TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 13, 1997
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
submitting herewith for filing on behalf of Textainer Equipment Income Fund III,
L.P. (the "Company") the Company's Quarterly Report on Form 10-Q for the Third
Quarter ended September 30, 1997.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
<PAGE>
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, 1997
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>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
Quarterly Report on Form 10Q for the
Quarter Ended September 30, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 1997 (unaudited) and December 31, 1996..................... 3
Statements of Earnings for the nine and three months ended
September 30, 1997 and 1996 (unaudited)................................................... 4
Statements of Partners' Capital for the nine months ended
September 30, 1997 and 1996 (unaudited)................................................... 5
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited)................................................... 6
Notes to Financial Statements (unaudited)................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Balance Sheets
September 30, 1997 and December 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $35,299 (1996: $30,943) $77,698 $81,075
Cash 1,388 2,426
Accounts receivable, net of allowance
for doubtful accounts of $1,580 (1996: $1,616) 4,690 5,219
Prepaid expenses - 45
--------------- ---------------
$83,776 $88,765
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $672 $456
Accrued liabilities 127 -
Accrued recovery costs (note 2) 109 71
Accrued damage protection plan costs (note 3) 337 422
Warranty claims (note 4) 238 267
Due to affiliates (note 6) 65 52
Deferred quarterly distribution 115 116
Equipment purchases payable 308 580
--------------- ---------------
Total liabilities 1,971 1,964
--------------- ---------------
Partners' capital:
General partners - -
Limited partners 81,805 86,801
--------------- ---------------
Total partners' capital 81,805 86,801
--------------- ---------------
$83,776 $88,765
=============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Earnings
For the nine and three months ended September 30, 1997 and 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Rental income $4,855 $5,235 $14,325 $16,215
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Direct container expenses 1,082 831 2,979 2,458
Bad debt expense 2 39 79 211
Depreciation 1,698 1,701 5,113 5,099
Professional fees 10 7 28 24
Management fees to affiliates (note 6) 459 485 1,355 1,490
General and administrative costs
to affiliates (note 6) 259 272 878 912
Other general and administrative costs 60 60 165 186
---------------- ---------------- ---------------- ----------------
3,570 3,395 10,597 10,380
---------------- ---------------- ---------------- ----------------
Income from operations 1,285 1,840 3,728 5,835
---------------- ---------------- ---------------- ----------------
Other (loss) income:
Interest income 16 12 59 59
(Loss) gain on sale of equipment (100) 28 (130) 120
---------------- ---------------- ---------------- ----------------
(84) 40 (71) 179
---------------- ---------------- ---------------- ----------------
Net earnings $1,201 $1,880 $3,657 $6,014
================ ================ ================ ================
Allocation of net earnings (note 6):
General partners $30 $30 $90 $90
Limited partners 1,171 1,850 3,567 5,924
---------------- ---------------- ---------------- ----------------
$1,201 $1,880 $3,657 $6,014
================ ================ ================ ================
Limited partners' per unit share
of net earnings $ 0.19 $ 0.30 $ 0.59 $ 0.96
================ ================ ================ ================
Limited partners' per unit share
of distributions $ 0.46 $ 0.46 $ 1.39 $ 1.39
================ ================ ================ ================
Weighted average number of limited
partnership units outstanding 6,168,527 6,175,478 6,168,527 6,187,841
================ ================ ================ ================
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the nine months ended September 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Partners' Capital
--------------------------------------------------------
General Limited Total
------------ ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1996 $0 $90,887 $90,887
Distributions (90) (8,584) (8,674)
Redemptions (note 8) - (244) (244)
Net earnings 90 5,924 6,014
------------ ---------------- ---------------
Balances at September 30, 1996 $0 $87,983 $87,983
============ ================ ===============
Balances at January 1, 1997 $0 $86,801 $86,801
Distributions (90) (8,559) (8,649)
Redemptions (note 8) - (4) (4)
Net earnings 90 3,567 3,657
------------ ---------------- ---------------
Balances at September 30, 1997 $0 $81,805 $81,805
============ ================ ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $3,657 $6,014
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 5,113 5,099
(Decrease) increase in allowance for doubtful accounts (36) 104
Loss (gain) on sale of equipment 130 (120)
Changes in assets and liabilities:
Decrease in accounts receivable 570 755
Increase (decrease) in due to affiliates, net 37 (1,083)
Increase in accounts payable and accrued liabilities 343 92
(Decrease) increase in accrued damage protection plan costs (85) 47
Increase in accrued recovery costs 38 53
Decrease in warranty claims (29) (30)
Decrease in prepaid expenses 45 42
---------------- ---------------
Net cash provided by operating activities 9,783 10,973
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of equipment 1,184 1,024
Equipment purchases (3,351) (3,325)
---------------- ---------------
Net cash used in investing activities (2,167) (2,301)
---------------- ---------------
Cash flows from financing activities:
Redemptions of limited partnership units (4) (244)
Distributions to partners (8,650) (8,702)
---------------- ---------------
Net cash used in financing activities (8,654) (8,946)
---------------- ---------------
Net decrease in cash (1,038) (274)
Cash at beginning of period 2,426 986
---------------- ---------------
Cash at end of period $1,388 $712
================ ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
Statements of Cash Flows--Continued
For the nine months ended September 30, 1997 and 1996
(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, 1997 and 1996, and December 31,
1996 and 1995, resulting in differences in amounts recorded and amounts of cash
disbursed or received by the Partnership, as shown in the Statements of Cash
Flows for the nine-month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30 Dec. 31
1997 1996 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates.......................................... $ 1 - 19 86
Equipment purchases payable................................ 308 580 56 738
Distributions to partners included in:
Due to affiliates.......................................... 10 10 18 42
Deferred quarterly distribution............................ 115 116 118 122
Proceeds from sale of Equipment included in:
Accounts receivable........................................ - - - 19
Due from affiliates........................................ 406 381 296 348
</TABLE>
The following table 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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment purchases recorded............................................................... $ 3,080 2,576
Equipment purchases paid................................................................... 3,351 3,325
Distributions to partners declared......................................................... 8,649 8,674
Distributions to partners paid............................................................. 8,650 8,702
Proceeds from sale of Equipment recorded................................................... 1,209 953
Proceeds from sale of Equipment received................................................... 1,184 1,024
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
Notes to Financial Statements
September 30, 1997
(Dollar amounts in thousands except for 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 containers (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, 1997 and December 31, 1996, and the
results of its operations, changes in partners' capital, and cash flows for
the nine- and three-month periods ended September 30, 1997 and 1996, 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, 1996.
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 1997 financial statement presentation.
Note 2. Recovery Costs
The Partnership accrues an estimate for recovery costs as a result of
defaults under its leases that it expects to incur, which are in excess of
estimated insurance proceeds. At September 30, 1997 and December 31, 1996,
the amounts accrued were $109 and $71, respectively.
Note 3. Damage Protection Plan
The Partnership offers a Damage Protection Plan (DPP) to lessees of its
Equipment. Under the terms of DPP, 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 these revenues
when earned and provide a reserve sufficient to cover the Partnership's
obligation for estimated future repair costs. At September 30, 1997 and
December 31, 1996, this reserve was equal to $337 and $422, respectively.
Note 4. 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, 1997 and December 31, 1996, the unamortized portion of the
settlement amounts was equal to $238 and $267, respectively.
Note 5. Acquisition of Equipment
During the nine-month periods ended September 30, 1997 and 1996, the
Partnership purchased Equipment with a cost of $3,080 and $2,576,
respectively.
Note 6. 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. The General Partners
manage and control the affairs of the Partnership. 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, TEM, TL and TAS are
subsidiaries of Textainer Group Holdings Limited (TGH). 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, and subject to special
allocations described therein, net earnings or losses and partnership
distributions are generally allocated 1% to the General Partners and 99% to
the limited 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 capital accounts' deficit exceed the portion of
syndication and offering costs allocated to them. On termination of the
Partnership, the General Partners shall be allocated gross income equal to
their allocations of syndication and offering costs.
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 as well
as reimburse the General Partners for certain administrative costs. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $160 and $156 of equipment acquisition fees as part of
Equipment costs during the nine-month periods ended September 30, 1997 and
1996, respectively. The Partnership incurred $360 and $120 of incentive
management fees during the nine- and three-month periods ended September
30, 1997 and $361 and $120 for the comparable periods in 1996. No equipment
liquidation fees were incurred in either period.
The Equipment of the Partnership is managed by TEM. In its role as manager,
TEM has authority to acquire, hold, manage, lease, sell and dispose of the
Partnership's Equipment. Additionally, TEM holds, for the payment of direct
operating expenses, a reserve of cash that has been collected from
container leasing operations; such cash is included in the amount due to
affiliates, net at September 30, 1997 and December 31, 1996.
Subject to certain reductions, TEM receives a monthly equipment management
fee equal to 7% of gross lease revenues attributable to operating leases
and 2% of gross lease revenues attributable to full payout net leases. The
Partnership paid $995 and $339 in Equipment management fees to TEM during
the nine- and three-month periods ended September 30, 1997 and $1,129 and
$365 during the comparable periods in 1996. The Partnership's Equipment is
leased by TEM to third party lessees on operating master leases, spot
leases and term leases. The majority of the Equipment is leased under
operating master leases with limited terms and no purchase option.
Certain general and administrative costs such as salaries, employee
benefits, taxes and insurance, are incurred in performing administrative
services necessary to the operation of the Partnership. These costs are
borne by TFS and TEM. Total general and administrative costs allocated to
the Partnership were $878 and $259 for the nine- and three-month periods
ended September 30, 1997 of which $483 and $150, respectively, were for
salaries. For the nine- and three-month periods ended September 30, 1996,
total general and administrative costs allocated to the Partnership were
$912 and $272, of which $470 and $159, respectively, were for salaries.
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the managed Equipment to the total Equipment
managed by TEM during the period. TFS allocates these costs based on the
ratio of the Partnership's Equipment to the total Equipment of all limited
partnerships managed by TFS. General and administrative costs allocated to
the Partnership by TEM were $771, $234, $802 and $239 for the nine- and
three-month periods ended September 30, 1997 and 1996, respectively. TFS
allocated $107, $25, $110 and $33 of general and administrative costs to
the Partnership during the nine- and three-month periods ended September
30, 1997 and 1996, respectively.
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, 1997 and December 31, 1996, due to affiliates, net is
comprised of:
1997 1996
---- ----
Due to affiliates:
Due to (from) TEM........................... $ 10 ($ 27)
Due to TFS.................................. 46 52
Due to TGH.................................. - 1
Due to TCC.................................. 8 26
Due to TL................................... 1 -
=========== ===========
$ 65 $ 52
=========== ===========
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 remittance of net rental
revenues from TEM.
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 a rate not greater than the General Partners' or
affiliates' own cost of funds. There was no interest expense incurred on
intercompany balances for the nine- and three-month periods ended September
30, 1997 and 1996.
Note 7. Rentals under Operating Leases
The following is a schedule by year of minimum future rentals receivable on
noncancelable operating leases at September 30, 1997:
Year ending September 30:
1998.......................................................... $ 1,264
1999.......................................................... 164
2000.......................................................... 29
-------
Total minimum future rentals receivable....................... $ 1,457
=====
Note 8. Redemptions
The following redemption offerings were consummated by the Partnership
during the nine-month period ended September 30, 1997:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
--------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 81,098 $14.69 $ 1,191
Quarter ended:
March 31, 1997................... 375 $10.43 4
June 30, 1997.................... - - -
September 30, 1997............... - - -
------ -------
Partnership to date.................... 81,473 $14.67 $ 1,195
====== =======
</TABLE>
The redemption price is fixed by formula and varies depending on the length
of time the units are outstanding.
<PAGE>
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 nine- and three-month periods
ended September 30, 1997 and 1996. 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.
From time to time, the Partnership redeems units from limited partners 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. During the three-months ended March 31, 1997 the
Partnership redeemed 375 units for a total dollar amount of $4. The Partnership
has used cash flow from operations to pay for the redeemed units. During the
three-month periods ended June 30, and September 30, 1997, the Partnership did
not redeem Partnership units.
The Partnership invests working capital and cash flow from operations prior to
its distribution to the partners in short-term, liquid investments. The
Partnership's cash is affected by cash provided by or used in operating,
investing and financing activities. These activities are discussed in detail
below.
During the nine months ended September 30, 1997, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1996
through August 1997 in the amount of $8,559. These distributions represent 9.25%
of original capital (measured on an annualized basis) on each unit. On a GAAP
basis, $4,992 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 periods ended September 30, 1997 and 1996, the Partnership
had net cash provided by operating activities of $9,783, and $10,973,
respectively. The decrease in net cash provided by operating activities was
primarily attributable to a decrease in net earnings of $2,357, offset by an
increase in due to affiliates, net of $37. The increase in due from affiliates,
net was due to timing differences in the accrual and payment of expenses and
fees or in the accrual and remittance of net rental revenues. The decrease in
net earnings of 39% in the nine-month period ending September 30, 1997 compared
to the comparable period of 1996 was primarily due to a 12% decrease in rental
revenues. The decrease in rental revenues between periods was due to a decline
in utilization and rental rates. These decreases are discussed more fully below
under "Results of Operations". As explained below under "Results of Operations",
demand for leased containers has declined compared to the prior period, and this
decline has affected the Partnership's financial condition.
Net cash used in investing activities (the purchase and sale of rental
equipment) for the nine-month period ended September 30, 1997 was $2,167, was
comparable to net cash used in investing activities of $2,301 for the nine-month
period ended September 30, 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 future Equipment sales in additional Equipment. Such
additional units of Equipment purchased may not, however, equal the number of
units sold.
Results of Operations
The Partnership's operations, which consist of rental income, container
depreciation, direct container 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, 1997 and 1996, as
well as certain other factors as discussed below. The following is a summary of
the container fleet (in units) available for lease during those periods:
1997 1996
---- ----
Opening inventory....................... 30,605 30,236
Closing inventory....................... 31,230 30,642
Average................................. 30,918 30,439
Rental income and direct container expenses are also affected by the lease
utilization percentages for the equipment, which averaged 79% and 85% during the
nine-month periods ended September 30, 1997 and 1996, respectively. In addition,
rental income is affected by daily rental rates, which declined by 6%.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 1997 and 1996.
The Partnership's income from operations for the nine-month periods ended
September 30, 1997 and 1996 was $3,728 and $5,835, respectively, on rental
income of $14,325 and $16,215, respectively. The decrease in rental income of
$1,890, or 12%, from the nine-month period ended September 30, 1996 to the same
period in 1997, was primarily attributable to income from container rentals, the
major component of total revenue, which decreased by $1,892, or 13%, from the
nine-month period ending September 30, 1996 to the equivalent period in 1997. As
noted above, income from container 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 2%, average utilization decreased 7%, and average daily rental rates
decreased by 6% from the nine-month period ended September 30, 1996 to the same
period in 1997.
Container utilization began to decline in late 1995 and that decline persisted
throughout 1996 and into the first quarter of 1997. The General Partners believe
that this decrease in demand for leased containers is the result of adverse
changes in the business of its shipping line customers. These changes consist
principally of: (i) a general slowdown in the growth of world containerized
cargo trade, particularly in the Asia-North America and Asia-Europe trade
routes; (ii) over-capacity resulting from the 1996 and 1997 additions of new,
larger ships to the existing container ship fleet at a rate in excess of the
growth rate in containerized cargo trade; and (iii) shipping line alliances and
other operational consolidations that have allowed shipping lines to operate
with fewer containers, thereby decreasing the demand for leased containers. The
container ship over-capacity in particular led to lower shipping rates,
resulting in shipping lines' need to reduce operating costs. The drive to reduce
costs, coupled with the availability of inexpensive financing and lower
container prices, encouraged shipping lines to purchase, rather than lease, a
greater number of new containers in 1996 than in previous years. All of these
factors have led to downward pressure on container lease rates, a decline in
utilization of leased containers, and an increase in leasing incentives and
other discounts being granted to shipping lines by container lessors, further
eroding Partnership profitability. The decline in demand for leased containers
has been accompanied by a drop in the purchase price of new containers.
During the second and third quarters there was an improvement in utilization,
however lease rates declined and leasing incentives remained high due to high
levels of off-lease inventory in low demand locations. The General Partners do
not foresee material changes in current market conditions and caution that both
utilization and lease rates could decline further, and leasing incentives could
remain high, adversely affecting the Partnership's results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's containers 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 containers from prime
locations less credits granted to lessees for leasing containers from surplus
locations (location income), income for handling and returning containers and
income from charges to lessees for a damage protection plan (DPP). For the
nine-month period ended September 30, 1997, the total of these other income
items was $1,237, an increase of $2 compared to the equivalent period in 1996.
The primary components of this net increase were an increase in handling income
of $169, offset by a decrease in location income of $161. Handling income
increased due to an increase in container movement offset by lower average
handling charges to lessees for the nine-months ending September 30, 1997
compared to the same period ending in 1996. The decline in location income is
mainly due to lower demand, which required an increase in credits given to
lessees for picking up units from surplus locations.
Direct container expenses, excluding bad debt expense, increased $521, or 21%,
for the nine-month period ended September 30, 1997 from the same period in 1996.
The primary components of this increase were costs incurred for storage and
repositioning, which increased $354 and $194, respectively. Storage expense
increased due to a decline in utilization rates from the nine-month period ended
September 30, 1996 to the same period in 1997. Repositioning costs increased due
to an increased number of containers being transported from surplus locations to
higher demand locations.
Bad debt expense decreased by $132 for the nine-month period ended September 30,
1997 from the same period in 1996, primarily due to lower reserve requirements.
Depreciation expense was comparable at $5,113 and $5,099 for the nine-month
periods ended September 30, 1997 and 1996, respectively.
Management fees to affiliates decreased by $135, or 9%, from the nine months
ended September 30, 1996 to the equivalent period in 1997, due to a decrease in
Equipment management fees. Equipment management fees, which are based primarily
on gross revenue, decreased $134, or 12%, due to the decrease in rental income,
and were approximately 7% of gross revenue for both periods. Incentive
management fees, which are based on the Partnership's limited and general
partner distribution percentage and partners' capital, were comparable at $360
and $361 for the nine-month periods ended September 30, 1997 and 1996,
respectively.
General and administrative costs to affiliates decreased by $34, or 4%, in the
nine-month period ended September 30, 1997, compared to the same period in 1996.
The decrease was primarily the result of a decline in overhead costs allocable
from TEM.
Other income contained a loss on sale of Equipment of $130 for the nine-month
period ended September 30, 1997 compared to a gain of $120 for the equivalent
period in 1996. Interest income was constant at $59 for both periods.
Net earnings per limited partnership unit decreased to $0.59 for the nine-month
period ended September 30, 1997 from $0.96 for the equivalent period in 1996,
reflecting the decrease in net earnings to $3,567 for the nine months ended
September 30, 1997 from $5,924 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, 1997 and 1996.
The Partnership's income from operations for the three-month periods ended
September 30, 1997 and 1996 was $1,285 and $1,840, respectively, on rental
income of $4,855 and $5,235, respectively. The decrease in rental income of
$380, or 7%, was primarily attributable to income from container rentals, the
major component of total revenue, which decreased by $403, or 8%. This decrease
resulted from the decrease in average utilization of 2% and the decrease in
average daily rental rates of 8%. These decreases were offset by an increase in
fleet size of 2%.
The balance of rental income was $408 for the three-months ended September 30,
1997, an increase of $24 compared to the equivalent period in 1996. The primary
components of this increase were increases in handling and DPP income of $88 and
$42, respectively, offset by decreases in location income of $78. Handling
income increased as a result of an increase in container movement offset by
lower average handling charges to lessees. An increased number of containers
participating in the DPP Plan, offset by lower average charges to lessees,
resulted in higher DPP income. Location income decreased due to lower demand,
which required an increase in credits given to lessees as incentives for picking
up containers in surplus locations.
Direct container expenses, excluding bad debt expense, increased by $251, or
30%, for the three-month period ended September 30, 1997 compared to the same
period in 1996. The primary components of this increase were costs incurred for
repositioning, handling and maintenance. Repositioning expense increased due to
a greater number of containers being transported from surplus locations to
higher demand locations for the three-month period ended September 30, 1997,
compared to the same period in 1996. Increased container movement and a higher
average cost per container also resulted in increased handling expense.
Maintenance expense increased due to an increase in the number of containers
requiring repair. This increase was partially offset by a decrease in the
average repair cost per container.
Bad debt expense decreased by $37, or 95%, for the three-month period ended
September 30, 1997 from the same period in 1996, primarily due to lower reserve
requirements.
Depreciation expense remained constant at $1,698 and $1,701 for the three-month
periods ending September 30, 1997 and 1996, respectively.
Management fees to affiliates decreased by $26, or 5%, for the three months
ended September 30, 1997 from the equivalent period in 1996, due to a decrease
in Equipment management fees which resulted from the decrease in rental income.
Incentive management fees remained constant at $120 for both periods.
General and administrative costs to affiliates decreased by $13, or 5%, in the
three-month period ended September 30, 1997 compared to the same period in 1996,
primarily due to a decrease in overhead costs allocable from TFS and TEM.
Other income contained a loss on sales of equipment of $100 for the three-month
period ended September 30, 1997, compared to a gain of $28 for the equivalent
period in 1996.
Net earnings per limited partnership unit decreased from $0.30 for the
three-month period ended September 30, 1996 to $0.19 for the equivalent period
in 1997, reflecting the decrease in net earnings to $1,171 for the three months
ended September 30, 1997 from $1,850 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 at profitable rates, 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
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, 1997 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, industry trends and/or general
business and economic cycles on the Partnership's operations. See "Risk Factors"
in the Partnership's Prospectus, as supplemented, for additional information on
risks of the Partnership's business.
<PAGE>
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: November 13, 1997
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>
Executive Vice President November 13, 1997
- ---------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
President (Principal Executive November 13, 1997
- ---------------------------------- Officer) and Director
James E. Hoelter
</TABLE>
<PAGE>
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 13, 1997
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/ John R. Rhodes Executive Vice President November 13, 1997
- ------------------------------------ (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ James E. Hoelter President (Principal Executive November 13, 1997
- ------------------------------------ Officer) and Director
James E. Hoelter
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Income Fund III, LP
</LEGEND>
<CIK> 0000866888
<NAME> Textainer Equipment Income Fund III, LP
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,388
<SECURITIES> 0
<RECEIVABLES> 6,270
<ALLOWANCES> 1,580
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 112,997
<DEPRECIATION> 35,299
<TOTAL-ASSETS> 83,776
<CURRENT-LIABILITIES> 1,971
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 81,805
<TOTAL-LIABILITY-AND-EQUITY> 83,776
<SALES> 0
<TOTAL-REVENUES> 14,325
<CGS> 0
<TOTAL-COSTS> 10,597
<OTHER-EXPENSES> 71
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,657
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,657
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
