<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-19145
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3097644
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 CALIFORNIA STREET, 16TH FLOOR
SAN FRANCISCO, CALIFORNIA 94108
(Address of Principal Executive Offices) (ZIP Code)
(415) 434-0551
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
<PAGE> 2
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
QUARTERLY REPORT ON FORM 10Q FOR THE
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS.
Balance Sheets - June 30, 1996 (unaudited) and December 31, 1995 . . . . . . . 3
Statements of Earnings for the six and three months ended
June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Partners' Capital for the six months ended
June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
2
<PAGE> 3
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
June 30, 1996 and December 31, 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
------- -------
(unaudited)
<S> <C> <C>
ASSETS
Container rental equipment, net of accumulated
depreciation of $20,634 (1995: $19,588) $42,704 42,977
Cash and cash equivalents (note 1) 188 489
Net investment in direct financing leases (note 5) 950 1,141
Accounts receivable, net of allowance for
doubtful accounts of $1,172 (1995: $1,303) 2,824 3,478
Due from affiliates (note 4) 2,399 2,032
Prepaid expenses 9 25
------- -------
$49,074 50,142
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $324 262
Accrued liabilities 175 224
Warranty claim payable (note 9) 919 1,026
Accrued damage protection plan costs (note 2) 296 321
Due to affiliates (note 4) 133 144
Equipment purchases payable 177 400
------- -------
Total liabilities 2,024 2,377
------- -------
Partners' capital:
General partners (90) (90)
Limited partners 47,140 47,855
------- -------
Total partners' capital 47,050 47,765
------- -------
$49,074 50,142
======= =======
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF EARNINGS
For the six and three months ended June 30, 1996 and 1995
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental income $6,006 2,887 6,719 3,331
--------- --------- --------- ---------
Costs and expenses:
Direct container expenses 922 489 978 543
Bad debt (benefit) provision (58) 88 155 99
Depreciation 2,014 1,012 2,122 1,058
Professional fees 16 7 23 15
Management fees to affiliates (note 4) 544 265 597 297
General and administrative costs 369 169 534 278
to affiliates (note 4)
Other general and administrative costs 95 58 91 54
--------- --------- --------- ---------
3,902 2,088 4,500 2,344
--------- --------- --------- ---------
Income from operations 2,104 799 2,219 987
--------- --------- --------- ---------
Other income:
Interest income 31 15 18 10
Gain on sales of equipment 167 70 121 34
--------- --------- --------- ---------
198 85 139 44
--------- --------- --------- ---------
Net earnings $2,302 884 2,358 1,031
========= ========= ========= =========
Allocation of net earnings (note 4):
General partners 32 16 30 15
Limited partners 2,270 868 2,328 1,016
--------- --------- --------- ---------
$2,302 884 2,358 1,031
========= ========= ========= =========
Limited partners' per unit share
of net earnings $0.61 $0.23 $0.62 $0.27
========= ========= ========= =========
Limited partners' per unit share
of distributions $0.80 $0.40 $0.80 $0.40
========= ========= ========= =========
Weighted average number of limited
partnership units outstanding 3,728,623 3,728,623 3,736,131 3,736,131
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
------------------------------------
GENERAL LIMITED TOTAL
------------------------------------
<S> <C> <C> <C>
Balances at January 1, 1995 $(90) 49,458 49,368
Distributions (30) (2,989) (3,019)
Redemptions (note 7) - (52) (52)
Net earnings 30 2,328 2,358
---- ------ ------
Balances at June 30, 1995 $(90) 48,745 48,655
==== ====== ======
Balances at January 1, 1996 $(90) 47,855 47,765
Distributions (32) (2,983) (3,015)
Redemptions (note 7) - (2) (2)
Net earnings 32 2,270 2,302
---- ------ ------
Balance at June 30, 1996 $(90) 47,140 47,050
==== ====== ======
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,302 2,358
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 2,014 2,122
Decrease in allowance for doubtful accounts (131) (105)
Gain on sales of container rental equipment (167) (121)
Proceeds from principal payments on direct
financing leases 214 110
Changes in assets and liabilities:
Decrease in accounts receivable 734 289
Increase in accounts payable and accrued liabilities 13 97
(Decrease) increase in accrued damage protection plan (25) 43
Decrease in warranty claim payable (107) (70)
(Increase) decrease in due from affiliates, net (419) 593
Decrease in prepaid expenses 16 18
------- ------
Net cash provided by operating activities 4,444 5,334
------- ------
Cash flows from investing activities:
Proceeds from sale of container rental equipment 1,081 779
Equipment purchases (2,830) (2,281)
------- ------
Net cash used in investing activities (1,749) (1,502)
------- ------
Cash flows from financing activities:
Redemptions of limited partnership units (2) (52)
Distributions to partners (2,994) (3,029)
------- ------
Net cash used in financing activities (2,996) (3,081)
------- ------
Net (decrease) increase in cash (301) 751
Cash at beginning of period 489 635
------- ------
Cash at end of period $ 188 1,386
======= ======
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS -- CONTINUED
For the six months ended June 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
SUPPLEMENTAL DISCLOSURES:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of equipment purchases,
distributions to partners and proceeds from sale of Equipment which had not
been paid or received by the Partnership as of June 30, 1996 and 1995, and
December 31, 1995 and 1994, 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 six-month periods ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
June 30, Dec. 31, June 30, Dec. 31,
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to (from) affiliates . . . . . . . . . . $ 97 85 (2) 27
Equipment purchases payable . . . . . . . . 177 400 1,493 599
Distributions to partners included in:
Due to affiliates . . . . . . . . . . . . . 84 63 9 18
Accounts payable and accrued liabilities . . 80 80 82 83
Proceeds from sale of Equipment included in:
Due from affiliates . . . . . . . . . . . . 396 404 412 346
Accounts receivable . . . . . . . . . . . . 36 87 39 54
</TABLE>
The following table summarizes the amounts of equipment purchases,
distributions to partners, and proceeds from sale of Equipment recorded by the
Partnership and the amounts paid or received as shown in the Statements of Cash
Flows for the six-month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Equipment purchases recorded . . . . . . . . . . . . . . . . . . . . . . . . $2,619 3,146
Equipment purchases paid . . . . . . . . . . . . . . . . . . . . . . . . . . 2,830 2,281
Distributions to partners declared . . . . . . . . . . . . . . . . . . . . . 3,015 3,019
Distributions to partners paid . . . . . . . . . . . . . . . . . . . . . . . 2,994 3,029
Proceeds from sale of Equipment recorded . . . . . . . . . . . . . . . . . . 1,022 830
Proceeds from sale of Equipment received . . . . . . . . . . . . . . . . . . 1,081 779
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 8
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
NOTE 1. GENERAL
Textainer Equipment Income Fund II (the Partnership) is a California
Limited Partnership formed in 1989. The Partnership owns and leases a
fleet of intermodal marine cargo container equipment (the Equipment) to
international shipping lines.
The accompanying interim comparative financial statements have not been
audited by an independent public accountant. However, all adjustments
(which were only normal and recurring adjustments), which are, in the
opinion of management, necessary to fairly present the financial position
of the Partnership as of June 30, 1996 and December 31, 1995, and the
results of its operations, changes in partners' capital, and cash flows for
the six- and three-month periods ended June 30, 1996 and 1995, have been
made.
The financial information presented herein should be read in conjunction
with the audited financial statements and the accompanying Notes included
in the Partnership's audited financial statements as of December 31, 1995.
For purposes of the Statements of Cash Flows, the Partnership considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Certain reclassifications of prior year amounts have been made in order to
conform with the 1996 financial statement presentation.
NOTE 2. DAMAGE PROTECTION PLAN
The Partnership offers a Damage Protection Plan (the Plan) to lessees of
its Equipment. Under the terms of the Plan, the Partnership earns
additional revenues on a daily basis and, as a result, has agreed to bear
certain repair costs. It is the Partnership's policy to recognize revenue
when earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated repair costs. At June 30, 1996 and December 31,
1995, this reserve was equal to $296 and $321, respectively.
NOTE 3. ACQUISITION OF EQUIPMENT
During the six-month periods ended June 30, 1996 and 1995, the Partnership
purchased Equipment with a cost of $2,619 and $3,146, respectively.
NOTE 4. TRANSACTIONS WITH AFFILIATES
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership. TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM)
and Textainer Limited (TL) are associate general partners of the
Partnership. The managing general partner and the associate general
partners are collectively referred to as the General Partners and are
commonly owned by Textainer Group Holdings Limited (TGH). The General
Partners also act in this capacity for other limited partnerships.
Textainer Acquisition Services Limited (TAS) is an affiliate of the General
Partners which performs services relative to the acquisition of Equipment
outside the United States on behalf of the Partnership. TCC Securities
Corporation (TSC), a licensed broker and dealer in securities and an
affiliate of the General Partners, was the managing sales agent for the
offering of Units for sale.
8
<PAGE> 9
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
In accordance with the Partnership Agreement, net earnings or losses,
syndication and offering costs and partnership distributions are allocated
1% to the General Partners and 99% to the limited partners with the
exception of gross income, as defined in the Partnership agreement. Gross
income is allocated to the General Partners to the extent that their
partners' capital accounts' deficits exceed the portion of syndication and
offering costs allocated to them. On termination of the Partnership, the
General Partners shall be allocated gross income equal to their allocations
of syndication and offering costs.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners or TAS an incentive management fee, an acquisition
fee, an equipment management fee and an equipment liquidation fee. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $135 and $107 of equipment acquisition fees as part of
Equipment costs for the six-month periods ended June 30, 1996 and 1995,
respectively. The Partnership incurred $125, $63, $126, and $63 of
incentive management fees for six- and three-month periods ended June 30,
1996 and 1995, respectively. No equipment liquidation fees were incurred
during either period.
The Equipment is managed by TEM. Prior to the sale of the Partnership's
storage fleet during 1995, TEM had entered into an agreement with its
wholly-owned subsidiary Textainer Storage Services (TSS) to manage storage
containers owned by the Partnership and other owners (note 8). In its role
as manager, TEM has authority to acquire, hold, manage, lease, sell and
dispose of the Equipment. Additionally, TEM holds, for payment of direct
operating expenses, a reserve of cash that has been collected from
Equipment leasing operations; such cash is included in the amount due from
affiliates at June 30, 1996 and December 31,1995.
Subject to certain reductions, TEM receives a monthly Equipment management
fee equal to 7% of gross lease revenues attributable to operating leases
and 2% of gross lease revenues attributable to full payout net leases.
Such fees are either retained by TEM or, prior to the sale of the storage
fleet, such fees allocable to TSS, if any, were passed through to TSS by
TEM for services rendered. For the six- and three-month periods ended June
30, 1996, these fees totaled $419 and $202, respectively, and $471 and $234
for the comparable periods ended June 30, 1995. The Equipment is or was
leased by TEM and TSS to third party lessees on operating master leases,
spot leases and term leases. The majority of the Equipment is leased under
operating leases with limited terms and no purchase option.
Certain indirect general and administrative costs incurred in performing
administrative services necessary to the operation of the Partnership are
borne by TEM and, prior to the sale of the storage fleet, TSS. Such costs
are allocated to the Partnership based on the ratio of the Partnership's
interest in managed Equipment to the total equipment managed by TEM and
TSS. Indirect general and administrative costs allocated to the
Partnership were $324 and $161 for the six- and three-month periods ended
June 30, 1996, respectively, and $458 and $242 for the comparable periods
ended June 30, 1995.
TFS, in its capacity as managing general partner, also incurred general and
administrative costs of $45 and $8 for the six- and three-month periods
ended June 30, 1996, respectively, and $76 and $36 for the comparable
periods ended June 30, 1995, which were reimbursed by the Partnership.
9
<PAGE> 10
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The General Partners or TAS may acquire Equipment in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such Equipment for the Partnership. The Equipment may then
be resold to the Partnership on an all-cash basis at a price equal to the
actual cost, as defined in the Partnership Agreement. In addition, the
General Partners, or TAS, are entitled to an acquisition fee for any
Equipment resold to the Partnership.
At June 30, 1996 and December 31, 1995, due from and to affiliates are
comprised of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Due from affiliates:
Due from TEM and TSS . . . . . . . . $ 2,399 2,032
======= ======
Due to affiliates:
Due to TFS . . . . . . . . . . . . . $ 28 47
Due to TGH . . . . . . . . . . . . . 1 2
Due to TAS . . . . . . . . . . . . . 84 77
Due to TCC . . . . . . . . . . . . . 8 10
Due to TL . . . . . . . . . . . . . 12 8
------- ------
$ 133 144
======= ======
</TABLE>
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual and payment of expenses and
fees described above or in the accrual and collection of net rental
revenues from TEM and TSS.
It is the policy of the Partnership and the General Partners to charge
interest on intercompany balances which are outstanding for more than one
month to the extent such balances relate to loans for Equipment purchases.
Interest is charged to the Partnership at the Prime Rate plus certain
margins depending on TGH's leverage ratio. There was no interest charged
on intercompany balances for the six- and three-month periods ended June
30, 1996 and 1995.
NOTE 5. DIRECT FINANCING LEASES
The components of the net investment in direct financing leases as of June
30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Future minimum lease payments receivable . . $ 1,334 1,620
Residual value . . . . . . . . . . . . . . . 4 4
Less: unearned income . . . . . . . . . . . (388) (483)
------- -----
Net investment in direct financing leases . $ 950 1,141
======= =====
</TABLE>
10
<PAGE> 11
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following is a schedule by year of minimum lease payments receivable
under the fourteen direct financing leases as of June 30, 1996:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . $ 571
1998 . . . . . . . . . . . . . . . . . . . . . . 282
1999 . . . . . . . . . . . . . . . . . . . . . . 244
2000 . . . . . . . . . . . . . . . . . . . . . . 219
2001 . . . . . . . . . . . . . . . . . . . . . . 18
-------
Total minimum lease payments receivable . . . . . $ 1,334
=======
</TABLE>
Rental income for the six-month periods ended June 30, 1996 and 1995
includes $129 and $62, respectively, of income from direct financing
leases.
NOTE 6. RENTALS UNDER OPERATING LEASES
The following is a schedule by year of minimum future rentals receivable on
noncancelable operating leases as of June 30, 1996:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . $ 925
1998 . . . . . . . . . . . . . . . . . . . . . . 38
1999 . . . . . . . . . . . . . . . . . . . . . . 27
2000 . . . . . . . . . . . . . . . . . . . . . . 14
-------
Total minimum future rentals receivable . . . . . $ 1,004
=======
</TABLE>
NOTE 7. REDEMPTIONS
The following redemption offerings were consummated by the Partnership
during the six-month period ended June 30, 1996:
<TABLE>
<CAPTION>
AVERAGE
UNITS REDEEMED REDEMPTION PRICE AMOUNT PAID
-------------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 21,126 $11.77 $ 249
Quarter ended:
March 31, 1996........... 250 $ 9.44 2
-------- -----
Balance at June 30, 1996 21,376 $11.75 $ 251
====== =====
</TABLE>
The redemption price is fixed by formula and varies depending on the length
of time the units have been outstanding.
11
<PAGE> 12
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 8. SALE OF STORAGE FLEET
In August 1995, the Partnership sold its container storage fleet, managed
by TSS, to an unrelated purchaser. The proceeds from the sale were $603
compared to the Partnership's cost basis of $540. The resulting gain from
the sale was $63. The Partnership invested the proceeds from this sale in
additional Equipment.
NOTE 9. WARRANTY CLAIM
During 1992, 1993, and 1995, the Partnership settled warranty claims
against an Equipment manufacturer. The Partnership will amortize the
settlement amounts over the remaining estimated useful lives of the
applicable Equipment (between six and seven years), reducing maintenance
and repair costs over that time. At June 30, 1996 and December 31, 1995,
the unamortized portion of the settlement amounts was equal to $919 and
$1,026, respectively.
12
<PAGE> 13
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in thousands except for per unit amounts)
The Financial Statements contain information which will assist in evaluating
the financial condition of the Partnership for the six- and three-month
periods ended June 30, 1996 and 1995. Please refer to the Financial Statements
and Notes thereto in connection with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
From November 8, 1989 until January 15, 1991, the Partnership was involved in
the offering of limited partnership interests to the public. On January 15,
1991 the Partnership received its maximum subscription amount of $75,000.
The Partnership has set up a program whereby limited partners may redeem units
for a specified redemption value. The redemption price is set by formula and
varies depending on length of time the units are outstanding. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2%
limit may be exceeded at the Managing General Partner's discretion. All
redemptions are subject to the Managing General Partner's good faith
determination that payment for the redeemed units will not (i) cause the
Partnership to be taxed as a corporation, (ii) impair the capital or operations
of the Partnership, or (iii) impair the ability of the Partnership to pay
distributions in accordance with its distribution policy. The Partnership
redeemed 250 units for a total dollar amount of $2 during the six-month period
ended June 30, 1996. From the inception of the Partnership through June 30,
1996, the Partnership has redeemed a total of 21,376 units for $251,
representing an average redemption price of $11.75. The Partnership has used
cash flow from operations to pay for the redeemed units.
The Partnership invests working capital and cash flows from operations prior to
its distribution or reinvestment in additional Equipment in short-term, highly
liquid investments. It is the policy of the Partnership to maintain a minimum
working capital reserve in an amount which is the lesser of (i) 1% of capital
contributions, or (ii) $100. At June 30, 1996, the Partnership's cash of $188
was primarily invested in a market-rate account.
During the six-month period ended June 30, 1996, the Partnership declared cash
distributions to limited partners, pertaining to the period from December 1995
through May 1996, in the amount of $2,983. These distributions represent a
return of 8% of original capital (measured on an annualized basis) on each
unit. Of these distributions, on a GAAP basis $713 was a return of capital
and the balance was from net earnings. On a cash basis all of these
distributions were from operations.
For the six-month periods ended June 30, 1996 and 1995, the Partnership had net
cash provided by operating activities of $4,444 and $5,334, respectively. This
decline was due, in part, to a reduction in income from operations resulting
from a decrease in rental income of $713, or 11%, partially offset by a decline
in accounts receivable from operations. The average collection period of
accounts receivable from operations improved slightly from 123 days for the
six-month period ended June 30, 1995 to 120 days for the comparable period in
1996. Additionally, net cash from operations was impacted by an increase in
due from affiliates, which reflects timing differences in the accrual and
payment of net rental revenues, fees and other expenses to or from TEM and
affiliates.
The Partnership's principal lessees, shipping lines, are currently experiencing
over-capacity, in part due to the delivery of new, large capacity ships. This
over-capacity has, in some instances, caused shipping lines to reduce freight
rates, which could affect the profitability of their business, resulting in the
possibility of delays in the remittance of rental payments, pressure on
Equipment rental rates, and, in extreme cases, bankruptcy of
13
<PAGE> 14
some shipping lines. As discussed more fully below under "Results of
Operations", utilization rates have reflected a lower demand for Equipment, and
this over-capacity could also further affect these rates.
Net cash used in investing activities (the purchase and sale of Equipment) for
the six-month period ended June 30, 1996 was $1,749 compared to $1,502 for the
same period in 1995. This difference reflects that, on a cash basis, the
Partnership bought more Equipment during the first two quarters of 1996 than in
the same period in 1995. The Partnership believes that these differences
reflect normal fluctuations in Equipment sales and purchases. The Partnership
has a significant amount of used Equipment in its portfolio and expects to sell
this Equipment periodically when it reaches the end of its useful marine life.
Consistent with its investment objectives, the Partnership intends to reinvest
all or a significant amount of proceeds from equipment sales in additional
Equipment.
RESULTS OF OPERATIONS
The Partnership's operations, which consist of rental income, Equipment
depreciation, direct operating expenses, management fees, and reimbursement of
administrative expenses were directly related to the size of the Equipment
fleet (inventory) during the six-month periods ended June 30, 1996 and 1995, as
well as other factors as discussed below. The following is a summary of the
size of the Equipment fleet (in units) available for lease during those
periods:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Opening inventory . . . . . . . 18,650 18,829
Closing inventory . . . . . . . 18,537 19,101
Average . . . . . . . . . . . . 18,594 18,965
</TABLE>
The decline in the average Equipment fleet from 1995 to 1996 was due, in part,
to the sale of units in 1995 which were near-term disposal candidates that had
been acquired used. The sale of a higher proportion of used Equipment
generally resulted in lower proceeds available for reinvestment. Additionally,
during 1995, the price of new Equipment generally rose. The lower proceeds
from the sale of a higher proportion of used Equipment, in conjunction with the
rising price of new Equipment, generally resulted in the purchase of fewer
units than those sold, resulting in a net decrease in the size of the Equipment
fleet. These factors resulted in a slower rate of reinvestment than had been
expected by the General Partners.
Rental income and direct operating expenses are also affected by lease
utilization percentages for the Equipment which were 83% and 91% on average
during the six-month period ended June 30, 1996 and 1995, respectively. In
addition, rental income is affected by daily rental rates and Equipment
available for lease (average inventory).
The following is a comparative analysis of the results of operations for the
six-month periods ended June 30, 1996 and 1995.
The Partnership's income from operations for the six-month periods ended June
30, 1996 and 1995 was $2,104 and $2,219, respectively, on total rental income
of $6,006 and $6,719, respectively. The largest component of total rental
income is income from Equipment rentals, which decreased by $550, or 9%, from
1995 to 1996. This decrease was primarily due to a decrease in utilization of
eight percentage points, a 2% decrease in average fleet size and a .7% decrease
in the average daily rental rate.
Utilization began to decrease in the last quarter of 1995 and continued to
decline for all Equipment types owned by the Partnership in the first and
second quarters of 1996. The General Partners believe that this softening in
demand has been due, in part, to a slow-down in activity in the Asia-North
America trade route
14
<PAGE> 15
as well as to seasonal factors. The General Partners have seen recent evidence
of some stabilization in utilization rates for certain Equipment types;
however, there can be no assurance regarding the trend for utilization in the
future. Additionally, as noted previously, the Partnership's principal
lessees, shipping lines, are currently experiencing over-capacity, which may
adversely affect rental payments and/or rates and utilization. Rental rates
have also been restrained by quantity rate discounts granted to the
Partnership's larger Equipment lessees.
Substantially all of the Partnership's rental income was generated from the
leasing of Equipment under short-term operating leases. There were fourteen
direct financing leases at June 30, 1996.
The balance of rental income consists of other lease-related items, primarily
income from charges to the lessees for pick-up of Equipment from prime
locations less credits granted to lessees for leasing Equipment from less
desirable locations (location income), income from charges to the lessees under
a damage protection plan and income for handling and returning Equipment. For
the six-month period ended June 30, 1996, the total of these other revenue
items decreased by $163 from the equivalent period in 1995. The primary
component of this net decrease in other rental revenues was due to a decrease
in location income of $172. The decline in location income is mainly due to
an increase in credits given to lessees for pick-up of Equipment from less
desirable locations, which was largely driven by decreased demand for
Equipment, as well as a decrease in drop-off charges to lessees. This decrease
in drop-off charges primarily resulted from charges made to a specific lessee
in the first quarter of 1995, which did not re-occur in the same period in
1996.
Direct operating expenses, excluding bad debt expense, were $922 in the first
two quarters of 1996 compared with $978 for the same period in 1995. The
primary component of this decline is maintenance expense, which decreased by
$68. Maintenance expense decreased due to a lower average cost to repair units
during the six-month period ended June 30, 1996.
Bad debt expense decreased from $155 in the six-month period ended June 30,
1995, to a benefit of $58 in the same period of 1996. The benefit recorded in
1996 was primarily due to a reduction in reserve requirements for a specific
lessee as a result of a partial resolution of prior period payment problems
with that lessee during the first quarter of 1996.
Depreciation and amortization expense decreased by $108, or 5%, from the
quarter ended June 30, 1995 to the same period in 1996, reflecting reduced
depreciation resulting from the decrease in the Partnership's average fleet
between periods.
Management fees to affiliates, which are based primarily on gross revenue, were
$53, or 9%, lower in the six-month period ended June 30, 1996 than in the same
period in 1995. The decrease between periods primarily resulted from the 11%
decline in rental income. These fees were 9.1% and 8.9% of gross revenue,
respectively for the six-month periods ended 1996 and 1995. Base management
fees were 7% of gross revenue for both periods.
General and administrative costs to affiliates decreased by 31%, or $165, in
the six-month period ended June 30, 1996 compared to the same period in 1995.
This decrease was primarily the result of a decline in overhead costs allocated
from TEM.
Other income provided $198 of additional income for the six-month period ended
June 30, 1996, representing an increase of $59, or 42%, over the equivalent
period in 1995. The increase was attributable to a $46 increase in gains from
sales of Equipment and a $13 increase in interest income.
15
<PAGE> 16
The following is a comparative analysis of the results of operations for the
three-month periods ended June 30, 1996 and 1995.
The Partnership's income from operations for the three-month period ended June
30, 1996 decreased by $188, or 19%, compared to the same period in 1995, on
total rental income of $2,887 and $3,331, respectively. The decrease in total
revenue of $444, or 13%, between the two periods was primarily attributable to
income from Equipment rentals, the major component of total rental income,
which decreased by $329, or 11%, from 1995 to 1996. This decline was due to a
decrease in average inventory of 2%, a decrease in utilization of ten
percentage points, and a decrease in average daily rental rates of 2% from the
three-month period ended June 30, 1995 to the comparable period ended June 30,
1996.
The balance of total revenue for the three months ended June 30, 1996 was $296
compared to $411 for the same period in 1995, a decrease of $115, or 28%. The
primary component of this decrease was a decline in location income of $98.
The decrease in location income is mainly due to an increase in credits given
to lessees for pick-up of Equipment from less desirable locations, which was
largely driven by decreased demand for Equipment.
Direct operating expenses, excluding bad debt expense, decreased by $54, or
10%, from the three-month period ended June 30, 1995 to the equivalent period
in 1996. This decrease was due to a decline in maintenance expense of $41.
Maintenance expense decreased due to a lower average cost to repair units
during the three-month period ended June 30, 1996.
Bad debt expense decreased slightly by $11 from the three-month period ended
June 30, 1995 to the same period in 1996.
General and administrative costs to affiliates decreased by 39%, or $109, in
the three-month period ended June 30, 1996 compared to the same period in 1995.
This decrease was primarily the result of a decline in overhead costs allocated
from TEM.
Depreciation expense decreased by $46 from the three-month period ended June
30, 1996 to the equivalent period in 1995 resulting from the decrease in the
Partnership's average fleet between periods. Management fees to affiliates were
lower by $32 in the three-month period ended June 30, 1996 than in the same
period in 1995 resulting from the decline in rental income.
Other income includes a gain on sales of Equipment of $70 for the three-month
period ended June 30, 1996 compared to a gain of $34 for the three-month period
ended June 30, 1995. Interest income increased by $5 from the three-month
period ended June 30, 1996 to the comparable period in 1995.
Net earnings decreased from $1,031 for the three-month period ended June 30,
1995 to $884 for the three-month period ended June 30, 1996 for the reasons
noted above.
Although substantially all of the Partnership's income from operations is
derived from assets employed in foreign operations, virtually all of this
income is denominated in United States dollars. The Partnership's customers
are international shipping lines which transport goods on international trade
routes. The domicile of the lessee is not indicative of where the lessee is
transporting the Equipment. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep the Equipment under lease, rather than the geographic location
of the Equipment or the domicile of the lessees. The Equipment is generally
operated on the international high seas rather than on the domestic waterways.
The Equipment is subject to the risk of war or other political, economic or
social occurrence where the Equipment is used, which may result in the loss of
Equipment,
16
<PAGE> 17
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 June 30, 1996 which would result in such risk materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning Equipment after it comes off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the Equipment, and the effect of world trade and/or general business and
economic cycles on the Partnership's operations.
17
<PAGE> 18
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 II, L.P.
(A California Limited Partnership)
By Textainer Financial Services Corporation
The Managing General Partner
By
---------------------------------
John R. Rhodes
Executive Vice President
Date: August 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Textainer
Financial Services Corporation, the Managing General Partner of the Registrant,
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
- ---------------------------- President (Principal Executive August 12, 1996
James E. Hoelter Officer) and Director
- ---------------------------- Executive Vice President August 12, 1996
John R. Rhodes (Principal Financial and
Accounting Officer),
Secretary and Treasurer
</TABLE>
18
<PAGE> 19
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 II, 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: August 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Textainer
Financial Services Corporation, the Managing General Partner of the Registrant,
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James E. Hoelter President (Principal Executive August 12, 1996
- ---------------------- Officer) and Director
James E. Hoelter
/s/ John R. Rhodes Executive Vice President August 12, 1996
- ---------------------- (Principal Financial and
John R. Rhodes Accounting Officer),
Secretary and Treasurer
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 188
<SECURITIES> 0
<RECEIVABLES> 7,345
<ALLOWANCES> 1,172
<INVENTORY> 0
<CURRENT-ASSETS> 9
<PP&E> 63,338
<DEPRECIATION> 20,634
<TOTAL-ASSETS> 49,074
<CURRENT-LIABILITIES> 2,024
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47,050
<TOTAL-LIABILITY-AND-EQUITY> 49,074
<SALES> 0
<TOTAL-REVENUES> 6,006
<CGS> 0
<TOTAL-COSTS> 3,902
<OTHER-EXPENSES> (198)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,302
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,302
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
