TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 10, 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
Third Quarter ended September 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 September 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 September 30, 2000
Table of Contents
----------------------------------------------------------------------------------------------------------
Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999.......................................................... 3
Statements of Earnings for the three and nine months
ended September 30, 2000 and 1999 (unaudited).................................. 4
Statements of Partners' Capital for the nine months
ended September 30, 2000 and 1999 (unaudited).................................. 5
Statements of Cash Flows for the nine months
ended September 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>
<PAGE>
<TABLE>
<CAPTION>
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
September 30, 2000 and December 31, 1999
(Amounts in thousands)
------------------------------------------------------------------------------------------------------------------
2000 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $18,458 (1999: $18,956) (note 5) $ 27,067 $ 28,795
Cash 2,111 2,018
Net investment in direct finance leases (note 4) 153 315
Accounts receivable, net of allowance for doubtful
accounts of $354 (1999: $398) 1,626 2,038
Due from affiliates, net (note 2) 363 499
Prepaid expenses - 11
---------------- ----------------
$ 31,320 $ 33,676
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 143 $ 187
Accrued liabilities 191 155
Accrued recovery costs 85 74
Accrued damage protection plan costs 167 272
Warranty claims 12 172
Deferred quarterly distributions 68 69
Container purchases payable 756 243
---------------- ----------------
Total liabilities 1,422 1,172
---------------- ----------------
Partners' capital:
General partners - -
Limited partners 29,898 32,504
---------------- ----------------
Total partners' capital 29,898 32,504
---------------- ----------------
$ 31,320 $ 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 and nine months ended September 30, 2000 and 1999
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental income $ 1,882 $ 2,015 $ 5,874 $ 6,079
------------- ------------- ------------- -------------
Costs and expenses:
Direct container expenses 195 468 879 1,611
Bad debt expense (benefit) 7 29 (15) 109
Depreciation 655 751 2,005 2,337
Write-down of containers (note 5) 53 40 201 296
Professional fees 17 31 58 53
Management fees to affiliates (note 2) 193 204 601 614
General and administrative costs to
affiliates (note 2) 100 82 289 326
Other general and administrative costs 22 28 68 76
------------- ------------- ------------- -------------
1,242 1,633 4,086 5,422
------------- ------------- ------------- -------------
Income from operations 640 382 1,788 657
------------- ------------- ------------- -------------
Other income (expense):
Interest income 31 23 100 74
Gain (loss) on sale of containers (note 5) 2 (107) 95 (281)
------------- ------------- ------------- -------------
33 (84) 195 (207)
------------- -------------- ------------- -------------
Net earnings $ 673 $ 298 $ 1,983 $ 450
============= ============= ============= =============
Allocation of net earnings (note 2):
General partners $ 16 $ 16 $ 47 $ 47
Limited partners 657 282 1,936 403
------------- ------------- ------------- -------------
$ 673 $ 298 $ 1,983 $ 450
============= ============= ============= =============
Limited partners' per unit share
of net earnings $ 0.18 $ 0.08 $ 0.52 $ 0.11
============= ============= ============= =============
Limited partners' per unit share
of distributions $ 0.40 $ 0.40 $ 1.20 $ 1.20
============= ============= ============= =============
Weighted average number of limited
partnership units outstanding 3,698,748 3,712,328 3,707,134 3,712,461
============= ============= ============= =============
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 nine months ended September 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 (47) (4,455) (4,502)
Redemptions (note 6) - (18) (18)
Net earnings 47 403 450
------------ -------------- -------------
Balances at September 30, 1999 $ - $ 33,498 $ 33,498
============ ============== =============
Balances at January 1, 2000 $ - $ 32,504 $ 32,504
Distributions (47) (4,450) (4,497)
Redemptions (note 6) - (92) (92)
Net earnings 47 1,936 1,983
------------ -------------- -------------
Balances at September 30, 2000 $ - $ 29,898 $ 29,898
============ ============== =============
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 nine months ended September 30, 2000 and 1999
(Amounts in thousands)
(unaudited)
----------------------------------------------------------------------------------------------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,983 $ 450
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 2,005 2,337
Write-down of containers (note 5) 201 296
(Decrease) increase in allowance for doubtful accounts (44) 76
(Gain) loss on sale of containers (95) 281
Decrease (increase) in assets:
Net investment in direct finance leases 206 179
Accounts receivable 456 199
Due from affiliates, net 11 (66)
Prepaid expenses 11 16
(Decrease) increase in liabilities:
Accounts payable and accrued liabilities (8) 25
Accrued recovery costs 11 21
Damage protection plan costs (105) 37
Warranty claims (160) (160)
------------- -------------
Net cash provided by operating activities 4,472 3,691
------------- -------------
Cash flows from investing activities:
Proceeds from sale of containers 1,683 2,280
Container purchases (1,470) (1,300)
-------------- -------------
Net cash provided by investing activities 213 980
-------------- -------------
Cash flows from financing activities:
Redemptions of limited partnership units (92) (18)
Distributions to partners (4,500) (4,502)
-------------- -------------
Net cash used in financing activities (4,592) (4,520)
-------------- -------------
Net increase in cash 93 151
Cash at beginning of period 2,018 1,752
-------------- -------------
Cash at end of period $ 2,111 $ 1,903
============== =============
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 nine months ended September 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 September 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
nine-month periods ended September 30, 2000 and 1999.
Sept. 30 Dec. 31 Sept. 30 Dec. 31
2000 1999 1999 1998
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates.............................. $ - $ - $ 1 $ 34
Container purchases payable.................... 756 243 554 -
Distributions to partners included in:
Due to affiliates.............................. 4 6 6 6
Deferred quarterly distributions............... 68 69 68 68
Proceeds from sale of containers included in:
Due from affiliates............................ 240 367 418 489
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
nine-month periods ended September 30, 2000 and 1999.
2000 1999
---- ----
Container purchases recorded...................................................... $1,983 $1,821
Container purchases paid.......................................................... 1,470 1,300
Distributions to partners declared................................................ 4,497 4,502
Distributions to partners paid.................................................... 4,500 4,502
Proceeds from sale of containers recorded......................................... 1,556 2,209
Proceeds from sale of containers received......................................... 1,683 2,280
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 nine months ended September 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 September 30, 2000 and December 31, 1999, and the
results of its operations, changes in partners' capital and cash flows for
the nine-month periods ended September 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 $94 and $87 of
acquisition fees as part of container rental equipment costs during the
nine-month periods ended September 30, 2000 and 1999, respectively. The
Partnership incurred $62 and $187 of incentive management fees during both
the three and nine-month periods ended September 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
September 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 $131 and $414 for the three and nine-month periods
ended September 30, 2000, respectively, and $141 and $427, 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.
<PAGE>
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
nine-month periods ended September 30, 2000 and 1999 were as follows:
Three months Nine months
ended Sept. 30, ended Sept. 30,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
Salaries $ 49 $ 48 $149 $178
Other 51 34 140 148
--- --- --- ---
Total general and
administrative costs $100 $ 82 $289 $326
=== === === ===
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 nine-month periods ended September 30,
2000 and 1999:
Three months Nine months
ended Sept. 30, ended Sept. 30,
---------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
TEM $ 83 $ 72 $244 $290
TFS 17 10 45 36
--- --- --- ---
Total general and
administrative costs $100 $ 82 $289 $326
=== === === ===
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 September 30, 2000 and December 31, 1999, due from affiliates, net is
comprised of:
2000 1999
---- ----
Due from affiliates:
Due from TEM............................. $416 $529
--- ---
Due to affiliates:
Due to TFS............................... 25 23
Due to TL................................ 1 1
Due to TCC............................... 27 6
--- ---
53 30
--- ---
Due from affiliates, net $363 $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.
<PAGE>
Note 3. Rentals Under Long-Term Operating Leases
The following are the future rent receivables under cancelable long-term
operating leases at September 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.
Year ending September 30:
2001............................................. $ 956
2002............................................. 680
2003............................................. 606
2004............................................. 506
2005............................................. 484
-----
Total future rentals receivable.................. $3,232
=====
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 September 30, 2000 and December 31, 1999 are
as follows:
2000 1999
---- ----
Future minimum lease payments receivable....... $170 $353
Residual value................................. 2 3
Less: unearned income......................... (19) (41)
--- ---
Net investment in direct finance leases........ $153 $315
=== ===
The following is a schedule by year of minimum lease payments receivable
under the direct finance leases as of September 30, 2000:
Year ending September 30:
2001............................................... $ 83
2002............................................... 40
2003............................................... 27
2004............................................... 18
2005............................................... 2
---
Total minimum lease payments receivable............ $170
===
Rental income for the three and nine-month periods ended September 30,
2000 and 1999 includes $8 and $19 and $28 and $65, 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 increased in 2000, the cost of new containers at year-end
1998, during 1999 and the first three quarters 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 September 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 nine-month period ended September 30, 2000, the Partnership
recorded a write-down of $201 on 498 containers identified for sale and
sold 545 previously written-down containers for a loss of $9. During the
nine-month period ended September 30, 1999, the Partnership recorded a
write-down of $296 on 810 containers identified for sale and sold 971
previously written down containers for a loss of $61. 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 a gain
of $104 and a loss of $220 on the sale of containers that had not been
written-down during the nine-months ended September 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.
<TABLE>
<CAPTION>
Note 6. Redemptions
The following redemptions were consummated by the Partnership during the
nine-month periods ended September 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 $10.85 $ 385
Quarter ended:
March 31, 1999....................... 2,000 $ 8.50 17
September 30, 1999................... 200 $ 6.39 1
------ ----
Partnership through September 30, 1999.... 37,672 $10.70 $ 403
====== ====
Total Partnership redemption as of
December 31, 1999....................... 37,672 $10.70 $ 403
Quarter ended:
March 31, 2000...................... 1,000 $ 7.00 7
September 30, 2000.................. 12,579 $ 6.75 85
------ ----
Partnership through September 30, 2000... 51,251 $ 9.66 $ 495
====== ====
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
nine-month periods ended September 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 nine-month period ended September 30,
2000, the Partnership redeemed 13,579 units for a total dollar amount of $92.
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 nine-month period
ended September 30, 2000, the Partnership declared cash distributions to limited
partners pertaining to the period from December 1999 through August 2000 in the
amount of $4,450. On a GAAP basis, $2,514 of these distributions was a return of
capital and the balance was from net earnings. On a cash basis, $4,380 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. Any
decision to distribute proceeds from container sales in future years will be
based on the Partnership's age (in the context of the Partnership's finite-life
and eventual termination) and existing market conditions.
At September 30, 2000, the Partnership had no commitments to purchase
containers.
Net cash provided by operating activities for the nine-month periods ended
September 30, 2000 and 1999, was $4,472 and $3,691, respectively. The increase
of $781, or 21%, was primarily attributed to the increase in net earnings,
adjusted for non-cash transactions, and to fluctuations in accounts receivable,
offset by fluctuations in accrued damage protection plan costs. 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 decrease in accounts receivable of $456 for the nine month
period ended September 30, 2000 was primarily due to the decline in the average
collection period of accounts receivable. The decline in accounts receivable of
$199 for the comparable period in 1999 was primarily due to the decline in
rental income. The decrease in accrued damage protection plan costs during the
nine month period ended September 30, 2000 was primarily due to the decline in
the number of units covered under the damage protection plan.
For the nine-month periods ended September 30, 2000 and 1999, net cash provided
by investing activities (the purchase and sale of containers) was $213 and $980,
respectively. The decrease of $767 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 primarily as the Partnership purchased more
containers in the nine-month period ended September 30, 2000 compared to the
same period in 1999. The fluctuation in container purchases reflects the
reinvestment of a portion of proceeds from recent container sales described
below. The current decrease in proceeds from container sales was primarily due
to the Partnership selling fewer containers than in 1999. While the Partnership
continued to sell containers in low demand locations (described below under
"Results of Operations"), 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 amount of these sales proceeds will affect how much the Partnership can
reinvest in new containers.
The rate of reinvestment is also affected by cash from operations available for
reinvestment which, like sales proceeds, has been adversely affected by market
conditions. These market conditions have resulted in a slower 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. Furthermore, even with reinvestment, the
Partnership is not likely to be able to replace all the containers it sells,
since new container prices are usually higher than the average sales price for a
used container.
Consistent with its investment objectives and subject to its distribution
policy, the Partnership intends to continue to reinvest both cash from
operations available for reinvestment and some portion of the proceeds from
container sales in additional containers. Cash from operations available for
reinvestment is generally equal to cash provided by operating activities, less
distributions and redemptions paid, subject to the General Partners' authority
to set all of these amounts (and modify reserves and working capital), as
provided in the Partnership Agreement. The amount of sales proceeds available
for reinvestment will fluctuate based on the number of containers sold and the
sales price received. 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.
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 nine-month periods ended September 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.................. 13,720 15,053
Average container fleet................. 13,995 15,667
The decline in the average container fleet of 11% from the nine-month period
ended September 30, 1999 to the comparable period ended September 30, 2000 was
due to the Partnership having sold more containers than it purchased since
September 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 81% and 72% on average during the nine-month
periods ended September 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
nine-month periods ended September 30, 2000 and 1999.
The Partnership's income from operations for the nine-month periods ending
September 30, 2000 and 1999 was $1,788 and $657, respectively on rental income
of $5,874 and $6,079, respectively. The decrease in rental income of $205, or
3%, from the nine-month period ended September 30, 1999 to the comparable period
in 2000 was primarily attributable to the decrease in other rental income.
Income from container rentals, the major component of total revenue, increased
$43, or 1%, primarily due to an increase in average on-hire utilization of 13%,
offset by the decreases in average container fleet of 11% and average rental
rates of 5%.
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 three
quarters 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.
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 nine-month period ended September 30, 2000, other rental
income was $543, a decrease of $248 from the equivalent period in 1999. The
decrease in other rental income was due to the decrease in fleet size and
additional decreases in DPP and location income. The additional decline in DPP
income was primarily due to a decline in the number of containers covered under
DPP. 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 $732, or 45% from the nine-month period
ending September 30, 1999 to the equivalent period in 2000, primarily due to
decreases in storage, DPP and repositioning expenses of $306, $206 and $91,
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. DPP expense further
declined primarily due to a decrease in the number of containers covered under
DPP. 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.
Bad debt expense decreased from an expense of $109 for the nine-month period
ended September 30, 1999 to a benefit of $15 for the comparable period in 2000.
The benefit recorded for the nine-month period ended September 30, 2000 was
primarily due to an overall lower required reserve at September 30, 2000 than at
December 31, 1999.
Depreciation expense decreased $332, or 14%, from the nine-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 increased in 2000, the cost of new containers at year-end 1998,
during 1999 and the first three quarters 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
September 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 nine-month period ended September 30, 2000, the Partnership recorded
a write-down of $201 on 498 containers identified for sale and sold 545
previously written-down containers for a loss of $9. During the nine-month
period ended September 30, 1999, the Partnership recorded a write-down of $296
on 810 containers identified for sale and sold 971 previously written down
containers for a loss of $61. 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 a gain of $104 and a loss of $220 on the sale of
containers that had not been written-down during the nine-months ended September
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 $13, or 2%, from the nine-month period
ended September 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 $187 for both the nine-month periods ended
September 30, 2000 and 1999.
General and administrative costs to affiliates decreased $37, or 11%, from the
nine-month period ended September 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 $207 for the nine-month period ended
September 30, 1999 to income of $195 for the comparable period in 2000. The
decrease was primarily due to gain (loss) on sale of containers fluctuating from
a loss of $281 to a gain of $95.
Net earnings per limited partnership unit increased from $0.11 to $0.52 from the
nine-month period ended September 30, 1999 to the same period in 2000,
reflecting the increase in net earnings allocated to limited partners from $403
to $1,936 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 September 30, 2000 and 1999.
The Partnership's income from operations for the three-month periods ending
September 30, 2000 and 1999 was $640 and $382, respectively on rental income of
$1,882 and $2,015, respectively. The decrease in rental income of $133, or 7%,
from the three-month period ended September 30, 1999 to the comparable period in
2000 was attributable to the decrease in other rental income. Income from
container rentals increased $57, or 3%, primarily due to the increase in average
on-hire utilization of 12%, offset by decreases in the average container fleet
of 10% and average rental rates of 2%.
For the three-month period ended September 30, 2000, other rental income was
$94, a decrease of $190 from the equivalent period in 1999. Other rental income
decreased due to the decrease in fleet size and additional decreases in DPP and
location income. DPP income further declined primarily due to a refund of $83
to one lessee as a result of the lessee canceling their DPP coverage in July,
2000. The Partnership also recorded a decrease in previously accrued damage
protection plan cost related to units on lease to this lessee as a result
of this cancellation, resulting in decrease to DPP expense of $114. Location
income further declined due to an increase in credits granted to lessees for
picking up containers from surplus locations and a decrease in charges to
lessees for dropping off containers in surplus locations.
Direct container expenses decreased $273, or 58% from the three-month period
ending September 30, 1999 to the equivalent period in 2000, primarily due to
decreases in DPP and storage expenses of $149 and $98, 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. DPP
expense further declined primarily due to the reduction in the DPP reserve as a
result of a lessee canceling their DPP coverage as described above. Storage
expense further declined due to the improvement in utilization noted above and
a lower average storage cost per container.
Bad debt expense decreased $22 from the three-month period ended September 30,
1999 to the comparable period in 2000, primarily due to a smaller required
increase to bad debt reserve during the three-month period ended September 30,
2000 than in the same period in 1999.
Depreciation expense decreased $96, or 13%, from the three-month period ended
September 30, 1999 to the comparable period in 2000 primarily due to the
decrease in fleet size.
During the three-month periods ended September 30, 2000 and 1999, the
Partnership recorded write-downs of $53 and $40, respectively on containers
identified for sale. The increase in the write-down of $13 was primarily due to
more containers being identified as for sale and requiring a reserve.
Management fees to affiliates decreased $11, or 5%, from the three-month period
ended September 30, 1999 to the comparable period in 2000. The decrease was due
to the decrease in equipment management fees, which decreased as a result of the
decline in rental income. These fees were approximately 7% of rental income for
both periods. Incentive management fees were comparable at $62 for both the
three-month periods ended September 30, 2000 and 1999.
General and administrative costs to affiliates increased $18, or 22%, from the
three-month period ended September 30, 1999 to the comparable period in 2000
primarily due to an increase in the allocation of overhead costs from TEM and
TCC resulting from an increase in allocable costs.
Other expense decreased from an expense of $84 for the three-month period ended
September 30, 1999 to income of $33 for the comparable period in 2000. The
decrease was primarily due to gain (loss) on sale of containers fluctuating from
a loss of $107 to a gain of $2.
Net earnings per limited partnership unit increased from $0.08 to $0.18 from the
three-month period ended September 30, 1999 to the same period in 2000,
reflecting the increase in net earnings allocated to limited partners from $282
to $657, 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 September 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: November 10, 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:
Signature Title Date
<S> <C> <C>
________________________ Senior Vice President, November 10, 2000
Ernest J. Furtado (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive November 10, 2000
John A. Maccarone Officer)
</TABLE>
<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 /s/Ernest J. Furtado
____________________________________
Ernest J. Furtado
Senior Vice President
Date: November 10, 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:
Signature Title Date
<S> <C> <C>
/s/Ernest J. Furtado
___________________________ Senior Vice President, November 10, 2000
Ernest J. Furtado (Principal Financial and
Accounting Officer) and
Secretary
/s/John A. Maccarone President (Principal Executive November 10, 2000
___________________________ Officer)
John A. Maccarone
</TABLE>
