<PAGE> 1
UNITED STATES
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 SEPTEMBER 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 SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - September 30, 1996 (unaudited) and December 31, 1995... 3
Statements of Earnings for the nine and three months ended
September 30, 1996 and 1995 (unaudited)................................. 4
Statements of Partners' Capital for the nine months ended
September 30, 1996 and 1995 (unaudited)................................. 5
Statements of Cash Flows for the nine months ended
September 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
September 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 $29,452 (1995: $24,768) $82,623 85,982
Cash 712 986
Accounts receivable, net of allowance
for doubtful accounts of $1,620 (1995: $1,516) 5,091 5,966
Due from affiliates (note 5) 1,174 119
Prepaid expenses 5 47
------- ------
$89,605 93,100
======= ======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 516 383
Accrued liabilities 147 135
Accrued damage protection plan costs (note 2) 420 373
Warranty claims (note 3) 276 306
Deferred quarterly distribution 118 122
Due to affiliates (note 5) 89 156
Equipment purchases payable 56 738
------- ------
Total liabilities 1,622 2,213
------- ------
Partners' capital:
General partners -- --
Limited partners 87,983 90,887
------- ------
Total partners' capital 87,983 90,887
------- ------
$89,605 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 nine and three months ended September 30, 1996 and 1995
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1996 SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental Income $ 16,215 5,235 17,726 5,934
---------- ---------- ---------- ----------
Costs and expenses:
Direct container expenses 2,458 831 1,868 545
Bad debt provision 211 39 404 184
Depreciation and amortization 5,099 1,701 4,998 1,683
Professional fees 24 7 45 9
Management fees to affiliates (note 5) 1,490 485 1,597 536
General and administrative costs
to affiliates (note 5) 912 272 1,188 393
Other general and administrative costs 186 60 241 65
---------- ---------- ---------- ----------
10,380 3,395 10,341 3,415
---------- ---------- ---------- ----------
Income from operations 5,835 1,840 7,385 2,519
---------- ---------- ---------- ----------
Other income:
Interest income 59 12 50 15
Gain on sales of equipment 120 28 279 151
---------- ---------- ---------- ----------
179 40 329 166
---------- ---------- ---------- ----------
Net earnings $ 6,014 1,880 7,714 2,685
========== ========== ========== ==========
Allocation of net earnings (note 5):
General partners $ 90 30 85 29
Limited partners 5,924 1,850 7,629 2,656
---------- ---------- ---------- ----------
$ 6,014 1,880 7,714 2,685
========== ========== ========== ==========
Limited partners' per unit share
of net earnings $ 0.96 $ 0.30 $ 1.23 $ 0.43
Limited partners' per unit share
of distributions $ 1.39 $ 0.46 $ 1.36 $ 0.46
Weighted average number of limited
partnership units outstanding 6,187,841 6,175,478 6,207,318 6,200,293
========== ========== ========== ==========
</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 nine months ended September 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 (85) (8,431) (8,516)
Redemptions (note 7) -- (167) (167)
Net earnings 85 7,629 7,714
---- ------ ------
Balances at September 30, 1995 $ -- 91,287 91,287
==== ====== ======
Balances at January 1, 1996 $ -- 90,887 90,887
Distributions (90) (8,584) (8,674)
Redemptions (note 7) -- (244) (244)
Net earnings 90 5,924 6,014
---- ------ ------
Balances at September 30, 1996 $ -- 87,983 87,983
==== ====== ======
</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 nine months ended September 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,014 7,714
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 5,099 4,970
Increase in allowance for doubtful accounts 104 123
Gain on sales of rental equipment (120) (279)
Amortization of organization costs -- 28
Changes in assets and liabilities:
Decrease in accounts receivable 755 145
(Increase) decrease in due from affiliates, net (1,083) 458
Increase in accounts payable
and accrued liabilities 145 131
Decrease in warranty claim payable (30) (2)
Increase (decrease) in accrued damage protection plan costs 47 (10)
Decrease in prepaid expenses 42 41
------- ------
Net cash provided by operating activities 10,973 13,319
------- ------
Cash flows from investing activities:
Proceeds from sale of container rental equipment 1,024 1,642
Container purchases (3,325) (8,836)
------- ------
Net cash used in investing activities (2,301) (7,194)
------- ------
Cash flows from financing activities:
Redemptions (244) (167)
Distributions to partners (8,702) (8,487)
------- ------
Net cash used in financing activities (8,946) (8,654)
------- ------
Net decrease in cash (274) (2,529)
Cash at beginning of period 986 3,155
------- ------
Cash at end of period $ 712 626
======= ======
</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 nine months ended September 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 September 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
nine-month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30, Dec. 31,
1996 1995 1995 1994
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates ..................... $ 19 86 306 185
Equipment purchases payable ........... 56 738 1,616 2,929
Distributions to partners included in:
Due to affiliates ..................... 18 42 39 7
Deferred quarterly distribution ....... 118 122 124 127
Proceeds from sale of Equipment included in:
Due from affiliates ................... 296 348 346 330
Accounts receivable ................... -- 19 396 587
</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
nine-month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Equipment purchases recorded .............. $2,576 7,644
Equipment purchases paid .................. 3,325 8,836
Distributions to partners declared ........ 8,674 8,516
Distributions to partners paid ............ 8,702 8,487
Proceeds from sale of Equipment recorded... 953 1,467
Proceeds from sale of Equipment received... 1,024 1,642
</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
September 30, 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
NOTE 1. GENERAL
Textainer Equipment Income Fund III, L.P. (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 September 30, 1996 and December 31, 1995, and the
results of its operations, changes in partners' capital, and cash flows for
the nine- and three-month periods ended September 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.
Certain estimates and assumptions were made by the Partnership's management
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior year amounts have been made in order to
conform with the 1996 financial statement presentation.
For the nine months ended September 30, 1996, the revenue from one lessee
accounted for 10.67% of the Partnership's revenues. No other single lessee
accounted for more than 10% of the Partnership's revenues and it is not
anticipated that the loss of any single customer or small group of
customers, would have a material adverse effect on the business of the
Partnership.
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 repair 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 September 30, 1996 and December
31, 1995, this reserve was equal to $420 and $373, respectively.
NOTE 3. WARRANTY CLAIMS
During 1992 and 1995, the Partnership settled warranty claims against an
Equipment manufacturer. The Partnership is amortizing 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
September 30, 1996 and December 31, 1995, the unamortized portion of the
settlement amounts was $276 and $306, respectively.
8
<PAGE> 9
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 4. ACQUISITION OF EQUIPMENT
During the nine-month periods ended September 30, 1996 and 1995, the
Partnership purchased Equipment with a cost of $2,576 and $7,644,
respectively.
NOTE 5. 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 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 $156 and $427 of equipment acquisition fees as a component of
container costs during the nine-month periods ended September 30, 1996 and
1995, respectively. The Partnership incurred $361 and $120 of incentive
management fees during the nine- and three-month periods ended September
30, 1996, respectively, and $356 and $121 for the comparable periods ended
September 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 8). 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 September 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 nine- and
three-month periods ended September 30, 1996, these fees totaled $1,129 and
$365, respectively, and $1,241 and $415 for the comparable periods ended
September 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.
9
<PAGE> 10
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 $802 and $239 for the nine- and three-month periods ended September
30, 1996, respectively, and $1,019 and $336 for the comparable periods
ended September 30, 1995.
TFS, in its capacity as managing general partner, also incurred general and
administrative costs of $110 and $33 for the nine- and three-month periods
ended September 30, 1996, respectively, and $169 and $57 for the equivalent
periods ended September 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.
At September 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 ....................... $1,174 119
====== ===
Due to affiliates:
Due to TAS.................................. $ 18 54
Due to TFS.................................. 50 76
Due to TGH and TL........................... 1 10
Due to TCC.................................. 20 16
------ ---
$ 89 156
====== ===
</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.
NOTE 6. RENTALS UNDER OPERATING LEASES
The following is a schedule by year of minimum future rentals receivable on
noncancelable operating leases as of September 30, 1996:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997...................................... $1,439
1998...................................... 306
1999...................................... 117
2000...................................... 31
------
Total minimum future rentals receivable... $1,893
======
</TABLE>
10
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TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 7. REDEMPTIONS
The following redemption offerings were consummated by the Partnership
during the nine-month period ended September 30, 1996:
<TABLE>
<CAPTION>
AVERAGE
UNITS REDEEMED REDEMPTION PRICE AMOUNT PAID
-------------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995.......... 55,907 $15.53 $ 868
Quarter ended :
March 31, 1996.................. 4,350 $13.94 61
September 30, 1996.............. 14,265 $12.88 183
------
Fund to date at September 30, 1996 ... 74,522 $14.94 $1,112
====== ======
</TABLE>
The redemption price is fixed by formula and varies depending on the
length of time the units have been outstanding.
NOTE 8. 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.
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 unit and per unit amounts)
The Financial Statements contain information which will assist in evaluating the
financial condition of the Partnership for the nine- and three-month periods
ended September 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 18,615 units for a total
dollar amount of $244, representing an average redemption price of $13.13,
during the nine-month period ended September 30, 1996. From the inception of the
Partnership through September 30, 1996, the Partnership has redeemed a total of
74,522 units for $1,112, representing an average redemption price of $14.94. 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 September 30, 1996, the Partnership's cash of
$712 was invested in a market-rate account.
During the nine-month period ended September 30, 1996, the Partnership declared
cash distributions to limited partners pertaining to the period from December
1995 through August 1996 in the amount of $8,584. These distributions represent
a return of 9.25% of original capital (measured on an annualized basis) on each
unit. On a GAAP basis $2,660 of these distributions 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 nine-month period ended September 30, 1996, the Partnership had net cash
provided by operating activities of $10,973, compared with net cash provided by
operating activities of $13,319 for the comparable period ended September 30,
1995. This decrease was primarily attributable to a decrease in income from
operations, resulting from a decline in rental income of $1,511 or 9% and an
increase in direct operating expenses of $590 or 32%, partially offset by a
decrease in accounts receivable from operations. The decrease in rental income
and increase in direct operating expenses resulted primarily from a lower
utilization rate and drop in rental rates for the Partnership's Equipment.
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 caused shipping lines to reduce freight rates and has affected
the profitability of their business, resulting in the need to reduce costs. This
is producing downward pressure on lease rates. Delays in the remittance of
rental payments, and in extreme cases, bankruptcy of some shipping lines may
occur if profitability continues to erode. As noted
12
<PAGE> 13
above and discussed more fully below under "Results of Operations", utilization
rates have reflected a lower demand for containers, and this over-capacity could
also further affect utilization.
Net cash used in investing activities (the purchase and sale of Equipment) for
the nine-month period ended September 30, 1996 was $2,301, compared with $7,194
for the nine-month period ended September 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.
Proceeds from the sale of container rental Equipment were higher in the
nine-month period ended September 30, 1995 than in the same period in 1996.
Consistent with its investment objectives and the General Partners'
determination that Equipment can be profitably sold or bought at any time, the
Partnership intends to reinvest all or a significant amount of proceeds from
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 nine-month periods ended September 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 ...... 30,642 30,315
Average ................ 30,439 29,371
</TABLE>
The average inventory (in units) increased by 4% from the nine-month period
ended September 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 86% and 93% on average
during the nine-month periods ended September 30, 1996 and 1995, respectively.
In addition, rental income is affected by daily rental rates, which have also
decreased as discussed below.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 1996 and 1995.
The Partnership's income from operations for the nine-month periods ended
September 30, 1996 and 1995 was $5,835 and $7,385, respectively, on rental
income of $16,215 and $17,726, respectively. The decrease in rental income of
$1,511, or 9%, from the nine-month period ended September 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 $1,314, or 8%, 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. Despite average
inventory increasing 4%, average utilization decreased 8%, and average daily
rental rates decreased by 4% from the nine-month period ended September 30, 1995
to the same period in 1996.
Utilization began to decrease in the last quarter of 1995 and has continued to
decline in the first three 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. 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 which is likely affecting rental rates. Rental
13
<PAGE> 14
rates have also been restrained by quantity rate discounts granted to the
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 dropping off Equipment at less desirable
locations as adjusted by credits granted to lessees for pick up of 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 nine-month period ended September 30, 1996, the total
of these other revenue items was $1,244, a decrease of $198 compared to the
equivalent period in 1995. This decrease was primarily due to location income,
which decreased $265 from the nine-month period ended September 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 $590 from
the nine-month period ended September 30, 1995 to the same period in 1996. The
primary component of this increase was costs incurred for storage, which
increased by $462 between periods. This cost increased due to a decline in
utilization rates from the nine-month period ended September 30, 1995 to the
same period in 1996. Additionally, maintenance expenses associated with the
damage protection plan increased by $111 from the nine-month period ended
September 30, 1995 to the same period in 1996, due to a higher cost to repair
the units in the nine-month period ended September 30, 1996 versus the
comparable period in 1995. Repositioning expense also increased by $89 from the
nine-month period ended September 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 $193 from the nine-month period ended September
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
and due to higher reserve requirements for two particular lessees in the
nine-month period ended September 30, 1995 than in the same period of 1996. This
was tempered by an increase in the reserve requirements for another lessee
recorded during the second quarter of 1996.
Depreciation and amortization expense increased by $101 from the nine-month
period ended September 30, 1995 to the equivalent period in 1996. Depreciation
increased by $129 or 3% due to an increase in average inventory of 4%, tempered
by the elimination of depreciation for storage containers in the nine-month
period ended September 30, 1996 resulting from the sale of the storage fleet in
the third quarter of 1995. In the nine-month period ended September 30, 1995,
there was depreciation expense of $45 related to the storage fleet. Organization
costs were fully amortized at December 31, 1995.
Management fees to affiliates were 9.2% and 9.0% of rental income for the
nine-months ended September 30, 1996 and 1995, respectively. Incentive
management fees, which are based on the Partnership's distributions to the
limited and general partners and capital raised were 2.2% of gross revenue in
the nine-months ended September 30, 1996 and 2.0% of gross revenue in the
comparative period in 1995. The increase reflects the increase in the
distribution rate to the limited partners from 9% to 9.25% in the third quarter
of 1995. Equipment management fees were 7% of gross revenue for both periods.
General and administrative costs to affiliates decreased by $276 in the
nine-month period ended September 30, 1996 compared to the same period in 1995.
These costs were 6.7% of gross revenue for the nine-month period ended September
30, 1995 compared to 5.6% for the same period in 1996. The decrease was
primarily the result of a decline in the overhead costs allocated from TEM and
overhead costs relating to the storage fleet sold in 1995 which did not re-occur
in 1996.
14
<PAGE> 15
Other income contained a gain on sales of Equipment of $120 for the nine-month
period ended September 30, 1996 compared to a gain of $279 for the equivalent
period ended September 30, 1995. Interest income increased by $9 from the
nine-month period ended September 30, 1995 to the comparable period in 1996.
Net earnings per limited partnership unit decreased from $1.23 for the
nine-month period ended September 30, 1995 to $0.96 for the equivalent period in
1996, reflecting the decrease in net earnings from $7,714 for the nine-month
period ended September 30, 1995 to $6,014 for the same period in 1996.
The following is a comparative analysis of the results of operations for the
three-month periods ended September 30, 1996 and 1995.
The Partnership's income from operations for the three-month periods ended
September 30, 1996 and 1995 was $1,840 and $2,519, respectively, on rental
income of $5,235 and $5,934, respectively. The decrease in rental income from
the three-month period ended September 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 $5,572 for the three-month period
ended September 30, 1995 to $4,881 for the same period in 1996, a decrease of
$691 or 12%. Although average inventory increased by 3%, average utilization
decreased by 11% and rental rates decreased by 5% from the three-month period
ended September 30, 1995 to the three-month period ended September 30, 1996.
The balance of rental income for the three-month period ended September 30,1996
was $386 compared to $362 for the same period in 1995, a decrease of $24 or 7%.
The decrease was primarily related to an increase in pick-up credits, reducing
location income from $141 in the three-month period ended September 30, 1996 to
$75 in the comparable period in 1995, a change of $66. The increased pick-up
credits were driven by declining utilization and a lower demand for Equipment.
Direct operating expenses, excluding bad debt expense, increased by $286 from
the three-month period ended September 30, 1995 to the three-month period ended
September 30, 1996. This increase was mainly due to storage expense which
increased from $115 for the three-month period ended September 30, 1995 to $309
in the equivalent period in 1996. This increase was the result of lower
utilization rates. Additionally, repair expenses for Equipment covered under the
damage protection plan increased by $83 for the three-month period ended
September 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 decreased by $145 from the three-month period
ended September 30, 1995 to the same period in 1996 due to lower specific
reserve requirements recorded in the three-month period ended September 30,
1996.
Depreciation and amortization increased by $18 from the three-month period ended
September 30, 1995 to the equivalent period in 1996. Depreciation expense alone
increased $28 from the three-month period ended September 30, 1995 to the
equivalent period in 1996. This represents a 2% increase, primarily due to the
increase in inventory of 3% 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 September 30, 1995 was $11.
Management fees to affiliates were $51 lower in the three-month period ended
September 30, 1996 than in 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 September 30, 1996 were
comparable to the equivalent period in 1995.
General and administrative costs to affiliates decreased by $121 from the
three-month period ended September 30, 1995 to the same period in 1996. As a
percentage of gross revenue, these costs were 5.2% in the three-month period
ended September 30, 1996 compared to 6.6% 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 $28 on Equipment sales in the three-month period ended
September 30, 1996 compared to a gain of $151 for the same period in 1995.
Interest income decreased by $3 in the three-month period ended September 30,
1996 compared to the same period in 1995.
Net earnings per limited partnership unit decreased from $0.43 for the
three-month period ended September 30, 1995 to $0.30 for the equivalent period
in 1996, reflecting the decrease in net earnings from $2,685 for the three-month
period ended September 30, 1995 to $1,880 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 September 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 /s/ John R. Rhodes
------------------
John R. Rhodes
Executive Vice President
Date: November 14, 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 November 14, 1996
- ---------------------- Officer) and Director
James E. Hoelter
/s/ John R. Rhodes Executive Vice President November 14, 1996
- ---------------------- (Principal Financial and
John R. Rhodes Accounting Officer),
Secretary and Treasurer
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 712
<SECURITIES> 0
<RECEIVABLES> 7,885
<ALLOWANCES> 1,620
<INVENTORY> 0
<CURRENT-ASSETS> 5
<PP&E> 112,075
<DEPRECIATION> 29,452
<TOTAL-ASSETS> 89,605
<CURRENT-LIABILITIES> 1,622
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 87,983
<TOTAL-LIABILITY-AND-EQUITY> 89,605
<SALES> 00
<TOTAL-REVENUES> 16,215
<CGS> 0
<TOTAL-COSTS> 10,380
<OTHER-EXPENSES> (179)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,014
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,014
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
