TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 19, 2002
Securities and Exchange Commission
Washington, DC 20549
Ladies and Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
submitting herewith for filing on behalf of Textainer Equipment Income Fund II,
L.P. (the "Partnership") the Partnership's Quarterly Report on Form 10-Q for the
Third Quarter ended September 30, 2002.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 0-19145
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
A California Limited Partnership
(Exact name of Registrant as specified in its charter)
California 94-3097644
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 California Street, 16th Floor
San Francisco, CA 94108
(Address of Principal Executive Offices) (ZIP Code)
(415) 434-0551
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2002
Table of Contents
- -------------------------------------------------------------------------------------------------------------------
Page
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2002
and December 31, 2001..................................................................... 3
Statements of Operations for the three and nine months
ended September 30, 2002 and 2001......................................................... 4
Statements of Partners' Capital for the nine months
ended September 30, 2002 and 2001......................................................... 5
Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001......................................................... 6
Notes to Financial Statements............................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 24
Item 4. Controls and Procedures................................................................... 24
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
September 30, 2002 and December 31, 2001
(Amounts in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------
2002 2001
---------------- ----------------
Assets
Container rental equipment, net of accumulated
depreciation of $15,081 (2001: $16,028) (note 4) $ 17,683 $ 21,072
Cash 312 266
Accounts receivable, net of allowance for doubtful
accounts of $109 (2001: $114) 1,092 1,168
Due from affiliates, net (note 2) 124 155
Prepaid expenses - 10
---------------- ----------------
$ 19,211 $ 22,671
================ ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 148 $ 200
Accrued liabilities 175 94
Accrued damage protection plan costs 117 107
Accrued recovery costs 9 93
Deferred quarterly distributions 38 61
Deferred damage protection plan revenue 83 72
---------------- ----------------
Total liabilities 570 627
---------------- ----------------
Partners' capital:
General partners - -
Limited partners 18,641 22,044
---------------- ----------------
Total partners' capital 18,641 22,044
---------------- ----------------
$ 19,211 $ 22,671
================ ================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Operations
For the three and nine months ended September 30, 2002 and 2001
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
---------------- ---------------- ---------------- ----------------
Rental income $ 1,207 $ 1,485 $ 3,448 $ 4,735
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Direct container expenses 298 415 982 1,369
Bad debt expense (benefit) 5 15 18 (8)
Depreciation (note 4) 1,004 575 2,000 1,811
Write-down of containers (note 4) 77 121 279 242
Professional fees 11 6 35 24
Management fees to affiliates (note 2) 107 105 306 496
General and administrative costs to affiliates (note 2) 55 66 182 225
Other general and administrative costs 42 19 127 67
Loss on sale of containers, net (note 4) 58 11 37 124
---------------- ---------------- ---------------- ----------------
1,657 1,333 3,966 4,350
---------------- ---------------- ---------------- ----------------
(Loss) income from operations (450) 152 (518) 385
---------------- ---------------- ---------------- ----------------
Interest income 2 9 5 53
---------------- ---------------- ---------------- ----------------
Net (loss) earnings $ (448) $ 161 $ (513) $ 438
================ ================ ================ ================
Allocation of net (loss) earnings (note 2):
General partners $ 8 $ 30 $ 28 $ 61
Limited partners (456) 131 (541) 377
---------------- ---------------- ---------------- ----------------
$ (448) $ 161 $ (513) $ 438
================ ================ ================ ================
Limited partners' per unit share
of net (loss) earnings $ (0.13) $ 0.04 $ (0.15) $ 0.10
================ ================ ================ ================
Limited partners' per unit share
of distributions $ 0.22 $ 0.73 $ 0.73 $ 1.53
================ ================ ================ ================
Weighted average number of limited
partnership units outstanding 3,640,833 3,688,717 3,649,886 3,691,547
================ ================ ================ ================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
For the nine months ended September 30, 2002 and 2001
(Amounts in thousands)
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
Partners' Capital
------------------------------------------------------------
General Limited Total
------------- -------------- ---------------
Balances at January 1, 2001 $ - $ 28,967 $ 28,967
Distributions (61) (5,631) (5,692)
Redemptions (note 5) - (47) (47)
Net earnings 61 377 438
------------- -------------- ---------------
Balances at September 30, 2001 $ - $ 23,666 $ 23,666
============= ============== ===============
Balances at January 1, 2002 $ - $ 22,044 $ 22,044
Distributions (28) (2,681) (2,709)
Redemptions (note 5) - (181) (181)
Net earnings 28 (541) (513)
------------- -------------- ---------------
Balances at September 30, 2002 $ - $ 18,641 $ 18,641
============= ============== ===============
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001
(Amounts in thousands)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net (loss) earnings $ (513) $ 438
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 2,000 1,811
Write-down of containers (note 4) 279 242
Decrease in allowance for doubtful accounts (5) (87)
Loss on sale of containers, net 37 124
(Increase) decrease in assets:
Accounts receivable 93 396
Due from affiliates, net (38) 362
Prepaid expenses 10 10
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 29 (114)
Accrued damage protection plan costs 10 (31)
Accrued recovery costs (84) 13
Deferred damage protection plan revenue 11 75
----------- -----------
Net cash provided by operating activities 1,829 3,239
----------- -----------
Cash flows from investing activities:
Proceeds from sale of containers 1,128 1,475
Container purchases - (96)
----------- -----------
Net cash provided by investing activities 1,128 1,379
----------- -----------
Cash flows from financing activities:
Redemptions of limited partnership units (181) (47)
Distributions to partners (2,730) (5,685)
----------- -----------
Net cash used in financing activities (2,911) (5,732)
----------- -----------
Net increase (decrease) in cash 46 (1,114)
Cash at beginning of period 266 1,652
----------- -----------
Cash at end of period $ 312 $ 538
=========== ===========
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the nine months ended September 30, 2002 and 2001
(Amounts in thousands)
(unaudited)
- --------------------------------------------------------------------------------
Supplemental Disclosures:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of container purchases, distributions
to partners, and proceeds from sale of containers which had not been paid or
received as of September 30, 2002 and 2001, and December 31, 2001 and 2000,
resulting in differences in amounts recorded and amounts of cash disbursed or
received by the Partnership, as shown in the Statements of Cash Flows for the
nine-month periods ended September 30, 2002 and 2001.
Sept. 30 Dec. 31 Sept. 30 Dec. 31
2002 2001 2001 2000
---------- ---------- ---------- ----------
Container purchases included in:
Container purchases payable.................... $ - $ - $ - $ 88
Distributions to partners included in:
Due to affiliates.............................. 4 2 8 6
Deferred quarterly distributions............... 38 61 71 66
Proceeds from sale of containers included in:
Due from affiliates............................ 177 244 347 279
The following table summarizes the amounts of container purchases, distributions
to partners and proceeds from sale of containers recorded by the Partnership and
the amounts paid or received as shown in the Statements of Cash Flows for the
nine-month periods ended September 30, 2002 and 2001.
2002 2001
---- ----
Container purchases recorded...................................... $ - $ 9
Container purchases paid.......................................... - 96
Distributions to partners declared................................ 2,709 5,692
Distributions to partners paid.................................... 2,730 5,685
Proceeds from sale of containers recorded......................... 1,061 1,543
Proceeds from sale of containers received......................... 1,128 1,475
The Partnership has entered into direct finance leases, resulting in the
transfer of containers from container rental equipment to accounts receivable.
The carrying value of containers transferred during the nine-month periods ended
September 30, 2002 and 2001 was $12 and $9, respectively.
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Notes To Financial Statements
For the three and nine months ended September 30, 2002 and 2001
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- --------------------------------------------------------------------------------
Note 1. General
Textainer Equipment Income Fund II, L.P. (the Partnership), a California
limited partnership with a maximum life of 20 years, was formed in 1989.
The Partnership owns a fleet of intermodal marine cargo containers, which
are leased to international shipping lines.
In July 2001, the Partnership began its liquidation phase. This phase may
last from two to six or more years depending on whether the containers are
sold (i) in one or more large transactions or (ii) gradually, either as
they reach the end of their marine useful lives or when an analysis
indicates that their sale is warranted based on existing market conditions
and the container's age, location and condition. The Partnership
anticipates that all excess cash, after redemptions and working capital
reserves, will be distributed to the limited and general partners on a
monthly basis.
The final termination and winding up of the Partnership, as well as payment
of liquidating and/or final distributions, will occur at the end of the
liquidation phase when all or substantially all of the Partnership's
containers have been sold and the Partnership begins its dissolution.
The accompanying interim comparative financial statements have not been
audited by an independent public accountant. However, all adjustments
(which were only normal and recurring adjustments), which are, in the
opinion of management, necessary to fairly present the financial position
of the Partnership as of September 30, 2002 and December 31, 2001, and the
results of its operations for the three and nine-month periods ended
September 30, 2002 and 2001 and changes in partners' capital and cash flows
for the nine-month periods ended September 30, 2002 and 2001, have been
made.
The financial information presented herein should be read in conjunction
with the audited financial statements and the accompanying notes included
in the Partnership's audited financial statements as of and for the year
ended December 31, 2001, in the Annual Report filed on Form 10-K.
Certain estimates and assumptions were made by the Partnership's management
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. The Partnership's management evaluates its estimates on
an on-going basis, including those related to the container rental
equipment, accounts receivable and accruals.
These estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments regarding the carrying
values of assets and liabilities. Actual results could differ from those
estimates under different assumptions or conditions.
The Partnership's management believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements.
The Partnership maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its lessees to make required
payments. These allowances are based on management's current assessment of
the financial condition of the Partnership's lessees and their ability to
make their required payments. If the financial condition of the
Partnership's lessees were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
The Partnership depreciates its container rental equipment based on certain
estimates related to the container's useful life and salvage value. These
estimates are based upon assumptions about future demand for leased
containers and the estimated sales price at the end of the container's
useful life. The Partnership will evaluate the estimated residual values
and remaining estimated useful lives on an on-going basis and will revise
its estimates as needed. As a result, depreciation expense may fluctuate in
future periods based on fluctuations in these estimates.
Additionally, the recoverability of the recorded amounts of containers to
be held for continued use and identified for sale in the ordinary course of
business are evaluated to ensure that containers held for continued use are
not impaired and that containers identified for sale are recorded at
amounts that do not exceed the estimated fair value of the containers.
Containers to be held for continued use are considered impaired and are
written down to estimated fair value when the estimated future undiscounted
cash flows are less than the recorded values. Containers identified for
sale are written down to estimated fair value when the recorded value
exceeds the estimated fair value. In determining the estimated future
undiscounted cash flows and fair value of containers, assumptions are made
regarding future demand and market conditions for leased containers and the
sales prices for used containers. If actual market conditions are less
favorable than those projected or if actual sales prices are lower than
those estimated by the Partnership, additional write-downs may be required
and/or losses may be realized.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of," and elements of Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects on Disposal of
a Segment of a Business and Extraordinary, Unusual or Infrequently
Occurring Events and Transactions."
SFAS No. 144 establishes a single-accounting model for long-lived assets to
be disposed of while maintaining many of the provisions relating to
impairment testing and valuation. The Partnership adopted SFAS No. 144 on
January 1, 2002 and there was no material impact on the Partnership's
financial condition, operating results or cash flow.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains
and Losses of Debt Extinguishments" and an amendment of that Statement,
FASB Statement No. 64. SFAS No. 145 also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." FASB 145 also amends
FASB Statement No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions. These
rescissions and amendment are not anticipated to have a material impact on
the financial statements of the Partnership.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
With Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002,
with early application encouraged. The Partnership anticipates that the
adoption of SFAS No. 146 will not have a material impact on its financial
statements.
Certain reclassifications, not affecting net earnings, have been made to
prior year amounts in order to conform to the 2002 financial statement
presentation.
Note 2. Transactions with Affiliates
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership and is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM) and
Textainer Limited (TL) are associate general partners of the Partnership.
The managing general partner and the associate general partners are
collectively referred to as the General Partners and are commonly owned by
Textainer Group Holdings Limited (TGH). The General Partners also act in
this capacity for other limited partnerships. The General Partners manage
and control the affairs of the Partnership.
In accordance with the Partnership Agreement, sections 3.08 through 3.12,
net earnings or losses and distributions are generally allocated 1% to the
General Partners and 99% to the Limited Partners. If the allocation of
distributions exceeds the allocation of net earnings and creates a deficit
in the General Partners' aggregate capital account, the Partnership
Agreement provides for a special allocation of gross income equal to the
amount of the deficit to be made to the General Partners.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners an equipment management fee, an incentive management
fee and an equipment liquidation fee. These fees are for various services
provided in connection with the administration and management of the
Partnership. For the three and nine-month periods ended September 30, 2002
the Partnership incurred $24 and $66 of incentive management fees,
respectively, and $1 and $169, respectively, for the comparable periods in
2001. There were no equipment liquidation fees incurred during these
periods.
The Partnership's container fleet is managed by TEM. In its role as
manager, TEM has authority to acquire, hold, manage, lease, sell and
dispose of the Partnership's containers. TEM holds, for the payment of
direct operating expenses, a reserve of cash that has been collected from
leasing operations; such cash is included in due from affiliates, net at
September 30, 2002 and December 31, 2001.
Subject to certain reductions, TEM receives a monthly equipment management
fee equal to 7% of gross lease revenues attributable to operating leases
and 2% of gross lease revenues attributable to full payout net leases.
These fees totaled $83 and $240 for the three and nine-month periods ended
September 30, 2002, respectively, and $104 and $327, respectively, for the
comparable periods in 2001.
Certain indirect general and administrative costs such as salaries,
employee benefits, taxes and insurance are incurred in performing
administrative services necessary to the operation of the Partnership.
These costs are incurred and paid by TFS and TEM. General and
administrative costs allocated to the Partnership during the three and
nine-month periods ended September 30, 2002 and 2001 were as follows:
Three months Nine months
ended Sept. 30, ended Sept. 30,
-------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
Salaries $37 $43 $118 $134
Other 18 23 64 91
-- -- --- ---
Total general and
administrative costs $55 $66 $182 $225
== == === ===
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the managed containers to the total container
fleet managed by TEM during the period. TFS allocates these costs based on
the ratio of the Partnership's containers to the total container fleet of
all limited partnerships managed by TFS. The General Partners allocated the
following general and administrative costs to the Partnership during the
three and nine-month periods ended September 30, 2002 and 2001:
Three months Nine months
ended Sept. 30, ended Sept. 30,
--------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
TEM $48 $57 $156 $195
TFS 7 9 26 30
-- -- --- ---
Total general and
administrative costs $55 $66 $182 $225
== == === ===
At September 30, 2002 and December 31, 2001, due from affiliates, net is
comprised of:
2002 2001
---- ----
Due from affiliates:
Due from TEM..................... $157 $192
--- ---
Due to affiliates:
Due to TFS....................... 22 23
Due to TCC....................... 11 14
--- ---
33 37
--- ---
Due from affiliates, net $124 $155
=== ===
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual and remittance of expenses,
fees and distributions described above and in the accrual and remittance of
net rental revenues and container sales proceeds from TEM.
Note 3. Lease Rental Income
Leasing income arises principally from the renting of containers to various
international shipping lines. Revenue is recorded when earned according to
the terms of the container rental contracts. These contracts are typically
for terms of five years or less. The following is the lease mix of the
on-lease containers (in units) at September 30, 2002 and 2001:
2002 2001
---- ----
On-lease under master leases 4,867 5,302
On-lease under long-term leases 3,152 2,738
----- -----
Total on-lease containers 8,019 8,040
===== =====
Under master lease agreements, the lessee is not committed to lease a
minimum number of containers from the Partnership during the lease term and
may generally return any portion or all the containers to the Partnership
at any time, subject to certain restrictions in the lease agreement. Under
long-term lease agreements, containers are usually leased from the
Partnership for periods of between three to five years. Such leases are
generally cancelable with a penalty at the end of each twelve-month period.
Under direct finance leases, the containers are usually leased from the
Partnership for the remainder of the container's useful life with a
purchase option at the end of the lease term.
The remaining containers are off-lease and are located primarily at a large
number of storage depots. At September 30, 2002, the Partnership's
off-lease containers were in the following locations:
Americas 971
Europe 303
Asia 392
Other 42
-----
Total off-lease containers 1,708
=====
At September 30, 2002 approximately 15% of the Partnership's off-lease
containers had been specifically identified as for sale.
Note 4. Container Rental Equipment
Effective July 1, 2002, the Partnership revised its estimate for container
salvage value from a percentage of equipment cost to an estimated dollar
residual value. The effect of this change for the three and nine-month
periods ended September 30, 2002 was an increase to depreciation expense of
$564. The Partnership will evaluate the estimated residual values and
remaining estimated useful lives on an on-going basis and will revise its
estimates as needed. As a result, depreciation expense may fluctuate in
future periods based on fluctuations in these estimates.
The Partnership stopped purchasing containers in 2001, but its leasing
activities are affected by fluctuations in new container prices. New
container prices steadily declined from 1995 through 1999. Although
container prices increased in 2000, these prices declined again in 2001 and
have remained low during 2002. As a result, the cost of new containers
purchased in recent years is significantly less than the average cost of
containers purchased in prior years. The Partnership evaluated the
recoverability of the recorded amount of container rental equipment at
September 30, 2002, and 2001 for containers to be held for continued use
and determined that a reduction to the carrying value of these containers
was not required. The Partnership also evaluated the recoverability of the
recorded amount of containers identified for sale in the ordinary course of
business and determined that a reduction to the carrying value of these
containers was required. The Partnership wrote down the value of these
containers to their estimated fair value, which was based on recent sales
prices less cost of sales. During the nine-month periods ended September
30, 2002 and 2001, the Partnership recorded write-down expenses of $279 and
$242, respectively, on 545 and 650 containers identified as for sale and
requiring a reserve. During the three-month periods ended September 30,
2002 and 2001, the Partnership recorded write-down expenses of $77 and
$121, respectively, on 111 and 305 containers identified as for sale and
requiring a reserve. During the three and nine-month periods ended
September 30, 2002, the Partnership also reclassified 56 containers from
containers identified for sale to containers held for continued use due to
the improvement in demand for leased containers in Asia. There were no
reclassifications during the three and nine-month periods ended September
30, 2001. At September 30, 2002 and 2001, the net book value of the 251 and
348 containers identified as for sale was $195 and $293, respectively.
The Partnership sold 630 previously written down containers for a loss of
$75 during the nine-month period ended September 30, 2002 and sold 497
previously written down containers for a loss of $19 during the same period
in 2001. During the three-month period ended September 30, 2002 the
Partnership sold 173 previously written down containers for a loss of $31
and sold 282 previously written down containers for a loss of $10 during
the same period in 2001. The Partnership incurred losses on the sale of
some containers previously written down as the actual sales prices received
on these containers were lower than the estimates used for the write-downs.
The Partnership also sold containers that had not been written down and
recorded a gain of $38 and a loss of $105 during the nine-month periods
ended September 30, 2002 and 2001, respectively. During the three-month
periods ended September 30, 2002 and 2001 the Partnership recorded losses
of $27 and $1, respectively, on the sale of containers that had not been
written down.
As more containers are subsequently identified for sale or if container
sales prices continue to decline, the Partnership may incur additional
write-downs on containers and/or may incur losses on the sale of
containers. The Partnership will continue to evaluate the recoverability of
the recorded amounts of container rental equipment and cautions that a
write-down of container rental equipment may be required in future periods
for some of its container rental equipment.
Note 5. Redemptions
The following redemptions were consummated by the Partnership during the
nine-month periods ended September 30, 2002 and 2001:
Units Average
Redeemed Redemption Price Amount Paid
--------- ----------------- ------------
Total Partnership redemptions as of
December 31, 2000.................... 54,194 $9.50 $515
Nine-month period ended
September 30, 2001................... 7,088 $6.57 47
------- ---
Total Partnership redemptions as of
September 30, 2001................... 61,282 $9.17 $562
======= ===
Total Partnership redemptions as of
December 31, 2001.................... 71,715 $8.66 $621
Nine-month period ended
September 30, 2002................... 37,451 $4.83 181
------- ---
Total Partnership redemptions as of
September 30, 2002................... 109,166 $7.35 $802
======= ===
The redemption price is fixed by formula.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Amounts in thousands except for unit and per unit amounts)
- --------------------------------------------------------------------------------
The Financial Statements contain information which will assist in evaluating the
financial condition of the Partnership for the three and nine-month periods
ended September 30, 2002 and 2001. Please refer to the Financial Statements and
Notes thereto in connection with the following discussion.
Textainer Financial Services Corporation (TFS) is the Managing General Partner
of the Partnership and is a wholly-owned subsidiary of Textainer Capital
Corporation (TCC). Textainer Equipment Management Limited (TEM) and Textainer
Limited (TL) are Associate General Partners of the Partnership. The General
Partners manage and control the affairs of the Partnership.
Liquidity and Capital Resources
From November 8, 1989 until January 15, 1991, the Partnership offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $1,000 on December 19, 1989, and on January 15, 1991, the
Partnership had received its maximum subscription amount of $75,000.
In July 2001, the Partnership entered its liquidation phase, which may last from
two to six or more years depending on whether the containers are sold (i) in one
or more large transactions or (ii) gradually, either as they reach the end of
their useful marine lives or when an analysis indicates that their sale is
warranted based on existing market conditions and the container's age, location
and condition. To date, the Partnership has sold containers only gradually,
rather than in large transactions. The Partnership anticipates that all excess
cash, after redemptions and working capital reserves, will be distributed to the
general and limited partners on a monthly basis. These distributions will
consist of cash from operations and/or cash from sales proceeds. As the
Partnership's container fleet decreases, cash from operations is expected to
decrease, while cash from sales proceeds is expected to fluctuate based on the
number of containers sold and the actual sales price per container received.
Consequently, the Partnership anticipates that a large portion of all future
distributions will be a return of capital.
The final termination and winding up of the Partnership, as well as payment of
liquidating and/or final distributions, will occur at the end of the liquidation
phase when all or substantially all of the Partnership's containers have been
sold and the Partnership begins its dissolution.
The Partnership invests working capital, cash flow from operating and investing
activities prior to its distribution to the partners in short-term, liquid
investments. Rental income and proceeds from container sales are the
Partnership's principal sources of liquidity and provide the source of funds for
distributions. Rental income and container sales prices have been adversely
affected by current market conditions for leased containers, and these market
conditions may continue or worsen. Market conditions are discussed more fully in
"Results of Operations. " The Partnership's cash is affected by cash provided by
or used in operating, investing and financing activities. These activities are
discussed in detail below.
During the nine-month period ended September 30, 2002, the Partnership declared
cash distributions to limited partners pertaining to the period from December
2001 through August 2002 in the amount of $2,681, which represented $0.73 per
unit. On a cash basis, after paying redemptions and general partner
distribtutions, $1,620 of these distributions was from operating activities, and
the balance of $1,061 was a return of capital. On a financial statement basis,
after paying redemptions, all of these distributions were a return of capital.
From time to time, the Partnership redeems units from limited partners for a
specified redemption value, which is set by formula. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2% limit
may be exceeded at the Managing General Partner's discretion. All redemptions
are subject to the Managing General Partner's good faith determination that
payment for the redeemed units will not (i) cause the Partnership to be taxed as
a corporation, (ii) impair the capital or operations of the Partnership, or
(iii) impair the ability of the Partnership to pay distributions in accordance
with its distribution policy. During the nine-month period ended September 30,
2002, the Partnership redeemed 37,451 units for a total dollar amount of $181.
The Partnership used cash flow from operations to pay for the redeemed units.
Net cash provided by operating activities for the nine-month periods ended
September 30, 2002 and 2001, was $1,829 and $3,239, respectively. The decrease
of $1,410, or 44%, was primarily attributed to the fluctuation in net earnings,
adjusted for non-cash transactions, and the fluctuations in due from affiliates,
net and gross accounts receivable. Net earnings, adjusted for non-cash
transactions, decreased primarily due to the decrease in rental income, which is
discussed more fully in "Results of Operations." The fluctuations in due from
affiliates, net, resulted from timing differences in the payment of expenses,
fees and distributions and the remittance of net rental revenues and container
sales proceeds, as well as in fluctuations in these amounts. The decrease of $93
in gross accounts receivable during the nine-month period ended September 30,
2002 was primarily due to the decrease in rental income, and was partially
offset by the increase in the average collection period of accounts receivable.
The decrease in gross accounts receivable of $396 during the same period in 2001
was primarily due to the decrease in rental income and a decline in the average
collection period of accounts receivable.
For the nine-month periods ended September 30, 2002 and 2001 net cash provided
by investing activities (the purchase and sale of containers) was $1,128 and
$1,379, respectively. The decrease of $251 was due to the decrease in proceeds
from container sales of $347, offset by the decrease in cash used for container
purchases of $96. Cash used for container purchases decreased as the Partnership
did not purchase containers during the nine-month period ended September 30,
2002 as it is now in its liquidation phase, as discussed above. Proceeds from
container sales decreased primarily due to the decrease in the number of
containers sold and a decrease in the sales price received on container sales.
Some containers sold were located in low demand locations, and these sales were
driven by not only by the liquidation plans discussed above, but also by adverse
market conditions in these locations. The sale of containers in these locations,
the decline in value of used containers, and the related market conditions are
discussed more fully under "Results of Operations."
Due, in part, to these market conditions and their effect on demand for used
containers, the Partnership has been primarily selling containers only if the
containers are at the end of their useful lives or if they are located in these
low demand locations. Therefore, and as noted above, the Partnership has
implemented its liquidation phase to date by selling containers gradually. The
Partnership will continue to evaluate its options for selling containers in the
context of both these market conditions and the Partnership's liquidation plans.
The number of containers sold both in low demand locations and elsewhere, as
well as the amount of sales proceeds, will affect how much the Partnership will
pay in future distributions to Partners.
Results of Operations
The Partnership's income from operations, which consists primarily of rental
income less costs and expenses (including container depreciation, direct
container expenses, management fees and reimbursement of administrative
expenses) was directly related to the size of the container fleet during the
nine-month periods ended September 30, 2002 and 2001, as well as certain other
factors as discussed below. The following is a summary of the container fleet
(in units) available for lease during those periods:
2002 2001
---- ----
Beginning container fleet............... 10,990 13,243
Ending container fleet.................. 9,727 11,519
Average container fleet................. 10,359 12,381
The average container fleet decreased 16% from the nine-month period ended
September 30, 2001 to the comparable period in 2002, primarily due to continuing
sales of containers (i) that had reached the end of their useful lives or (ii)
that an analysis had indicated their sale was otherwise warranted. Included in
this second group were containers located in low demand locations. The
Partnership expects that the size of its container fleet will further decline as
additional containers are sold for these reasons and as the Partnership
continues its liquidation plans. The decline in the container fleet has
contributed to an overall decline in rental income from the nine-month period
ended September 30, 2001 to the equivalent period in 2002. This decline is
expected to continue in future years, as the size of the Partnership's container
fleet continues to decrease.
Rental income and direct container expenses are also affected by the average
utilization of the container fleet, which was 69%, and 71% during the nine-month
periods ended September 30, 2002 and 2001, respectively. The remaining container
fleet is off-lease and is located primarily at a large number of storage depots.
At September 30, 2002, the Partnership's off-lease containers (in units) were in
the following locations:
Americas 971
Europe 303
Asia 392
Other 42
-----
Total off-lease containers 1,708
=====
At September 30, 2002 approximately 15% of the Partnership's off-lease
containers had been specifically identified as for sale.
In addition to utilization, rental income is affected by daily rental rates. The
average daily rental rate decreased 11% between the periods. The decrease in the
average rental rate was due to declines in both master and long term lease
rates, which are the two principal types of leases for the Partnership's
containers. The majority of the Partnership's rental income was generated from
leasing of the Partnership's containers under master operating leases, but an
increasing percentage of the Partnership's containers are on lease under long
term leases, 39% as of September 30, 2002 versus 34% as of September 30, 2001.
Long term leases generally have lower rental rates than master leases because
the lessees have contracted to lease the containers for several years and cannot
return the containers prior to the termination date without a penalty.
Fluctuations in rental rates under either type of lease generally will affect
the Partnership's operating results.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 2002 and 2001.
The Partnership's (loss) income from operations for the nine-month periods ended
September 30, 2002 and 2001 was ($518) and $385, respectively, on rental income
of $3,448 and $4,735, respectively. The decrease in rental income of $1,287, or
27%, from the nine-month period ended September 30, 2001 to the comparable
period in 2002 was attributable to the decreases in income from container
rentals and other rental income, which is discussed below. Income from container
rentals, the major component of total revenue, decreased $1,102, or 27%,
primarily due to decreases in the average container fleet of 16%, average rental
rates of 11% and average on-hire utilization of 3% between the periods.
In the fourth quarter of 2000, utilization began to decline and continued to
decline during 2001 and the beginning of 2002. This decline was due to lower
overall demand by shipping lines for leased containers, which was primarily a
result of the worldwide economic slowdown. Two other factors reduced the demand
for leased containers. Shipping lines added larger vessels to their fleets,
which combined with lower cargo volume growth, made it easier for them to use
otherwise empty vessel space to reposition their own containers back to high
demand locations. Additionally, in anticipation of the delivery of these new,
larger vessels, many shipping lines placed large orders for new containers in
2000 and 2001, thus temporarily reducing their need to lease containers. These
orders for additional containers are part of a general increase in vessel
capacity for the shipping lines. This increase in vessel capacity amounted to
12% in 2001. An additional increase in vessel capacity of approximately 12% is
expected in 2002.
Utilization has improved steadily since March 2002 due to:
o An increase in export cargo out of Asia
o Prior repositioning of containers to Asia which placed large quantities of
containers in areas of high demand
o Disposal of older containers and fewer purchases of new containers by both
container lessors and shipping lines in 2001 and 2002, resulting in an
overall better-balanced supply of containers
o The labor disagreement that is currently affecting U.S. West Coast ports is
having a short-term positive effect on demand for containers as shipping
lines are not able to reposition enough containers to Asia and must lease
more containers to meet their customers' demands
This utilization improvement has continued into the fourth quarter of 2002 but
the General Partners caution that market conditions could deteriorate again due
to global economic conditions. Demand for leased containers could therefore
weaken again and result in a decrease in utilization and further declines in
lease rates and container sale prices, adversely affecting the Partnership's
operating results.
Despite the improvement in utilization, the Partnership continues to sell
(rather than reposition) some older containers located in low demand locations.
For the number of off-lease containers located in the lower demand locations in
the Americas and Europe, see chart above. The decision to sell containers is
based on the current expectation that the economic benefit of selling these
containers is greater than the estimated economic benefit of continuing to own
these containers. The majority of the containers sold are older containers. The
expected economic benefit of continuing to own these older containers is
significantly less than that of newer containers. This is due to their shorter
remaining marine life, the cost to reposition them, and the shipping lines'
preference for leasing newer containers when they have a choice.
Once the decision had been made to sell containers, the Partnership wrote down
the value of these specifically identified containers when the carrying value
was greater than the container's estimated fair value, which was based on recent
sales prices less cost of sales. Due to declines in container sales prices, the
actual sales prices received on some containers were lower than the estimates
used for the write-down, resulting in the Partnership incurring losses upon the
sale of some of these containers. Until market conditions improve, the
Partnership may incur further write-downs and/or losses on the sale of such
containers. Should the decline in economic value of continuing to own such
containers turn out to be permanent, the Partnership may be required to
write-down the value of some of its container rental equipment.
Other rental income consists of other lease-related items, primarily income from
charges to lessees for dropping off containers in surplus locations less credits
granted to lessees for leasing containers from surplus locations (location
income), income from charges to lessees for handling related to leasing and
returning containers (handling income) and income from charges to lessees for a
Damage Protection Plan (DPP). For the nine-month period ended September 30,
2002, other rental income was $423, a decrease of $185 from the equivalent
period in 2001. Other rental income decreased primarily due to the declines in
location and DPP income. Location income decreased $107, primarily due to the
decrease in charges to lessees for dropping off containers in certain locations.
DPP income decreased $96, due to the decline in the number of containers covered
under DPP and a decrease in the average DPP price charged per container.
Direct container expenses decreased $387, or 28%, from the nine-month period
ended September 30, 2001 to the equivalent period in 2002. The decrease was
primarily due to the decrease in the average fleet size. Repositioning, DPP and
storage expenses decreased $229, $60, and $37, respectively. Repositioning
expense decreased due to the decline in the number of containers repositioned
and a decrease in the average cost of repositioning containers. DPP expense
decreased primarily due to the decrease in the number of containers covered
under DPP and the decrease in the average DPP repair cost per container. Storage
expense decreased despite the decline in average fleet utilization, primarily
due to the decrease in the average fleet size.
Bad debt expense (benefit) was $18, and ($8) for the nine-month periods ended
September 30, 2002 and 2001, respectively. Fluctuations in bad debt expense
(benefit) reflect the adjustment to the bad debt allowance and are based on
management's then current estimates of the portion of accounts receivable that
may not be collected, and which will not be covered by insurance. These
estimates are based primarily on management's current assessment of the
financial condition of the Partnership's lessees and their ability to make their
required payments. The expense recorded during the nine-month period ended
September 30, 2002 reflects a higher reserve estimate from December 31, 2001.
The benefit recorded during the comparable period in 2001 reflects a lower
reserve estimate from December 31, 2000.
Depreciation expense increased $189, or 10%, from the nine-month period ended
September 30, 2001 to the comparable period in 2002, primarily due an increase
in the depreciation rate as a result of changes in estimated salvage values as
discussed below, offset by the decrease in average fleet size noted above.
Effective July 1, 2002, the Partnership revised its estimate for container
salvage value from a percentage of equipment cost to an estimated dollar
residual value. The effect of this change for the three and nine- month periods
ended September 30, 2002 was an increase to depreciation expense of $564. The
Partnership will evaluate the estimated residual values and remaining estimated
useful lives on an on-going basis and will revise its estimates as needed. As a
result, depreciation expense may fluctuate in future periods based on
fluctuations in these estimates. If the estimates regarding residual value and
remaining useful life of the containers were to decline, depreciation expense
would increase, adversely affecting the Partnership's operating results.
The Partnership stopped purchasing containers in 2001, but its leasing
activities are affected by fluctuations in new container prices. New container
prices steadily declined from 1995 through 1999. Although container prices
increased in 2000, these prices declined again in 2001 and have remained low
during 2002. As a result, the cost of new containers purchased in recent years
is significantly less than the average cost of containers purchased in prior
years. The Partnership evaluated the recoverability of the recorded amount of
container rental equipment at September 30, 2002, and 2001 for containers to be
held for continued use and determined that a reduction to the carrying value of
these containers was not required. The Partnership also evaluated the
recoverability of the recorded amount of containers identified for sale in the
ordinary course of business and determined that a reduction to the carrying
value of these containers was required. The Partnership wrote down the value of
these containers to their estimated fair value, which was based on recent sales
prices less cost of sales. During the nine-month periods ended September 30,
2002 and 2001, the Partnership recorded write-down expenses of $279 and $242,
respectively, on 545 and 650 containers identified as for sale and requiring a
reserve. During the nine-month period ended September 30, 2002, the Partnership
also reclassified 56 containers from containers identified for sale to
containers held for continued use due to the improvement in demand for leased
containers in Asia. There were no reclassifications during the nine-month period
ended September 30, 2001. At September 30, 2002 and 2001, the net book value of
the 251 and 348 containers identified as for sale was $195 and $293,
respectively.
The Partnership sold 630 previously written down containers for a loss of $75
during the nine-month period ended September 30, 2002 and sold 497 previously
written down containers for a loss of $19 during the same period in 2001. The
Partnership incurred losses on the sale of some containers previously written
down as the actual sales prices received on these containers were lower than the
estimates used for the write-downs.
The Partnership also sold containers that had not been written down and recorded
a gain of $38 and a loss of $105 during the nine-month periods ended September
30, 2002 and 2001, respectively.
As more containers are subsequently identified for sale or if container sales
prices continue to decline, the Partnership may incur additional write-downs on
containers and/or may incur losses on the sale of containers. The Partnership
will continue to evaluate the recoverability of the recorded amounts of
container rental equipment and cautions that a write-down of container rental
equipment may be required in future periods for some of its container rental
equipment.
Management fees to affiliates decreased $190, or 38% from the nine-month period
ended September 30, 2001 to the equivalent period in 2002. The decrease was due
to decreases in both incentive and equipment management fees. Incentive
management fees, which are based on the Partnership's limited and general
partner distributions made from cash from operations and partners' capital
decreased primarily due to the decrease in the amount of distributions paid from
cash from operations between the two periods. Equipment management fees, which
are based primarily on gross revenue, decreased as a result of the decrease in
rental income and were approximately 7% of rental income for both nine-month
periods ended September 30, 2002 and 2001.
General and administrative costs to affiliates decreased $43, or 19%, from the
nine-month period ended September 30, 2001 to the same period in 2002, primarily
due to the decrease in overhead costs allocated from TEM, as the Partnership
represented a smaller portion of the total fleet managed by TEM.
The Partnership Agreement provides for the ongoing payment to the General
Partners of the management fees and the reimbursement of the expenses discussed
above. Since these fees and expenses are established by the Agreement, they
cannot be considered the result of arms' length negotiations with third parties.
The Partnership Agreement was formulated at the Partnership's inception and was
part of the terms upon which the Partnership solicited investments from its
limited partners. The business purpose of paying the General Partners these fees
is to compensate the General Partners for the services they render to the
Partnership. Reimbursement for expenses is made to offset some of the costs
incurred by the General Partners in managing the Partnership and its container
fleet. More details about these fees and expenses are included in footnote 2 to
the Financial Statements.
Loss on sale of containers, net fluctuated from $124 for the nine-month period
ended September 30, 2001 to $37 for the comparable period in 2002. The
fluctuation was primarily due to the decrease in the number of container sold
and the decrease in the average loss recorded on containers sold during the
nine-month period ended September 30, 2002, compared to the same period in 2001.
Net earnings (loss) per limited partnership unit fluctuated from earnings $0.10
to a loss of $0.15 from the nine-month period ended September 30, 2001 to the
comparable period in 2002, respectively, reflecting the fluctuations in net
earnings (loss) allocated to limited partners from earnings of $377 to a loss of
$541, respectively. The allocation of net earnings (loss) for the nine-month
periods ended September 30, 2002 and 2001 included a special allocation of gross
income to General Partners of $33 and $57, respectively, in accordance with the
Partnership Agreement.
The following is a comparative analysis of the results of operations for the
three-month periods ended September 30, 2002 and 2001.
The Partnership's (loss) income from operations for the three-month periods
ending September 30, 2002 and 2001 was ($450) and $152, respectively, on rental
income of $1,207 and $1,485, respectively. The decrease in rental income of
$278, or 19%, from the three-month period ended September 30, 2001 to the
comparable period in 2002 was attributable to decreases in container rental
income and other rental income. Income from container rentals decreased $190, or
15%, primarily due to decreases in the average container fleet of 16% and
average rental rates of 13%, offset by an increase in average on-hire
utilization of 12%.
For the three-month period ended September 30, 2002, other rental income was
$151, a decrease of $88 from the equivalent period in 2001. The decrease in
other rental income was primarily due to the decrease in location income of $81.
Location income decreased due to the decrease in charges to lessees for dropping
off containers in certain locations and an increase in credits granted to
lessees for picking up containers from certain locations.
Direct container expenses decreased $117, or 28%, from the three-month period
ending September 30, 2001 to the equivalent period in 2002. The decrease was
primarily due to decreases in storage, DPP and repositioning expenses of $68,
$28 and $25, respectively. Storage expense decreased primarily due to the
decline in average fleet size and the increase in utilization noted above. The
decline in DPP expense was due to decreases in the average DPP repair cost per
container, offset by an increase in the number of containers covered under DPP.
Repositioning expense decreased due to a decrease in the average cost of
repositioning containers, offset by an increase in the number of containers
repositioned.
Bad debt expense decreased from $15 for the three-month period ended September
30, 2001 to $5 for the comparable period in 2002. The decline was due to a lower
adjustment to bad debt estimate during the three-month period ended September
30, 2002 compared to the same period in 2001.
Depreciation expense increased $429, or 75%, from the three-month period ended
September 30, 2001 to the comparable period in 2002 primarily due to the change
in estimated salvage values used to calculate depreciation expense as noted
above.
During the three-month periods ended September 30, 2002 and 2001, the
Partnership recorded write-down expenses of $77 and $121, respectively, on 111
and 305 containers identified as for sale and requiring a reserve. The
Partnership sold 173 previously written down containers for a loss of $31 during
the three-month period ended September 30, 2002 and sold 282 previously written
down containers for a loss of $10 during the same period in 2001. The
Partnership also sold containers that had not been written down and recorded
losses of $27 and $1 during the three-month periods ended September 30, 2002 and
2001, respectively.
Management fees to affiliates increased $2, or 2%, from the three-month period
ended September 30, 2001 to the comparable period in 2002. The increase was due
to an increase in incentive management fees, offset by a decrease in equipment
management fees. Incentive management fees increased primarily due to the
increase in the amount of distributions made from cash from operations between
the two periods. Equipment management fees decreased as a result of the decrease
in rental income and were approximately 7% of rental income for both periods.
General and administrative costs to affiliates decreased $11, or 17%, from the
three-month period ended September 30, 2001 to the same period in 2002 primarily
due to a decrease in the allocation of overhead costs from TEM, as the
Partnership represented a smaller portion of the total fleet managed by TEM.
Loss on sale of containers, net fluctuated from $11 for the three-month period
ended September 30, 2001 to $58 for the comparable period in 2002. The
fluctuation was primarily due to the increase in the average loss recorded on
container sales, offset by the decrease in the number of containers sold from
the three-month period ended September 30, 2001, to the same period in 2002.
Net earnings (loss) per limited partnership unit fluctuated from earnings of
$0.04 during the three-month period ended September 30, 2001 to a loss of $0.13
for the comparable period in 2002, reflecting the fluctuation in net earnings
(loss) allocated to limited partners from earnings of $131 to a loss of $456,
respectively. The allocation of net earnings (loss) for the three-month periods
ended September 30, 2002 and 2001 included a special allocation of gross income
to the General Partners in accordance with the Partnership Agreement.
Critical Accounting Policies and Estimates
The Partnership's discussion and analysis of its financial condition and results
of operations are based upon the Partnership's financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. Certain estimates and assumptions were made by the
Partnership's management that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. The Partnership's management evaluates its estimates on an
on-going basis, including those related to the container rental equipment,
accounts receivable, and accruals.
These estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments regarding the carrying
values of assets and liabilities. Actual results could differ from those
estimates under different assumptions or conditions.
The Partnership's management believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its financial statements.
The Partnership maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its lessees to make required payments. These
allowances are based on management's current assessment of the financial
condition of the Partnership's lessees and their ability to make their required
payments. If the financial condition of the Partnership's lessees were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required, which would adversely affect the
Partnership's operating results.
The Partnership depreciates its container rental equipment based on certain
estimates related to the container's useful life and salvage value. These
estimates are based upon assumptions about future demand for leased containers
and the estimated sales price at the end of the container's useful life.
Effective July 1, 2002, the Partnership revised its estimate for container
salvage value from a percentage of equipment cost to an estimated dollar
residual value. The Partnership will evaluate the estimated residual values and
remaining estimated useful lives on an on-going basis and will revise its
estimates as needed. As a result, depreciation expense may fluctuate in future
periods based on fluctuations in these estimates. If the estimates regarding
residual value and remaining useful life of the containers were to decline,
depreciation expense would increase, adversely affecting the Partnership's
operating results.
Additionally, the recoverability of the recorded amounts of containers to be
held for continued use and identified for sale in the ordinary course of
business are evaluated to ensure that containers held for continued use are not
impaired and that containers identified for sale are recorded at amounts that do
not exceed the estimated fair value of the containers. Containers to be held for
continued use are considered impaired and are written down to estimated fair
value when the estimated future undiscounted cash flows are less than the
recorded values. Containers identified for sale are written down to estimated
fair value when the recorded value exceeds the estimated fair value. In
determining the estimated future undiscounted cash flows and fair value of
containers, assumptions are made regarding future demand and market conditions
for leased containers and the sales prices for used containers. If actual market
conditions are less favorable than those projected or if actual sales prices are
lower than those estimated by the Partnership, additional write-downs may be
required and/or losses may be realized. Any additional write-downs, or losses
would adversely affect the Partnership's operating results.
Accounting Pronouncement
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of," and
elements of Accounting Principles Board Opinion 30, "Reporting the Results of
Operations - Reporting the Effects on Disposal of a Segment of a Business and
Extraordinary, Unusual or Infrequently Occurring Events and Transactions."
SFAS No. 144 establishes a single-accounting model for long-lived assets to be
disposed of while maintaining many of the provisions relating to impairment
testing and valuation. The Partnership adopted SFAS No. 144 on January 1, 2002
and there was no material impact on the Partnership's financial condition,
operating results or cash flow.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses of Debt
Extinguishments" and an amendment of that Statement, FASB Statement No. 64. SFAS
No. 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers." FASB 145 also amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
These rescissions and amendment are not anticipated to have a material impact on
the financial statements of the Partnership.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated With
Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Partnership anticipates that the
adoption of SFAS No. 146 will not have a material impact on its financial
statements.
Risk Factors and Forward Looking Statements
Although substantially all of the Partnership's income from operations is
derived from assets employed in foreign operations, virtually all of this income
is denominated in United States dollars. The Partnership's customers are
international shipping lines, which transport goods on international trade
routes. The domicile of the lessee is not indicative of where the lessee is
transporting the containers. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep its containers under lease, rather than the geographic location
of the containers or the domicile of the lessees. The containers are generally
operated on the international high seas rather than on domestic waterways. The
containers are subject to the risk of war or other political, economic or social
occurrence where the containers are used, which may result in the loss of
containers, which, in turn, may have a material impact on the Partnership's
results of operations and financial condition.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning containers after they come off-lease, the risk of an
uninsured loss, including bad debts, increases in maintenance expenses or other
costs of operating the containers, and the effect of world trade, industry
trends and/or general business and economic cycles on the Partnership's
operations. See "Risk Factors" in the Partnership's Prospectus, as supplemented,
for additional information on risks of the Partnership's business. See "Critical
Accounting Policies and Estimates" above for information on the Partnership's
critical accounting policies and how changes in those estimates could adversely
affect the Partnership's results of operations.
The foregoing includes forward-looking statements and predictions about possible
or future events, results of operations and financial condition. These
statements and predictions may prove to be inaccurate, because of the
assumptions made by the Partnership or the General Partners or the actual
development of future events. No assurance can be given that any of these
forward-looking statements or predictions will ultimately prove to be correct or
even substantially correct. The risks and uncertainties in these forward-looking
statements include, but are not limited to, changes in demand for leased
containers, changes in global business conditions and their effect on world
trade, future modifications in the way in which the Partnership's lessees
conduct their business or of the profitability of their business, increases or
decreases in new container prices or the availability of financing therefor,
alterations in the costs of maintaining and repairing used containers, increases
in competition, changes in the Partnership's ability to maintain insurance for
its containers and its operations, the effects of political conditions on
worldwide shipping and demand for global trade or of other general business and
economic cycles on the Partnership, as well as other risks detailed herein and
from time to time in the Partnership's filings with the Securities and Exchange
Commission. The Partnership does not undertake any obligation to update
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Inapplicable.
Item 4. Controls and Procedures.
Based on an evaluation of the Partnership's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934)
conducted within ninety days of the filing date of this report, the managing
general partner's principal executive officer and principal financial officer
have found those controls and procedures to be effective. There have been no
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
Part II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 99.1 and 99.2 Certifications pursuant to 18 U.S.C. Section
1350, as adopted, and regarding Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
A California Limited Partnership
By Textainer Financial Services Corporation
The Managing General Partner
By _______________________________
Ernest J. Furtado
Chief Financial Officer
Date: November 19, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the Managing General Partner of the Registrant, in the
capacities and on the dates indicated:
Signature Title Date
________________________ Chief Financial Officer, Senior November 19, 2002
Ernest J. Furtado Vice President and Secretary
________________________ President November 19, 2002
John A. Maccarone
Part II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 99.1 and 99.2 Certifications pursuant to 18 U.S.C. Section
1350, as adopted, and regarding Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
A California Limited Partnership
By Textainer Financial Services Corporation
The Managing General Partner
By /s/Ernest J. Furtado
___________________________________
Ernest J. Furtado
Chief Financial Officer
Date: November 19, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the Managing General Partner of the Registrant, in the
capacities and on the dates indicated:
Signature Title Date
/s/Ernest J. Furtado
__________________________________ Chief Financial Officer, Senior November 19, 2002
Ernest J. Furtado Vice President and Secretary
/s/John A. Maccarone President November 19, 2002
__________________________________
John A. Maccarone
CERTIFICATIONS
I, John A. Maccarone, certify that:
1. I have reviewed this quarterly report on form 10-Q of Textainer Equipment
Income Fund II, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report ( the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls ; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 19, 2002
/s/ John A. Maccarone
_____________________________________
John A. Maccarone
President and Director of TFS
CERTIFICATIONS
I, Ernest J. Furtado, certify that:
1. I have reviewed this quarterly report on form 10-Q of Textainer Equipment
Income Fund II, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report ( the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls ; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 19, 2002
/s/ Ernest J. Furtado
_________________________________________________
Ernest J. Furtado
Chief Financial Officer, Senior Vice President,
Secretary and Director of TFS
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED, REGARDING SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Textainer Equipment Income Fund II,
L.P., (the "Registrant") on Form 10-Q for the quarterly period ended September
30, 2002, as filed on November 19, 2002 with the Securities and Exchange
Commission (the "Report"), I, John A. Maccarone, the President and Director of
Textainer Financial Services Corporation ("TFS") and Principal Executive Officer
of TFS, the Managing General Partner of the Registrant, certify, pursuant to 18
U.S.C. ss. 1350, as adopted, regarding Section 906 of the Sarbanes-Oxley Act of
2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition, results of operations and
cash flows of the Registrant.
November 19, 2002
By /s/ John A. Maccarone
_________________________________
John A. Maccarone
President and Director of TFS
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED, REGARDING SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Textainer Equipment Income Fund II,
L.P., (the "Registrant") on Form 10-Q for the quarterly period ended September
30, 2002, as filed on November 19, 2002 with the Securities and Exchange
Commission (the "Report"), I, Ernest J. Furtado, Chief Financial Officer, Senior
Vice President, Secretary and Director of Textainer Financial Services
Corporation ("TFS") and Principal Financial and Accounting Officer of TFS, the
Managing General Partner of the Registrant, certify, pursuant to 18 U.S.C. ss.
1350, as adopted, regarding Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition, results of operations and
cash flows of the Registrant.
November 19, 2002
By /s/ Ernest J. Furtado
_________________________________________________
Ernest J. Furtado
Chief Financial Officer, Senior Vice President,
Secretary and Director of TFS