TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 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 Third
Quarter ended September 30, 1997.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
<PAGE>
UNITED STATES
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 September 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 September 30, 1997
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 1997 (unaudited) and December 31, 1996................ 3
Statements of Earnings for the nine and three months ended
September 30, 1997 and 1996 (unaudited).............................................. 4
Statements of Partners' Capital for the nine months ended
September 30, 1997 and 1996 (unaudited).............................................. 5
Statements of Cash Flows for the nine months
ended September 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............................................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
September 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 $22,650 (1996: $21,660) $39,127 $39,408
Cash 1,110 1,655
Net investment in direct financing leases (note 7) 528 695
Accounts receivable, net of allowance
for doubtful accounts of $1,047 (1996: $1,073) 2,893 3,126
Due from affiliates, net (note 5) 115 1,601
Prepaid expenses 5 25
--------------- ---------------
$43,778 $46,510
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $376 $314
Accrued liabilities 226 168
Accrued damage protection plan costs (note 2) 217 263
Warranty claims (note 3) 652 812
Equipment purchases payable 503 426
--------------- ---------------
Total liabilities 1,974 1,983
--------------- ---------------
Partners' capital:
General partners (90) (90)
Limited partners 41,894 44,617
--------------- ---------------
Total partners' capital 41,804 44,527
--------------- ---------------
$43,778 $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 nine and three months ended September
30, 1997 and 1996 (Dollar amounts in thousands
except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Rental income $2,698 $2,831 $7,770 $8,837
------------------ ---------------- ------------------ -----------------
Costs and expenses:
Direct container expenses 609 423 1,559 1,345
Bad debt (benefit) expense (19) (72) 33 (130)
Depreciation 896 996 3,180 3,010
Professional fees 8 6 24 22
Management fees to affiliates (note 5) 251 262 730 806
General and administrative costs to affiliates (note 5) 145 155 497 524
Other general and administrative costs 35 55 98 150
------------------ ---------------- ------------------ -----------------
1,925 1,825 6,121 5,727
------------------ ---------------- ------------------ -----------------
Income from operations 773 1,006 1,649 3,110
------------------ ---------------- ------------------ -----------------
Other income:
Interest income 16 5 58 36
Gain on sale of equipment 9 125 90 292
------------------ ---------------- ------------------ -----------------
25 130 148 328
------------------ ---------------- ------------------ -----------------
Net earnings $798 $1,136 $1,797 $3,438
================== ================ ================== =================
Allocation of net earnings (note 5):
General partners $16 $15 $47 $47
Limited partners 782 1,121 1,750 3,391
------------------ --------------- ------------------ -----------------
$798 $1,136 $1,797 $3,438
================== =============== ================== =================
Limited partners' per unit share
of net earnings $ 0.21 $ 0.30 $ 0.47 $ 0.91
================== =============== ================== =================
Limited partners' per unit share
of distributions $ 0.40 $ 0.40 $ 1.20 $ 1.20
================== =============== ================== =================
Weighted average number of limited
partnership units outstanding 3,726,977 3,727,852 3,726,977 3,728,521
================== =============== ================== =================
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 nine months ended September 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 (47) (4,474) (4,521)
Redemptions (note 8) - (9) (9)
Net earnings 47 3,391 3,438
------------- ---------------- ---------------
Balances at September 30, 1996 ($90) $46,763 $46,673
============= ================ ===============
Balances at January 1, 1997 ($90) $44,617 $44,527
Distributions (47) (4,472) (4,519)
Redemptions (note 8) - (1) (1)
Net Earnings 47 1,750 1,797
------------- ---------------- ---------------
Balances at September 30, 1997 ($90) $41,894 $41,804
============= ================ ===============
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 nine months ended September 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $1,797 $3,438
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 3,180 3,010
Decrease in allowance for doubtful accounts (26) (214)
Gain on sale of equipment (90) (292)
Changes in assets and liabilities:
Decrease in accounts receivable 259 645
Proceeds from principal payments of direct financing leases 185 330
Decrease (increase) in due from affiliates, net 1,354 (619)
Increase in accounts payable and accrued liabilities 125 4
Decrease in accrued damage protection plan costs (46) (38)
Decrease in warranty claims (160) (160)
Decrease in prepaid expenses 20 25
-------------- ---------------
Net cash provided by operating activities 6,598 6,129
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of equipment 2,521 1,585
Equipment purchases (5,135) (3,115)
-------------- ---------------
Net cash used in investing activities (2,614) (1,530)
-------------- ---------------
Cash flows from financing activities:
Redemptions of limited partnership units (1) (9)
Distributions to partners (4,528) (4,576)
-------------- ---------------
Net cash used in financing activities (4,529) (4,585)
-------------- ---------------
Net (decrease) increase in cash (545) 14
Cash at beginning of period 1,655 489
-------------- ---------------
Cash at end of period $1,110 $503
============== ===============
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 nine months ended September 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 September 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 nine-month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30 Dec. 31
1997 1996 1996 1995
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates.......................................... $ 3 $ 27 $ 21 $ 85
Equipment purchases payable................................ 503 426 - 400
Distributions to partners included in:
Due to affiliates.......................................... 6 10 10 63
Accounts payable and accrued liabilities................... 72 77 78 80
Proceeds from sale of Equipment included in:
Accounts receivable........................................ - - 18 87
Due from affiliates........................................ 338 498 446 404
</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
nine-month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment purchases recorded...................................................................$ 5,188 $2,651
Equipment purchases paid........................................................................ 5,135 3,115
Distributions to partners declared.............................................................. 4,519 4,521
Distributions to partners paid.................................................................. 4,528 4,576
Proceeds from sale of Equipment recorded........................................................ 2,361 1,558
Proceeds from sale of Equipment received........................................................ 2,521 1,585
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Notes to Financial Statements
September 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 containers (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 September 30, 1997 and December 31, 1996, and the
results of its operations, changes in partners' capital, and cash flows for
the nine- and three-month periods ended September 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 (DPP) to lessees of its
Equipment. Under the terms of DPP, 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 September 30, 1997 and
December 31, 1996, this reserve was equal to $217 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 September 30, 1997 and December 31, 1996, the
unamortized portion of the settlement amounts was equal to $652 and $812,
respectively.
Note 4. Acquisition of Equipment
During the nine-month periods ended September 30, 1997 and 1996, the
Partnership purchased Equipment with a cost of $5,188 and $2,651,
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
manage and control the affairs of the Partnership. 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 as well
as reimburse the General Partners for certain administrative costs. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $243 and $145 of equipment acquisition fees as part of
Equipment costs for the nine-month periods ended September 30, 1997 and
1996, respectively. The Partnership incurred $188 and $62 of incentive
management fees for the nine- and three-month periods ended September 30,
1997 and $188 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 September 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 $542 and $189 for the nine- and three-month periods
ended September 30, 1997 and $618 and $199 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 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. Total general and administrative costs allocated to
the Partnership were $497 and $145 for the nine- and three-month periods
ended September 30, 1997 of which $273 and $84, respectively were for
salaries. For the nine- and three-month periods ended September 30, 1996,
total general and administrative costs allocated to the Partnership were
$524 and $155, of which $270 and $91, respectively were for salaries.
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in managed Equipment to the total Equipment
managed by TEM during the period. 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. General and administrative costs allocated to the
Partnership by TEM were $345, $131, $459 and $135 for the nine- and
three-month periods ended September 30, 1997 and 1996, respectively. TFS
allocated $62, $14, $65 and $20 of these general and administrative costs
to the Partnership during the nine- and three-month periods ended September
30, 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 September 30, 1997 and December 31, 1996, due from affiliates, net is
comprised of:
1997 1996
---- ----
Due from affiliates:
Due from TEM............................. $ 148 $1,665
==== ======
Due to affiliates:
Due to TFS............................... $ 24 $ 27
Due to TL................................ 1 1
Due to TAS............................... 3 27
Due to TCC............................... 5 9
----- ------
$ 33 $ 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 nine- and three-month periods ended September
30, 1997 and 1996.
Note 6. Rentals Under Operating Leases
The following is a schedule by year of minimum future rentals receivable on
noncancelable operating leases at September 30, 1997:
Year ending September 30:
1998............................................. $ 449
1999............................................. 20
2000............................................. 12
---
Total minimum future rentals receivable.......... $ 481
===
Note 7. Direct Financing Leases
The components of the net investment in direct financing leases at
September 30, 1997 and December 31, 1996 are as follows:
1997 1996
---- ----
Future minimum lease payments receivable.......... $ 705 $ 967
Residual value ................................... 3 4
Less: unearned income ............................ (180) (276)
---- ----
Net investment in direct financing leases ........ $ 528 $ 695
==== ====
The following is a schedule by year of minimum lease payments receivable
under the eight direct financing leases at September 30, 1997:
1998................................................. $ 267
1999................................................. 231
2000................................................. 189
2001................................................. 18
---
Total minimum lease payments receivable.............. $ 705
===
Rental income for the nine- and three-month periods ended September 30,
1997 and 1996 includes $92, $31, $180, $51, respectively, of income from
direct financing leases.
Note 8. Redemptions
The following redemption offerings were consummated by the Partnership
during the nine-month period ended September 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......................... - - -
September 30, 1997.................... - - -
------ ----- ------
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.
<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 nine- and three-month periods
ended September 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's offering of limited partnership interests was closed out
at $75,000.
From time to time, the Partnership redeems units from limited partners 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 three months ended March 31, 1997, the
Partnership redeemed 126 units for a total dollar amount of $1. The Partnership
used cash provided by operations to redeem these units. During the three-month
periods ended June 30, and September 30, 1997 the Partnership did not redeem
Partnership units.
The Partnership invests working capital and cash flow from operations prior to
its distribution to the partners in short-term, liquid investments. The
Partnership's cash is affected by cash provided by or used in operating,
investing and financing activities. These activities are discussed in detail
below.
During the nine-month period ended September 30, 1997, the Partnership declared
cash distributions to limited partners pertaining to the period from December
1996 through August 1997, in the amount of $4,472. These distributions represent
8% of original capital (measured on an annualized basis) on each unit. On a GAAP
basis, $2,722 of these distributions 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 nine-month periods ended September 30, 1997 and 1996, the Partnership
had net cash provided by operating activities of $6,598 and $6,129,
respectively. The increase was primarily attributable to a decrease in due from
affiliates, net of $1,354, and was offset by a decrease in net earnings of
$1,641. 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 48% for the nine months
ended September 30, 1997 compared to equivalent period in 1996 was primarily due
to a 12% 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". As
explained below under "Results of Operations", demand for leased containers has
declined compared to the prior period, 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 nine months ended September 30, 1997 was $2,614 compared to
$1,530 for the same period in 1996. This difference reflects that, on a cash
basis, the Partnership purchased more Equipment during the nine months ended
September 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 Equipment that was purchased used 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 units of Equipment purchased 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 nine-month periods ended September 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................... 17,872 18,190
Average............................. 17,944 18,420
The decline in the size of the average container fleet of 3% from the nine-month
period ended September 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. As Equipment is sold in future
sales, proceeds are not likely to be sufficient to replace all of the Equipment
sold. Therefore, the decline in the size of the fleet is likely to continue,
even though the Partnership is still reinvesting funds in new Equipment. The
decline in the container fleet contributed to an overall decline in rental
income from the nine-month period ended September 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 averaged 76% and 82% during the
nine months ended September 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
nine months ended September 30, 1997 and 1996.
The Partnership's income from operations for the nine-month periods ended
September 30, 1997 and 1996 was $1,649 and $3,110, respectively, on total rental
income of $7,770 and $8,837, respectively. The largest component of total rental
income is income from container rentals, which decreased by $1,091, or 14%, 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 7%, average fleet size decreased 3%, and average daily
rental rates decreased 5% from the nine-month period ended September 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 and third quarters there was an improvement in utilization,
however lease rates declined and leasing incentives remained high due to high
levels of off-lease inventory in low demand locations. The General Partners do
not foresee material changes in current market conditions and caution that both
utilization and lease rates could decline further, and leasing incentives could
remain high, adversely affecting the Partnership's 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 September 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
nine-month period ending September 30, 1997, the total of these other income
items was $859, an increase of $24 from the equivalent period in 1996. The
primary components of this net increase in other rental income were increases in
DPP and handling income offset by a decrease in location income. DPP income
increased due to an increased number of containers participating in the plan.
This increase was offset by a lower per container average price charged.
Increased container movement resulted in increased handling income for the
nine-months ending September 30, 1997, compared to the same period in 1996.
Location income decreased primarily from lower demand, which required an
increase in credits to lessees for picking up containers from surplus locations.
Direct container expenses, excluding bad debt provision, were $1,559 for the
nine-month period ended September 30, 1997 compared to $1,345 for the equivalent
period in 1996. The increase was primarily due to increases in storage and
repositioning expenses of $178 and $155, respectively, offset by a decrease in
maintenance expense. The increase in storage expenses resulted from the decline
in utilization. Repositioning expense increased due to a greater number of
containers being transported from surplus locations to demand locations during
the nine-month period ended September 30, 1997 compared to the same period in
1996. Maintenance expense decreased primarily due to the decrease in the average
repair costs per container.
Bad debt expense increased from a benefit of $130 for the nine months ended
September 30, 1996 to an expense of $33 for the comparable period in 1997. The
benefit recorded in 1996 resulted from a reduction in reserve requirements for a
specific lessee as a result of a resolution of payment problems.
Depreciation expense increased $170, or 6%, from the nine-month period ended
September 30, 1996 to the comparable period in 1997 despite a 3% decrease in
fleet size. The increase is primarily due to a charge to depreciation expense of
$343 to write down the value of refrigerated containers to their estimated fair
value.
Management fees to affiliates decreased $76, or 9%, for the nine-month period
ended September 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 approximately 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 $188 for both
periods.
General and administrative costs to affiliates decreased by 5%, or $27, from the
nine-month period ended September 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 was $148 for the nine months ended September 30, 1997, representing
a decrease of $180, or 55%, over the equivalent period in 1996. The decrease was
attributable to a $202 decrease in gain on sale of Equipment, offset by a $22
increase in interest income.
Net earnings per limited partnership unit decreased to $0.47 for the nine months
ended September 30, 1997 from $0.91 for the same period in 1996, reflecting the
decrease in net earnings to $1,750 from $3,391 for the respective periods.
The following is a comparative analysis of the results of operations for the
three months ended September 30, 1997 and 1996.
The Partnership's income from operations for the three-month period ended
September 30, 1997 and 1996 was $773 and $1,006, respectively, on total rental
income of $2,698 and $2,831, respectively. The decrease in total rental income
was primarily due to a decrease in income from container rentals, which
decreased by $191, or 7%, from 1996 to 1997. This decline resulted from a
decrease in average on-hire utilization of 1%, a decrease in average fleet size
of 3% ,and a decrease in average daily rental rates of 6% from the three-month
period ended September 30, 1997 to the comparable period in 1996.
The balance of other income items comprising total rental income for the
three-month period ending September 30, 1997 was $295, an increase of $58, or
25%, from the equivalent period in 1996. The primary components of this net
increase in other rental income were increases in DPP and handling income of $31
and $39, respectively. DPP income increased due to a higher number of containers
participating in DPP, offset by a lower average cost per container charged to
lessees. Increased container movement offset by lower average handling charges
to lessees resulted in increased handling income for the three-months ending
September 30, 1997 compared to the same period in 1996.
Direct container expenses, excluding bad debt provision, were $609 for the
three-month period ended September 30, 1997, compared to $423 for the same
period in 1996. The increase of $186 was primarily due to an increase in
repositioning, handling and DPP expenses of $119, $37, and $33, respectively.
The increase in repositioning resulted from increased container movement from
surplus locations to higher demand locations. Increased container movement also
resulted in increased handling expense which was slightly offset by a lower
average cost per container. DPP expense increased due to more containers
requiring repairs.
The bad debt benefit decreased to a benefit of $19 for the three-month period
ending September 30, 1997 from a benefit of $72 for the equivalent period in
1996, due to higher reserve requirements.
Depreciation expense decreased to $896 for the three-month period ended
September 30, 1997, compared to $996 for the equivalent period in 1996,
reflecting the decrease in average fleet size between periods.
The decrease in management fees to affiliates of $11, or 4%, from the
three-month period ended September 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 decreased by $10, or 6%, for the
three months ended September 30, 1997, compared to the equivalent period in
1996, primarily due to the decrease in overhead costs allocated from TEM and TFS
during these periods.
Other income was $25 for the three months ended September 30, 1997, representing
a decrease of $105, or 81%, over the equivalent period in 1996. The decrease is
due to a decrease of gain on sale of assets of $116, offset by an increase in
interest income of $11.
Net earnings per limited partnership unit decreased to $0.21 for the three
months ended September 30, 1997 from $0.30 for the same period in 1996,
reflecting the decrease in net earnings to $782 from $1,121 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
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 September 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: November 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 November 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
President (Principal Executive November 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: November 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 November 13, 1997
- ------------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ James E. Hoelter President (Principal Executive November 13, 1997
- ------------------------------- Officer) and Director
James E. Hoelter
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Incoem Fund II, LP
</LEGEND>
<CIK> 0000853086
<NAME> Textainer Equipment Income Fund II, LP
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,110
<SECURITIES> 0
<RECEIVABLES> 4,583
<ALLOWANCES> 1,047
<INVENTORY> 0
<CURRENT-ASSETS> 5
<PP&E> 61,777
<DEPRECIATION> 22,650
<TOTAL-ASSETS> 43,778
<CURRENT-LIABILITIES> 1,974
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 41,804
<TOTAL-LIABILITY-AND-EQUITY> 43,778
<SALES> 0
<TOTAL-REVENUES> 7,770
<CGS> 0
<TOTAL-COSTS> 6,121
<OTHER-EXPENSES> (148)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,797
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,797
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
