TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
May 14, 1998
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, 1998.
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 March 31, 1998
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, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997.................... 3
Statements of Earnings for the three months ended
March 31, 1998 and 1997 (unaudited).................................................. 4
Statements of Partners' Capital for the three months ended
March 31, 1998 and 1997 (unaudited).................................................. 5
Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (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, 1998 and December 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $21,847 (1997: $22,257) $ 36,892 $ 38,315
Cash 1,773 981
Net investment in direct financing leases (note 7) 606 493
Accounts receivable, net of allowance for doubtful
accounts of $431 (1997: $1,024) (note 8) 2,602 2,864
Due from affiliates, net (note 5) 201 117
Prepaid expenses 94 95
--------------- ---------------
$ 42,168 $ 42,865
=============== ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 264 $ 254
Accrued liabilities 169 229
Accrued damage protection plan costs (note 2) 240 226
Warranty claims (note 3) 545 599
Container purchases payable 322 342
--------------- ---------------
Total liabilities 1,540 1,650
--------------- ---------------
Partners' capital:
General partners (90) (90)
Limited partners 40,718 41,305
--------------- ---------------
Total partners' capital 40,628 41,215
--------------- ---------------
Commitments (note 11)
$ 42,168 $ 42,865
=============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Earnings
For the three months ended March 31, 1998 and 1997
(Amounts in thousands except for unit and per unit
amounts)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Rental income $ 2,643 $ 2,524
--------------- ---------------
Costs and expenses:
Direct container expenses 618 396
Bad debt benefit (21) (11)
Depreciation 867 1,007
Professional fees 6 7
Management fees to affiliates (note 5) 209 237
General and administrative costs to affiliates (note 5) 166 179
Other general and administrative costs 32 33
--------------- ---------------
1,877 1,848
--------------- ---------------
Income from operations 766 676
--------------- ---------------
Other income:
Interest income 17 25
Gain on sale of containers (note 9) 137 6
--------------- ---------------
154 31
--------------- ---------------
Net earnings $ 920 $ 707
=============== ===============
Allocation of net earnings (note 5):
General partners $ 15 $ 15
Limited partners 905 692
--------------- ---------------
$ 920 $ 707
=============== ===============
Limited partners' per unit share
of net earnings $ 0.24 $ 0.19
=============== ===============
Limited partners' per unit share
of distributions $ 0.40 $ 0.40
=============== ===============
Weighted average number of limited
partnership units outstanding 3,726,977 3,726,977
=============== ===============
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Partners' Capital
----------------------------------------------------------
General Limited Total
------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1997 $ (90) $ 44,617 $ 44,527
Distributions (15) (1,491) (1,506)
Redemptions (note 10) - (1) (1)
Net earnings 15 692 707
------------- ---------------- ---------------
Balances at March 31, 1997 $ (90) $ 43,817 $ 43,727
============= ================ ===============
Balances at January 1, 1998 $ (90) $ 41,305 $ 41,215
Distributions (15) (1,492) (1,507)
Net earnings 15 905 920
------------- ---------------- ---------------
Balances at March 31, 1998 $ (90) $ 40,718 $ 40,628
============= ================ ===============
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 920 $ 707
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 867 1,007
Decrease in allowance for doubtful accounts, excluding
write off (note 8) (77) (43)
Gain on sale of containers (note 9) (137) (6)
Changes in assets and liabilities:
Proceeds from principal payments of direct financing leases 53 69
Decrease in accounts receivable, excluding write off (note 8) 339 289
(Increase) decrease in due from affiliates, net (190) 1,209
Decrease in prepaid expenses 1 6
Decrease in accounts payable and accrued liabilities (50) (66)
Increase (decrease) in accrued damage protection plan costs 14 (40)
Decrease in warranty claims (54) (53)
--------------- --------------
Net cash provided by operating activities 1,686 3,079
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of containers 963 486
Container purchases (350) (2,128)
--------------- --------------
Net cash provided by (used in) investing activities 613 (1,642)
--------------- --------------
Cash flows from financing activities:
Redemptions of limited partnership units - (1)
Distributions to partners (1,507) (1,513)
--------------- --------------
Net cash used in financing activities (1,507) (1,514)
--------------- --------------
Net increase (decrease) in cash 792 (77)
Cash at beginning of period 981 1,655
--------------- --------------
Cash at end of period $ 1,773 $ 1,578
=============== ==============
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 three months ended March 31, 1998 and 1997
(Amounts in thousands)
(unaudited)
Supplemental Disclosures:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of container purchases, distributions
to partners and proceeds from sale of containers which had not been paid or
received by the Partnership as of March 31, 1998 and 1997, and December 31, 1997
and 1996, 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, 1998 and 1997.
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Mar. 31 Dec. 31
1998 1997 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Container purchases included in:
Due (from) to affiliates, net.............................. $ (1) $ (3) $ 63 $ 27
Containers purchases payable................................ 322 342 761 426
Distributions to partners included in:
Due to affiliates.......................................... 6 6 6 10
Accounts payable and accrued liabilities................... 77 77 74 77
Proceeds from sale of containers included in:
Due from affiliates........................................ 462 566 585 498
The following table summarizes the amounts of container purchases, distributions
to partners and proceeds from sale of containers 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, 1998 and 1997.
1998 1997
Container purchases recorded.......................................................... $ 332 $ 2,499
Container purchases paid.............................................................. 350 2,128
Distributions to partners declared.................................................... 1,507 1,506
Distributions to partners paid........................................................ 1,507 1,513
Proceeds from sale of containers recorded............................................. 859 573
Proceeds from sale of containers received............................................. 963 486
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Notes to Financial Statements
March 31, 1998
(Amounts in thousands except for per unit amounts)
(unaudited)
Note 1. General
Textainer Equipment Income Fund II, L.P. (the Partnership), a California
Limited Partnership with a maximum life of 20 years, was formed in 1989.
The Partnership owns and leases a fleet of intermodal marine cargo
containers which are leased 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, 1998 and December 31, 1997, and the
results of its operations, changes in partners' capital, and cash flows for
the three-month periods ended March 31, 1998 and 1997, 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, 1997,
in the Annual Report filed on Form 10K.
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
containers. Under the terms of DPP, the Partnership earns additional
revenues on a daily basis and, in return, 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. DPP expenses are included in direct
container expenses in the Statements of Earnings and the related reserve at
March 31, 1998 and December 31, 1997, was $240 and $226, respectively.
Note 3. Warranty Claims
During 1992, 1993 and 1995, the Partnership settled warranty claims against
an equipment manufacturer relating to certain containers. The Partnership
is amortizing the settlement amounts over the remaining estimated useful
lives of the these containers (between six and seven years), reducing
maintenance and repair costs over that time. At March 31, 1998 and December
31, 1997, the unamortized portion of the settlement amounts was equal to
$545 and $599, respectively.
Note 4. Acquisition of Containers
During the three-month periods ended March 31, 1998 and 1997, the
Partnership purchased containers with a cost of $332 and $2,499,
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 containers outside the
United States on behalf of the Partnership. TCC, TEM, TL and TAS are
subsidiaries of Textainer Group Holdings Limited (TGH). The General
Partners manage and control the affairs of the Partnership.
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 acquisition fee, an incentive management
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 $17 and $103 of equipment acquisition fees as part of container
rental equipment costs for the three-month periods ended March 31, 1998 and
1997, respectively, and incurred $63 of incentive management fees in both
periods. No equipment liquidation fees were incurred in either period.
The Partnership's container fleet is managed by TEM. In its role as
manager, TEM has authority to acquire, hold, manage, lease, sell and
dispose of the Partnership's containers. 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, net at March 31, 1998 and December 31,1997.
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, 1998 and 1997 these fees totaled
$146 and $174, respectively. The Partnership's container fleet is leased by
TEM to third party lessees on operating master leases, spot leases, term
leases and direct finance leases. The majority of the container fleet 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 incurred and paid by TFS and TEM. Total general and
administrative costs allocated to the Partnership were $166 and $179 for
the three-month periods ended March 31, 1998 and 1997, respectively, of
which $79 and $91 were for salaries.
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the managed containers to the total
container fleet managed by TEM during the period. TFS allocates these
costs based on the ratio of the Partnership's containers to the total
container fleet of all limited partnerships managed by TFS. General and
administrative costs allocated to the Partnership by TEM were $151 and
$157 for the three-month periods ended March 31, 1998 and 1997,
respectively. TFS allocated $15 and $22 of general and administrative
costs to the Partnership during the same periods.
The General Partners or TAS may acquire containers in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such containers for the Partnership. The containers 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
containers resold to the Partnership.
At March 31, 1998 and December 31, 1997, due from affiliates, net is
comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM............................. $ 241 $ 152
---- ----
Due to affiliates:
Due to TFS............................... 25 25
Due to TL................................ 1 1
Due to TCC............................... 14 9
----- ----
40 35
----- ----
Due from affiliates, net.................... $ 201 $ 117
==== ====
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 amounts due to the General Partners which are outstanding for
more than one month, to the extent such balances relate to loans for
container 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 amounts due to the General Partners for the three-month periods
ended March 31, 1998 or 1997.
Note 6. Rentals Under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at March 31, 1998. Although the leases are
generally cancelable at the end of each twelve-month period with a
penalty, the following schedule assumes that the leases will not be
terminated.
Year ending March 31:
1999............................................. $ 288
2000............................................. 23
2001............................................. 9
----
Total minimum future rentals receivable.......... $ 320
====
Note 7. Direct Financing Leases
The components of the net investment in direct financing leases at March
31, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Future minimum lease payments receivable.......... $ 798 $ 650
Residual value ................................... - -
Less: unearned income ............................ (192) (157)
----- -----
Net investment in direct financing leases ........ $ 606 $ 493
==== ====
The following is a schedule by year of minimum lease payments receivable
under the eight direct financing leases as of March 31, 1998:
Year ending March 31:
1999................................................. $ 344
2000................................................. 316
2001................................................. 138
----
Total minimum lease payments receivable.............. $ 798
====
Rental income for the three-month periods ended March 31, 1998 and 1997
includes $32 and $64, respectively, of income from direct financing leases.
Note 8. Accounts Receivable Write-Off
During the three-month period ending March 31, 1998, the Partnership
wrote-off $516 of delinquent receivables from two lessees against which
reserves were recorded in 1994 and 1995.
Note 9. Insurance Proceeds
In February 1998, the Partnership wrote-off 32 containers held by a lessee
that were deemed unrecoverable. These containers had a net book value of
$175 for which the Partnership received insurance proceeds of $202
resulting in a gain of $27.
Note 10. 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, 1996 22,897 $11.56 $ 265
Quarter ended:
March 31, 1997........................ 126 $ 8.71 1
------ -----
Partnership to date................... 23,023 $11.54 $ 266
====== =====
</TABLE>
There were no redemptions during the three-month period ended March 31,
1998. The redemption price is fixed by formula.
Note 11. Commitments
At March 31, 1998, the Partnership has committed to purchase 110 new
containers at an approximate total purchase price of $370 which includes
acquisition fees of $18. These commitments were made to TAS which, as the
contracting party, has in turn committed to purchase these containers on
behalf of the Partnership.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Amounts in thousands except for unit and 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, 1998 and 1997. 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 offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $1,000 on December 19, 1989, and on January 15, 1991 the
Partnership had received its maximum subscription amount of $75,000.
From time to time, the Partnership redeems units from limited partners for a
specified redemption value which is set by formula. 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-month period ended March 31, 1998
the Partnership did not redeem any 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 three-month period ended March 31, 1998, the Partnership declared
cash distributions to limited partners pertaining to the period from December
1997 through February 1998, in the amount of $1,492. These distributions
represent a return of 8% on original capital (measured on an annualized basis)
on each unit. On a cash basis, all of these distributions were from operations.
On a GAAP basis, $587 of these distributions was a return of capital and the
balance was from net earnings.
Net cash provided by operating activities for the three-month periods ending
March 31, 1998 and 1997, was $1,686 and $3,079, respectively. The decrease of
$1,393, or 45%, is primarily attributable to the $190 increase in due from
affiliates, net for the three month period ended March 31, 1998 compared to a
$1,209 decrease in due from affiliates, net during the comparable period in
1997. Fluctuations in due from affiliates, net result from timing differences in
the payment of expenses and fees and or in the remittance of net rental
revenues.
For the three-month period ending March 31, 1998, net cash provided by investing
activities (the purchase and sale of containers) was $613, compared to net cash
used in investing activities of $1,642 for the same period in 1997. The
difference of $2,255 is primarily due to the Partnership having purchased
significantly more containers during the three-month period ended March 31, 1997
than in the comparable period in 1998. The General Partners believe that these
differences reflect normal fluctuations in container sales and purchases.
However, recent container purchases (reinvestment) have been lower than
anticipated due to the adverse effect of market conditions on cash available for
reinvestment. Market conditions are discussed more fully below under "Results of
Operations". Consistent with its investment objectives and the General Partners'
determination that containers can be profitably sold or bought at any time, the
Partnership intends to reinvest all or a significant amount of proceeds from
future container sales in additional containers. The Partnership sells
containers as they reach the end of their estimated useful life however,
additional containers purchased may not equal the number of containers sold.
At March 31, 1998, the Partnership has committed to purchase 110 new containers
at an approximate total purchase price of $370 which includes acquisition fees
of $18. These commitments were made to TAS which, as the contracting party, has
in turn committed to purchase these containers on behalf of the Partnership. At
March 31, 1998 the Partnership had sufficient cash on hand to meet these
commitments. In the event the Partnership decides not to purchase these
containers, one of the General Partners or an affiliate of the General Partners
will retain the containers for its own account.
Results of Operations
The Partnership's income from operations, which consists primarily of rental
income, container depreciation, direct container expenses, management fees, and
reimbursement of administrative expenses was directly related to the size of the
container fleet during the three-month periods ended March 31, 1998 and 1997, as
well as certain other factors as discussed below. The following is a summary of
the size of the container fleet (in units) available for lease during those
periods:
1998 1997
---- ----
Opening container fleet............. 17,697 18,016
Closing container fleet............. 17,297 18,081
Average container fleet............. 17,497 18,049
The decline in the average inventory from the three-month period ending March
31, 1997 to the equivalent period in 1998 was due to the Partnership having sold
more containers than it purchased since March 31, 1997. Although sales proceeds
were used to purchase additional containers, fewer containers were bought than
sold, resulting in a net decrease in the size of the container fleet. When
containers are sold in the future, sales proceeds are not likely to be
sufficient to replace all of the containers sold. This factor has contributed to
a slower rate of reinvestment than had been expected by the General Partners.
This trend is expected to continue.
Rental income and direct container expenses are also affected by utilization of
the containers, which was 79% and 74% on average during the three-month periods
ended March 31, 1998 and 1997, respectively. In addition, rental income is
affected by daily rental rates and leasing incentives.
The following is a comparative analysis of the results of operations for the
three-month periods ended March 31, 1998 and 1997.
The Partnership's income from operations for the three-month periods ending
March 31, 1998 and 1997 was $766 and $676, respectively, on rental income of
$2,643 and $2,524, respectively. The increase in rental income of $119, or 5%,
from the three-month period ended March 31, 1997 to the comparable period in
1998 was primarily attributable to an increase in other rental income which is
discussed below. Income from container rentals, the major component of total
revenue, decreased $74, or 3%, from the three-month period ending March 31, 1997
to the same period in 1998. This decrease was primarily due to the decrease in
average rental rates of 4% and the decrease in containers available for lease of
3%, offset by the increase in average utilization of 7%, and the decrease in
average leasing incentives of 14%.
Container utilization and rental rates declined during 1996 and 1997 primarily
due to decreased demand for leased containers and increased competition. The
decrease in demand for leased containers resulted from changes in the business
of shipping line customers consisting primarily of (i) over-capacity resulting
from the 1995 and 1996 additions of new, larger ships to the existing container
ship fleet at a rate in excess of the growth rate in containerized cargo trade;
(ii) shipping line alliances and other operational consolidations that have
allowed shipping lines to operate with fewer containers; and (iii) shipping
lines reducing their ratio of leased versus owned containers by purchasing
containers. This decreased demand, along with the entry of new leasing company
competitors offering low container rental rates to shipping lines, resulted in
downward pressure on rental rates, also caused leasing companies to offer higher
leasing incentives and other discounts to shipping lines. Rental rates were also
adversely affected by a drop in the purchase price of new containers which
resulted in additional downward pressure on rental rates.
Utilization increased during the second and third quarters of 1997 and began
declining again during the fourth quarter of 1997 and into the first quarter of
1998. Despite these declines, utilization for the first quarter of 1998 was
greater than the average first quarter 1997 utilization and greater than the
average utilization for the year ended December 31, 1997. Rental rates
stabilized during the later half of the first quarter of 1998 and, overall, were
comparable to fourth quarter 1997 rental rates. Leasing incentives reached a
high during mid-1997, began declining during the second half of 1997, and have
stabilized during the first quarter of 1998. The improvement in utilization and
the stabilization in rental rates and leasing incentives are primarily due to
increased demand in Asia. The weakening of many Asian currencies resulted in a
significant increase in exports which has created a strong demand for containers
in Asia. The General Partners believe that market conditions have stabilized and
may be slowly improving; however, for the near term, the General Partners do not
foresee any material changes in existing market conditions and caution that both
utilization and lease rates could decline again, adversely affecting the
Partnership's operating results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's containers under short-term operating leases. At
March 31, 1998 and 1997, there were 209 and 75 containers under direct financing
leases, respectively.
The balance of other rental income consists of other lease-related items,
primarily income from charges to lessees for picking up containers from surplus
locations less credits granted to lessees for leasing containers from less
desirable locations (location income), income for handling and returning
containers and income from charges to lessees for a Damage Protection Plan
(DPP). For the three months ended March 31, 1998, the total of these other
rental income items was $437, an increase of $193, or 79%, from the equivalent
period in 1997. The primary component of this increase was an increase in
location income of $162 which increased due to the inclusion of certain credits
received during 1997 and 1998 which had previously been applied against
repositioning expense and also due to an increase in the average drop-off charge
per container and a decrease in credits given to lessees to pick up containers
from certain locations.
Direct container expenses increased $222, or 56%, for the three-month period
ending March 31, 1998 compared to the equivalent period in 1997. The increase
was primarily due to increases in repositioning and DPP expenses of $154 and
$65, respectively. Repositioning expense increased due to the removal of certain
credits from repositioning costs to other rental income as discussed above, and
due to a greater number of containers being transported from surplus locations
to demand locations. DPP expense increased due to a greater number of containers
requiring repair, offset by a lower average repair cost per container.
Bad debt benefit for the three-month periods ending March 31, 1998 and 1997 was
$21 and $11, respectively. The benefit recorded in 1998 was primarily due to the
Partnership writing-off certain receivables that had reserves in excess of the
receivable.
Depreciation expense decreased $140, or 14%, between the three-month periods
ending March 31, 1998 and 1997 primarily due to the smaller average fleet size
and due to certain containers having been acquired used, which have now been
fully depreciated.
Management fees to affiliates decreased $28, or 12%, from the three-month period
ended March 31, 1997 to the comparable period ending in 1998 primarily due to an
adjustment made to reduce equipment management fees resulting from the write-off
of receivables for two lessees.
General and administrative costs to affiliates decreased $13, or 7%, from the
three-month period ended March 31, 1997 to the comparable period in 1998 due to
a decrease in overhead costs allocated by TFS and TEM.
Other income increased $123 primarily due to an increase in gain on sale of
containers between the three-month periods ending March 31, 1998 and 1997. Gain
on sale of containers increased primarily due to the write-off of certain
containers held by a lessee that were deemed unrecoverable for which the
Partnership received insurance proceeds for these containers in excess of their
net book value.
Net earnings per limited partnership unit increased from $0.19 to $0.24 from the
three-month period ending March 31, 1997 compared to the same period in 1998,
reflecting the increase in limited partners net earnings from $692 to $905,
respectively.
Many computer systems may experience difficulty processing dates beyond the year
1999 and, as such, some computer hardware and software will need to be modified
prior to the year 2000 to remain functional. Certain of the Partnership's and
General Partner's core internal systems that have recently been implemented are
year 2000 compliant. The remaining core internal systems are scheduled to be
revised to be year 2000 compliant by the end of 1998. Based on its initial
evaluation, the Partnership and the General Partners do not believe that the
cost of remedial actions relating to these systems will have a material adverse
effect on the Partnership's results of operations and financial condition.
Additionally, the Partnership and the General Partners are also completing a
preliminary assessment of year 2000 issues not related to its core systems,
including issues surrounding systems that interface with external third parties.
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 containers. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep the containers under lease, rather than the geographic location
of the containers or the domicile of the lessees. The containers are generally
operated on the international high seas rather than on domestic waterways. The
containers are subject to the risk of war or other political, economic or social
occurrence where the containers are used, which may result in the loss of
containers, 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, 1998 which would result in such a risk
materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning containers after they come off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the containers, 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 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 14, 1998
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 May 14, 1998
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
_____________________ President (Principal Executive May 14, 1998
Philip K. Brewer Officer)
</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 14, 1998
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 May 14, 1998
_____________________ (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/ Philip K. Brewer President (Principal Executive May 14, 1998
_____________________ Officer)
Philip K. Brewer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Income Fund II, L.P. 10Q
</LEGEND>
<CIK> 0000853086
<NAME> Textainer Equipment Income Fund II, L.P.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,773
<SECURITIES> 0
<RECEIVABLES> 3,840
<ALLOWANCES> 431
<INVENTORY> 0
<CURRENT-ASSETS> 94
<PP&E> 58,739
<DEPRECIATION> 21,847
<TOTAL-ASSETS> 42,168
<CURRENT-LIABILITIES> 1,540
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 40,628
<TOTAL-LIABILITY-AND-EQUITY> 42,168
<SALES> 0
<TOTAL-REVENUES> 2,643
<CGS> 0
<TOTAL-COSTS> 1,877
<OTHER-EXPENSES> (154)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 920
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 920
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
