TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
May 14, 1999
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, 1999.
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 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number 0-20140
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
A California Limited Partnership
(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, CA 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 [ ]
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1999
Table of Contents
- ----------------------------------------------------------------------------------------------------------
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998....................................................................... 3
Statements of Earnings for the three months
ended March 31, 1999 and 1998 (unaudited)................................................... 4
Statements of Partners' Capital for the three months
ended March 31, 1999 and 1998 (unaudited)................................................... 5
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited)................................................... 6
Notes to Financial Statements (unaudited)................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 13
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Balance Sheets
March 31, 1999 and December 31, 1998
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $40,703 (1998: $40,147) (note 9) $ 64,874 $ 65,872
Cash 3,723 3,455
Accounts receivable, net of allowance for doubtful
accounts of $601 (1998: $439) (note 8) 3,718 4,185
Due from affiliates, net (note 6) 695 1,041
Prepaid expenses 17 26
--------------- ---------------
$ 73,027 $ 74,579
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 520 $ 502
Accrued liabilities 184 163
Accrued recovery costs (note 2) 129 116
Accrued damage protection plan costs (note 3) 284 291
Warranty claims (note 4) 178 188
Deferred quarterly distribution 98 97
Container purchases payable 1,178 56
--------------- ---------------
Total liabilities 2,571 1,413
--------------- ---------------
Partners' capital:
General partners - -
Limited partners 70,456 73,166
--------------- ---------------
Total partners' capital 70,456 73,166
--------------- ---------------
$ 73,027 $ 74,579
=============== ===============
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Earnings
For the three months ended March 31, 1999 and 1998
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- --------------------------------------------------------------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Rental income $ 3,866 $ 4,845
------------------ ------------------
Costs and expenses:
Direct container expenses 1,043 1,036
Bad debt expense (benefit) 173 (99)
Depreciation 1,576 1,695
Write-down of containers (note 9) 175 -
Professional fees 9 7
Management fees to affiliates (note 6) 377 417
General and administrative costs
to affiliates (note 6) 254 305
Other general and administrative costs 41 53
------------------ ------------------
3,648 3,414
------------------ ------------------
Income from operations 218 1,431
------------------ ------------------
Other (expense) income:
Interest income 47 15
(Loss) gain on sale of containers (note 9) (257) 42
------------------ ------------------
(210) 57
------------------ ------------------
Net earnings $ 8 $ 1,488
================== ==================
Allocation of net earnings (note 6):
General partners $ 27 $ 30
Limited partners (19) 1,458
------------------ ------------------
$ 8 $ 1,488
================== ==================
Limited partners' per unit share
of net earnings $ 0.00 $ 0.24
================== ==================
Limited partners' per unit share
of distributions $ 0.41 $ 0.46
================== ==================
Weighted average number of limited
partnership units outstanding 6,136,934 6,168,527
================== ==================
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the three months ended March 31, 1999 and 1998
(Amounts in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------
Partners' Capital
------------------------------------------------------------
General Limited Total
--------------- --------------- ---------------
<S> <C> <C> <C>
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
=============== =============== ===============
Balances at January 1, 1999 $ - $ 73,166 $ 73,166
Distributions (27) (2,534) (2,561)
Redemptions (note 10) - (157) (157)
Net earnings 27 (19) 8
--------------- --------------- ---------------
Balances at March 31, 1999 $ - $ 70,456 $ 70,456
=============== =============== ===============
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements of Cash Flows
For the three months ended March 31, 1999 and 1998
(Amounts in thousands)
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8 $ 1,488
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,576 1,695
Container write-down (note 9) 175 -
Increase (decrease) in allowance for doubtful accounts,
excluding write-off (note 8) 162 (182)
Loss (gain) on sale of containers 257 (42)
(Increase) decrease in assets:
Accounts receivable, excluding write off (note 8) 340 645
Due from affiliates, net 50 (176)
Prepaid expenses 9 (3)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 39 26
Accrued recovery costs 13 (65)
Accrued damage protection plan costs (7) -
Warranty claims (10) (10)
---------------- ----------------
Net cash provided by operating activities 2,612 3,376
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of containers 1,210 697
Container purchases (837) (325)
---------------- ----------------
Net cash provided by investing activities 373 372
---------------- ----------------
Cash flows from financing activities:
Redemptions of limited partnership units (157) -
Distributions to partners (2,560) (2,881)
---------------- ----------------
Net cash used in financing activities (2,717) (2,881)
---------------- ----------------
Net increase in cash 268 867
Cash at beginning of period 3,455 370
---------------- ----------------
Cash at end of period $ 3,723 $ 1,237
================ ================
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the three months ended March 31, 1999 and 1998
(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 as of March 31, 1999 and 1998, and December 31, 1998 and 1997,
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, 1999 and 1998.
Mar. 31 Dec. 31 Mar. 31 Dec. 31
1999 1998 1998 1997
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates.............................. $ 44 $ 16 $ - $ 42
Container purchases payable.................... 1,178 56 56 365
Distributions to partners included in:
Due to affiliates.............................. 9 9 10 10
Deferred quarterly distribution................ 98 97 122 121
Proceeds from sale of containers included in:
Due from affiliates............................ 544 812 390 399
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, 1999 and 1998.
1999 1998
---- ----
Container purchases recorded...................................................... $ 1,987 $ (26)
Container purchases paid.......................................................... 837 325
Distributions to partners declared................................................ 2,561 2,882
Distributions to partners paid.................................................... 2,560 2,881
Proceeds from sale of containers recorded......................................... 942 688
Proceeds from sale of containers received......................................... 1,210 697
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND III, L.P.
(a California Limited Partnership)
Notes To Financial Statements
For the three months ended March 31, 1999 and 1998
(Amounts in thousands except for unit and 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 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, 1999 and December 31, 1998, and the
results of its operations, changes in partners' capital and cash flows for
the three-month periods ended March 31, 1999 and 1998, have been made.
The financial information presented herein should be read in conjunction
with the audited financial statements and other accompanying notes
included in the Partnership's annual audited financial statements as of
December 31, 1998, in the Annual Report filed on Form 10-K.
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 to the 1999 financial statement
presentation.
Note 2. Recovery Costs
The Partnership accrues an estimate for recovery costs that it expects to
incur, as a result of defaults under its leases, which are in excess of
estimated insurance proceeds. At March 31, 1999 and December 31, 1998, the
amounts accrued were $129 and $116, 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 revenue when
earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated future repair costs. DPP expenses are included in
direct container expenses in the Statements of Earnings, and at March 31,
1999 and December 31, 1998, the related reserves were $284 and $291,
respectively.
Note 4. 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 estimated useful life
of these containers (between seven and eight years), reducing maintenance
and repair costs over that time. At March 31, 1999 and December 31, 1998,
the unamortized portion of the settlement amount was $178 and $188,
respectively.
Note 5. Acquisition of Containers
During the three-month period ended March 31, 1999, the Partnership
purchased containers with a cost of $1,987. The Partnership did not
purchase containers during the three-month period ended March 31, 1998.
Note 6. Transactions with Affiliates
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership and 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. Prior
to its liquidation in October 1998, Textainer Acquisition Services Limited
(TAS), a former affiliate of the General Partners, performed services
related to the acquisition of containers outside the United States on
behalf of the Partnership. Effective November 1998, these services are
being performed by TEM. The General Partners manage and control the
affairs of the Partnership.
In accordance with the Partnership Agreement, net earnings or losses and
distributions are generally allocated 1% to the General Partners and 99%
to the Limited Partners. If the allocation of distributions exceeds the
allocation of net earnings and creates a deficit in the General Partners'
aggregate capital account, the Partnership Agreement provides for a
special allocation of gross income equal to the amount of the deficit.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners, or TAS prior to its liquidation, an acquisition fee,
an equipment management fee, an incentive 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 $95 of container acquisition fees as a component
of container costs during the three-month period ended March 31, 1999. The
Partnership did not capitalize any acquisition fees during the three-month
period ended March 31, 1998. The Partnership incurred $107 and $120 of
incentive management fees during the three-month periods ended March 31,
1999 and 1998, respectively. No equipment liquidation fees were incurred
during these periods.
The Partnership's container fleet 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
leasing operations; such cash is included in due from affiliates, net at
March 31, 1999 and December 31, 1998.
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. During the
three-month periods ended March 31, 1999, these fees totaled $270 and
$297, respectively. The Partnership's container fleet is leased by TEM to
third party lessees on operating master leases, spot leases, term leases
and direct finance 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. General and
administrative costs allocated to the Partnership for the three-month
periods ended March 31, 1999 and 1998 were as follows:
1999 1998
---- ----
Salaries $135 $147
Other 119 158
--- ---
Total general and
administrative costs $254 $305
=== ===
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the 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. The General
Partners allocated the following general and administrative costs to the
Partnership for the three-month periods ended March 31, 1999 and 1998:
1999 1998
---- ----
TEM $227 $278
TFS 27 27
--- ---
Total general and
administrative costs $254 $305
=== ===
The General Partners or TAS, through October 1998, 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. The
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 and TAS, prior to its liquidation, are
entitled to an acquisition fee for any containers resold to the
Partnership.
At March 31, 1999 and December 31, 1998, due from affiliates, net is
comprised of:
1999 1998
---- ----
Due from affiliates:
Due from TEM................. $ 749 $ 1,087
---- -----
Due to affiliates:
Due to TFS................... 44 37
Due to TCC................... 9 8
Due to TL.................... 1 1
---- -----
54 46
---- -----
Due from affiliates, net $ 695 $ 1,041
==== =====
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 remittance
of expenses and fees described above and in the accrual and remittance
of net rental revenues and sales proceeds from TEM.
Note 7. Rentals Under Long-Term Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at March 31, 1999. 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:
2000............................................. $580
2001............................................. 9
2002............................................. 1
2003............................................. 1
---
Total minimum future rentals receivable.......... $591
===
Note 8. Accounts Receivable Write-Off
During the three-months 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 9. Container Rental Equipment Write-Down
New container prices have been declining since 1995, and the cost of
purchasing new containers at year-end 1998 and the first quarter of 1999,
was significantly less than the cost of containers purchased in the last
several years. The Partnership evaluated the recoverability of the
recorded amount of container rental equipment at March 31, 1999 and
December 31, 1998, and determined that a reduction to the carrying value
of the containers held for continued use was not required, but that a
write-down in value of certain containers identified for sale was
required. During 1998 and the three-month period ended March 31, 1999, the
Partnership wrote-down the value of these containers to their estimated
fair value, which was based on recent sales.
At December 31, 1998 the Partnership recorded additional depreciation
expense of $349 to write down the value of 930 containers identified for
sale in low demand locations. During the three-month period ended March
31, 1999, the Partnership sold 375 of these previously written down
containers for a loss of $110 and recorded an additional depreciation
expense of $175 to write down the value of 556 additional containers
subsequently identified for sale in these locations. The Partnership
incurred losses on the sale of containers previously written down as the
actual sales prices received during 1999 were lower than the estimates
used for the write-down recorded in 1998, due to unexpected decline in
container sales prices.
If more containers in these or other locations are subsequently
identified as available for sale, the Partnership may incur additional
write-downs and/or may incur losses on the sale of these containers.
Note 10. Redemptions
The following redemption offerings were consummated by the Partnership
during the three-month period ended March 31, 1999:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
<S> <C> <C> <C>
Inception through December 31, 1998 96,140 $14.05 $ 1,350
Quarter ended:
March 31, 1999............... 16,926 $ 9.27 157
------- -----
Partnership to date................ 113,066 $13.33 $ 1,507
======= =====
</TABLE>
There were no redemptions during the three-month period ended March 31,
1998. The redemption price is fixed by formula.
Note 11. Readiness for Year 2000
Many computer systems may experience difficulty processing dates beyond
the year 1999; as a consequence, some computer hardware and software at
many companies will need to be modified or replaced prior to the year 2000
in order to remain functional. The Partnership relies on the financial and
operating systems provided by the General Partners; these systems include
both information technology systems as well as non-information technology
systems. There can be no assurance that issues related to the Year 2000
will not have a material impact on the financial condition, results of
operations or cash flows 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, 1999 and 1998. 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,
1999, the Partnership redeemed 16,926 units for a total dollar amount of $157.
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, 1999, the Partnership declared
cash distributions to limited partners pertaining to the period from December
1998 through February 1999, in the amount of $2,534. These distributions
represent an annualized return of 8.25% on each unit. On a cash basis, all of
these distributions were from operations. On a GAAP basis, all of these
distributions were a return of capital.
At March 31, 1999, the Partnership had no commitments to purchase containers.
Net cash provided by operating activities for the three-month periods ending
March 31, 1999 and 1998, was $2,612 and $3,376, respectively. The decrease of
$764 was primarily attributable to the decrease in net earnings, adjusted for
non-cash transactions and fluctuations in accounts receivable, excluding
write-offs, offset by fluctuations in due from affiliates, net. Net earnings,
adjusted for non-cash transactions decreased primarily due to the decrease in
rental income, which is discussed more fully in "Results of Operations". The
decrease in accounts receivable, excluding write-off, of $340 for the
three-month period ended March 31, 1999 was primarily due to the decline in
rental income. For the three-month period ended March 31, 1998, accounts
receivable, excluding write-off deceased $645 primarily due to a decrease in the
average collection period of accounts receivable. The fluctuation in due from
affiliates, net resulted from timing differences in the payment of expenses and
fees and the remittance of net rental revenues.
For the three-month periods ending March 31, 1999 and 1998, net cash provided by
investing activities (the purchase and sale of containers) was comparable at
$373 and $372, respectively. Proceeds from the sale of containers increased due
to timing differences in the remittance of sales proceeds and an increase in the
number of containers sold, partially offset by a lower average sales price per
container. The increase in proceeds from container sales was offset by an
increase in container purchases. The increase in container sales in 1999 was
primarily due to the Partnership having sold containers located in low demand
locations as discussed below in "Results of Operations". Until market conditions
improve, the Partnership plans to continue to sell these containers and proceeds
from container sales will fluctuate based on the number of containers sold and
the actual price received on the sale of these containers.
Consistent with its investment objectives, the Partnership intends to continue
to reinvest available cash from operations and all or a significant amount of
the proceeds from container sales in additional containers. However, the number
of additional containers purchased may not equal the number of containers sold
as new container prices are likely to be greater than proceeds from container
sales. Current market conditions are expected to continue to have an adverse
effect on the amount of cash provided by operations that is available for
additional container purchases, which has resulted in lower than anticipated
reinvestment in containers. Additionally, market conditions have also had an
adverse effect on the average amount of sales proceeds recently realized from
container sales. Market conditions are discussed more fully under "Results of
Operations".
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, 1999 and 1998, 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:
1999 1998
---- ----
Beginning container fleet............... 29,237 31,342
Ending container fleet.................. 29,216 30,957
Average container fleet................. 29,227 31,150
The decline in the average container fleet of 6% from the three-month period
ended March 31, 1998 to the three-month period ended March 31, 1999 was due to
the Partnership having sold more containers than it purchased since March 31,
1998. Although some of the sales proceeds were used to purchase additional
containers, fewer containers were bought than sold, resulting in a net decrease
in the size of the container fleet. The Partnership plans to use the remaining
sales proceeds for future container purchases. As noted above, when containers
are sold in the future, sales proceeds are not likely to be sufficient to
replace all of the containers sold. This trend, which is expected to continue,
has contributed to a slower rate of reinvestment than had been expected by the
General Partners. Other factors related to this trend are discussed above in
"Liquidity and Capital Resources."
Rental income and direct container expenses are also affected by the average
utilization of the container fleet, which was 70% and 80% during the three
months ended March 31, 1999 and 1998, respectively. This decline in utilization,
caused by lower demand, had a significant adverse effect on rental income as
discussed below. 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, 1999 and 1998.
The Partnership's income from operations for the three-month periods ending
March 31, 1999 and 1998 was $218 and $1,431, respectively, on rental income of
$3,866 and $4,845, respectively. The decrease in rental income of $979, or 20%,
from the three-month period ended March 31, 1998 to the comparable period in
1999 was attributable to decreases in container rental income and other rental
income, which is discussed below. Income from container rentals, the major
component of total revenue, decreased $840, or 20%, due to the decreases in the
average on-hire utilization of 13%, average container fleet of 6% and average
rental rates of 3%, offset by the decrease in leasing incentives of 20%.
However, the decline in utilization, which is discussed below, had the most
significant adverse effect on rental income.
The decline in rental rates from the three-month period ended March 31, 1998 to
the equivalent period in 1999 was primarily due to historically low new
container prices and lower demand for leased containers. The lower demand was
also principally responsible for the decline in utilization from the three-month
period ended March 31, 1998 to the equivalent period in 1999. Demand decreased
primarily due to the growth of the trade imbalance with Asia, as the weakening
of many Asian currencies in 1998 resulted in significant increases in exports
from Asia to North America and Europe and corresponding decreases in imports
into Asia from North America and Europe. This trade imbalance has created a
strong demand for containers in Asia and a weak demand for containers in North
America and Europe. While this imbalance resulted in a decline in leasing
incentives, it also contributed to further declines in average utilization and
rental rates for the Partnership during 1998 and 1999. This imbalance has also
resulted in an unusually high build-up of containers in lower demand locations
during 1998 and the first quarter of 1999.
In an effort to improve utilization and to alleviate the container build-up, the
General Partners have repositioned newer containers to higher demand locations.
The General Partners plan to continue this repositioning effort despite the
continuing decline in utilization in 1999, as they believe that the decline in
the Partnership's utilization during the first quarter of 1999 would have been
even greater had containers not been repositioned. The Partnership incurred
increased direct container expenses in 1998 as a result of repositioning
containers from these lower demand locations and anticipates incurring
additional direct container costs in 1999 as it continues its repositioning
efforts. The Partnership has also sold and plans to continue to sell certain
containers located in lower demand locations. The decision to sell these
containers was based on the current expectation that the economic benefit of
selling these containers and using the related sales proceeds to purchase new
containers in high demand locations was greater than the economic benefit of
continuing to own these containers. The majority of the containers sold were
older containers as the expected economic benefit of continuing to own these
containers was significantly less than that of newer containers primarily due to
their shorter remaining marine life and the lower demand for leased containers
due to the shipping lines' preference for leasing newer containers.
Because of this decision, during 1998, the Partnership wrote down the value of
these specifically-identified containers to their estimated fair value, which
was based on recent sales prices. However, as the actual sales prices received
on these containers during 1999 were lower than the estimates used for the
write-down recorded in 1998, due to an unexpected decline in container sales
prices, the Partnership incurred losses on the sale of these containers.
The Partnership recorded an additional write-down during 1999 on certain
containers which were identified as meeting the same criteria for sale. Until
market conditions improve, the Partnership may incur further write-downs and/or
losses on the sale of such containers. Should the decline in economic value of
continuing to own such containers turn out to be permanent, the Partnership may
be required to increase its depreciation rate for container rental equipment.
For the near term, the General Partners do not foresee material changes in
existing market conditions and caution that both utilization and lease rates
could further decline, adversely affecting the Partnership's operating 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 other rental income consists of other lease-related items,
primarily income from charges to lessees for dropping off containers in surplus
locations, less credits granted to lessees for leasing containers from surplus
locations (location income), income from charges to lessees for handling and
returning containers (handling income) and income from charges to lessees for a
Damage Protection Plan (DPP). For the three-month period ended March 31, 1999,
the total of these other rental income items was $437, a decrease of $139 from
the equivalent period in 1998. Other income decreased primarily due to decreases
in location and handling income of $85 and $50, respectively. Location income
decreased primarily due to a decrease in charges to lessees for dropping off
containers in certain locations, and due to an increase in credits given to
lessees for picking up containers from certain locations. Handling income
decreased primarily due to decreases in container movement and in the average
handling price charged per container during the three-month period ended March
31, 1999 compared to the equivalent period in 1998.
Direct container expenses remained comparable from the three-month period ending
March 31, 1998 to the equivalent period in 1999, primarily due to the increase
in storage expense of $146, partially offset by decreases in handling, insurance
and repositioning expenses of $35, $27 and $24, respectively. Storage expense
increased due to the decrease in average utilization noted above and due to an
increase in the average storage cost per container. Handling expense decreased
primarily due to the decrease in container movement and due to the decrease in
the average handling cost per container. Insurance expense decreased due to a
reduction in insurance premiums. Repositioning expense decreased primarily due
to a decrease in the number of containers repositioned during the three-month
period ended March 31, 1999 compared to the equivalent period in 1998.
Repositioning expense has decreased, despite continued efforts to reposition
containers to higher demand locations, due to the timing of repositioning moves
and the location of the Partnership's containers.
Bad debt expense increased from a benefit of $99 for the three-month period
ended March 31, 1998 to an expense of $173 for the comparable period in 1999.
The effect of insurance proceeds received during the three-month period ended
March 31, 1998 relating to certain receivables against which reserves had been
recorded in 1994 and 1995 as well as the resolution of payment issues with one
lessee during 1998 resulted in the increase in bad debt expense between the
periods.
Depreciation expense decreased $119, or 7%, from the three-month period ended
March 31, 1998 to the comparable period in 1999 primarily due to the decrease in
fleet size.
New container prices have been declining since 1995, and the cost of purchasing
new containers at year-end 1998 and the first quarter of 1999, was significantly
less than the cost of containers purchased in the last several years. The
Partnership evaluated the recoverability of the recorded amount of container
rental equipment at March 31, 1999 and December 31, 1998, and determined that a
reduction to the carrying value of the containers held for continued use was not
required, but that a write-down in value of certain containers identified for
sale was required. During 1998 and the three-month period ended March 31, 1999,
the Partnership wrote-down the value of these containers to their estimated fair
value, which was based on recent sales prices.
At December 31, 1998 the Partnership recorded additional depreciation expense of
$349 to write down the value of 930 containers identified for sale in low demand
locations. During the three-month period ended March 31, 1999, the Partnership
sold 375 of these previously written down containers for a loss of $110 and
recorded an additional depreciation expense of $175 to write down the value of
556 additional containers subsequently identified for sale in these locations.
The Partnership incurred losses on the sale of containers previously written
down as the actual sales prices received during 1999 were lower than the
estimates used for the write-down recorded in 1998, due to the unexpected
decline in container sales prices.
If more containers in these or other locations are subsequently identified as
available for sale, the Partnership may incur additional write-downs and/or may
incur losses on the sale of these containers.
Management fees to affiliates decreased $40, or 10%, from the three-month period
ended March 31, 1998 to the comparable period in 1999, due to decreases in
equipment and incentive management fees. The decrease in equipment management
fees resulted primarily from the decrease in rental revenue, upon which the
management fee is primarily based, and these fees were approximately 7% of
revenue for the three-month period ended March 31, 1999. Equipment management
fees for the three-month period ended March 31, 1998 were only 6% of revenue due
to an adjustment resulting from the write-off of receivables for two lessees.
Incentive management fees, which are based on the Partnership's limited and
general partner distributions and partners' capital, decreased primarily due to
the decrease in the limited partner distribution percentage from 9.25% to 8.25%,
effective July 1, 1998.
General and administrative costs to affiliates decreased $51, or 17%, from the
three-month period ended March 31, 1998 to the comparable period in 1999 due to
a decrease in the allocation of overhead costs from TEM.
Other income (expense) increased from income of $57 for the three-month period
ended March 31, 1998 to an expense of $210 for the comparable period in 1999.
The increase was primarily due to the fluctuation of gain/loss on sale of
containers from a gain of $42 for the three-month period ended March 31, 1998 to
a loss of $257 for the comparable period in 1999. The loss on sale of containers
recorded in 1999 was due to the loss recorded on the sale of containers
previously written down and due to the Partnership having sold containers at a
younger age and a lower average sales price per container. The Partnership
incurred losses on the sale of containers previously written down as the actual
sales prices received during 1999 were lower than the estimates used for the
write-down recorded in 1998, due to the unexpected decline in container sales
prices. The decision to sell containers was based on the current expectation
that the economic benefit of selling these containers and using the related
sales proceeds to purchase new containers in high demand locations was greater
than the economic benefit of continuing to own these containers. If other
containers are identified as available for sale, the Partnership may incur
losses on such sales.
Net earnings per limited partnership unit decreased from $0.24 to $0.00 from the
three-month period ending March 31, 1998 to the same period in 1999, reflecting
the decrease in net earnings allocated to limited partners from $1,458 to $(19),
respectively. The $(19) allocated to limited partners was primarily due to the
special allocation of gross income made in accordance with the Partnership
Agreement.
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 its 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, 1999, 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 the Partnership's business.
Readiness for Year 2000
Many computer systems may experience difficulty processing dates beyond the year
1999; as a consequence, some computer hardware and software at many companies
will need to be modified or replaced prior to the year 2000 in order to remain
functional. The Partnership relies on the financial and operating systems
provided by the General Partners; these systems include both information
technology (IT) systems as well as non-information technology (non-IT) systems.
For IT and non-IT systems developed by independent third parties
(externally-developed) the General Partners have obtained representations from
their vendors and suppliers that these systems are Year 2000 compliant and have
internally tested mission critical systems as operational. The General Partners
have reviewed all internally-developed IT and non-IT systems for Year 2000
issues and identified certain of these systems which required revision. The
General Partners have completed the revision and testing of these identified
systems, and these revised systems are now operational.
The cost of the revisions and testing relating to these systems was incurred by
TEM and a portion of the cost was allocated to the Partnership as part of
general and administrative costs allocated from TEM during 1998. While Year 2000
remediation costs were not specifically identified, it is estimated that total
Year 2000 related expenses included in allocated overhead from TEM were less
than $25. The Partnership and the General Partners do not anticipate incurring
significant additional remediation costs related to the Year 2000 issue in 1999.
There has been no material effect on the Partnership's financial condition and
results of operations as a result of TEM's delay in routine systems projects as
a result of Year 2000 remediation.
As noted above, Year 2000 compliance testing was undertaken by the General
Partners on both externally- and internally-developed systems. Standard
transactions were processed under simulated operating conditions for dates
crossing over January 1, 2000 as well as for other critical dates such as
February 29, 2000. In the standard business scenarios tested, the identified
systems appeared to function correctly. Under nonstandard conditions or
unforeseen scenarios, the results may be different. Therefore, these tests,
regardless of how carefully they were conducted, cannot guarantee that the
General Partners' systems will function without error in the Year 2000 and
beyond. If these systems are not operational in the Year 2000, the General
Partners have determined that they can operate manually for approximately two to
three months while correcting the system problems before experiencing material
adverse effects on the Partnership's and the General Partners' business and
results of operations. However, shifting portions of the daily operations to
manual processes may result in time delays and increased processing costs.
Additionally, the Partnership and General Partners may not be able to provide
lessees with timely and pertinent information, which may negatively affect
customer relations and lead to the potential loss of lessees, even though the
immediate monetary consequences of this would be limited by the standard
Partnership lease agreements between the lessees and the Partnership.
The Partnership and the General Partners are also continuing their assessment of
Year 2000 issues with third parties, comprised of lessees, manufacturers,
depots, and other vendors and suppliers, with whom the Partnership and the
General Partners have a material business relationship (Third Parties).
Currently, the Partnership and the General Partners believe that if a
significant portion of its lessees is non-compliant for a substantial length of
time, the Partnership's operations and financial condition would be materially
adversely affected. Non-compliance by other Third Parties is not expected to
have a material effect on the Partnership's results of operations and financial
condition. The General Partners have sent letters to lessees and other Third
Parties requesting representations on their Year 2000 readiness. The General
Partners have received responses to 83% of the letters sent with all but seven
respondents representing that they are or will be Year 2000 compliant.
Non-compliance by these seven respondents is not expected to have a material
adverse effect on the Partnership's operations or financial condition. The
General Partners are continuing to follow up with non-respondents and will
continue to identify additional Third Parties whose Year 2000 readiness should
be assessed. As this assessment has not been completed, the General Partners
have not yet assumed that a lack of response means that any non-responding Third
Parties will not be Year 2000 compliant.
Nevertheless, the Partnership and the General Partners believe that they are
likely to encounter Year 2000 problems with certain Third Parties, particularly
those with significant operations within countries that are not actively
promoting correction of Year 2000 issues. Possible consequences of Year 2000
non-compliance among Third Parties include, but are not limited to, (i) TEM's
inability to provide service to certain areas of the world, (ii) delays in
container movement, (iii) payment and collection difficulties, and (iv)
invoicing errors due to late reporting of transactions. These types of problems
could result in additional operating costs and loss of lessee business. As
discussed above, the General Partners are prepared to shift portions of their
daily operations to manual processes in the event of Third Party non-compliance.
With respect to manufacturers, vendors and other suppliers, the General Partners
would also attempt to find alternate sources for goods and services. With
respect to depots and agents who handle, inspect or repair containers, if the
majority of the computer systems and networks of TEM are operational, the
General Partners believe that they will be able to compensate manually for these
Third Parties' failures (e.g., one field office performing data entry for
another, communication with depots conducted without computers), by using
temporary personnel at additional cost. Although costs will be incurred to pay
for the temporary personnel, the Partnership and the General Partners do not
expect these costs to be material to the Partnership. With respect to lessees'
non-compliance, the General Partners would compensate for communications
failures manually. If a lessee's noncompliance is broad enough to disrupt
significantly the operations of its shipping business, the resulting loss of
revenue could result in the lessee renting fewer containers. The Partnership and
the General Partners are unable to estimate the financial impact of these
problems, but to the extent that lessees' problems result in weakening demand
for containers, the Partnership's results of operations would likely be
adversely affected. If Year 2000 problems result in delays in collections,
either because of the additional time required to communicate with lessees or
because of lessees' loss of revenues, the Partnership's cash flow could be
affected and distributions to general and limited partners could be reduced. The
Partnership and the General Partners believe that these risks are inherent in
the industry and are not specific to the Partnership or General Partners.
Forward Looking Statements and Other Risk Factors Relating to the Year 2000
The foregoing analysis of Year 2000 issues includes forward-looking statements
and predictions about possible or future events, results of operations and
financial condition. As such, this analysis may prove to be inaccurate, because
of the assumptions made by the Partnership and the General Partners or the
actual development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct. Some of the risks relating to Year 2000
compliance are described above. In addition, in analyzing Year 2000 issues, the
Partnership and the General Partners have assumed that the infrastructure of the
United States and most other countries, including ports and customs, remains
intact. If the infrastructure of one or more countries were to fail, the
resulting business disruption would likely have an adverse effect on the
Partnership and the General Partners. The Partnership and General Partners are
unable to determine a reasonably likely worst case scenario in the event of an
infrastructure failure or failures.
Various other risks and uncertainties could also affect the Partnership and
could affect the Year 2000 analysis, causing the effect on the Partnership to be
more severe than discussed above. These risks and uncertainties include, but are
not limited to, the following. The Partnerships' and the General Partners' Year
2000 compliance testing cannot guarantee that all computer systems will function
without error beyond the Year 2000. Tests were only conducted of normal business
scenarios, and no independent verification or testing was used. Risks also exist
with respect to Year 2000 compliance by Third Parties, such as the risk that an
external party, who may have no relationship to the Partnership or General
Partners, but who has a significant relationship with one or more Third Parties,
may have a system failure that adversely affects the Partnership's ability to
conduct its business. While the Partnership and the General Partners are
attempting to identify such external parties, no assurance can be given that
they will be able to do so. Furthermore, Third Parties with direct relationships
with the Partnership, whose systems have been identified as likely to be Year
2000 compliant, may suffer a breakdown due to unforeseen circumstances. It is
also possible that the information collected by the General Partners from these
Third Parties regarding their compliance with Year 2000 issues may be incorrect.
Finally, it should be noted that the foregoing discussion of Year 2000 issues
assumes that to the extent the General Partners' systems fail, either because of
unforeseen complications or because of Third Parties' failure, switching to
manual operations will allow the Partnership to continue to conduct its
business. While the Partnership and the General Partners believe this assumption
to be reasonable, if it is incorrect, the Partnership's results of operations
would likely be adversely affected.
<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, 1999
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, 1999
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive May 14, 1999
John A. Maccarone 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, 1999
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, 1999
________________________ (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/John A. Maccarone President (Principal Executive May 14, 1999
________________________ Officer)
John A. Maccarone
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1999 1st Quarter 10Q
</LEGEND>
<CIK> 0000866888
<NAME> Textainer Equipment Income Fund III
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,723
<SECURITIES> 0
<RECEIVABLES> 5,014
<ALLOWANCES> 601
<INVENTORY> 0
<CURRENT-ASSETS> 17
<PP&E> 105,577
<DEPRECIATION> 40,703
<TOTAL-ASSETS> 73,027
<CURRENT-LIABILITIES> 2,571
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 70,456
<TOTAL-LIABILITY-AND-EQUITY> 73,027
<SALES> 0
<TOTAL-REVENUES> 3,866
<CGS> 0
<TOTAL-COSTS> 3,648
<OTHER-EXPENSES> 210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
