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TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
March 29, 1999
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
submitting herewith for filing on behalf of Textainer Equipment Income Fund II,
L.P. (the "Partnership") the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
The financial statements included in the enclosed Annual Report on Form 10-K do
not reflect a change from the preceding year in any accounting principles or
practices, or in the method of applying any such principles or practices.
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-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-19145
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP DEPOSITARY UNITS (THE "UNITS")
(TITLE OF CLASS)
LIMITED PARTNERSHIP INTERESTS (UNDERLYING THE UNITS)
(TITLE OF CLASS)
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. [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and ask prices of such
stock, as of a specified date within 60 days prior to the date of the filing.
Not Applicable.
Documents Incorporated by Reference
The Registrant's Prospectus as contained in Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement, as filed with the Commission on November 3,
1989 as supplemented by Post-Effective Amendment No. 2 filed with the Commission
under Section 8(c) of the Securities Act of 1933 on December 11, 1990.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
For more detailed information about the Registrant's business, see "Business of
the Partnership" in the Registrant's Prospectus as supplemented.
(a) General Development of Business
The Registrant is a California Limited Partnership formed on July 11,
1989 to purchase, own, operate, lease, and sell equipment used in the
containerized cargo shipping industry. The Registrant commenced
offering units representing limited partnership interests (Units) to
the public on November 8, 1989 in accordance with its Registration
Statement and ceased to offer such Units as of January 15, 1991. The
Registrant raised a total of $75,000,000 from the offering and invested
a substantial portion of the money raised in equipment. The Registrant
has since engaged in leasing this and other equipment in the
international shipping industry.
See Item 10 herein for a description of the Registrant's General
Partners. See Item 7 herein for a description of current market
conditions affecting the Registrant's business.
(b) Financial Information About Industry Segments
Inapplicable.
(c) Narrative Description of Business
(c)(1)(i)A container leasing company generally, and the Registrant specifically,
is an operating business comparable to a rental car business. A
customer can lease a car from a bank leasing department for a monthly
charge which represents the cost of the car, plus interest, amortized
over the term of the lease; or the customer can rent the same car from
a rental car company at a much higher daily lease rate. The customer
is willing to pay the higher daily rate for the convenience and value-
added features provided by the rental car company, the most important
of which is the ability to pick up the car where it is most convenient,
use it for the desired period of time, and then drop it off at a
location convenient to the customer. Rental car companies compete with
one another on the basis of lease rates, availability of cars, and
the provision of additional services. They generate revenues by
maintaining the highest lease rates and the highest utilization factors
that market conditions will allow, and by augmenting this income with
proceeds from sales of insurance, drop-off fees, and other special
charges. A large percentage of lease revenues earned by car rental
companies are generated under corporate rate agreements wherein, for
a stated period of time, employees of a participating corporation can
rent cars at specific terms, conditions and rental rates.
Container leasing companies and the Registrant operate in a similar
manner by owning and leasing a worldwide fleet of new and used
transportation containers to international shipping companies hauling
various types of goods among numerous trade routes. All lessees pay a
daily rental rate and in certain markets may pay special handling fees
and/or drop-off charges. In addition to these fees and charges, a
lessee must either provide physical damage and liability insurance
or purchase a damage waiver from the Registrant, in which case the
Registrant agrees to pay the cost of repairing any physical damage to
containers caused by lessees. Container leasing companies compete with
one another on the basis of lease rates, availability of equipment and
services provided. To ensure the availability of equipment, container
leasing companies and the Registrant may reposition containers from low
demand locations to higher demand locations. By maintaining the
highest lease rates and the highest equipment utilization factors
allowed by market conditions, the Registrant generates revenue and
profit. Rental revenues are primarily generated under master leases,
which are comparable to the corporate rate agreements used by rental
car companies. The master leases provide that the lessee, for a
specified period of time, may rent containers at specific terms,
conditions and rental rates. Although the terms of the master lease
governing each container under lease do not vary, the number of
containers in use can vary from time to time within the term of the
master lease. The terms and conditions of the master lease provide
that the lessee pays a daily rental rate for the entire time the
container is in his possession (whether or not he is actively using
it), is responsible for any damage, and must insure the container
against liabilities. For a more detailed discussion of the leases for
the Registrant's equipment, see "Leasing Policy" under "Business of the
Partnership" in the Registrant's Prospectus as supplemented. The
Registrant also sells containers in the course of its business if
opportunities arise or at the end of the container's useful life. See
"Business of the Partnership" in Registrant's Prospectus, as
supplemented.
(c)(1)(ii) Inapplicable.
(c)(1)(iii) Inapplicable.
(c)(1)(iv) Inapplicable.
(c)(1)(v) Inapplicable.
(c)(1)(vi) Inapplicable.
(c)(1)(vii) No single lessee had revenue for the years ended December 31, 1998,
1997 and 1996 which was 10% or more of the total revenue of the
Registrant.
(c)(1)(viii)Inapplicable.
(c)(1)(ix) Inapplicable.
(c)(1)(x) There are approximately 80 container leasing companies of which
the top ten control approximately 93% of the total equipment held
by all container leasing companies. The top two container leasing
companies combined control approximately 39% of the total equipment
held by all container leasing companies. Textainer Equipment
Management Limited, an Associate General Partner of the Registrant
and the manager of its marine container equipment, is the third
largest container leasing company and manages approximately 10%
of the equipment held by all container leasing companies. The
Registrant alone is not a material participant in the worldwide
container leasing market. The principal methods of competition are
price, availability and the provision of worldwide service to the
international shipping community. Competition in the container
leasing market has increased over the past few years. Since 1996,
shipping alliances and other operational consolidations among
shipping lines have allowed shipping lines to begin operating with
fewer containers, thereby decreasing the demand for leased
containers. This decrease in demand, along with the entry of new
leasing company competitors offering low container rental rates to
shipping lines, has increased competition among container lessors
such as the Registrant.
(c)(1)(xi) Inapplicable.
(c)(1)(xii) Inapplicable.
(c)(1)(xiii)The Registrant has no employees. Textainer Financial Services
Corporation (TFS), the Managing General Partner of the Registrant,
is responsible for the overall management of the business of
the Registrant and at December 31, 1998 had 6 employees. Textainer
Equipment Management Limited (TEM), an Associate General Partner,
is responsible for the management of the leasing operations of the
Registrant and at December 31, 1998 had a total of 162 employees.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
The Registrant is involved in leasing containers to international
shipping companies for use in world trade. Approximately 19%, 14% and
14% of the Registrant's rental revenue during the years ended December
31, 1998, 1997 and 1996, respectively, was derived from operations
sourced or terminated domestically. These percentages do not reflect
the proportion of the Partnership's income from operations generated
domestically or in domestic waterways. Substantially all of the
Partnership's income from operations is derived from assets employed in
foreign operations. See "Business of the Partnership", and for a
discussion of the risks of leasing containers for use in world trade,
"Risk Factors" in the Registrant's Prospectus, as supplemented.
ITEM 2. PROPERTIES
As of December 31, 1998, the Registrant owned the following types and quantities
of equipment:
20-foot standard dry freight containers 7,193
20-foot refrigerated containers 83
40-foot standard dry freight containers 5,868
40-foot high cube dry freight containers 3,137
-------
16,281
=======
During December 1998, approximately 74% of these containers were on lease to
international shipping companies and the balance were being stored at container
manufacturers' locations and at a large number of storage depots located
worldwide.
For further information about the Registrant's property, see "Business of the
Partnership" in the Registrant's Prospectus, as supplemented.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not subject to any material legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ITEM 201:
(a) Market Information.
(a)(1)(i) The Registrant's limited partnership Units are not publicly traded
and there is no established trading market for such Units. The
Registrant has a program whereby limited partners may redeem Units
for a specified redemption price. The program operates only when the
Managing General Partner determines, among other matters, that
payment for redeemed units will not impair the capital or operations
of the Registrant.
(a)(1)(ii) Inapplicable.
(a)(1)(iii)Inapplicable.
(a)(1)(iv) Inapplicable.
(a)(1)(v) Inapplicable.
(a)(2) Inapplicable.
(b) Holders.
(b)(1) As of January 1, 1999 there were 4,714 holders of record of limited
partnership interests in the Registrant.
(b)(2) Inapplicable.
(c) Dividends.
Inapplicable.
For details of the distributions which are made monthly by the Registrant to its
limited partners, see Item 6 "Selected Financial Data."
ITEM 701: Inapplicable.
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands except for per unit amounts)
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Rental income..................... $ 10,031 $ 10,433 $ 11,613 $ 13,232 $ 13,193
Net earnings...................... $ 2,492 $ 2,715 $ 2,806 $ 4,579 $ 4,166
Net earnings per unit
of limited partnership
interest........................ $ 0.63 $ 0.71 $ 0.74 $ 1.21 $ 1.10
Distributions per unit
of limited partnership
interest........................ $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 1.60
Distributions per unit
of limited partnership
interest representing a
return of capital.............. $ 0.97 $ 0.89 $ 0.86 $ 0.39 $ 0.50
Total assets...................... $ 38,644 $ 42,865 $ 46,510 $ 49,998 $ 51,393
ITEM 7. 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 that will assist in evaluating the
financial condition of the Partnership for the years ended December 31, 1998,
1997 and 1996. Please refer to the Financial Statements and Notes thereto in
connection with the following discussion.
Liquidity and Capital Resources
From November 8, 1989 until January 15, 1991, the Partnership offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $1,000 on December 19, 1989, and on January 15, 1991, the
Partnership had received its maximum subscription amount of $75,000.
From time to time, the Partnership redeems units from limited partners for a
specified redemption value, which is set by formula. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2% limit
may be exceeded at the Managing General Partner's discretion. All redemptions
are subject to the Managing General Partner's good faith determination that
payment for the redeemed units will not (i) cause the Partnership to be taxed as
a corporation, (ii) impair the capital or operations of the Partnership, or
(iii) impair the ability of the Partnership to pay distributions in accordance
with its distribution policy. During the year ended December 31, 1998, the
Partnership redeemed 12,449 units for a total dollar amount of $119. The
Partnership used cash flow from operations to pay for the redeemed units.
The Partnership invests working capital and cash flow from operations prior to
its distribution to the partners in short-term, liquid investments. The
Partnership's cash is affected by cash provided by or used in operating,
investing and financing activities. These activities are discussed in detail
below.
During the year ended December 31, 1998, the Partnership declared cash
distributions to limited partners pertaining to the period from December 1997
through November 1998 in the amount of $5,957. These distributions represent 8%
on original capital (measured on an annualized basis) on each unit. On a cash
basis, all of these distributions were from operations. On a GAAP basis, $3,618
of these distributions was a return of capital and the balance was from net
income.
At December 31, 1998 the Partnership had no commitments to purchase containers.
Net cash provided by operating activities for years ended December 31, 1998 and
1997, was $6,674 and $8,392, respectively. The decrease of $1,718, or 20%, was
primarily attributable to fluctuations in due from affiliates, net offset by the
fluctuation in accounts receivable, excluding write-off. Due from affiliates,
net increased $530 in the year ended December 31, 1998 compared to a decrease of
$1,586 in the year ended December 31, 1997. The fluctuation resulted from timing
differences in the payment of expenses and fees and in the remittance of net
rental revenues from TEM. The decrease in accounts receivable, excluding
write-off, of $866, in the year ended December 31, 1998 compared to a decrease
of $311 in the year ended December 31, 1997, was primarily due to the decrease
in rental income, the resolution of payment issues with one lessee, and a
decrease in the average collection period.
For the year ended December 31, 1998, net cash provided by investing activities
(the purchase and sale of containers) was $245 compared to net cash used in
investing activities of $3,035 for the comparable period in 1997. Net cash
provided by investing activities increased $3,280 primarily due to the
Partnership having purchased more containers during 1997 than in 1998. The
decrease in container purchases was primarily due to current market conditions
which had an adverse effect on the amount of cash provided by operations
available for additional container purchases, resulting in lower than
anticipated reinvestment in containers. Additionally, until market conditions
improve, the Partnership plans to continue to sell certain older containers in
surplus locations where demand is weak and repositioning costs are high. Market
conditions are discussed more fully under "Results of Operations".
Consistent with its investment objectives, the Partnership intends to continue
to reinvest available cash from operations and all or a significant amount of
the proceeds from container sales in additional containers. However, the number
of additional containers purchased may not equal the number of containers sold,
despite the decline in average container prices from their most recent high in
1995, as new container prices are likely to be greater than proceeds from
container sales.
Results of Operations
The Partnership's income from operations, which consists primarily of rental
income, container depreciation, direct container expenses, management fees, and
reimbursement of administrative expenses was directly related to the size of the
container fleet during the years ended December 31, 1998, 1997 and 1996, 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:
1998 1997 1996
---- ---- ----
Beginning container fleet............. 17,697 18,016 18,650
Ending container fleet................ 16,281 17,697 18,016
Average container fleet............... 16,989 17,857 18,333
The decline in the average container fleet of 5% from the year ended December
31, 1997 to the year ended December 31, 1998 was due to the Partnership having
sold more containers than it purchased since December 31, 1997. Although a
substantial amount of sales proceeds were used to purchase additional
containers, fewer containers were bought than sold, resulting in a net decrease
in the size of the container fleet. The Partnership plans to use the remaining
sales proceeds for future container purchases. As noted above, when containers
are sold in the future, sales proceeds are not likely to be sufficient to
replace all of the containers sold. This trend, which is expected to continue,
has contributed to a slower rate of reinvestment than had been expected by the
General Partners. Other factors related to this trend are discussed above under
"Liquidity and Capital Resources".
Rental income and direct container expenses are also affected by the average
utilization of the container fleet, which was 78%, 78% and 82% during the years
ended December 31, 1998, 1997 and 1996, respectively. In addition, rental income
is affected by daily rental rates and leasing incentives.
The following is a comparative analysis of the results of operations for the
years ended December 31, 1998, 1997 and 1996.
The Partnership's income from operations for the years ended December 31, 1998
and 1997 was $2,690 and $2,471, respectively, on rental income of $10,031 and
$10,433, respectively. The decrease in rental income of $402, or 4%, from the
year ended December 31, 1997 to the year ended December 31, 1998 was primarily
attributable to a decrease in income from container rentals, partially offset by
an increase in other rental income. Income from container rentals, the major
component of total revenue, decreased $636, or 7%, primarily due to the decrease
in the average container fleet of 5% and the decrease in average rental rates of
2%, offset by the decrease in leasing incentives of 38%.
The Partnership's income from operations for both the years ended December 31,
1997 and 1996 was $2,471, on total rental income of $10,433 and $11,613,
respectively. The decrease in rental income of $1,180, or 10%, was primarily due
to the decrease in income from container rentals. Income from container rentals
decreased $1,223, or 12%, from 1996 to 1997 primarily due to the decreases in
average fleet size of 3%, average on-hire utilization of 5% and average daily
rental rates of 3% and due to the increase in leasing incentives of 100%.
Container utilization and rental rates have been declining since 1996. This
resulted from changes in the business of shipping line customers consisting
primarily of (i) over-capacity resulting from the additions of new, larger ships
to the existing container ship fleet at a rate in excess of the growth rate in
containerized cargo trade; (ii) shipping line alliances and other operational
consolidations that have allowed shipping lines to operate with fewer
containers; and (iii) shipping lines purchasing containers to take advantage of
low prices and favorable interest rates. The entry of new leasing company
competitors offering low container rental rates to shipping lines resulted in
downward pressure on rental rates, and caused leasing companies to offer higher
leasing incentives and other discounts to shipping lines. The decline in the
purchase price of new containers during this period and excess industry capacity
have also caused additional downward pressure on rental rates.
Additionally, the weakening of many Asian currencies in 1998 has resulted in a
significant increase in exports from Asia to North America and Europe and a
corresponding decrease in imports into Asia from North America and Europe. This
trade imbalance has created a strong demand for containers in Asia and a weak
demand for containers in North America and Europe. While this imbalance has
resulted in the decline in leasing incentives, it has also contributed to the
further decline in average utilization and rental rates for the fleet managed by
TEM. This imbalance has also resulted in an unusually high build-up of
containers in lower demand locations during the year ended December 31, 1998
compared to 1997. In an effort to improve utilization and to alleviate the
container build-up, the Partnership has repositioned, and plans to continue to
reposition, newer containers to higher demand locations. The Partnership
incurred increased direct container expenses as a result of repositioning
containers from these lower demand locations during 1998 and anticipates
incurring additional direct container costs in 1999 as it continues its
repositioning efforts. The Partnership has also sold and plans to continue to
sell certain older containers located in lower demand locations. The decision to
sell such containers was based on the high costs to reposition these containers
and on the current low demand for containers manufactured prior to 1993. The
General Partners believe that the especially low demand for these older
containers is a temporary situation caused by the market conditions discussed
above.
The low demand for these older containers has had an adverse effect on rental
income and has resulted in the Partnership incurring losses on the sale of these
older containers. Until market conditions improve, rental income will continue
to be adversely affected and additional losses may be incurred if more older
containers are sold. Should the especially low demand for these older containers
turn out to be a permanent situation, the Partnership may be required to
increase its depreciation rate for container rental equipment. For the near
term, the General Partners do not foresee material changes in existing market
conditions and caution that both utilization and lease rates could further
decline, adversely affecting the Partnership's operating results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's containers under short-term operating leases. At
December 31, 1998, 1997 and 1996, there were 229, 98 and 334 containers under
direct financing leases, respectively.
The balance of other rental income consists of other lease-related items,
primarily income from charges to lessees for dropping off containers in surplus
locations less credits granted to lessees for leasing containers from surplus
locations (location income), income from charges to lessees for handling and
returning containers (handling income) and income from charges to lessees for a
Damage Protection Plan (DPP). For the year ended December 31, 1998, the total of
these other rental income items was $1,421, an increase of $234 from the year
ended December 31, 1997. The increase was primarily due to an increase in
location income of $294, offset by a decrease in handling income of $78.
Location income increased primarily due to a decrease in credits given to
lessees for picking up containers from certain locations. Handling income
decreased primarily due to a decrease in container movement.
For the year ended December 31, 1997, the total of these other rental income
items was $1,186, an increase of $43 from the year ended December 31, 1996. The
primary components of this net increase were increases in DPP and handling
income of $83 and $80, respectively, offset by a decrease in location income of
$108. The increase in DPP income was due to an increased number of containers
participating in the plan, offset by a lower average DPP price charged per
container. Handling income increased as a result of increased container movement
during the year ended December 31, 1997, compared to 1996, offset by a lower
average handling price charged per container. Location income decreased
primarily due to lower demand, which resulted in an increase in credits granted
to lessees for picking up containers from less desirable locations and due to
lower average drop-off charges per container which reduced drop-off charges to
lessees during 1997 compared to 1996.
Direct container expenses increased $212, or 11%, from the year ended December
31, 1997 to the year ended December 31, 1998. The increase was primarily due to
an increase in repositioning expense of $300, offset by a decrease in storage
expense of $60. Repositioning expense increased primarily due to an increase in
the number of containers repositioned at a higher average repositioning cost per
container. Storage expenses decreased due to a decrease in the average cost of
storing the containers.
Direct container expenses increased $146, or 8%, for the year ended December 31,
1997, compared to the year ended December 31, 1996. The increase was primarily
due to increases in repositioning and storage expenses of $182 and $129,
respectively, offset by a decrease in maintenance expense of $150. Repositioning
expense increased due to a greater number of containers being transported from
low demand locations to higher demand locations during 1997 compared to 1996.
The increase in storage expense resulted from the decrease in utilization in the
year ending December 31, 1997 compared to 1996. Maintenance expense decreased
due to the decrease in the average repair cost per container and due to a
decrease in the number of containers requiring repair.
Bad debt expense decreased from an expense of $92 for the year ended December
31, 1997 to a recovery of $111 for the year ended December 31, 1998. The
recovery recorded for the year ended December 31, 1998 resulted from the effect
of insurance proceeds received for certain receivables against which reserves
had been recorded in 1994 and 1995, as well as from the resolution of payment
issues with one lessee.
Bad debt expense increased from a recovery of $97 for the year ended December
31, 1996, to an expense of $92 for the year ended December 31, 1997. The
recovery recorded in 1996 was primarily due to a reduction in reserve
requirements for a specific lessee as a result of a resolution of prior period
payment problems with that lessee during 1996.
Depreciation expense decreased $320, or 9%, from the year ended December 31,
1997 to the year ended December 31, 1998 and $246, or 6%, from the year ended
December 31, 1996 to the year ended December 31, 1997, primarily due to certain
containers, acquired used, which have been fully depreciated and to the smaller
average fleet size.
New container prices have been declining since 1995, and the cost of purchasing
new containers at year-end 1998 was significantly less than the cost of
containers purchased in the last several years. The Partnership has evaluated
the recoverability of the recorded amount of container rental equipment and
determined that a reduction to the carrying value of the containers was not
required, but that a write-down in value of certain containers identified for
sale was required. In the fourth quarter of 1998, the Partnership recorded a
charge of $232 for the expected loss on disposal of these containers. These
containers were manufactured prior to 1993 and were located in certain low
demand locations. This charge is only for those containers specifically
identified as being for sale. If other containers manufactured prior to 1993,
whether situated in these or other locations, are subsequently identified as
available for sale, the Partnership may incur additional losses.
In the fourth quarter of 1996 and the second quarter of 1997, charges of $1,421
and $343, respectively, were recorded to write down the value of the
refrigerated containers owned by the Partnership. During 1996, the carrying
value of these containers was written down to an amount equal to the estimated
future undiscounted cash flows from these containers as there had been no recent
sales of this equipment type. The carrying value was further written down during
1997, based on the sales proceeds received in recent sales of these containers.
Management fees to affiliates decreased $60, or 6%, and $85, or 8%, from the
year ended December 31, 1997 to the year ended December 31, 1998 and from the
year ended December 31, 1996 to the year ended December 31, 1997, respectively,
due to decreases in equipment management fees. Equipment management fees, which
are based primarily on gross revenue, decreased as a result of the decrease in
rental income. Equipment management fees further decreased from 1997 to 1998 due
to an adjustment resulting from the write-off of receivables for two lessees.
Incentive management fees, which are based on the Partnership's limited and
general partner distribution percentage and partners' capital, remained constant
at $251 for the years ended December 31, 1996, 1997 and 1998.
General and administrative costs to affiliates decreased $110, or 17%, and $17,
or 3%, from the year ended December 31, 1997 to 1998 and from the year ended
December 31, 1997 to 1996, respectively, due to the decrease in overhead costs
allocated by TFS and TEM.
Other income (expense) decreased $442 from income of $244 for the year ended
December 31, 1997 to an expense of $198 for the year ended December 31, 1998.
The decrease was primarily due to the fluctuation of gain/loss on sale of
containers from a gain of $169 for the year ended December 31, 1997 to a loss of
$297 for the year ended December 31, 1998. The loss on sale of containers was
primarily due to the Partnership selling containers located in low demand
locations at a younger age than they would have been sold during previous years,
as a result of current market conditions. As noted above, if other containers
are identified as available for sale, the Partnership may incur additional
losses.
Other income provided $244 of additional income for the year ended December 31,
1997, representing a decrease of $91, or 27%, compared to the year ended
December 31, 1996. This decrease was due to a $112 decrease in gain on sale of
containers, offset by a $21 increase in interest income.
Net earnings per limited partnership unit decreased from $0.71 to $0.63 from the
year ended December 31, 1997 to the year ended December 31, 1998, reflecting the
decrease in net earnings allocated to limited partners from $2,652 to $2,339,
respectively.
Net earnings per limited partnership unit decreased from $0.74 to $0.71 from the
year ended December 31, 1996 to the year ended December 31, 1997, reflecting the
decrease in net earnings allocated to limited partners from $2,743 to $2,652
respectively.
Although substantially all of the Partnership's income from operations is
derived from assets employed in foreign operations, virtually all of this income
is denominated in United States dollars. The Partnership's customers are
international shipping lines, which transport goods on international trade
routes. The domicile of the lessee is not indicative of where the lessee is
transporting the containers. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep its containers under lease, rather than the geographic location
of the containers or the domicile of the lessees. The containers are generally
operated on the international high seas rather than on domestic waterways. The
containers are subject to the risk of war or other political, economic or social
occurrence where the containers are used, which may result in the loss of
containers, which, in turn, may have a material impact on the Partnership's
results of operations and financial condition. The General Partners are not
aware of any conditions as of December 31, 1998, which would result in such a
risk materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning containers after they come off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the containers, and the effect of world trade, industry trends and/or general
business and economic cycles on the Partnership's operations. See "Risk Factors"
in the Partnership's Prospectus, as supplemented, for additional information on
risks of the Partnership's business.
Readiness for Year 2000
Many computer systems may experience difficulty processing dates beyond the year
1999; as a consequence, some computer hardware and software at many companies
will need to be modified or replaced prior to the year 2000 in order to remain
functional. The Partnership relies on the financial and operating systems
provided by the General Partners; these systems include both information
technology (IT) systems as well as non-information technology (non-IT) systems.
For IT and non-IT systems developed by independent third parties
(externally-developed) the General Partners have obtained representations from
their vendors and suppliers that these systems are Year 2000 compliant and have
internally tested mission critical systems as operational. The General Partners
have reviewed all internally-developed IT and non-IT systems for Year 2000
issues and identified certain of these systems which required revision. The
General Partners have completed the revision and testing of these identified
systems, and these revised systems are now operational.
The cost of the revisions and testing relating to these systems was incurred by
TEM and a portion of the cost was allocated to the Partnership as part of
general and administrative costs allocated from TEM. While Year 2000 remediation
costs were not specifically identified, it is estimated that total Year 2000
related expenses included in allocated overhead from TEM were less than $15. The
Partnership and the General Partners do not anticipate incurring significant
additional remediation costs related to the Year 2000 issue. There has been no
material effect on the Partnership's financial condition and results of
operations as a result of TEM's delay in routine systems projects as a result of
Year 2000 remediation.
As noted above, Year 2000 compliance testing was undertaken by the General
Partners on both externally- and internally-developed systems. Standard
transactions were processed under simulated operating conditions for dates
crossing over January 1, 2000 as well as for other critical dates such as
February 29, 2000. In the standard business scenarios tested, the identified
systems appeared to function correctly. Under nonstandard conditions or
unforeseen scenarios, the results may be different. Therefore, these tests,
regardless of how carefully they were conducted, cannot guarantee that the
General Partners' systems will function without error in the Year 2000 and
beyond. If these systems are not operational in the Year 2000, the General
Partners have determined that they can operate manually for approximately two to
three months while correcting the system problems before experiencing material
adverse effects on the Partnership's and the General Partners' business and
results of operations. However, shifting portions of the daily operations to
manual processes may result in time delays and increased processing costs.
Additionally, the Partnership and General Partners may not be able to provide
lessees with timely and pertinent information, which may negatively affect
customer relations and lead to the potential loss of lessees, even though the
immediate monetary consequences of this would be limited by the standard
Partnership lease agreements between the lessees and the Partnership.
The Partnership and the General Partners are also continuing their assessment of
Year 2000 issues with third parties, comprised of lessees, manufacturers,
depots, and other vendors and suppliers, with whom the Partnership and the
General Partners have a material business relationship (Third Parties).
Currently, the Partnership and the General Partners believe that if a
significant portion of its lessees is non-compliant for a substantial length of
time, the Partnership's operations and financial condition would be materially
adversely affected. Non-compliance by other Third Parties is not expected to
have a material effect on the Partnership's results of operations and financial
condition. The General Partners have sent letters to lessees and other Third
Parties requesting representations on their Year 2000 readiness. The General
Partners have received responses to 53% of the letters sent with all but three
respondents representing that they are or will be Year 2000 compliant.
Non-compliance by these three respondents is not expected to have a material
adverse effect on the Partnership's operations or financial condition. The
General Partners are continuing to follow up with non-respondents and will
continue to identify additional Third Parties whose Year 2000 readiness should
be assessed. As this assessment has not been completed, the General Partners
have not yet assumed that a lack of response means that any non-responding Third
Parties will not be Year 2000 compliant.
Nevertheless, the Partnership and the General Partners believe that they are
likely to encounter Year 2000 problems with certain Third Parties, particularly
those with significant operations within countries that are not actively
promoting correction of Year 2000 issues. Possible consequences of Year 2000
non-compliance among Third Parties include, but are not limited to, (i) TEM's
inability to provide service to certain areas of the world, (ii) delays in
container movement, (iii) payment and collection difficulties, and (iv)
invoicing errors due to late reporting of transactions. These types of problems
could result in additional operating costs and loss of lessee business. As
discussed above, the General Partners are prepared to shift portions of their
daily operations to manual processes in the event of Third Party non-compliance.
With respect to manufacturers, vendors and other suppliers, the General Partners
would also attempt to find alternate sources for goods and services. With
respect to depots and agents who handle, inspect or repair containers, if the
majority of the computer systems and networks of TEM are operational, the
General Partners believe that they will be able to compensate manually for these
Third Parties' failures (e.g., one field office performing data entry for
another, communication with depots conducted without computers), by using
temporary personnel at additional cost. Although costs will be incurred to pay
for the temporary personnel, the Partnership and the General Partners do not
expect these costs to be material to the Partnership. With respect to lessees'
non-compliance, the General Partners would compensate for communications
failures manually. If a lessee's noncompliance is broad enough to disrupt
significantly the operations of its shipping business, the resulting loss of
revenue could result in the lessee renting fewer containers. The Partnership and
the General Partners are unable to estimate the financial impact of these
problems, but to the extent that lessees' problems result in weakening demand
for containers, the Partnership's results of operations would likely be
adversely affected. If Year 2000 problems result in delays in collections,
either because of the additional time required to communicate with lessees or
because of lessees' loss of revenues, the Partnership's cash flow could be
affected and distributions to general and limited partners could be reduced. The
Partnership and the General Partners believe that these risks are inherent in
the industry and are not specific to the Partnership or General Partners.
Forward-Looking Statements and Other Risk Factors Relating to Year 2000
The foregoing analysis of Year 2000 issues includes forward-looking statements
and predictions about possible or future events, results of operations and
financial condition. As such, this analysis may prove to be inaccurate, because
of the assumptions made by the Partnership and the General Partners or the
actual development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct. Some of the risks relating to Year 2000
compliance are described above. In addition, in analyzing Year 2000 issues, the
Partnership and the General Partners have assumed that the infrastructure of the
United States and most other countries, including ports and customs, remains
intact. If the infrastructure of one or more countries were to fail, the
resulting business disruption would likely have an adverse effect on the
Partnership and the General Partners. The Partnership and General Partners are
unable to determine a reasonably likely worst case scenario in the event of an
infrastructure failure or failures.
Various other risks and uncertainties could also affect the Partnership and
could affect the Year 2000 analysis, causing the effect on the Partnership to be
more severe than discussed above. These risks and uncertainties include, but are
not limited to, the following. The Partnerships' and the General Partners' Year
2000 compliance testing cannot guarantee that all computer systems will function
without error beyond the Year 2000. Tests were only conducted of normal business
scenarios, and no independent verification or testing was used. Risks also exist
with respect to Year 2000 compliance by Third Parties, such as the risk that an
external party, who may have no relationship to the Partnership or General
Partners, but who has a significant relationship with one or more Third Parties,
may have a system failure that adversely affects the Partnership's ability to
conduct its business. While the Partnership and the General Partners are
attempting to identify such external parties, no assurance can be given that
they will be able to do so. Furthermore, Third Parties with direct relationships
with the Partnership, whose systems have been identified as likely to be Year
2000 compliant, may suffer a breakdown due to unforeseen circumstances. It is
also possible that the information collected by the General Partners from these
Third Parties regarding their compliance with Year 2000 issues may be incorrect.
Finally, it should be noted that the foregoing discussion of Year 2000 issues
assumes that to the extent the General Partners' systems fail, either because of
unforeseen complications or because of Third Parties' failure, switching to
manual operations will allow the Partnership to continue to conduct its
business. While the Partnership and the General Partners believe this assumption
to be reasonable, if it is incorrect, the Partnership's results of operations
would likely be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached pages 13 to 25.
Independent Auditors' Report
The Partners
Textainer Equipment Income Fund II, L.P.:
We have audited the accompanying balance sheets of Textainer Equipment Income
Fund II, L.P. (a California limited partnership) as of December 31, 1998 and
1997, and the related statements of earnings, partners' capital and cash flows
for each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Textainer Equipment Income Fund
II, L.P. as of December 31, 1998 and 1997, and the results of its operations,
its partners' capital, and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
San Francisco, California
February 19, 1999
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Balance Sheets
December 31, 1998 and 1997
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------
1998 1997
----------------- ----------------
Assets
Container rental equipment, net of accumulated
depreciation of $21,059 (1997: $22,257) $ 33,685 $ 38,315
Cash 1,752 981
Net investment in direct financing leases (note 4) 467 493
Accounts receivable, net of allowance
for doubtful accounts of $315 (1997: $1,024) (note 6) 2,191 2,864
Due from affiliates, net (note 2) 533 117
Prepaid expenses 16 95
----------------- ----------------
$ 38,644 $ 42,865
================= ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 264 $ 254
Accrued liabilities 137 152
Accrued damage protection plan costs (note 1(j)) 222 226
Warranty claims (note 1(k)) 385 599
Deferred quarterly distributions (note 1(g)) 68 77
Container purchases payable - 342
----------------- ----------------
Total liabilities 1,076 1,650
----------------- ----------------
Partners' capital:
General partners - (90)
Limited partners 37,568 41,305
----------------- ----------------
Total partners' capital 37,568 41,215
----------------- ----------------
$ 38,644 $ 42,865
================= ================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands except for unit and per unit amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Rental income $ 10,031 $ 10,433 $ 11,613
----------------- ----------------- -----------------
Costs and expenses:
Direct container expenses 2,215 2,003 1,857
Bad debt (recovery) expense (111) 92 (97)
Depreciation 3,413 3,733 3,979
Write-down of containers (note 1 (e)) 232 343 1,421
Professional fees 36 33 48
Management fees to affiliates (note 2) 915 975 1,060
General and administrative costs to affiliates (note 2) 538 648 665
Other general and administrative costs 103 135 209
----------------- ----------------- -----------------
7,341 7,962 9,142
----------------- ----------------- -----------------
Income from operations 2,690 2,471 2,471
----------------- ----------------- -----------------
Other (expense) income:
Interest income 99 75 54
(Loss) gain on sale of containers (297) 169 281
----------------- ----------------- -----------------
(198) 244 335
----------------- ----------------- -----------------
Net earnings $ 2,492 $ 2,715 $ 2,806
================= ================= =================
Allocation of net earnings (note 1(g)):
General partners $ 153 $ 63 $ 63
Limited partners 2,339 2,652 2,743
----------------- ----------------- -----------------
$ 2,492 $ 2,715 $ 2,806
================= ================= =================
Limited partners' per unit share
of net earnings $ 0.63 $ 0.71 $ 0.74
================= ================= =================
Limited partners' per unit share
of distributions $ 1.60 $ 1.60 $ 1.60
================= ================= =================
Weighted average number of limited
partnership units outstanding (note 1(l)) 3,722,072 3,726,977 3,728,051
================= ================= =================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------
Partners' Capital
----------------------------------------------------------
General Limited Total
--------------- -------------- ---------------
Balances at December 31, 1995 $ (90) $ 47,855 $ 47,765
Distributions (63) (5,965) (6,028)
Redemptions (note 1(m)) - (16) (16)
Net earnings 63 2,743 2,806
--------------- -------------- ---------------
Balances at December 31, 1996 (90) 44,617 44,527
--------------- -------------- ---------------
Distributions (63) (5,963) (6,026)
Redemptions (note 1(m)) - (1) (1)
Net earnings 63 2,652 2,715
--------------- -------------- ---------------
Balances at December 31, 1997 (90) 41,305 41,215
--------------- -------------- ---------------
Distributions (63) (5,957) (6,020)
Redemptions (note 1(m)) - (119) (119)
Net earnings 153 2,339 2,492
--------------- -------------- ---------------
Balances at December 31, 1998 $ - $ 37,568 $ 37,568
=============== ============== ===============
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------- ------------
Cash flows from operating activities:
Net earnings $ 2,492 $ 2,715 $ 2,806
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and container write-down 3,645 4,076 5,400
Decrease in allowance for doubtful accounts,
net of write-off (note 6) (193) (49) (230)
Loss (gain) on sale of containers 297 (169) (281)
(Increase) decrease in assets:
Net investment in direct financing leases 241 241 440
Accounts receivable, net of write-off (note 6) 866 311 495
Due from affiliates, net (530) 1,586 492
Prepaid expenses 79 (70) -
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (5) 1 (1)
Accrued damage protection plan costs (4) (37) (58)
Warranty claims (214) (213) (214)
------------ ------------- ------------
Net cash provided by operating activities 6,674 8,392 8,849
------------ ------------- ------------
Cash flows from investing activities:
Proceeds from sale of containers 3,407 3,049 2,105
Container purchases (3,162) (6,084) (3,688)
------------ ------------- ------------
Net cash provided by (used in) investing activities 245 (3,035) (1,583)
------------ ------------- ------------
Cash flows from financing activities:
Redemptions of limited partnership units (119) (1) (16)
Distributions to partners (6,029) (6,030) (6,084)
------------ ------------- ------------
Net cash used in financing activities (6,148) (6,031) (6,100)
------------ ------------- ------------
Net increase (decrease) in cash 771 (674) 1,166
Cash at beginning of period 981 1,655 489
------------ ------------- ------------
Cash at end of period $ 1,752 $ 981 $ 1,655
============ ============= ============
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Statements of Cash Flows--Continued
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
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 by the Partnership as of December 31, 1998, 1997, 1996 and 1995,
resulting in differences in amounts recorded and amounts of cash disbursed or
received by the Partnership, as shown in the Statements of Cash Flows.
1998 1997 1996 1995
---- ---- ---- ----
Container purchases included in:
Due to (from) affiliates...................... $ 34 $ (3) $ 27 $ 85
Container purchases payable................... - 342 426 400
Distributions to partners included in:
Due to affiliates............................. 6 6 10 63
Deferred quarterly distributions.............. 68 77 77 80
Proceeds from sale of containers included in:
Due from affiliates........................... 489 566 498 404
Accounts receivable........................... - - - 87
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 years ended December 31, 1998, 1997, and 1996.
1998 1997 1996
---- ---- ----
Container purchases recorded......................................... $2,857 $5,970 $3,656
Container purchases paid............................................. 3,162 6,084 3,688
Distributions to partners declared................................... 6,020 6,026 6,028
Distributions to partners paid....................................... 6,029 6,030 6,084
Proceeds from sale of containers recorded............................ 3,330 3,117 2,112
Proceeds from sale of containers received............................ 3,407 3,049 2,105
The Partnership has entered into direct finance leases, resulting in the
transfer of containers from container rental equipment to net investment in
direct finance lease. The carrying values of containers transferred during the
years ended December 31, 1998, 1997 and 1996 were $215, $39 and $7,
respectively.
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(a California Limited Partnership)
Notes to Financial Statements
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands except for unit and per unit amounts)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
(a) Nature of Operations
Textainer Equipment Income Fund II, L.P. (TEIF II or the Partnership), a
California limited partnership, with a maximum life of 20 years, was
formed on July 11, 1989. The Partnership was formed to engage in the
business of owning, leasing and selling both new and used containers
related to the international containerized cargo shipping industry,
including, but not limited to, containers, trailers and other
container-related equipment. TEIF II offered units representing limited
partnership interests (Units) to the public until January 15, 1991, the
close of the offering period, when a total of 3,750,000 Units had been
purchased for a total of $75,000.
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. Prior
to its liquidation in October 1998, Textainer Acquisition Services Limited
(TAS), a former affiliate of the General Partners, performed services
related to the acquisition of containers outside the United States on
behalf of the Partnership. Effective November 1998, these services are
being performed by TEM. The General Partners manage and control the
affairs of the Partnership.
(b) Basis of Accounting
The Partnership utilizes the accrual method of accounting. Revenue is
recorded when earned according to the terms of the container rental
contracts. These contracts are classified as operating leases or direct
financing leases if they so qualify under Statement of Financial
Accounting Standards No. 13: "Accounting for Leases". Substantially all of
the Partnership's rental income was generated from the leasing of the
Partnership's containers under short-term operating leases.
(c) Use of Estimates
Certain estimates and assumptions were made by the Partnership's
management that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(d) Fair Value of Financial Instruments
In accordance with the Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments," the
Partnership calculates the fair value of financial instruments and
includes this additional information in the notes to the financial
statements when the fair value is different than the book value of those
financial instruments. At December 31, 1998 and 1997, the fair value of
the Partnership's financial instruments approximate the related book value
of such instruments.
(e) Container Rental Equipment
Container rental equipment is recorded at the cost of the assets
purchased, which includes acquisition fees, less depreciation charged.
Depreciation of new containers is computed using the straight-line method
over an estimated useful life of 12 years to a 28% salvage value. Used
containers are depreciated based upon their estimated remaining useful
life at the date of acquisition (from 2 to 11 years). When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the equipment accounts and any resulting
gain or loss is recognized in income for the period.
In accordance with the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" (SFAS 121), the Partnership periodically
compares the carrying value of its containers to expected future cash
flows for the purpose of assessing the recoverability of the recorded
amounts. If the carrying value exceeds expected future cash flows, the
assets are written down to estimated fair value. In addition, containers
identified for disposal are recorded at the lower of carrying amount or
fair value less cost to sell.
New container prices have been declining since 1995, and the cost of
purchasing new containers at year-end 1998 was significantly less than the
cost of containers purchased in the last several years. The Partnership
has evaluated the recoverability of the recorded amount of container
rental equipment and determined that a reduction to the carrying value of
the containers was not required, but that a write-down in value of certain
containers identified for sale was required. In the fourth quarter of
1998, the Partnership recorded a charge of $232 for the expected loss on
disposal of these containers. These containers were manufactured prior to
1993 and were located in certain low demand locations. This charge is only
for those containers specifically identified as being for sale. If other
containers manufactured prior to 1993, whether situated in these or other
locations, are subsequently identified as available for sale, the
Partnership may incur additional losses.
In the fourth quarter of 1996, a charge of $1,421 was recorded to write
down the value of certain refrigerated containers. The write-down was the
result of an evaluation of the Partnership's ability to recover the net
book value of these containers given the changes in market conditions for
this specific container type. The estimated undiscounted cash flows
anticipated from these containers indicated that a write-down to fair
value was required under SFAS 121. The carrying value of these containers
was written down to an amount equal to the estimated future undiscounted
cash flows from these containers, as there had been no recent sales of
this container type to indicate fair value. During 1997, it was determined
that an additional write-down of $33 was required based on 1997 sales of
this container type.
The write-downs were recorded as accumulated depreciation during the years
ended December 31, 1998, 1997 and 1996.
(f) Nature of Income from Operations
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 that 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 rather than the geographic location of its containers or the
domicile of the lessees.
For the years ended December 31, 1998, 1997 and 1996, no single lessee
accounted for more than 10% of the Partnership's revenues.
(g) Allocation of Net Earnings and Partnership Distributions
In accordance with the Partnership Agreement, net earnings or losses and
distributions are generally allocated 1% to the General Partners and 99%
to the Limited Partners. However, notwithstanding this general allocation,
each year gross income, as defined in the Partnership Agreement, is
specially allocated to the General Partners to the extent necessary to
cause their aggregate Capital Account balance to be not less than zero.
Actual cash distributions to the Limited Partners differ from the
allocated net earnings as presented in these financial statements because
cash distributions are based on cash available for distribution. Cash
distributions are paid to the general and limited partners on a monthly
basis in accordance with the provisions of the Partnership Agreement. Some
limited partners have elected to have their distributions paid quarterly.
The Partnership has recorded deferred distributions of $68 and $77 at
December 31, 1998 and 1997, respectively.
(h) Income Taxes
The Partnership is not subject to income taxes. Accordingly, no provision
for income taxes has been made. The Partnership files federal and state
information returns only. Taxable income or loss is reportable by the
individual partners.
(i) Acquisition Fees
In accordance with the Partnership Agreement, acquisition fees equal to
5% of the container purchase price were paid to TEM beginning in November
1998 and TAS through October 1998. These fees are capitalized a part
of the cost of the containers.
(j) Damage Protection Plan
The Partnership offers a Damage Protection Plan (DPP) to lessees of its
containers. Under the terms of DPP, the Partnership earns additional
revenues on a daily basis and, in return, has agreed to bear certain
repair costs. It is the Partnership's policy to recognize revenue when
earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated future repair costs. DPP expenses are included in
direct container expenses in the Statements of Earnings and the related
reserve at December 31, 1998 and 1997, was $222 and $226, respectively.
(k) Warranty Claims
During 1992, 1993 and 1995, the Partnership settled warranty claims
against a container manufacturer. The Partnership is amortizing the
settlement amounts over the remaining estimated useful lives of the
applicable containers (between six and seven years), reducing maintenance
and repair costs over that time. At December 31, 1998 and 1997, the
unamortized portion of the settlement amounts was equal to $385 and $599,
respectively.
(l) Limited Partners' Per Unit Share of Net Earnings and Distributions
Limited partners per unit share of both net earnings and distributions
were computed using the weighted average number of units outstanding
during the years ended December 31, 1998, 1997 and 1996, which were
3,722,072, 3,726,977, and 3,728,051, respectively.
(m) Redemptions
The following redemption offerings were consummated by the Partnership
during the years ended December 31, 1998, 1997 and 1996:
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
Balance at December 31, 1995: 21,126 $ 11.79 $ 249
------ -----
Year ended December 31, 1996:
1st quarter........................... 250 $ 9.52 2
3rd quarter........................... 771 $ 9.20 7
4th quarter........................... 750 $ 9.22 7
------ -----
1,771 $ 9.25 16
------ -----
Year ended December 31, 1997:
1st quarter........................... 126 $ 8.87 1
------ -----
Year ended December 31, 1998:
3rd quarter........................... 7,169 $ 9.62 69
4th quarter........................... 5,280 $ 9.42 50
------ -----
12,449 $ 9.53 119
------ -----
Partnership to date........................ 35,472 $ 10.86 $ 385
====== =====
The redemption price is fixed by formula.
(n) Reclassifications
Certain reclassifications, not affecting net earnings, have been made to
prior year amounts in order to conform with the 1998 financial statement
presentation.
Note 2. Transactions with Affiliates
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners, or TAS prior to its liquidation, an acquisition fee,
an equipment management fee, an incentive management fee and an equipment
liquidation fee. These fees are for various services provided in
connection with the administration and management of the Partnership. The
Partnership capitalized $136, $288 and $173 of equipment acquisition fees
as part of container rental equipment costs during the years ended
December 31, 1998, 1997 and 1996. The Partnership incurred $251 of
incentive management fees during each of the three years ended December
31, 1998, 1997 and 1996. No equipment liquidation fees were incurred
during these periods.
The Partnership's containers are managed by TEM. In its role as manager,
TEM has authority to acquire, hold, manage, lease, sell and dispose of the
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 December 31, 1998 and 1997.
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. For
the years ended December 31, 1998, 1997 and 1996, equipment management
fees totaled $664, $724, and $809, respectively. The Partnership's
containers are leased by TEM to third party lessees on operating master
leases, spot leases, term leases and full payout net leases. The majority
of the Partnership's leases are operating leases with limited terms and no
purchase option.
Certain indirect general and administrative costs such as salaries,
employee benefits, taxes and insurance are incurred in performing
administrative services necessary to the operation of the Partnership.
These costs are incurred and paid by TEM and TFS. Total general and
administrative costs allocated to the Partnership were as follows:
1998 1997 1996
---- ---- ----
Salaries $ 291 $ 352 $ 348
Other 247 296 317
--- --- ---
Total general and
administrative costs $ 538 $ 648 $ 665
=== === ===
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:
1998 1997 1996
---- ---- ----
TEM $ 486 $ 572 $ 577
TFS 52 76 88
--- --- ---
Total general and
administrative costs $ 538 $ 648 $ 665
=== === ===
The General Partners, or TAS through October 1998, may acquire containers
in their own name and hold title on a temporary basis for the purpose of
facilitating the acquisition of such containers for the Partnership. The
containers may then be resold to the Partnership on an all-cash basis at a
price equal to the actual cost, as defined in the Partnership Agreement.
In addition, the General Partners and, prior to its liquidation, TAS are
entitled to an acquisition fee for any containers resold to the
Partnership.
At December 31, 1998 and 1997, due from affiliates, net is comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM........................... $ 560 $ 152
----- -----
Due to affiliates:
Due to TL.............................. 1 1
Due to TCC............................. 5 9
Due to TFS............................. 21 25
----- -----
27 35
----- -----
Due from affiliates, net $ 533 $ 117
===== =====
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 payment of expenses
and fees described above or in the accrual and remittance of net rental
revenues from TEM.
Note 3. Rentals Under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at December 31, 1998. Although the leases are
generally cancelable at the end of each twelve-month period with a
penalty, the following schedule assumes that the leases will not be
terminated.
Year ending December 31,
1999.............................................................. $ 309
2000.............................................................. 68
2001.............................................................. 44
2002.............................................................. 43
2003.............................................................. 36
-----
Total minimum future rentals receivable........................... $ 500
=====
Note 4. Direct Financing Leases
The Partnership has leased containers under direct finance leases with
terms ranging from two to five years. The components of the net investment
in direct financing leases as of December 31, 1998 and 1997 are as
follows:
1998 1997
---- ----
Future minimum lease payments receivable.......... $ 568 $ 650
Residual value.................................... 2 -
Less: unearned income............................. (103) (157)
---- ----
Net investment in direct financing leases.......... $ 467 $ 493
==== ====
The following is a schedule by year of minimum lease payments receivable
under the direct financing leases at December 31, 1998:
Year ending December 31:
1999................................................... $ 317
2000................................................... 246
2001................................................... 5
----
Total minimum lease payments receivable................ $ 568
====
Rental income for the years ended December 31, 1998, 1997 and 1996
includes $100, $110 and $238, respectively, of income from direct finance
leases.
Note 5. Income Taxes
At December 31, 1998, 1997 and 1996, there were temporary differences of
$20,468, $23,346, and $26,537, respectively, between the financial
statement carrying value of certain assets and liabilities and the federal
income tax basis of such assets and liabilities. The reconciliation of net
income for financial statement purposes to net income for federal income
tax purposes for the years ended December 31, 1998, 1997 and 1996 is as
follows:
1998 1997 1996
---- ---- ----
Net income per financial statements.............................. $ 2,492 $ 2,715 $ 2,806
Decrease in provision for bad debt............................... (709) (49) (230)
Depreciation for income tax purposes less than (in excess of)
depreciation for financial statement purposes.................. 51 521 (1,631)
Gain on sale of fixed assets for federal income tax
purposes in excess of gain/loss recognized for
financial statement purposes................................... 3,754 2,969 1,679
Decrease in damage protection plan costs......................... (4) (37) (58)
Warranty reserve income for tax purposes in excess of
financial statement purposes................................... (214) (213) 298
----- ----- -----
Net income for federal income tax purposes....................... $ 5,370 $ 5,906 $ 2,864
===== ===== =====
Note 6. Accounts Receivable Write-Off
During 1998, the Partnership wrote-off $516 of delinquent receivables from
two lessees against which reserves were recorded in 1994 and 1995.
Note 7. Readiness for Year 2000
Many computer systems may experience difficulty processing dates beyond
the year 1999; as a consequence, some computer hardware and software at
many companies will need to be modified or replaced prior to the year 2000
in order to remain functional. The Partnership relies on the financial and
operating systems provided by the General Partners; these systems include
both information technology systems as well as non-information technology
systems. There can be no assurance that issues related to the Year 2000
will not have a material impact on the financial condition, results of
operations or cash flows of the Partnership.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been none.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant has no officers or directors.
As described in the Prospectus, the Registrant's three original general partners
were TCC, TEM and Textainer Inc. (TI), which comprised the Textainer Group.
Effective October 1, 1993, the Textainer Group streamlined its organization by
forming a new holding company, Textainer Group Holdings Limited (TGH), and the
shareholders of the underlying companies which include the General Partners
accepted shares in TGH in exchange for their shares in the individual companies.
Textainer Financial Services Corporation (TFS) is the Managing General Partner
of the Partnership (prior to its name change on April 4, 1994, TFS was known as
Textainer Capital Corporation). TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC) (prior to its name change on April 4, 1994, TCC was
known as Textainer (Delaware) Inc.). Textainer Equipment Management Limited
(TEM) is an Associate General Partner of the Partnership. TI was an Associate
General Partner of the Partnership through September 30, 1993 when it was
replaced in that capacity by Textainer Limited (TL), pursuant to a corporate
reorganization effective October 1, 1993, which caused TFS, TEM and TL to fall
under the common ownership of TGH. Pursuant to this restructuring, TI
transferred substantially all of its assets including all of its rights and
duties as Associate General Partner to TL. This transfer was effective from
October 1, 1993. The end result was that TFS now serves as Managing General
Partner and TEM and TL now serve as Associate General Partners. The Managing
General Partner and Associate General Partners are collectively referred to as
the General Partners and are wholly-owned or substantially-owned subsidiaries of
TGH. The General Partners also act in this capacity for other limited
partnerships. Prior to its liquidation in October 1998, Textainer Acquisition
Services Limited (TAS) was an affiliate of the General Partners and performed
services related to the acquisition of equipment outside the United States on
behalf of the Partnership. Effective November 1998, these services are performed
by TEM.
TFS, as the Managing General Partner, is responsible for managing the
administration and operation of the Registrant, and for the formulation and
administration of investment policies.
TEM, an Associate General Partner, manages all aspects of the operation of the
Registrant's equipment.
TL, an Associate General Partner, owns a fleet of container rental equipment
which is managed by TEM. TL provides advice to the Partnership regarding
negotiations with financial institutions, manufacturers and equipment owners,
and regarding the terms upon which particular items of equipment are acquired.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Partnership's General Partners, policy-making officials and persons who
beneficially own more than ten percent of the Units to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Copies of these reports must also be furnished to the
Partnership.
Based solely on a review of the copies of such forms furnished to the
Partnership or on written representations that no forms were required to
be filed, the Partnership believes that with respect to its most recent
fiscal year ended December 31, 1998, all Section 16(a) filing requirements
were complied with. No member of management, or beneficial owner owned
more than 10 percent of any interest in the Partnership. None of the
individuals subject to section 16(a) failed to file or filed late any
reports of transactions in the Units.
The directors and executive officers of the General Partners are as follows:
Name Age Position
Neil I. Jowell 65 Director and Chairman of TGH, TEM, TL, TCC and TFS
John A. Maccarone 54 President, CEO and Director of TGH, TEM, TL, TCC and TFS
John R. Rhodes 49 Executive Vice President, CFO, and Secretary of TGH, TEM, TL, TCC and TFS
and Director of TEM, TCC and TFS
James E. Hoelter 59 Director of TGH, TEM, TL, TCC and TFS
Alex M. Brown 60 Director of TGH, TEM, TL, TCC and TFS
Harold J. Samson 77 Director of TGH and TL
Philip K. Brewer 42 Senior Vice President - Asset Management Group, Director of TCC and TFS
Robert D. Pedersen 40 Senior Vice President - Leasing Group, Director of TEM
Wolfgang Geyer 45 Regional Vice President - Europe/Middle East/Persian Gulf
Mak Wing Sing 41 Regional Vice President - South Asia
Masanori Sagara 43 Regional Vice President - North Asia
Stefan Mackula 46 Vice President - Equipment Resale
Anthony C. Sowry 46 Vice President - Operations and Acquisitions
Ernest J. Furtado 43 Vice President - Finance and Assistant Secretary of TGH, TL, TEM, TCC and
TFS, Director of TCC and TFS
Brian W. Anderson 42 Vice President - Information Systems
Richard G. Murphy 46 Vice President - Risk Management
Janet S. Ruggero 50 Vice President - Administration and Marketing Services
Jens W. Palludan 48 Vice President - Logistics Division
Isam K. Kabbani 64 Director of TGH and TL
James A. C. Owens 59 Director of TGH and TL
S. Arthur Morris 65 Director of TGH, TEM and TL
Dudley R. Cottingham 47 Assistant Secretary, Vice President and Director of TGH, TEM and TL
Cara D. Smith 36 Member of Investment Advisory Committee
Nadine Forsman 31 Controller of TCC and TFS
Neil I. Jowell is Director and Chairman of TGH, TEM, TL, TCC and TFS
and a member of the Investment Advisory Committee (see "Committees" below). He
has served on the Board of Trencor Ltd. since 1966 and as Chairman since 1973.
He is also a director of Mobile Industries, Ltd. (1969 to present), an Affiliate
of Trencor, and a non-executive director of Forward Corporation Ltd. (1993 to
present). Trencor is a publicly traded diversified industrial group listed on
the Johannesburg Stock Exchange. Its business is the leasing, owning, managing
and financing of marine cargo containers worldwide and the manufacture and
export of containers for international markets. In South Africa, it is engaged
in manufacturing, transport, trading and exports of general commodities. Trencor
also has an interest in Forward Corporation Ltd., a publicly traded holding
company listed on the Johannesburg Stock Exchange. It has interests in
industrial and consumer businesses operating in South Africa and abroad. Mr.
Jowell became affiliated with the General Partners and its affiliates when
Trencor became, through its beneficial ownership in two controlled companies, a
major shareholder of the Textainer Group in 1992. Mr. Jowell has over 36 years'
experience in the transportation industry. He holds an M.B.A. degree from
Columbia University and a Bachelor of Commerce L.L.B. from the University of
Cape Town.
John A. Maccarone is President, CEO and director of TGH, TEM, TL, TCC
and TFS. In this capacity he is responsible for overseeing the management of and
coordinating the activities of Textainer's worldwide fleet of marine cargo
containers and the activities of TCC and TFS. Additionally, he is Chairman of
the Equipment Investment Committee, the Credit Committee and the Investment
Advisory Committee (see "Committees", below). Mr. Maccarone was instrumental in
co-founding Intermodal Equipment Association (IEA), a marine container leasing
company based in San Francisco, and held a variety of executive positions with
IEA from 1979 until 1987, when he joined the Textainer Group. Mr. Maccarone was
previously a Director of Marketing for Trans Ocean Leasing Corporation in Hong
Kong with responsibility for all leasing activities in Southeast Asia. From 1969
to 1977, Mr. Maccarone was a marketing representative for IBM Corporation. He
holds a Bachelor of Science degree in Engineering Management from Boston
University and an M.B.A. from Loyola University of Chicago.
John R. Rhodes is Executive Vice President, Chief Financial Officer
and Secretary of TGH, TEM, TL, TCC and TFS and a director of TEM, TCC and TFS.
In this capacity he is responsible for all accounting, financial management, and
reporting functions for the Textainer Group. He is also a member of the
Equipment Investment Committee, the Credit Committee and Investment Advisory
Committee (see "Committees", below). Prior to joining Textainer in November
1987, Mr. Rhodes was Vice President of Finance for Greenbrier Capital
Corporation in San Francisco, a trailer leasing and management company, from
1986 to 1987; from 1981 to 1985, he was employed by Gelco Rail Services, an
intermodal refrigerated trailer company in San Francisco, first in the capacity
of Vice President and Controller and then as Senior Vice President and General
Manager. Mr. Rhodes' earlier business affiliations include serving as Vice
President and General Manager of Itel Capital Corporation and as senior
accountant with Arthur Andersen & Co., both in San Francisco. He is a Certified
Public Accountant and holds a B.A. in economics from Stanford University and an
M.B.A. in accounting from Golden Gate University.
James E. Hoelter is a director of TGH, TEM, TL, TCC and TFS. In
addition, Mr. Hoelter is a member of the Equipment Investment Committee and the
Investment Advisory Committee (see "Committees", below). Mr Hoelter was the
president and chief executive officer of TGH and TL from 1993 to 1998. Prior to
joining the Textainer Group in 1987, Mr. Hoelter was president of IEA. Mr.
Hoelter co-founded IEA in 1978 with Mr. Maccarone and was president from
inception until 1987. From 1976 to 1978, Mr. Hoelter was vice president for
Trans Ocean Ltd., San Francisco, a marine container leasing company, where he
was responsible for North America. From 1971 to 1976, he worked for Itel
Corporation, San Francisco, where he was director of financial leasing for the
container division. Mr. Hoelter received his B.B.A. in finance from the
University of Wisconsin, where he is an emeritus member of its Business School's
Dean's Advisory Board, and his M.B.A. from the Harvard Graduate School of
Business Administration.
Alex M. Brown is a director of TGH, TEM, TL,TCC and TFS. Additionally,
he is a member of the Equipment Investment Committee and the Investment Advisory
Committee (see "Committees", below). Among other directorships, Mr. Brown is a
director of Trencor Ltd. (1996 to present) and Forward Corporation (1997 to
present). Both companies are publicly traded and are listed on the Johannesburg
Stock Exchange. Mr. Brown became affiliated with the Textainer Group in April
1986. From 1987 until 1993, he was President and Chief Executive Officer of
Textainer, Inc. and the Chairman of the Textainer Group. Mr. Brown was the
managing director of Cross County Leasing in England from 1984 until it was
acquired by Textainer in 1986. From 1993 to 1997, Mr. Brown was Chief Executive
Officer of AAF, a company affiliated with Trencor Ltd. Mr. Brown was also
Chairman of WACO International Corporation, based in Cleveland, Ohio until 1997.
Harold J. Samson is a director of TGH and TL and is a member of the
Investment Advisory Committee (see "Committees", below). Mr. Samson served as a
consultant to various securities firms from 1981 to 1989. From 1974 to 1981 he
was Executive Vice President of Foster & Marshall, Inc., a New York Stock
Exchange member firm based in Seattle. Mr. Samson was a director of IEA from
1979 to 1981. From 1957 to 1984 he served as Chief Financial Officer in several
New York Stock Exchange member firms. Mr. Samson holds a B.S. in Business
Administration from the University of California, Berkeley and is a California
Certified Public Accountant.
Philip K. Brewer was President of TCC and TFS from January 1, 1998 to
December 31, 1998 until his appointment as Senior Vice President - Asset
Management Group. As President of TCC, Mr. Brewer was responsible for overseeing
the management of, and coordinating the activities of TCC and TFS. As Senior
Vice President, he is responsible for optimizing the capital structure of and
identifying new sources of finance for Textainer, as well as overseeing the
management of and coordinating the activities of Textainer's risk management,
logistics and the resale divisions. Mr. Brewer is a member of the Equipment
Investment Committee, the Credit Committee and was a member of the Investment
Advisory Committee through December 31, 1998 (see "Committees" below). Prior to
joining Textainer in 1996, Mr. Brewer worked at Bankers Trust from 1990 to 1996,
starting as a Vice President in Corporate Finance and ending as Managing
Director and Country Manager for Indonesia; from 1989 to 1990, he was Vice
President in Corporate Finance at Jarding Fleming; from 1987 to 1989, he was
Capital Markets Advisor to the United States Agency for International
Development; and from 1984 to 1987 he was an Associate with Drexel Burnham
Lambert in New York. Mr. Brewer holds an M.B.A. in Finance from the Graduate
School of Business at Columbia University, and a B.A. in Economics and Political
Science from Colgate University.
Robert D. Pedersen is Senior Vice-President - Leasing Group and a
Director of TEM, responsible for worldwide sales and marketing related
activities and operations. Mr. Pedersen is a member of the Equipment Investment
Committee and the Credit Committee (see "Committees" below). He joined Textainer
in 1991 as Regional Vice President for the Americas Region. Mr. Pedersen has
extensive experience in the industry having held a variety of positions with
Klinge Cool, a manufacturer of refrigerated container cooling units (from 1989
to 1991), where he was worldwide sales and marketing director, XTRA, a container
lessor (from 1985 to 1988) and Maersk Line, a container shipping line (from 1978
to 1984). Mr. Pedersen is a graduate of the A.P. Moller shipping and
transportation program and the Merkonom Business School in Copenhagen, majoring
in Company Organization.
Wolfgang Geyer is based in Hamburg, Germany and is Regional Vice
President - Europe/ Middle East/ Persian Gulf, responsible for coordinating all
leasing activities in these areas of operation. Mr. Geyer joined Textainer in
1993 and was the Marketing Director in Hamburg through July 1997. From 1991 to
1993, Mr. Geyer most recently was the Senior Vice President for Clou Container
Leasing, responsible for its worldwide leasing activities. Mr. Geyer spent the
remainder of his leasing career, 1975 through 1991, with Itel Container, during
which time he held numerous positions in both operations and marketing within
the company.
Mak Wing Sing is based in Singapore and is the Regional Vice President
- - South Asia, responsible for container leasing activities in North/Central
People's Republic of China, Hong Kong, South China (PRC), and Southeast Asia.
Mr. Mak most recently was the Regional Manager, Southeast Asia, for Trans Ocean
Leasing, working there from 1994 to 1996. From 1987 to 1994, Mr. Mak worked with
Tiphook as their Regional General Manager, and with OOCL from 1976 to 1987 in a
variety of positions, most recently as their Logistics Operations Manager.
Masanori Sagara is based in Yokohama, Japan and is the Regional Vice
President - North Asia, responsible for container leasing activities in Japan,
Korea, and Taiwan. Mr. Sagara joined Textainer in 1990 and was the company's
Marketing Director in Japan through 1996. From 1987 to 1990, he was the
Marketing Manager at IEA. Mr. Sagara's other experience in the container leasing
business includes marketing management at Genstar from 1984 to 1987 and various
container operations positions with Thoresen & Company from 1979 to 1984. Mr.
Sagara holds a Bachelor of Science degree in Economics from Aoyama Bakuin
University.
Stefan Mackula is Vice President - Equipment Resale, responsible for
coordinating the worldwide sale of equipment into secondary markets. Mr. Mackula
also served as Vice President - Marketing from 1989 to 1991 where he was
responsible for coordinating all leasing activities in Europe, Africa, and the
Middle East. Mr. Mackula joined Textainer in 1983 as Leasing Manager for the
United Kingdom. Prior to joining Textainer, Mr. Mackula held, beginning in 1972,
a variety of positions in the international container shipping industry.
Anthony C. Sowry is Vice President - Operations and Acquisitions. He
is also a member of the Equipment Investment Committee and the Credit Committee
(see "Committees", below). Mr. Sowry supervises all international container
operations and maintenance and technical functions for the fleets under
Textainer's management. In addition, he is responsible for the acquisition of
all new and used containers for the Textainer Group. He began his affiliation
with Textainer in 1982, when he served as Fleet Quality Control Manager for
Textainer Inc. until 1988. From 1980 to 1982, he was operations manager for
Trans Container Services in London; and from 1978 to 1982, he was a technical
representative for Trans Ocean Leasing, also in London. He received his B.A.
degree in business management from the London School of Business. Mr. Sowry is a
member of the Technical Committee of the International Institute of Container
Lessors and a certified container inspector.
Ernest J. Furtado is Vice President - Finance and Assistant Secretary
of TGH, TL, TEM, TCC and TFS and a Director of TCC and TFS, in which capacity he
is responsible for all accounting, financial management, and reporting functions
for TGH, TL, TEM, TCC and TFS. Additionally, he is a member of the Equipment
Investment Committee and the Investment Advisory Committee for which he serves
as Secretary (see "Committees", below). Prior to joining Textainer in May 1991,
Mr. Furtado was Controller for Itel Instant Space and manager of accounting for
Itel Containers International Corporation, both in San Francisco, from 1984 to
1991. Mr. Furtado's earlier business affiliations include serving as audit
manager for Wells Fargo Bank and as senior accountant with John F. Forbes & Co.,
both in San Francisco. He is a Certified Public Accountant and holds a B.S. in
business administration from the University of California at Berkeley and an
M.B.A. in information systems from Golden Gate University.
Brian Anderson is Vice President of Information Systems. In this
capacity, he is responsible for the worldwide information systems of Textainer.
He has been in the container industry since 1991 and has more than 15 years of
Information Systems/Information Technology experience. Prior to joining
Textainer in 1994, Mr. Anderson was the Vice-President of Information Systems
for Trans-Ocean Leasing Corporation from 1991 to 1994. Mr. Anderson is a
Certified Public Accountant and in the past has been technology consultant with
Price Waterhouse and several Silicon Valley startups. Mr. Anderson holds
Bachelors degrees in Philosophy and English and Masters degrees in Information
Technology and Accounting.
Richard G. Murphy is Vice President, Risk Management, responsible for
all credit and risk management functions. He also supervises the administrative
aspects of equipment acquisitions. He is a member of and acts as secretary to
the Equipment Investment and Credit Committees (see "Committees", below). He
previously served as TEM's Director of Credit and Risk Management from 1989 to
1991 and as Controller from 1988 to 1989. Prior to the takeover of the
management of the Interocean Leasing Ltd. fleet by TEM in 1988, Mr. Murphy held
various positions in the accounting and financial areas with that company from
1980, acting as Chief Financial Officer from 1984 to 1988. Prior to 1980, he
held various positions with firms of public accountants in the U.K. Mr. Murphy
is an Associate of the Institute of Chartered Accountants in England and Wales
and holds a Bachelor of Commerce degree from the National University of Ireland.
Janet S. Ruggero is Vice President, Administration and Marketing
Services. Ms. Ruggero is responsible for the tracking and billing of fleets
under TEM management, including direct responsibility for ensuring that all data
is input in an accurate and timely fashion. She assists the marketing and
operations departments by providing statistical reports and analyses and serves
on the Credit Committee (see "Committees", below). Prior to joining Textainer in
1986, Ms. Ruggero held various positions with Gelco CTI over the course of 15
years, the last one as Director of Marketing and Administration for the North
American Regional office in New York City. She has a B.A. in education from
Cumberland College.
Jens W. Palludan is based in Hackensack, New Jersey and is the Vice
President- Logistics Division, responsible for coordinating container logistics.
He joined Textainer in 1993 as Regional Vice President - Americas/Africa/
Australia, responsible for coordinating all leasing activities in North and
South America, Africa and Australia/New Zealand. Mr. Palludan spent his career
from 1969 through 1992 with Maersk Line of Copenhagen, Denmark in a variety of
key management positions in both Denmark and overseas. Mr. Palludan's most
recent position was that of General Manager, Equipment and Terminals, where he
was responsible for a fleet of over 200,000 TEUs. Mr. Palludan holds an M.B.A.
from the Centre European D'Education Permanente, Fontainebleau, France.
Sheikh Isam K. Kabbani is a director of TGH and TL. He is Chairman and
principal stockholder of the IKK Group, Jeddah, Saudi Arabia, a manufacturing
and trading group which is active both in Saudi Arabia and internationally. In
1959 Sheikh Isam Kabbani joined the Saudi Arabian Ministry of Foreign Affairs,
and in 1960 moved to the Ministry of Petroleum for a period of ten years. During
this time he was seconded to the Organization of Petroleum Exporting Countries
(OPEC). After a period as Chief Economist of OPEC, in 1967 he became the Saudi
Arabian member of OPEC's Board of Governors. In 1970 he left the ministry of
Petroleum to establish his own business, the National Marketing Group, which has
been his principal business activity for the past 18 years. Sheikh Kabbani holds
a B.A. degree from Swarthmore College, Pennsylvania, and an M.A. degree in
Economics and International Relations from Columbia University.
James A.C. Owens is a director of TGH and TL. Mr. Owens has been
associated with the Textainer Group since 1980. In 1983 he was appointed to the
Board of Textainer Inc., and served as President of Textainer Inc. from 1984
to 1987. From 1987 to 1998, Mr. Owens served as an alternate director on the
Boards of TI, TGH and TL. Apart from his association with the Textainer Group,
Mr. Owens has been involved in insurance and financial brokerage companies and
captive insurance companies. He is a member of a number of Boards of Directors.
Mr.Owens holds a Bachelor of Commerce degree from the University of South
Africa.
S. Arthur Morris is a director of TGH, TEM and TL. He is a founding
partner in the firm of Morris and Kempe, Chartered Accountants (1962-1977) and
currently functions as a correspondent member of a number of international
accounting firms through his firm Arthur Morris and Company (1978 to date). He
is also President and director of Continental Management Limited (1977 to date).
Continental Management Limited is a Bermuda corporation that provides corporate
representation, administration and management services and corporate and
individual trust administration services. Mr. Morris has over 30 years
experience in public accounting and serves on numerous business and charitable
organizations in the Cayman Islands and Turks and Caicos Islands. Mr. Morris
became a director of TL and TGH in 1993, and TEM in 1994.
Dudley R. Cottingham is Assistant Secretary, Vice President and a
director of TGH, TEM and TL. He is a partner with Arthur Morris and Company
(1977 to date) and a Vice President and director of Continental Management
Limited (1978 to date), both in the Cayman Islands and Turks and Caicos Islands.
Continental Management Limited is a Bermuda corporation that provides corporate
representation, administration and management services and corporate and
individual trust administration services. Mr. Cottingham has over 20 years
experience in public accounting with responsibility for a variety of
international and local clients. Mr. Cottingham became a director of TL and TGH
in 1993, and TEM in 1994.
Cara D. Smith is a member of the Investment Advisory Committee (see
"Committees", below). Ms. Smith was the President and Chief Executive Officer of
TCC Securities Corporation through June 1997 and a director of TCC and TFS
through August 1997. Ms. Smith joined Textainer in 1992, and prior to 1996, was
Vice President of Marketing. Ms. Smith has worked in the securities industry for
the past 13 years. Ms. Smith's extensive experience ranges from compliance and
investor relations to administration and marketing of equipment leasing,
multi-family housing and tax credit investment programs. She holds five
securities licenses and is a registered principal. Ms. Smith is also a member of
the International Association of Financial Planners.
Nadine Forsman is the Controller of TCC and TFS. Additionally, she is a
member of the Investment Advisory Committee (See "Committees" below). As
Controller of TCC and TFS, she is responsible for accounting, financial
management and reporting functions for TCC and TFS as well as overseeing all
communications with the Limited Partners and as such, supervises personnel in
performing this function. Prior to joining Textainer in August 1996, Ms. Forsman
was employed by KPMG Peat Marwick LLP, holding various positions, the most
recent of which was manager, from 1990 to 1996. Ms. Forsman holds a B.S. in
Accounting and Finance from San Francisco State University and holds a general
securities license and a financial and operations principal securities license.
Committees
The Managing General Partner has established the following three committees to
facilitate decisions involving credit and organizational matters, negotiations,
documentation, management and final disposition of equipment for the Partnership
and for other programs organized by the Textainer Group:
Equipment Investment Committee. The Equipment Investment Committee
will review the equipment leasing programs of the Partnership on a regular basis
with emphasis on matters involving equipment purchases, the equipment mix in the
Partnership's portfolio, equipment remarketing issues, and decisions regarding
ultimate disposition of equipment. The members of the committee are John A.
Maccarone (Chairman), James E. Hoelter, John R. Rhodes, Anthony C. Sowry,
Richard G. Murphy (Secretary), Alex M. Brown, Philip K. Brewer, Robert D.
Pedersen and Ernest J. Furtado.
Credit Committee. The Credit Committee will establish credit limits
for every lessee and potential lessee of equipment and periodically review these
limits. In setting such limits, the Credit Committee will consider such factors
as customer trade routes, country, political risk, operational history, credit
references, credit agency analyses, financial statements, and other information.
The members of the Credit Committee are John A. Maccarone (Chairman), Richard G.
Murphy (Secretary), Janet S. Ruggero, John R. Rhodes, Anthony C. Sowry, Philip
K. Brewer and Robert D. Pedersen.
Investment Advisory Committee. The Investment Advisory Committee
will review investor program operations on at least a quarterly basis,
emphasizing matters related to cash distributions to investors, cash flow
management, portfolio management, and liquidation. The Investment Advisory
Committee is organized with a view to applying an interdisciplinary approach,
involving management, financial, legal and marketing expertise, to the analysis
of investor program operations. The members of the Investment Advisory Committee
are John A. Maccarone (Chairman), James E. Hoelter, Cara D. Smith, Ernest J.
Furtado (Secretary), John R. Rhodes, Nadine Forsman, Harold J. Samson, Alex M.
Brown and Neil I. Jowell.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant has no executive officers and does not reimburse TFS, TEM or TL
for the remuneration payable to their executive officers. For information
regarding reimbursements made by the Registrant to the General Partners, see
note 2 of the Financial Statements in Item 8.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
There is no person or "Group" who is known to the Registrant to be the
beneficial owner of more than five percent of the outstanding units of
limited partnership interest in the Registrant.
(b) Security Ownership of Management
As of January 1, 1999:
Number
Name of Beneficial Owner Of Units % All Units
-------- -----------
James E. Hoelter.............................. 438 0.012%
John A. Maccarone............................. 500 0.013%
Harold J. Samson.............................. 2,500 0.067%
----- -----
Officers and Management as a Group............ 3,438 0.092%
===== =====
(c) Changes in control
Inapplicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Amounts in thousands)
(a) Transactions with Management and Others.
At December 31, 1998 and 1997, due from affiliates, net is comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM........................... $ 560 $ 152
---- ----
Due to affiliates:
Due to TL.............................. 1 1
Due to TCC............................. 5 9
Due to TFS............................. 21 25
---- ----
27 35
---- ----
Due from affiliates, net $ 533 $ 117
==== ====
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 payment
of expenses and fees and in the accrual and remittance of net rental
revenues from TEM.
In addition, the Registrant paid or will pay the following amounts to
the General Partners and TAS:
Acquisition fees in connection with the purchase of containers on behalf
of the Registrant:
1998 1997 1996
---- ---- ----
TAS.......................... $ 124 $ 288 $ 173
TEM.......................... 12 - -
---- ---- ----
Total........................ $ 136 $ 288 $ 173
==== ==== ====
Management fees in connection with the operations of the Registrant:
1998 1997 1996
---- ---- ----
TEM.......................... $ 719 $ 779 $ 864
TFS.......................... 196 196 196
---- ---- -----
Total........................ $ 915 $ 975 $ 1,060
==== ==== =====
Reimbursement for administrative costs in connection with of the
operations of the Registrant:
1998 1997 1996
---- ---- ----
TEM.......................... $ 486 $ 572 $ 577
TFS.......................... 52 76 88
---- ---- ----
Total........................ $ 538 $ 648 $ 665
==== ==== ====
(b) Certain Business Relationships
Inapplicable.
(c) Indebtedness of Management
Inapplicable.
(d) Transactions with Promoters
Inapplicable.
See the "Management" and "Compensation of the General Partners and
Affiliates" section of the Registrant's Prospectus, as supplemented, and
the Notes to the Financial Statements in Item 8.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Audited financial statements of the Registrant for the year
ended December 31, 1998 are contained in Item 8 of this Report.
2. Financial Statement Schedules.
(i) Independent Auditors' Report on Supplementary Financial
Schedule.
(ii) Schedule II - Valuation and Qualifying Accounts.
3. Exhibits Incorporated by reference.
(i) The Registrant's Prospectus as contained in Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement
(No. 33-29990), as filed with the Commission on November 3,
1989 as supplemented by Post-Effective Amendment No. 2 filed
with the Commission under Section 8(c) of the Securities Act
of 1933 on December 11, 1990.
(ii) The Registrant's limited partnership agreement, Exhibit A to
the Prospectus.
(b) During the year ended 1998, no reports on Form 8-K have been filed by the
Registrant.
Independent Auditors' Report on Supplementary Schedule
The Partners
Textainer Equipment Income Fund II, L.P.:
Under the date of February 19, 1999, we reported on the balance sheets of
Textainer Equipment Income Fund II, L.P. (the Partnership) as of December 31,
1998 and 1997, and the related statements of earnings, partners' capital and
cash flows for each of the years in the three-year period ended December 31,
1998 which are included in the 1998 annual report on Form 10-K. In connection
with our audits of the aforementioned financial statements, we also audited the
related financial statement schedule as listed in Item 14. This financial
statement schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
San Francisco, California
February 19, 1999
TEXTAINER EQUIPMENT INCOME FUND II, L.P.
(A California Limited Partnership)
Schedule II - Valuation and Qualifying Accounts
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
Charged Balance
Balance at to Costs Charged at End
Beginning and to Other of
of Period Expenses Accounts Deduction Period
--------- -------- -------- --------- ------
For the year ended December 31, 1998:
Allowance for
doubtful accounts $ 1,024 $ (111) $ (516) $ (82) $ 315
------ ------ ------- ------ ------
Damage protection
plan reserve $ 226 $ 277 $ - $ (281) $ 222
------ ------ ------- ------ ------
For the year ended December 31, 1997:
Allowance for
doubtful accounts $ 1,073 $ 92 $ - $ (141) $ 1,024
------ ------ ------- ------ ------
Damage protection
plan reserve $ 263 $ 239 $ - $ (276) $ 226
------ ------ ------- ------ ------
For the year ended December 31, 1996:
Allowance for
doubtful accounts $ 1,303 $ (97) $ - $ (133) $ 1,073
------ ------ ------- ------ ------
Damage protection
plan reserve $ 321 $ 218 $ - $ (276) $ 263
------ ------ ------- ------ ------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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_______________________________
John R. Rhodes
Executive Vice President
Date: March 29, 1999
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
______________________ Executive Vice President March 29, 1999
John R. Rhodes (Principal Financial and
Accounting Officer), Secretary
and Director
______________________ President (Principal Executive March 29, 1999
John A. Maccarone Officer), Director
______________________ Vice President, Finance, March 29, 1999
Ernest J. Furtado Assistant Secretary and Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/John R. Rhodes
John R. Rhodes
Executive Vice President
Date: March 29, 1999
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/John R. Rhodes Executive Vice President March 29, 1999
______________________ (Principal Financial and
John R. Rhodes Accounting Officer), Secretary
and Director
/s/John A. Maccarone President (Principal Executive March 29, 1999
______________________ Officer), Director
John A. Maccarone
/s/Ernest J. Furtado Vice President, Finance March 29, 1999
______________________ Assistant Secretary and Director
Ernest J. Furtado