TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
August 13, 1997
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
submitting herewith for filing on behalf of Textainer Equipment Income Fund II,
L.P. (the "Company") the Company's Quarterly Report on Form 10-Q for the Second
Quarter ended June 30, 1997.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
<PAGE>
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, 1997
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>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Quarterly Report on Form 10Q for the
Quarter Ended June 30, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996..................... 3
Statements of Earnings for the six and three months ended
June 30, 1997 and 1996 (unaudited)................................................... 4
Statements of Partners' Capital for the six months ended
June 30, 1997 and 1996 (unaudited)................................................... 5
Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (unaudited)............................................. 6
Notes to Financial Statements (unaudited)............................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 13
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
June 30, 1997 and December 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $22,872 (1996: $21,660) $ 40,027 39,408
Cash 822 1,655
Net investment in direct financing leases (note 7) 562 695
Accounts receivable, net of allowance
for doubtful accounts of $1,070 (1996: $1,073) 3,033 3,126
Due from affiliates, net (note 5) 297 1,601
Prepaid expenses 12 25
--------------- ---------------
$ 44,753 46,510
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 378 314
Accrued liabilities 195 168
Accrued damage protection plan costs (note 2) 212 263
Warranty claims (note 3) 706 812
Equipment purchases payable 750 426
--------------- ---------------
Total liabilities 2,241 1,983
--------------- ---------------
Partners' capital:
General partners (90) (90)
Limited partners 42,602 44,617
--------------- ---------------
Total partners' capital 42,512 44,527
--------------- ---------------
$ 44,753 46,510
=============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Earnings
For the six and three months ended June 30, 1997 and 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Six months Three months Six months Three months
Ended Ended Ended Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rental income $ 5,072 2,548 6,006 2,887
--------------- ---------------- --------------- ----------------
Costs and expenses:
Direct container expenses 950 553 922 489
Bad debt expense (benefit) 52 64 (58) 88
Depreciation 2,284 1,277 2,014 1,012
Professional fees 16 9 16 7
Management fees to affiliates (note 5) 479 242 544 265
General and administrative costs 352 173 369 169
to affiliates (note 5)
Other general and administrative costs 63 30 95 58
--------------- ---------------- --------------- ----------------
4,196 2,348 3,902 2,088
--------------- ---------------- --------------- ----------------
Income from operations 876 200 2,104 799
--------------- ---------------- --------------- ----------------
Other income:
Interest income 42 17 31 15
Gain on sale of equipment 81 75 167 70
--------------- ---------------- --------------- ----------------
123 92 198 85
--------------- ---------------- --------------- ----------------
Net earnings $ 999 292 2,302 884
=============== ================ =============== ================
Allocation of net earnings (note 5):
General partners $ 31 16 32 16
Limited partners 968 276 2,270 868
--------------- ---------------- --------------- ----------------
$ 999 292 2,302 884
=============== ================ =============== ================
Limited partners' per unit share
of net earnings $ 0.26 0.07 0.61 0.23
=============== ================ =============== ================
Limited partners' per unit share
of distributions $ 0.80 0.40 0.80 0.40
=============== ================ =============== ================
Weighted average number of limited
partnership units outstanding 3,726,977 3,726,977 3,728,623 3,728,623
=============== ================ =============== ================
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the six months ended June 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Partners' Capital
----------------------------------------------------------
General Limited Total
------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1996 $ (90) 47,855 47,765
Distributions (32) (2,983) (3,015)
Redemptions (note 8) - (2) (2)
Net earnings 32 2,270 2,302
------------- ---------------- ---------------
Balances at June 30, 1996 $ (90) 47,140 47,050
============= ================ ===============
Balances at January 1, 1997 $ (90) 44,617 44,527
Distributions (31) (2,982) (3,013)
Redemptions (note 8) - (1) (1)
Net Earnings 31 968 999
------------- ---------------- ---------------
Balances at June 30, 1997 $ (90) 42,602 42,512
============= ================ ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Cash Flows
For the six months ended June 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 999 2,302
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 2,284 2,014
Decrease in allowance for doubtful accounts (3) (131)
Gain on sale of equipment (81) (167)
Changes in assets and liabilities:
Decrease in accounts receivable 96 734
Proceeds from principal payments of direct financing leases 143 214
Decrease (increase) in due from affiliates, net 1,461 (419)
Increase in accounts payable and accrued liabilities 96 13
Decrease in accrued damage protection plan costs (51) (25)
Decrease in warranty claims (106) (107)
Decrease in prepaid expenses 13 16
-------------- ---------------
Net cash provided by operating activities 4,851 4,444
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of equipment 1,426 1,081
Equipment purchases (4,087) (2,830)
-------------- ---------------
Net cash used in investing activities (2,661) (1,749)
-------------- ---------------
Cash flows from financing activities:
Redemptions of limited partnership units (1) (2)
Distributions to partners (3,022) (2,994)
-------------- ---------------
Net cash used in financing activities (3,023) (2,996)
-------------- ---------------
Net decrease in cash (833) (301)
Cash at beginning of period 1,655 489
-------------- ---------------
Cash at end of period $ 822 188
============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Statements of Cash Flows--Continued
For the six and three months ended June 30, 1997 and 1996
(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, 1997 and 1996, and December 31, 1996
and 1995, 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, 1997 and 1996.
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30 Dec. 31
1997 1996 1996 1995
------- ------- ------- -------
Equipment purchases included in:
<S> <C> <C> <C> <C>
Due to affiliates.......................................... $ 15 27 97 85
Equipment purchases payable................................ 750 426 177 400
Distributions to partners included in:
Due to affiliates.......................................... 6 10 84 63
Accounts payable and accrued liabilities................... 72 77 80 80
Proceeds from sale of Equipment included in:
Accounts receivable........................................ - - 36 87
Due from affiliates........................................ 639 498 396 404
</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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment purchases recorded...................................................................$ 4,399 2,619
Equipment purchases paid........................................................................ 4,087 2,830
Distributions to partners declared.............................................................. 3,013 3,015
Distributions to partners paid.................................................................. 3,022 2,994
Proceeds from sale of Equipment recorded........................................................ 1,567 1,022
Proceeds from sale of Equipment received........................................................ 1,426 1,081
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Notes to Financial Statements
June 30, 1997
(Dollar amounts in thousands except for per unit amounts)
(unaudited)
Note 1. General
Textainer Equipment Income Fund II, L.P. (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, 1997 and December 31, 1996, and the
results of its operations, changes in partners' capital, and cash flows for
the six- and three-month periods ended June 30, 1997 and 1996, 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, 1996.
Certain estimates and assumptions were made by the Partnership's management
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
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 future repair costs. At June 30, 1997 and December
31, 1996, this reserve was equal to $212 and $263, respectively.
Note 3. Warranty Claims
During 1992, 1993 and 1995, the Partnership settled warranty claims against
an equipment manufacturer. The Partnership is amortizing 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, 1997 and December 31, 1996, the
unamortized portion of the settlement amounts was equal to $706 and $812,
respectively.
Note 4. Acquisition of Equipment
During the six-month periods ended June 30, 1997 and 1996, the Partnership
purchased Equipment with a cost of $4,399 and $2,619, respectively.
Note 5. Transactions with Affiliates
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership. TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM) and
Textainer Limited (TL) are associate general partners of the Partnership.
The managing general partner and the associate general partners are
collectively referred to as the General Partners. The General Partners also
act in this capacity for other limited partnerships. Textainer Acquisition
Services Limited (TAS) is an affiliate of the General Partners which
performs services relative to the acquisition of Equipment outside the
United States on behalf of the Partnership. TCC, TEM, TL and TAS are
subsidiaries of Textainer Group Holdings Limited (TGH). 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, and subject to the special
allocations described therein, net earnings or losses and partnership
distributions are generally allocated 1% to the General Partners and 99% to
the limited partners with the exception of gross income, as defined in the
Partnership Agreement. Gross income is allocated to the General Partners to
the extent that their 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 $194 and $135 of equipment acquisition fees as part of
Equipment costs for the six-month periods ended June 30, 1997 and 1996,
respectively. The Partnership incurred $126 and $63 of incentive management
fees for the six- and three-month periods ended June 30, 1997 and $125 and
$63 for the comparable periods in 1996. No equipment liquidation fees were
incurred in either period.
The Partnership's Equipment is managed by TEM. 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 June 30, 1997 and December 31,1996.
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.
These fees totaled $353 and $179 for the six- and three-month periods ended
June 30, 1997 and $419 and $202 for the comparable periods in 1996. The
Partnership's Equipment is leased by TEM to third party lessees on
operating master leases, spot leases and term leases. The majority of the
Equipment is leased under operating master leases with limited terms and no
purchase option.
Certain indirect general and administrative costs such as salaries,
employee benefits, taxes and insurance, are incurred in performing
administrative services necessary to the operation of the Partnership.
These costs are borne by TFS and TEM. Costs allocated to the Partnership
for salaries were $187 and $95 during the six- and three-month periods
ended June 30, 1997 and $181 and $85 for the comparable periods in 1996.
Other general and administrative costs were $165 and $78 for the six- and
three-month periods ended June 30, 1997 and $188 and $84 for the comparable
periods in 1996. TEM allocates these costs based on the ratio of the
Partnership's interest in managed Equipment to the total Equipment managed
by TEM during the period. Indirect general and administrative costs
allocated to the Partnership by TEM were $305 and $148 for the six- and
three-month periods ended June 30, 1997 and $324 and $161 for the
comparable periods in 1996.
TFS allocates indirect general and administrative costs to the Partnership
based on the ratio of the Partnership's Equipment to the total Equipment of
all limited partnerships managed by TFS. TFS allocated $47 and $25 of these
indirect costs to the Partnership during the six- and three-month periods
ended June 30, 1997 and $45 and $8 during the comparable periods in 1996.
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, 1997 and December 31, 1996, due from affiliates, net is
comprised of:
1997 1996
---- ----
Due from affiliates:
Due from TEM............................. $ 350 1,665
==== =====
Due to affiliates:
Due to TFS............................... $ 30 27
Due to TL................................ 1 1
Due to TAS............................... 14 27
Due to TCC............................... 8 9
----- -----
$ 53 64
===== =====
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual and payment of expenses and
fees described above or in the accrual and remittance of net rental
revenues from TEM.
It is the policy of the Partnership and the General Partners to charge
interest on intercompany balances which are outstanding for more than one
month, to the extent such balances relate to loans for Equipment purchases.
Interest is charged at a rate not greater than the General Partners' or
affiliates' own cost of funds. There was no interest charged on
intercompany balances for the six- and three-month periods ended June 30,
1997 or 1996.
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, 1997:
Year ending June 30:
1998............................................. $ 427
1999............................................. 4
2000............................................. 1
----
Total minimum future rentals receivable.......... $ 432
===
Note 7. Direct Financing Leases
The components of the net investment in direct financing leases as of June
30, 1997 and December 31, 1996 are as follows:
1997 1996
---- ----
Future minimum lease payments receivable.......... $ 766 967
Residual value ................................... 3 4
Less: unearned income ............................ (207) (276)
----- -----
Net investment in direct financing leases ........ $ 562 695
==== ====
The following is a schedule by year of minimum lease payments receivable
under the six direct financing leases as of June 30, 1997:
1998................................................. $ 275
1999................................................. 233
2000................................................. 216
2001................................................. 42
---
Total minimum lease payments receivable.............. $ 766
===
Rental income for the six- and three-month periods ended June 30, 1997 and
1996 includes $61, $30, $129, $62, respectively, of income from direct
financing leases.
Note 8. Redemptions
The following redemption offerings were consummated by the Partnership
during the six-month period ended June 30, 1997:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 22,897 $11.56 $ 265
Quarter ended:
March 31, 1997........................ 126 $ 8.71 1
June 30, 1997......................... - - -
------ ------
Partnership to date....................... 23,023 $11.55 $ 266
====== ======
The redemption price is fixed by formula and varies depending on the length
of time the units are outstanding.
</TABLE>
<PAGE>
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, 1997 and 1996. 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 June 30, 1997, the
Partnership did not redeem any partnership units.
Prior to its distribution or reinvestment in additional Equipment, the
Partnership invests working capital and cash flow from operations 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, 1997, the Partnership's cash of
$822 was invested in a market-rate account.
During the six-month period ended June 30, 1997, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1996
through May 1997, in the amount of $2,982. These distributions represent 8% of
original capital (measured on an annualized basis) on each unit. Of these
distributions, on a GAAP basis, $2,014 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, 1997 and 1996, the Partnership had net
cash provided by operating activities of $4,851 and $4,444, respectively. The
increase was primarily attributable to a decrease in due from affiliates, net of
$1,461, and was offset by decreases in net earnings of $1,303 and accounts
receivable from operations of $96. The decrease in due from affiliates, net was
due to timing differences in the accrual and payment of expenses and fees or in
the accrual and remittance of net rental revenues. The decrease in net earnings
of 57% for the six months ended June 30, 1997 compared to equivalent period in
1996 was primarily due to a 17% decrease in rental revenues. This decrease in
rental revenues between periods was due to a decline in utilization, rental
rates and fleet size. These decreases are discussed more fully below under
"Results of Operations". Accounts receivable from operations decreased primarily
due to the decrease in rental income. As explained below under "Results of
Operations", demand for leased containers has declined compared to the prior
year, and this decline has affected the Partnership's financial condition.
Net cash used in investing activities (the purchase and sale of rental
equipment) for the quarter ended June 30, 1997 was $2,661 compared to $1,749 for
the same period in 1996. This difference reflects that, on a cash basis, the
Partnership purchased more Equipment during the six months ended June 30, 1997
than in the same period in 1996. The General Partners believe that these
differences reflect normal fluctuations in equipment sales and purchases.
Moreover, the Partnership has 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 and the General Partners'
determination that Equipment can be profitably sold or bought at any time, the
Partnership intends to reinvest all or a significant amount of proceeds from
future Equipment sales in additional Equipment. Such additional Equipment
purchases may not, however, equal the number of units sold.
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 six-month periods ended June 30, 1997 and 1996. The
following is a summary of the size of the container fleet (in units) available
for lease during those periods:
1997 1996
---- ----
Opening inventory................... 18,016 18,650
Closing inventory................... 18,097 18,537
Average............................. 18,057 18,594
The decline in the size of the average container fleet of 3% from the six-months
ended June 30, 1996 to the equivalent period in 1997 was primarily due to the
sale of certain Equipment. Although sales proceeds were used to purchase new
Equipment, fewer units were bought than sold, resulting in a net decrease in the
size of the Equipment fleet. These factors resulted in a slower rate of
reinvestment than has been expected by the General Partners and this slower rate
is currently expected to continue. The decline in the container fleet
contributed to an overall decline in rental income from the six month period
ended June 30, 1996 to the same period in 1997, and future declines in the fleet
can be expected to have a similar effect on rental income.
Rental income and direct container expenses are also affected by lease
utilization percentages for the equipment which were 74% and 83% on average
during the six months ended June 30, 1997 and 1996, respectively. In addition,
rental income is affected by daily rental rates, which declined.
The following is a comparative analysis of the results of operations for the six
months ended June 30, 1997 and 1996.
The Partnership's income from operations for the six-month period ended June 30,
1997 and 1996 was $876 and $2,104, respectively, on total rental income of
$5,072 and $6,006, respectively. The largest component of total rental income is
income from container rentals, which decreased by $900, or 17%, from 1996 to
1997. As noted above, income from container rentals is largely dependent on
three factors: equipment available for lease (average inventory), average
on-hire (utilization) percentage and average daily rental rates. Average on-hire
utilization decreased 11%, average fleet size decreased 3% and average daily
rental rates decreased 5% from the six-month period ended June 30, 1996 to the
comparable period in 1997.
Container utilization began to decline in late 1995 and that decline persisted
throughout 1996 and into the first quarter of 1997. The General Partners believe
that this decrease in demand for leased containers is the result of adverse
changes in the business of its shipping line customers. These changes consist
principally of: (i) a general slowdown in the growth of world containerized
cargo trade, particularly in the Asia-North America and Asia-Europe trade
routes; (ii) over-capacity resulting from the 1996 and 1997 additions of new,
larger ships to the existing container ship fleet at a rate in excess of the
growth rate in containerized cargo trade; and (iii) shipping line alliances and
other operational consolidations that have allowed shipping lines to operate
with fewer containers, thereby decreasing the demand for leased containers. The
container ship over-capacity in particular led to lower shipping rates,
resulting in shipping lines' need to reduce operating costs. The drive to reduce
costs, coupled with the availability of inexpensive financing and lower
container prices, encouraged shipping lines to purchase, rather than lease, a
greater number of new containers in 1996 than in previous years. All of these
factors have led to downward pressure on container lease rates, a decline in
utilization of leased containers, and an increase in leasing incentives and
other discounts being granted to shipping lines by container lessors, further
eroding Partnership profitability. The decline in demand for leased containers
has been accompanied by a drop in the purchase price of new containers.
During the second quarter of 1997, there was a slight improvement in market
conditions as utilization improved and continues to improve into the third
quarter of 1997. Despite the improving utilization, for the near term, the
General Partners do not foresee material changes in current market conditions
and caution that both utilization and lease rates could decline, adversely
affecting the Partnership's operating results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's equipment under short-term operating leases. There
were six direct financing leases at June 30, 1997.
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 surplus
locations (location income), income from charges to the lessees under a damage
protection plan (DPP) and income for handling and returning containers. For the
six-month period ending June 30, 1997, the total of these other revenue income
items was $564 a decrease of $34 from the equivalent period in 1996. The primary
component of this net decrease in other rental income was a decrease in location
income, which was offset by increases in DPP income and handling income.
Location income decreased primarily from lower demand, which increased credits
to lessees for picking up units at surplus locations. DPP income increased due
to an increased number of units participating in the plan. Increased container
movement resulted in increased handling income for the six-months ending June
30, 1997 as compared to the same period ending in 1996.
Direct container expenses, excluding bad debt provision, were $950 for the
six-month period ended June 30, 1997 as compared to $922 for the same period in
1996. The increase was primarily due to an increase in storage expense of $173,
offset by an decrease in maintenance expense and DPP expense of $140. The
increase in storage expense resulted from the decline in utilization for the
six-month period ended June 30, 1997 compared to the same period in 1996.
Accrued maintenance expenses and accrued damage protection plan expenses
decreased primarily due to the decrease in the average repair costs per unit.
Bad debt expense increased from a benefit of $58 for the six months ended June
30, 1996 to an expense of $52 for the comparable period in 1997. The benefit
recorded in 1996 was 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.
Depreciation expense was $2,284 for the six-month period ended June 30, 1997, as
compared with depreciation expense of $2,014 for the same period in 1996.
Depreciation expense increased between periods, despite a 3% decrease in fleet
size, primarily due to a charge to depreciation expense of $343 to write down
the value of refrigerated containers from an amount equal to the estimated
future discounted cash flows from these containers to their estimated fair
value.
Management fees to affiliates decreased $65 or 12%, for the six-month period
ended June 30, 1997 from the comparable period in 1996, due to a decrease in
equipment management fees. Equipment management fees, which are based primarily
on gross revenues, decreased as a result of the decrease in rental income and
were 7% of gross revenue for both periods. Incentive management fees, which are
based on the Partnership's limited and general partner distribution percentages
and partners' capital, were $126 for both periods.
General and administrative costs to affiliates decreased by 5%, or $17, from the
quarter ended June 30, 1997 to the same period in 1996. The decrease was
primarily the result of a decline in overhead costs allocated from TEM and TFS
during these periods.
Other income provided $123 of additional income for the quarter ended June 30,
1997, representing a decrease of $75, or 38%, over the equivalent period in
1996. The decrease was attributable to a $86 decrease in gain on sale of
Equipment offset by a $11 increase in interest income.
Net earnings per limited partnership unit decreased to $0.26 for the six months
ended June 30, 1997 from $0.61 for the same period in 1996, reflecting the
decrease in net earnings to $968 from $2,270 for the respective periods.
The following is a comparative analysis of the results of operations for the
three months ended June 30, 1997 and 1996.
The Partnership's income from operations for the three-month period ended June
30, 1997 and 1996 was $200 and $799, respectively, on total rental income of
$2,548 and $2,887, respectively. The decrease in total rental income was
primarily due to a decrease in income from container rentals, which decreased by
$425, or 16%, from 1996 to 1997. This decline resulted from a decrease in
average on-hire utilization of 8%, a decrease in average fleet size of 3% and a
decrease in average daily rental rates of 5% from the three-month period ended
June 30, 1997 to the comparable period in 1996.
The balance of other revenue items comprising total revenue for the three-month
period ending June 30, 1997 was $320, an increase of $86 from the equivalent
period in 1996. The primary components of this net increase in other rental
revenue were increases in DPP income of $29, handling income of $28 and location
income of $24. DPP income increased due to a higher number of units
participating in the DPP Plan. Increased container movement resulted in
increased handling income for the three-months ending June 30, 1997 as compared
to the same period in 1996.
Direct container expenses, excluding bad debt provision, were $553 for the
three-month period ended June 30, 1997 as compared to $489 for the same period
in 1996. The increase of $64 was primarily due to an increase in storage expense
of $76. The increase in storage cost resulted from the decline in utilization
for the three-month period ended June 30, 1997 compared to the same period in
1996.
The bad debt expense decreased to $64 for the three-month period ending June
30, 1997 from $88 for the equivalent period in 1 996 due to lower reserve
requirements.
Depreciation expense was $1,277 for the three-month period ended June 30, 1997,
as compared to $1,012 for the same period in 1996. Depreciation expense
increased despite the decrease in average fleet size primarily due to the second
quarter write-down of refrigerated containers.
The decrease in management fees of $23 or 9%, from the three-month period ended
June 30, 1996 to the comparable period in 1997, was primarily due to a decrease
in equipment management fees, which resulted from the decrease in rental income.
General and administrative costs to affiliates were comparable for the three
months ended June 30, 1997 and 1996.
Other income provided $92 of additional income for the quarter ended June 30,
1997, representing an increase of $7, or 8%, over the equivalent period in 1996.
Net earnings per limited partnership unit decreased to $0.07 for the quarter
ended June 30, 1997 from $0.23 for the same period in 1996, reflecting the
decrease in net earnings to $276 from $868 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 at profitable rates, 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, 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, 1997 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, industry trends and/or general
business and economic cycles on the Partnership's operations. See "Risk Factors"
in the Partnership's Prospectus, as supplemented, for additional information on
risks of the Partnership's business.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND 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 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the Managing General Partner of the Registrant, in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Executive Vice President August 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
President (Principal Executive August 13, 1997
- ------------------------------- Officer) and Director
James E. Hoelter
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND 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 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the Managing General Partner of the Registrant, in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John R. Rhodes Executive Vice President August 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ James E. Hoelter President (Principal Executive August 13, 1997
- ------------------------------- Officer) and Director
James E. Hoelter
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Income Fund II, LP
</LEGEND>
<CIK> 0000853086
<NAME> Textainer Equipment Income Fund II, LP
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 822
<SECURITIES> 0
<RECEIVABLES> 4,922
<ALLOWANCES> 1,030
<INVENTORY> 0
<CURRENT-ASSETS> 12
<PP&E> 63,514
<DEPRECIATION> 23,487
<TOTAL-ASSETS> 44,753
<CURRENT-LIABILITIES> 2,241
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 42,512
<TOTAL-LIABILITY-AND-EQUITY> 44,753
<SALES> 0
<TOTAL-REVENUES> 5,072
<CGS> 0
<TOTAL-COSTS> 4,196
<OTHER-EXPENSES> (123)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 999
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 999
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
