TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
August 11, 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
Second Quarter ended June 30, 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 June 30, 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 June 30, 2000
Table of Contents
----------------------------------------------------------------------------------------------------------
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - June 30, 2000 (unaudited)
and December 31, 1999............................................................. 3
Statements of Operations for the three and six months
ended June 30, 2000 and 1999 (unaudited).......................................... 4
Statements of Partners' Capital for the six months
ended June 30, 2000 and 1999 (unaudited).......................................... 5
Statements of Cash Flows for the six months
ended June 30, 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>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
June 30, 2000 and December 31, 1999
(Amounts in thousands)
------------------------------------------------------------------------------------------------------------------
2000 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $18,715 (1999: $18,956) (note 5) $ 27,475 $ 28,795
Cash 1,687 2,018
Net investment in direct finance leases (note 4) 210 315
Accounts receivable, net of allowance for doubtful
accounts of $374 (1999: $398) 1,936 2,038
Due from affiliates, net (note 2) 327 499
Prepaid expenses 3 11
---------------- ----------------
$ 31,638 $ 33,676
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 146 $ 187
Accrued liabilities 175 155
Accrued recovery costs 82 74
Accrued damage protection plan costs 294 272
Warranty claims 65 172
Deferred quarterly distributions 69 69
Container purchases payable - 243
---------------- ----------------
Total liabilities 831 1,172
---------------- ----------------
Partners' capital:
General partners - -
Limited partners 30,807 32,504
---------------- ----------------
Total partners' capital 30,807 32,504
---------------- ----------------
$ 31,638 $ 33,676
================ ================
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Operations
For the three and six months ended June 30, 2000 and 1999
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental income $ 2,025 $ 1,961 $ 3,993 $ 4,064
------------- ------------- ------------- -------------
Costs and expenses:
Direct container expenses 343 633 685 1,143
Bad debt (benefit) expense (42) 21 (21) 80
Depreciation 674 786 1,350 1,586
Write-down of containers (note 5) 68 195 149 256
Professional fees 23 11 40 22
Management fees to affiliates (note 2) 206 200 408 410
General and administrative costs to
affiliates (note 2) 96 110 190 244
Other general and administrative costs 26 24 45 48
------------- ------------- ------------- -------------
1,394 1,980 2,846 3,789
------------- ------------- ------------- -------------
Income (loss) from operations 631 (19) 1,147 275
------------- ------------- ------------- -------------
Other income (loss):
Interest income 37 27 69 51
Gain (loss) on sale of containers (note 5) 108 (125) 94 (174)
------------- ------------- ------------- -------------
145 (98) 163 (123)
------------- ------------- ------------- -------------
Net earnings (loss) $ 776 $ (117) $ 1,310 $ 152
============= ============= ============= =============
Allocation of net earnings (loss) (note 2):
General partners $ 15 $ 15 $ 31 $ 31
Limited partners 761 (132) 1,279 121
------------- ------------- ------------- -------------
$ 776 $ (117) $ 1,310 $ 152
============= ============= ============= =============
Limited partners' per unit share
of net earnings (loss) $ 0.21 $ (0.04) $ 0.34 $ 0.03
============= ============= ============= =============
Limited partners' per unit share
of distributions $ 0.40 $ 0.40 $ 0.80 $ 0.80
============= ============= ============= =============
Weighted average number of limited
partnership units outstanding 3,711,328 3,712,528 3,711,328 3,712,528
============= ============= ============= =============
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the six months ended June 30, 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 (31) (2,970) (3,001)
Redemptions (note 6) - (17) (17)
Net earnings 31 121 152
------------- --------------- --------------
Balances at June 30, 1999 $ - $ 34,702 $ 34,702
============= =============== ==============
Balances at January 1, 2000 $ - $ 32,504 $ 32,504
Distributions (31) (2,969) (3,000)
Redemptions (note 6) - (7) (7)
Net earnings 31 1,279 1,310
------------- --------------- --------------
Balances at June 30, 2000 $ - $ 30,807 $ 30,807
============= =============== ==============
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, 2000 and 1999
(Amounts in thousands)
(unaudited)
----------------------------------------------------------------------------------------------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,310 $ 152
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,350 1,586
Write-down of containers (note 5) 149 256
(Decrease) increase in allowance for doubtful accounts (24) 68
(Gain) loss on sale of containers (94) 174
(Increase) decrease in assets:
Net investment in direct finance leases 149 116
Accounts receivable 126 133
Due from affiliates, net 89 (48)
Prepaid expenses 8 11
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (21) (6)
Accrued recovery costs 8 15
Damage protection plan costs 22 49
Warranty claims (107) (106)
--------------- --------------
Net cash provided by operating activities 2,965 2,400
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of containers 1,155 1,495
Container purchases (1,444) (1,282)
--------------- --------------
Net cash (used in) provided by investing activities (289) 213
--------------- --------------
Cash flows from financing activities:
Redemptions of limited partnership units (7) (17)
Distributions to partners (3,000) (3,001)
--------------- --------------
Net cash used in financing activities (3,007) (3,018)
--------------- --------------
Net decrease in cash (331) (405)
Cash at beginning of period 2,018 1,752
--------------- --------------
Cash at end of period $ 1,687 $ 1,347
=============== ==============
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 six months ended June 30, 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 June 30, 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 six-month
periods ended June 30, 2000 and 1999.
<S> <C> <C> <C> <C>
June 30 Dec. 31 June 30 Dec. 31
2000 1999 1999 1998
----------- ----------- ----------- -----------
Container purchases included in:
Due to affiliates.............................. $ 8 $ - $ 1 $ 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............................ 292 367 426 489
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
six-month periods ended June 30, 2000 and 1999.
2000 1999
----- -----
Container purchases recorded...................................................... $1,209 $1,249
Container purchases paid.......................................................... 1,444 1,282
Distributions to partners declared................................................ 3,000 3,001
Distributions to partners paid.................................................... 3,000 3,001
Proceeds from sale of containers recorded......................................... 1,080 1,432
Proceeds from sale of containers received......................................... 1,155 1,495
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, 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 June 30, 2000 and December 31, 1999, and the
results of its operations, changes in partners' capital and cash flows for
the six-month periods ended June 30, 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 $58 and $59 of
acquisition fees as part of container rental equipment costs during the
six-month periods ended June 30, 2000 and 1999, respectively. The
Partnership incurred $62 and $124 of incentive management fees during both
the three and six-month periods ended June 30, 2000 and 1999. 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
June 30, 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 $144 and $284 for the three and six-month periods ended
June 30, 2000, respectively, and $138 and $286, respectively, for the
comparable periods in 1999. 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 and
six-month periods ended June 30, 2000 and 1999 were as follows:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Salaries $49 $ 59 $100 $130
Other 47 51 90 114
-- --- --- ---
Total general and
administrative costs $96 $110 $190 $244
== === === ===
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 and six-month periods ended June 30, 2000 and
1999:
Three months Six months
ended June 30, ended June 30,
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
TEM $82 $ 98 $163 $218
TFS 14 12 27 26
-- --- --- ---
Total general and
administrative costs $96 $110 $190 $244
== === === ===
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 June 30, 2000 and December 31, 1999, due from affiliates, net is
comprised of:
2000 1999
---- ----
Due from affiliates:
Due from TEM........................... $389 $529
--- ---
Due to affiliates:
Due to TFS............................. 25 23
Due to TL.............................. 1 1
Due to TCC............................. 36 6
--- ---
62 30
--- ---
Due from affiliates, net $327 $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 June 30, 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.
<PAGE>
Year ending June 30:
2001............................................. $ 462
2002............................................. 158
2003............................................. 106
2004............................................. 37
---
Total future rentals receivable.................. $ 763
===
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 June 30, 2000 and December 31, 1999 are as
follows:
2000 1999
---- ----
Future minimum lease payments receivable....... $233 $353
Residual value................................. 3 3
Less: unearned income......................... (26) (41)
--- ---
Net investment in direct finance leases........ $210 $315
=== ===
The following is a schedule by year of minimum lease payments receivable
under the direct finance leases as of June 30, 2000:
Year ending June 30:
2001............................................... $133
2002............................................... 42
2003............................................... 32
2004............................................... 22
2005............................................... 4
---
Total minimum lease payments receivable............ $233
===
Rental income for the three and six-month periods ended June 30, 2000 and
1999 includes $6 and $20 and $21 and $46, respectively, of income from
direct finance leases.
Note 5. Container Rental Equipment Write-Down
New container prices steadily declined from 1995 through 1999. Although
container prices began increasing in 2000, the cost of new containers at
year-end 1998, during 1999 and the first half of 2000 was significantly
less than the average cost of containers purchased in prior years. The
Partnership evaluated the recoverability of the recorded amount of
container rental equipment at June 30, 2000 and 1999 for containers to be
held for continued use and determined that a reduction to the carrying
value of these containers was not required. The Partnership also evaluated
the recoverability of the recorded amount of containers identified for
sale in the ordinary course of business and determined that a reduction to
the carrying value of these containers 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 six-month period ended June 30, 2000, the Partnership recorded
a write-down of $149 on 356 containers identified for sale and sold 345
previously written-down containers for a loss of $5. During the six-month
period ended June 30, 1999, the Partnership recorded a write-down of $256
on 757 containers identified for sale and sold 647 previously written down
containers for a loss of $58. 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 recorded gains of $99 and losses of
$116 on the sale of containers that had not been written-down during the
six-months ended June 30, 2000 and 1999, respectively.
If more containers are subsequently identified for sale or if container
sales prices decline, the Partnership may incur additional write-downs on
containers and/or may incur losses on the sale of containers. The
Partnership 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>
<TABLE>
<CAPTION>
Note 6. Redemptions
The following redemptions were consummated by the Partnership during the
six-month periods ended June 30, 2000 and 1999:
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 June 30, 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 June 30, 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 and six-month
periods ended June 30, 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 six-month period ended June 30, 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 six-month period
ended June 30, 2000, the Partnership declared cash distributions to limited
partners pertaining to the period from December 1999 through May 2000 in the
amount of $2,969. On a GAAP basis, $1,690 of these distributions was a return of
capital and the balance was from net earnings. On a cash basis, $2,958 of these
distributions were from current year operating activities and the remainder was
from cash provided by previous years' operations that had not been distributed
or used to purchase containers or redeem units. 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 (in the context of the
Partnership's finite-life and eventual termination) and existing market
conditions.
At June 30, 2000, the Partnership had no commitments to purchase containers.
Net cash provided by operating activities for the six-month periods ended June
30, 2000 and 1999, was $2,965 and $2,400, respectively. The increase of $565, or
24%, was primarily attributed to the increase in net earnings, adjusted for
non-cash transactions and fluctuations in due from affiliates, net. Net
earnings, adjusted for non-cash transactions increased primarily due to the
decrease in direct container expenses, which are discussed more fully in
"Results of Operations". The fluctuations in due from affiliates, net, resulted
from timing differences in payment of expenses and fees and the remittance of
net rental revenues, as well as in fluctuations in these amounts.
For the six-month period ended June 30, 2000, net cash used in investing
activities (the purchase and sale of containers) was $289 compared to net cash
provided by investing activities of $213 for the comparable period in 1999. The
decrease of $502 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
six-month period ended June 30, 2000 compared to the same period in 1999. The
General Partners believe that the fluctuation in container purchases reflect
normal fluctuations in recent container purchases. The decrease in proceeds from
container sales was primarily due to the Partnership selling fewer containers.
The Partnership continued to sell containers in low demand locations (described
below under "Results of Operations"); however there were fewer low demand
locations and 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 was comparable for
both periods, however these sales prices are lower than sales prices received in
previous years 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. Although there has been some recent
improvement in market conditions, overall existing market conditions have had
and may continue to have an adverse effect on the amount of cash provided by
operations that is available for the purchase of additional containers. As a
result of market conditions, in the near term, the Partnership does not
anticipate having significant sums of cash from operations 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 and a declining container fleet.
Market conditions are discussed more fully under "Results of Operations".
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, 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.................. 13,873 15,592
Average container fleet................. 14,071 15,937
The decline in the average container fleet of 12% from the six-month period
ended June 30, 1999 to the comparable period ended June 30, 2000 was due to the
Partnership having sold more containers than it purchased since June 30, 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 six-month
periods ended June 30, 2000 and 1999, respectively. In addition, rental income
is affected by daily rental rates, which have decreased between the periods, as
described below.
The following is a comparative analysis of the results of operations for the
six-month periods ended June 30, 2000 and 1999.
The Partnership's income from operations for the six-month periods ending June
30, 2000 and 1999 was $1,147 and $275, respectively on rental income of $3,993
and $4,064, respectively. The decrease in rental income of $71, or 2%, from the
six-month period ended June 30, 1999 to the comparable period in 2000 was
attributable to decreases in container rental income and other rental income.
Income from container rentals, the major component of total revenue, decreased
$14, or 1%, primarily due to decreases in average container fleet of 12% and
average rental rates of 5%, offset by the increase in average on-hire
utilization of 11%.
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. This
improvement in demand, coupled with container lessors' efforts to sell older
containers in low demand locations, has also reduced the container surplus.
However, the trade imbalance between Asia and North America still exists, and as
a consequence, the build-up of containers, primarily on the East Coast of the
United States, persists. The Partnership has been unable to reposition a large
number of newer containers to higher demand locations in Asia, due to lack of
available vessel capacity from the United States East Coast ports.
As a result, 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. The
expected economic benefit of continuing to own these older 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 they are available.
Once the decision had been made to sell containers, if the book value of these
containers was greater than the estimated fair value, 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 during 1999, 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 increases in the purchase
price of new containers, rental rates have stabilized during the first half 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 six-month period ended June 30, 2000,
other rental income was $448, a decrease of $57 from the equivalent period in
1999. The decrease in other rental income was primarily due to the decrease in
fleet size and an additional decrease in location income. The further decline in
location income was due to a decrease in charges to lessees for dropping off
containers in certain locations, offset by a decrease in credits granted for
picking up containers in surplus locations.
Direct container expenses decreased $458, or 40% from the six-month period
ending June 30, 1999 to the equivalent period in 2000, primarily due to
decreases in storage, repositioning and DPP expenses of $208, $109 and $56,
respectively. The decrease in these expenses, as well as other direct container
expenses, was partially due to the overall decrease in the average container
fleet. Storage expense further declined due to the improvement in utilization
noted above and a lower average storage cost per container. Repositioning
expense further declined as there were fewer containers repositioned, offset by
a higher average repositioning cost due to the high demand for limited vessel
capacity noted above. DPP expense further declined due to a decrease in the
average DPP cost per container.
Bad debt expense decreased from an expense of $80 for the six-month period ended
June 30, 1999 to a benefit of $21 for the comparable period in 2000. The benefit
recorded for the six-month period ended June 30, 2000 was primarily due to an
overall lower required reserve at June 30, 2000 than at December 31, 1999.
Depreciation expense decreased $236, or 15%, from the six-month period ended
June 30, 1999 to the comparable period in 2000 primarily due to the decrease in
fleet size.
New container prices steadily declined from 1995 through 1999. Although
container prices began increasing in 2000, the cost of new containers at
year-end 1998, during 1999 and the first half of 2000 was significantly less
than the average cost of containers purchased in prior years. The Partnership
evaluated the recoverability of the recorded amount of container rental
equipment at June 30, 2000 and 1999 for containers to be held for continued use
and determined that a reduction to the carrying value of these containers was
not required. The Partnership also evaluated the recoverability of the recorded
amount of containers identified for sale in the ordinary course of business and
determined that a reduction to the carrying value of these containers 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 six-month period ended June 30, 2000, the Partnership recorded a
write-down of $149 on 356 containers identified for sale and sold 345 previously
written-down containers for a loss of $5. During the six-month period ended June
30, 1999, the Partnership recorded a write-down of $256 on 757 containers
identified for sale and sold 647 previously written down containers for a loss
of $58. 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
recorded gains of $99 and losses of $116 on the sale of containers that had not
been written-down during the six-months ended June 30, 2000 and 1999,
respectively.
If more containers are subsequently identified for sale or if container sales
prices 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 $2, or 1%, from the six-month period
ended June 30, 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.
These fees were approximately 7% of rental income for both periods. Incentive
management fees were comparable at $124 for both the six-month periods ended
June 30, 2000 and 1999.
General and administrative costs to affiliates decreased $54, or 22%, from the
six-month period ended June 30, 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 $123 for the six-month period ended
June 30, 1999 to income of $163 for the comparable period in 2000. The decrease
was primarily due to the change in loss on sale of containers from a loss of
$174 to a gain of $94.
Net earnings per limited partnership unit increased from $0.03 to $0.34 from the
six-month period ended June 30, 1999 to the same period in 2000, reflecting the
increase in net earnings allocated to limited partners from $121 to $1,279,
respectively. The allocation of net earnings included a special allocation of
gross income to the General Partners in accordance with the Partnership
Agreement.
The following is a comparative analysis of the results of operations for the
three-month periods ended June 30, 2000 and 1999.
The Partnership's income (loss) from operations for the three-month periods
ending June 30, 2000 and 1999 was $631 and ($19), respectively on rental income
of $2,025 and $1,961, respectively. The increase in rental income of $64, or 3%,
from the three-month period ended June 30, 1999 to the comparable period in 2000
was attributable to increases in container rental income and other rental
income. Income from container rentals increased $50, or 3%, primarily due to the
increase in average on-hire utilization of 13%, offset by decreases in the
average container fleet of 12% and average rental rates of 5%.
For the three-month period ended June 30, 2000, other rental income was $230, an
increase of $14 from the equivalent period in 1999. Other rental income
increased primarily due to an increase in location income which increased due to
a decrease in credits granted to lessees for leasing containers from certain
locations, offset by a decrease in charges to lessees for dropping off
containers in certain locations.
Direct container expenses decreased $290, or 46% from the six-month period
ending June 30, 1999 to the equivalent period in 2000, primarily due to
decreases in storage, repositioning and DPP expenses of $105, $82 and $52,
respectively. The decrease in these expenses, as well as other direct container
expenses, was partially due to the overall decrease in the average container
fleet. Storage expense further declined due to the improvement in utilization
noted above and a lower average storage cost per container. Repositioning
expense further declined as there were fewer containers repositioned, offset by
a higher average repositioning cost due to the high demand for limited vessel
capacity noted above. DPP expense further declined due to a decrease in the
average DPP cost per container.
Bad debt expense decreased from an expense of $21 for the three-month period
ended June 30, 1999 to a benefit of $42 for the comparable period in 2000. The
benefit recorded for the three-month period ended June 30, 2000 was primarily
due to an overall lower required reserve at June 30, 2000 than at March 31,
2000.
Depreciation expense decreased $112, or 14%, from the three-month period ended
June 30, 1999 to the comparable period in 2000 primarily due to the decrease in
fleet size.
During the three-month periods ended June 30, 2000 and 1999, the Partnership
recorded write-downs of $68 and $195, respectively on containers identified for
sale. The decrease in the write-down of $127 was primarily due to fewer
containers identified as for sale and requiring a reserve.
Management fees to affiliates increased $6, or 3%, from the three-month period
ended June 30, 1999 to the comparable period in 2000. The increase was due to
the increase in equipment management fees, which increased as a result of the
increase in rental income. These fees were approximately 7% of rental income for
both periods. Incentive management fees were comparable at $63 for both the
three-month periods ended June 30, 2000 and 1999.
General and administrative costs to affiliates decreased $14, or 13%, from the
three-month period ended June 30, 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 $98 for the three-month period ended
June 30, 1999 to income of $145 for the comparable period in 2000. The decrease
was primarily due to the change in loss on sale of containers from a loss of
$125 to a gain of $108.
Net earnings per limited partnership unit increased from a loss of $0.04 for the
three-month period ended June 30, 1999 to earnings of $0.21 for the same period
in 2000, reflecting the increase in net earnings allocated to limited partners
from a loss of $132 to earnings of $761, respectively. The allocation of net
earnings (loss) 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 June 30, 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.
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>
<TABLE>
<CAPTION>
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: August 11, 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:
<S> <C> <C>
Signature Title Date
________________________ Senior Vice President, August 11, 2000
Ernest J. Furtado (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive August 11, 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: August 11, 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>
/s/Ernest J. Furtado August 11, 2000
____________________________ Senior Vice President,
Ernest J. Furtado (Principal Financial and
Accounting Officer) and
Secretary
/s/John A. Maccarone August 11, 2000
____________________________ President (Principal Executive
John A. Maccarone Officer)
</TABLE>
