<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 MARCH 31, 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 MARCH 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM 1. FINANCIAL STATEMENTS.
<S> <C>
Balance Sheets - March 31, 1996 (unaudited) and December 31, 1995... 3
Statements of Earnings for the three months ended
March 31, 1996 and 1995 (unaudited)................................. 4
Statements of Partners' Capital for the three months ended
March 31, 1996 and 1995 (unaudited)................................. 5
Statements of Cash Flows for the three months
ended March 31, 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
March 31, 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 $20,090 (1995: $19,588) $ 43,226 42,977
Cash and cash equivalents (note 1) 1,409 489
Net investment in direct financing leases (note 5) 1,058 1,141
Accounts receivable, net of allowance for
doubtful accounts of $1,124 (1995: $1,303) 2,920 3,478
Due from affiliates (note 4) 2,053 2,032
Prepaid expenses 17 25
-------- --------
$ 50,683 50,142
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 359 262
Accrued liabilities 1,193 1,250
Accrued damage protection plan costs (note 2) 288 321
Due to affiliates (note 4) 112 144
Equipment purchases payable 1,057 400
-------- --------
Total liabilities 3,009 2,377
-------- --------
Partners' capital:
General partners (90) (90)
Limited partners 47,764 47,855
-------- --------
Total partners' capital 47,674 47,765
-------- --------
Commitments (note 9)
$ 50,683 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 three months ended March 31, 1996 and 1995
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Rental income $ 3,119 3,388
----------- -----------
Costs and expenses:
Direct container expenses 433 435
Bad debt (benefit) provision (146) 56
Depreciation and amortization 1,002 1,063
Professional fees 9 9
Management fees to affiliates (note 4) 279 300
General and administrative costs to affiliates (note 4) 200 256
Other general and administrative costs 37 37
----------- -----------
1,814 2,156
----------- -----------
Income from operations 1,305 1,232
----------- -----------
Other income:
Interest income 16 8
Gain on sales of equipment 97 87
----------- -----------
113 95
----------- -----------
Net earnings $ 1,418 1,327
=========== ===========
Allocation of net earnings (note 4):
General partners $ 16 15
Limited partners 1,402 1,312
----------- -----------
$ 1,418 1,327
=========== ===========
Limited partners' per unit share of net earnings $ 0.38 $ 0.35
=========== ===========
Limited partners' per unit share of distributions $ 0.40 $ 0.40
=========== ===========
Weighted average number of limited partnership
units outstanding 3,728,623 3,740,418
=========== ===========
</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 three months ended March 31, 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 (15) (1,495) (1,510)
Redemptions (note 7) - (52) (52)
Net earnings 15 1,312 1,327
------- ------- -------
Balances at March 31, 1995 $ (90) 49,223 49,133
======= ======= =======
Balances at January 1, 1996 $ (90) 47,855 47,765
Distributions (16) (1,491) (1,507)
Redemptions (note 7) - (2) (2)
Net earnings 16 1,402 1,418
------- ------- -------
Balance at March 31, 1996 $ (90) 47,764 47,674
======= ======= =======
</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 three months ended March 31, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,418 $ 1,327
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 1,002 1,063
(Decrease) increase in allowance for doubtful accounts (179) 57
Gain on sales of container rental equipment (97) (87)
Proceeds from principal payments on direct financing leases 106 51
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 704 (264)
Increase (decrease) in accounts payable
and accrued liabilities 41 (41)
(Decrease) increase in accrued damage protection plan (33) 3
Decrease in due from affiliates, net 21 360
Decrease in prepaid expenses 8 9
------- -------
Net cash provided by operating activities 2,991 2,478
------- -------
Cash flows from investing activities:
Proceeds from sale of container rental equipment 531 406
Container purchases (1,096) (1,207)
------- -------
Net cash used in investing activities (565) (801)
------- -------
Cash flows from financing activities:
Redemptions of limited partnership units (2) (52)
Distributions to partners (1,504) (1,515)
------- -------
Net cash used in financing activities (1,506) (1,567)
------- -------
Net increase in cash 920 110
Cash at beginning of period 489 635
------- -------
Cash at end of period $ 1,409 $ 745
======= =======
Interest paid during the period $ - $ -
======= =======
</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 three months ended March 31, 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 container rental equipment which had not
been paid or received by the Partnership as of March 31, 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 three-month periods ended March 31, 1996 and
1995.
<TABLE>
<CAPTION>
MAR 31 DEC 31 MAR 31 DEC 31
1996 1995 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates............................ $ 58 85 34 27
Equipment purchases payable.................. 1,057 400 1,343 599
Distributions to partners included in:
Due to affiliates ........................... 67 63 14 18
Accounts payable and accrued liabilities..... 79 80 82 83
Proceeds from sale of equipment included in:
Due from affiliates.......................... 455 404 389 346
Accounts receivable.......................... 54 87 43 54
</TABLE>
The following summarizes the amounts of equipment purchases, distributions to
partners and proceeds from sale of container rental equipment recorded by the
Partnership and the amounts paid or received as shown in the Statements of Cash
Flows for the three-month periods ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment purchases recorded.................................. $1,726 1,958
Equipment purchases paid...................................... 1,096 1,207
Distributions to partners declared............................ 1,507 1,510
Distributions to partners paid................................ 1,504 1,515
Proceeds from sale of container rental equipment recorded..... 549 438
Proceeds from sale of container rental equipment received..... 531 406
</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
March 31, 1996
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
NOTE 1. GENERAL
The accompanying interim comparative financial statements have not been
audited by an independent public accountant. However, all adjustments
(which were only normal and recurring adjustments), which are, in the
opinion of management, necessary to fairly present the financial position
of the Partnership as of March 31, 1996 and December 31, 1995, and the
results of its operations, changes in partners' capital, and cash flows for
the three-month periods ended March 31, 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 container rental 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.
NOTE 3. ACQUISITION OF EQUIPMENT
During the three-month periods ended March 31, 1996 and 1995, the
Partnership purchased container rental equipment (the Equipment) with a
cost of $1,726 and $1,958, 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.
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.
8
<PAGE> 9
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 $51 and $58 of equipment acquisition fees as part of Equipment
costs for the three-month periods ended March 31, 1996 and 1995,
respectively, and incurred $63 of incentive management fees in both
periods. No equipment liquidation fees were incurred in either period.
The Partnership's 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 Partnership's Equipment. Additionally, TEM holds,
for payment of direct operating expenses, a reserve of cash that has been
collected from container leasing operations; such cash is included in the
amount due from affiliates at March 31, 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 were passed through to TSS by TEM for services
rendered. For the three-month periods ended March 31, 1996 and 1995 these
fees totaled $217 and $237, respectively. The Partnership's 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 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 $163 and $217, respectively, for the three-month periods
ended March 31, 1996 and 1995.
TFS also incurred general and administrative costs of $37 and $39 during
the three-month periods ended March 31, 1996 and 1995, respectively, which
were reimbursed by the Partnership.
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.
9
<PAGE> 10
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At March 31, 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............... $2,053 $2,032
====== ======
Due to affiliates:
Due to TFS......................... 32 $ 47
Due to TGH......................... 1 2
Due to TAS......................... 51 77
Due to TCC......................... 18 10
Due to TL.......................... 10 8
------ ------
$ 112 $ 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 three-month periods ended March 31, 1996 and
1995.
NOTE 5. DIRECT FINANCING LEASES
The components of the net investment in direct financing leases as of
March 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Future minimum lease payments receivable....... $1,503 $1,620
Residual value ................................ 4 4
Less: unearned income ......................... (449) (483)
------ ------
Net investment in direct financing leases ..... $1,058 $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 years of minimum lease payments receivable
under the direct financing leases as of March 31, 1996:
<TABLE>
<S> <C>
1997................................................. $ 512
1998................................................. 374
1999................................................. 252
2000................................................. 219
2001................................................. 146
------
Total minimum lease payments receivable.............. $1,503
=====
</TABLE>
Rental income for the three-month periods ended March 31, 1996 and 1995
includes $67 and $31, 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 March 31, 1996:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1997............................................. $1,045
1998............................................. 26
1999............................................. 16
2000............................................. 7
2001............................................. 1
------
Total minimum future rentals receivable.......... $1,095
======
</TABLE>
NOTE 7. REDEMPTIONS
The following redemption offerings were consummated by the Partnership
during the three-month period ended March 31, 1996 and the year ended
December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE
UNITS REDEEMED REDEMPTION PRICE AMOUNT PAID
-------------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994 9,582 $12.55 $120
Quarter ended:
March 31, 1995........... 4,287 $12.09 52
Sept. 30, 1995........... 3,215 $10.76 35
Dec. 31, 1995............ 4,042 $10.40 42
------ ----
Balance at December 31, 1995 21,126 $11.77 249
Quarter ended:
March 31, 1996........... 250 $ 9.44 2
------ ----
Balance at March 31, 1996 21,376 $11.75 $251
====== ====
</TABLE>
The redemption price is fixed by formula and varies depending on the length
of time the units are 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 in the equipment of $540. The
resulting gain from the sale was $63. The Partnership invested the proceeds
from this sale in additional marine container rental equipment.
NOTE 9. COMMITMENTS
At March 31, 1996, the Partnership has committed to purchase 210 containers
at an approximate total purchase price of $813 which includes acquisition
fees of $39. These commitments were made to TAS which, as the contracting
party, has in turn committed to purchase this equipment on behalf of the
Partnership. The Partnership has sufficient liquidity at March 31, 1996 to
satisfy these commitments.
NOTE 10. 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 March 31, 1996 and December 31, 1995,
the unamortized portion of the settlement amounts was equal to $972 and
$1,026, respectively, and is included in accrued liabilities.
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 three-month periods ended March
31, 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 units are outstanding. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2% limit
may be exceeded at the Managing General Partner's discretion. All redemptions
are subject to the Managing General Partner's good faith determination that
payment for the redeemed units will not (i) cause the Partnership to be taxed as
a corporation, (ii) impair the capital or operations of the Partnership, or
(iii) impair the ability of the Partnership to pay distributions in accordance
with its distribution policy. During the quarter ended March 31, 1996, the
Partnership redeemed 250 units for a total of $2, and, during the year ended
December 31, 1995, the Partnership redeemed 11,544 units for a total dollar
amount of $129. The Partnership has used cash flow from operations to pay for
the redeemed units.
The Partnership invests working capital and cash flow 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 March 31, 1996, the Partnership's cash of $1,409
was primarily invested in a market-rate account.
During the quarter ended March 31, 1996, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1995
through February 1996, in the amount of $1,491. These distributions represent 8%
of original capital (measured on an annualized basis) on each unit. Of these
distributions, on a GAAP basis, $89 was a return of capital and the balance was
from net earnings. On a cash basis, all of these distributions were from
operations.
At March 31, 1996, the Partnership had committed to purchase 210 containers at
an approximate total purchase price of $813, which includes acquisition fees of
$39. At March 31, 1996, the Partnership had cash of $1,409 and had not yet
received $456 of the proceeds from the 1996 sale of its equipment. The
Partnership expects to fund the purchase of equipment with its cash on hand and
with cash flows from operations, which is in excess of distributions. In the
event the Partnership decides not to purchase the equipment, one of the General
Partners or its affiliates will retain the equipment for its own account.
For the quarters ended March 31, 1996 and 1995, the Partnership had net cash
provided by operating activities of $2,991 and $2,478, respectively. The
increase over the prior period was primarily attributable to an improvement in
the average collection period of accounts receivable from operations from 136
days during the three-month period ended March 31, 1995 to 116 days during the
comparable period in 1996. In 1994, the Partnership experienced a deterioration
in the payment performance of one of its lessees, and another lessee defaulted
under the terms of its lease agreement. These lessees have cooperated in
returning the Equipment, and the returned Equipment was substantially re-leased
to other customers during 1995. This, in conjunction with a partial resolution
of payment problems in the first
13
<PAGE> 14
quarter of 1996 with one of these lessees, were the primary causes for the
improvement in the average collection period between periods. The Partnership is
continuing its efforts to conclude resolution of both of these accounts in 1996.
While net cash from operating activities has improved, the Partnership's
principal lessees, shipping lines, are currently anticipating over-capacity, due
to the delivery of new ships. This over-capacity may cause 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 container rental rates, and, in extreme cases, bankruptcy of some
shipping lines. As discussed more fully below under "Results of Operations",
utilization rates have reflected a lower demand for containers, and this
over-capacity could also further affect these rates.
Net cash used in investing activities (the purchase and sale of rental
equipment) for the quarter ended March 31, 1996 was $565 compared to $801 for
the same period in 1995. This difference reflects that, on a cash basis, the
Partnership sold slightly more equipment and purchased slightly less equipment
in the first quarter of 1996 than in the same period in 1995. The Partnership
believes that these differences reflect normal fluctuations in equipment sales
and purchases. In addition, 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, container
depreciation, direct container expenses, management fees, and reimbursement of
administrative expenses were directly related to the size of the container fleet
(inventory) during the three-month periods ended March 31, 1996 and 1995, as
well as other factors as discussed below. The following is a summary of the size
of the container fleet (in units) available for lease during those periods:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Opening inventory................... 18,650 18,829
Closing inventory................... 18,678 19,062
Average............................. 18,664 18,946
</TABLE>
The decline in the average container fleet from 1995 to 1996 was due, in part,
to the sale of units in 1995 which were near-term disposal candidates that were
acquired used. The sale of a higher proportion of used equipment generally
resulted in lower proceeds available for reinvestment. Additionally, during the
first three quarters of 1995, the price of marine equipment generally rose. The
lower proceeds from the sale of a higher proportion of used equipment, in
conjunction with the rising price of equipment, generally resulted in the
purchase of fewer units than those sold, resulting in a net decrease in the size
of the container fleet.
Rental income and direct container expenses are also affected by lease
utilization percentages for the equipment which were 83% and 90% on average
during the quarters ended March 31, 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
quarters ended March 31, 1996 and 1995.
The Partnership's income from operations for the quarters ended March 31, 1996
and 1995 was $1,305 and $1,232, respectively, on total rental income of $3,119
and $3,388, respectively. The largest component of total rental income is income
from container rentals, which decreased by $221, or 7.6%,
14
<PAGE> 15
from 1995 to 1996. This decrease was primarily due to a decrease in utilization
of seven percentage points, a 1.5% 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 quarter 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 as
well as to seasonal factors. Additionally, as noted above, the Partnership's
principal lessees, shipping lines, are currently anticipating further
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 container lessees.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's equipment under short-term operating leases. There
were ten direct financing leases at March 31, 1996.
The balance of rental income consists of other lease-related items, primarily
income from charges to the lessees for pick-up of containers from prime
locations less credits granted to lessees for leasing containers from less
desirable locations (location income), income from charges to the lessees under
a damage protection plan and income for handling and returning containers. For
the quarter ended March 31, 1996, the total of these other revenue items
decreased by $48 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 (which decreased by $74). The decline in location income is mainly due to
a decrease in drop-off charges to lessees for Equipment at less desirable
locations, which primarily resulted from drop-off charges to a specific lessee
in the first quarter of 1995 that did not re-occur in the same period in 1996,
as well as an increase in credits given to lessees for pick-up of Equipment from
less desirable locations, which was largely driven by decreased demand.
Direct container expenses, excluding bad debt expense, were $433 and were fairly
consistent with direct container expenses, excluding bad debt expense, of $435
for the same period in 1995. Increases in storage expenses due to the decline in
utilization were offset by decreases in maintenance and damage protection plan
expenses. Maintenance expense decreased due to a lower average cost to repair
units during the three-month period ended March 31, 1996. Repair expenses for
containers covered under the damage protection plan decreased due to the
cancellation of this coverage by certain lessees.
Bad debt expense decreased from $56 in the first quarter of 1995 to a benefit of
$146 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 payment problems with that lessee during the first quarter
of 1996, as noted above.
Depreciation and amortization expense decreased by $61, or 5.7%, from the
quarter ended March 31, 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
$21, or 7%, lower in the quarter ended March 31, 1996 than in the same period in
1995. The decrease between periods resulted from the 7.9% decline in rental
income. These fees were 8.9% of rental income for both periods and base
management fees were 7% of rental income.
General and administrative costs to affiliates decreased by 22%, or $56, in the
quarter ended March 31, 1996 compared to the same period in 1995. This decrease
was the result of a decline in allocable overhead from TEM due to the sale of
the storage fleet.
Other income provided $113 of additional income for the quarter ended March 31,
1996, representing an increase of $18, or 19%, over the equivalent period in
1995. The increase was attributable to a $10 increase in gains from sales of
equipment and a $8 increase in interest income.
15
<PAGE> 16
Net earnings per limited partnership unit increased from $0.35 for the quarter
ended March 31, 1995 to $0.38 for the same period in 1996, reflecting the
increase in net earnings from $1,327 to $1,418 for the respective periods.
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 Partnership's containers
are generally operated on the international high seas rather than on the
domestic waterways. The Partnership's Equipment is subject to the risk of war or
other political, economic or social occurrence where the Equipment is used,
which may result in the loss of Equipment, which, in turn, may have a material
impact on the Partnership's results of operations and financial condition. The
General Partners are not aware of any conditions as of March 31, 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 Partnership's equipment, and the effect of demand for world trade and/or
general business and economic cycles on the Partnership's operations.
16
<PAGE> 17
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: May 10, 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:
Signature Title Date
/s/ James E. Hoelter President (Principal Executive May 10, 1996
- - -------------------- Officer) and Director
James E. Hoelter
/s/ John R. Rhodes Executive Vice President May 10, 1996
- - -------------------- (Principal Financial and
John R. Rhodes Accounting Officer),
Secretary and Treasurer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit No.
- - -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,409
<SECURITIES> 0
<RECEIVABLES> 7,155
<ALLOWANCES> 1,124
<INVENTORY> 0
<CURRENT-ASSETS> 17
<PP&E> 63,316
<DEPRECIATION> 20,090
<TOTAL-ASSETS> 50,683
<CURRENT-LIABILITIES> 3,009
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47,674
<TOTAL-LIABILITY-AND-EQUITY> 50,683
<SALES> 0
<TOTAL-REVENUES> 3,119
<CGS> 0
<TOTAL-COSTS> 1,814
<OTHER-EXPENSES> (113)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,418
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,418
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
