Table of Contents

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, 2006
or

[ ]  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- 001-32638

TAL International Group, Inc.

(Exact name of registrant as specified in the charter)


Delaware 20-1796526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
100 Manhattanville Road,
Purchase, New York
10577-2135
(Address of principal executive office) (Zip Code)

(914) 251-9000

(Registrant's telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X]    No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [ ]                     Accelerated filer [ ]                     Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes [ ]    No [X]

As of August 7, 2006, there were 32,950,634 shares of the Registrant’s common stock, $.001 par value outstanding.




TAL INTERNATIONAL GROUP, INC.
INDEX


1




Table of Contents

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’’ in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘‘SEC’’), on March 20, 2006, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to 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 SEC.

PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The consolidated financial statements of TAL International Group, Inc. (‘‘TAL’’ or the ‘‘Company,’’) as of June 30, 2006 (unaudited) and December 31, 2005 and for the three and six months ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited) included herein have been prepared by the Company, without audit, pursuant to U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (the ‘‘SEC’’). However, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the results for the interim periods. The results of operations for such interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘‘SEC’’), on March 20, 2006, from which the accompanying December 31, 2005 Balance Sheet information was derived, and all of our other filings filed with the SEC from October 11, 2005 through the current date pursuant to the Securities Exchange Act of 1934.

2




Table of Contents

TAL INTERNATIONAL GROUP, INC.

Consolidated Balance Sheets
(Dollars in thousands, except share data)


  June 30,
2006
December 31,
2005
  (Unaudited)  
Assets:  
 
Cash and cash equivalents (including restricted cash of $12,070 and $0) $ 45,374
$ 27,259
Accounts receivable, net of allowances of $372 and $820 32,705
31,738
Net investment in finance leases 117,777
73,819
Leasing equipment, net of accumulated depreciation and allowances of $166,439 and $124,543 1,052,515
1,036,363
Leasehold improvements and other fixed assets, net of accumulated depreciation and amortization of $1,635 and $1,312 3,411
3,771
Equipment held for sale 24,673
24,844
Goodwill 71,898
71,898
Deferred financing costs 7,124
3,540
Other assets (including fair value of derivative instruments) 31,149
26,304
Total assets $ 1,386,626
$ 1,299,536
Liabilities and stockholders' equity:  
 
Accounts payable $ 34,283
$ 7,524
Accrued expenses 35,123
30,063
Income taxes payable 216
116
Deferred income tax liability 24,626
9,239
Debt:  
 
Asset securitization facility
710,000
Asset backed securities (ABS):  
 
Term notes 668,667
Warehouse facility 35,000
Revolving credit facilities 160,000
148,000
Capital lease obligations 20,797
14,627
Total liabilities 978,712
919,569
Stockholders' equity:  
 
Preferred stock, $.001 par value, 500,000 shares authorized, none issued
Common stock, $.001 par value, 100,000,000 shares authorized, 32,949,521 and 32,882,208 shares issued and outstanding, respectively 33
33
Additional paid-in capital 394,393
394,389
Accumulated earnings (deficit) 9,088
(13,737
)
Accumulated other comprehensive income (loss) 4,400
(718
)
Total stockholders' equity 407,914
379,967
Total liabilities and stockholders' equity $ 1,386,626
$ 1,299,536

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

3




Table of Contents

TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Operations
(Dollars and shares in thousands, except earnings per share)


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
  (Unaudited) (Unaudited)
Revenues:  
 
 
 
Leasing revenues, including income recognized on finance leases of $2,832, $1,138, $5,117, and $1,422 respectively $ 66,821
$ 71,808
$ 133,696
$ 144,083
Equipment trading revenue 5,757
6,891
10,776
9,399
Management fee income 1,573
1,416
3,149
3,412
Other revenues 563
418
1,040
1,171
Total revenues 74,714
80,533
148,661
158,065
Expenses:  
 
 
 
Equipment trading expenses 4,714
5,166
8,939
7,231
Direct operating expenses 7,366
7,180
13,423
14,297
Administrative expenses 9,120
9,242
18,659
18,951
Depreciation and amortization 25,703
29,373
51,192
58,658
(Reversal) provision for doubtful accounts (913
)
264
(442
)
39
Net (gain) on sale of leasing equipment (1,084
)
(2,580
)
(976
)
(6,955
)
Write-off of deferred financing costs 2,367
2,367
Interest and debt expense 11,124
21,496
23,580
42,610
Unrealized (gain) loss on interest rate swaps (4,444
)
8,674
(3,590
)
(1,386
)
Management fees
1,626
3,252
Total expenses 53,953
80,441
113,152
136,697
Income before income taxes 20,761
92
35,509
21,368
Income tax expense (benefit) 7,441
(224
)
12,684
7,667
Net income 13,320
316
22,825
13,701
Preferred stock dividends
(6,131
)
(12,159
)
Net income (loss) applicable to common stockholders $ 13,320
$ (5,815
)
$ 22,825
$ 1,542
Net income (loss) per common share — Basic $ 0.40
$ (0.57
)
$ 0.69
$ 0.15
Net income (loss) per common share — Diluted $ 0.40
$ (0.57
)
$ 0.68
$ 0.15
Weighted average number of common shares outstanding
— Basic
32,895
10,204
32,889
10,177
Weighted average number of common shares outstanding
— Diluted
33,495
10,204
33,469
10,605

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

4




Table of Contents

TAL INTERNATIONAL GROUP, INC.

Consolidated Statements of Cash Flows
(Dollars in thousands)


  Six months ended June 30,
  2006 2005
  (Unaudited)
Cash flows from operating activities:  
 
Net income $ 22,825
$ 13,701
Adjustments to reconcile net income to net cash provided by operating activities:  
 
Depreciation and amortization 51,192
58,658
Write-off of deferred financing costs 2,367
Amortization of deferred financing costs 323
2,987
Net (gain) on sale of leasing equipment (976
)
(6,955
)
Unrealized (gain) on interest rate swaps (3,590
)
(1,386
)
Deferred income taxes 15,387
7,525
Stock compensation charge 4
245
Changes in operating assets and liabilities 33,424
35,079
Net cash provided by operating activities 120,956
109,854
Cash flows from investing activities:  
 
Purchases of leasing equipment (106,353
)
(142,574
)
Investment in finance leases (28,975
)
(14,963
)
Proceeds from sale of equipment 26,315
60,477
Cash collections on financing leases, net of unearned income 6,312
3,083
Other 135
Net cash used in investing activities (102,566
)
(93,977
)
Cash flows from financing activities:  
 
Proceeds from issuance of preferred stock
1,205
Proceeds from issuance of common stock
1
Initial borrowings under ABS term notes 680,000
Payments under ABS term notes (11,333
)
Net borrowings under ABS warehouse facility 35,000
Payments of finance fees related to new debt agreements (5,942
)
Net payments under asset securitization facility (710,000
)
Net borrowings (payments) under revolving credit facilities 12,000
(10,000
)
(Increase) in restricted cash (12,070
)
Net cash used in financing activities (12,345
)
(8,794
)
Net increase in cash and cash equivalents 6,045
7,083
Unrestricted cash and cash equivalents, beginning of period 27,259
16,424
Unrestricted cash and cash equivalents, end of period $ 33,304
$ 23,507
Supplemental non-cash financing activities:  
 
Purchases of leasing equipment financed through capital lease obligations $ 6,170
$

The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.

5




Table of Contents

TAL INTERNATIONAL GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of the Business, Basis of Presentation, Recently Issued Accounting Pronouncements

A.    Description of the Business

TAL International Group, Inc. (‘‘TAL,’’ or the ‘‘Company’’) was formed on October 26, 2004 and commenced operations on November 4, 2004. TAL consists of the consolidated accounts of Trans Ocean Ltd. (‘‘TOL’’) and TAL International Container Corporation (‘‘TALI’’), formerly known as Transamerica Leasing Inc., and their subsidiaries. Effective October 31, 2004, TAL acquired all of the outstanding capital stock of TOL and TALI for approximately $1.2 billion in cash (‘‘the Acquisition’’).

The Company provides long-term leases, service leases and finance leases of maritime containers and related equipment, along with maritime container management services, through a worldwide network of offices, third party depots and other facilities. The Company operates in both international and domestic markets. The majority of the Company's business is derived from leasing its containers to shipping line customers through a variety of long-term and short-term contractual lease arrangements. The Company also provides container sales and positioning services, enters into management agreements with third party container owners under which the Company manages the leasing and selling of containers on behalf of the third party owners, and leases chassis used for the transportation of containers domestically.

B.    Basis of Presentation

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the accompanying prior period financial statements and notes to conform with the current year’s presentation.

C.    Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company is required to adopt the provisions of FIN 48 during the first fiscal year beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated results of operations and financial position.

In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of Financial Accounting Standards No.123R Share-Based Payment (‘‘SFAS No. 123R’’). This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (‘‘APB No. 25’’), and its related implementation guidance. SFAS No. 123R requires companies to recognize in the statement of operations the fair value of all employee share-based payments, including grants of

6




Table of Contents

employee stock options, as well as compensatory employee stock purchase plans. The Company adopted SFAS No. 123R on January 1, 2006. Given that the options outstanding upon adoption of SFAS No. 123R were fully vested, the adoption of SFAS No.123R did not have an impact on the financial position, results of operations or cash flows of the Company. However, grants made during the second quarter of 2006 and any future grants of share-based compensation did and will result in the recognition of compensation expense.

Note 2 — Initial Public Offering

On October 17, 2005, the Company sold 11.5 million shares of common stock at a price of $18.00 per share in an initial public offering (‘‘IPO’’) which generated net proceeds of approximately $189.2 million, after deducting underwriter discounts and other offering expenses. The Company used the net proceeds of this offering, together with additional borrowings under certain of its debt facilities and available cash, to repay the entire outstanding principal and accrued cash interest due on the senior unsecured credit agreement which was approximately $288.0 million on October 17, 2005. On October 21, 2005, the underwriters of TAL’s IPO exercised their over-allotment option in part and purchased 1.0 million additional shares of common stock from certain of TAL’s stockholders. TAL did not receive any proceeds from the sale of the shares pursuant to the over-allotment option.

Note 3 — Capital Stock and Stock-Based Compensation Plans

Preferred Stock Exchange

All 201,205 outstanding shares of the Company’s Series A 12.0% cumulative senior preferred stock were converted into 11,178,035 shares of common stock on October 17, 2005, based on the IPO price of $18.00 per common share. The Company paid the aggregate outstanding accrued dividends on the Series A 12.0% cumulative senior preferred stock of $23.6 million in November 2005.

2004 Management Stock Plan

During 2004, the Company adopted the 2004 Management Stock Plan (the ‘‘2004 Plan’’), which provides for the issuance of awards in the form of stock options, stock appreciation rights, restricted stock and certain other instruments to employees, consultants and members of the Company's board of directors. A total of 534,425 shares were reserved for issuance under the 2004 Plan.

During 2004, options to purchase a total of 400,945 shares were granted at an exercise price of $0.01 per share, which the board of directors believed equaled the fair value per share of the Company's common stock.

During 2005, options to purchase an additional 53,667 shares were granted at an exercise price of $0.01 per share.

Upon completion of the IPO on October 17, 2005, all 454,612 options outstanding under the 2004 Plan became fully vested. All options granted during 2004 and 2005 have a contractual life of ten years.

2005 Management Omnibus Incentive Plan

In October 2005, the Company adopted the TAL International Group, Inc. 2005 Management Omnibus Incentive Plan (the ‘‘2005 Plan’’), which provided for the issuance of awards in the form of stock options, stock appreciation rights and restricted stock. A total of 2,500,000 shares of common stock were reserved for issuance under the 2005 Plan.

In October 2005, the board of directors approved the grant of options under the 2005 Plan to purchase an aggregate of 612,195 shares of the Company’s common stock upon consummation of the IPO with an exercise price equal to the IPO price of the common stock, and a vesting period of four years. All options granted in 2005 have a contractual life of ten years. All 612,195 options granted on the IPO date became fully vested as of December 30, 2005, the date their acceleration was approved by the Compensation Committee of the Company’s board of directors. The purpose of the accelerated vesting was to avoid future compensation expense associated with these options that the Company would otherwise recognize in its consolidated statements of operations upon the adoption of SFAS No.123(R).

7




Table of Contents

During the second quarter of 2006, options to purchase 9,500 shares were granted to several employees at fair market values as of the grant date with exercise prices ranging from $21.99 to $24.44 per share. These options vest ratably over four years, and have a contractual life of ten years.

Adoption of New Accounting Standard

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. The Company adopted SFAS No.123R using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options.

There was approximately four thousand dollars of compensation cost reflected in administrative expense in the Company’s statement of operations related to the Company’s stock-based compensation plans as a result of 9,500 new options granted during the period. Total unrecognized compensation cost of approximately one hundred ten thousand dollars as of June 30, 2006 related to the new options granted during the quarter will be recognized over the remaining vesting period of approximately 3.75 years.

The Company computed the estimated fair value of each option award on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on computed volatility from trading activity of TAL stock since its IPO date and volatilities of other similar companies. The Company derives an expected term for its options using an estimated option exercise date based on historical employee termination behavior. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. For options granted during the three months ended June 30, 2006, the following assumptions were utilized in computing the fair value of the options: expected volatility of 28%, expected term of 10 years, expected dividends of zero, and risk-free rates of 4.97% – 5.14%.

All previously granted options in 2005 and 2004 were fully vested as of December 30, 2005.

8




Table of Contents

The following table illustrates the effect on net income and earnings per share had the fair value method of accounting been applied consistent with the requirements of SFAS No. 123 to the Company's stock compensation plans for the three and six months ended June 30, 2005 (in thousands, except earnings per share):


  Three months
ended
June 30, 2005
Six months
ended
June 30, 2005
Net (loss) income applicable to common stockholders:  
 
As reported $ (5,815
)
$ 1,542
Add: Stock-based compensation expense included in reported net income 245
245
Deduct: Stock-based compensation expense determined under the fair value method (241
)
(244
)
Pro forma net (loss) income applicable to common stockholders $ (5,811
)
$ 1,543
(Loss) earnings per common share:  
 
As reported — Basic and Diluted $ (0.57
)
$ 0.15
Pro forma — Basic and Diluted $ (0.57
)
$ 0.15
Weighted average number of common shares outstanding  
 
— Basic 10,204
10,177
— Diluted 10,204
10,605

Stock option activity under the Plans from January 1, 2006 to June 30, 2006 was as follows:


  Options Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (Yrs)
Aggregate
Intrinsic
Value $ in
000’s
Outstanding January 1, 2006 1,066,807
$ 10.33
9.4
 
Granted 9,500
$ 23.34
 
 
Exercised (67,313
)
$ 0.01
 
$ 1,498
Canceled
 
 
 
Outstanding June 30, 2006 1,008,994
$ 11.15
9.0
$ 13,066
Exercisable:  
 
 
 
June 30, 2006 999,494
$ 11.03
8.9
$ 13,063

The weighted-average fair value of options granted during the quarter ended June 30, 2006 was $11.94. Cash received from employee exercises of stock options for the three months ended June 30, 2006 was six hundred sixty-three dollars. TAL did not recognize any tax benefits associated with these exercises.

Note 4 — Debt

Asset Backed Securitization Program

Effective August 1, 2005, the Company entered into an asset securitization facility (the ‘‘Asset Securitization Facility’’) pursuant to which it had contributed certain eligible containers, together with the related leases, to TAL Advantage I LLC, a special purpose entity (the ‘‘SPE’’) which is a wholly-owned consolidated subsidiary of the Company, whose primary business activity is to issue asset backed notes.

On April 12, 2006, the SPE issued two series of floating rate secured notes under its Asset Backed Securitization (‘‘ABS’’) program designed to reduce borrowing costs and enhance financing resources for the Company's equipment fleet. Included in the issuance was $680.0 million of floating rate secured term notes (the ‘‘Series 2006-1 Notes’’ or ‘‘ABS Term Notes’’). The proceeds from this issuance, along

9




Table of Contents

with available cash, were used to repay the outstanding borrowings under the Asset Securitization Facility. A write-off of $2.4 million was recorded for certain deferred financing fees in the second quarter of 2006 associated with this re-financing. The Series 2006-1 Notes amortize in equal monthly installments and have a legal final maturity of April 2021. At June 30, 2006, the outstanding balance under the ABS Term Notes was $668.7 million. At June 30, 2006, the applicable interest rate, including the insurance premium, was LIBOR plus 0.48%. The weighted average interest rate on the ABS Term Notes for the three months ended June 30, 2006 was 5.6%.

On April 12, 2006, the SPE entered into a floating rate revolving facility (the ‘‘Series 2005-1 Notes’’ or the ‘‘ABS Warehouse Facility’’) under the ABS program. The ABS Warehouse Facility provides up to $300.0 million of borrowing capacity to support future fleet expansion. The Series 2005-1 Notes have a two year revolving period that precedes a term period in which the outstanding balance amortizes in equal monthly installments. The ABS Warehouse Facility has a legal final maturity of April 2023. At June 30, 2006, the outstanding balance under the ABS Warehouse Facility was $35.0 million. At June 30, 2006, the applicable commitment fee was 0.30%, including the insurance premium, and the applicable interest rate was LIBOR plus 0.74%, including the insurance premium. The weighted average interest rate on the ABS Warehouse Facility for the three months ended June 30, 2006 was 5.8%.

All debt issued under the ABS program is collateralized by the assets of the SPE consisting of the revenue earning containers used in the Company’s leasing business, restricted cash and certain receivables related to revenue earning equipment. The SPE's borrowing capacity under the ABS program is determined by reference to an advance rate percentage of the net book values, as calculated in the ABS program documents of the SPE's eligible containers, subject to certain adjustments and restricted cash. Under the ABS program, the SPE is required to maintain restricted cash balances on deposit in a designated bank account.

Based on the applicable advance rate of 82%, the SPE’s borrowing capacity was $706.8 million at June 30, 2006. At June 30, 2006, the Company was in compliance with all of the various ABS program covenant requirements.

Revolving Credit Facilities

In connection with the Acquisition, the Company entered into an $875.0 million Senior Secured Credit Facility (‘‘SSCF’’). Upon the closing of the asset securitization facility on August 1, 2005, the Company amended and restated the SSCF to, among other things, reduce the maximum aggregate commitments thereunder to $175.0 million. Effective June 1, 2006, the Company further amended the SSCF to reduce the interest rate margin from LIBOR plus 2.125% to LIBOR plus 1.375% and to reduce the maximum aggregate commitments thereunder to $165.0 million. The final maturity date of this facility is August 1, 2008. The outstanding balance under the facility was $160.0 million at June 30, 2006 and $148.0 million at December 31, 2005.

The Company’s borrowing capacity under this facility is based upon a variable advance rate percentage of the net book values, as calculated in the credit agreement, of the Company’s eligible containers and eligible chassis, subject to certain adjustments. At June 30, 2006, the variable advance rate percentage was 85%, but is subject to annual decreases of 1% for each full calendar year following the IPO until a minimum advance rate of 82% is reached. At June 30, 2006, the unused borrowing capacity was $5.0 million based on aggregate availability of $165.0 million. The Company’s eligible containers for the purposes of determining borrowing capacity under this facility does not include any containers transferred to the SPE. The SSCF is secured by a first priority lien on the Company’s eligible containers, eligible chassis, related leases and lease rights and a pledge of the equity interests of the SPE.

At June 30, 2006, the SSCF applicable commitment fee was 0.375%, and the applicable interest rate was LIBOR plus 1.375%. Interest and fees and a portion of the outstanding principal amount of the loans under this facility, together with certain other amounts, are payable on a quarterly basis. The portion of the outstanding principal amount of the loans, if any, payable on any such payment date will be equal to the amount by which the outstanding principal amount of the loans exceeds the

10




Table of Contents

Company’s then effective borrowing capacity. The weighted average interest rate under this facility for the six months ended June 30, 2006 was 6.8%. At June 30, 2006, the Company was compliant with all of the various covenant requirements under this facility.

Effective June 7, 2006, the Company entered into an additional revolving credit facility (the ‘‘Swing Line Facility’’) to support general working capital requirements. The Company’s borrowing capacity under this facility is based upon a 90% advance rate on the net book values of the containers and chassis not included in the SPE. The commitment under the Swing Line Facility is $10.0 million and there was no outstanding balance at June 30, 2006. At June 30, 2006, the applicable commitment fee was 0.375%, and the applicable interest rate was LIBOR plus 2.00%.

Capital Lease Obligations

The Company has entered into a series of capital leases with various financial institutions totaling $20.8 million to finance the purchase of chassis. The lease agreements are structured as ten year Terminal Rental Adjustment Clause (‘‘TRAC’’) leases with purchase options at the end of the lease terms equal to the TRAC amount as defined in each lease. For income tax purposes, these leases are treated as operating leases. The weighted average interest rate for these leases as of June 30, 2006 is 5.37%. The total lease obligation was $20.8 million as of June 30, 2006, and was $14.6 million as of December 31, 2005.

Interest Rate Swaps

To hedge the risk associated with fluctuations in interest rates on long-term borrowings, the Company has entered into interest rate swap contracts with various financial institutions. The counterparties to these agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap contracts, the Company’s exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the agreements. The Company does not anticipate any non-performance by the counterparties.

As of June 30, 2006, the Company had in place interest rate swap contracts to fix the floating interest rates on a portion of the borrowings under its debt facilities as summarized below:


Swap Date Notional Amount Fixed Leg
Interest Rate
Term
December 14, 2004 $200.0 million 3.82% 7 years — amortizing
December 14, 2004 $200.0 million 3.82% 7 years — amortizing
December 14, 2004 $100.0 million 3.82% 7 years — amortizing
October 28, 2005 $100.0 million 4.82% 6 years — non-amortizing
October 28, 2005 $25.0 million 4.71% 2.75 years-non-amortizing

As of April 12, 2006, in conjunction with the ABS program described above, the Company de-designated all of its existing interest rate swap contracts. Previously, the Company had designated all interest rate swap contracts as cash flow hedges, in accordance with Statement of Financial Accounting Standards No.133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. Therefore, during the designation period beginning November 1, 2005 through April 12, 2006, substantially all changes in the fair value of the interest rate swap contracts were reflected in accumulated other comprehensive income (loss). Changes in the fair value of these interest rate swap contracts in periods pre and post designation have been recognized in the consolidated statements of operations as unrealized losses or gains on interest rate swaps.

At the time of de-designation, the change in fair value reflected in accumulated other comprehensive income was $7.5 million. This amount is being recognized in income as unrealized (gain) loss on interest rate swaps using the interest method over the remaining life of the contracts. Amounts recorded in accumulated other comprehensive income (loss) would be reclassified into earnings upon termination of these interest rate swap contracts and related debt instruments prior to their contractual maturity.

11




Table of Contents

The fair value of the interest rate swap contracts was $25.2 million at June 30, 2006, and $13.9 million at December 31, 2005, which is included in other assets in the consolidated balance sheets. In its consolidated statements of operations, the Company recognized a net unrealized gain of $4.4 million for the three months ended June 30, 2006, a net unrealized loss of $8.7 million for the three months ended June 30, 2005, a net unrealized gain of $3.6 million for the six months ended June 30, 2006, and a net unrealized gain of $1.4 million for the six months ended June 30, 2005, which predominantly represents the change in fair value of the interest rate swap contracts.

In July 2006, the Company entered into two additional interest rate swap contracts with financial institutions. The first interest rate swap contract has a notional amount of $50.0 million, a non-amortizing term of five years and a fixed rate of 5.52%. The second interest rate swap contract has a notional amount of $33.0 million, an amortizing term of approximately 11 years and a fixed rate of 5.56%. Changes in the fair value on these interest rate swap contracts will be recognized in the consolidated statements of operations as unrealized gains or losses on interest rate swaps.

Note 5 — Earnings (Loss) Per Share

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2006 and 2005 (in thousands, except earnings per share):


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Numerator:  
 
 
 
Net income (loss) applicable to common stockholders for basic and diluted earnings per share $ 13,320
$ (5,815
)
$ 22,825
$ 1,542
Denominator:  
 
 
 
Weighted average shares outstanding for basic earnings (loss) per share 32,895
10,204
32,889
10,177
Dilutive stock options 600
580
428
Weighted average shares for diluted earnings (loss) per share 33,495
10,204
33,469
10,605
Earnings (loss) per share:  
 
 
 
Basic $ 0.40
$ (0.57
)
$ 0.69
$ 0.15
Diluted $ 0.40
$ (0.57
)
$ 0.68
$ 0.15

Note 6 — Related Party Transactions

The Company recognized $1.6 million for the three months ended June 30, 2005, and $3.3 million for the six months ended June 30, 2005 of management fees and expenses relating to the management consulting agreements with certain of the Company’s stockholders. The management consulting agreements were terminated as of the effective date of the IPO, October 17, 2005.

Note 7 — Segment and Geographic Information

Industry Segment Information

The Company operates in one industry segment, intermodal equipment leasing.

Geographic Segment Information

The Company's customers use the containers for their global trade utilizing many worldwide trade routes. The following table represents the allocation of domestic (U.S.) and international revenues for the periods indicated based on the customers' primary domicile (in thousands):

12




Table of Contents
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Total revenues:  
 
 
 
Domestic $ 7,474
$ 8,189
$ 14,778
$ 15,663
Asia 35,120
35,975
69,263
70,127
Europe 27,200
31,823
54,996
63,607
Other International 4,920
4,546
9,624
8,668
Total $ 74,714
$ 80,533
$ 148,661
$ 158,065

As substantially all of the Company's containers are used internationally, where no one container is domiciled in one particular place for a prolonged period of time, all of the Company's containers are considered to be international.

Note 8 — Commitments and Contingencies

At June 30, 2006, commitments for capital expenditures totaled approximately $88.8 million, principally through the remainder of 2006.

Note 9 — Income Taxes

The consolidated income tax expense for the six month periods ended June 30, 2006 and 2005 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2006 and 2005, 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.

Note 10 — Comprehensive Income

The following table provides a reconciliation of the Company’s net income to comprehensive income (in thousands):


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Net income $ 13,320
$ 316
$ 22,825
$ 13,701
Other comprehensive income:  
 
 
 
Foreign currency translation adjustments 129
(34
)
135
(43
)
Unrealized (loss) gain on derivative instruments designated as cash flow hedges (net of taxes of $(7), $0, $2,775 and $0, respectively ) (39
)
4,983
Total $ 13,410
$ 282
$ 27,943
$ 13,658

Note 11 — Subsequent Events    

On July 31, 2006, the Company entered into a credit facility to support the growth of its finance lease business (the ‘‘Finance Lease Facility’’). The Company’s borrowing capacity under this facility is based upon a 90% advance rate on the net present values of finance lease receivables on certain containers and chassis not included in the SPE. The Finance Lease Facility has a two year revolving period that precedes a 10 year term in which the outstanding balance, as of the term conversion date, amortizes in monthly installments. The commitment under the Finance Lease Facility is $50.0 million. The applicable commitment fee and interest rate is 0.30% and LIBOR plus 1.00%, respectively.

On August 8, 2006, TAL’s board of directors approved and declared a $0.20 per share quarterly cash dividend on its issued and outstanding common stock, payable on September 26, 2006 to shareholders of record at the close of business on September 12, 2006.

13




Table of Contents
ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations of TAL International Group, Inc. and its subsidiaries should be read in conjunction with related consolidated financial data and our annual audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2006. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under ‘‘Risk Factors’’ and ‘‘Forward-Looking Statements’’ in our Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our Company

We are one of the world's largest and oldest lessors of intermodal freight containers and chassis. Intermodal freight containers are large, standardized steel boxes used to transport freight by ship, rail or truck. Chassis are used for the transportation of containers domestically via rail and roads. Because of the handling efficiencies they provide, intermodal freight containers are the primary means by which many goods and materials are shipped internationally.

Our operations include the acquisition, leasing, re-leasing and subsequent sale of multiple types of intermodal containers and chassis. As of June 30, 2006, our fleet consisted of 633,930 containers and chassis, including 73,993 containers under management for third parties, representing more than one million twenty-foot equivalent units (TEU). We have an extensive global presence, offering leasing services through 20 offices in 12 countries and approximately 197 third party container depot facilities in 42 countries as of June 30, 2006. Our customers are among the world's largest shipping lines.

Our lease products provide numerous operational and financial benefits to our shipping line customers. These benefits include:

•  Operating Flexibility — The timing, location and daily volume of cargo movements for a shipping line are often unpredictable. Leasing containers helps the shipping lines manage this uncertainty and minimize the requirement for large inventory buffers by allowing them to pick-up leased containers on short notice.
•  Fleet Size Flexibility — Container leases allow shipping lines to adjust the size and mix of their fleets as their trade volumes change due to seasonality, market changes or changes in company strategies.
•  Alternative Source of Financing — Container leases provide an additional source of equipment financing to help shipping lines manage the high level of investment required to maintain pace with the rapid growth of the asset-intensive container shipping industry.

We lease three principal types of containers: (1) dry freight containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, (2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, and (3) special containers, which are used for heavy and oversized cargo such as marble slabs, building products and machinery. We also manage our own container disposals, act as the disposal agent for a number of our shipping line customers, and buy and sell used containers through our Trader group. As of June 30, 2006, dry, refrigerated, special containers and Trader represented approximately 86%, 5%, 7% and 1 % of our fleet on a unit basis, respectively. Our chassis leasing business, which commenced in the fourth quarter of 2005, represented approximately 1% of our fleet on a unit basis as of June 30, 2006.

14




Table of Contents

The following tables provide the composition of our equipment fleet as of the dates indicated below (in both units and TEU’s):


  Equipment Fleet in Units
  June 30, 2006 December 31, 2005 June 30, 2005
  Owned Managed Total Owned Managed Total Owned Managed Total
Dry 487,116
57,128
544,244
464,353
59,180
523,533
477,677
61,217
538,894
Refrigerated 33,222
1,508
34,730
34,006
1,625
35,631
35,041
1,658
36,699
Special 27,045
15,357
42,402
27,389
16,025
43,414
28,165
16,775
44,940
Chassis 4,268
4,268
1,210
1,210
Subtotal 551,651
73,993
625,644
526,958
76,830
603,788
540,883
79,650
620,533
Trader 8,286
8,286
10,123
10,123
19,517
19,517
Total 559,937
73,993
633,930
537,081
76,830
613,911
560,400
79,650
640,050

  Equipment Fleet in TEU’s
  June 30, 2006 December 31, 2005 June 30, 2005
  Owned Managed Total Owned Managed Total Owned Managed Total
Dry 776,631
97,546
874,177
737,802
100,759
838,561
756,583
104,066
860,649
Refrigerated 59,548
2,167
61,715
60,674
2,394
63,068
62,132
2,450
64,582
Special 42,228
25,283
67,511
42,249
26,179
68,428
43,282
27,227
70,509
Chassis 7,738
7,738
2,270
2,270
Subtotal 886,145
124,996
1,011,141
842,995
129,332
972,327
861,997
133,743
995,740
Trader 11,581
11,581
15,968
15,968
31,330
31,330
Total 897,726
124,996
1,022,722
858,963
129,332
988,295
893,327
133,743
1,027,070

We lease our equipment on a per diem basis to our customers under three types of leases: long-term leases, service leases and finance leases. Long-term leases, typically with terms of three to eight years, provide us with stable cash flow and low transaction costs by requiring customers to maintain specific containers on-hire for the duration of the lease. Service leases command a premium per diem rate in exchange for providing customers with a greater level of operational flexibility by allowing the pick-up and drop-off of containers during the lease term. Finance leases, which are typically structured as full payout leases, provide for a predictable recurring revenue stream with the lowest daily cost to the customer because customers are generally required to retain the container for the duration of its useful life. As of June 30, 2006, approximately 91% of our containers were on-hire to customers, with approximately 58% of our containers on long-term leases, approximately 26% on service leases or long-term leases whose fixed terms have expired but for which the related units remain on-hire and for which we continue to receive rental payments, and approximately 7% on finance leases. In addition, approximately 6% of our containers were available for lease and approximately 3% were available for sale.

The following table provides a summary of our lease portfolio, based on units in the fleet as of the dates indicated below:


Lease Portfolio June 30,
2006
December 31,
2005
June 30,
2005
Long-term lease 58.2
%
59.0
%
58.2
%
Service lease 25.6
25.6
27.6
Finance lease 7.1
4.6
3.8
Total leased 90.9
89.2
89.6
Existing units available for lease 4.1
5.1
4.1
New units available for lease 1.7
2.6
4.0
Available for sale 3.3
3.1
2.3
Total portfolio 100.0
%
100.0
%
100.0
%

15




Table of Contents

Operating Performance

Our profitability is primarily determined by the extent to which our leasing and other revenues exceed our ownership, operating and administrative expenses. Our profitability is also impacted by the gain or loss that we realize on the sale of our used containers. During the first quarter of 2006, seasonal factors and market conditions placed pressure on our profitability. Our profitability improved in the second quarter as we were able to benefit from an increase in container prices and an improvement in market conditions.

Our leasing revenue is primarily driven by our owned fleet size, utilization and average rental rates. As of June 30, 2006, our owned fleet included 897,726 TEU, an increase of 4.5% from December 31, 2005. The increase in fleet size relative to the fourth quarter of 2005 was mainly due to the delivery of a large number of containers purchased in the first quarter of 2006. These container deliveries proved to be timely since they allowed us to capitalize on the strong increase in leasing demand we experienced early in the second quarter. We expect sizable container deliveries in the third quarter of 2006 as well.

Our June 30, 2006 fleet size was relatively unchanged from June 30, 2005 despite the 4.5% increase achieved in the first half of this year mainly due to the reduction in our trading equipment resale inventories. In addition, in the latter half of 2005, we limited our investment in new containers due to a temporary surplus of new containers in China.

Our average utilization was 89.8% in the second quarter of 2006, an increase of 1.1% from the first quarter of 2006, though a decrease of 0.6% from the second quarter of 2005. Ending utilization increased 2.2% from 88.7% as of March 31, 2006 to 90.9% as of June 30, 2006. We experienced exceptionally strong demand for dry and special containers during the early part of the 2006 second quarter, and we managed to increase our average utilization while also absorbing a net increase of over 35,000 TEU of containers in our fleet. Demand for refrigerated containers remained somewhat weak in the 2006 second quarter and the average utilization of our refrigerated containers fell slightly. The strong demand for dry and special containers resulted from stronger than expected cargo volumes prior to the traditional peak season combined with a reduction in the production of new containers. Due to this favorable combination and our large early purchase of containers in 2006, we achieved one of our best months ever for net container pick-ups in April. However, leasing demand moderated and our utilization stabilized toward the end of the second quarter as production space for new containers became available and cargo volumes came more into line with our customers’ expectations.

Our average utilization in the second quarter of 2006 was 0.6% lower than it was in the second quarter of 2005 mainly due to the high starting point for utilization in 2005. Utilization at the end of 2004 was exceptionally high, so that while we experienced a downward trend during the first half of 2005, the high starting point ensured that the average utilization for the first and second quarters of 2005 was strong.

The following table sets forth our average fleet utilization for the periods indicated below:


  June 30,
2006
June 30,
2005
June 30,
2006
June 30,
2005
  3 months 3 months 6 months 6 months
Average Utilization 89.8
%
90.4
%
88.9
%
91.5
%

Average lease rates for our dry container product line decreased by almost 2% during the second quarter of 2006 despite a large increase in the price of new dry containers. New container prices fell steeply in the fourth quarter of 2005 and the first part of 2006, then climbed nearly 50% in the late first quarter and early second quarter, due to an increase in the price of steel in China, wood floor shortages and a reduction in production by the large container manufacturers. New refrigerated container prices did not change substantially during the quarter since steel represents a relatively small portion of the total unit cost of a refrigerated container. In addition, there was no shortage of production capacity for refrigerated containers.

The decrease in our average dry container lease rates was mainly caused by the completion of several large lease extension transactions. The profitability of our shipping line customers has come under

16




Table of Contents

pressure this year due to a large increase in vessel capacity and declining freight rates, and our customers are actively seeking ways to reduce operating expenses. In several cases, we have responded to our customers’ requests for lease rate reductions by renewing or extending lease agreements in return for lease rate savings, and in 2006 we have completed lease extension transactions that cover more than 10% of the dry containers in our fleet. While these lease extension transactions have reduced our current revenue, we expect they will have a positive impact on the net present value of our lease portfolio, particularly for our older containers, since they extend the revenue-earning life of the containers. The higher price of new containers has also not been heavily reflected in our average lease rates since most of the containers we supplied to our customers in the second quarter were placed on leases negotiated during the first quarter when container prices and market leasing rates were lower. If container prices remain at their current level for a sustained period, we expect to see positive momentum in our average dry container leasing rates.

Average lease rates for refrigerated containers decreased by approximately 1% during the second quarter of 2006 as compared to the first quarter of 2006, mainly due to lease extension transactions. Average lease rates for special containers were flat during the second quarter. Our average leasing rates for refrigerated containers will likely decrease further due to the completion of a lease extension transaction in the third quarter with one of our largest customers for refrigerated containers.

During the second quarter of 2006, we recognized a $1.1 million gain on the sale of our used containers compared to a $0.1 million loss in the first quarter of 2006 and a $2.6 million gain in the second quarter of 2005. The improvement compared to the first quarter of 2006 mainly resulted from higher sales volumes which reduced the number of containers in the assets held for sale category and allowed us to realize unrecognized gains on the units previously held for sale. The portion of our container fleet identified as for sale decreased from 3.8% as of March 31, 2006 to 3.3% as of June 30, 2006. The decrease in gain relative to the second quarter of 2005 mainly resulted from a decrease in average selling prices. Selling prices were exceptionally high in the first half of 2005 due to high new container prices and very low inventories of available containers.

Our direct operating expenses increased by $1.3 million in the second quarter of 2006 from the first quarter of 2006 mainly due to an increase in repair and positioning expense associated with the large increase in the number of containers picked-up by our customers in the second quarter. The increase in direct operating expenses was offset by a reversal in our provision for doubtful accounts due to the successful resolution of a repair charge dispute.

Our ownership expenses, principally depreciation and interest expense, were much lower in the second quarter of 2006 than they were for the second quarter of 2005. The decrease in depreciation expense in 2006 resulted from the termination of depreciation charges for containers that reached the end of their accounting useful life at the end of 2005 but remain in our fleet. The significant reduction in interest expense in the second quarter of 2006 compared to the level we experienced in 2005 was due to the benefits of our securitization as well as the large reduction in the amount of outstanding debt and interest rates that we achieved as a result of our initial public offering in the fourth quarter of last year.

On April 12, 2006, we successfully completed the placement of our $680.0 million Series 2006-1 Floating Rate Secured Notes (the ‘‘ABS Term Notes’’). The net proceeds from this offering, together with cash on hand, were used to repay all principal and interest that was owed under the Asset Securitization Facility. Simultaneously with the closing of the ABS Term Note offering, we also completed the placement of our $300.0 million Series 2005-1 Floating Rate Secured Notes (the ‘‘ABS Warehouse Facility’’). The ABS Warehouse Facility has a two year revolving period in which we can meet our new equipment procurement funding requirements. These two transactions have positively impacted our future operating performance by reducing the borrowing spread on $680.0 million of our previously outstanding indebtedness while also allowing us to finance future growth at significantly reduced rates. We also successfully renegotiated our Senior Secured Credit Facility to reduce the borrowing spread by 0.75% and reduce our commitment from $175.0 million to $165.0 million.

17




Table of Contents

On August 8, 2006, TAL’s board of directors approved and declared a $0.20 per share quarterly cash dividend on its issued and outstanding common stock, payable on September 26, 2006 to shareholders of record at the close of business on September 12, 2006.

Results of Operations

The following table summarizes our results of operations for the three months and six months ended June 30, 2006 and 2005 in dollars and as a percentage of total revenues:


  Three Months Ended June 30, Six Months Ended June 30,
  2006 2005 2006 2005
  Dollars Percent Dollars Percent Dollars Percent Dollars Percent
Leasing revenues $ 66,821
89.4
%
$ 71,808
89.2
%
$ 133,696
89.9
%
$ 144,083
91.1
%
Equipment trading revenue 5,757
7.7
6,891
8.5
10,776
7.3
9,399
6.0
Management fee income 1,573
2.1
1,416
1.8
3,149
2.1
3,412
2.2
Other revenues 563
0.8
418
0.5
1,040
0.7
1,171
0.7
Total revenues 74,714
100.0
80,533
100.0
148,661
100.0
158,065
100.0
Equipment trading expenses 4,714
6.3
5,166
6.4
8,939
6.0
7,231
4.6
Direct operating expenses 7,366
9.9
7,180
8.9
13,423
9.0
14,297
9.0
Administrative expenses 9,120
12.2
9,242
11.5
18,659
12.6
18,951
12.0
Depreciation and amortization 25,703
34.4