TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
May 12, 2000
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 "Partnership") the Partnership's Quarterly Report on Form 10-Q for the
First Quarter ended March 31, 2000.
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 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 10-Q for the
Quarter Ended March 31, 2000
Table of Contents
- ----------------------------------------------------------------------------------------------------------
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - March 31, 2000 (unaudited)
and December 31, 1999................................................................... 3
Statements of Earnings for the three months
ended March 31, 2000 and 1999 (unaudited)............................................... 4
Statements of Partners' Capital for the three months
ended March 31, 2000 and 1999 (unaudited)............................................... 5
Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (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
March 31, 2000 and December 31, 1999
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
(unaudited)
Assets
Container rental equipment, net of accumulated
depreciation of $18,800, (1999: $18,956) (note 5) $ 27,609 $ 28,795
Cash 2,286 2,018
Net investment in direct finance leases (note 4) 264 315
Accounts receivable, net of allowance for doubtful
accounts of $416, (1999: $398) 1,786 2,038
Due from affiliates, net (note 2) 450 499
Prepaid expenses 7 11
---------------- ----------------
$ 32,402 $ 33,676
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 170 $ 187
Accrued liabilities 164 155
Accrued recovery costs 78 74
Accrued damage protection plan costs 273 272
Warranty claims 118 172
Deferred quarterly distributions 69 69
Container purchases payable - 243
---------------- ----------------
Total liabilities 872 1,172
---------------- ----------------
Partners' capital:
General partners - -
Limited partners 31,530 32,504
---------------- ----------------
Total partners' capital 31,530 32,504
---------------- ----------------
$ 32,402 $ 33,676
================ ================
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 months ended March 31, 2000 and 1999
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- -----------------------------------------------------------------------------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Rental income $ 1,968 $ 2,103
---------------- ---------------
Costs and expenses:
Direct container expenses 342 510
Bad debt expense 21 59
Depreciation 676 800
Write-down of containers (note 5) 81 61
Professional fees 17 11
Management fees to affiliates (note 2) 202 210
General and administrative costs to affiliates (note 2) 94 134
Other general and administrative costs 19 24
---------------- ---------------
1,452 1,809
---------------- ---------------
Income from operations 516 294
---------------- ---------------
Other income (expense):
Interest income 32 24
Loss on sale of containers (14) (49)
---------------- ---------------
18 (25)
---------------- ---------------
Net earnings $ 534 $ 269
================ ===============
Allocation of net earnings (note 2):
General partners $ 16 $ 16
Limited partners 518 253
---------------- ---------------
$ 534 $ 269
================ ===============
Limited partners' per unit share
of net earnings $ 0.14 $ 0.07
================ ===============
Limited partners' per unit share
of distributions $ 0.40 $ 0.40
================ ===============
Weighted average number of limited
partnership units outstanding 3,711,328 3,712,528
================ ===============
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 three months ended March 31, 2000 and 1999
(Amounts in thousands)
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
Partners' Capital
------------------------------------------------------------
General Limited Total
------------- -------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1999 $ - $ 37,568 $ 37,568
Distributions (16) (1,485) (1,501)
Redemptions (note 6) - (17) (17)
Net earnings 16 253 269
-------------- -------------- ---------------
Balances at March 31, 1999 $ - $ 36,319 $ 36,319
============== ============== ===============
Balances at January 1, 2000 $ - $ 32,504 $ 32,504
Distributions (16) (1,485) (1,501)
Redemptions (note 6) - (7) (7)
Net earnings 16 518 534
-------------- -------------- ---------------
Balances at March 31, 2000 $ - $ 31,530 $ 31,530
============== ============== ===============
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 three months ended March 31, 2000 and 1999
(Amounts in thousands)
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 534 $ 269
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 676 800
Write-down of containers (note 5) 81 61
Increase in allowance for doubtful accounts 18 55
Loss on sale of containers 14 49
(Increase) decrease in assets:
Net investment in direct finance leases 72 56
Accounts receivable 234 117
Due from affiliates, net 20 (5)
Prepaid expenses 4 5
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (8) (6)
Accrued recovery costs 4 7
Accrued damage protection plan costs 1 (4)
Warranty claims (54) (53)
--------------- --------------
Net cash provided by operating activities 1,596 1,351
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of containers 548 707
Container purchases (368) (287)
--------------- --------------
Net cash provided by investing activities 180 420
--------------- --------------
Cash flows from financing activities:
Redemptions of limited partnership units (7) (17)
Distributions to partners (1,501) (1,501)
--------------- --------------
Net cash used in financing activities (1,508) (1,518)
--------------- --------------
Net increase in cash 268 253
Cash at beginning of period 2,018 1,752
--------------- --------------
Cash at end of period $ 2,286 $ 2,005
=============== ==============
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--Continued
For the three months ended March 31, 2000 and 1999
(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 March 31, 2000 and 1999, and December 31, 1999 and 1998,
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, 2000 and 1999.
Mar. 31 Dec. 31 Mar. 31 Dec. 31
2000 1999 1999 1998
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates.............................. $ (2) $ - $ 13 $ 34
Container purchases payable.................... - 243 - -
Distributions to partners included in:
Due to affiliates.............................. 6 6 6 6
Deferred quarterly distributions............... 69 69 68 68
Proceeds from sale of containers included in:
Due from affiliates............................ 336 367 408 489
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, 2000 and 1999.
2000 1999
---- ----
Container purchases recorded...................................................... $ 123 $ 266
Container purchases paid.......................................................... 368 287
Distributions to partners declared................................................ 1,501 1,501
Distributions to partners paid.................................................... 1,501 1,501
Proceeds from sale of containers recorded......................................... 517 626
Proceeds from sale of containers received......................................... 548 707
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 months ended March 31, 2000 and 1999
(Amounts in thousands except for unit and 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 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, 2000 and December 31, 1999, and the
results of its operations, changes in partners' capital and cash flows for
the three-month periods ended March 31, 2000 and 1999, 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, 1999,
in the Annual Report filed on Form 10-K.
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. Transactions with Affiliates
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership and is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM)
and Textainer Limited (TL) are associate general partners of the
Partnership. The managing general partner and the associate general
partners are collectively referred to as the General Partners and are
commonly owned by Textainer Group Holdings Limited (TGH). The General
Partners also act in this capacity for other limited partnerships. The
General Partners manage and control the affairs of the Partnership.
In accordance with the Partnership Agreement, sections 3.08 through 3.12,
net earnings or losses and distributions are generally allocated 1% to the
General Partners and 99% to the Limited Partners. If the allocation of
distributions exceeds the allocation of net earnings and creates a deficit
in the General Partners' aggregate capital account, the Partnership
Agreement provides for a special allocation of gross income equal to the
amount of the deficit to be made to the General Partners.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners, an acquisition fee, an equipment management fee, an
incentive 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 $6 and $13 of
acquisition fees as part of container rental equipment costs during the
three-month periods ended March 31, 2000 and 1999, respectively. For the
three-month period ended March 31, 2000 and 1999 the Partnership incurred
$63 and $62 of incentive management fees, respectively. No equipment
liquidation fees were incurred during these periods.
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
leasing operations; such cash is included in due from affiliates, net at
March 31, 2000 and December 31, 1999.
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 $139 and $148 for the three-month periods ended March
31, 2000 and 1999, 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. General and
administrative costs allocated to the Partnership during the three-month
periods ended March 31, 2000 and 1999 were as follows:
2000 1999
---- ----
Salaries $49 $ 71
Other 45 63
-- ---
Total general and
administrative costs $94 $134
== ===
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. The General
Partners allocated the following general and administrative costs to the
Partnership during the three-month periods ended March 31, 2000 and 1999:
2000 1999
---- ----
TEM $80 $120
TFS 14 14
-- ---
Total general and
administrative costs $94 $134
== ===
The General Partners 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 are entitled to an acquisition fee for any containers resold to
the Partnership.
At March 31, 2000 and December 31, 1999, due from affiliates, net is
comprised of:
2000 1999
---- ----
Due from affiliates:
Due from TEM................................... $491 $529
--- ---
Due to affiliates:
Due to TFS..................................... 26 23
Due to TL...................................... 1 1
Due to TCC..................................... 14 6
--- ---
41 30
--- ---
Due from affiliates, net $450 $499
=== ===
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 and in the accrual and remittance of net rental
revenues and sales proceeds from TEM.
Note 3. Rentals Under Long-Term Operating Leases
The following are the future rent receivables under cancelable long-term
operating leases at March 31, 2000. Although the leases are generally
cancelable with a penalty at the end of each twelve-month period, the
following schedule assumes that the leases will not be terminated.
Year ending March 31:
2001............................................. $384
2002............................................. 142
2003............................................. 110
2004............................................. 51
2005............................................. 2
---
Total future rentals receivable.................. $689
===
Note 4. Direct Finance Leases
The Partnership has leased containers under direct finance leases with
terms ranging from two to five years. The components of the net investment
in direct finance leases at March 31, 2000 and December 31, 1999 are as
follows:
2000 1999
---- ----
Future minimum lease payments receivable... $294 $353
Residual value............................. 3 3
Less: unearned income..................... (33) (41)
--- ---
Net investment in direct finance leases.... $264 $315
=== ===
The following is a schedule by year of minimum lease payments receivable
under the direct finance leases as of March 31, 2000:
Year ending March 31:
2001............................................... $205
2002............................................... 35
2003............................................... 25
2004............................................... 22
2005............................................... 7
---
Total minimum lease payments receivable............ $294
===
Rental income for the three-month periods ended March 31, 2000 and 1999
includes $14 and $25, respectively, of income from direct finance leases.
Note 5. Container Rental Equipment Write-Down
New container prices have been declining since 1995, and the cost of new
containers at year-end 1998, during 1999 and the beginning of 2000 was
significantly less than the cost of containers purchased in prior years.
The Partnership evaluated the recoverability of the recorded amount of
container rental equipment at December 31, 1999 and March 31, 2000 for
containers to be held for continued use as well as for containers
identified for sale in the ordinary course of business and determined that
a reduction to the carrying value of containers held for continued use was
not required, but that a write-down in value of certain containers
identified for sale was required. The Partnership wrote down the value of
these containers to their estimated fair value, which was based on recent
sales prices less cost to sell.
During the three-month period ended March 31, 2000, the Partnership
recorded a write-down of $81 on 189 containers identified for sale and
sold 187 previously written down containers for a loss of $4. During the
three-month period ended March 31, 1999, the Partnership recorded a
write-down of $61 on 504 containers identified for sale and sold 303
previously written-down containers for a loss of $35. The Partnership
incurred losses on the sale of some containers previously written down as
the actual sales prices received on these containers were lower than the
estimates used for the write-downs, primarily due to unexpected declines
in container sales prices. Additionally, the Partnership incurred losses
of $10 and $14 on the sale of containers that had not been written-down
during the three-months ended March 31, 2000 and 1999, respectively.
If more containers are subsequently identified as for sale or if container
sales prices continue to decline, the Partnership may incur additional
write-downs on containers and/or may incur losses on the sale of
containers. The Partnership will continue to evaluate the recoverability
of the recorded amounts of container rental equipment and cautions that a
write-down of container rental equipment and/or an increase in its
depreciation rate may be required in future periods for some or all of its
container rental equipment.
<PAGE>
Note 6. Redemptions
The following redemptions were consummated by the Partnership during the
three-month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
---------- ---------------- ------------
<S> <C> <C> <C>
Total Partnership redemption as of
December 31, 1998................ 35,472 $ 10.86 $385
Quarter ended:
March 31, 1999................ 2,000 $ 8.50 17
------ ---
Partnership through March 31, 1999 37,472 $ 10.73 $402
====== ===
Total Partnership redemption as of
December 31, 1999................. 37,672 $ 10.70 $403
Quarter ended:
March 31, 2000................ 1,000 $ 7.00 7
------ ---
Partnership through March 31, 2000 38,672 $ 10.62 $410
====== ===
The redemption price is fixed by formula.
</TABLE>
<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 as of and for the three-month periods
ended March 31, 2000 and 1999. 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,
2000, the Partnership redeemed 1,000 units for a total dollar amount of $7. The
Partnership used cash flow from operations to pay for the redeemed units.
The Partnership invests working capital, cash flow from operations prior to its
distribution to the partners and sales proceeds from container sales that have
not been used to purchase containers 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.
Limited partners are currently receiving monthly distributions in an annualized
amount equal to 8% of their original investment. During the three-month period
ended March 31, 2000, the Partnership declared cash distributions to limited
partners pertaining to the period from December 1999 through February 2000 in
the amount of $1,485. On a cash basis, all of these distributions were from
current year operating activities. On a GAAP basis, $967 of these distributions
was a return of capital and the balance was from net earnings. Distributions in
future years may be greater than cash provided by operations and, in this event,
would be made from any remaining undistributed cash from previous years'
operations and then from proceeds from container sales. The portion of future
distributions made from proceeds from container sales would be a return of
capital. The decision that distributions might be made from proceeds from
container sales in future years was based on the Partnership's age and existing
market conditions.
At March 31, 2000, the Partnership had no commitments to purchase containers.
Net cash provided by operating activities for three-month periods ended March
31, 2000 and 1999, was $1,596 and $1,351, respectively. The increase of $245, or
18%, was primarily attributed to the increase in net earnings, adjusted for
non-cash transactions and fluctuations in accounts receivable. Net earnings,
adjusted for non-cash transactions increased primarily due to the decrease in
direct container expenses, offset by the decline in rental income. The reasons
for these fluctuations are discussed in "Results of Operations". The decrease in
accounts receivable of $234 for the three-month period ended March 31, 2000 was
primarily due to the decrease in rental income and a decrease in the average
collection period of accounts receivable. The decrease in accounts receivable of
$117 for the comparable period in 1999 was primarily due to the decline in
rental income.
For the three-month period ended March 31, 2000, net cash provided by investing
activities (the purchase and sale of containers) was $180 compared to $420 for
the comparable period in 1999. The decrease of $240 was due to the increase in
cash used for container purchases and a decrease in proceeds from container
sales. Cash used for container purchases increased as a result of timing
differences in the accrual and payment of these purchases even though the
Partnership purchased fewer containers in the three-month period ended March 31,
2000 compared to the same period in 1999. The decrease in proceeds from
container sales was due to the Partnership selling fewer containers and at lower
average sales prices. The Partnership continued to sell containers in low demand
locations (described below under "Results of Operations"); however there were
fewer containers in these locations primarily as a result of previous sales
efforts, which resulted in the decline in the number of containers sold. The
sales prices received on container sales continued to decrease as a result of
current market conditions, which have adversely affected the value of used
containers. Until conditions improve in these low demand locations, the
Partnership plans to continue to sell some of its containers in these locations.
The Partnership sells containers when (i) a container reaches the end of its
useful life or (ii) an analysis indicates that the sale is warranted based on
existing market conditions and the container's age, location and condition.
Proceeds from container sales will fluctuate based on the number of containers
sold and the actual price received on the sale. Sales proceeds will affect the
rate of reinvestment in containers.
The rate of reinvestment is also affected by cash from operations available for
reinvestment. Subject to the General Partners' discretion, cash from operations
available for reinvestment is generally equal to cash provided by operating
activities less distributions and redemptions paid. Distributions and
redemptions are determined by the General Partners in accordance with the
Partnership Agreement. Consistent with its investment objectives and subject to
its distribution policy, the Partnership intends to continue to reinvest any
cash from operations available for reinvestment and some portion of sales
proceeds in additional containers. As a result of market conditions, in the near
term, the Partnership does not anticipate having significant sums to reinvest in
new containers, and may pay distributions from future container sales proceeds,
resulting in a slower than anticipated rate of reinvestment. Additionally, these
market conditions have had an adverse effect on the average sales price recently
realized from container sales. Furthermore, to the extent new containers are
purchased with sales proceeds, they are not likely to equal the number of
containers sold, as new container prices are likely to be greater than the
average sales price of containers sold. These factors have contributed to a
lower than anticipated rate of reinvestment. Market conditions are discussed
more fully under "Results of Operations". A slower rate of reinvestment will,
over time, affect the size of the Partnership's container fleet.
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, 2000 and 1999, 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:
2000 1999
------ ------
Beginning container fleet............... 14,269 16,281
Ending container fleet.................. 13,849 15,869
Average container fleet................. 14,059 16,075
The decline in the average container fleet of 13% from the three-month period
ended March 31, 1999 to the comparable period ended March 31, 2000 was due to
the Partnership having sold more containers than it purchased since March 31,
1999. Although some of the 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. As noted above, when containers are sold in
the future, sales proceeds not used to pay distributions are unlikely 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. Other factors related to this trend are
discussed above in "Liquidity and Capital Resources."
Rental income and direct container expenses are also affected by the utilization
of the container fleet, which was 80% and 72% on average during the three-month
periods ended March 31, 2000 and 1999, respectively. In addition, rental income
is affected by daily rental rates.
The following is a comparative analysis of the results of operations for the
three-month periods ended March 31, 2000 and 1999.
The Partnership's income from operations for the three-month periods ending
March 31, 2000 and 1999 was $516 and $294, respectively on rental income of
$1,968 and $2,103, respectively. The decrease in rental income of $135, or 6%,
from the three-month period ended March 31, 1999 to the comparable period in
2000 was attributable to decreases in container rental income and other rental
income. Income from container rentals decreased $64, or 4%, due to decreases in
average container fleet of 13% and average rental rates of 6%, offset by an
increase in average on-hire utilization of 11%. The decline in the average fleet
size had the most significant adverse effect on rental income.
The improvement in utilization was due to improvements in demand for leased
containers and in the trade balance, primarily as a result of the improvement in
certain Asian economies and a related increase in exports out of Europe.
Additionally, the container surplus, which existed primarily as a result of the
lower demand in the past several years, has eased as a result of container
lessors selling older containers in low demand locations and as a result of the
improvement in demand discussed above.
However, the trade imbalance between Asia and North America still exists, and as
a consequence, the build-up of containers in North America persists. The
Partnership has been unable to reposition a large number of newer containers to
higher demand locations in Asia, primarily due to lack of available vessel
capacity.
Additionally, the Partnership continues to sell some containers located in low
demand locations. The decision to sell containers is based on the current
expectation that the economic benefit of selling these containers is greater
than the estimated economic benefit of continuing to own these containers. The
majority of the containers sold during 1999 and 2000 were older containers as
the expected economic benefit of continuing to own these containers was
significantly less than that of newer containers primarily due to their shorter
remaining marine life, the cost to reposition containers and the shipping lines'
preference for leasing newer containers when demand is low.
Once the decision had been made to sell containers, the Partnership wrote down
the value of these specifically identified containers to their estimated fair
value, which was based on recent sales prices. Due to unanticipated declines in
container sales prices, the actual sales prices received on some containers were
lower than the estimates used for the write-down, resulting in the Partnership
incurring losses upon the sale of some of these containers. Until the trade
balance between Asia and North America improves, the Partnership may incur
further write-downs and/or losses on the sale of such containers. Should the
decline in economic value of continuing to own such containers turn out to be
permanent, the Partnership may be required to increase its depreciation rate or
write-down the value on some or all of its container rental equipment.
The decline in the purchase price of new containers and the container surplus
mentioned above have resulted in the decline in rental rates in recent years.
However, as a result of the improvement in demand and slight increases in the
purchase price of new containers, rental rates have stabilized during the first
quarter of 2000.
The General Partners are cautiously optimistic that rental rates will remain
stable and the current level of utilization will be maintained during 2000 and
may improve if demand for leased containers and the trade balance continue to
improve. However, the General Partners caution that utilization, lease rates and
container sale prices could also decline, adversely affecting the Partnership's
operating results.
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 (handling income) and income from charges to lessees for a
Damage Protection Plan (DPP). For the three-month period ended March 31, 2000,
other rental income was $218, a decrease of $71 from the equivalent period in
1999. Other rental income decreased due to the decrease in fleet size and
decreases in location, DPP and handling income of $43, $14 and $14,
respectively. Location income decreased primarily due to a decrease in charges
to lessees for dropping off containers in certain locations. DPP income
decreased due to a decrease in the average DPP price charged per container,
offset by an increase in the number of containers carrying DPP. Handling income
decreased due to decreases in container movement and in the average handling
price charged per container during the three-month period ended March 31, 2000
compared to the equivalent period in 1999.
Direct container expenses decreased $168, or 33% from the three-month period
ending March 31, 1999 to the equivalent period in 2000, primarily due to the
decrease in the average container fleet and decreases in storage and
repositioning expenses of $103 and $27, respectively. Storage expense decreased
primarily due to the increase in average utilization noted above and a decrease
in the average storage cost per container. Repositioning expense decreased due
to a decrease in the number of containers repositioned.
Bad debt expense decreased from $59 for the three-month period ended March 31,
1999 to $21 for the comparable period in 2000 primarily due to a smaller
required increase in the bad debt reserve in 2000.
Depreciation expense decreased $124, or 16%, from the three-month period ended
March 31, 1999 to the comparable period in 2000 primarily due to the decrease in
fleet size.
New container prices have been declining since 1995, and the cost of new
containers at year-end 1998, during 1999 and the beginning of 2000 was
significantly less than the cost of containers purchased in prior years. The
Partnership evaluated the recoverability of the recorded amount of container
rental equipment at December 31, 1999 and March 31, 2000 for containers to be
held for continued use as well as for containers identified for sale in the
ordinary course of business and determined that a reduction to the carrying
value of containers held for continued use was not required, but that a
write-down in value of certain containers identified for sale was required. The
Partnership wrote down the value of these containers to their estimated fair
value, which was based on recent sales prices less cost to sell.
During the three-month period ended March 31, 2000, the Partnership recorded a
write-down of $81 on 189 containers identified for sale and sold 187 previously
written down containers for a loss of $4. During the three-month period ended
March 31, 1999, the Partnership recorded a write-down of $61 on 504 containers
identified for sale and sold 303 previously written down containers for a loss
of $35. The Partnership incurred losses on the sale of some containers
previously written-down as the actual sales prices received on these containers
were lower than the estimates used for the write-downs, primarily due to
unexpected declines in container sales prices. Additionally, the Partnership
incurred losses of $10 and $14 on the sale of containers that had not been
written-down during the three-months ended March 31, 2000 and 1999,
respectively. If more containers are subsequently identified as for sale or if
container sales prices continue to decline, the Partnership may incur additional
write-downs on containers and /or may incur losses on the sale of containers.
Management fees to affiliates decreased $8, or 4%, from the three-month period
ended March 31, 1999 to the comparable period in 2000, due to a decrease in
equipment management fees. The decrease in equipment management fees, which are
based primarily on gross revenue, resulted from the decrease in rental income
and were approximately 7% of rental income for both periods. Incentive
management fees were comparable at $63 and $62 during the three-month periods
ended March 31, 2000 and 1999, respectively.
General and administrative costs to affiliates decreased $40, or 30%, from the
three-month period ended March 31, 1999 to the comparable period in 2000
primarily due to a decrease in the allocation of overhead costs from TEM, as the
Partnership represented a smaller portion of the total fleet managed by TEM.
Other expense decreased from an expense of $25 for the three-month period ended
March 31, 1999 to income of $18 for the comparable period in 2000. The decrease
was primarily due to the decrease in loss on sale of containers.
Net earnings per limited partnership unit increased from $0.07 to $0.14 from the
three-month period ended March 31, 1999 to the same period in 2000, reflecting
the increase in net earnings allocated to limited partners from $253 to $518,
respectively. The allocation of net earnings included a special allocation of
gross income to the General Partners in accordance with the Partnership
Agreement.
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 March 31, 2000, 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.
Effect of Date Crossing to Year 2000
There has been no material effect on the Partnership's financial condition and
results of operations as a result of problems arising from computer systems'
abilities to process dates beyond January 1, 2000. The General Partners do not
currently expect any such problems to arise within their own computer systems.
The likelihood that a failure in a third party's system would occur and have a
significant adverse effect on the Partnership's operations seems increasingly
remote, but no assurance can be given that, due to unforeseen circumstances,
such an event could not occur. Therefore, the Partnership's contingency plan
remains in place; that is, the General Partners continue to remain capable of
switching temporarily to manual operations in the event of a computer system's
failure. There can be no assurance, however, that switching to manual operations
would prevent all adverse effects of any future year 2000 problem.
Forward Looking Statements
The foregoing includes forward-looking statements and predictions about possible
or future events, results of operations and financial condition. These
statements and predictions may prove to be inaccurate, because of the
assumptions made by the Partnership or the General Partners or the actual
development of future events. No assurance can be given that any of these
forward-looking statements or predictions will ultimately prove to be correct or
even substantially correct. The risks and uncertainties in these forward-looking
statements include, but are not limited to, changes in demand for leased
containers, changes in global business conditions and their effect on world
trade, future modifications in the way in which the Partnership's lessees
conduct their business or of the profitability of their business, increases or
decreases in new container prices or the availability of financing therefor,
alterations in the costs of maintaining and repairing used containers, increases
in competition, changes in the Partnership's ability to maintain insurance for
its containers and its operations, the effects of political conditions on
worldwide shipping and demand for global trade or of other general business and
economic cycles on the Partnership, as well as other risks detailed herein and
from time to time in the Partnership's filings with the Securities and Exchange
Commission. The Partnership does not undertake any obligation to update
forward-looking statements.
<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 _______________________________
Ernest J. Furtado
Senior Vice President
Date: May 12, 2000
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>
________________________ Senior Vice President, May 12, 2000
Ernest J. Furtado (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive May 12, 2000
John A. Maccarone 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/Ernest J. Furtado
_________________________
Ernest J. Furtado
Senior Vice President
Date: May 12, 2000
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/Ernest J. Furtado Senior Vice President, May 12, 2000
_____________________________ (Principal Financial and
Ernest J. Furtado Accounting Officer) and
Secretary
/s/John A. Maccarone President (Principal Executive May 12, 2000
_____________________________ Officer)
John A. Maccarone
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1st Quarter 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,286
<SECURITIES> 0
<RECEIVABLES> 2,916
<ALLOWANCES> 416
<INVENTORY> 0
<CURRENT-ASSETS> 7
<PP&E> 46,409
<DEPRECIATION> 18,800
<TOTAL-ASSETS> 32,402
<CURRENT-LIABILITIES> 872
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 31,530
<TOTAL-LIABILITY-AND-EQUITY> 32,402
<SALES> 0
<TOTAL-REVENUES> 1,968
<CGS> 0
<TOTAL-COSTS> 1,452
<OTHER-EXPENSES> (18)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 534
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
