UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2006
or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                  to                 

Commission file number- 001-32638

TAL International Group, Inc.

(Exact name of registrant as specified in the charter)


Delaware 20-1796526
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification Number)
100 Manhattanville Road,
Purchase, New York		 10577-2135
(Address of principal executive office) (Zip Code)

(914) 251-9000

(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 requirement for the past 90 days. Yes [X]    No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [ ]                     Accelerated filer [ ]                     Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes [ ]    No [X]

As of November 3, 2006, there were 33,166,781 shares of the Registrant’s common stock, $.001 par value outstanding.



TAL INTERNATIONAL GROUP, INC.
INDEX


Part I — Financial Information Page No.  
Item 1. Financial Statements (unaudited) 1  
  Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 2  
  Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and September 30, 2005 3  
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005 4  
  Notes to Consolidated Financial Statements 5-13  
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations		 14-27  
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27-28  
Item 4. Controls and Procedures 29  
Part II — Other Information    
Item 1. Legal Proceedings 30  
Item 1A. Risk Factors 30  
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Repurchases of Equity Securities 30  
Item 6. Exhibits 30  
Signature 31  


Table of Contents

CAUTIONARY STATEMENT FOR PURPOSES OF THE ‘‘SAFE HARBOR’’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a ‘‘safe harbor’’ for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words ‘‘may’’, ‘‘might’’, ‘‘should’’, ‘‘estimate’’, ‘‘project’’, ‘‘plan’’, ‘‘anticipate’’, ‘‘expect’’, ‘‘intend’’, ‘‘outlook’’, ‘‘believe’’ and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under ‘‘Risk Factors’’ in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘‘SEC’’), on March 20, 2006, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to the Securities Exchange Act of 1934.

We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our filings with the SEC.

PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

The consolidated financial statements of TAL International Group, Inc. (‘‘TAL’’ or the ‘‘Company,’’) as of September 30, 2006 (unaudited) and December 31, 2005 and for the three and nine months ended September 30, 2006 (unaudited) and September 30, 2005 (unaudited) included herein have been prepared by the Company, without audit, pursuant to U.S. generally accepted accounting principles and the rules and regulations of the SEC. However, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the results for the interim periods. The results of operations for such interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC, on March 20, 2006, from which the accompanying December 31, 2005 Balance Sheet information was derived, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to the Securities Exchange Act of 1934.

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TAL INTERNATIONAL GROUP, INC.

Consolidated Balance Sheets
(Dollars in thousands, except share data)


  September 30,
2006		 December 31,
2005
  (Unaudited)  
Assets:  
 
Cash and cash equivalents (including restricted cash of $13,274 and $0) $ 45,712
$ 27,259
Accounts receivable, net of allowances of $295 and $820 35,724
36,470
Net investment in finance leases 129,163
73,819
Leasing equipment, net of accumulated depreciation and allowances of $188,479 and $124,543 1,099,755
1,036,363
Leasehold improvements and other fixed assets, net of accumulated depreciation and amortization of $1,878 and $1,312 3,109
3,771
Equipment held for sale 17,559
24,844
Goodwill 71,898
71,898
Deferred financing costs 7,150
3,540
Other assets (including fair value of derivative instruments) 22,484
26,304
Total assets $ 1,432,554
$ 1,304,268
Liabilities and stockholders' equity:  
 
Accounts payable $ 24,442
$ 12,256
Accrued expenses 40,207
30,063
Income taxes payable 320
116
Deferred income tax liability 26,733
9,239
Debt:  
 
Asset securitization facility —
710,000
Asset backed securities (ABS):  
 
Term notes 651,667
—
Warehouse facility 106,500
—
Revolving credit facilities 131,500
148,000
Finance lease facility 12,500
—
Other debt 11,798
—
Capital lease obligations 24,369
14,627
Total liabilities 1,030,036
924,301
Stockholders' equity:  
 
Preferred stock, $.001 par value, 500,000 shares authorized, none issued —
—
Common stock, $.001 par value, 100,000,000 shares authorized, 33,303,031 and 32,882,208 shares issued, respectively 33
33
Treasury stock, at cost, 136,250 shares and 0 shares, respectively (2,862
)
 —
Additional paid-in capital 394,434
394,389
Accumulated earnings (deficit) 6,901
(13,737
)
Accumulated other comprehensive income (loss) 4,012
(718
)
Total stockholders' equity 402,518
379,967
Total liabilities and stockholders' equity $ 1,432,554
$ 1,304,268

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

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TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Operations
(Dollars and shares in thousands, except earnings per share)


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
  (Unaudited) (Unaudited)
Revenues:  
 
 
 
Leasing revenues, including income recognized on finance leases of $3,399, $1,934, $8,516 and $3,356, respectively $ 67,827
$ 71,001
$ 201,523
$ 215,084
Equipment trading revenue 6,897
7,774
17,673
17,173
Management fee income 1,538
1,566
4,687
4,978
Other revenues 413
738
1,453
1,909
Total revenues 76,675
81,079
225,336
239,144
Expenses:  
 
 
 
Equipment trading expenses 5,606
6,026
14,545
13,257
Direct operating expenses 6,311
6,410
19,734
20,707
Administrative expenses 9,350
9,411
28,009
28,362
Depreciation and amortization 26,590
29,418
77,782
88,076
(Reversal) provision for doubtful accounts (58
)
 528
(500
)
 567
Net (gain) on sale of leasing equipment (1,883
)
 (1,178
)
 (2,859
)
 (8,133
)
Write-off of deferred financing costs —
24,313
2,367
24,313
Interest and debt expense 11,686
21,239
35,266
63,849
Unrealized loss (gain) on interest rate swaps 12,174
(7,589
)
 8,584
(8,975
)
Management fees —
1,346
—
4,598
Total expenses 69,776
89,924
182,928
226,621
Income (loss) before income taxes 6,899
(8,845
)
 42,408
12,523
Income tax expense (benefit) 2,449
(3,090
)
 15,133
4,577
Net income (loss) 4,450
(5,755
)
 27,275
7,946
Preferred stock dividends —
(6,568
)
 —
(18,727
)
Net income (loss) applicable to common stockholders $ 4,450
$ (12,323
)
 $ 27,275
$ (10,781
)
Net income (loss) per common share — Basic $ 0.13
$ (1.21
)
 $ 0.83
$ (1.06
)
Net income (loss) per common share — Diluted $ 0.13
$ (1.21
)
 $ 0.82
$ (1.06
)
Weighted average number of common shares outstanding — Basic 33,001
10,204
32,927
10,186
Weighted average number of common shares outstanding — Diluted 33,421
10,204
33,450
10,186
Cash dividends paid per common share $ 0.20
—
$ 0.20
—

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

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TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Cash Flows
(Dollars in thousands)


  Nine months ended
September 30,
  2006 2005
  (Unaudited)
Cash flows from operating activities:  
 
Net income $ 27,275
$ 7,946
Adjustments to reconcile net income to net cash provided by operating activities:  
 
Depreciation and amortization 77,782
88,076
Write-off of deferred financing costs 2,367
24,313
Amortization of deferred financing costs 556
3,918
Net (gain) on sale of leasing equipment (2,859
)
 (8,133
)
Unrealized loss (gain) on interest rate swaps 8,584
(8,975
)
Deferred income taxes 17,494
4,469
Stock compensation charge 32
490
Changes in operating assets and liabilities 23,191
21,083
Net cash provided by operating activities 154,422
133,187
Cash flows from investing activities:  
 
Purchases of leasing equipment (189,794
)
 (132,235
)
Investment in finance leases (39,895
)
 (42,110
)
Proceeds from sale of equipment 42,999
77,213
Cash collections on financing leases, net of unearned income 10,446
4,181
Other 180
—
Net cash used in investing activities (176,064
)
 (92,951
)
Cash flows from financing activities:  
 
Proceeds from issuance of common and preferred stock —
1,206
Purchases of treasury stock (2,862
)
 —
Stock options exercised 13
—
Dividends paid (6,637
)
 —
Initial borrowings under asset securitization facility —
705,000
Net payments under asset securitization facility (710,000
)
 (10,000
)
Net payments under senior secured credit facility —
(710,000
)
Borrowings under long-term credit facilities 799,000
—
Payments of finance fees related to new debt agreements (6,384
)
 —
Payments under long-term credit facilities (44,833
)
 —
Increase in other debt 11,798
—
(Increase) in restricted cash (13,274
)
 —
Net cash provided by (used in) financing activities 26,821
(13,794
)
Net increase in cash and cash equivalents 5,179
26,442
Unrestricted cash and cash equivalents, beginning of period 27,259
16,424
Unrestricted cash and cash equivalents, end of period $ 32,438
$ 42,866
Supplemental non-cash financing activities:  
 
Purchases of leasing equipment financed through capital lease obligations $ 9,742
$ —

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

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TAL INTERNATIONAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of the Business, Basis of Presentation, Recently Issued Accounting Pronouncements

A.    Description of the Business

TAL International Group, Inc. (‘‘TAL,’’ or the ‘‘Company’’) was formed on October 26, 2004 and commenced operations on November 4, 2004. TAL consists of the consolidated accounts of TAL International Container Corporation (‘‘TALI’’), formerly known as Transamerica Leasing Inc., Trans Ocean Ltd. (‘‘TOL’’) and their subsidiaries. Effective October 31, 2004, TAL acquired all of the outstanding capital stock of TALI and TOL for approximately $1.2 billion in cash (‘‘the Acquisition’’).

The Company provides long-term leases, service leases and finance leases of maritime containers and related equipment, along with maritime container management services, through a worldwide network of offices, third party depots and other facilities. The Company operates in both international and domestic markets. The majority of the Company's business is derived from leasing its containers to shipping line customers through a variety of long-term and short-term contractual lease arrangements. The Company also provides container sales and positioning services, enters into management agreements with third party container owners under which the Company manages the leasing and selling of containers on behalf of the third party owners, and leases chassis used for the transportation of containers domestically.

B.    Basis of Presentation

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the accompanying prior period financial statements and notes to conform with the current year’s presentation.

C.    Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (‘‘SFAS No. 157’’) which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (GAAP). Under SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. The new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The Company is required to adopt the provisions of SFAS No. 157 during the first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated results of operations and financial position.

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,

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disclosure, and transition. The Company is required to adopt the provisions of FIN 48 during the first fiscal year beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated results of operations and financial position.

Note 2 — Initial Public Offering

On October 17, 2005, the Company sold 11.5 million shares of common stock at a price of $18.00 per share in an initial public offering (‘‘IPO’’) which generated net proceeds of approximately $189.2 million, after deducting underwriter discounts and other offering expenses. The Company used the net proceeds of this offering, together with additional borrowings under certain of its debt facilities and available cash, to repay the entire outstanding principal and accrued cash interest due on the senior unsecured credit agreement which was approximately $288.0 million on October 17, 2005. On October 21, 2005, the underwriters of TAL’s IPO exercised their over-allotment option in part and purchased 1.0 million additional shares of common stock from certain of TAL’s stockholders. TAL did not receive any proceeds from the sale of the shares pursuant to the over-allotment option.

Note 3 — Capital Stock and Stock-Based Compensation Plans

Preferred Stock Exchange

All 201,205 outstanding shares of the Company’s Series A 12.0% cumulative senior preferred stock were converted into 11,178,035 shares of common stock on October 17, 2005, based on the IPO price of $18.00 per common share. The Company paid the aggregate outstanding accrued dividends on the Series A 12.0% cumulative senior preferred stock of $23.6 million in November 2005.

Treasury Stock

On March 13, 2006, the Company’s Board of Directors authorized a stock buyback program for the repurchase of up to 1.5 million shares of its common stock. The Company repurchased 136,250 shares of its outstanding common stock in the open market during the quarter ended September 30, 2006 at a total cost of approximately $2.9 million.

Dividends Paid

On September 26, 2006, the Company paid a quarterly dividend of $0.20 per share or an aggregate of approximately $6.6 million on its issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on September 12, 2006.

2004 Management Stock Plan

During 2004, the Company adopted the 2004 Management Stock Plan (the ‘‘2004 Plan’’), which provides for the issuance of awards in the form of stock options, stock appreciation rights, restricted stock and certain other instruments to employees, consultants and members of the Company's board of directors. A total of 534,425 shares were reserved for issuance under the 2004 Plan.

During 2004, options to purchase a total of 400,945 shares were granted at an exercise price of $0.01 per share, which the board of directors believed equaled the fair value per share of the Company's common stock.

During 2005, options to purchase an additional 53,667 shares were granted at an exercise price of $0.01 per share.

Upon completion of the IPO on October 17, 2005, all 454,612 options outstanding under the 2004 Plan became fully vested. All options granted during 2004 and 2005 have a contractual life of ten years.

2005 Management Omnibus Incentive Plan

In October 2005, the Company adopted the TAL International Group, Inc. 2005 Management Omnibus Incentive Plan (the ‘‘2005 Plan’’), which provided for the issuance of awards in the form of

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stock options, stock appreciation rights and restricted stock. A total of 2,500,000 shares of common stock were reserved for issuance under the 2005 Plan.

In October 2005, the board of directors approved the grant of options under the 2005 Plan to purchase an aggregate of 612,195 shares of the Company’s common stock upon consummation of the IPO with an exercise price equal to the IPO price of the common stock, a vesting period of four years, and a contractual life of ten years. All 612,195 options granted on the IPO date became fully vested as of December 30, 2005, the date their acceleration was approved by the Compensation Committee of the Company’s board of directors. The purpose of the accelerated vesting was to avoid future compensation expense associated with these options that the Company would otherwise recognize in its consolidated statements of operations upon the adoption of SFAS No.123(R).

During the nine months ended September 30, 2006, options to purchase 21,000 shares were granted at exercise prices equal to fair market values of the stock as of the grant date, with exercise prices ranging from $21.99 to $24.69 per share. These options vest ratably over four years, and have a contractual life of ten years.

Adoption of New Accounting Standard — Share-Based Payment

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. The Company adopted SFAS No.123R using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. Given that the options outstanding upon adoption of SFAS No. 123R were fully vested, the adoption of SFAS No.123R did not have an impact on the financial position, results of operations or cash flows of the Company. However, grants made during the second and third quarters of 2006 and any future grants of share-based compensation did and will result in the recognition of compensation expense.

There was approximately thirteen thousand dollars of compensation cost reflected in administrative expense in the Company’s statement of operations related to the Company’s stock-based compensation plans as a result of 21,000 new options granted during the nine months ended September 30, 2006. Total unrecognized compensation cost of approximately ninety thousand dollars as of September 30, 2006 related to the new options granted during the nine months ended September 30, 2006 will be recognized over the remaining vesting period of approximately 3.75 years.

In addition, approximately twenty thousand dollars of compensation cost is reflected in administrative expense related to a stock option modification related to a previously vested option grant. The Board of Directors approved an amendment to the stock option plans to permit participants whose employment terminates to exercise any unexercised vested options within 90 days of the date their employment terminates.

The Company computed the estimated fair value of each option award on the date of grant using the Black-Scholes option-pricing model. Expected volatility was based on computed volatility from trading activity of TAL stock since its IPO date and volatilities of other similar companies. The Company derives an expected term for its options using an estimated option exercise date based on historical employee termination behavior. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. For options granted during the

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nine months ended September 30, 2006, the following assumptions were utilized in computing the fair value of the options: expected volatility of 28%, expected term of 6.5 years, expected annual dividends of $0.80, and risk-free rates of 4.73% – 4.82%.

The weighted-average fair value of options granted during the nine months ended September 30, 2006 was $4.88. Cash received from employee exercises of stock options for the nine months ended September 30, 2006 was approximately thirteen thousand dollars. TAL did not recognize any tax benefits associated with these exercises.

All previously granted options in 2005 and 2004 were fully vested as of December 30, 2005.

The following table illustrates the effect on net income and earnings per share had the fair value method of accounting been applied consistent with the requirements of SFAS No. 123 to the Company's stock compensation plans for the three and nine months ended September 30, 2005 (in thousands, except earnings per share):


  Three months ended
September 30, 2005		 Nine months ended
September 30, 2005
Net (loss) income applicable to common stockholders:  
 
As reported $ (12,323
)
 $ (10,781
)
Add: Stock-based compensation expense included in reported net income 245
490
Deduct: Stock-based compensation expense determined under the fair value method (245
)
 (490
)
Pro forma net (loss) applicable to common stockholders $ (12,323
)
 $ (10,781
)
(Loss) earnings per common share:  
 
As reported — Basic and Diluted $ (1.21
)
 $ (1.06
)
Pro forma — Basic and Diluted $ (1.21
)
 $ (1.06
)
Weighted average number of common shares outstanding  
 
— Basic 10,204
10,186
— Diluted 10,204
10,186

Stock option activity under the Plans from January 1, 2006 to September 30, 2006 was as follows:


  Options Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Life (Yrs)		 Aggregate
Intrinsic
Value
$ in 000’s
Outstanding January 1, 2006 1,066,807
$ 10.33
9.4
 
Granted 21,000
$ 23.28
 
 
Exercised (420,823
)
 $ 0.03
 
$ 9,521
Canceled (1,500
)
  
 
 
Outstanding September 30, 2006 665,484
$ 17.24
9.0
$ 2,642
Exercisable:  
 
 
 
September 30, 2006 644,484
$ 17.04
9.0
$ 2,687

Note 4 — Debt

Asset Backed Securitization Program

Effective August 1, 2005, the Company entered into an asset securitization facility (the ‘‘Asset Securitization Facility’’) pursuant to which it had contributed certain eligible containers, together with the related leases, to TAL Advantage I LLC, a special purpose entity (the ‘‘SPE’’) which is a wholly-owned consolidated subsidiary of the Company, whose primary business activity is to issue asset backed notes.

On April 12, 2006, the SPE issued two series of floating rate secured notes under its Asset Backed Securitization (‘‘ABS’’) program designed to reduce borrowing costs and enhance financing resources

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for the Company's equipment fleet. Included in the issuance was $680.0 million of floating rate secured term notes (the ‘‘Series 2006-1 Notes’’ or ‘‘ABS Term Notes’’). The proceeds from this issuance, along with available cash, were used to repay the outstanding borrowings under the Asset Securitization Facility. A write-off of $2.4 million was recorded for certain deferred financing fees during the nine months ended September 30, 2006 associated with this re-financing. The Series 2006-1 Notes amortize in equal monthly installments and have a legal final maturity of April 2021. At September 30, 2006, the outstanding balance under the ABS Term Notes was $651.7 million. At September 30, 2006, the applicable interest rate, including the insurance premium, was LIBOR plus 0.48%. The weighted average interest rate on the ABS Term Notes for the period from the refinancing date to September 30, 2006 was 5.7%.

On April 12, 2006, the SPE entered into a floating rate revolving facility (the ‘‘Series 2005-1 Notes’’ or the ‘‘ABS Warehouse Facility’’) under the ABS program. The ABS Warehouse Facility provides up to $300.0 million of borrowing capacity to support future fleet expansion. The Series 2005-1 Notes have a two year revolving period that precedes a term period in which the outstanding balance amortizes in equal monthly installments. The ABS Warehouse Facility has a legal final maturity of April 2023. At September 30, 2006, the outstanding balance under the ABS Warehouse Facility was $106.5 million. At September 30, 2006, the applicable commitment fee was 0.30%, including the insurance premium, and the applicable interest rate was LIBOR plus 0.74%, including the insurance premium. The weighted average interest rate on the ABS Warehouse Facility for the period from the refinancing date to September 30, 2006 was 6.0%.

All debt issued under the ABS program is collateralized by the assets of the SPE consisting of the revenue earning containers used in the Company’s leasing business, restricted cash and certain receivables related to revenue earning equipment. The SPE's borrowing capacity under the ABS program is determined by reference to an advance rate percentage of the net book values, as calculated in the ABS program documents of the SPE's eligible containers, subject to certain adjustments and restricted cash. Under the ABS program, the SPE is required to maintain restricted cash balances on deposit in a designated bank account.

Based on the applicable advance rate of 82%, the SPE’s borrowing capacity was $761.2 million at September 30, 2006. At September 30, 2006, the Company was in compliance with all of the various ABS program covenant requirements.

Revolving Credit Facilities

In connection with the Acquisition, the Company entered into an $875.0 million Senior Secured Credit Facility (‘‘SSCF’’). Upon the closing of the Asset Securitization Facility on August 1, 2005, the Company amended and restated the SSCF to, among other things, reduce the maximum aggregate commitments thereunder to $175.0 million. Effective June 1, 2006, the Company further amended the SSCF to reduce the interest rate margin from LIBOR plus 2.125% to LIBOR plus 1.375% and to reduce the maximum aggregate commitments thereunder to $165.0 million. The final maturity date of this facility is August 1, 2008. The outstanding balance under the facility was $131.5 million at September 30, 2006 and $148.0 million at December 31, 2005.

The Company’s borrowing capacity under this facility is based upon a variable advance rate percentage of the net book values, as calculated in the credit agreement, of the Company’s eligible containers and eligible chassis, subject to certain adjustments. At September 30, 2006, the variable advance rate percentage was 85%, and is subject to annual decreases of 1% for each full calendar year following the IPO until a minimum advance rate of 82% is reached. At September 30, 2006, the unused borrowing capacity was $33.5 million based on aggregate availability of $165.0 million. The Company’s eligible containers for the purposes of determining borrowing capacity under this facility does not include any containers transferred to the SPE. The SSCF is secured by a first priority lien on the Company’s eligible containers, eligible chassis, related leases and lease rights and a pledge of the equity interests of the SPE.

At September 30, 2006, the SSCF applicable commitment fee was 0.375%, and the applicable interest rate was LIBOR plus 1.375%. Interest and fees and a portion of the outstanding principal amount of

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the loans under this facility, together with certain other amounts, are payable on a quarterly basis. The portion of the outstanding principal amount of the loans, if any, payable on any such payment date will be equal to the amount by which the outstanding principal amount of the loans exceeds the Company’s then effective borrowing capacity. The weighted average interest rate under this facility for the nine months ended September 30, 2006 was 6.8%. At September 30, 2006, the Company was compliant with all of the various covenant requirements under this facility.

Effective June 7, 2006, the Company entered into an additional revolving credit facility (the ‘‘Swing Line Facility’’) to support general working capital requirements. The Company’s borrowing capacity under this facility is based upon a 90% advance rate on the net book values of the containers and chassis not included in the SPE. The commitment under the Swing Line Facility is $10.0 million and there was no outstanding balance at September 30, 2006. At September 30, 2006, the applicable commitment fee was 0.375%, and the applicable interest rate was LIBOR plus 2.00%.

Finance Lease Facility

On July 31, 2006, the Company entered into a credit facility to support the growth of its finance lease business (the ‘‘Finance Lease Facility’’). The Company’s borrowing capacity under this facility is based upon a 90% advance rate on the net present values of finance lease receivables on certain containers and chassis not included in the SPE. The Finance Lease Facility has a two year revolving period that precedes a 10 year term in which the outstanding balance, as of the term conversion date, amortizes in monthly installments. The commitment under the Finance Lease Facility is $50.0 million. At September 30, 2006, the applicable commitment fee and interest rate is 0.30% and LIBOR plus 1.00%, respectively. The outstanding balance under the facility was $12.5 million at September 30, 2006. The weighted average interest rate on the Finance Lease Facility for the three months ended September 30, 2006 was 6.3%.

Capital Lease Obligations and Other Debt

The Company has entered into a series of capital leases with various financial institutions to finance the purchase of chassis. The lease agreements are structured as ten year Terminal Rental Adjustment Clause (‘‘TRAC’’) leases with purchase options at the end of the lease terms equal to the TRAC amount as defined in each lease. For income tax purposes, these leases are treated as operating leases. The weighted average interest rate for these leases as of September 30, 2006 is 5.3%. The total lease obligation was $24.4 million as of September 30, 2006, and was $14.6 million as of December 31, 2005.

During June 2006, the Company entered into an interim agreement with a financial institution to provide funding for chassis equipment that will be included in a TRAC lease by the end of 2006. At September 30, 2006, the advances totaled $11.8 million and are classified as ‘‘Other Debt’’ on the consolidated balance sheet. The interest rate at September 30, 2006 was LIBOR plus 1.375% and the weighted average interest rate for the three months ended September 30, 2006 was 6.8%.

Interest Rate Swaps

To hedge the risk associated with fluctuations in interest rates on long-term borrowings, the Company has entered into interest rate swap contracts with various financial institutions. The counterparties to these agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap contracts, the Company’s exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the agreements. The Company does not anticipate any non-performance by the counterparties.

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As of September 30, 2006, the Company had in place interest rate swap contracts to fix the floating interest rates on a portion of the borrowings under its debt facilities as summarized below:


Swap Date Notional Amount Fixed Leg
Interest Rate		 Term
December 14, 2004 $200.0 million 3.82% 7 years — amortizing
December 14, 2004 $200.0 million 3.82% 7 years — amortizing
December 14, 2004 $100.0 million 3.82% 7 years — amortizing
October 28, 2005 $100.0 million 4.82% 6 years — non-amortizing
October 28, 2005 $25.0 million 4.71% 2.75 years — non-amortizing
July 13, 2006 $50.0 million 5.52% 5 years — non-amortizing
July 19, 2006 $33.0 million 5.56% 11 years — amortizing

As of April 12, 2006, in conjunction with the ABS program described above, the Company de-designated all of its existing interest rate swap contracts. Previously, the Company had designated all existing interest rate swap contracts as cash flow hedges, in accordance with Statement of Financial Accounting Standards No.133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. Therefore, during the designation period beginning November 1, 2005 through April 12, 2006, substantially all changes in the fair value of the interest rate swap contracts were reflected in accumulated other comprehensive income (loss). Changes in the fair value of these interest rate swap contracts in periods before and after designation have been recognized in the consolidated statements of operations as unrealized losses or gains on interest rate swaps.

At the time of de-designation, the change in fair value reflected in accumulated other comprehensive income was $7.5 million. This amount is being recognized in income as unrealized (gain) loss on interest rate swaps using the interest method over the remaining life of the contracts. As of September 30, 2006, the unamortized pre-tax balance of the change in fair value reflected in accumulated other comprehensive income was $6.0 million. The amount of other comprehensive income which will be amortized to income over the next 12 months is approximately $2.4 million. Amounts recorded in accumulated other comprehensive income (loss) would be reclassified into earnings upon termination of these interest rate swap contracts and related debt instruments prior to their contractual maturity.

The net fair value of the interest rate swap contracts was $12.4 million at September 30, 2006, and $13.9 million at December 31, 2005. Fair value of $13.4 million as of September 30, 2006 and $13.9 million at December 31, 2005 are included in other assets in the consolidated balance sheets. Fair value of $1.0 million at September 30, 2006 is a liability and is included in accrued expenses in the consolidated balance sheets. In its consolidated statements of operations, the Company recognized a net unrealized loss of $12.2 million for the three months ended September 30, 2006, a net unrealized (gain) of $(7.6) million for the three months ended September 30, 2005, a net unrealized loss of $8.6 million for the nine months ended September 30, 2006, and a net unrealized (gain) of $(9.0) million for the nine months ended September 30, 2005, which predominantly represents the change in fair value of the interest rate swap contracts.

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Note 5 — Earnings (Loss) Per Share

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2006 and 2005 (in thousands, except earnings per share):


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Numerator:  
 
 
 
Net income (loss) applicable to common stockholders for basic and diluted earnings per share $ 4,450
$ (12,323
)
 $ 27,275
$ (10,781
)
Denominator:  
 
 
 
Weighted average shares outstanding for basic earnings (loss) per share 33,001
10,204
32,927
10,186
Dilutive stock options 420
—
523
—
Weighted average shares for diluted earnings (loss) per share 33,421
10,204
33,450
10,186
Earnings (loss) per share:  
 
 
 
Basic $ 0.13
$ (1.21
)
 $ 0.83
$ (1.06
)
Diluted $ 0.13
$ (1.21
)
 $ 0.82
$ (1.06
)

Options for 16,500 shares were considered to be anti-dilutive for the three and nine months ended September 30, 2006 and were therefore not included in the calculation of diluted earnings per share.

Note 6 — Related Party Transactions

The Company recognized $1.3 million for the three months ended September 30, 2005, and $4.6 million for the nine months ended September 30, 2005 of management fees and expenses relating to the management consulting agreements with certain of the Company’s stockholders. The management consulting agreements were terminated as of the effective date of the IPO, October 17, 2005.

Note 7 — Segment and Geographic Information

Industry Segment Information

The Company operates in one industry segment, intermodal equipment leasing.

Geographic Segment Information

The Company's customers use the containers for their global trade utilizing many worldwide trade routes. The following table represents the allocation of domestic (U.S.) and international revenues for the periods indicated based on the customers' primary domicile (in thousands):


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Total revenues:  
 
 
 
Domestic $ 7,754
$ 7,866
$ 22,517
$ 23,474
Asia 36,028
36,790
105,203
106,918
Europe 27,665
31,682
82,774
95,314
Other International 5,228
4,741
14,842
13,438
Total $ 76,675
$ 81,079
$ 225,336
$ 239,144

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As substantially all of the Company's containers are used internationally, where no one container is domiciled in one particular place for a prolonged period of time, all of the Company's containers are considered to be international.

Note 8 — Commitments and Contingencies

At September 30, 2006, commitments for capital expenditures totaled approximately $15.2 million, principally through the remainder of 2006.

Note 9 — Income Taxes

The consolidated income tax expense for the nine month periods ended September 30, 2006 and 2005 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2006 and 2005, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes and the effect of certain permanent differences.

Note 10 — Comprehensive Income

The following table provides a reconciliation of the Company’s net income to comprehensive income (in thousands):


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Net income (loss) $ 4,450
$ (5,755
)
 $ 27,275
$ 7,946
Other comprehensive income (loss):  
 
 
 
Foreign currency translation adjustments 45
(2
)
 180
(45
)
Unrealized (loss) gain on derivative instruments designated as cash flow hedges (net of taxes of $(243), $0, $2,162 and $0, respectively ) (433
)
 —
4,550
—
Total $ 4,062
$ (5,757
)
 $ 32,005
$ 7,901

The balance included in comprehensive income for cumulative translation adjustments as of September 30, 2006 and September 30, 2005 was $130 and $(28), respectively.

Note 11 — Subsequent Events    

Fourth Quarter Dividend

The Company’s Board of Directors approved and declared a $0.25 per share quarterly cash dividend on its issued and outstanding common stock, payable on December 8, 2006 to shareholders of record at the close of business on November 21, 2006.

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ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations of TAL International Group, Inc. and its subsidiaries should be read in conjunction with related consolidated financial data and our annual audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2006. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under ‘‘Risk Factors’’ and ‘‘Forward-Looking Statements’’ in our Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our Company

We are one of the world's largest and oldest lessors of intermodal freight containers and chassis. Intermodal freight containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Chassis are used for the transportation of containers domestically via rail and roads. Because of the handling efficiencies they provide, intermodal freight containers are the primary means by which many goods and materials are shipped internationally.

Our operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of September 30, 2006, our fleet consisted of 645,622 containers and chassis, including 72,257 containers under management for third parties, representing more than one million twenty-foot equivalent units (TEU). We have an extensive global presence, offering leasing services through 20 offices in 12 countries and approximately 190 third party container depot facilities in 41 countries as of September 30, 2006. Our customers are among the world's largest shipping lines.

Our lease products provide numerous operational and financial benefits to our shipping line customers. These benefits include:

•  Operating Flexibility — The timing, location and daily volume of cargo movements for a shipping line are often unpredictable. Leasing containers helps the shipping lines manage this uncertainty and minimize the requirement for large inventory buffers by allowing them to pick-up leased containers on short notice.
•  Fleet Size Flexibility — Container leases allow shipping lines to adjust the size and mix of their fleets as their trade volumes change due to seasonality, market changes or changes in company strategies.
•  Alternative Source of Financing — Container leases provide an additional source of equipment financing to help shipping lines manage the high level of investment required to maintain pace with the rapid growth of the asset-intensive container shipping industry.

We lease three principal types of containers: (1) dry freight containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, (2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, and (3) special containers, which are used for heavy and oversized cargo such as marble slabs, building products and machinery. We also manage our own container disposals, act as the disposal agent for a number of our shipping line customers, and buy and sell used containers through our Trader group. As of September 30, 2006, dry, refrigerated, special containers and Trader represented approximately 86%, 5%, 7% and 1% of our fleet on a unit basis, respectively. Our chassis leasing business, which commenced in the fourth quarter of 2005, represented approximately 1% of our fleet on a unit basis as of September 30, 2006.

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The following tables provide the composition of our equipment fleet as of the dates indicated below (in both units and TEU’s). Certain reclassifications have been made to the accompanying prior period equipment fleet data to conform with the current year’s presentation.


  Equipment Fleet in Units
  September 30, 2006 December 31, 2005 September 30, 2005
  Owned * Managed Total Owned * Managed Total Owned * Managed Total
Dry 499,947
55,864
555,811
464,353
59,180
523,533
470,187
60,055
530,242
Refrigerated 34,300
1,251
35,551
34,006
1,625
35,631
34,322
1,648
35,970
Special 27,577
15,142
42,719
27,389
16,025
43,414
27,443
16,315
43,758
Chassis 6,079
—
6,079
1,210
—
1,210
—
—
—
Subtotal 567,903
72,257
640,160
526,958
76,830
603,788
531,952
78,018
609,970
Trader 5,462
—
5,462
10,123
—
10,123
14,386
—
14,386
Total 573,365
72,257
645,622
537,081
76,830
613,911
546,338
78,018
624,356

  Equipment Fleet in TEU’s
  September 30, 2006 December 31, 2005 September 30, 2005
  Owned * Managed Total Owned * Managed Total Owned * Managed Total
Dry 798,123
95,473
893,596
737,802
100,759
838,561
745,106
102,167
847,273
Refrigerated 61,682
1,898
63,580
60,674
2,394
63,068
61,019
2,435
63,454
Special 43,465
24,994
68,459
42,249
26,179
68,428
42,195
26,594
68,789
Chassis 10,608
—
10,608
2,270
—
2,270
—
—
—
Subtotal 913,878
122,365
1,036,243
842,995
129,332
972,327
848,320
131,196
979,516
Trader 7,698
—
7,698
15,968
—
15,968
22,985
—
22,985
Total 921,576
122,365
1,043,941
858,963
129,332
988,295
871,305
131,196
1,002,501
* Includes units placed on finance lease contracts.

We lease our equipment on a per diem basis to our customers under three types of leases: long-term leases, service leases and finance leases. Long-term leases, typically with terms of three to eight years, provide us with stable cash flow and low transaction costs by requiring customers to maintain specific containers on-hire for the duration of the lease. Service leases command a premium per diem rate in exchange for providing customers with a greater level of operational flexibility by allowing the pick-up and drop-off of containers during the lease term. Finance leases, which are typically structured as full payout leases, provide for a predictable recurring revenue stream with the lowest daily cost to the customer because customers are generally required to retain the container for the duration of its useful life. As of September 30, 2006, approximately 93% of our containers were on-hire to customers, with approximately 58% of our containers on long-term leases, approximately 27% on service leases or long-term leases whose fixed terms have expired but for which the related units remain on-hire and for which we continue to receive rental payments, and approximately 8% on finance leases. In addition, approximately 5% of our containers were available for lease and approximately 2% were available for sale.

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The following table provides a summary of our lease portfolio, based on units in the fleet as of the dates indicated below:


Lease Portfolio September 30,
2006		 December 31,
2005		 September 30,
2005
Long-term lease 58.0
%
 59.0
%
 59.2
%
Service lease 26.8
25.6
26.7
Finance lease 7.7
4.6
4.3
Total leased 92.5
89.2
90.2
Existing units available for lease 3.3
5.1
4.5
New units available for lease 1.8
2.6
2.7
Available for sale 2.4
3.1
2.6
Total portfolio 100.0
%
 100.0
%
 100.0
%

Operating Performance

Our profitability is primarily determined by the extent to which our leasing and other revenues exceed our ownership, operating and administrative expenses. Our profitability is also impacted by the gain or loss that we realize on the sale of our used containers. During the first quarter of 2006, seasonal factors and market conditions placed pressure on our profitability. Our operating profitability improved in the second and third quarters as we were able to benefit from an increase in container prices and an improvement in market conditions.

Our leasing revenue is primarily driven by our owned fleet size, utilization and average rental rates. Our leasing revenue is also impacted by the mix of leases in our portfolio. As of September 30, 2006, our owned fleet included 921,576 TEU, an increase of 7.3% from December 31, 2005. The increase in fleet size relative to the fourth quarter of 2005 was mainly due to the delivery of a large number of containers purchased in the first and second quarters of 2006. These container deliveries proved to be timely since they allowed us to capitalize on the strong leasing demand for dry containers that we experienced early in the second quarter and late in the third quarter. We expect the pace of container deliveries to slow in the fourth quarter since we ordered fewer containers in the third quarter due to price uncertainty and our expectation for reduced dry container demand after the end of the summer peak season.

Our September 30, 2006 owned container fleet size was 5.8% greater than our owned container fleet size as of September 30, 2005. Our fleet size decreased during the fourth quarter of 2005 due to a reduction in our trading equipment resale inventories and a reduction in our investment in new containers due to a temporary surplus of new containers in China.

Our average utilization was 91.0% in the third quarter of 2006, an increase of 1.2% from the second quarter of 2006. Ending utilization increased 1.6% from 90.9% as of June 30, 2006 to 92.5% as of September 30, 2006. We experienced strong demand for dry and special containers in the latter half of the third quarter, and we managed to increase our average utilization while also absorbing a net increase of over 20,000 TEU of containers in our fleet. Demand for refrigerated containers remained weak in the 2006 third quarter and the average utilization of our refrigerated containers decreased during the quarter. While the utilization of our refrigerated containers does not heavily influence our overall utilization, it has a disproportionate impact on our leasing revenue due to the much higher unit cost and lease rates of refrigerated containers.

Our average utilization in the third quarter of 2006 was 1.2% higher than it was in the third quarter of 2005, while our average utilization for the nine months ending September 30, 2006 was 0.9 % lower than our average utilization for the nine months ending September 30, 2005. In 2006, our utilization has increased on a quarterly basis due to the strong leasing demand for dry containers we experienced early in the second quarter and late in the third quarter of this year. During 2005, utilization was very high at the beginning of the year after the exceptional leasing market of 2004, but then decreased throughout the year due to a build-up of an excess inventory of new containers in China during the middle of the year.

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The following table sets forth our average fleet utilization for the periods indicated below:


  September 30,
2006		 September 30,
2005		 September 30,
2006		 September 30,
2005
  3 months 3 months 9 months 9 months
Average Utilization 91.0
%
 89.8
%
 90.0
%
 90.9
%

Average lease rates for our dry container product line in the third quarter decreased by 1.6% from the average level of the second quarter despite the high new container prices that prevailed during the third quarter. The decrease in average dry container leasing rates was primarily caused by several large lease extension transactions completed during the second and third quarters. The profitability of our shipping line customers has come under pressure this year due to a large increase in vessel capacity and declining freight rates, and our customers are actively seeking ways to reduce operating expenses. In several cases, we have responded to our customers’ requests for lease rate reductions by renewing or extending lease agreements in return for lease rate savings, and in 2006 we have completed lease extension transactions that cover more than 10% of the dry containers and nearly 10% of the refrigerated containers in our fleet. While these lease extension transactions have reduced our current revenue, we expect they will have a positive impact on the net present value of our lease portfolio, particularly for our older containers, since they extend the revenue-earning life of the containers. The higher price of new containers has also not been heavily reflected in our average lease rates since most of the containers we supplied to our customers in the third quarter were placed on leases negotiated during the first quarter when container prices and market leasing rates were lower. New container prices began to decrease at the end of the third quarter, although they remain 15% to 20% higher than they were at the beginning of the year.

Average lease rates for refrigerated containers in the third quarter decreased by 4.8% from the average level in the second quarter mainly due to a large lease extension transaction completed at the beginning of the third quarter. Average rental rates for special containers decreased by 1.1% during the third quarter.

During the third quarter of 2006, the percentage of our units on finance leases increased to 7.7% compared to 4.3% as of September 30, 2005. Finance lease revenue increased from $1.9 million to $3.4 million for the three months ended September 30, 2006 as compared to the prior year period. Additionally, finance lease revenue increased from $3.4 million to $8.5 million for the nine months ended September 30, 2006 as compared to the prior year period. However, the increase in the portion of our units on finance leases resulted in a reduction in our overall leasing revenue, since under a finance lease we recognize interest income as revenue, whereas under an operating lease we recognize the entire monthly billing as revenue.

During the third quarter of 2006, we recognized a $(1.9) million (gain) on the sale of our used containers compared to a $(1.1) million (gain) in the second quarter of 2006 and a $(1.2) million (gain) in the third quarter of 2005. The improvement compared to the second quarter of 2006 mainly resulted from higher sales volumes which reduced the number of containers in the assets held for sale category and allowed us to realize unrecognized gains on the units previously held for sale. The portion of our container fleet identified as for sale decreased from 3.3% as of June 30, 2006 to 2.4% as of September 30, 2006. The increase in gain relative to the third quarter of 2005 mainly resulted from higher volume of units sold, and placement of certain existing equipment on finance leases.

Our direct operating expenses decreased by $1.1 million in the third quarter of 2006 from the second quarter of 2006 mainly due to lower positioning and storage costs. Our direct operating expenses for the third quarter of 2006 were also slightly less than our direct operating expenses in the third quarter of 2005.

Our ownership expenses, principally depreciation and interest expense increased by $1.4 million in the third quarter of 2006 from the second quarter, mainly due to the increase in the size of our owned container fleet. However, our ownership expenses were much lower in the third quarter of 2006 than they were for the third quarter of 2005. The decrease in depreciation expense in 2006 resulted from the termination of depreciation charges for containers that reached the end of their accounting useful life at the end of 2005 but remain in our fleet. The significant reduction in interest expense in the third quarter of 2006 compared to the level we experienced in 2005 was due to the benefits of our

17



Table of Contents

securitization as well as the large reduction in the amount of outstanding debt and interest rates that we achieved as a result of our initial public offering in the fourth quarter of last year.

On July 31, 2006, we entered into a credit facility to support the growth of our finance lease business (the ‘‘Finance Lease Facility’’). Our borrowing capacity under this facility is based upon a 90% advance rate on the net present values of finance lease receivables on certain containers and chassis not included in the SPE. The Finance Lease Facility has a two year revolving period that precedes a 10 year term in which the outstanding balance, as of the term conversion date, amortizes in monthly installments.

On September 26, 2006, we paid a quarterly dividend of $0.20 per share or an aggregate of approximately $6.6 million on our issued and outstanding common stock. The dividend was paid to shareholders of record at the close of business on September 12, 2006. In addition, the Company repurchased 136,250 shares of its outstanding common stock in the open market during the quarter ended September 30, 2006 at a total cost of approximately $2.9 million.

Results of Operations

The following table summarizes our results of operations for the three months and nine months ended September 30, 2006 and 2005 in dollars and as a percentage of total revenues:


  Three Months Ended September 30, Nine Months Ended September 30,
  2006 2005 2006 2005
  Dollars Percent Dollars Percent Dollars Percent Dollars Percent
Leasing revenues $ 67,827
88.5
%
 $ 71,001
87.6
%
 $ 201,523
89.4
%
 $ 215,084
89.9
%
Equipment trading revenue 6,897
9.0
7,774
9.6
17,673
7.8
17,173
7.2
Management fee income 1,538
2.0
1,566
1.9
4,687
2.1
4,978
2.1
Other revenues 413
0.5
738
0.9
1,453
0.7
1,909
0.8
Total revenues