TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
May 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 First
Quarter ended March 31, 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 March 31, 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 March 31, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets - March 31, 1997 (unaudited) and December 31, 1996.................... 3
Statements of Earnings for the three months ended
March 31, 1997 and 1996 (unaudited).................................................. 4
Statements of Partners' Capital for the three months ended
March 31, 1997 and 1996 (unaudited).................................................. 5
Statements of Cash Flows for the three months
ended March 31, 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
March 31, 1997 and December 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(unaudited)
Assets
<S> <C> <C>
Container rental equipment, net of accumulated
depreciation of $23,487 (1996: $21,660) $ 40,365 39,408
Cash 1,578 1,655
Net investment in direct financing leases (note 7) 594 695
Accounts receivable, net of allowance
for doubtful accounts of $1,030 (1996: $1,073) 2,880 3,126
Due from affiliates, net (note 5) 447 1,601
Prepaid expenses 19 25
--------------- ---------------
$ 45,883 46,510
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 293 314
Accrued liabilities 120 168
Accrued damage protection plan costs (note 2) 223 263
Warranty claims (note 3) 759 812
Equipment purchases payable 761 426
--------------- ---------------
Total liabilities
2,156 1,983
--------------- ---------------
Partners' capital:
General partners (90) (90)
Limited partners 43,817 44,617
--------------- ---------------
Total partners' capital 43,727 44,527
--------------- ---------------
Commitments (note 9)
$ 45,883 46,510
=============== ===============
</TABLE>
See accompanying notes to financial statements
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California limited partnership)
Statements of Earnings
For the three months ended March 31, 1997 and 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Rental Income $ 2,524 $ 3,119
---------------- ----------------
Costs and expenses:
Direct container expenses 396 433
Bad debt benefit (11) (146)
Depreciation 1,007 1,002
Professional fees 7 9
Management fees to affiliates (note 5) 237 279
General and administrative costs to affiliates (note 5) 179 200
Other general and administrative costs 33 37
---------------- ----------------
1,848 1,814
---------------- ----------------
Income from operations 676 1,305
---------------- ----------------
Other income:
Interest income 25 16
Gain on sale of equipment 6 97
---------------- ----------------
31 113
---------------- ----------------
Net earnings $ 707 1,418
================ ================
Allocation of net earnings (note 5):
General partners $ 15 16
Limited partners 692 1,402
---------------- ----------------
$ 707 1,418
================ ================
Limited partners' per unit share
of net earnings $ 0.19 0.38
================ ================
Limited partners' per unit share
of distributions $ 0.40 0.40
================ ================
Weighted average number of limited
partnership units outstanding 3,726,977 3,728,623
================ ================
</TABLE>
See accompanying notes to financial statements
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California limited partnership)
Statements of Partners' Capital
For the three months ended March 31, 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 (16) (1,491) (1,507)
Redemptions (note 8) - (2) (2)
Net earnings 16 1,402 1,418
------------- ---------------- ---------------
Balances at March 31, 1996 $ (90) 47,764 47,674
============= ================ ===============
Balances at January 1, 1997 $ (90) 44,617 44,527
Distributions (15) (1,491) (1,506)
Redemptions (note 8) - (1) (1)
Net Earnings 15 692 707
------------- ---------------- ---------------
Balances at March 31, 1997 $ (90) 43,817 43,727
============= ================ ===============
</TABLE>
See accompanying notes to financial statements
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California limited partnership)
Statements of Cash Flows
For the three months ended March 31, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 707 1,418
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation 1,007 1,002
Decrease in allowance for doubtful accounts (43) (179)
Gain on sale of equipment (6) (97)
Changes in assets and liabilities:
Decrease in accounts receivable 289 704
Proceeds from principal payments of direct financing leases 69 106
Decrease in due from affiliates, net 1,209 21
(Decrease) increase in accounts payable and accrued liabilities (66) 95
Decrease in accrued damage protection plan costs (40) (33)
Decrease in warranty claims (53) (54)
Decrease in prepaid expenses 6 8
-------------- ---------------
Net cash provided by operating activities 3,079 2,991
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of equipment 486 531
Equipment purchases (2,128) (1,096)
-------------- ---------------
Net cash used in investing activities (1,642) (565)
-------------- ---------------
Cash flows from financing activities:
Redemptions of limited partnership units (1) (2)
Distributions to partners (1,513) (1,504)
-------------- ---------------
Net cash used in financing activities (1,514) (1,506)
-------------- ---------------
Net (decrease) increase in cash (77) 920
Cash at beginning of period 1,655 489
-------------- ---------------
Cash at end of period $ 1,578 1,409
============== ===============
</TABLE>
See accompanying notes to financial statements
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California limited partnership)
Statements of Cash Flows--Continued
For the three months ended March 31, 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 March 31, 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 three-month periods ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Mar. 31 Dec. 31
1997 1996 1996 1995
------- ------- ------- -------
Equipment purchases included in:
<S> <C> <C> <C> <C>
Due to affiliates.......................................... $ 63 27 58 85
Equipment purchases payable................................ 761 426 1,057 400
Distributions to partners included in:
Due to affiliates.......................................... 6 10 67 63
Accounts payable and accrued liabilities................... 74 77 79 80
Proceeds from sale of Equipment included in:
Accounts receivable........................................ - - 54 87
Due from affiliates........................................ 585 498 455 404
</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
three-month periods ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment purchases recorded...................................................................$ 2,499 1,726
Equipment purchases paid........................................................................ 2,128 1,096
Distributions to partners declared.............................................................. 1,506 1,507
Distributions to partners paid.................................................................. 1,513 1,504
Proceeds from sale of Equipment recorded........................................................ 573 549
Proceeds from sale of Equipment received........................................................ 486 531
</TABLE>
See accompanying notes to financial statements
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California limited partnership)
Notes to Financial Statements
March 31, 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 March 31, 1997 and December 31, 1996, and the
results of its operations, changes in partners' capital, and cash flows for
the three-month periods ended March 31, 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 March 31, 1997 and
December 31, 1996, this reserve was equal to $223 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 March 31, 1997 and December 31, 1996, the
unamortized portion of the settlement amounts was equal to $759 and $812,
respectively.
Note 4. Acquisition of Equipment
During the three-month periods ended March 31, 1997 and 1996, the
Partnership purchased Equipment with a cost of $2,499 and $1,726,
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 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, 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 $103 and $51 of equipment acquisition fees as part of Equipment
costs for the three-month periods ended March 31, 1997 and 1996,
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. 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, 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. For
the three-month periods ended March 31, 1997 and 1996 these fees totaled
$174 and $216, respectively. 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. During the three-month periods ended
March 31, 1997 and 1996, costs allocated to the Partnership for salaries
were $91 and $98, respectively and other general and administrative costs
were $88 and $102, respectively. 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 $157 and $163
for the three-month periods ended March 31, 1997 and 1996, respectively.
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 $22 and $37 of these
indirect costs to the Partnership during the three-month periods ended
March 31, 1997 and 1996, respectively.
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 March 31, 1997 and December 31, 1996, due from affiliates, net is
comprised of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Due from affiliates:
Due from TEM............................. $ 553 1,665
==== =====
Due to affiliates:
Due to TFS............................... $ 29 27
Due to TL................................ 1 1
Due to TAS............................... 61 27
Due to TCC............................... 15 9
---- -----
$ 106 64
==== =====
</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 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 three-month period ended March 31, 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 March 31, 1997:
Year ending March 31:
1998............................................. $ 389
1999............................................. 17
2000............................................. 1
---
Total minimum future rentals receivable.......... $ 407
===
Note 7. Direct Financing Leases
The components of the net investment in direct financing leases as of March
31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Future minimum lease payments receivable.......... $ 828 967
Residual value ................................... 3 4
Less: unearned income ............................ (237) (276)
---- ----
Net investment in direct financing leases ........ $ 594 695
==== ====
</TABLE>
The following is a schedule by year of minimum lease payments receivable
under the eight direct financing leases as of March 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998................................................. $ 285
1999................................................. 234
2000................................................. 220
2001................................................. 89
---
Total minimum lease payments receivable.............. $ 828
===
</TABLE>
Rental income for the three-month periods ended March 31, 1997 and 1996
includes $64 and $67, respectively, of income from direct financing leases.
Note 8. Redemptions
The following redemption offerings were consummated by the Partnership
during the three-month period ended March 31, 1997:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997.......... 22,897 $11.56 $ 265
Quarter ended:
March 31, 1997..................... 126 $ 8.71 1
------ ----
Partnership to date................... 23,023 $11.55 $ 266
====== ====
</TABLE>
The redemption price is fixed by formula and varies depending on the length
of time the units are outstanding.
Note 9. Commitments
At March 31, 1997, the Partnership has committed to purchase 380 new
containers at an approximate total purchase price of $1,178 which includes
acquisition fees of $56. These commitments were made to TAS which, as the
contracting party, has in turn committed to purchase this Equipment on
behalf of the Partnership.
<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 three-month periods ended March
31, 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 March 31, 1997, the
Partnership redeemed 126 units for a total of $1.
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, 1997, the Partnership's cash of $1,578
was primarily invested in a market-rate account.
During the quarter ended March 31, 1997, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1996
through February 1997, 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, $799 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, 1997, the Partnership had committed to purchase 380 new containers
at an approximate total purchase price of $1,178, which includes acquisition
fees of $56. At March 31, 1997, the Partnership had sufficient cash on hand to
meet these commitments. In the event the Partnership decides not to purchase the
Equipment, one of the General Partners or an affiliate of the General Partners
will retain the Equipment for its own account.
For the quarters ended March 31, 1997 and 1996, the Partnership had net cash
provided by operating activities of $3,079 and $2,991, respectively. The
increase over the prior period was primarily attributable to a decrease in due
from affiliates, net, offset by decreases in net earnings and accounts
receivable from operations. 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
50% in the first quarter of 1997 compared to the first quarter of 1996 was
primarily due to a 19% decrease in rental revenues. The 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. Notwithstanding this reduction, the average
collection period of accounts receivable from operations increased from 116 days
to 139 days for the three-month periods ended March 31, 1996 and 1997,
respectively.
As explained below under "Results of Operations", demand for leased containers
has declined, 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 March 31, 1997 was $1,642 compared to $565 for
the same period in 1996. This difference reflects that, on a cash basis, the
Partnership purchased more Equipment in the first quarter of 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 three-month periods ended March 31, 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................... 18,081 18,678
Average............................. 18,049 18,664
The decline in the average container fleet of 3% from the three-months ended
March 31, 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 which is currently expected
to continue. Moreover, the decline in the container fleet contributed to an
overall decline in rental income from the three month period ended March 31,
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 quarters ended March 31, 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
quarters ended March 31, 1997 and 1996.
The Partnership's income from operations for the quarters ended March 31, 1997
and 1996 was $676 and $1,305, respectively, on total rental income of $2,524 and
$3,119, respectively. The largest component of total rental income is income
from container rentals, which decreased by $473, or 18%, from 1996 to 1997.
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 by
3%.
Container utilization began to decline in late 1995 and that decline persisted
throughout 1996 and into 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. For the near
term, the General Partners do not foresee any changes in current market
conditions and caution that both utilization and lease rates could continue to
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 eight direct financing leases at March 31, 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 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, 1997, the total of these other revenue income items
decreased by $122 from the equivalent period in 1996. The primary component of
this net decrease in other rental income was due to a decrease in location
income of $118 which was largely due to lower demand, which drove drop off
charges to lessees down and increased credits to lessees for picking up units at
less desirable locations.
Direct container expenses, excluding bad debt benefit, were $396 for the three
months ended March 31, 1997 as compared to $433 for the same period in 1996. The
decrease was primarily due to a decrease in maintenance expense, partially
offset by an increase in storage cost. Accrued maintenance expense and expenses
accrued under the damage protection plan decreased by $82 primarily due to the
decrease in the average number of units requiring repairs from March 31, 1996 to
the same period in 1997, coupled with a slight decrease in the average repair
costs per unit between the two periods. The increase in storage cost of $97 was
due to the decline in utilization for the three months ended March 31, 1997
compared to the same period in 1996.
Bad debt benefit decreased from $146 in the first quarter of 1996 to $11 in the
same period of 1997. 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. The benefit recorded in the first quarter of 1997 was mainly due to an
adjustment recorded to reduce an overaccrued reserve for one lessee.
Depreciation expense was $1,007 for the three months ended March 31, 1997,
consistent with depreciation expense of $1,002 for the same period in 1996.
Depreciation expense remained consistent between periods, despite a 3% decrease
in fleet size, primarily due to there being fewer fully depreciated containers
in the fleet in the first quarter of 1997 compared to the same period in 1996.
Management fees to affiliates decreased $42 or 15%, from the three months ended
March 31, 1996 to the comparable period in 1997, primarily due to a decrease in
equipment management fees. Equipment management fees, which are based primarily
on gross revenues decreased $42 due to 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 $63 for both periods.
General and administrative costs to affiliates decreased by 11%, or $21, in the
quarter ended March 31, 1997 compared 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 $31 of additional income for the quarter ended March 31,
1997, representing an decrease of $82, or 73%, over the equivalent period in
1996. The decrease was attributable to a $91 decrease in gain on sale of
Equipment offset by a $9 increase in interest income.
Net earnings per limited partnership unit decreased from $0.38 for the quarter
ended March 31, 1996 to $0.19 for the same period in 1997, reflecting the
decrease in net earnings from $1,418 to $707 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 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 March 31, 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: May 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>
<S> <C> <C>
Signature Title Date
Executive Vice President May 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
President (Principal Executive May 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: May 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>
<S> <C> <C>
Signature Title Date
/s/ John R. Rhodes Executive Vice President May 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ James E. Hoelter President (Principal Executive May 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,578
<SECURITIES> 0
<RECEIVABLES> 4,951
<ALLOWANCES> 1,030
<INVENTORY> 0
<CURRENT-ASSETS> 19
<PP&E> 63,852
<DEPRECIATION> 23,487
<TOTAL-ASSETS> 45,883
<CURRENT-LIABILITIES> 2,156
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 43,727
<TOTAL-LIABILITY-AND-EQUITY> 45,883
<SALES> 0
<TOTAL-REVENUES> 2,524
<CGS> 0
<TOTAL-COSTS> 1,848
<OTHER-EXPENSES> (31)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 707
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
