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Cai International 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549>

FORM 10-Q  

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission file number: 001-33388
 

CAI International, Inc.
(Exact name of registrant as specified in its charter)

 
Delaware
 
94-3109229
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
Steuart Tower, 1 Market Plaza, Suite 900
San Francisco, California
 
94105
(Address of principal executive offices)
 
(Zip Code)
 
415-788-0100
(Registrant’s telephone number, including area code)
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
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   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Common
 
July 29, 2011
Common Stock, $.0001 par value per share
 
19,295,359 shares



 
 

 
 
CAI INTERNATIONAL, INC.
 
 
 
 
 
 
Page No.
Part I — Financial Information
            4
 
 
 
Item 1.
            4
 
 
 
 
            4
 
 
 
 
            5
 
 
 
 
            6
 
 
 
 
            7
 
 
 
Item 2.
            18
 
 
 
Item 3.
            26
 
 
 
Item 4.
            27
 
 
Part II — Other Information
            28
 
 
 
Item 1.
            28
 
 
 
Item 1A.
            28
 
 
 
Item 2.
            28
 
 
 
Item 3.
            28
 
 
 
Item 4.
            28
 
 
 
Item 5.
            28
 
 
 
Item 6.
            29
 
 
            30

 
2


CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and service development efforts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements so long as such information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. When used in this Quarterly Report on Form 10-Q, the words “may,” “might,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under “Risk Factors” below, as well as those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed on March 16, 2011, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

 
3


PART I — FINANCIAL INFORMATION
 
ITEM 1. 
FINANCIAL STATEMENTS
 
CAI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
(UNAUDITED)
 
ASSETS
 
June 30,
2011
   
December 31,
2010
 
             
Cash
  $ 11,064     $ 14,393  
Accounts receivable (owned fleet), net of allowance for doubtful accounts of $1,143 and $2,182 at June 30, 2011 and December 31, 2010, respectively
    19,975       20,874  
Accounts receivable (managed fleet)
    19,863       19,496  
Current portion of direct finance leases
    3,276       3,948  
Prepaid expenses
    6,472       6,645  
Deferred tax assets
    1,875       1,931  
Other current assets
    2,910       1,364  
Total current assets
    65,435       68,651  
Container rental equipment, net of accumulated depreciation of $94,706 and  $85,596 at June 30, 2011 and December 31, 2010, respectively
    738,659       530,939  
Net investment in direct finance leases
    11,236       7,886  
Furniture, fixtures and equipment, net of accumulated depreciation of  $780 and $548 at June 30, 2011 and December 31, 2010, respectively
    2,229       2,383  
Intangible assets, net of accumulated amortization of $6,053 and $5,982 at June 30, 2011 and December 31, 2010 respectively
    3,000       3,593  
Total assets
  $ 820,559     $ 613,452  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Accounts payable
  $ 2,327     $ 2,411  
Accrued expenses and other current liabilities
    5,231       5,408  
Due to container investors
    24,132       23,283  
Unearned revenue
    5,799       5,724  
Current portion of term loans
    15,600       24,800  
Current portion of capital lease obligations
    3,479       4,438  
Rental equipment payable
    72,094       88,097  
Total current liabilities
    128,662       154,161  
Revolving credit facility
    256,600       51,600  
Term loans
    170,600       169,200  
Deferred income tax liability
    30,882       30,226  
Capital lease obligations
    9,803       10,509  
Income taxes payable
    82       82  
Total liabilities
    596,629       415,778  
                 
Stockholders' equity:
               
Common stock: par value $.0001 per share; authorized 84,000,000 shares; issued and outstanding, 19,295,359 shares at June 30, 2011 and December 31, 2010
    2       2  
Additional paid-in capital
    127,504       127,064  
Accumulated other comprehensive loss
    (780 )     (2,510 )
Retained earnings
    78,719       55,043  
Total CAI stockholders' equity
    205,445       179,599  
Non-controlling interest
    18,485       18,075  
Total stockholders' equity
    223,930       197,674  
Total liabilities and stockholders' equity
  $ 820,559     $ 613,452  
 
See accompanying notes to unaudited consolidated financial statements.

 
4


CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)

    Three Months Ended June 30,    
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                       
Container rental revenue
  $ 24,711     $ 13,974     $ 47,096     $ 26,318  
Management fee revenue
    3,275       2,536       6,790       4,717  
Gain on sale of container portfolios
    253       348       1,663       614  
Finance lease income
    520       505       952       907  
Total revenue
    28,759       17,363       56,501       32,556  
                                 
Operating expenses:
                               
Depreciation of container rental equipment
    7,436       4,471       14,172       8,678  
Amortization of intangible assets
    343       341       686       695  
Impairment of container rental equipment
    5       11       10       28  
Gain on disposition of used container equipment
    (2,785 )     (2,498 )     (6,400 )     (3,918 )
Storage, handling and other expenses
    1,360       1,763       2,455       3,954  
Marketing, general and administrative expenses
    5,517       5,527       10,119       10,476  
(Gain) loss on foreign exchange
    (37 )     230       23       411  
Total operating expenses
    11,839       9,845       21,065       20,324  
                                 
Operating income
    16,920       7,518       35,436       12,232  
                                 
Interest expense
    3,529       963       6,503       1,820  
Interest income
    (1 )     (88 )     (4 )     (120 )
Net interest expense
    3,528       875       6,499       1,700  
                                 
Net income before income taxes and non-controlling interest
    13,392       6,643       28,937       10,532  
                                 
Income tax expense
    2,301       967       4,851       1,807  
                                 
Net income
    11,091       5,676       24,086       8,725  
Net income attributable to non-controlling interest
    (211 )     -       (410 )     -  
Net income attributable to CAI common stockholders
  $ 10,880     $ 5,676     $ 23,676     $ 8,725  
Net income per share attributable to CAI common stockholders:
                               
Basic
  $ 0.56     $ 0.32     $ 1.23     $ 0.49  
Diluted
  $ 0.55     $ 0.31     $ 1.20     $ 0.48  
Weighted average shares outstanding:
                               
Basic
    19,295       17,910       19,295       17,908  
Diluted
    19,798       18,141       19,779       18,098  
 
See accompanying notes to unaudited consolidated financial statements.

 
5

 
           CAI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(UNAUDITED)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 24,086     $ 8,725  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    14,397       8,773  
Amortization of debt issuance costs
    621       256  
Amortization of intangible assets
    686       695  
Impairment of container rental equipment
    10       28  
Stock-based compensation expense
    572       536  
(Gain) loss on foreign exchange
    (95 )     755  
Gain on sale of container portfolios
    (1,663 )     (614 )
Gain on disposition of used container equipment
    (6,400 )     (3,918 )
Deferred income taxes
    480       -  
Restructuring charges
    -       107  
Bad debt (recovery) expense
    (1,044 )     427  
Changes in other operating assets and liabilities:
               
Accounts receivable
    2,031       (4,986 )
Prepaid expenses and other assets
    (1,306 )     4,428  
Accounts payable, accrued expenses and other current liabilities
    (890 )     (5,340 )
Due to container investors
    849       2,850  
Unearned revenue
    (7 )     60  
Net cash provided by operating activities
    32,327       12,782  
Cash flows from investing activities:
               
Purchase of containers
    (261,258 )     (40,260 )
Net proceeds from sale of container portfolios
    12,642       12,367  
Net proceeds from disposition of used container equipment
    15,627       17,112  
Purchase of furniture, fixtures and equipment
    (65 )     (85 )
Receipt of principal payments from direct financing leases
    3,010       2,847  
Net cash used in investing activities
    (230,044 )     (8,019 )
Cash flows from financing activities:
               
Proceeds from bank debt
    221,800       29,200  
Principal payments on capital leases
    (2,661 )     (1,864 )
Principal payments made on bank debt
    (24,200 )     (40,200 )
Principal payments on related party term loan
    (400 )     (400 )
Debt issuance costs
    (456 )     -  
    Stock issuance costs     (132  )      
Net cash provided by (used in) financing activities
    193,951       (13,264 )
Effect on cash of foreign currency translation
    437       (593 )
Net decrease in cash
    (3,329 )     (9,094 )
Cash at beginning of the period
    14,393       14,492  
Cash at end of the period
  $ 11,064     $ 5,398  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ 3,353     $ 788  
Interest
    5,112       1,318  
Supplemental disclosure of non-cash investing and financing activity:
               
Transfer of container rental equipment to direct finance lease
    5,510       5,111  
Transfer of container rental equipment off direct finance lease
    -       1,237  
Container equipment purchase funded by offset to accounts receivable
    -       1,764  

See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
(1) The Company and Nature of Operations
 
Organization
 
CAI International, Inc. (CAI or the Company) operates in the international intermodal marine cargo container leasing business. Within this single industry sector, the Company generates revenue from two reportable segments: container leasing and container management. The container leasing segment specializes primarily in the ownership and leasing of intermodal dry freight standard containers, while the container management segment manages containers for container investors. The Company leases its containers principally to international container shipping lines located throughout the world. The Company sells containers primarily to investor groups and provides management services to those investors in return for a management fee.
 
The Company’s common stock is traded on the New York Stock Exchange under the symbol “CAP”. The Company’s corporate headquarters are located in San Francisco, California.
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation.
 
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of June 30, 2011 and December 31, 2010, the Company's results of operations for the three and six months ended June 30, 2011 and 2010 and the Company’s cash flows for the six months ended June 30, 2011 and 2010. The results of operations and cash flows for the periods presented are not necessarily indicative of the results of operations or cash flows which may be reported for the remainder of 2011 or in any future period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 16, 2011.
 
(2) Accounting Policies and Recent Accounting Pronouncements
 
(a) Accounting Policies
 
During the three months ended March 31, 2011, the Company completed a review of historical disposal experience relating to its fleet of container equipment and concluded that the estimated residual values and depreciable lives used in its equipment depreciation calculations should be amended effective January 1, 2011. The following table shows the current and prior residual values and depreciable lives adopted by the Company for each type of equipment:
 
   
Residual Value
   
Depreciable Life in Years
 
   
Current
   
Prior
   
Current
   
Prior
 
                         
20-ft. standard dry van
  $ 950     $ 850       12.5       12.5  
40-ft. standard dry van
  $ 1,150     $ 950       12.5       12.5  
40-ft. high cube dry van
  $ 1,300     $ 1,000       12.5       12.5  
40-ft. high cube refrigerated container
  $ 3,000    
15% of OEC*
      12.0       15.0  
                                 
* Original equipment cost
                               
 
The above changes reduced the Company's depreciation expense and increased pre-tax income by approximately $0.7 million and $1.5 million, increased net income by approximately $0.6 million and $1.2 million, and  increased diluted earnings per share by $0.03 and $0.06 for the three and six months ended June 30, 2011, respectively.
 
There were no other changes to the Company’s accounting policies during the six months ended June 30, 2011. See Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 16, 2011.
 
 
7

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(b) Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (FASB) issued an update to the Accounting Standards Codification (ASC) relating to revenue recognition. The update eliminates the requirement that all undelivered elements in an arrangement with multiple deliverables have objective and reliable evidence of fair value before revenue can be recognized for items that have been delivered. The update also no longer allows use of the residual method when allocating consideration to deliverables. Instead, arrangement consideration is to be allocated to deliverables using the relative selling price method, applying a selling price hierarchy. Vendor specific objective evidence (VSOE) of selling price should be used if it exists. Otherwise, third party evidence (TPE) of selling price should be used. If neither VSOE nor TPE is available, the company’s best estimate of selling price should be used. The update requires expanded qualitative and quantitative disclosures. The Company adopted the provisions of the update on January 1, 2011. Adoption of the update did not have a material effect on the Company’s consolidated financial statements.
 
In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active markets for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll-forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).  The guidance related to new disclosures was effective for the Company’s first quarter of 2010.  The guidance related to the roll-forward of Level 3 assets and liabilities was effective for the Company’s first quarter of 2011. Adoption of the guidance did not have a material effect on the Company’s consolidated financial statements.  In May 2011, the FASB issued further guidance associated with fair value measurement and disclosure. Most of the changes are clarifications of existing guidance and wording changes to align with International Financial Reporting Standards. The guidance is effective for interim and annual periods beginning after December 15, 2011 and its adoption is not expected to have an impact on the Company’s consolidated financial statements.
 
In June 2011, the FASB issued a pronouncement to increase the prominence of other comprehensive income in financial statements. Under this pronouncement, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The option to present other comprehensive income in the statement of changes in equity has been eliminated. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company will adopt the guidance in the first quarter of 2012.
 
(3) Consolidation of Variable Interest Entities as a Non-Controlling Interest
 
            The Company regularly performs a review of the container funds that it manages for investors to determine whether a fund is a variable interest entity (VIE) and whether the Company has a variable interest that provides it with a controlling financial interest and is the primary beneficiary of the VIE in accordance with ASC 810, Consolidation. If the fund is determined to be a VIE, a further analysis is performed to determine if the Company has a variable interest in, and is a primary beneficiary of, the VIE and meets both of the following criteria under Paragraph 14A of ASC 810:
 
 
it has power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and
 
 
it has the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive    benefits from the entity that could potentially be significant to the VIE.
 
If in the Company’s judgment both of the above criteria are met, the VIE’s financial statements are included in the Company’s consolidated financial statements as required under ASC 810. The equity attributable to the VIE is shown as a non-controlling interest on our consolidated balance sheet and the after tax result attributable to its operations is shown as a net income or loss attributable to non-controlling interest on the Company’s consolidated statement of operations.
 
Included among the funds that the Company manages are several Japanese container funds that were established by a related party under separate investment agreements allowed under Japanese commercial laws (see Note 11). Each of the funds is financed by unrelated Japanese third party investors. The container funds under management are considered VIEs because as manager of the funds, the Company has the power to direct the activities that most significantly impact the entity’s economic performance such as leasing and managing the containers owned by the funds. With the exception of two specific Japanese funds established in September 2010, the fees earned for arranging, managing and establishing the funds are not significant to the expected returns of the funds so the Company does not have a variable interest in the funds. The rights to receive benefits and obligations to absorb losses that could potentially be significant to the funds belong to the third party investors, so the Company concluded that it is not the primary beneficiary of the funds. With the exception of the sale of containers to the two Japanese funds established in September 2010, the Company recognized gains on sale of containers to the unconsolidated VIEs as sales in the ordinary course of the business. For the three and six months ended June 30, 2011, the Company sold $4.3 million and $12.6 million, respectively, of container portfolios to the Japanese VIEs and recognized gains of $0.3 million and $1.7 million, respectively. For the three and six months ended June 30, 2010, the Company sold $7.1 million and $12.4 million of containers, respectively, and recognized gains of $0.3 million and $0.6 million, respectively.
 
 
8

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
In September 2010, the Company transferred approximately $16.0 million of containers to two specific Japanese funds that are considered VIEs. The terms of the transaction included options for the Company to purchase the containers from the funds at a fixed price. As a result of the residual interest resulting from the fixed price call option, the Company concluded that it may absorb a significant amount of the variability associated with the funds’ anticipated economic performance so the Company has a variable interest in the funds. As the Company has the power to direct the activities that most significantly impact the economic performance of the VIEs and the variable interest provides the Company with the right to receive benefits from the entity that could potentially be significant to the funds, the Company determined that it is the primary beneficiary of these two specific VIEs and included the  VIEs' assets and liabilities as of June 30, 2011 and December 31, 2010 and the results of the VIEs' operations and cash flows for the three and six months ended June 30, 2011 in the Company’s consolidated financial statements.
 
The containers transferred to the two consolidated Japanese VIEs had a net book value of $14.8 million as of June 30, 2011. The container equipment along with $1.1 million of cash held by these container funds and $1.7 million of net investment in direct finance leases, have been included on the Company’s consolidated balance sheet with the offsetting equity related to the funds presented separately as non-controlling interest of $18.5 million in the equity section of the Company’s consolidated balance sheet as of June 30, 2011. No gain or loss was recognized upon the initial consolidation of the VIEs in September 2010. The net income of $0.2 million and $0.4 million for the three and six months ended June 30, 2011, respectively, attributable to the two Japanese funds is presented as net income attributable to non-controlling interest and was deducted from the Company’s consolidated statements of income for the three and six months ended June 30, 2011.
 
(4) Net Investment in Direct Finance Leases
 
            The following table represents the components of the Company’s net investment in direct finance leases (in thousands):
 
 
 
June 30,
2011
 
 
December 31,
2010
 
Gross finance lease receivables (1)
 
$
19,851
 
 
$
15,290
 
Allowance on gross finance lease receivables (2)
 
 
 
 
 
 
Gross finance lease receivables, net of allowance
 
 
19,851
 
 
 
15,290
 
Unearned income (3)
 
 
(5,339
)
 
 
(3,456)
 
Net investment in finance leases
 
$
14,512
 
 
$
11,834
 
 

 
(1)
At the inception of the lease, the Company records the total minimum lease payments, executory costs, if any, and unguaranteed residual value as gross finance lease receivables. The gross finance lease receivable is reduced as customer payments are received.  Approximately $6.0 million and $4.0 million of unguaranteed residual value at June 30, 2011 and December 31, 2010, respectively, were included in gross finance lease receivables. There were no executory costs included in gross finance lease receivables as of June 30, 2011 and December 31, 2010.
 
 
(2)
The Company evaluates potential losses in its finance lease portfolio by regularly reviewing the specific receivables in the portfolio and analyzing historical loss experience. For the period 2004 through  June 30, 2011, the Company's loss experience on its gross finance lease receivables, after considering equipment recoveries, was less than 2.0%.
 
 
(3)
The difference between the gross finance lease receivable and the cost of the equipment or carrying amount at the lease inception is recorded as unearned income. Unearned income together with initial direct costs, are amortized to income over the lease term so as to produce a constant periodic rate of return. There were no unamortized initial direct costs as of June 30, 2011 and December 31, 2010.
 
In order to estimate the allowance for losses contained in the gross finance lease receivables, the Company reviews the credit worthiness of its customers on an ongoing basis. The review includes monitoring credit quality indicators, the aging of customer receivables and general economic conditions.
 
The categories of gross finance lease receivables based on the Company's internal customer credit ratings can be described as follows:
 
Tier 1—These customers are typically large international shipping lines which have been in business for many years and have world-class operating capabilities and significant financial resources. In most cases, the Company has had a long commercial relationship with these customers and currently maintains regular communication with them at several levels of management which provides the Company with insight into the customer's current operating and financial performance. In the Company's view, these customers have the greatest ability to withstand cyclical down turns and would likely have greater access to needed capital than lower-rated customers. The Company views the risk of default for Tier 1 customers to range from minimal to modest.
 
 
9

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Tier 2—These customers are typically either smaller shipping lines or freight forwarders with less operating scale or with a high degree of financial leverage, and accordingly the Company views these customers as subject to higher volatility in financial performance over the business cycle. The Company generally expects these customers to have less access to capital markets or other sources of financing during cyclical down turns. The Company views the risk of default for Tier 2 customers as moderate.
 
Tier 3—Customers in this category exhibit volatility in payments on a regular basis. The Company has initiated or implemented plans to recover equipment on lease to these customers and believes that default is likely, or has already occurred.
 
Based on the above categories, the Company's gross finance lease receivables as of June 30, 2011, are as follows (in thousands):
 
Tier 1
 
$
6,938
 
Tier 2
 
 
12,913
 
Tier 3
 
 
 
 
 
$
19,851
 
 
Contractual maturities of the Company's gross finance lease receivables subsequent to June 30, 2011 are as follows (in thousands):
 
2011
 
$
5,080
 
2012
 
 
4,090
 
2013
 
 
1,998
 
2014
 
 
5,926
 
2015
 
 
1,759
 
2016 and thereafter
 
 
998
 
 
 
$
19,851
 

(5) Intangible Assets
 
The Company amortizes intangible assets on a straight line basis over their estimated useful lives as follows:
 
Trademarks
                 1-10 years
Contracts - third party
                 7 years
Contracts - owned equipment
                 5-7 years
 
Total amortization expense was $0.3 million for the three months ended June 30, 2011 and 2010, and $0.7 million for the six months ended June 30, 2011 and 2010. Intangible assets as of June 30, 2011 were as follows (in thousands):
 
 
 
Gross
Carrying
Amount
 
 
Accumulated
Amortization
 
 
Net Carrying
Amount
 
Trademarks
 
$
1,282
 
 
$
(642
)
 
$
640
 
Contracts - third party
 
 
3,650
 
 
 
(2,477
)
 
 
1,173
 
Contracts - owned equipment
 
 
4,121
 
 
 
(2,934
)
 
 
1,187
 
Intangible assets
 
$
9,053
 
 
$
(6,053
)
 
$
3,000
 

(6) Revolving Credit Facility, Term Loans and Capital Lease Obligations
 
(a) Revolving Credit Facility
 
The Company has a revolving line of credit agreement with a consortium of banks to finance the acquisition of assets and for general working capital purposes. This agreement was amended on May 27, 2008, August 20, 2010 and June 27, 2011.  As of June 30, 2011, the maximum credit commitment under the revolving line of credit was $330.0 million.
 
The Company’s revolving credit facility may be increased under certain conditions described in the agreement governing the facility. In addition, there is a commitment fee on the unused amount of the total commitment, payable quarterly in arrears. The agreement provides that swing line loans (short-term borrowings of up to $10.0 million in the aggregate that are payable within 10 business days or at maturity date, whichever comes earlier) and standby letters of credit (up to $15.0 million in the aggregate) will be available to the Company. These credit commitments are part of, and not in addition to, the total commitment provided under the agreement. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar rate loans, as defined in the revolving credit facility.  As of June 30, 2011, the interest rate under the amended agreement was approximately 2.5%. The agreement governing the Company’s revolving credit facility also contains various financial and other covenants. It also includes certain restrictions on the Company’s ability to incur other indebtedness or pay dividends to stockholders. As of June 30, 2011, the Company was in compliance with the terms of the revolving credit facility.
 
 
10

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
On June 27, 2011, the Company entered into an agreement with the banks to amend its revolving credit facility to provide it with greater flexibility in regards to its capital structure. The amendments include revising certain financial covenants, reducing the borrowing base and adding the ability for the Company to form subsidiary entities that will be structured in a manner which will provide the Company with the ability to access public debt markets through the use of asset-backed securities that are collateralized by the Company’s assets.
 
As of June 30, 2011, the outstanding balance under the Company’s revolving credit facility was $256.6 million. As of June 30, 2011, the Company had $73.3 million in availability under the revolving credit facility (net of $0.1 million in letters of credit) subject to the Company’s ability to meet the collateral requirements under the agreement governing the facility. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default. The agreement under the Company’s revolving credit facility will terminate on September 25, 2014.
 
On July 15, 2011, the Company drew down an additional $95.0 million under the existing terms of its term loan facility (see paragraph (b)(i) below).  The Company used these proceeds to reduce the outstanding balance under its revolving credit facility.
 
The Company’s revolving credit facility, including any amounts drawn on the facility, is secured by substantially all of the assets of the Company (not otherwise used as security for its other credit facilities) including the containers owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.
 
(b) Term Loans
 
Term loans consist of the following:
 
(i) Bank Term Loan. On December 20, 2010, the Company entered into a Term Loan Agreement with a consortium of banks. Under this loan agreement, the Company was initially eligible to borrow up to $300.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of the Company’s wholly owned foreign subsidiaries.  The Company initially borrowed $185.0 million under the agreement and had until September 2011 to utilize the remaining $115.0 million of the loan facility. The loan agreement is an amortizing facility with a term of six years, with quarterly payments of principal of $6.0 million each (i.e. 2.0% of the aggregate commitment).  Any unpaid principal will be due on December 20, 2016.  The applicable interest rate is equal to LIBOR plus 3.0% per annum for Eurodollar loans, and Base Rate plus 2.0% for base rate loans.  The Base Rate is defined as the highest of (i) the federal funds rate plus 1/2 of 1.0%, (ii) the prime rate (as published in The Wall Street Journal), and (iii) the Eurodollar rate (for three-month loans) plus 1.0%. The proceeds from the initial borrowing were used to pay part of the Company’s revolving credit facility.
 
On March 11, 2011 the Company entered into an Amendment to the Term Loan Agreement that reduced the quarterly payments of principal for the $185.0 million initially borrowed to $3.7 million each (i.e. 2.0% of the drawn amount) for the first 23 quarterly payment dates with a final payment of $99.9 million (54.0% of the drawn amount) due on December 20, 2016.   The Company is entitled to draw down the remaining $115.0 million commitment in up to three additional drawdowns through September 2011.  The quarterly payments of principal on these drawdowns (each determined separately) will be determined for each Principal Payment Date (other than the Maturity Date), as an amount equal to the product of (x) the quotient obtained by dividing 46.0% by the number of remaining scheduled Principal Payment Dates, as of the Drawdown Date of such Term Loan and (y) the initial Principal Balance of such Term Loan, with a final payment due on December 20, 2016 of 54.0% of the initial Principal Balance of such Term Loan. As of June 30, 2011, the loan had a balance of $177.6 million and interest rate of 3.2%. The loan agreement contains various financial and other covenants. As of June 30, 2011, the Company was in compliance with all the covenants under the loan agreement.
 
 On July 15, 2011, the Company drew down an additional $95.0 million under the existing terms of its term loan facility, and used these proceeds to reduce the outstanding balance under its revolving credit facility.
 
The Company's term loan with a consortium of banks, related party term loan and capital lease obligations are secured by a specific pool of containers owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.
 
(ii) Related Party Term Loan.  On August 20, 2009, the Company signed a $10.0 million five-year loan agreement with the Development Bank of Japan (DBJ). As of the date of closing of the loan agreement, DBJ owned approximately 9.4% of the Company’s outstanding common stock. The loan is payable in 19 quarterly installments of $0.2 million starting October 31, 2009 and a final payment of $6.2 million on July 31, 2014. The loan bears a variable interest rate based on BBA LIBOR and is secured by container rental equipment owned by the Company. The loan had a balance of $8.6 million and an interest rate of 2.7% as of June 30, 2011. The agreement governing the Company’s term loan contains various financial and other covenants. As of June 30, 2011, the Company was in compliance with all the covenants under the loan agreement. In December 2010, DBJ sold 753,000 shares of the Company’s stock, thereby reducing its equity interest to 4.9% of the Company’s total outstanding shares of common stock as of June 30, 2011.
 
 
11

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(c) Capital Lease Obligations
 
As of June 30, 2011, the Company had capital lease obligations of $13.3 million. The underlying obligations are denominated in U.S. Dollars and Euros at floating interest rates averaging 3.2% as of June 30, 2011 and with maturity dates between April 2012 and March 2020. The liability under each lease is secured by the underlying leased equipment.
 
(7) Stock–Based Compensation Plan
 
(a) Stock Options
 
The following table summarizes the activity in the Company’s stock option plan for the six-month periods ended June 30, 2011 and 2010:
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
   
Number of
Shares
   
Weighted
Average
Exercise Price
   
Number of
Shares
   
Weighted
Average
Exercise Price 
 
Options outstanding at January 1
    972,680     $ 10.32       930,180     $ 10.16  
Options granted - officers and employees
    180,000     $ 24.82              
Options granted - directors
    40,000     $ 21.62       30,000     $ 13.48  
                                 
Options outstanding at June 30
    1,192,680     $ 12.89       960,180     $ 10.26  
Options exercisable
    735,180     $ 11.69       503,264     $ 12.35  
Weighted average remaining term
 
7.6 years
           
8.0 years
         

Stock options granted to officers and employees have a vesting period of four years from grant date, with 25% vesting after one year, and 1/48th vesting each month thereafter until fully vested. Stock options granted to independent directors vest in one year. The estimated fair value of stock options granted to officers and employees during the six months ended June 30, 2011 was approximately $2.2 million or $12.44 per share. No stock options were granted to officers and employees during the six months ended June 30, 2010. The options granted to the independent directors during the six months ended June 30, 2011 and 2010 were valued at approximately $0.4 million or $10.22 per share and $0.1 million or $4.62 per share, respectively.
 
The fair value of the stock options granted to the Company’s officers and independent directors was estimated using the Black-Scholes-Merton pricing model using the following weighted average assumption :
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
Stock price
  $ 24.24     $ 13.48  
Exercise price
  $ 24.24     $ 13.48  
Expected term:
               
Officers and employees
 
6.25 years
      -  
Directors
 
5.5 years
   
5.5 years
 
Expected volatility:
               
Officers and employees
    50.2 %     -  
Directors
    50.8 %     37.2 %
Dividend yield
    0 %     0 %
Risk free rate
    1.89 %     1.98 %

As the Company has insufficient historical data, the expected option term is calculated using the simplified method in accordance with SEC guidance. In the absence of sufficient historical data, 50% of the assumed volatility factor used in the calculation was derived from the average volatility of common shares for similar companies over a period approximating the expected term of the options. The remaining 50% of the assumed volatility factor was derived from the average volatility of the Company’s common shares since their initial public offering in 2007.  The volatility factor for stock options granted prior to the second quarter of 2011 was based 100% on the average volatility of common shares for similar companies. The risk-free rate is based on daily U.S. Treasury yield curve with a term approximating the expected term of the option. No forfeiture was estimated on all options granted during the six months ended June 30, 2011 as management believes that none of the grantees will resign within the option vesting period.
 
 
12

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
The Company recorded stock-based compensation expense of $0.3 million relating to stock options for the three months ended June 30, 2011 and 2010, and $0.6 million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, the remaining unamortized stock-based compensation cost relating to stock options granted to the Company’s executive officers and management employees was approximately $2.6 million which is to be recognized over the remaining weighted average vesting period of approximately 2.8 years. Unamortized stock-based compensation cost relating to independent directors’ options as of June 30, 2011 was approximately $0.4 million which is to be recognized over a remaining weighted average vesting period of approximately 9 months. The aggregate intrinsic value of all options outstanding as of June 30, 2011 was $10.1 million based on the closing price of the Company’s common stock of $20.66 per share.
 
(b) Restricted Stock Grant
 
The Company granted certain employees approximately 39,000 shares of restricted common stock in 2007 with a three-year vesting period. Approximately 4,000 shares of restricted stock were forfeited while the remaining 35,000 shares were fully vested in May and July 2010. No additional shares of restricted common stock have been granted since July 2007.
 
Stock compensation expense relating to restricted stocks for the three and six months ended June 30, 2011 was zero. Stock compensation expense relating to restricted stock for the three and six months ended June 30, 2010 was less than $0.1 million.
 
Compensation expense relating to stock options and restricted stock is recorded as a component of marketing, general and administrative expense in the Company’s consolidated statements of income.
 
(8) Income Taxes
 
The consolidated income tax expense for the three and six months ended June 30, 2011 and 2010 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2011 and 2010, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes and the effect of certain permanent differences.
 
The Company’s effective tax rates for the three and six months ended June 30, 2011 were 17.2% and 16.8%, respectively, compared to 14.6% and 17.2% for the three and six months ended June 30, 2010, respectively. Movements in the effective tax rates are due primarily to changes in the proportion of the Company’s U.S. and overseas earnings.
 
The Company recognizes in the financial statements a liability for tax uncertainty if it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. As of June 30, 2011, the Company had unrecognized tax benefits of $0.1 million, which if recognized, would reduce the Company’s effective tax rate. Total accrued interest relating to unrecognized tax benefits was less than $0.1 million as of June 30, 2011. The Company does not believe the total amount of unrecognized tax benefits as of June 30, 2011 will increase or decrease significantly for the remainder of 2011.
 
The Company’s 2005 and 2006 income tax returns for the state of California are currently under examination by the state’s taxing authority.
 
(9) Fair Value of Financial Instruments
 
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company’s capital lease obligations of $13.3 million as of June 30, 2011 were estimated to have a fair value of approximately $12.7 million, based on the fair value of the estimated future payments calculated using the prevailing interest rates. Management believes that the balances of the Company’s revolving credit facility of $256.6 million, term loans totaling $186.2 million and net investment in direct finance leases of $14.5 million approximate their fair values as of June 30, 2011.
 
(10) Commitments and Contingencies
 
In addition to its debt obligations described in Note 6 above, the Company has commitments to purchase approximately $49.1 million of container equipment as of June 30, 2011. The Company also utilizes certain office facilities and equipment under long-term non-cancellable operating lease agreements with total future minimum lease payments of approximately $6.5 million as of June 30, 2011.
 
 
13

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(11) Related Party Transactions
 
The Company has transferred legal ownership of certain containers to Japanese container funds which were established by Japan Investment Adviser Co., Ltd. (JIA) and CAIJ. CAIJ is an 80%-owned subsidiary of CAI with the remaining 20% owned by JIA. JIA is owned and controlled by a Managing Director of CAIJ.  Prior to the transfer of containers from the Company, the container funds received contributions from unrelated Japanese investors, under separate Japanese investment agreements allowed under Japanese commercial laws. The contributions were used to purchase container equipment from the Company. Under the terms of the agreements, the CAI-related Japanese entities manage each of the investments but may outsource the whole or part of each operation to a third party. Pursuant to its services agreement with investors, the Japanese container funds have outsourced the general management of their operations to CAIJ. The Japanese container funds have also entered into equipment management service agreements whereby the Company manages the leasing activity of containers owned by the Japanese container funds.
 
As described in Note 3, the Japanese container funds are considered VIEs. However, with the exception of the two specific Japanese funds described in Note 3, the Company does not consider its interest in the Japanese container funds to be a variable interest. As such, the Company did not consolidate the assets and liabilities, results of operations or cash flows in its consolidated financial statements.
 
The sale of containers to the CAI-related unconsolidated Japanese VIEs has been recorded by the Company as a sale in the ordinary course of the business.
 
As described in Note 3, the Company has included in its consolidated financial statements, the assets and liabilities, results of operations and cash flows of two specific Japanese container funds that it manages, in accordance with ASC 810.
 
On August 20, 2009, the Company signed a $10.0 million five-year loan agreement with the Development Bank of Japan (DBJ).  As of the date of closing of the loan agreement, DBJ owned approximately 9.4% of the Company’s outstanding common stock. See Note 6(b)(ii).
 
(12) Comprehensive Income
 
The following table provides a reconciliation of the Company’s net income attributable to CAI commom stockholders to comprehensive income attributable to CAI common stockholders (in thousands):
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
   
2011
   
2010
   
2011
   
2010
Net income attributable to CAI common stockholders
  $ 10,880     $ 5,676     $ 23,676     $ 8,725  
Other comprehensive income:
                               
Foreign currency translation adjustments
    460       (1,618 )     1,730       (2,804 )
 
                               
Comprehensive income attributable to CAI common stockholders
  $ 11,340     $ 4,058     $ 25,406     $ 5,921  

(13) Segment Information
 
The Company operates in one industry segment, container leasing, but has two reportable business segments: container leasing and container management. The container leasing segment derives its revenue from the ownership and leasing of containers to container shipping lines and freight forwarders. The container management segment derives its revenue from management fees earned from portfolios of containers and associated leases which are managed on behalf of container investors. It also derives revenue from the sale of containers, previously owned by the Company, to container investors who in turn enter into management agreements with the Company. There are no inter-segment revenues.
 
With the exception of amortization of intangible assets and marketing, general and administrative expenses (MG&A), operating expenses are directly attributable to the container leasing segment. Amortization of intangible assets relating to owned and third party contracts is charged directly to the container leasing segment and container management segment, respectively. The amortization of remaining intangible assets relating to the trademark is allocated to the segments based on their average twenty-foot equivalent units (TEUs) of containers during the year.
 
 
14

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
During the year ended December 31, 2010, the Company refined its methodology for allocating MG&A expense to each segment based on a study which analyzed the departmental composition of MG&A expense. The expense allocation was based on either revenue or TEUs in each segment, depending on the function of the department which incurred the expense, after directly assigning MG&A expense relating to Consent and CAIJ subsidiaries to the container leasing and container management segments, respectively. Management believes that this allocation method results in a more representative distribution of MG&A expense between the two segments.  The Company applied this allocation method to MG&A expenses for the three and six months ended June 30, 2011 and adjusted the MG&A expense included in each segment’s operating expense previously reported for the same three and six month periods in 2010.  Prior to the adoption of this method, the Company had been allocating MG&A expense to each segment based solely on the ratio of owned and managed TEUs to its total fleet of TEUs after directly assigning MG&A expense relating to Consent to the container leasing segment.
 
The Company does not allocate interest income and income tax expense/benefit to its segments.
 
Total assets of the container management segment consist of managed accounts receivable, the net carrying value of the intangible asset relating to third party contracts and a portion of the intangible asset relating to trademarks (determined based on the percentage of average TEUs of managed containers to total average TEUs). The remaining balance of total assets is allocated to the container leasing business.
 
The following tables show condensed segment information for the Company’s container leasing and container management segments for the three and six months ended June 30, 2011 and 2010, reconciled to the Company’s net income before income taxes and non-controlling interest as shown in its consolidated statements of income for such periods (in thousands):
 
   
Three Months Ended June 30, 2011
 
   
Container
Leasing
   
Container
Management
   
Unallocated
   
Total
 
Total revenue
  $ 25,231     $ 3,528     $ -     $ 28,759  
Operating expenses
    9,487       2,352       -       11,839  
Operating income
    15,744       1,176       -       16,920  
Net interest expense
    3,529       -       (1 )     3,528  
Net income before income taxes and non-controlling interest
  $ 12,215     $ 1,176     $ 1     $ 13,392  
Total assets
  $ 799,188     $ 21,371     $ -     $ 820,559  
 
 
   
Three Months Ended June 30, 2010
 
   
Container
Leasing
   
Container
Management
   
Unallocated
   
Total
 
Total revenue
  $ 14,479     $ 2,884     $ -     $ 17,363  
Operating expenses
    8,279       1,566       -       9,845  
Operating income
    6,200       1,318       -       7,518  
Net interest expense
    963       -       (88 )     875  
Net income before income taxes and non-controlling interest
  $ 5,237     $ 1,318     $ 88     $ 6,643  
Total assets
  $ 366,605     $ 23,177     $ -     $ 389,782  

 
15

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
   
Six Months Ended June 30, 2011
 
   
Container
Leasing
   
Container
Management
   
Unallocated
   
Total
 
Total revenue
  $ 48,048     $ 8,453     $ -     $ 56,501  
Operating expenses
    16,722       4,343       -       21,065  
Operating income
    31,326       4,110       -       35,436  
Net interest expense
    6,503       -       (4 )     6,499  
Net income before income taxes and non-controlling interest
  $ 24,823     $ 4,110     $ 4     $ 28,937  
Total assets
  $ 799,188     $ 21,371     $ -     $ 820,559  
 
   
Six Months Ended June 30, 2010
 
   
Container
Leasing
   
Container
 Management
   
Unallocated
   
Total
 
Total revenue
  $ 27,225     $ 5,331     $ -     $ 32,556  
Operating expenses
    17,333       2,991       -       20,324  
Operating income
    9,892       2,340       -       12,232  
Net interest expense
    1,820       -       (120 )     1,700  
Net income before income taxes and non-controlling interest
  $ 8,072     $ 2,340     $ 120     $ 10,532  
Total assets
  $ 366,605     $ 23,177     $ -     $ 389,782  

Using an expense allocation methodology based solely on container fleet ownership, the Company had previously reported operating expenses for the container leasing segment of $6.4 million and $13.6 million, and pre-tax income of $7.1 million and $11.8 million for the three and six months ended June 30, 2010, respectively. The Company had previously reported operating expenses for the container management segment of $3.4 million and $6.7 million, and pre-tax losses of $0.5 million and $1.4 million for the three and six months ended June 30, 2010, respectively.

Geographic Data
 
The Company’s container lessees use containers for their global trade utilizing many worldwide trade routes. The Company earns its revenue from international carriers when the containers are in use and carrying cargo around the world. Most of the Company’s leasing related revenue is denominated in U.S. dollars. Since all of the Company’s containers are used internationally and typically no container is domiciled in one particular place for a prolonged period of time, all of the Company’s long-lived assets are considered to be international with no single country of use.

(14) Earnings Per Share
 
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if their effect is anti-dilutive.
 
 
16

 
CAI INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
The following table sets forth the reconciliation of basic and diluted net income per share for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share data):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Numerator:
                       
Net income attributable to CAI common stockholders used in calculation of basic and diluted earnings per share
  $ 10,880     $ 5,676     $ 23,676     $ 8,725  
                                 
Denominator:
                               
Weighted average shares used in the calculation of basic earnings per share
    19,295       17,910       19,295       17,908  
Effect of dilutive securities:
                               
Stock options
    503       231       483       190  
Weighted average shares used in the calculation of diluted earnings per share
    19,798       18,141       19,779       18,098  
                                 
Net income per share attributable to CAI common stockholders:
                               
Basic
  $ 0.56     $ 0.32     $ 1.23     $ 0.49  
Diluted
  $ 0.55     $ 0.31     $ 1.20     $ 0.48  
 
The calculation of diluted earnings per share for the three and six months ended June 30, 2011 excluded from the denominator 220,000 shares of stock options granted to officers and directors because their effect would have been anti-dilutive. The calculation of diluted earnings per share for the three and six months ended June 30, 2010 excluded from the denominator 480,180 shares of stock options granted to officers and directors because their effect would have been anti-dilutive.

 
17


ITEM 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 16, 2011. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
 
The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future.
 
Overview
 
We are one of the world’s leading container leasing and management companies. We purchase new containers, lease them to container shipping lines and either retain them as part of our owned fleet or sell them to container investors for whom we then provide management services. In operating our fleet, we lease, re-lease and dispose of containers and contract for the repair, repositioning and storage of containers. As of June 30, 2011, our fleet comprised approximately 884,000 twenty-foot equivalent units (TEUs) of containers. The following table shows the composition of our fleet as of June 30, 2011 and 2010 and our average fleet utilization for the three and six months ended June 30, 2011 and 2010:
 
 
 
As of June 30,
 
   
2011
   
2010
 
                 
Managed fleet in TEUs
 
 
468,598
 
 
 
512,836
 
Owned fleet in TEUs
 
 
415,260
 
 
 
263,632
 
Total
 
 
883,858
 
 
 
776,468
 
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Average fleet utilization for the period
    97.9 %     95.1 %     97.9 %     90.8 %
 
Average fleet utilization reflects the average number of TEUs in our fleet on lease as a percentage of total TEUs available for lease. In calculating TEUs available for lease, we exclude units held for sale and units we have purchased that are held at the manufacturer. The utilization rate for a period is calculated by averaging the utilization rates at the end of each calendar month during the period.
 
We plan to increase both the number of owned containers as well as the number of managed containers in our fleet. During the six months ended June 30, 2011, we paid approximately $261.3 million to purchase additional containers. We plan to invest in new containers as the demand for shipping containers increases. We believe it is important to maintain a balance between the size of our owned fleet and our managed fleet in order to have multiple sources of revenue.
 
Results of Operations
 
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
 
The following table summarizes our operating results for the three months ended June 30, 2011 and 2010 (dollars in thousands):
 
 
 
Three Months Ended
June 30,
 
 
Increase
 
 
 
2011
 
 
2010
 
 
Amount
 
 
Percent
 
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
28,759
 
 
$
17,363
 
 
$
11,396
 
 
 
65.6
%
Operating expenses
 
 
11,839
 
 
 
9,845
 
 
 
1,994
 
 
 
20.3
 
Net income attributable to CAI common stockholders
 
 
10,880
 
 
 
5,676
 
 
 
5,204
 
 
 
91.7
 

 
18

 
Total revenue of $28.8 million for the three months ended June 30, 2011 increased $11.4 million, or 65.6%, from $17.4 million for the three months ended June 30, 2010, due primarily to the increase in the number of owned containers on lease, higher utilization of owned and managed containers and higher per diem rates resulting in increased container rental revenue and management fee revenue.  Operating expenses of $11.8 million for the quarter ended June 30, 2011 was $2.0 million, or 20.3%, higher than the $9.8 million recorded during the three-month period in 2010, mainly as a result of an increase in depreciation expense, partly offset by the higher gain on sale of used container equipment, lower storage, handling and other expenses and a gain on foreign exchange in 2011 compared to a loss in 2010. The increase in revenue and reduction in operating expenses resulted in a $5.2 million, or 91.7%, increase in net income attributable to CAI common stockholders to $10.9 million for the three months ended June 30, 2011 compared to the same three-month period in 2010.
 
 
Container Rental Revenue. Container rental revenue increased $10.7 million, or 76.8%, to $24.7 million for the three months ended June 30, 2011 from $14.0 million for the three months ended June 30, 2010. The increase was driven by the increase in the number of containers on lease, higher utilization of containers and higher average per diem rates for short-term and long-term leases.
 
Management Fee Revenue. Management fee revenue for the three months ended June 30, 2011 was $3.3 million, an increase of $0.7 million, or 29.1%, from $2.5 million for the three months ended June 30, 2010. The increase in managed container utilization and average per diem rates and lower expenses from container recovery costs, partially offset by a reduction in the size of the managed container fleet, resulted in higher profitability in most of our investors’ portfolios.
 
Gain on Sale of Container Portfolios. Gain on sale of container portfolios decreased $0.1 million to $0.3 million for the three months ended June 30, 2011, a 27.3% decrease from a gain of $0.4 million recorded for the three months ended June 30, 2010. The decrease was due primarily to the lower number of containers sold to investors.
 
Expenses.>  The following discussion explains the significant changes in expenses for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010:
 
Depreciation of Container Rental Equipment. Depreciation of container rental equipment increased by $3.0 million, or 66.3%, to $7.4 million for the three months ended June 30, 2011, from $4.5 million for the three months ended June 30, 2010. This increase was primarily attributable to the 51% increase in average TEUs of owned containers, partly offset by the net impact of implementing higher residual values for our containers effective January 1, 2011. This change in residual values reduced depreciation expense and increased the Company’s pre-tax income by approximately $0.7 million, increased net income by approximately $0.6 million and increased diluted earnings per share by $0.03 for the three months ended June 30, 2011.  For the fleet owned at the beginning of the year, the increase in estimated residual values will result in a reduction of depreciation expense and an increase in pre-tax income of approximately $2.8 million in 2011 (or $0.12 of diluted earnings per share on an annual basis). We do not expect that the change in residual estimates will have a material effect on the reported gain on disposition of equipment over the next several years since the equipment estimated to be sold during the coming years has already been substantially depreciated.  See Note 2(a) to our unaudited consolidated financial statements included in this report.
 
Gain on Disposition of Used Container Equipment. Gain on disposition of used container equipment increased by $0.3 million, or 11.5%, to $2.8 million for the three months ended June 30, 2011, from $2.5 million for the three months ended June 30, 2010. We sold fewer containers this quarter compared to the same quarter last year but the profit margin on containers sold during the three months ended June 30, 2011 was significantly higher than those sold during the three months ended June 30, 2010.
 
Storage, Handling and Other Expenses. Storage, handling and other expenses decreased by $0.4 million, or 22.9%, to $1.4 million for the three months ended June 30, 2011, from $1.8 million for the three months ended June 30, 2010. The higher utilization of our owned containers has resulted in fewer containers in storage during the quarter resulting in lower handling, storage and other related charges.
 
(Gain) Loss on Foreign Exchange. We recorded a gain of less than $0.1 million on foreign exchange transactions for the three months ended June 30, 2011 compared to a loss of $0.2 million during the three months ended June 30, 2010. Gains and losses on foreign currency primarily occur when foreign denominated financial assets and liabilities are either settled or remeasured in U.S. dollars. The decrease in the value of the U.S. dollar relative to foreign currencies (primarily Euros and British Pound Sterling) resulted in U.S. dollar denominated liabilities held at some of our foreign subsidiaries to decrease in value relative to the foreign subsidiaries local currencies.
 
Net Interest Expense. Net interest expense of $3.5 million for the three months ended June 30, 2011 increased by $2.6 million, or 303.2%, from $0.9 million incurred during the three months ended June 30, 2010. The increase in net interest expense was due primarily to an increase in the average principal balance of our debts.

Income Tax Expense. Income tax expense for the three months ended June 30, 2011 was $2.3 million, a $1.3 million, or 138.0%, increase from $1.0 million for the three months ended June 30, 2010. The increase was due primarily to a 101.6% higher pre-tax income and a slightly higher effective tax rate. Our effective tax rate for the quarter ended June 30, 2011 was 17.2% compared to 14.6% for the same quarter in 2010. The increase in effective tax rate for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 resulted primarily from an increase in U.S. earnings taxed at a higher rate than earnings derived from our foreign subsidiaries.
 
Segment Information
 
During the year ended December 31, 2010, we refined our methodology for allocating marketing, general and administrative (MG&A) expense to each segment based on a study which analyzed the departmental composition of MG&A expense. The expense allocation was based on either revenue or TEUs of containers in each segment, depending on the function of the department which incurred the expense, after directly assigning MG&A expense relating to Consent and CAIJ subsidiaries to the container leasing and container management segments, respectively. Management believes that this allocation method results in a more representative distribution of MG&A expense between the two segments. We applied this allocation method to MG&A expenses for the three and six months ended June 30, 2011 and adjusted the MG&A expense included in each segment’s operating expense previously reported for the same three and six month periods in 2010.  Prior to the adoption of this method, we had been allocating MG&A expense to each segment based solely on the ratio of owned and managed TEUs to the total fleet of TEUs after directly assigning MG&A expense relating to Consent to the container leasing segment.
 
The following table summarizes our results of operations for each of our business segments for the three months ended June 30, 2011 and 2010 (dollars in thousands):
 
   
Three Months Ended June 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent Change
 
                         
Container Leasing
                       
Total revenue
  $ 25,231     $ 14,479     $ 10,752       74.3 %
Operating expenses
    9,487       8,279       1,208       14.6  
Interest expense
    3,529       963       2,566       266.5  
Income before taxes attributable to segment
  $ 12,215     $ 5,237     $ 6,978       133.2  
Container Management
                               
Total revenue
  $ 3,528     $ 2,884     $ 644       22.3 %
Operating expenses
    2,352       1,566       786       50.2  
Income before taxes attributable to segment
  $ 1,176     $ 1,318     $ (142 )     (10.8 )
 
Container Leasing. Total revenue from our container leasing segment increased $10.8 million, or 74.3%, to $25.2 million for the three months ended June 30, 2011 from $14.5 million during the three months ended June 30, 2010. The increase was primarily due to an increase in the number of containers on lease, higher average utilization and an increase in the average per diem rates on both short term and long term leases.
 
Total operating expenses for the container leasing segment for the three months ended June 30, 2011 increased $1.2 million, or 14.6%, to $9.5 million, from $8.3 million for the three months ended June 30, 2010. The increase was attributable to higher depreciation expense, partly offset by the higher gain on sale of used container equipment, decrease in storage, handling and other container related expenses and gain on foreign exchange this year compared to a loss during the three months ended June 30, 2010.
 
 Interest expense for the three months ended June 30, 2011 increased $2.6 million, or 266.5%, to $3.5 million compared to $1.0 million for the three months ended June 30, 2010. The increase in interest expense was primarily due to the increase in our average debt balance.
 
Container Management. Total revenue of $3.5 million from our container management segment for the three months ended June 30, 2011 was $0.6 million, or 22.3%, higher than the $2.9 million revenue we reported for this segment for the three months ended June 30, 2010. Higher utilization and per diem rates for our managed containers resulted in increased profitability for our managed portfolios, generating higher management fee income.
 
Total operating expenses of $2.4 million for the container management segment for the three months ended June 30, 2011 increased $0.8 million, or 50.2%, from $1.6 million for the three months ended June 30, 2010, as a result of the higher allocation of  MG&A expense.
 
We had previously reported $6.4 million and $3.4 million of operating expenses, and pre-tax income of $7.1 million and loss of $0.5 million, for the container leasing segment and container management segment, respectively, for the three months ended June 30, 2010 using a methodology of allocating MG&A expense based solely on the ratio of TEUs of our owned containers to the total fleet TEUs.
 
20


Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
 
The following table summarizes our operating results for the six months ended June 30, 2011 and 2010 (dollars in thousands):
 
   
Six Months Ended June 30,
   
Increase
 
   
2011
   
2010
   
Amount
   
Percent
 
Total revenue
  $ 56,501     $ 32,556     $ 23,945       73.6 %
Operating expenses
    21,065       20,324       741       3.6  
Net income attributable to CAI common stockholders
    23,676       8,725       14,951       171.4  
 
Total revenue of $56.5 million for the six months ended June 30, 2011 increased $23.9 million, or 73.6%, from $32.6 million for the six months ended June 30, 2010, due primarily to the increase in the number of owned containers on lease, higher utilization of owned and managed containers and higher per diem rates resulting in increased container rental revenue and management fee revenue. Additionally, there was an increase in gain on sale of container portfolio as a result of higher margin on containers sold to investors.  Operating expenses of $21.1 million for the six months ended June 30, 2011 was $0.7 million, or 3.6%, higher than the $20.3 million recorded for the six months ended June 30, 2010, primarily due to an increase in depreciation expense, partly offset by the higher gain on sale of used container equipment and lower storage, handling and other expenses. The increase in revenue and reduction in operating expenses resulted in a $15.0 million, or 171.4%, increase in net income attributable to CAI common stockholders to $23.7 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.
 
 
Container Rental Revenue. Container rental revenue increased $20.8 million, or 78.9%, to $47.1 million for the six months ended June 30, 2011 from $26.3 million for the six months ended June 30, 2010. The increase was driven by the increase in the number of containers on lease, higher utilization and higher average per diem rates for short-term and long-term leases.
 
Management Fee Revenue. Management fee revenue for the six months ended June 30, 2011 was $6.8 million, an increase of $2.1 million, or 43.9%, from $4.7 million for the six months ended June 30, 2010. The increase in managed container utilization and average per diem rates and lower expenses from container recovery costs, partially offset by a reduction in the size of the managed container fleet, resulted in higher profitability in most of our investors’ portfolios. In addition, we earned higher commissions on the sale of managed containers as a result of higher average selling prices during the first half of 2011.
 
Gain on Sale of Container Portfolios. Gain on sale of container portfolios increased $1.0 million to $1.7 million for the six months ended June 30, 2011, a 170.8% increase from a gain of $0.6 million for the six months ended June 30, 2010. The increase was due primarily to higher margins on containers sold to investors, partly offset by lower volumes of containers sold compared to the six months ended June 30, 2010.
 
Finance Lease Income. Finance lease income increased 5.0% to $1.0 million during the six months ended June 30, 2011, from $0.9 million during the six months ended June 30, 2010, due primarily to the higher interest income resulting from the increase in new finance lease contracts executed subsequent to June 30, 2010.
 
Expenses.>  The following discussion explains the significant changes in expenses for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010:
 
Depreciation of Container Rental Equipment. Depreciation of container rental equipment increased by $5.5 million, or 63.3%, to $14.2 million for the six months ended June 30, 2011, from $8.7 million for the six months ended June 30, 2010. This increase was primarily attributable to a 52% increase in average TEUs of owned containers, partly offset by the net impact of implementing new residual values for our containers effective January 1, 2011. This change in residual values reduced depreciation expense and increased the Company’s pre-tax income by approximately $1.5 million, increased net income by approximately $1.2 million and increased diluted earnings per share by $0.06 for the six months ended June 30, 2011.  For the fleet owned by us at the beginning of the year, the increase in estimated residual values will result in a reduction of depreciation expense and an increase in pre-tax income of approximately $2.8 million in 2011 (or $0.12 of diluted earnings per share on an annual basis). See Note 2(a) to our unaudited consolidated financial statements included in this report.

Gain on Disposition of Used Container Equipment. Gain on disposition of used container equipment increased by $2.5 million, or 63.3%, to $6.4 million for the six months ended June 30, 2011, from $3.9 million for the six months ended June 30, 2010. Although we sold fewer containers during the six months ended June 30, 2011compared to the six months ended June 30, 2010, the sales price and associated profit margin were significantly higher.
 
Storage, Handling and Other Expenses. Storage, handling and other expenses decreased by $1.5 million, or 37.9%, to $2.5 million for the six months ended June 30, 2011, from $4.0 million for the six months ended June 30, 2010. The higher utilization of our owned containers has resulted in fewer containers in storage resulting in lower handling, storage and other related charges.
 
         Marketing, General and Administrative Expense (MG&A). MG&A expense decreased $0.4 million, or 3.4%, to $10.1 million for the six months ended June 30, 2011, from $10.5 million for the six months ended June 30, 2010. The decrease was primarily due to the recovery of a previously reserved receivable partially offset by increased compensation-related costs.
 
(Gain) Loss on Foreign Exchange. Our gain on foreign exchange for the three months ended June 30, 2011 reduced our loss of $0.1 million on foreign exchange during the first quarter of this year to less than $0.1 million for the six months ended June 30, 2011 compared to a loss of $0.4 million during the six months ended June 30, 2010. Gains and losses on foreign currency primarily occur when foreign denominated financial assets and liabilities are either settled or remeasured in U.S. dollars. The improvement in foreign exchange loss was the result of the Euro and the British Pound Sterling strengthening against the U.S. dollar which resulted in U.S. dollar denominated liabilities held at some of our foreign subsidiaries to decrease in value relative to the foreign subsidiaries local currencies.
 
Net Interest Expense. Net interest expense of $6.5 million for the six months ended June 30, 2011 increased by $4.8 million, or 282.3%, from $1.7 million incurred during the six months ended June 30, 2010. The increase in net interest expense was due primarily to an increase in the average principal balance of our debts.
 
Income Tax Expense. Income tax expense for the six months ended June 30, 2011 was $4.9 million, a $3.0 million, or 168.5%, increase from $1.8 million for the six months ended June 30, 2010. The increase was due primarily to a 174.8% higher pre-tax income, partly offset by the impact of a lower effective tax rate. Our effective tax rate for the six months ended June 30, 2011 was 16.8% compared to 17.2% for the six months ended June 30, 2010, due primarily to a higher proportion of pre-tax income arising from foreign operations where statutory rates are lower than the U.S. income tax rates.
 
Segment Information
 
The following table summarizes our results of operations for each of our business segments for the six months ended June 30, 2011 and 2010 (dollars in thousands):
 
   
Six Months Ended June 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
Change
 
Container Leasing
                       
Total revenue
  $ 48,048     $ 27,225     $ 20,823       76.5 %
Operating expenses
    16,722       17,333       (611 )     (3.5 )
Interest expense
    6,503       1,820       4,683       257.3  
Income before taxes attributable to segment
  $ 24,823     $ 8,072     $ 16,751       207.5  
Container Management
                               
Total revenue
  $ 8,453     $ 5,331     $ 3,122       58.6 %
Operating expenses
    4,343       2,991       1,352       45.2  
Income before taxes attributable to segment
  $ 4,110     $ 2,340     $ 1,770       75.6  

Container Leasing. Total revenue from our container leasing segment increased $20.8 million, or 76.5%, to $48.0 million for the six months ended June 30, 2011 from $27.2 million during the six months ended June 30, 2010. The increase was primarily due to an increase in the number of our owned containers on lease, higher average utilization of our owned containers and increase in the average per diem rates on both short term and long term leases.
 
Total operating expenses for the container leasing segment for the six months ended June 30, 2011 decreased $0.6 million, or 3.5%, to $16.7 million, from $17.3 million from the six months ended June 30, 2010. The decrease was attributable to the higher gain on sale of used container equipment, decrease in storage, handling and other container related expenses and the recovery of a previously reserved receivable, partly offset by the increase in depreciation expense.
 
Interest expense for the six months ended June 30, 2011 increased $4.7 million, or 257.3%, to $6.5 million compared to $1.8 million for the six months ended June 30, 2010. The increase in interest expense was primarily due to the increase in our average debt balance.
 
22


Container Management. Total revenue of $8.5 million from our container management segment for the six months ended June 30, 2011 was $3.1 million, or 58.6%, higher than the $5.3 million revenue we reported for this segment for the six months ended June 30, 2010. Higher utilization and per diem rates for our managed containers resulted in increased profitability for our managed portfolios generating higher management fee income. In addition, we earned higher commissions on the sale of managed containers as a result of higher average selling prices during the first half of 2011.
 
Total operating expenses of $4.3 million for the container management segment for the six months ended June 30, 2011 increased $1.4 million, or 45.2%, from $3.0 million for the six months ended June 30, 2010, primarily due to increased compensation-related costs.
 
We had previously reported $13.6 million and $6.7 million of operating expenses, and pre-tax income of $11.8 million and a loss of $1.4 million, for the container leasing segment and container management segment, respectively, for the six months ended June 30, 2010 using a methodology of allocating MG&A expense based solely on the ratio of TEUs of our owned containers to the total fleet TEUs.
 
Liquidity and Capital Resources
 
            Our principal sources of liquidity have been cash flows from operations, sales of container portfolios, borrowings from financial institutions and sale of our stock. We believe that cash flow from operations, future sales of container portfolios and borrowing availability under our credit facilities are sufficient to meet our liquidity needs for at least the next 12 months.
 
            We have typically funded a significant portion of the purchase price for new containers through borrowings under our credit facilities. However, from time to time we have funded new container acquisitions through the use of working capital.
 
            Our revolving credit facility is secured by substantially all of our assets that are not otherwise used as security for our other credit facilities. Our term loan with a consortium of banks, related party term loan and capital lease obligations are secured by a specific pool of containers owned by the Company, the underlying leases thereon and the Company’s interest in any money received under such contracts.
 
            As of June 30, 2011, the maximum credit commitment under our existing revolving credit facility was $330.0 million. The facility may be increased under certain conditions described in the agreement. In addition, there is a commitment fee on the unused amount of the total commitment, payable quarterly in arrears. The amended agreement provides that swing line loans (short-term borrowings of up to $10.0 million in the aggregate that are payable within 10 business days or at maturity date, whichever comes earlier) and standby letters of credit (up to $15.0 million in the aggregate) will be available to us. These credit commitments are part of, and not in addition to, the maximum credit commitment of $330.0 million. The interest rates vary depending upon whether the loans are characterized as Base Rate loans or Eurodollar Rate loans as defined in the revolving credit facility. As of June 30, 2011 the interest rate on our revolving credit facility was 2.5%. Our revolving credit facility will expire on September 25, 2014.
 
            As of June 30, 2011, we had a balance of $256.6 million and availability of $73.3 million under our revolving credit facility (net of $0.1 million in letters of credit), subject to our ability to meet the collateral requirements under the agreement governing our revolving credit facility. The entire amount of the facility drawn at any time plus accrued interest and fees is callable on demand in the event of certain specified events of default.
 
            On June 27, 2011, we entered into an agreement with the banks to amend our revolving credit facility to provide us with greater flexibility in regards to our capital structure. The amendments include revising certain financial covenants, reducing our borrowing base and adding the ability for us to form subsidiary entities that will be structured in a manner which will provide us with the ability to access public debt markets through the use of asset-backed securities that are collateralized by our assets.
 
We intend to use our revolving credit facility primarily to fund the purchase of containers in the future. As of June 30, 2011, we had commitments to purchase $49.1 million of container equipment and had rental equipment payable of $72.1 million. We have typically used our cash flow from operations and the proceeds from sales of container portfolios to container investors to repay our revolving credit facility. As we expand our owned fleet, our revolving credit facility balance will be higher and will result in higher interest expense. In addition to customary events of default, our revolving credit facility contains financial covenants that require us to maintain certain ratios in our financial statements. As of June 30, 2011, we were in compliance with the financial covenants in our revolving credit facility.
 
 On July 15, 2011, we drew down an additional $95.0 million under the existing terms of our term loan facility (see below). We used these proceeds to reduce the outstanding balance under our revolving credit facility.
 
Our capital leases are denominated in U.S. dollars and Euros, are financed by various European banks and financial institutions and secured by their underlying assets. As of June 30, 2011, our capital lease obligations totaled $13.3 million, with floating interest rates averaging 3.2%.
 
On August 20, 2009, we signed a $10.0 million, five-year loan agreement with the Development Bank of Japan (DBJ). The loan is payable in 19 quarterly installments of $0.2 million starting October 31, 2009 and a final payment of $6.2 million on July 31, 2014. The loan bears a variable interest rate based on BBA LIBOR plus 2.4% and is secured by certain of our container rental equipment. The loan had a balance of $8.6 million and an interest rate of 2.7% as of June 30, 2011. DBJ owned approximately 9.4% of the Company’s outstanding common stock as of the date of closing of the loan agreement. DBJ’s ownership of the Company’s total outstanding common stock has been reduced to approximately 4.9% after selling 753,000 shares in December 2010.
 
 
23

 
            On December 20, 2010, we entered into a Term Loan Agreement with a consortium of banks. Under this loan agreement, we were initially eligible to borrow up to $300.0 million, subject to certain borrowing conditions, which amount is secured by certain assets of our wholly owned foreign subsidiaries.  We initially borrowed $185.0 million under the agreement and had until September 2011 to utilize the remaining $115.0 million of the loan facility. The loan agreement is an amortizing facility with a term of six years, with quarterly payments of principal of $6.0 million each (i.e. 2.0% of the aggregate commitment).  Any unpaid principal will be due on December 20, 2016.  The applicable interest rate is equal to LIBOR plus 3.0% per annum for Eurodollar loans, and Base Rate plus 2.0% for base rate loans.  The Base Rate is defined as the highest of (i) the federal funds rate plus 1/2 of 1.0%, (ii) the prime rate (as published in The Wall Street Journal), and (iii) the Eurodollar rate (for three-month loans) plus 1.0%. The proceeds from the initial borrowing were used to pay part of our revolving credit facility.
 
            On March 11, 2011 we entered into an Amendment to the Term Loan Agreement that reduced the quarterly payments of principal for the $185.0 million initially borrowed to $3.7 million each (i.e. 2.0% of the drawn amount) for the first 23 quarterly payment dates with a final payment of $99.9 million (54.0% of the drawn amount) due on December 20, 2016.   We are entitled to draw down the remaining $115.0 million commitment in up to three additional drawdowns through September 2011.  The quarterly payments of principal on these drawdowns (each determined separately) will be determined for each Principal Payment Date (other than the Maturity Date), as an amount equal to the product of (x) the quotient obtained by dividing 46.0% by the number of remaining scheduled Principal Payment Dates, as of the Drawdown Date of such Term Loan and (y) the initial Principal Balance of such Term Loan, with a final payment due on December 20, 2016 of 54.0% of the initial Principal Balance of such Term Loan. As of June 30, 2011, the loan had a balance of $177.6 million and interest rate of 3.2%. The loan agreement contains various financial and other covenants. As of June 30, 2011, we were in compliance with all the covenants under the agreement.
 
On July 15, 2011, we drew down an additional $95.0 million under the existing terms of our term loan facility, and used these proceeds to reduce the outstanding balance under our revolving credit facility.
 
On April 15, 2011, we filed a shelf registration statement on Form S-3 with the SEC. Under this shelf registration statement, we may sell various debt and equity securities, or a combination thereof, to be offered from time-to-time up to an aggregate offering price of $250.0 million for all securities, and the selling stockholders may sell up to 2,500,000 shares of common stock in one or more offerings.
 
Cash Flow
 
The following table sets forth certain cash flow information for the six months ended June 30, 2011 and 2010 (in thousands):
 
 
 
Six Months Ended
June 30,
 
 
 
2011
 
 
2010
 
 
 
 
 
Net income
 
$
24,086
 
 
$
8,725
 
Adjustments to income
 
 
8,241
 
 
 
4,057
 
Net cash provided by operating activities
 
 
32,327
 
 
 
12,782
 
Net cash used in investing activities
 
 
(230,044
)
 
 
(8,019
)
Net cash provided by (used in) financing activities
 
 
193,951
 
 
 
(13,264
)
Effect on cash of foreign currency translation
 
 
437
 
 
 
(593
)
Net decrease in cash
 
 
(3,329
)
 
 
(9,094
)
Cash at beginning of period
 
 
14,393
 
 
 
14,492
 
Cash at end of period
 
$
11,064
 
 
$
5,398
 
 
Cash Flows from Operating Activities
 
Net cash provided by operating activities of $32.3 million for the six months ended June 30, 2011 increased $19.5 million from $12.8 million for the six months ended June 30, 2010. The increase was due primarily to a $15.4 million increase in net income and a $3.7 million improvement in net working capital.
 
Cash Flows from Investing Activities
 
Net cash used in investing activities increased $222.0 million to $230.0 million for the six months ended June 30, 2011 from $8.0 million for the six months ended June 30, 2010. The increase in cash usage was primarily attributable to a $221.0 million increase in the purchase of containers.
 
 
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Cash Flows from Financing Activities
 
Net cash provided by financing activities for the six months ended June 30, 2011 was $194.0 million compared to net cash used for the six months ended June 30, 2010 of $13.3 million. For the six months ended June 30, 2011, we increased our  borrowings from our credit facilities by $192.6  million while payments of bank debts and capital lease obligations decreased by $15.2 million. The proceeds from bank borrowings were used to finance our acquisition of containers.
 
Contractual Obligations and Commercial Commitments
 
The following table sets forth our contractual obligations and commercial commitments by due date as of June 30, 2011 (in thousands):
 
    Payments Due by Period  
   
Total
   
Less than
1 year
   
1-2
years
   
2-3
years
   
3-4
years
   
4-5
years
   
More than
5 years
 
Total debt obligations:
                                                 
Revolving credit facility
  $ 256,600     $ -     $ -     $ -     $ 256,600     $ -     $ -  
Term loan - banks
    177,600       14,800       14,800       14,800       14,800       14,800       103,600  
Related party term loan
    8,600       800       800       800       6,200       -       -  
Interest on debt and capital    lease obligations (1)
    47,435       12,650       12,027       11,386       5,859       3,779       1,734  
Rental equipment payable
    72,094       72,094       -       -       -       -       -  
Rent, office facilities and equipment
    6,495       1,203       1,044       972       964       980       1,332  
Capital lease obligations
    13,282       3,479       3,830       1,698       1,513       1,276       1,486  
Container purchases commitments
    49,125       49,125       -       -       -       -       -  
Total contractual obligations
  $ 631,231     $ 154,151     $ 32,501     $ 29,656     $ 285,936     $ 20,835     $ 108,152  
 

(1)
Our estimate of interest expense commitment includes $20.6 million relating to our revolving credit facility, $0.7 million relating to our related party term loan, $25.1 million relating to our term loan with a consortium of banks and $1.0 million relating to our capital lease obligations. The calculation of interest related to our revolving credit facility and capital lease obligations assumes that  weighted average interest  rates of 2.5% and 3.2%, respectively, as of June 30, 2011 will remain at the same level over the next five years. We expect that the interest rate will vary over time based upon fluctuations in the underlying indexes upon which this interest rate is based. The interest relating to our related party term loan and term loan payable to banks was based on interest rates as of June 30, 2011 of 2.7% and 3.2%, respectively, over the above periods.

       See Note 6 to our unaudited consolidated financial statements included in this filing for a description of the terms of our revolving credit facilities, term loans and capital lease obligations.
 
Off-Balance Sheet Arrangements
 
As of June 30, 2011, we had no off-balance sheet arrangements or obligations other than noted below. An off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement involving an unconsolidated entity under which we would have: (1) retained a contingent interest in transferred assets; (2) an obligation under derivative instruments classified as equity; (3) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development services with us; or (4) made guarantees.
 
We transferred ownership of certain containers to Japanese container funds which were established by Japan Investment Adviser Co., Ltd. (JIA) and CAIJ. CAIJ is an 80%-owned subsidiary of CAI with the remaining 20% owned by JIA. JIA is owned and controlled by a Managing Director of CAIJ. Prior to the purchase of containers from us, the purchasing entities had received contributions from unrelated Japanese investors, under separate Japanese investment agreements allowed under Japanese commercial laws. The contributions were used to purchase container equipment from us. Under the terms of the agreements, the CAI-related Japanese entities manage each of the investments but may outsource the whole or part of each operation to a third party. Pursuant to its services agreements with investors, the Japanese container funds have outsourced the general management of their operations to CAIJ. The Japanese container funds have also entered into equipment management service agreements whereby we manage the leasing activity of containers owned by the Japanese container funds. The profit or loss from each investment will substantially belong to each respective investor, except with respect to two Japanese funds where the terms of the transaction provide us with an option to purchase the containers at a fixed price. When we exercise our purchase options on the two consolidated Japanese funds and resell the containers to a third party, we realize the associated profit at the time of sale. (See Notes 3 and 11 to our unaudited consolidated financial statements included in this report).
 
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Critical Accounting Policies and Estimates
 
During the three months ended March 31, 2011, we completed a review of historical disposal experience relating to our fleet of container equipment and concluded that the estimated residual values and depreciable lives used in our depreciation calculations should be amended effective January 1, 2011. The following table shows the current and prior residual values and depreciable lives that we adopted for each type of equipment:
 
   
Residual Value
   
Depreciable Life in Years
 
   
Current