TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
May 14, 1998
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 First
Quarter ended March 31, 1998.
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 March 31, 1998
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 March 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997......................... 3
Statements of Earnings for the three months ended
March 31, 1998 and 1997 (unaudited)....................................................... 4
Statements of Partners' Capital for the three months ended
March 31, 1998 and 1997 (unaudited)....................................................... 5
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited)....................................................... 6
Notes to Financial Statements (unaudited)................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 12
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Balance Sheets
March 31, 1998 and December 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $37,993 (1997: $36,728) $ 74,386 $ 76,802
Cash 1,237 370
Accounts receivable, net of allowance for doubtful
accounts of $672 (1997: $1,534) (note 9) 4,299 4,713
Due from affiliates, net (note 7) 400 191
Prepaid expenses 175 172
--------------- ---------------
$ 80,497 $ 82,248
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 517 $ 488
Accrued liabilities 61 58
Accrued recovery costs (note 2) 54 119
Accrued damage protection plan costs (note 3) 351 351
Accrued maintenance and repair costs (note 4) 74 80
Warranty claims (note 5) 218 228
Deferred quarterly distribution 122 121
Container purchases payable 56 365
--------------- ---------------
Total liabilities 1,453 1,810
--------------- ---------------
Partners' capital:
General partners - -
Limited partners 79,044 80,438
--------------- ---------------
Total partners' capital 79,044 80,438
--------------- ---------------
Commitments (note 12)
$ 80,497 $ 82,248
=============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Earnings
For the three months ended March 31, 1998 and 1997
(Dollar amounts in thousands except for unit and per unit
amounts)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
<S> <C> <C>
Rental income $ 5,002 $ 4,736
------------------ -------------------
Costs and expenses:
Direct container expenses 1,193 860
Bad debt (benefit) expense (99) 1
Depreciation 1,695 1,701
Professional fees 7 8
Management fees to affiliates (note 7) 417 449
General and administrative costs
to affiliates (note 7) 305 313
Other general and administrative costs 53 54
------------------ -------------------
3,571 3,386
------------------ -------------------
Income from operations 1,431 1,350
------------------ -------------------
Other income:
Interest income 15 29
Gain on sale of containers (note 10) 42 23
------------------ -------------------
57 52
------------------ -------------------
Net earnings $ 1,488 $ 1,402
================== ===================
Allocation of net earnings (note 7):
General partners $ 30 $ 30
Limited partners 1,458 1,372
------------------ -------------------
$ 1,488 $ 1,402
================== ===================
Limited partners' per unit share
of net earnings $ 0.24 $ 0.22
================== ===================
Limited partners' per unit share
of distributions $ 0.46 $ 0.46
================== ===================
Weighted average number of limited
partnership units outstanding 6,168,527 6,168,527
================== ===================
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Partners' Capital
-----------------------------------------------------------
General Limited Total
--------------- ---------------- --------------
<S> <C> <C> <C>
Balances at January 1, 1997 $ - $ 86,801 $ 86,801
Distributions (30) (2,853) (2,883)
Redemptions (note 11) - (4) (4)
Net earnings 30 1,372 1,402
--------------- ---------------- --------------
Balances at March 31, 1997 $ - $ 85,316 $ 85,316
=============== ================ ==============
Balances at January 1, 1998 $ - $ 80,438 $ 80,438
Distributions (30) (2,852) (2,882)
Net earnings 30 1,458 1,488
--------------- ---------------- --------------
Balances at March 31, 1998 $ - $ 79,044 $ 79,044
=============== ================ ==============
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,488 $ 1,402
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,695 1,701
Decrease in allowance for doubtful accounts, excluding
write-off (note 9) (182) (39)
Gain on sale of containers (note 10) (42) (23)
Changes in assets and liabilities:
Decrease in accounts receivable, excluding write-off (note 9) 645 182
Increase in due from affiliates, net (176) (278)
(Increase) decrease in prepaid expenses (3) 18
Increase (decrease) in accounts payable and accrued liabilities 32 (19)
(Decrease) increase in accrued recovery costs (65) 10
Decrease in accrued damage protection plan costs - (34)
Decrease in warranty claims (10) (9)
(Decrease) increase in accrued maintenance and repair costs (6) 14
---------------- ----------------
Net cash provided by operating activities 3,376 2,925
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of containers 697 324
Container purchases (325) (1,945)
---------------- ----------------
Net cash provided by (used in) investing activities 372 (1,621)
---------------- ----------------
Cash flows from financing activities:
Redemptions of limited partnership units - (4)
Distributions to partners (2,881) (2,883)
---------------- ----------------
Net cash used in financing activities (2,881) (2,887)
---------------- ----------------
Net increase (decrease) in cash 867 (1,583)
Cash at beginning of period 370 2,426
---------------- ----------------
Cash at end of period $ 1,237 $ 843
================ ================
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
Supplemental Disclosures:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of container purchases, distributions
to partners, and proceeds from sale of containers which had not been paid or
received by the Partnership as of March 31, 1998 and 1997, and December 31, 1997
and 1996, 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 three-month periods ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Mar. 31 Dec. 31
1998 1997 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates.......................................... $ - $ 42 $ 47 $ -
Container purchases payable................................ 56 365 539 580
Distributions to partners included in:
Due to affiliates.......................................... 10 10 10 10
Deferred quarterly distribution............................ 122 121 116 116
Proceeds from sale of containers included in:
Due from affiliates........................................ 390 399 400 381
The following table summarizes the amounts of container purchases, distributions
to partners and proceeds from sale of containers recorded by the Partnership and
the amounts paid or received as shown in the Statements of Cash Flows for the
three-month periods ended March 31, 1998 and 1997.
1998 1997
---- ----
Container purchases recorded............................................................... $ (26) $ 1,951
Container purchases paid................................................................... 325 1,945
Distributions to partners declared......................................................... 2,882 2,883
Distributions to partners paid............................................................. 2,881 2,883
Proceeds from sale of containers recorded.................................................. 688 343
Proceeds from sale of containers received.................................................. 697 324
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(A California Limited Partnership)
Notes to Financial Statements
March 31, 1998
(Amounts in thousands except for per unit amounts)
(unaudited)
Note 1. General
Textainer Equipment Income Fund III, L.P. (the Partnership), a California
limited partnership with a maximum life of 20 years, was formed in 1990.
The Partnership owns and leases a fleet of intermodal marine cargo
containers which are leased 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 March 31, 1998 and December 31, 1997, and the
results of its operations, changes in partners' capital, and cash flows for
the three-month periods ended March 31, 1998 and 1997, 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, 1997
in the Annual Report filed on Form 10K.
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, not affecting net earnings, have been made to
prior year amounts in order to conform with the 1998 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 March 31, 1998 and December 31, 1997, the
amounts accrued were $54 and $119, respectively.
Note 3. Damage Protection Plan
The Partnership offers a Damage Protection Plan (DPP) to lessees of its
containers. Under the terms of DPP, the Partnership earns additional
revenues on a daily basis and, in return, 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. DPP expenses are included in
direct container expenses on the Statements of Earnings and the related
reserve was $351 at March 31, 1998 and December 31, 1997.
Note 4. Maintenance and Repair
The Partnership accrues maintenance and repair costs on damaged containers
in depots. At March 31, 1998 and December 31, 1997, the amount accrued was
$74 and $80, respectively.
Note 5. Warranty Claims
During 1992 and 1995, the Partnership settled warranty claims against an
equipment manufacturer relating to certain containers. The Partnership is
amortizing the settlement amounts over the remaining useful life of the
these containers (between seven and eight years), reducing maintenance and
repair costs over that time. At March 31, 1998 and December 31, 1997, the
unamortized portion of the settlement amounts was equal to $218 and $228,
respectively.
Note 6. Acquisition of Containers
The Partnership did not purchase containers during the three-month period
ended March 31, 1998. During the three-month period ended March 31, 1997,
the Partnership purchased containers with a cost of $1,951.
Note 7. 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 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 containers outside the
United States on behalf of the Partnership. TCC, TEM, TL and TAS are
subsidiaries of Textainer Group Holdings Limited (TGH). The General
Partners manage and control the affairs of the Partnership.
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 acquisition fee, an incentive management
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 had
capitalized $14 and $95 of equipment acquisition fees as part of container
rental equipment costs during the three-month periods ended March 31, 1998
and 1997 and had incurred $120 of incentive management fees for both the
three-month periods ended March 31, 1998 and 1997. No equipment liquidation
fees were incurred in either period.
The container fleet 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 containers. 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 from
affiliates, net at March 31, 1998 and December 31, 1997.
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.
During the three-month periods ended March 31, 1998 and 1997, the
Partnership paid $297 and $329, respectively, in equipment management fees
to TEM. The Partnership's container fleet is leased by TEM to third party
lessees on operating master leases, spot leases and term leases. The
majority of the container fleet is leased under operating master leases
with limited terms and no purchase option.
Certain indirect 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 incurred and paid by TFS and TEM. Total general and
administrative costs allocated to the Partnership were $305 and $313 for
the three-month periods ended March 31, 1998 and 1997, respectively, of
which $147 and $161 were for salaries.
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in managed containers to the total container
fleet managed by TEM during the period. TFS allocates these costs based on
the ratio of the Partnership's containers to the total container fleet of
all limited partnerships managed by TFS. General and administrative costs
allocated to the Partnership by TEM were $278 and $275 for the three-month
periods ended March 31, 1998 and 1997, respectively. TFS allocated $27 and
$38 of general and administrative costs to the Partnership during the same
periods.
The General Partners or TAS may acquire containers in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such containers for the Partnership. These containers 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
containers resold to the Partnership.
At March 31, 1998 and December 31, 1997, due from affiliates, net is
comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM................................ $ 475 $ 297
------- --------
Due to affiliates:
Due to TAS.................................. - 42
Due to TFS.................................. 47 48
Due to TCC.................................. 27 15
Due to TL................................... 1 1
------- --------
75 106
------- --------
Due from affiliates, net...................... $ 400 $ 191
======= ========
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 amounts due to the General Partners which are outstanding for
more than one month, to the extent such balances relate to loans for
container 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 amounts due to the General Partners for the three-month
periods ended March 31, 1998 or 1997.
Note 8. Rentals under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at March 31, 1998. Although the leases are
generally cancelable at the end of each twelve-month period with a
penalty, the following schedule assumes that the leases will not be
terminated.
Year ending March 31:
1999...................................................... $ 844
2000...................................................... 99
2001...................................................... 3
-----
Total minimum future rentals receivable................... $ 946
=====
Note 9. Accounts Receivable Write-Off
During the three-month period ending March 31, 1998, the Partnership
wrote-off $680 of delinquent receivables from two lessees against which
reserves were recorded in 1994 and 1995.
Note 10. Insurance Proceeds
In February 1998, the Partnership wrote-off 23 containers held by a lessee
that were deemed unrecoverable. These containers had a net book value of
$335 for which the Partnership received insurance proceeds of $351
resulting in a gain of $16.
Note 11. Redemptions
The following redemption offerings were consummated by the Partnership
during the three-month period ended March 31, 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
------ -------
Partnership to date.................... 81,473 $14.67 $ 1,195
====== =======
</TABLE>
There were no redemptions during the three-month period ended March 31,
1998. The redemption price is fixed by formula.
Note 12. Commitments
At March 31, 1998, the Partnership has committed to purchase 35 new
containers at an approximate total purchase price of $106 which includes
acquisition fees of $5. These commitments were made to TAS which, as the
contracting party, has in turn committed to purchase these containers on
behalf of the Partnership.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(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 three-month periods ended March
31, 1998 and 1997. 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 offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $1,000 on February 11, 1991, and 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 which is set by formula. 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-month period ended March 31, 1998
the Partnership did not redeem any 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 three-month period ended March 31, 1998, the Partnership declared
cash distributions to limited partners pertaining to the period from December
1997 through February 1998 in the amount of $2,852. These distributions
represent a return of 9.25% on original capital (measured on an annualized
basis) on each unit. On a cash basis, all of these distributions were from
operations. On a GAAP basis, $1,394 of these distributions was a return of
capital and the balance was from net earnings.
Net cash provided by operating activities for the three-month periods ending
March 31, 1998 and 1997, was $3,376 and $2,925, respectively. The increase of
$451, or 15%, is primarily attributable to the decreases in accounts receivable,
excluding the write-off, and due to affiliates, net of $645 and $176,
respectively. Accounts receivable decreased primarily due to a decrease in the
average collection period of accounts receivable. The decrease in due from
affiliates, net resulted from timing differences in the payment of expenses and
fees and or in the remittance of net rental revenues.
For the three-month period ending March 31, 1998, net cash provided by investing
activities (the purchase and sale of containers) was $372, compared with cash
used in investing activities of $1,621 for the same period in 1997. The
difference of $1,993 is primarily due to the Partnership having purchased more
containers during the three-month period ended March 31, 1997 than in the
comparable period in 1998. The General Partners believe that these differences
reflect normal fluctuations in container sales and purchases. However, recent
container purchases (reinvestment) are currently lower than anticipated due to
the adverse effect of market conditions on cash available for reinvestment.
Market conditions are discussed more fully below under "Results of Operations".
Consistent with its investment objectives, and the General Partners'
determination that the containers can be profitably sold or bought, the
Partnership intends to reinvest all or a significant amount of proceeds from
future container sales in additional containers. The Partnership sells
containers as they reach the end of their estimated useful life however,
additional containers purchased may not equal the number of containers sold.
At March 31, 1998, the Partnership has committed to purchase 35 new containers
at an approximate total purchase price of $106 which includes acquisition fees
of $5. These commitments were made to TAS which, as the contracting party, has
in turn committed to purchase these containers on behalf of the Partnership. At
March 31, 1998 the Partnership had sufficient cash on hand to meet these
commitments. In the event the Partnership decides not to purchase these
containers, one of the General Partners or an affiliate of the General Partners
will retain the containers for its own account.
Results of Operations
The Partnership's income from operations, which consists primarily of rental
income, container depreciation, direct container expenses, management fees, and
reimbursement of administrative expenses was directly related to the size of the
container fleet during the three-month periods ended March 31, 1998 and 1997, 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:
1998 1997
---- ----
Opening container fleet................. 31,342 30,605
Closing container fleet................. 30,957 31,270
Average container fleet................. 31,150 30,938
Rental income and direct container expenses are also affected by utilization of
the container fleet, which was 80% and 78% on average during the three-month
periods ended March 31, 1998 and 1997, respectively. In addition, rental income
is affected by daily rental rates and leasing incentives.
The following is a comparative analysis of the results of operations for the
three-month periods ended March 31, 1998 and 1997.
The Partnership's income from operations for the three-month periods ending
March 31, 1998 and 1997 was $1,431 and $1,350, respectively, on rental income of
$5,002 and $4,736, respectively. The increase in rental income of $266, or 6%,
from the three-month period ended March 31, 1997 to the comparable period in
1998 was primarily attributable to the increase in other rental income which is
discussed below. Income from container rentals, the major component of total
revenue, decreased $88, or 2%, from the three-month period ending March 31, 1997
to the same period in 1998. This decrease was primarily due to the decrease in
average rental rates of 5% and the decrease in the average container fleet
available for lease of 1%, offset by the 3% increase in average utilization, and
the 17% decrease in average leasing incentives.
Container utilization and rental rates declined during 1996 and 1997 primarily
due to decreased demand for leased containers and increased competition. The
decrease in demand for leased containers resulted from changes in the business
of shipping line customers consisting primarily of (i) over-capacity resulting
from the 1995 and 1996 additions of new, larger ships to the existing container
ship fleet at a rate in excess of the growth rate in containerized cargo trade;
(ii) shipping line alliances and other operational consolidations that have
allowed shipping lines to operate with fewer containers; and (iii) shipping
lines reducing their ratio of leased versus owned containers by purchasing
containers. This decreased demand, along with the entry of new leasing company
competitors offering low container rental rates to shipping lines, resulted in
downward pressure on rental rates and also caused leasing companies to offer
higher leasing incentives and other discounts to shipping lines. Rental rates
were also adversely affected by a drop in the purchase price of new containers
which resulted in additional downward pressure on rental rates.
Utilization increased during the second and third quarters of 1997 and began
declining again during the fourth quarter of 1997 and into the first quarter of
1998. Despite these declines, utilization for the first quarter of 1998 was
greater than the average first quarter 1997 utilization and greater than the
average utilization for the year ended December 31, 1997. Rental rates
stabilized during the later half of the first quarter of 1998 and, overall, were
comparable to fourth quarter 1997 rental rates. Leasing incentives reached a
high during mid-1997, began declining during the second half of 1997, and have
stabilized during the first quarter of 1998. The improvement in utilization and
the stabilization in rental rates and leasing incentives are primarily due to
increased demand in Asia. The weakening of many Asian currencies resulted in a
significant increase in exports which has created a strong demand for containers
in Asia. The General Partners believe that market conditions have stabilized and
may be slowly improving; however, for the near term, the General Partners do not
foresee any material changes in existing market conditions and caution that both
utilization and lease rates could decline again, adversely affecting the
Partnership's operating results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's Equipment under short-term operating leases.
The balance of other rental income consists of other lease-related items,
primarily income from charges to lessees for picking up containers from surplus
locations less credits granted to lessees for leasing containers from less
desirable locations (location income), income for handling and returning
containers and income from charges to the lessees for a Damage Protection Plan
(DPP). For the three-month period ended March 31, 1998, the total of these other
rental income items was $733, an increase of $354, or 93%, from the equivalent
period in 1997. The primary component of this increase was an increase in
location income of $332, which increased due to the inclusion of certain credits
received during 1997 and 1998 which had previously been applied against
repositioning expense and also due to an increase in the average drop-off charge
per container and a decrease in credits given to lessees to pick up containers
from certain locations.
Direct container expenses increased $333, or 39%, for the three-month period
ending March 31, 1998 compared to the equivalent period in 1997. The increase in
direct container expenses was primarily due to increases in costs incurred for
repositioning and DPP expenses of $270 and $59, respectively, offset by a
decrease in storage expense of $79. Repositioning expense increased due to the
removal of certain credits from repositioning costs to other rental income as
discussed above, and due to the greater number of containers being transported
from surplus locations to demand locations. DPP expense increased due to a
greater number of containers requiring repair, offset by a lower average repair
cost per container. Storage expense decreased as a result of the increase in
utilization from 78% to 80% for the three months ending March 31, 1997 to the
same period in 1998.
Bad debt benefit/expense decreased from an expense of $1 for the three month
period ended March 31, 1997 to a benefit of $99 for the comparable period in
1998. The benefit recorded in 1998 was primarily due to the Partnership writing
off certain receivables that had reserves in excess of the receivable.
Depreciation expense remained fairly constant between the three-month periods
ending March 31, 1998 and 1997 and was $1,695 and $1,701, respectively.
Management fees to affiliates decreased $32, or 7% from the three-month period
ended March 31, 1997 to the comparable period in 1998, primarily due to an
adjustment made to reduce equipment management fees, resulting from the
write-off of receivables for two lessees.
General and administrative costs to affiliates decreased $8, or 3%, from the
three-month period ending March 31, 1997 to the comparable period in 1998,
primarily due to a decrease in overhead costs allocated by TFS.
Other income increased $5, or 10%, due to an increase in gain on sale of
containers of $19 offset by a decrease in interest income of $14 between the
three-month periods ending March 31, 1998 and 1997. Gain on sale of containers
increased primarily due to a write-off of containers held by a lessee that were
deemed unrecoverable for which the Partnership received insurance proceeds for
these containers in excess of their net book value. Interest income decreased
due to lower average cash balances during the three-month period ending March
31, 1998 compared to the same period in 1997.
Net earnings per limited partnership unit increased from $0.22 to $0.24 from the
three-month period ending March 31, 1997 compared to the same period in 1998,
reflecting the increase in limited partner net earnings from $1,372 to $1,458,
respectively.
Many computer systems may experience difficulty processing dates beyond the year
1999 and, as such, some computer hardware and software will need to be modified
prior to the year 2000 to remain functional. Certain of the Partnership's and
General Partner's core internal systems that have recently been implemented are
year 2000 compliant. The remaining core internal systems are scheduled to be
revised to be year 2000 compliant by the end of 1998. Based on its initial
evaluation, the Partnership and the General Partners do not believe that the
cost of remedial actions relating to these systems will have a material adverse
effect on the Partnership's results of operations and financial condition.
Additionally, the Partnership and the General Partners are also completing a
preliminary assessment of year 2000 issues not related to its core systems,
including issues surrounding systems that interface with external third parties.
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 containers. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep the containers under lease, rather than the geographic location
of the containers or the domicile of the lessees. The containers are generally
operated on the international high seas rather than on domestic waterways. The
containers are subject to the risk of war or other political, economic or social
occurrence where the containers are used, which may result in the loss of
containers, 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 March 31, 1998 which would result in such a risk
materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning containers after they come off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the containers, 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 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: May 14, 1998
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 May 14, 1998
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive May 14, 1998
Philip K. Brewer Officer)
</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: May 14, 1998
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 May 14, 1998
________________________________ (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ Philip K. Brewer President (Principal Executive May 14, 1998
________________________________ Officer)
Philip K. Brewer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Income Fund III, L.P. 10Q
</LEGEND>
<CIK> 0000866888
<NAME> Textainer Equipment Income Fund III, L.P.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,237
<SECURITIES> 0
<RECEIVABLES> 5,371
<ALLOWANCES> 672
<INVENTORY> 0
<CURRENT-ASSETS> 175
<PP&E> 112,379
<DEPRECIATION> 37,993
<TOTAL-ASSETS> 80,497
<CURRENT-LIABILITIES> 1,453
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 79,044
<TOTAL-LIABILITY-AND-EQUITY> 80,497
<SALES> 0
<TOTAL-REVENUES> 5,002
<CGS> 0
<TOTAL-COSTS> 3,571
<OTHER-EXPENSES> (57)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,488
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,488
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
