<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-20140
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3121277
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 CALIFORNIA STREET, 16TH FLOOR
SAN FRANCISCO, CALIFORNIA 94108
(Address of Principal Executive Offices) (ZIP Code)
(415) 434-0551
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
<PAGE> 2
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
QUARTERLY REPORT ON FORM 10Q FOR THE
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - June 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . . 3
Statements of Earnings for the six and three months ended
June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Partners' Capital for the six months ended
June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
2
<PAGE> 3
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
June 30, 1996 and December 31, 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
(unaudited)
---------- ------
<S> <C> <C>
ASSETS
Container rental equipment, net of accumulated
depreciation of $27,905 (1995: $24,768) $ 84,598 85,982
Cash and cash equivalents (note 1) 438 986
Accounts receivable, net of allowance
for doubtful accounts of $1,600 (1995: $1,516) 5,454 5,966
Due from affiliates (note 4) 532 119
Prepaid expenses 19 47
-------- ------
91,041 93,100
======== ======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 479 383
Accrued damage protection plan costs (note 2) 428 373
Accrued liabilities 232 257
Warranty claim payable (note 8) 287 306
Due to affiliates (note 4) 163 156
Equipment purchases payable 278 738
-------- ------
Total liabilities 1,867 2,213
======== ======
Partners' capital:
General partners - -
Limited partners 89,174 90,887
Total partners' capital 89,174 90,887
-------- ------
$ 91,041 93,100
======== ======
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF EARNINGS
For the six and three months ended June 30, 1996 and 1995
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental Income $ 10,980 5,335 11,792 5,921
--------- --------- --------- ----------
Costs and expenses:
Direct container expenses 1,627 793 1,323 581
Bad debt provision 172 138 220 41
Depreciation and amortization 3,398 1,719 3,315 1,675
Professional fees 17 7 36 21
Management fees to affiliates (note 4) 1,005 492 1,061 532
General and administrative costs 640 294 795 422
to affiliates (note 4)
Other general and administrative costs 126 66 176 87
--------- ---------- --------- ----------
6,985 3,509 6,926 3,359
--------- ---------- --------- ----------
Income from operations 3,995 1,826 4,866 2,562
--------- ---------- --------- ----------
Other income:
Interest income 47 18 35 11
Gain on sales of equipment 92 4 128 25
--------- ---------- --------- ----------
139 22 163 36
--------- ---------- --------- ----------
Net earnings $ 4,134 1,848 5,029 2,598
========= ========== ========= ==========
Allocation of net earnings (note 4):
General partners $ 60 30 56 28
Limited partners 4,074 1,818 4,973 2,570
--------- ---------- --------- ----------
$ 4,134 1,848 5,029 2,598
========= ========== ========= ==========
Limited partners' per unit share
of net earnings $0.66 $0.29 $0.80 $0.41
========= ========== ========= ==========
Limited partners' per unit share
of distributions $0.93 $0.46 $0.90 $0.45
========= ========== ========== ==========
Weighted average number of limited
partnership units outstanding 6,189,743 6,189,743 6,208,399 6,208,399
========= ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
----------------------------------------
GENERAL LIMITED TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
Balances at January 1, 1995 $ - 92,256 92,256
Distributions (56) (5,588) (5,644)
Redemptions (note 6) - (52) (52)
Net earnings 56 4,973 5,029
---- ------ ------
Balances at June 30, 1995 $ - 91,589 91,589
==== ====== ======
Balances at January 1, 1996 $ - 90,887 90,887
Distributions (60) (5,726) (5,786)
Redemptions (note 6) - (61) (61)
Net earnings 60 4,074 4,134
---- ------ ------
Balances at June 30, 1996 $ - 89,174 89,174
==== ====== ======
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $4,134 5,029
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 3,398 3,297
Increase (decrease) in allowance for doubtful
accounts 84 (55)
Gain on sales of rental equipment (92) (128)
Amortization of organization costs - 18
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 412 (246)
(Increase) decrease in due from affiliates, net (434) 93
Increase (decrease) in accounts payable
and accrued liabilities 73 (29)
Decrease in warranty claim payable (19) (1)
Increase in accrued damage protection plan costs 55 77
Decrease in prepaid expenses 28 32
------ -----
Net cash provided by operating activities 7,639 8,087
------ -----
Cash flows from investing activities:
Proceeds from sale of container rental equipment 656 1,204
Container purchases (2,993) (6,609)
------ -----
Net cash used in investing activities (2,337) (5,405)
------ -----
Cash flows from financing activities:
Redemptions (61) (52)
Distributions to partners (5,789) (5,646)
------ -----
Net cash used in investing activities (5,850) (5,698)
------ -----
Net decrease in cash and cash equivalents (548) (3,016)
Cash and cash equivalents at beginning of period 986 3,155
------ -----
Cash and cash equivalents at end of period $ 438 139
====== =====
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS--CONTINUED
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
SUPPLEMENTAL DISCLOSURES:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of equipment purchases,
distributions to partners, and proceeds from sale of Equipment which had not
been paid or received by the Partnership as of June 30, 1996 and 1995 and
December 31, 1995 and 1994, resulting in differences in amounts recorded and
amounts paid or received by the Partnership, as shown in the Statements of Cash
Flows for the six-month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
June 30, Dec. 31, June 30, Dec. 31,
1996 1995 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates . . . . . . . . . . . . $ 103 86 32 185
Equipment purchases payable . . . . . . . 278 738 501 2,929
Distributions to partners included in:
Due to affiliates . . . . . . . . . . . . 41 42 9 7
Accounts payable and accrued liabilities . 120 122 122 126
Proceeds from sale of Equipment included in:
Due from affiliates . . . . . . . . . . . 336 348 368 330
Accounts receivable . . . . . . . . . . . - 19 3 587
</TABLE>
The following summarizes the amounts of equipment purchases, distributions
to partners, and proceeds from sale of Equipment recorded by the Partnership and
the amounts paid or received as shown in the Statements of Cash Flows for the
six-month period ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment purchases recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,550 4,028
Equipment purchases paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,993 6,609
Distributions to partners declared . . . . . . . . . . . . . . . . . . . . . . . . . . 5,786 5,644
Distributions to partners paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,789 5,646
Proceeds from sale of Equipment recorded . . . . . . . . . . . . . . . . . . . . . . . 625 658
Proceeds from sale of Equipment received . . . . . . . . . . . . . . . . . . . . . . . 656 1,204
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 8
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
NOTE 1. GENERAL
Textainer Equipment Income Fund III (the Partnership) is a California
Limited Partnership formed in 1990. The Partnership owns and leases a
fleet of intermodal marine cargo container equipment (the Equipment) to
international shipping lines.
The accompanying interim comparative financial statements have not been
audited by an independent public accountant. However, all adjustments
(which were only normal and recurring adjustments), which are, in the
opinion of management, necessary to fairly present the financial position
of the Partnership as of June 30, 1996 and December 31, 1995, and the
results of its operations, changes in partners' capital, and cash flows for
the six- and three-month periods ended June 30, 1996 and 1995, have been
made.
The financial information presented herein should be read in conjunction
with the audited financial statements and the accompanying Notes included
in the Partnership's audited financial statements as of December 31, 1995.
For purposes of the Statements of Cash Flows, the Partnership considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Certain reclassifications of prior year amounts have been made in order to
conform with the 1996 financial statement presentation.
NOTE 2. DAMAGE PROTECTION PLAN
The Partnership offers a Damage Protection Plan (the Plan) to lessees of
its Equipment. Under the terms of the Plan, the Partnership earns
additional revenues on a daily basis and, as a result, has agreed to bear
certain costs. It is the Partnership's policy to recognize revenue when
earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated repair costs. At June 30, 1996 and December 31,
1995, this reserve was equal to $428 and $373, respectively.
NOTE 3. ACQUISITION OF EQUIPMENT
During the six-month periods ended June 30, 1996 and 1995, the Partnership
purchased Equipment with a cost of $2,550 and $4,028, respectively.
NOTE 4. TRANSACTIONS WITH AFFILIATES
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership. TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM) and
Textainer Limited (TL) are associate general partners of the Partnership.
The managing general partner and the associate general partners are
collectively referred to as the General Partners and are commonly owned by
Textainer Group Holdings Limited (TGH). The General Partners also act in
this capacity for other limited partnerships. Textainer Acquisition
Services Limited (TAS) is an affiliate of the General Partners which
performs services relative to the acquisition of Equipment outside the
United States on behalf of the
8
<PAGE> 9
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Partnership. TCC Securities Corporation (TSC), a licensed broker and dealer
in securities and an affiliate of the General Partners, was the managing
sales agent for the offering of Units for sale.
In accordance with the Partnership Agreement, the net earnings or losses
and partnership distributions are allocated 99% to the limited partners
and 1% to the General Partners with the exception of gross income as
defined in the Partnership Agreement. Gross income is allocated to the
General Partners to the extent that their partners' capital accounts show a
deficit.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners or TAS an incentive management fee, an acquisition
fee, an equipment management fee and an equipment liquidation fee. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $144 and $307 of equipment acquisition fees as part of
container costs during the six-month period ended June 30, 1996 and 1995,
respectively. The Partnership incurred $241 and $121 of incentive
management fees during the six- and three-month periods ended June 30,
1996, respectively, and $235 and $118 for the comparable periods ended June
30, 1995. No equipment liquidation fees were incurred during either
period.
The Equipment of the Partnership is managed by TEM. Prior to the
sale of the Partnership's storage fleet during 1995, TEM had entered into
an agreement with its wholly-owned subsidiary Textainer Storage Services
(TSS) to manage storage containers owned by the Partnership and other
owners (note 7). In its role as manager, TEM has authority to acquire,
hold, manage, lease, sell and dispose of the Equipment. Additionally, TEM
holds, for the payment of direct operating expenses, a reserve of cash that
has been collected from Equipment leasing operations; such cash is included
in the amount due from affiliates at June 30, 1996 and December 31, 1995.
Subject to certain reductions, TEM receives a monthly Equipment management
fee equal to 7% of gross revenues attributable to operating leases and 2%
of gross revenues attributable to full payout net leases. For the six-
and three-month periods ended June 30, 1996, these fees totaled $764 and
$371, respectively, and $826 and $414 for the comparable periods ended
June 30, 1995. Such fees are either retained by TEM or, prior to the sale
of the storage fleet, the fees allocable to TSS, if any, were passed
through to TSS by TEM for services rendered. The Equipment is or was
leased by TEM and TSS to third party lessees on operating master leases,
spot leases and term leases. The majority of the Equipment is leased
under operating leases with limited terms and no purchase option.
Certain indirect general and administrative costs incurred in performing
administrative services necessary to the operation of the Partnership are
borne by TEM and, prior to the sale of the storage fleet, TSS. Such costs
are allocated to the Partnership based on the ratio of the Partnership's
interest in managed Equipment to the total equipment managed by TEM and
TSS. Indirect general and administrative costs allocated to the
Partnership were $563 and $281 for the six- and three-month periods ended
June 30, 1996, respectively, and $682 and $362 for the comparable periods
ended June 30, 1995.
TFS, in its capacity as managing general partner, also incurred general
and administrative costs of $77 and $13 for the six-and three-month
periods ended June 30, 1996, respectively, and $113 and $60 for the
equivalent periods ended June 30, 1995, which were reimbursed by the
Partnership.
The General Partners or TAS may acquire Equipment in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such Equipment for the Partnership. The Equipment may then
be resold to the Partnership on an all-cash basis at a price equal to the
actual cost, as defined in the Partnership Agreement. In addition, the
General Partners or TAS are entitled to an acquisition fee for any
Equipment resold to the Partnership.
9
<PAGE> 10
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS CONTINUED
At June 30, 1996 and December 31, 1995, due from and to affiliates are
comprised of:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Due from affiliates:
Due from TEM and TSS . . . . . . . . $ 532 119
----- ---
Due to affiliates:
Due to TAS . . . . . . . . . . . . . $ 81 54
Due to TFS . . . . . . . . . . . . . 51 76
Due to TGH and TL . . . . . . . . . 18 10
Due to TCC . . . . . . . . . . . . . 13 16
----- ---
$ 163 156
===== ===
</TABLE>
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual and payment of expenses and
fees described above or in the accrual and payment of net rental revenues
from TEM and TSS.
It is the policy of the Partnership and the General Partners to charge
interest on intercompany balances which are outstanding for more than one
month to the extent such balances relate to loans for Equipment purchases.
Interest is charged at the Prime Rate plus certain margins based on TGH's
leverage ratio. There was no interest charged on intercompany balances for
the six- and three-month periods ending June 30, 1996 or 1995.
NOTE 5. RENTALS UNDER OPERATING LEASES
The following is a schedule by year of minimum future rentals receivable on
noncancelable operating leases as of June 30, 1996:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . $ 2,061
1998 . . . . . . . . . . . . . . . . . . . . 257
1999 . . . . . . . . . . . . . . . . . . . . 180
2000 . . . . . . . . . . . . . . . . . . . . 101
-------
Total minimum future rentals receivable . . . $ 2,599
=======
</TABLE>
NOTE 6. REDEMPTIONS
The following redemption offerings were consummated by the Partnership
during the six-month period ended June 30, 1996:
<TABLE>
<CAPTION>
AVERAGE
UNITS REDEEMED REDEMPTION PRICE AMOUNT PAID
-------------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 55,907 $15.54 $ 868
Quarter ended: March 31, 1996 4,350 $13.94 61
------ -----
Balance at June 30, 1996 60,257 $15.42 $ 929
====== =====
</TABLE>
The redemption price is fixed by formula and varies depending on the
length of time the units have been outstanding.
10
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TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7. SALE OF STORAGE FLEET
In August 1995, the Partnership sold its storage container fleet, managed
by TSS, to a third party investor. The proceeds from the sale were $345
compared to the Partnership's cost basis of $333. The resulting gain from
the sale was $12. The Partnership invested the proceeds from this sale in
additional Equipment.
NOTE 8. WARRANTY CLAIM
During 1992 and 1995, the Partnership settled warranty claims against an
Equipment manufacturer. The Partnership will amortize the settlement
amounts over the remaining useful life of the Equipment (between seven and
eight years), reducing maintenance and repair costs over that time. At June
30, 1996 and December 31, 1995, the unamortized portion of the settlement
amounts was equal to $287 and $306, respectively.
11
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in thousands except for per unit amounts)
The Financial Statements contain information which will assist in evaluating
the financial condition of the Partnership for the six and three-month
periods ended June 30, 1996 and 1995. Please refer to the Financial Statements
and Notes thereto in connection with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
From January 16, 1991 until May 4, 1992, the Partnership was involved in the
offering of limited partnership interests to the public. On May 4, 1992, the
Partnership's offering of limited partnership interests was closed at $125,000.
The Partnership has set up a program whereby limited partners may redeem units
for a specified redemption value. The redemption price is set by formula and
varies depending on length of time the units are outstanding. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2%
limit may be exceeded at the Managing General Partner's discretion. All
redemptions are subject to the Managing General Partner's good faith
determination that payment for the redeemed units will not (i) cause the
Partnership to be taxed as a corporation, (ii) impair the capital or operations
of the Partnership, or (iii) impair the ability of the Partnership to pay
distributions in accordance with its distribution policy. The Partnership
redeemed 4,350 units for a total dollar amount of $61, representing an average
redemption price of $13.94, during the six-month period ended June 30, 1996.
From the inception of the Partnership through June 30, 1996, the Partnership
has redeemed a total of 60,257 units for $929, representing an average
redemption price of $15.42. The Partnership has used cash flow from operations
to pay for the redeemed units.
The Partnership invests working capital and cash flow from operations prior to
its distribution or reinvestment in additional Equipment in short-term, highly
liquid investments. It is the policy of the Partnership to maintain a minimum
working capital reserve in an amount which is the lesser of (i) 1% of capital
contributions, or (ii) $100. At June 30, 1996, the Partnership's cash of $438
was primarily invested in a market-rate account.
During the six-month period ended June 30, 1996, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1995
through May 1996 in the amount of $5,726. These distributions represent a
return of 9.25% of original capital (measured on an annualized basis) on each
unit. Of these distributions, on a GAAP basis $1,652 was a return of capital
and the balance was from net earnings. On a cash basis all of these
distributions were from operations.
For the six-month period ended June 30, 1996, the Partnership had net cash
provided by operating activities of $7,639, compared with net cash provided by
operating activities of $8,087 for the comparable period ended June 30, 1995.
This decrease was primarily attributable to a decrease in income from
operations, resulting from a decline in rental income of $812 or 7% and an
increase in direct operating expenses of $304 or 23%, partially offset by a
decrease in accounts receivable from operations. The average collection period
of accounts receivable from operations was stable at 117 days during the
six-month periods ended June 30, 1995 and 1996. Additionally, net cash from
operations was impacted by an increase in due from affiliates, which reflects
timing differences in the accrual and payment of net rental revenues, fees and
other expenses to or from TEM and affiliates.
The Partnership's principal lessees, shipping lines, are currently experiencing
over-capacity, in part due to the delivery of new, large capacity ships. This
over-capacity has, in some instances, caused shipping lines to reduce freight
rates, which could affect the profitability of their business, resulting in the
possibility of delays in the remittance of rental payments, pressure on
Equipment rental rates, and, in extreme cases, bankruptcy of some shipping
lines. As discussed more fully below under "Results of Operations,"
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<PAGE> 13
utilization rates have reflected a lower demand for Equipment, and this
over-capacity could also further affect these rates.
Net cash used in investing activities (the purchase and sale of Equipment) for
the six-month period ended June 30, 1996 was $2,337, compared with $5,405 for
the six-month period ended June 30, 1995. This difference is primarily due to
the fact that, on a cash basis, the Partnership purchased more Equipment in
1995 (because of an increased availability of proceeds from the sale of a
trailer fleet that were received in 1994) than in the same period in 1996.
Consistent with its investment objectives, the Partnership intends to reinvest
all or a significant amount of proceeds from future Equipment sales in
additional Equipment.
RESULTS OF OPERATIONS
The Partnership's operations, which consist of rental income, container
depreciation, direct operating expenses, management fees, and reimbursement of
administrative expenses were directly related to the size of the fleet
(inventory) during the six-month periods ended June 30, 1996 and 1995, as well
as certain other factors as discussed below. The following is a summary of the
Equipment (in units) available for lease during those periods:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Opening inventory . . . . . . . . . 30,236 28,426
Closing inventory . . . . . . . . . 30,835 29,259
Average . . . . . . . . . . . . . . 30,536 28,843
</TABLE>
The average inventory (in units) increased by 6% from the six-month period
ended June 30, 1995 to the equivalent period in 1996. Average inventory
increased mainly due to reinvestment of proceeds from sales of used equipment
and from proceeds received during the latter part of 1995 from the sale of the
Partnership's storage fleet.
Rental income and direct operating expenses are also affected by the lease
utilization percentages for the Equipment, which were 87% and 93% on average
during the six-month periods ended June 30, 1996 and 1995, respectively. In
addition, rental income is affected by daily rental rates.
The following is a comparative analysis of the results of operations for the
six-month periods ended June 30, 1996 and 1995.
The Partnership's income from operations for the six-month periods ended June
30, 1996 and 1995 was $3,995 and $4,866, respectively, on rental income of
$10,980 and $11,792, respectively. The decrease in rental income of $812, or
7%, from the six-month period ended June 30, 1995 to the same period in 1996
was primarily attributable to income from Equipment rentals, the major
component of total rental income, which decreased by $590, or 6%, from 1995 to
1996. Income from Equipment rentals is largely dependent upon three factors:
Equipment available for lease (average inventory), average on-hire
(utilization) percentage, and average daily rental rates. Average inventory
increased 6%, average utilization decreased 7%, and average daily rental rates
decreased by 5% from the six-month period ended June 30, 1995 to the same
period in 1996.
Utilization began to decrease in the last quarter of 1995 and continued to
decline for all Equipment types owned by the Partnership in the first and
second quarters of 1996. The General Partners believe that this softening in
demand has been due, in part, to a slow-down in activity in the Asia-North
America trade route as well as to seasonal factors. The General Partners have
seen recent evidence of some stabilization in utilization rates for certain
Equipment types; however, there can be no assurance regarding the trend for
utilization in the future. Additionally, as noted above, the Partnership's
principal lessees, shipping lines, are currently experiencing over-capacity,
which may adversely affect rental payments and/or rates and utilization.
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<PAGE> 14
Rental rates have also been restrained by quantity rate discounts granted to
Partnership's larger Equipment lessees.
Substantially all of the Partnership's rental income was generated from the
leasing of Equipment under short-term operating leases.
The balance of rental income consists of other lease-related items, primarily
income from charges to the lessees for pick-up of Equipment from prime
locations less credits granted to lessees for leasing Equipment from less
desirable locations (location income), income for handling and returning
Equipment and income from charges to the lessees for a damage protection plan.
For the six-month period ended June 30, 1996, the total of these other revenue
items was $858, a decrease of $222 compared to the equivalent period in 1995.
This decrease was primarily due to location income, which decreased $198 from
the six-month period ended June 30, 1995 to the equivalent period in 1996. The
decline in location income is mainly due to an increase in pick-up credits to
lessees for Equipment leased at less desirable locations, which was largely
driven by decreased demand for Equipment.
Direct operating expenses, excluding bad debt expense, increased by $304 from
the six-month period ended June 30, 1995 to the same period in 1996. The
primary component of this increase was costs incurred for storage, which
increased by $267 between periods. This cost increased due to a decline in
utilization rates from the six-month period ended June 30, 1995 to the same
period in 1996. Additionally, maintenance expense increased by $52 from the
six-month period ended June 30, 1995 to the same period in 1996, due to a
higher number of units needing repair as well as a higher cost to repair the
units in the six-month period ended June 30, 1996 versus the comparable period
in 1995. Repositioning expense also increased by $43 from the six-month period
ended June 30, 1995 to the same period in 1996, due to the decrease in demand
for Equipment, requiring the repositioning of Equipment to more desirable
leasing locations.
Bad debt expense decreased by $48 from the six-month period ended June 30, 1995
to the same period of 1996. The decrease was primarily due to a reduction in
reserve requirements for a specific lessee as a result of a partial resolution
of payment problems with that lessee during the first quarter of 1996, tempered
by an increase in the reserve requirements for another lessee recorded during
the second quarter of 1996.
Depreciation and amortization expense increased by $83 from the six-month
period ended June 30, 1995 to the equivalent period in 1996. Depreciation
increased by $101 or 3% due to an increase in average inventory of 6%, tempered
by the elimination of depreciation for storage containers in the six-month
period ended June 30, 1996 resulting from the sale of the storage fleet in the
third quarter of 1995. In the six-month period ended June 30, 1995, there was
depreciation expense of $34 related to the storage fleet. Organization costs
were fully amortized at December 31, 1995.
Management fees to affiliates, which are based primarily on gross revenue,
decreased by $56 from the six-month period ended June 30, 1995 to the same
period in 1996. Equipment management fees, which decreased by $62 between
periods due to a decrease in rental income, were slightly offset by increased
incentive management fees. The increase in incentive management fees, which are
based on the Partnership's distributions to the limited and general partners,
reflects the increase in the distribution rate to the limited partners from 9%
to 9.25%.
General and administrative costs to affiliates decreased by $155 in the
six-month period ended June 30, 1996 compared to the same period in 1995. These
costs were 6.7% of gross revenue for the six-month period ended June 30, 1995
compared to 5.8% for the same period in 1996. The decrease was primarily the
result of a decline in the overhead costs allocated from TEM. Overhead costs
relating to the storage fleet in 1995 did not re-occur in 1996 due to the sale
of that fleet.
14
<PAGE> 15
Other income contained a gain on sales of Equipment of $92 for the six-month
period ended June 30, 1996 compared to a gain of $128 for the equivalent period
ended June 30, 1995. Interest income increased by $12 from the six-month period
ended June 30, 1995 to the comparable period in 1996.
Net earnings per limited partnership unit decreased from $0.80 for the
six-month period ended June 30, 1995 to $0.66 for the equivalent period in
1996, reflecting the decrease in net earnings from $5,029 for the six-month
period ended June 30, 1995 to $4,134 for the same period in 1996.
The following is a comparative analysis of the results of operations for the
three-month periods ended June 30, 1996 and 1995.
The Partnership's income from operations for the three-month periods ended June
30, 1996 and 1995 was $1,826 and $2,562, respectively, on rental income of
$5,335 and $5,921, respectively. The decrease in rental income from the
three-month period ended June 30, 1995 to the equivalent period in 1996 was
primarily attributable to income from Equipment rentals, the major component of
total rental income, which decreased from $5,458 for the three-month period
ended June 30, 1995 to $4,976 for the same period in 1996, or by $482.
Although average inventory increased by 6%, average utilization decreased by
10% and rental rates decreased by 5% from the three-month period ended June 30,
1995 to the three-month period ended June 30, 1996.
The balance of rental income for the three-month period ended June 30,1996 was
$359 compared to $463 for the same period in 1995, a decrease of $104 or 22%.
The decrease was primarily related to an increase in pick-up credits, reducing
location income by $77 in the three-month period ended June 30, 1996 compared
to the same period in 1995. The increased pick-up credits were driven by
declining utilization and a lower demand for Equipment.
Direct operating expenses, excluding bad debt expense, increased from $581 in
the three-month period ended June 30, 1995 to $793 for the three-month period
ended June 30, 1996 or an increase of $212. This increase was mainly due to
storage expense which increased by $152 as a result of lower utilization rates.
Additionally, repair expenses for Equipment covered under the damage protection
plan increased by $64 for the three-month period ended June 30, 1996 compared
to the same period in 1995. This increase is due to higher average repair
costs in 1996 than in 1995.
The provision for bad debt expense increased by $97 from the three-month period
ended June 30, 1995 to the same period in 1996 due to higher specific reserve
requirements recorded in the three-month period ended June 30, 1996, primarily
for one specific lessee.
Depreciation expense of $1,719 for the three-month period ended June 30, 1996
represented a 3% increase from depreciation expense of $1,666 for the
three-month period ended June 30, 1995. This increase is due to the increase
in inventory of 6% between the two periods, tempered by the sale of the storage
fleet in the third quarter of 1995. Depreciation related to the storage fleet
in the three-month period ended June 30, 1995 was $17.
Management fees to affiliates were $40 lower in the three-month period ended
June 30, 1996 than in the comparable period in 1995. Management fees to
affiliates were 9.2% of gross revenue for the three-month period ended June 30,
1996, and 9.0% of gross revenue for the comparable period in 1995. Equipment
management fees were 7% of gross revenue for both three-month periods and
incentive management fees in the three-month period ended June 30, 1996 were a
higher percentage of gross revenue than in the comparative period in 1995,
reflecting the increase in the distribution rate to the limited partners from
9% to 9.25%.
General and administrative costs to affiliates decreased by $128 from the
three-month period ended June 30, 1995 to the same period in 1996. As a
percentage of gross revenue, these costs were 5.5% in the three-month period
ended June 30, 1996 compared to 7.1% in the comparable period in 1995. The
decrease was primarily the result of a decline in overhead costs allocable from
TEM.
15
<PAGE> 16
There was a gain of $4 on Equipment sales in the three-month period ended June
30, 1996 compared to a gain of $25 for the same period in 1995.
Net earnings per limited partnership unit decreased from $0.41 for the
three-month period ended June 30, 1995 to $0.29 for the equivalent period in
1996, reflecting the decrease in net earnings from $2,598 for the three-month
period ended June 30, 1995 to $1,848 for the same period in 1996.
Although substantially all of the Partnership's income from operations is
derived from assets employed in foreign operations, virtually all of this
income is denominated in United States dollars. The Partnership's customers
are international shipping lines which transport goods on international trade
routes. The domicile of the lessee is not indicative of where the lessee is
transporting the Equipment. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep the Equipment under lease, rather than the geographic location
of the Equipment or the domicile of the lessees. The Equipment is generally
operated on the international high seas rather than on the domestic waterways.
The Equipment is subject to the risk of war or other political, economic or
social occurrence where the Equipment is used, which may result in the loss of
Equipment, which, in turn, may have a material impact on the Partnership's
results of operations and financial condition. The General Partners are not
aware of any conditions as of June 30, 1996 which would result in such risk
materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning Equipment after it comes off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the Equipment, and the effect of world trade and/or general business and
economic cycles on the Partnership's operations.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
By Textainer Financial Services Corporation
The Managing General Partner
By
--------------------------------
John R. Rhodes
Executive Vice President
Date: August 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Textainer
Financial Services Corporation, the Managing General Partner of the Registrant,
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
- ---------------- President (Principal Executive August 12, 1996
James E. Hoelter Officer) and Director
- ---------------- Executive Vice President August 12, 1996
John R. Rhodes (Principal Financial and
Accounting Officer),
Secretary and Treasurer
</TABLE>
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
By Textainer Financial Services Corporation
The Managing General Partner
By /s/ John R. Rhodes
-----------------------------
John R. Rhodes
Executive Vice President
Date: August 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Textainer
Financial Services Corporation, the Managing General Partner of the Registrant,
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James E. Hoelter President (Principal Executive August 12, 1996
- -------------------- Officer) and Director
James E. Hoelter
/s/ John R. Rhodes Executive Vice President August 12, 1996
- ------------------ (Principal Financial and
John R. Rhodes Accounting Officer),
Secretary and Treasurer
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 438
<SECURITIES> 0
<RECEIVABLES> 7,586
<ALLOWANCES> 1,600
<INVENTORY> 0
<CURRENT-ASSETS> 19
<PP&E> 112,503
<DEPRECIATION> 27,905
<TOTAL-ASSETS> 91,041
<CURRENT-LIABILITIES> 1,867
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 89,174
<TOTAL-LIABILITY-AND-EQUITY> 91,041
<SALES> 0
<TOTAL-REVENUES> 10,980
<CGS> 0
<TOTAL-COSTS> 6,985
<OTHER-EXPENSES> (139)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,134
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,134
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
