TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
August 13, 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 10Q for the Second
Quarter ended June 30, 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 June 30, 1998
Commission file number 0-19145
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
A California Limited Partnership
(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, CA 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>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Quarterly Report on Form 10Q for the
Quarter Ended June 30, 1998
Table of Contents
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Page
Item 1. Financial Statements
Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997.................................. 3
Statements of Earnings for the three and six months
ended June 30, 1998 and 1997 (unaudited).......................................................... 4
Statements of Partners' Capital for the six months
ended June 30, 1998 and 1997 (unaudited).......................................................... 5
Statements of Cash Flows for the six months
ended June 30, 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>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
June 30, 1998 and December 31, 1997
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
-------------- -------------
(unaudited)
Assets
Container rental equipment, net of accumulated
depreciation of $21,608 (1997: $22,257) $ 36,465 $ 38,315
Cash 1,611 981
Net investment in direct financing leases (note 7) 551 493
Accounts receivable, net of allowance for doubtful
accounts of $377 (1997: $1,024) (note 8) 2,420 2,864
Due from affiliates, net (note 5) 234 117
Prepaid expenses 63 95
-------------- -------------
$ 41,344 $ 42,865
============== =============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 306 $ 254
Accrued liabilities 135 152
Accrued damage protection plan costs (note 2) 232 226
Warranty claims (note 3) 492 599
Container purchases payable 247 342
Deferred quarterly distributions 75 77
-------------- -------------
Total liabilities 1,487 1,650
-------------- -------------
Partners' capital:
General partners (90) (90)
Limited partners 39,947 41,305
-------------- -------------
Total partners' capital 39,857 41,215
-------------- -------------
Commitments (note 10)
$ 41,344 $ 42,865
============== =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Earnings
For the three and six months ended June 30, 1998 and 1997 (Amounts in thousands
except for unit and per unit amounts) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-------------- -------------- ------------- -------------
Rental income $ 2,533 $ 2,548 $ 5,176 $ 5,072
-------------- -------------- ------------- -------------
Costs and expenses:
Direct container expenses 558 553 1,176 950
Bad debt (benefit) expense (54) 64 (75) 52
Depreciation 865 1,277 1,732 2,284
Professional fees 11 9 17 16
Management fees to affiliates (note 5) 240 242 449 479
General and administrative costs to affiliates (note 5) 141 173 307 352
Other general and administrative costs 13 30 45 63
-------------- -------------- ------------- -------------
1,774 2,348 3,651 4,196
-------------- -------------- ------------- -------------
Income from operations 759 200 1,525 876
-------------- -------------- ------------- -------------
Other (expense) income:
Interest income 23 17 40 42
(Loss) gain on sale of containers (47) 75 90 81
-------------- -------------- ------------- -------------
(24) 92 130 123
-------------- -------------- ------------- -------------
Net earnings $ 735 $ 292 $ 1,655 $ 999
============== ============== ============= =============
Allocation of net earnings (note 5):
General partners $ 16 $ 16 $ 31 $ 31
Limited partners 719 276 1,624 968
-------------- -------------- ------------- -------------
$ 735 $ 292 $ 1,655 $ 999
============== ============== ============= =============
Limited partners' per unit share
of net earnings $ 0.19 $ 0.07 $ 0.44 $ 0.26
============== ============== ============= =============
Limited partners' per unit share
of distributions $ 0.40 $ 0.40 $ 0.80 $ 0.80
============== ============== ============= =============
Weighted average number of limited
partnership units outstanding 3,726,977 3,726,977 3,726,977 3,726,977
============== ============== ============= =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the six months ended June 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------------
Partners' Capital
--------------------------------------------------------
General Limited Total
------------- -------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1997 $ (90) $ 44,617 $ 44,527
Distributions (31) (2,982) (3,013)
Redemptions (note 9) - (1) (1)
Net earnings 31 968 999
------------- -------------- ---------------
Balances at June 30, 1997 $ (90) $ 42,602 $ 42,512
============= ============== ===============
Balances at January 1, 1998 $ (90) $ 41,305 $ 41,215
Distributions (31) (2,982) (3,013)
Net earnings 31 1,624 1,655
------------- -------------- ---------------
Balances at June 30, 1998 $ (90) $ 39,947 $ 39,857
============= ============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Cash Flows
For the six months ended June 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
------------- -------------
Cash flows from operating activities:
Net earnings $ 1,655 $ 999
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,732 2,284
Decrease in allowance for doubtful accounts, excluding
write-off (note 8) (131) (3)
Gain on sale of containers (90) (81)
Changes in assets and liabilities:
Proceeds from principal payments of direct financing leases 109 143
Decrease in accounts receivable, excluding write-off (note 8) 575 96
(Increase) decrease in due from affiliates, net (339) 1,461
Decrease in prepaid expenses 32 13
Increase in accounts payable and accrued liabilities 35 96
Increase (decrease) in accrued damage protection plan costs 6 (51)
Decrease in warranty claims (107) (106)
------------- -------------
Net cash provided by operating activities 3,477 4,851
------------- -------------
Cash flows from investing activities:
Proceeds from sale of containers 1,784 1,426
Container purchases (1,615) (4,087)
------------- -------------
Net cash provided by (used in) investing activities 169 (2,661)
------------- -------------
Cash flows from financing activities:
Redemptions of limited partnership units - (1)
Distributions to partners (3,016) (3,022)
------------- -------------
Net cash used in financing activities (3,016) (3,023)
------------- -------------
Net increase (decrease) in cash 630 (833)
Cash at beginning of period 981 1,655
------------- -------------
Cash at end of period $ 1,611 $ 822
============= =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the six months ended June 30, 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 as of June 30, 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 six-month
periods ended June 30, 1998 and 1997. <TABLE> <CAPTION>
Jun. 30 Dec. 31 Jun. 30 Dec. 31
1998 1997 1997 1996
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates.............................. $ 50 $ (3) $ 15 $ 27
Container purchases payable.................... 247 342 750 426
Distributions to partners included in:
Due to affiliates.............................. 5 6 6 10
Deferred quarterly distributions............... 75 77 72 77
Proceeds from sale of containers included in:
Due from affiliates............................ 396 566 639 498
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
six-month periods ended June 30, 1998 and 1997.
1998 1997
---- ----
Container purchases recorded...................................................... $ 1,573 $ 4,399
Container purchases paid.......................................................... 1,615 4,087
Distributions to partners declared................................................ 3,013 3,013
Distributions to partners paid.................................................... 3,016 3,022
Proceeds from sale of containers recorded......................................... 1,614 1,567
Proceeds from sale of containers received......................................... 1,784 1,426
See accompanying notes to financial statements
</TABLE>
<PAGE>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Notes To Financial Statements
For the three and six months ended June 30, 1998 and 1997 (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 June 30, 1998 and December 31, 1997, and the
results of its operations, changes in partners' capital and cash flows for
the three- and six-month periods ended June 30, 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.
Certain reclassifications not affecting net earnings have been made to
prior year amounts to conform with 1998 financial statement presentation.
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 June 30, 1998 and December 31, 1997, was $232 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 life of these containers (between six and seven years),
reducing maintenance and repair costs over that time. At June 30, 1998 and
December 31, 1997, the unamortized portion of the settlement amount was
$492 and $599, respectively.
Note 4. Acquisition of Containers
During the six-month periods ended June 30, 1998 and 1997, the Partnership
purchased containers with a cost of $1,573 and $4,399, 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, net earnings or losses and
partnership distributions are allocated 1% to the General Partners and 99%
to the limited partners, with the exception of gross income as defined in
the Partnership Agreement. Gross income is allocated to the General
Partners to the extent that their partners' capital accounts deficits
exceed the portion of syndication and offering costs allocated to them. On
termination of the Partnership, the General Partners shall be allocated
gross income equal to their allocations of syndication and offering costs.
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 $74 and $194 of equipment acquisition fees as part of
container rental equipment costs during the six-month periods ended June
30, 1998 and 1997. The Partnership incurred $63 and $126 of incentive
management fees during the three- and six-month periods ended June 30,
1998 and 1997. No equipment liquidation fees were incurred during 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 the 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 June 30, 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.
These fees totaled $177 and $323 for the three- and six-month periods
ended June 30, 1998 and $179 and $353 for the comparable periods in 1997.
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. For the three- and
six-month periods ended June 30, 1998, total general and administrative
costs allocated to the Partnership were $141 and $307, of which $60 and
$128 were for salaries. Total general and administrative costs allocated
to the Partnership were $173 and $352 for the three- and six-month periods
ended June 30, 1997, of which $95 and $187 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 $127 and
$277 for the three- and six-month periods ended June 30, 1998 and were
$148 and $305 for the comparable periods in 1997. TFS allocated $14 and
$30 of general and administrative costs to the Partnership during the
three- and six-month periods ended June 30, 1998 and allocated $25 and $47
for the comparable periods in 1997.
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 June 30, 1998 and December 31, 1997, due from affiliates, net is
comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM................................... $ 316 $ 152
----- -----
Due to affiliates:
Due to TFS..................................... 20 25
Due to TL...................................... 1 1
Due to TAS..................................... 46 -
Due to TCC..................................... 15 9
------ -----
82 35
------ -----
Due from affiliates, net $ 234 $ 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 remittance 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
expense incurred on amounts due to the General Partners for the three- and
six-month periods ended June 30, 1998 or 1997.
Note 6. Rentals Under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at June 30, 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 June 30:
1999............................................. $ 397
2000............................................. 38
2001............................................. 7
2002............................................. 2
2003............................................. 1
----
Total minimum future rentals receivable.......... $ 445
====
Note 7. Direct Financing Leases
The components of the net investment in direct financing leases at June
30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Future minimum lease payments receivable............ $ 711 $ 650
Less: unearned income.............................. (160) (157)
---- -----
Net investment in direct financing leases........... $ 551 $ 493
==== =====
The following is a schedule by year of minimum lease payments receivable
under the sixteen direct financing leases as of June 30, 1998:
Year ending June 30:
1999............................................... $ 343
2000............................................... 305
2001............................................... 63
----
Total minimum lease payments receivable............ $ 711
====
Rental income for the three- and six-month periods ended June 30, 1998 and
1997 includes $38 and $70 and $30 and $61, respectively, of income from
direct financing leases.
Note 8. Accounts Receivable Write-Off
During the six-month period ending June 30, 1998, the Partnership
wrote-off $516 of delinquent receivables from two lessees against which
reserves were recorded in 1994 and 1995.
Note 9. Redemptions
The following redemption offerings were consummated by the Partnership
during the six-month period ended June 30, 1997:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
<S> <C> <C> <C>
Balance at December 31, 1996....... 22,897 $11.56 $ 265
Quarter ended:
March 31, 1997................... 126 $8.71 -
------ ----
1
Partnership to date.............. 23,023 $11.55 $ 266
====== ====
</TABLE>
There were no redemptions during the six-month period ended June 30, 1998.
The redemption price is fixed by formula.
Note 10. Commitments
At June 30, 1998, the Partnership has committed to purchase 61 new
containers at an approximate total purchase price of $202 which includes
acquisition fees of $10. 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- and six-month periods
ended June 30, 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 six-month period ended June 30, 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 six-month period ended June 30, 1998, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1997
through May 1998 in the amount of $2,982. 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,
$1,358 of these distributions was a return of capital and the balance was from
net income.
At June 30, 1998, the Partnership had committed to purchase 61 new containers at
an approximate total purchase price of $202 which includes acquisition fees of
$10. At June 30, 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 acquire the containers for its own account.
Net cash provided by operating activities for the six-month periods ending June
30, 1998 and 1997, was $3,477 and $4,851, respectively. The decrease of $1,374,
or 28%, is primarily attributable to an increase in due from affiliates, net
offset by an increase in net earnings. Due from affiliates, net decreased $1,461
for the six-month period ending June 30, 1997 compared to an increase of $339
for the comparable period in 1998. The fluctuation resulted from timing
differences in payment of expenses and fees and or in remittance of net rental
revenues. The increase in net earnings of $656, or 66%, resulted primarily from
an increase in other rental revenue which is discussed more fully in "Results of
Operations."
For the six-month period ending June 30, 1998, net cash provided by investing
activities (the purchase and sale of containers) was $169 compared to net cash
used in investing activities of $2,661 for the comparable period in 1997. Net
cash provided by investing activities increased $2,830 primarily due to the
Partnership having purchased more containers during the six-month period ended
June 30, 1997 than in the comparable period in 1998. The General Partners
believe these differences reflect normal fluctuations in container sales and
purchases. However, recent container purchases (reinvestment) are currently
lower than anticipated due to the adverse effect of market conditions on cash
available for reinvestment. Market conditions are discussed more fully under
"Results of Operations". Consistent with its investment objectives, the
Partnership intends to reinvest all or a significant amount of proceeds from
future container sales in additional containers. However, due to the difference
between sales proceeds and new containers prices, the number of additional
containers purchased may not equal the number of containers sold.
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 six-month periods ended June 30, 1998 and 1997, as
well as certain other factors as discussed below. The following is a summary of
the container fleet (in units) available for lease during those periods:
1998 1997
Opening container fleet................. 17,697 18,016
Closing container fleet................. 17,066 18,097
Average container fleet................. 17,382 18,057
The decline in the average container fleet of 4% from the six-month period
ending June 30, 1997 to the equivalent period in 1998 was due to the Partnership
having sold more containers than it purchased since June 30, 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 trend, which is
expected to continue, has contributed to a slower rate of reinvestment than had
been expected by the General Partners.
Rental income and direct container expenses are also affected by the utilization
of the container fleet, which was 80% and 74% on average during the six-month
periods ended June 30, 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
six-month periods ended June 30, 1998 and 1997.
The Partnership's income from operations for the six-month periods ending June
30, 1998 and 1997 was $1,525 and $876, respectively, on rental income of $5,176
and $5,072, respectively. The increase in rental income of $104, or 2%, from the
six-month period ended June 30, 1997 to the comparable period in 1998 was
primarily attributable to an increase in other income and was partially offset
by a decrease in income from container rentals. Income from container rentals,
the major component of total revenue, decreased $80, or 2%, primarily due to the
decrease in the average container fleet of 4% and the decrease in average rental
rates of 4%, and was offset by the increase in average on-hire (utilization)
percentage of 8% and the decrease in leasing incentives of 38%.
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, and 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.
Average utilization for the three- and six month-periods ended June 30, 1998 was
greater than the average utilization for the comparable periods in 1997. Despite
the improvement in average utilization from the prior year, utilization has been
slowly declining over the last six months. Rental rates have also been declining
and average rental rates for the six-month period ended June 30, 1998 are lower
than average rental rates for the same period in 1997. These decreases were
offset by decreased leasing incentives during the six-month period ended June
30, 1998 as compared to the same period in 1997. The improvement in utilization
over the prior year and the overall improvement in leasing incentives is
primarily due to increased demand in Asia. The weakening of many Asian
currencies resulted in a significant increase in exports from Asia which has
created a strong demand for containers in certain locations. However, the
weakening of these currencies has also lowered demand in Asia for imports from
North America and Europe resulting in a lower demand for containers in these
areas. For the near term, the General Partners do not foresee material changes
in existing market conditions and caution that both utilization and rental rates
could continue declining, 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
June 30, 1998 and 1997, there were 211 and 79 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 dropping off containers in surplus
locations less credits granted to lessees for leasing containers from surplus
locations (location income), income from charges to lessees for handling and
returning containers and income from charges to lessees for a Damage Protection
Plan (DPP). For the six months ended June 30, 1998, the total of these other
rental income items was $748, an increase of $184 from the equivalent period in
1997. The primary component of this increase was an increase in location income
of $179. Location income increased primarily due to the inclusion of certain
credits received during 1997 and 1998 which had been previously applied against
repositioning expense and due to a decrease in credits given to lessees for
picking up containers from certain locations.
Direct container expenses increased $226, or 24%, from the six-month period
ending June 30, 1997 to the equivalent period in 1998. The increase was
primarily due to increases in repositioning and maintenance and repair expenses
of $211 and $95, offset by a decrease in storage expense of $118. Repositioning
expense increased due to the removal of certain credits from repositioning costs
to other rental income as discussed above and due to a higher average
repositioning cost per container. Maintenance and repair expense increased due
to an increase in the number of units requiring repair, offset by a decrease in
the average repair cost per container, and storage expense decreased due to the
8% increase in utilization.
Bad debt expense decreased from an expense of $52 for the six months ended June
30, 1997 to a benefit of $75 for the comparable period ending June 30, 1998. The
write-off of certain receivables that had reserves in excess of the receivable,
due to insurance proceeds received, as well as the resolution of payment issues
with one lessee resulted in the benefit recorded in 1998.
Depreciation expense decreased $552, or 24%, from the six-month period ended
June 30, 1997 to the same period in 1998 primarily due to a charge to
depreciation expense of $343 to write down the value of the refrigerated
containers owned by the Partnership during the second quarter of 1997 and to due
to the decrease in average fleet size.
Management fees to affiliates decreased $30, or 6%, from the six-month period
ended June 30, 1997 to the comparable period ending in 1998 due to a decrease in
equipment management fees. The decrease in equipment management fees was due to
an adjustment made to reduce fees resulting from the write-off of receivables
for two lessees and was offset by the increase in gross revenue upon which the
equipment management fees are primarily based.
General and administrative costs to affiliates decreased $45, or 13%, from the
six-month period ended June 30, 1997 to the comparable period ending in 1998 due
to the decrease in overhead costs allocated by TFS and TEM.
Other income provided $130 of additional income for the six-month period ending
June 30, 1998, an increase of $7 over the equivalent period in 1997. The
increase was due to an increase in gain on sale of equipment of $9 offset by a
decrease in interest income, net of $2.
Net earnings per limited partnership unit increased from $0.26 to $0.44 from the
six-month period ending June 30, 1997 to the same period in 1998, reflecting the
increase in net earnings allocated to limited partners from $968 to $1,624,
respectively.
The following is a comparative analysis of the results of operations for the
three-month periods ended June 30, 1998 and 1997.
The Partnership's income from operations for the three-month periods ending June
30, 1998 and 1997 was $759 and $200, respectively, on rental income of $2,533
and $2,548, respectively. The decrease in rental income of $15 was due to an $8
decrease in other rental income and a $7 decrease in income from container
rental.
Direct container expenses for the three-month period ending June 30, 1998 were
comparable to the equivalent period in 1997 due to increases in repositioning
and maintenance and repair expenses offset by a decrease in storage expense.
Repositioning expense increased due to an increase in the average repositioning
cost per container, offset by a decrease in the number of containers
repositioned. Maintenance and repair expense increased due to an increase in the
number of units requiring repair offset by a decrease in the average repair cost
per container. Storage expense decreased due to the increase in utilization.
Bad debt expense decreased from an expense of $64 for the three-month period
ended June 30, 1997 to a benefit of $54 for the comparable period in 1998. The
benefit recorded in 1998 was primarily due to the resolution of payment issues
with one lessee and due to lower reserve requirements.
Depreciation expense decreased $412, or 32% from the three-month period ended
June 30, 1997 to the comparable period in 1998 primarily due to a charge of
$343 to depreciation expense to write down the value of the refrigerated
containers in the second quarter of 1997.
Management fees to affiliates were comparable from the three-month period ended
June 30, 1997 to the same period in 1998.
General and administrative costs to affiliates decreased $32, or 19%, from the
three-month period ended June 30, 1997 to the comparable period in 1998 due to
the decrease in overhead costs allocated by TFS and TEM.
Other income decreased $117, to an expense of $24, primarily due to an increase
in loss on sale of containers of $123 from the three-month period ending June
30, 1997 to the equivalent period in 1998.
Net earnings per limited partnership unit increased from $0.07 to $0.19 from the
three-month period ending June 30, 1997 to the same period in 1998, reflecting
the increase in net earnings allocated limited partners from $276 to $719,
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, where Year 2000 issues have been
identified, are currently being revised. 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 continuing their
assessment of Year 2000 issues not related to their core systems, including
issues surrounding systems that interface with external third parties. If
external third party systems are not Year 2000 compliant, those external third
parties may have difficulty conducting ordinary operations, which could
adversely affect the General Partners and the Partnership.
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 its 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 June 30, 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 the Partnership's business.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
A California Limited Partnership
By Textainer Financial Services Corporation
The Managing General Partner
By _______________________________
John R. Rhodes
Executive Vice President
Date: August 13, 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, August 13, 1998
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive August 13, 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: August 13, 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, August 13, 1998
- ------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/Philip K. Brewer President (Principal Executive August 13, 1998
- --------------------------- Officer)
Philip K. Brewer
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,611
<SECURITIES> 0
<RECEIVABLES> 3,582
<ALLOWANCES> 377
<INVENTORY> 0
<CURRENT-ASSETS> 63
<PP&E> 58,073
<DEPRECIATION> 21,608
<TOTAL-ASSETS> 41,344
<CURRENT-LIABILITIES> 1,487
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,857
<TOTAL-LIABILITY-AND-EQUITY> 41,344
<SALES> 0
<TOTAL-REVENUES> 5,176
<CGS> 0
<TOTAL-COSTS> 3,651
<OTHER-EXPENSES> (130)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,655
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,655
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
