unit.
(2) Comparison of the Partnership's Operating Results for the Years Ended December 31, 1999 and 1998
(a) Owned Equipment Operations
Lease revenues less direct expenses (defined as repairs and maintenance, equipment operating and asset-specific insurance expenses) on owned equipment decreased for the year ended December 31, 1999 when compared to the same period of 1998.
The following table presents lease revenues less direct expenses by segment (in thousands of dollars):
For the Years Ended December 31, 1999 1998 ------------------------------------------------------------------------------ Rail equipment $ 5,100 $ 4,768 Aircraft 4,977 5,150 Marine vessel 660 1,215 Trailers 512 1,035 Marine containers 118 272 Mobile offshore drilling unit -- 738
Rail equipment: Railcar lease revenues and direct expenses were $6.9 million and $1.8 million, respectively, for 1999, compared to $7.1 million and $2.4 million, respectively, during 1998. The decrease in lease revenues of $0.2 million was due to the disposition of rail equipment during 1999 and 1998. The decrease in direct expenses of $0.6 million was a result of fewer running repairs being required on rail equipment in 1999 than was needed during 1998.
Aircraft: Aircraft lease revenues and direct expenses were $5.6 million and $0.7 million, respectively, for 1999, compared to $6.5 million and $1.3 million, respectively, during 1998. A $0.9 million decrease in lease revenues was due to an aircraft being offlease during the entire year of 1999 and another aircraft coming off lease in the third quarter of 1999. Both of these aircraft were on lease for all of 1998. The decrease in lease revenue was partially offset by the increase in lease revenue of $0.5 million from an aircraft that was transferred into the Partnership's owned equipment portfolio from a trust during the second quarter of 1998. Direct expense decreased by $0.6 million due to repairs required on one aircraft in 1998 that were not needed in 1999.
Marine vessel: Marine vessel lease revenues and direct expenses were $1.5 million and $0.8 million, respectively, for 1999, compared to $2.5 million and $1.3 million respectively for 1998. In September 1999, the General Partner amended the coporate-by-laws of the USPEs in which the Partnership owns an interest greater than 50%. As a result of the amendment and the related change in accounting for these USPEs from consolidation basis to equity basis, lease revenues for the Partnership's majority held marine vessel decreased $0.6 million for the year ended December 31, 1999, when compared to the same period of 1998. Direct expenses for the Partnership's majority held marine vessel also decreased $0.2 due to the amendment and related change in accounting.
Trailers: Trailer lease revenues and direct expenses were $0.7 million and $0.2 million, respectively, for 1999, compared to $1.3 million and $0.2 million, respectively, during 1998. The number of trailers owned by the Partnership has been declining due to sales and dispositions. The result of this declining fleet has been a decrease in trailer contribution.
Marine containers: Marine containers lease revenues and direct expenses were $0.1 million and $2,000, respectively in 1999 compared to $0.3 million and $6,000 respectively in 1998. Lease revenues decreased by $0.2 million in 1999 compared to 1998 due to lower utilization rates.
Mobile offshore drilling unit: Mobile offshore drilling unit (MODU) lease revenues and direct expenses were $0.8 million and $19,000, respectively, for 1998. The decrease in contribution in 1999 compared to 1998 was due to the sale of the Partnership's MODU in June of 1998.
(b) Interest and Other Income
Interest and other income increased by $0.2 million for 1999 due to higher income on the railcars related to mileage charges.
(c) Indirect Expenses Related to Owned Equipment Operations
Total indirect expenses of $11.4 million for 1999 decreased from $14.3 million for 1998. Significant variances are explained as follows:
(i) A decrease of $2.8 million in depreciation and amortization expense from 1998 levels resulted from an approximately $0.7 million decrease due to the sale of certain assets during 1999 and 1998 and an approximately $2.1 million decrease resulting from the use of the double-declining balance depreciation method which results in greater depreciation the first years an asset is owned.reflects the sale or disposition of certain Partnership assets.
(ii)A decrease of $0.7 million in interest expense was due to lower average debt balance outstanding during 1999 when compared to 1998.
(iii) A decrease of $0.2 million in management fees was due to lower lease revenues in 1999, compared to 1998.
(iv)An increase of $0.6 million in bad debt expense from 1998 was due to the collection of $0.4 million from past due receivables during 1999 that had previously been reserved for as a bad debt and the General Partner's evaluation of the collectability of receivables due from certain lessees.
(v) An increase of $0.2 million in general and administrative expenses was primarily due to higher legal and consulting fees related to one of the Partnership's aircraft.
(d) Net Gain on Disposition of Owned Equipment
The net gain on disposition of equipment was $2.2 million for 1999 and resulted from the disposition of marine containers, trailers, railcars, and an aircraft. These assets had an aggregate net book value of $1.6 million and were sold or liquidated for proceeds of $3.8 million. The net gain on disposition of equipment totaled $3.8 million for 1998 and resulted from the disposition of marine containers, trailers, railcars, and a mobile offshore drilling unit. These assets had an aggregate net book value of $8.3 million and were sold or liquidated for proceeds of $12.1 million.
(e) 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 segment (in thousands of dollars):
For the Years Ended December 31, 1999 1998 ---------------------------------- Aircraft, aircraft engines, and rotables $ 1,477 $ 49 Marine vessel (64) -- ---------------------------------- Equity in net income of USPEs $ 1,413 $ 49 ==================================
Aircraft, aircraft engines, and rotables: As of December 31, 1999, the Partnership had no remaining interest in entities owning aircraft, aircraft engines, or rotables. The interest in the trust was sold in 1999, for a gain of $1.6 million. The Partnerships share of aircraft, aircraft engines, and rotables revenue and expenses were $0 and $0.1 million respectively, for 1999, compared to $1.2 million and $1.2 million respectively, during 1998. The decrease in revenue and expenses is due to the sale of the aircraft, aircraft engines, and rotables in the first quarter of 1999.
Marine vessel: The Partnership's share of revenues and expenses of marine vessels was $0.2 million and $0.3 million, respectively, for 1999. In September 1999, the General Partner amended the corporate-by-laws of the USPEs in which the Partnership owns an interest greater than 50%. As a result of the amendment and the related change in accounting for these USPEs from consolidation basis to equity basis, lease revenues and direct expenses are discussed in owned equipment operations for the nine months ended September 30, 1999, and for the entire year ended December 31, 1998, for the Partnership's majority held marine vessel.
(f) Net Income
As a result of the foregoing, the Partnership's net income for 1999 was $4.0 million, compared to net income of $2.9 million during 1998. The Partnership's ability to operate, liquidate assets, and re-lease those assets whose leases expire is subject to many factors, and the Partnership's performance during the year ended December 31, 1999 is not necessarily indicative of future periods. In the year ended December 31, 1999, the Partnership distributed $7.4 million to the limited partners, or $0.75 per weighted-average depositary unit.
(E) Geographic Information
Certain of the Partnership's equipment operates in international markets. Although these operations expose the Partnership to certain currency, political, credit, and economic risks, the General Partner believes these risks are minimal or has implemented strategies to control the risks. Currency risks are at a minimum because all invoicing, with the exception of a number of railcars operating in Canada, is conducted in U.S. dollars. Political risks are minimized by avoiding operations in countries that do not have a stable judicial system and established commercial business laws. Credit support strategies for lessees range from letters of credit supported by U.S. banks to cash deposits. Although these credit support mechanisms allow the Partnership to maintain its lease yield, there are risks associated with slow-to-respond judicial systems when legal remedies are required to secure payment or repossess equipment. Economic risks are inherent in all international markets and the General Partner strives to minimize this risk with market analysis prior to committing equipment to a particular geographic area. Refer to Note 6 to the audited financial statements for information on the revenues, net income (loss), and net book value of equipment in various geographic regions.
Revenues and net operating income by geographic region are impacted by the time period the asset is owned and the useful life ascribed to the asset for depreciation purposes. Net income (loss) from equipment is significantly impacted by depreciation charges, which are greatest in the early years of ownership due to the use of the double-declining balance method of depreciation. The relationships of geographic revenues, net income (loss), and net book value of equipment are expected to change significantly in the future, as assets come off lease and decisions are made to either redeploy the assets in the most advantageous geographic location or sell the assets.
The Partnership's owned equipment on lease to the U.S. domiciled lessees consisted of railcars, and trailers. During 2000, U.S. lease revenues accounted for 21% of the lease revenues generated by wholly-and partially-owned equipment. U.S. operations resulted in a net loss of $1.0 million including the gain from this region of $0.1 million.
The Partnership's owned equipment on lease to Canadian-domiciled lessees consisted of an owned aircraft and railcars. Canadian lease revenues accounted for 54% of total lease revenues generated by wholly-and partially-owned equipment. Canadian operations generated net income of $8.7 million including the gain from this region of $4.6 million.
The Partnership's owned equipment on lease to European domiciled leases consisted of two owned aircraft. During 2000, the lease revenues for these operations accounted for 18% of total lease revenues generated by wholly-and partially-owned equipment. Net income from this region was $5.9 million including the gain from this region of $5.0 million.
The Partnership's owned equipment and investments in equipment owned by unconsolidated special-purpose entity on lease to lessees in the rest of the world consisted of marine containers and a partially-owned marine vessel. During 2000, lease revenues for these operations accounted for 7% of the total lease revenue generated by wholly-and partially-owned equipment. Net income generated from this region was $1.0 million including the gain of this region of $1.1 million.
The Partnership has an owned aircraft located in Asia. This aircraft has been off-lease throughout 2000 and 1999 and was reclassed to an asset held for sale as of December 31, 2000. During 2000, no revenue was earned from this region but operations resulted in a loss of $1.5 million due to repairs and depreciation expenses during 2000.
(F) Inflation
Inflation did not significantly impact on the Partnership's operations during 2000, 1999, or 1998.
(G) Forward-Looking Information
Except for historical information contained herein, the discussion in this Form 10-K 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-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. The Partnership's actual results could differ materially from those discussed here.
(H) 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 on December 22, 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.
Factors affecting the Partnership's contribution during the year 2001:
1. The Partnership's fleet of both standard dry and specialized marine containers is in excess of twelve years of age and is generally no longer suitable for use in international commerce either due to it's specific physical condition, or lessees preferences for newer equipment. Demand for the Partnership's marine containers will continue to be weak due to their age.
2. Railcar loadings in North America have continued to be high, however a softening in the market is expected. Lease rates in this market are showing signs of weakness and has lead to 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 to satisfy its operating requirements and pay cash distributions to the investors.
Several other factors may affect the Partnership's operating performance in the year 2001, including changes in the markets for the Partnership's equipment and changes in the regulatory environment in which that equipment operates.
(1) Repricing Risk
Certain of the Partnership's marine containers, railcars and trailers will be remarketed in 2001 as existing leases expire, exposing the Partnership to some repricing risk/opportunity. Additionally, the Partnership entered its liquidation phase on January 1, 2000 and has commenced an orderly liquidation of the Partnership's assets. In either case, the General Partner intends to sell equipment at prevailing market rates; however, the General Partner cannot predict these future rates with any certainty at this time, and cannot accurately assess the effect of such activity on future Partnership performance.
(2) Impact of Government Regulations on Future Operations
The General Partner operates the Partnership's equipment in accordance with current applicable regulations (see Item 1, Section E, Government Regulations). However, the continuing implementation of new or modified regulations by some of the authorities mentioned previously, or others, may adversely affect the Partnership's ability to continue to own or operate equipment in its portfolio. Additionally, regulatory systems vary from country to country, which may increase the burden to the Partnership of meeting regulatory compliance for the same equipment operated between countries. Ongoing changes in the regulatory environment, both in the United States and internationally, cannot be predicted with accuracy, and preclude the General Partner from determining the impact of such changes on Partnership operations, purchases, or sale of equipment. Under U.S. Federal Aviation Regulations, after December 31, 1999, no person may operate an aircraft to or from any airport in the contiguous United States unless that aircraft has been shown to comply with Stage III noise levels. The Partnership has one Stage II aircraft that does not meet Stage III requirements. As of December 31, 2000, this aircraft was reclassed to an asset held for sale. Furthermore, the Federal Railroad Administration has mandated that effective July 1, 2000, all tank railcars must be re-qualified every ten years from the last test date stenciled on each railcar to insure tank shell integrity. Tank shell thickness, weld seams, and weld attachments must be inspected and repaired if necessary to re-qualify a tank railcar for service. The average cost of this inspection is $1,800 for non-jacketed tank railcars and $3,600 for jacketed tank railcars, not including any necessary repairs. This inspection is to be performed at the next scheduled tank test and every ten years thereafter. The Partnership currently owns 699 non-jacketed tank railcars and 478 jacketed tank railcars of which a total of 30 tank railcars have been inspected with no reportable defects. The Association of American Railroads (AAR) has mandated that effective October 19, 2000, certain tank cars built by Hawker Siddeley between 1961 and 1981 be inspected for improper weld attachments for body mounted brake rigging. The inspection cost is minimal. The modification will cost between $900 and $1,300 per car, if necessary. A schedule has been established by the AAR to complete the inspection and modification as follows: 50% completion by October 31, 2001, 90% completion by October 31, 2002, and 100% completion by October 31, 2003. As of December 31, 2000, none of the Partnership's railcars have been inspected.
(3) Distributions
During the active liquidation phase, the Partnership will use operating cash flow and proceeds from the sale of equipment to meet its operating obligations, and make distributions to the partners. Although the General Partner intends to maintain a sustainable level of distributions prior to final liquidation of the Partnership, actual Partnership performance and other considerations may require adjustments to then-existing distribution levels. In the long term, changing market conditions and used equipment values preclude the General Partner from accurately determining the impact of future re-leasing activity and equipment sales on Partnership performance and liquidity.
Since the Partnership has entered the active liquidation phase, 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 unitholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is currency devaluation risk. During 2000, 79% 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 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Partnership are listed in the Index to Financial Statements included in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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(PART III)
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PLM FINANCIAL SERVICES, INC.
As of the filing date of this report, the directors and executive officers of PLM Financial Services, Inc. (and key executive officers of its subsidiaries) are as follows:
Name Age Position - ----------------- ---- ---------------------------------------------------------
Stephen M. Bess 55 President, PLM Financial Services, Inc., PLM Investment Management, Inc. and PLM Transportation Equipment Corporation, Director of PLM Financial Services, Inc.
Richard K Brock 38 Vice President and Chief Financial Officer, PLM Financial Services, Inc., PLM Investment Management, Inc. and PLM Transportation Equipment Corporation, Director of PLM Financial Services, Inc.
Susan C. Santo 38 Vice President, Secretary, and General Counsel, PLM Financial Services, Inc., Director of PLM Financial Services, Inc.
Stephen M. Bess was appointed a Director of PLM Financial Services, Inc. in July 1997. Mr. Bess has served as President of PLM Investment Management, Inc., an indirect wholly-owned subsidiary of PLM International, since August 1989, and as an executive officer of certain other of PLM International's subsidiaries or affiliates since 1982.
Richard K Brock was appointed a Director of PLM Financial Services, Inc. in October 1, 2000. Mr. Brock was appointed as Vice President and Chief Financial Officer of PLM International and PLM Financial Services, Inc. in January 2000, having served as Acting Chief Financial Officer since June 1999 and as Vice President and Corporate Controller of PLM International and PLM Financial Services, Inc. since June 1997. Prior to June 1997, Mr. Brock served as an accounting manager beginning in September 1991 and as Director of Planning and General Accounting beginning in February 1994.
Susan C. Santo was appointed a Director of PLM Financial Services, Inc., a subsidiary of PLM International, in October 1, 2000. Miss Santo was appointed as Vice President, Secretary, and General Counsel of PLM International and PLM Financial Services, Inc. in November 1997. She has worked as an attorney for PLM International and PLM Financial Services, Inc. since 1990 and served as its Senior Attorney from 1994 until her appointment as General Counsel.
The directors of PLM Financial Services, Inc. are elected for a one-year term or until their successors are elected and qualified. No family relationships exist between any director or executive officer of PLM Financial Services, Inc., PLM Transportation Equipment Corp., or PLM Investment Management, Inc.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors, officers, or employees. The Partnership had no pension, profit sharing, retirement, or similar benefit plan in effect as of December 31, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) Security Ownership of Certain Beneficial Owners
The General Partner is entitled to a 5% interest in the profits and losses and distributions of the Partnership subject to certain allocations of income. In addition to its General Partner interest, FSI owned 8,000 units in the Partnership as of December 31, 2000. As of December 31, 2000, no investor was known by the General Partner to beneficially own more than 5% of the depositary units of the Partnership.
(B) Security Ownership of Management
Table 3, below, sets forth, as of the date of this report, the amount and percent of the Partnership's outstanding depositary units beneficially owned by each of the directors and executive officers and all directors and executive officers as a group of the General Partner and its affiliates:
TABLE 3
NAME DEPOSITARY UNITS PERCENT OF UNITS ---- ---------------- ----------------
Robert N. Tidball 2,000 *
All directors and officers As a group (1 person) 2,000 *
* Less than 1%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
During 2000, the Partnership paid or accrued $0.6 million for management fees to PLM Financial Services, Inc. (FSI) or its affiliates. The Partnership reimbursed FSI or its affiliates $0.4 million for administrative and data processing services performed on behalf of the Partnership during 2000.
During 2000, the USPEs paid or accrued the following fees to FSI or its affiliates (based on the Partnership's proportional share of ownership): management fees, $36,000 and administrative and data processing services, $10,000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements listed in the accompanying Index to Financial Statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statements required under Regulation S-X Rule 3-09
The following financial statements are filed as Exhibits of this Annual Report on Form 10-K:
a. TAP Trust
(B) Financial Statement Schedules
Schedule II Valuation Accounts
All other financial statement schedules have been omitted, as the required information is not pertinent to the registrant or is not material, or because the information required is included in the financial statements and notes thereto.
(C) Reports on Form 8-K
None.
(D) Exhibits
4. Limited Partnership Agreement of Partnership. Incorporated by reference to the Partnership's Registration Statement on Form S-1 (Reg. No. 33-18104), which became effective with the Securities and Exchange Commission on March 25, 1988.
4.1 Amendment, dated November 18, 1991, to Limited Partnership Agreement of Partnership. Incorporated by reference to the Partnership's Annual Report on Form 10-K dated December 31, 1991 filed with the Securities and Exchange Commission on March 30, 1992.
10.1 Management Agreement between Partnership and PLM Investment Management, Inc. Incorporated by reference to the Partnership's Registration Statement on Form S-1 (Reg. No. 33-18104), which became effective with the Securities and Exchange Commission on March 25, 1988.
24. Powers of Attorney.
Financial Statements required under Regulation S-X Rule 3-09:
99.1 TAP Trust
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Partnership has no directors or officers. The General Partner has signed on behalf of the Partnership by duly authorized officers.
Date: March 12, 2001 PLM EQUIPMENT GROWTH FUND III PARTNERSHIP
By: PLM Financial Services, Inc. General Partner
By: /s/ Stephen M. Bess Stephen M. Bess President and Director
By: /s/ Richard K Brock
Richard K Brock Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following directors of the Partnership's General Partner on the dates indicated.
NAME CAPACITY DATE - ---- -------- ----
*___________________ Stephen M. Bess Director, FSI March 12, 2001
*___________________ Richard K Brock Director, FSI March 12, 2001
*___________________ Susan C. Santo Director, FSI March 12, 2001
*Susan C. Santo, by signing her name hereto, does sign this document on behalf of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
/s/ Susan C. Santo Susan C. Santo Attorney-in-Fact
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP)
(Item 14(a))
Page ---- Independent auditors' report 25
Balance sheets as of December 31, 2000 and 1999 26
Statements of income for the years ended December 31, 2000, 1999, and 1998 27
Statements of changes in partners' capital for the years ended December 31, 2000, 1999, and 1998 28
Statements of cash flows for the years ended December 31, 2000, 1999, and 1998 29
Notes to financial statements 30-40
Independent auditor report on financial statement schedule 41
Schedule II Valuation Accounts 42
INDEPENDENT AUDITORS' REPORT
The Partners PLM Equipment Growth Fund III:
We have audited the accompanying financial statements of PLM Equipment Growth Fund III (the Partnership) as listed in the accompanying index to financial statements. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, PLM Equipment Growth Fund III, in accordance with the limited partnership agreement, entered its liquidation phase on January 1, 2000 and has commenced an orderly liquidation of the Partnership assets. 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 22, 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PLM Equipment Growth Fund III as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
SAN FRANCISCO, CALIFORNIA March 2, 2001
PLM EQUIPMENT GROWTH FUND III (A Limited Partnership) BALANCE SHEETS December 31, (in thousands of dollars, except unit amounts)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (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 YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (in thousands of dollars)
See accompanying notes to financial statements.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (In thousands of dollars)
See accompanying notes to financial statements.
EQUIPMENT GROWTH FUND III (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS December 31, 2000
1. BASIS OF PRESENTATION
ORGANIZATION
PLM Equipment Growth Fund III, a California limited partnership (the Partnership), was formed on October 15, 1987 to engage in the business of owning, leasing, or otherwise investing in predominately used transportation and related equipment. PLM Financial Services, Inc. (FSI) is the General Partner of the Partnership. FSI is a wholly-owned subsidiary of PLM International, Inc. (PLM International).
Beginning in the Partnership's eleventh year of operations which commenced on January 1, 2000, the General Partner began the 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.
FSI manages the affairs of the Partnership. The cash distributions of the Partnership are generally allocated 95% to the limited partners and 5% to the General Partner. Net income is allocated to the General Partner to the extent necessary to cause the General Partner's capital account to equal zero. The General Partner is also entitled to a subordinated incentive fee equal to 7.5% of surplus distributions, as defined in the limited partnership agreement, remaining after the limited partners have received a certain minimum rate of return.
These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
OPERATIONS
The equipment owned by the Partnership is managed, under a continuing management agreement by PLM Investment Management, Inc. (IMI), a wholly-owned subsidiary of FSI. IMI receives a monthly management fee from the Partnership for managing the equipment (see Note 2). FSI, in conjunction with its subsidiaries, sells equipment to investor programs and third parties, manages pools of equipment under agreements with the investor programs, and is a general partner of other programs.
ACCOUNTING FOR LEASES
The Partnership's leasing operations consist of operating leases. Under the operating lease method of accounting, the leased asset is recorded at cost and depreciated over its estimated useful life. Rental payments are recorded as revenue over the lease term. Lease origination costs were capitalized and amortized over the term of the lease.
DEPRECIATION AND AMORTIZATION
Depreciation of transportation equipment, held for operating leases, is computed on the double-declining balance method, taking a full month's depreciation in the month of acquisition, based upon estimated useful lives of 15 years for railcars and 12 years for most other types of equipment. Certain aircraft are depreciated under the double-declining balance method over the lease term which approximates the assets economic life. The depreciation method is changed to straight-line method when annual depreciation expense using the straight-line method exceeds that calculated by
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
1. BASIS OF PRESENTATION (CONTINUED)
DEPRECIATION AND AMORTIZATION (CONTINUED)
the double-declining balance method. Acquisition fees have been capitalized as part of the cost of the equipment and amortized over the equipment's depreciable life. Lease negotiation fees are amortized over the initial equipment lease term. Debt placement fees are amortized over the term of the related loan. Major expenditures that are expected to extend the useful lives or reduce future operating expenses of equipment are capitalized and amortized over the estimated remaining life of the equipment.
TRANSPORTATION EQUIPMENT
In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the General Partner reviews the carrying value of the Partnership's equipment portfolio at least quarterly and whenever circumstances indicate the carrying value of an asset may not be recoverable in relation to expected future market conditions for the purpose of assessing the recoverability of the recorded amounts. If projected undiscounted future cash flows are less than the carrying value of the equipment, a loss on revaluation is recorded. A loss on revaluation of $0.2 million was recorded during 2000. No reductions to the carrying values of equipment were required during 1999 or 1998.
INVESTMENTS IN UNCONSOLIDATED SPECIAL-PURPOSE ENTITIES
The Partnership has interests in unconsolidated special-purpose entities (USPEs) that owned transportation equipment. As of December 31, 2000, the Partnership owns a majority interest in one such entity. Prior to September 30, 1999, the Partnership controlled the management of this entity and thus it was consolidated into the Partnership's financial statements. On September 30, 1999, the corporate-by-laws of this entitiy were changed to require a unanimous vote by all owners on major business decisions. Thus, from September 30, 1999 forward, the Partnership no longer controls the management of this entity, and the accounting method for the entity was changed from the consolidation method to the equity method.
The Partnership's investment in USPEs includes acquisition and lease negotiation fees paid by the Partnership to PLM Transportation Equipment Corporation (TEC). TEC is a wholly-owned subsidiary of FSI. The Partnership's interest in USPEs are managed by IMI. The Partnership's equity interest in the net income (loss) of USPEs is reflected net of management fees paid or payable to IMI and the amortization of acquisition and lease negotiation fees paid to TEC.
REPAIRS AND MAINTENANCE
Repair and maintenance costs for railcars and trailers are usually the obligation of the Partnership. Maintenance costs for aircraft and containers are usually the obligation of the lessee. If they are not covered by the lessee, they are charged against operations as incurred. To meet the maintenance requirements of certain aircraft airframes and engines, reserve accounts are prefunded by the lessee. The reserve accounts are included in the balance sheet as lessee deposits and reserve for repairs.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
1. BASIS OF PRESENTATION (CONTINUED)
NET INCOME AND DISTRIBUTIONS PER DEPOSITARY UNIT
Cash distributions of the Partnership are allocated 95% to the limited partners and 5% to the General Partner and may include amounts in excess of net income. Net income is allocated to or from the General Partner to the extent necessary to cause the General Partner's capital account to equal zero. The General Partner allocated $0.1 million to the limited partners during 2000. The General Partner received an allocation in the amount of $0.2 million and $0.4 million from the gross gain on disposition of equipment for the years ended December 31, 1999 and 1998, respectively. The limited partners' net income and distributions are allocated among the limited partners based on the number of depositary units owned by each limited partner and on the number of days of the year each limited partner is in the Partnership.
Cash distributions are recorded when paid. Cash distributions to investors in excess of net income are considered a return of capital. Cash distributions to the limited partners of $0, $3.8 million, and $7.5 million, for the years ended December 31, 2000, 1999, and 1998, respectively, were deemed to be a return of capital.
NET INCOME PER WEIGHTED-AVERAGE DEPOSITARY UNIT
Net income per weighted-average depositary unit was computed by dividing net income attributable to limited partners by the weighted-average number of depositary units deemed outstanding during the period. The weighted-average number of depositary units deemed outstanding during the years ended December 31, 2000, 1999, and 1998 were 9,871,073.
COMPREHENSIVE INCOME
The Partnership's net income was equal to comprehensive income for the years ended December 31, 2000, 1999, and 1998.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less to be cash equivalents.
RESTRICTED CASH
As of December 31, 2000, restricted cash represented lessee security deposits held by the Partnership.
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES
An officer of FSI, a wholly-owned subsidiary of the General Partner, contributed $100 of the Partnership's initial capital. Under the equipment management agreement, IMI, subject to certain reductions, receives a monthly management fee attributable to either owned equipment or interests in equipment owned by the USPEs equal to the lesser of (a) the fees that would be charged by an independent third party for similar services for similar equipment or (b) the sum of (i) 5% of the gross lease revenues attributable to equipment that is subject to operating leases, (ii) 2% of the gross lease revenues attributable to equipment that is subject to full payout net leases, and (iii) 7% of the gross lease revenues attributable to equipment for which IMI provides both management and additional services relating to the continued and active operation of program equipment, such as on-going marketing and re-leasing of equipment, hiring or arranging for the or operating personnel for
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
2. GENERAL PARTNER AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
equipment, and similar services. The Partnership's proportional share of USPE management fees of $10,000 and $12,000 were payable as of December 31, 2000 and 1999, respectively. The Partnership's proportional share of USPEs management fee expense during 2000, 1999, and 1998 was $36,000, $0.1 million, and $0.1 million, respectively. The Partnership reimbursed FSI and its affiliates $0.4 million, $0.5 million, and $0.6 million, for administrative and data processing services performed on behalf of the Partnership in 2000, 1999, and 1998, respectively.
The Partnership's proportional share of USPEs administrative and data processing services reimbursed to FSI was $10,000, $6,000, and $26,000 during 2000, 1999, and 1998, respectively.
The Partnership paid lease negotiation and equipment acquisition fees of $0.1 million to TEC during 1998. No lease negotiation and equipment acquisition fees were paid to TEC during 2000 or 1999.
The Partnership owned certain equipment in conjunction with affiliated programs (see Note 4).
During 2000, the Partnership borrowed a total of $4.6 million from the General Partner in addition to the $0.6 million outstanding on December 31, 1999. The General Partner charged the Partnership market interest rates. Total interest paid to the General Partner was $0.1 million. All borrowings were repaid by December 31, 2000.
The balance due to affiliates as of December 31, 2000 included $0.1 million due to FSI and its affiliates for management fees. The balance due to affiliates as of December 31, 1999 included $0.1 million due to FSI and its affiliates for management fees and $0.6 million to FSI for the loan made to the Partnership.
3. EQUIPMENT
The components of owned equipment as of December 31, are as follows (in thousands of dollars):
Equipment Held for Operating Leases: 2000 1999 --------------------------------
Rail equipment $ 33,370 $ 33,572 Trailers 3,428 4,166 Marine containers 3,230 4,453 Aircraft -- 42,000 -------------------------------- 40,028 84,191 Less accumulated depreciation (34,361) (69,303) -------------------------------- 5,667 14,888 Equipment Held for Sale 1,703 -- -------------------------------- Net equipment $ 7,370 $ 14,888 ================================
Revenues are earned by placing the equipment under operating leases. The Partnership's marine containers are leased to operators of utilization-type leasing pools, which include equipment owned by unaffiliated parties. In such instances, revenues received by the Partnership consist of a specified percentage of revenues generated by leasing the pooled equipment to sublessees, after deducting certain direct operating expenses of the pooled equipment. Rents for railcars are based on a fixed rates. Lease revenues for trailers that operated in rental yards owned by PLM Rental, Inc. were based on a fixed rate for a specific period of time.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
3. EQUIPMENT (CONTINUED)
As of December 31, 2000, all owned equipment in the Partnership portfolio was on lease except for 88 railcars, 25 trailers, and an aircraft. As of December 31, 1999, all owned equipment in the Partnership portfolio was on lease or operating in PLM-affiliated short-term trailer rental yards, except for 40 railcars, and an aircraft. The aggregate net book value of equipment off lease was $0.6 million and $1.2 million as of December 31, 2000 and 1999, respectively.
During 2000, the Partnership sold or disposed of marine containers, trailers, railcars, and aircraft with an aggregate net book value of $2.8 million for proceeds of $12.5 million.
During 1999, the Partnership sold or disposed of marine containers, trailers, railcars, and an aircraft with an aggregate net book value of $1.6 million for proceeds of $3.8 million.
During 2000, the Partnership entered into contracts to sell the Partnership's 737-200 stage II and Dash 8-300 aircraft. Consequently, these two aircraft are reported as assets held for sale as of December 31, 2000. There were no assets held for sale as of December 31, 1999.
In the fourth quarter of 1996, the Partnership ended its investment phase in accordance with the limited partnership agreement; therefore, no equipment was purchased during 2000, 1999, or 1998. The Partnership made capital improvements as required by lease agreement to the Partnership's existing equipment of $0.2 million, $26,000, and $0.1 million were made during 2000, 1999, and 1998, respectively.
All leases for owned equipment are being accounted for as operating leases. Per diem and short-term rentals consisting of utilization rate lease payments included in revenue amounted to approximately $0.2 million, $0.3 million, and $0.8 million in 2000, 1999, and 1998, respectively.
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL PURPOSE ENTITIES
The Partnership owned equipment jointly with affiliated programs.
In September 1999, the General Partner amended the corporate-by-laws of certain USPEs in which the Partnership, or any affiliated program, owns an interest greater than 50%. The amendment to the corporate-by-laws provided that all decisions regarding the acquisition and disposition of the investment as well as other significant business decisions of that investment would be permitted only upon unanimous consent of the Partnership and all the affiliated programs that have an ownership in the investment. As such, although the Partnership may own a majority interest in a USPE, the Partnership does not control its management and thus the equity method of accounting will be used after adoption of the amendment. As a result of the amendment, as of September 30, 1999, all jointly owned equipment in which the Partnership owned a majority interest, which had been consolidated, were reclassified to investments in USPEs. Accordingly, as of December 31, 2000, the balance sheet reflects all investments in USPEs on an equity basis.
The net investments in USPEs include the following jointly-owned equipment (and related assets and liabilities) as of December 31, (in thousands of dollars):
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
4. INVESTMENTS IN UNCONSOLIDATED SPECIAL PURPOSE ENTITIES (CONTINUED)
During 2000, the Partnership sold its 56% interest in an entity that owned a bulk-carrier marine vessel and received liquidation proceeds of $3.2 million for its net investment of $2.1 million.
During 1999, the Partnership sold its 17% interest in two trusts that owned a total of three commercial aircraft, two aircraft engines, and a portfolio of aircraft rotables and received liquidation proceeds of $3.5 million for its net investment of $1.9 million.
As of December 31, 2000, the Partnership's remaining interest in the entity that owned a marine vessel represents $0.1 million of receivables from the former lessee.
The following summarizes the financial information for the USPEs and the Partnership's interests therein as of and for the years ended December 31, (in thousands of dollars):
5. OPERATING SEGMENTS
The Partnership operates or operated primarily in six different segments: aircraft leasing, marine container leasing, mobile offshore drilling unit (MODU) leasing, marine vessel leasing, trailer leasing, and railcar leasing. Each equipment leasing segment engages in short-term to mid-term operating leases to a variety of customers.
The General Partner evaluates the performance of each segment based on profit or loss from operations before allocation of certain general and administrative expenses, interest expense, and certain other expenses. The segments are managed separately due to different business strategies for each operation.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
5. OPERATING SEGMENTS (CONTINUED)
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 DECEMBER 31, 2000
5. OPERATING SEGMENTS (CONTINUED)
6. GEOGRAPHIC INFORMATION
The Partnership owns certain equipment that is leased and operated internationally. A limited number of the Partnership's transactions are denominated in a foreign currency. Gains or losses resulting from foreign currency transactions are included in the results of operations and are not material.
The Partnership leases or leased its aircraft, railcars, and trailers to lessees domiciled in four geographic regions: the United States, Canada, Europe, and Asia. The marine vessels, mobile offshore drilling unit, and marine containers are leased to multiple lessees in different regions that operate this equipment worldwide.
The table below set forth lease revenue by geographic region for the Partnership's owned equipment and investments in USPEs grouped by domicile of the lessee as of and for the years ended December 31, (in thousands of dollars):
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
6. GEOGRAPHIC INFORMATION (CONTINUED)
The following table sets forth net income (loss) information by region for the owned equipment and investments in USPEs for the years ended December 31, (in thousands of dollars):
The net book value of these assets as of December 31, were as follows (in thousands of dollars):
7. NOTE PAYABLE
The Partnership had a note outstanding for $7.5 million as of December 31, 1999, with interest computed at LIBOR plus 1.5% per annum. During 2000, the Partnership repaid this loan in accordance with the terms of the facility.
8. CONCENTRATIONS OF CREDIT RISK
No single lessee accounted for more than 10% of total consolidated revenues for the year ended December 31, 2000, 1999, and 1998. However, BCI Aircraft Leasing, Inc. purchased two Boeing 737's from the Partnership and the gain from the sale accounted for 33%, of total consolidated revenues from the wholly-and partially-owned equipment during 2000. R & B Falcon Drilling, Inc. purchased a mobile offshore drilling unit from the Partnership and the gain from the sale accounted for 15% of total consolidated revenues from wholly-and partially-owned equipment during 1998.
As of December 31, 2000 and 1999, the General Partner believes the Partnership had no significant concentrations of credit risk that could have a material adverse effect on the Partnership.
9. INCOME TAXES
The Partnership is not subject to income taxes, as any income or loss is included in the tax returns of the individual partners. Accordingly, no provision for income taxes has been made in the financial statements of the Partnership.
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
9. INCOME TAXES (CONTINUED)
As of December 31, 2000, the financial statement carrying amount of assets and liabilities was approximately $22.6 million lower than the federal income tax basis of such assets and liabilities, primarily due to differences in depreciation methods, equipment reserves, provision for bad debt, prepaid deposits, and the tax treatment of underwriting commissions and syndication costs.
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 counter claims are completely without merit, and the General Partner will vigorously defend against such counter claims. The General Partner believes the likelihood of an unfavorable outcome from the counter claims is remote.
11. LIQUIDATION OF PARTNERSHIP
During the first quarter of 2000, the Partnership completed its 11th year of operations. 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 22, 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. 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 from time to time to partners. The amounts reflected for assets and liabilities of the Partnership have not been adjusted to reflect liquidation values. The equipment portfolio continues to be reported at the lower of depreciated cost of fair value less cost to dispose. 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.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 2000 (in thousands of dollars, except per share amounts):
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
The following is a summary of the quarterly results of operations for the years ended December 31, 1999 in thousands of dollars, except per share amounts):
13. SUBSEQUENT EVENT
On January 04, 2001, the General Partner for the Partnership announced that it has begun recognizing transfers involving trading of units in the partnership for the 2001 calendar year. The Partnership is listed on the OTC Bulletin Board under the symbols GFZPZ.
In February 2001, PLM International, the parent of the Partnership, announced that MILPI Acquisition Corp. (MILPI) completed its cash tender offer for the outstanding common stock of PLM International. To date, MILPI has acquired 83% of the common shares outstanding. MILPI will complete its acquisition of PLM International by effecting a merger of MILPI into PLM International under Delaware law. The merger is expected to be completed after MILPI obtains approval of the merger by PLM International's shareholders pursuant to a special shareholders' meeting which is expected to be held during the first half of 2001.
During February 2001, the Partnership sold a Boeing 737-200 commercial aircraft with a net book value of $0.2 million for $2.3 million which was an asset held for sale as of December 31, 2000.
INDEPENDENT AUDITORS' REPORT
The Partners PLM Equipment Growth Fund III:
Under date of March 2, 2001, we reported on the balance sheets of PLM Equipment Growth Fund III as of December 31, 2000 and 1999, and the related statements of income, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2000, as contained in the 2000 annual report to stockholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
San Francisco, CA March 2, 2001
SCHEDULE II
PLM EQUIPMENT GROWTH FUND III (A LIMITED PARTNERSHIP) VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 2000, 1999, AND 1998 (in thousands of dollars)
PLM EQUIPMENT GROWTH FUND III
INDEX OF EXHIBITS
EXHIBIT PAGE
4. Limited Partnership Agreement of Partnership. *
4.1 Amendment, dated November 18, 1991, to Limited Partnership * Agreement of Partnership.
10.1 Management Agreement between Partnership and PLM Investment * Management, Inc.
24. Powers of Attorney. 44-46
Financial Statements required under Regulation S-X Rule 3-09:
99.1 TAP Trust
- ---------- * Incorporated by reference. See page 22 of this report.