10-K 1 f2_annual03.txt TEXTAINER FINANCIAL SERVICES CORPORATION 650 California Street, 16th Floor San Francisco, CA 94108 March 25, 2004 Securities and Exchange Commission Washington, DC 20549 Ladies & 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, 2003. 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, 2003 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 of incorporation or organization) (IRS Employer 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 (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 ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes __ No X - State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Not Applicable. -------------- Documents Incorporated by Reference Incorporated into Part IV of this report, the Registrant's limited partnership agreement, Exhibit A to the 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 (a) General Development of Business The Registrant is a California Limited Partnership ("the 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. In July 2001, the Registrant entered into its liquidation phase. During this phase, the Registrant will no longer add to its container fleet but will instead sell its containers (i) in one or more large transactions or (ii) gradually, either as they reach the end of their useful marine lives or when an analysis indicates that their sale is warranted based on existing market conditions and the container's age, location and condition. To date, the Partnership has sold containers only gradually rather than in large transactions. Sales proceeds, after reserves for working capital, will generally be distributed to the Partners. The Registrant will be terminated and dissolved on the earlier of December 31, 2009 or the sale of all or substantially all of its equipment. 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 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 a worldwide fleet of transportation containers and leasing these containers to international shipping lines 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 certain physical damage to containers. (This later arrangement is called the "Damage Protection Plan.") The Registrant, and not the lessee, is responsible for maintaining the containers and repairing damage caused by normal deterioration of the containers. This maintenance and repair, as well as any repairs required under the Damage Protection Plan, are performed in depots in major port areas by independent agents retained for the Registrant by the General Partners. These same agents handle and inspect containers that are picked up or redelivered by lessees, and these agents store containers not immediately subject to re-lease. Container leasing companies compete with one another on the basis of lease rates, fees charged, services provided and availability of equipment. By maintaining the highest lease rates and the highest equipment utilization allowed by market conditions, the Registrant attempts to generate revenue and profit. The majority of the Registrant's equipment is leased under master operating 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 the lessee's possession (whether or not it is used), is responsible for certain types of damage, and must insure the container against liabilities. Equipment not subject to master leases may instead be leased under long-term lease agreements. Unlike master lease agreements, long-term lease agreements provide for containers to be leased for periods of between three to five years. Such leases are generally cancelable with a penalty at the end of each twelve-month period. Another type of lease, a direct finance lease, currently covers a minority of the Partnership's equipment. Under direct finance leases, the containers are usually leased from the Partnership for the remainder of the container's useful life with a purchase option at the end of the lease term. Leases specify an array of port locations where the lessee may pick up or return the containers. The Registrant incurs expenses in repositioning containers to a better location when containers are returned to a location that has an over-supply. Sales of containers in these low demand locations can occur, if a sale is judged a better alternative to repositioning and re-leasing the container. The Registrant is currently in its liquidation phase. Regular leasing operations continue during this phase, but the Registrant is allowing its fleet to permanently diminish through sales of containers. As noted above, sales of containers to date have been made only gradually, rather than in large transactions. See Item 7 herein. Once the Registrant has sold substantially all of its fleet and the liquidation phase has been completed, the Registrant will begin its final dissolution and the winding up of its business. (c)(1)(ii) Inapplicable. (c)(1)(iii) Inapplicable. (c)(1)(iv) Inapplicable. (c)(1)(v) Inapplicable. (c)(1)(vi) Inapplicable. (c)(1)(vii) During the year ended December 31, 2003, no single lessee generated lease revenue which was 10% or more of the total revenue of the Registrant. (c)(1)(viii) Inapplicable. (c)(1)(ix) Inapplicable. (c)(1)(x) Among container leasing companies, the top ten control approximately 86% of the total equipment held by all container leasing companies. The top two container leasing companies combined control approximately 26% 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 largest standard dry freight container leasing company and manages approximately 14% of the equipment held by all container leasing companies. The customers for leased containers are primarily international shipping lines. 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 and allowing lessees to gain concessions from lessors about price, special charges or credits and, in certain markets, the age specification of the containers leased. Furthermore, primarily as a result of lower new container prices and low interest rates, shipping lines now own, rather than lease, a higher percentage of containers. The decrease in demand from shipping lines, along with the entry of new leasing company competitors offering low container rental rates, has increased competition among container lessors such as the Registrant. Furthermore, changes in worldwide demand for shipping have placed additional strains on competition. Utilization of containers can be maximized if containers that come off-lease can be re-leased in the same location. If demand for containers is strong in some parts of the world and weak in others, containers that come off-lease may have to be repositioned, usually at the Registrant's expense, before they can be re-leased. Over the last several years, demand for goods brought into Asia has been lower than demand for goods brought out of Asia. This imbalance has created low demand locations in certain areas of international shipping routes, where containers coming off-lease after the delivery of goods cannot quickly be re-leased. Shipping lines have an advantage over container leasing companies with respect to these low demand locations, because the shipping lines can frequently reposition their own containers, while leasing companies have to find alternative ways of repositioning their containers, including offering incentives to shipping lines or paying directly for the repositioning. (c)(1)(xi) Inapplicable. (c)(1)(xii) Inapplicable. (c)(1)(xiii) The Registrant has no employees. Textainer Financial Services Corporation (TFS), a wholly owned subsidiary of Textainer Capital Corporation (TCC), and the Managing General Partner of the Registrant, is responsible for the overall management of the business of the Registrant and at December 31, 2003 had 3 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, 2003 had a total of 149 employees. (d) Financial Information About Foreign and Domestic Operations and Export Sales. The Registrant is involved in leasing containers to international shipping lines for use in world trade. Approximately 15%, 12% and 16% of the Registrant's rental revenue during the years ended December 31, 2003, 2002, and 2001, 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. For a discussion of the risks of leasing containers for use in world trade see "Risk Factors and Forward-Looking Statements" in Item 7 herein. ITEM 2. PROPERTIES As of December 31, 2003, the Registrant owned the following types and quantities of equipment: 20-foot standard dry freight containers 1,080 40-foot standard dry freight containers 3,578 40-foot high cube dry freight containers 3,794 ----- 8,452 During December 2003, approximately 84% of these containers were on lease to international shipping lines, and the balance were being stored primarily at a large number of storage depots located worldwide. Generally, the Partnership sells containers (i) that have reached the end of their useful lives or (ii) that an analysis indicates that their sale is warranted based on existing market conditions and the container's age location and condition. At December 31, 2003 approximately 5% of the Partnership's off-lease equipment had been specifically identified as for sale. The Partnership expects more containers to be identified as for sale as the Partnership continues its liquidation plans. Some containers identified for sale have been written down, as described below in Item 7, "Results of Operations." See Item 7, "Results of Operations" for more information about changes in the size of the Registrant's container fleet, container sales and write-downs, as well as the location of the Registrant's off-lease containers. ITEM 3. LEGAL PROCEEDINGS The Registrant is not subject to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Inapplicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Part 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 the 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, 2004, there were 4,473 holders of record of limited partnership interests in the Registrant. (b)(2) Inapplicable. (c) Dividends. Effective July, 2001, when the Registrant began its liquidation phase, the Registrant makes monthly distributions to its limited partners in an amount equal to the Registrant's excess cash, after redemptions and working capital reserves. For both the years ended December 31, 2003 and 2002, the Registrant paid distributions at an annualized rate equal to 4.95% of a Unit's initial cost or $0.99 per Unit per year. For information about the amount of distributions paid during the five most recent fiscal years, see Item 6, "Selected Financial Data." Part 701: Inapplicable.
ITEM 6. SELECTED FINANCIAL DATA (Amounts in thousands except for per unit amounts) Years Ended December 31, ---------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Rental income (1)................... $ 4,687 $ 4,712 $ 6,053 $ 7,772 $ 8,133 Income from operations.............. $ 757 $ 80 $ 459 $ 2,436 $ 857 Net earnings........................ $ 761 $ 87 $ 515 $ 2,566 $ 957 Net earnings per unit of limited partner interest.......................... $ 0.20 $ 0.01 $ 0.12 $ 0.68 $ 0.24 Distributions per unit of limited partner interest (2)...................... $ 0.99 $ 0.99 $ 1.97 $ 1.60 $ 1.60 Distributions per unit of limited partner interest representing a return of capital............... $ 0.79 $ 0.98 $ 1.85 $ 0.92 $ 1.36 Total assets........................ $ 15,811 $ 18,738 $ 22,671 $ 29,763 $ 33,676 (1) The Registrant entered its liquidation phase in July 2001, from which time the Registrant has no longer been replenishing its container fleet by purchasing containers. Sales of containers now permanently diminish the Registrant's fleet. For information about changes in the size of the Registrant's fleet, see Item 7. (2) As noted above, the Registrant entered its liquidation phase in July 2001, from which time forward it began distributing its excess cash, after redemptions and working capital reserves. This cash includes some proceeds from container sales, as well as cash from operations. See Item 7.
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 which will assist in evaluating the financial condition of the Partnership for the years ended December 31, 2003, 2002 and 2001. Please refer to the Financial Statements and Notes thereto in connection with the following discussion. Textainer Financial Services Corporation (TFS) is the Managing General Partner of the Partnership and is a wholly-owned subsidiary of Textainer Capital Corporation (TCC). Textainer Equipment Management Limited (TEM) and Textainer Limited (TL) are Associate General Partners of the Partnership. The General Partners manage and control the affairs of the Partnership. Introduction The Partnership is a finite-life entity whose principal business is to own a fleet of containers for lease to the international shipping industry. The Partnership's revenues come primarily from the rental income generated by leased containers and, to a smaller extent, from services related to rental income, such as handling charges paid by lessees. The Partnership's revenues are, therefore, dependent on demand for leased containers. Demand for leased containers drives not only the percentage of the Partnership's containers that are on lease (utilization), but also, to a certain extent, the rental rates the Partnership can charge under its leases. When demand declines, utilization falls, and the Partnership has fewer containers on lease, often earning less revenue, and more containers off-lease incurring storage expense. In times of reduced demand, then, the Partnership has higher expenses and may have to offer lessees incentives such as free rental periods or credits. The General Partners try at all times to take advantage of the opportunities created by different levels of demand for leased containers, either by changing services, lease terms or lease rates offered to customers or by concentrating on different geographic markets. Demand for containers is driven by many factors, including the overall volume of worldwide shipping, the number of containers manufactured, the number of containers available for lease in specific locations and the capacity of the worldwide shipping industry to transport containers on its existing ships. Since many of the Partnership's customers are shipping lines that also own their own containers, the price and availability of new containers directly affects demand for leased containers. If shipping lines have the cash or financing to buy containers and find that alternative attractive, demand for leased containers will fall. Current demand and related market conditions for containers are discussed below under "Comparative Results of Operations: Current Market Conditions for Leased Containers." Competition for shipping lines' business has increased in recent years due to operational consolidations among shipping lines and the entry of new leasing companies that compete with entities like the Partnership. This competition has generally driven down rental rates and allowed shipping lines to obtain other favorable lease terms. The Partnership also recognizes gains and losses from the sale of its containers. Containers are generally sold either at the end of their useful life, or when an economic analysis indicates that it would be more profitable to sell the container rather than to continue to own it. An example of the latter would be when re-leasing a container might be relatively expensive, either because of expenses required to repair the container or to reposition the container to a location where the container could be readily leased. The sales price of used containers is affected by supply and demand for used containers. The Partnership's containers are primarily sold to wholesalers who subsequently sell to buyers such as mini-storage operators, construction companies, farmers and other non-marine users. Additionally, if a container is lost or completely damaged by a lessee, the Partnership receives proceeds from the lessee for the value of the container. The Partnership counts these transactions as sales, as well as the more traditional sales to wholesalers. Generally, since 1998, used container prices have declined, causing the Partnership to realize less from the sale of its used containers. Used container sales prices appear to have stabilized in 2002 and 2003. The Partnership's operations and financial results are also affected by the price of new containers. The Partnership's operations and financial results are also affected by the price of new containers. The price for new containers has fallen since 1995. This decrease has significantly depressed rental rates. This decrease has also caused the Partnership to evaluate the carrying cost of its container fleet, and has resulted in write-downs of some containers the Partnership has decided to sell. These matters are discussed in detail below under the caption "Other Income and Expenses: Write Down of Certain Containers Identified for Sale." Prior to the start of the Partnership's liquidation period, which is discussed below, the Partnership purchased new containers and the decrease in price worked to the Partnership's advantage. The Partnership is in its liquidation phase, which means that regular leasing operations continue, but the Partnership no longer seeks to replenish its container fleet by buying new containers. As containers are sold, the Partnership's fleet is permanently decreasing. Eventually, substantially all of its containers will be sold, and the Partnership will begin its final dissolution and winding up of its business. The liquidation phase can take up to six or more years, and the Partnership currently estimates that the liquidation phase will be longer rather than shorter, due to the current market for, and opportunities to sell, used containers. Liquidity and Capital Resources Historical 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 on December 19, 1989, and on January 15, 1991, the Partnership had received its maximum subscription amount of $75,000. General In July 2001, the Partnership entered its liquidation phase, which may last up to six or more years depending on whether the containers are sold (i) in one or more large transactions or (ii) gradually, either as they reach the end of their useful marine lives or when an analysis indicates that their sale is warranted based on existing market conditions and the container's age, location and condition. To date, the Partnership has sold containers only gradually, rather than in large transactions. The Partnership anticipates that all excess cash, after redemptions and working capital reserves, will be distributed to the general and limited partners on a quarterly basis. These distributions will consist of cash from operations and/or cash from sales proceeds. As the Partnership's container fleet decreases, cash from operations is expected to decrease, while cash from sales proceeds is expected to fluctuate based on the number of containers sold and the actual sales price per container received. Consequently, the Partnership anticipates that a large portion of all future distributions will be a return of capital. Sources of Cash Rental income and proceeds from container sales are the Partnership's principal sources of liquidity, and the source of funds for distributions. Rental income and container sales prices are affected by market conditions for leased and used containers. Cash provided from these sources will fluctuate based on demand for leased and used containers. Demand for leased and used containers is discussed more fully in "Results of Operations." Cash provided by operating activities is affected by rental income, operating expenses and the timing of both payments received from lessees and payments made by the Partnership for operating expenses. Additionally, a continued stream of rental income is dependent partly on the Partnership's ability to re-lease containers as they come off lease. See the discussion of "Utilization" below under "Results of Operations." Cash provided by investing activities is affected by the number of containers sold, the sale price received on these containers and the timing of payments received for these sales. Previously reported cash from operations and sales proceeds is not indicative of future cash flows as these amounts can fluctuate significantly based on demand for new and used containers, fleet size and timing of the payments made and received. Fluctuations in rental income, operating expenses, and sale prices for used containers are discussed more fully in "Results of Operations." Operating and investing activities are discussed in detail below. Cash from Operations Net cash provided by operating activities for the years ended December 31, 2003 and 2002, was $2,997 and $2,554, respectively. The increase of $443, or 17%, was primarily due to the improvement in net earnings, adjusted for non-cash transactions and fluctuations in gross accounts receivable and accounts payable and accrued liabilities. The improvement in net earnings, adjusted for non-cash transactions, was primarily due to decreases in direct container expenses and other general and administrative costs. These expense items are discussed more fully under "Results of Operations." The decline in gross accounts receivable of $196 for the year ended December 31, 2003 was primarily due to the decline in the average collection period of accounts receivable. Accounts receivable declined $31 during the comparable period in 2002 primarily due to a decline in rental income, partially offset by an increase in the average collection period of accounts receivable. Rental income is discussed below under "Results of Operations." The changes in accounts payable and accrued liabilities between the periods resulted from timing differences in the payment of expenses and fees, as well as in fluctuations in these amounts. Cash from Sale of Containers Current Uses: For the years ended December 31, 2003 and 2002, net cash provided by investing activities (the sale of containers) was $782 and $1,481, respectively. The decrease of $699 was primarily due to the Partnership selling fewer containers during the year ended December 31, 2003, compared to the equivalent period in 2002. The Partnership primarily sells containers when they come off-lease, and an analysis indicates that the container should be sold. Fluctuations between periods in the number of containers sold reflect the age and condition of containers coming off-lease, the geographic market in which they come off-lease, and other related market conditions. Fluctuations can also be affected by the number of containers sold to lessees, who pay for any containers that are lost or damaged beyond repair. Effect of Market Conditions on Liquidation: Due, in part, to current market conditions and their effect on demand for used containers, the Partnership has been primarily selling containers only if the containers are at the end of their useful lives or if an analysis indicates that their sale is warranted based on existing market conditions and the container's age, location and condition. Low demand locations, the decline in the value of used containers and the related market conditions are discussed more fully under "Results of Operations." These market conditions have caused the Partnership to implement its liquidation phase to date by selling containers gradually. The Partnership will continue to evaluate its options for selling containers in the context of both these market conditions and the Partnership's liquidation plans. Effect of Liquidation on Future Cash Flows: The number of containers sold both in low demand locations and elsewhere, as well as the amount of sales proceeds and cash provided by operating activities, will affect how much the Partnership will pay in future distributions to Partners. Future distributions are expected to decline as cash from operations and cash from sales proceeds decrease along with the Partnership's fleet. The fleet will decrease as part of the Partnership's liquidation and eventual termination. Uses of Cash Distributions to partners are the Partnership's primary use of cash. The amount of distributions paid to partners is dependent on cash received from operations and the sale of containers, less amounts used to pay redemptions or held as working capital. From time to time, the Partnership redeems units from limited partners for a specified redemption value, which is set by formula. Up to 2% of the Partnership's outstanding units may be redeemed each year, although the 2% limit may be exceeded at the Managing General Partner's discretion. All redemptions are subject to the Managing General Partner's good faith determination that payment for the redeemed units will not (i) cause the Partnership to be taxed as a corporation, (ii) impair the capital or operations of the Partnership, or (iii) impair the ability of the Partnership to pay distributions in accordance with its distribution policy. These activities are discussed in detail below. Distributions: During the year ended December 31, 2003, the Partnership declared cash distributions to limited partners pertaining to the period from December 2002 through November 2003 in the amount of $3,575, which represented $0.99 per unit. On a cash basis, as reflected in the Statements of Cash Flows, after paying redemptions and general partner distributions, $2,860 of these distributions was from operating activities and the balance of $715 was a return of capital. On an accrual basis, as reflected on the Statements of Partners' Capital, after paying redemptions, $624 of these distributions were from current year earnings and $2,951 was a return of capital. Capital Commitments: Redemptions: During the year ended December 31, 2003, the Partnership redeemed 25,864 units for a total dollar amount of $100. The Partnership also redeemed 5,625 units for a total dollar amount of $20 in January 2004. The Partnership used cash flow from operations to pay for the redeemed units. The Partnership invests working capital and cash flow from operations and investing activities prior to its distribution to the partners in short-term, liquid investments. Results of Operations The Partnership's income from operations, which consists primarily of rental income less costs and expenses (including container depreciation, direct container expenses, management fees, and reimbursement of administrative expenses) is primarily affected by the size of its container fleet, the number of containers it has on lease (utilization) and the rental rates received under its leases. The current status of each of these factors is discussed below. Size of Container Fleet The following is a summary of the container fleet (in units) available for lease during the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Beginning container fleet........... 9,425 10,990 13,243 Ending container fleet.............. 8,452 9,425 10,990 Average container fleet............. 8,939 10,208 12,117 The average container fleet decreased 12% and 16% from the years ended December 31, 2002 to 2003 and from December 31, 2001 to 2002, respectively, primarily due to the continuing sale of containers. While the decline in container fleet resulted in lower rental income, this decrease was more than offset by the improvement in utilization, resulting in the increase in container rental income from the year ended December 31, 2002 to the same period in 2003. An overall decline in rental income is expected to continue in future years, as the size of the Partnership's container fleet continues to decrease. Utilization Rental income and direct container expenses are also affected by the average utilization of the container fleet, which was 84%, 73% and 70% on average during the years ended December 31, 2003, 2002 and 2001, respectively. The remaining container fleet is off-lease and is being stored primarily at a large number of storage depots. At December 31, 2003, 2002 and 2001, utilization was 84%, 85% and 66%, respectively, and the Partnership's off-lease containers (in units) were located in the following locations: 2003 2002 2001 ---- ---- ---- Americas 540 894 1,105 Europe 153 289 390 Asia 629 210 2,221 Other 17 39 42 ----- ----- ----- Total off-lease containers 1,339 1,432 3,758 ===== ===== ===== At December 31, 2003 and 2002, approximately 5% and 10%, respectively, of the Partnership's off-lease containers had been specifically identified as for sale. Rental Rates In addition to utilization, rental income is affected by daily rental rates. The average daily rental rate for the Partnership's containers decreased 6% and 11% from the years ended December 31, 2002 to 2003 and December 31, 2001 to 2002, respectively. Average rental rates declined primarily due to the decline in long term lease rates. The decline in average rental rates under master leases between the periods was minor. The majority of the Partnership's rental income was generated from master leases, but in the past several years an increasing percentage of the Partnership's containers have been on lease under long term leases. At December 31, 2003, 2002 and 2001, 46%, 40% and 37%, respectively, of the Partnership's on-lease containers were on lease under long term leases. Long term leases generally have lower rental rates than master leases because the lessees have contracted to lease the containers for several years and cannot return the containers prior to the termination date without a penalty. Fluctuations in rental rates under either type of lease generally will affect the Partnership's operating results. Comparative Results of Operations The following is a comparative analysis of the results of operations for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Income from operations $ 757 $ 80 $ 459 Rental income $4,687 $4,712 $6,053 Percent change from previous year in Utilization 15% 4% (14%) Average container fleet (12%) (16%) (12%) Average rental rates ( 6%) (11%) ( 3%) The Partnership's rental income decreased $25, or 1%, from the year ended December 31, 2002 to the comparable period in 2003 as the decline in other rental income, was offset by the increase in container rental income. Income from container rentals, the major component of total revenue, increased $19, or 1%, as a result of the fluctuations in utilization, average container fleet and rental rates as detailed in the above table. The decrease in rental income of $1,341, or 22%, from the year ended December 31, 2001 to the comparable period in 2002 was primarily due to decreases in income from container rentals and other rental income. Income from container rentals, decreased $1,115, or 21%, primarily due to the fluctuations in utilization, average container fleet and rental rates as detailed in the above table. Current Market Conditions for Leased Containers: Beginning in March 2002, utilization began to improve and improved steadily through the end of 2002. Utilization declined slightly in the first quarter of 2003, which is traditionally a slow period for container demand, improved during the second quarter and was stable for the remainder of 2003. Utilization has remained relatively strong due to a large volume of export cargo out of Asia, a larger percentage of containers under long term lease and efforts by the General Partners to reduce the quantities of containers that lessees can return in low demand locations. However, rental rates continued to slowly decline primarily due to low new container prices, low interest rates and low rental rates offered by competitors. The General Partners are cautiously optimistic that current utilization levels can be maintained during the next several months. However, the General Partners caution that market conditions could deteriorate again due to global economic and political conditions. Demand for leased containers could therefore weaken again and result in a decrease in utilization and further declines in lease rates and container sale prices, adversely affecting the Partnership's operating results. Sale of Containers in Low Demand Locations Created by Current Market Conditions: Although demand for leased containers has improved, the trade imbalance between Asia and the Americas and Europe continues. As a result, a large portion of the Partnership's off-lease containers are located in low demand locations in the Americas and Europe as detailed above in "Utilization." For these and other off-lease containers, the Partnership determines whether these containers should be sold or held for continued use. The decision to sell containers is based on the current expectation that the economic benefit of selling these containers is greater than the estimated economic benefit of continuing to own these containers. The majority of the containers sold in low demand locations are older containers. The expected economic benefit of continuing to own these older containers is significantly less than that of newer containers. This is due to their shorter remaining marine life, the cost to reposition them, and the shipping lines' preference for leasing newer containers when they have a choice. Until demand for containers improves in certain low demand locations, the Partnership plans to continue selling some of its containers that are off-lease in these locations rather than incurring the expense of repositioning them. Other Income and Expenses The following is a discussion of other income earned by the Partnership and its expenses: Other Rental Income Other rental income consists of other lease-related items, primarily income from charges to lessees for dropping off containers in surplus locations less credits granted to lessees for leasing containers from surplus locations (location income), income from charges to lessees for handling related to leasing and returning containers (handling income) and income from charges to lessees for a Damage Protection Plan (DPP). For the year ended December 31, 2003, other rental income was $508, a decrease of $44 from the equivalent period in 2002. The decrease in other rental income was primarily due to decreases in handling and location income of $62 and $48, respectively, offset by an increase in DPP income of $66. For the year ended December 31, 2002, other rental income was $552, a decrease of $226 from the equivalent period in 2001. The decrease in other rental income was primarily due to decreases in location and DPP income of $128 and $114, respectively. Direct Container Expenses Direct container expenses decreased $77, or 7%, from the year ended December 31, 2002 to the equivalent period in 2003, primarily due to the decline in the average fleet size. The decrease in expenses was primarily attributable to declines in storage and handling expenses of $313 and $38, respectively, offset by increases in repositioning and DPP expenses of $224 and $52, respectively. These changes are discussed in detail below. Storage expense decreased not only due to the decrease in average fleet size, but also due to the increase in utilization noted above and a slight decrease in the average storage cost per container. The decrease in handling expense was primarily due to the decline in container movement. Repositioning expense increased due to an increase in the average repositioning costs due to (i) expensive repositioning moves related to one lessee who required containers to be delivered to certain locations and (ii) longer average repositioning moves and a slight increase in the number of containers repositioned between the periods. The increase in DPP expense was primarily due to the increase in the number of containers covered under DPP. Direct container expenses decreased $497, or 30%, from the year ended December 31, 2001 to the equivalent period in 2002, primarily due to the decline in the average fleet size. The declines in repositioning, storage, and DPP expenses were $206, $167, and $70, respectively. These changes are discussed in detail below. Repositioning expense decreased due to the decrease in the average repositioning cost per container due to shorter average repositioning moves and a decrease in the number of containers repositioned during 2002 compared to 2001. Storage expense decreased primarily due to the decrease in average fleet size. DPP expense declined due to the decrease in the number of containers covered under DPP and the decrease in the average DPP repair cost per container. Bad Debt Expense or Benefit Bad debt expense (benefit) was $0, $19 and ($21) for the years ended December 31, 2003, 2002 and 2001, respectively. Fluctuations in bad debt expense (benefit) reflect the adjustments to the bad debt reserve, after deductions have been taken against the reserve, and are based on management's then current estimates of the portion of accounts receivable that may not be collected, and which will not be covered by insurance. These estimates are based primarily on management's current assessment of the financial condition of the Partnership's lessees and their ability to make their required payments. See "Critical Accounting Policies and Estimates" below. There was no benefit or expense recorded during the year ended December 31, 2003, as the reserve estimate, after deductions had been taken against the reserve, was similar to the reserve estimate at December 31, 2002. The expense recorded during the year ended December 31, 2002 reflects a higher reserve estimate, after deductions had been taken against the reserve, from December 31, 2001. The benefit recorded during the year ended December 31, 2001 reflects a lower reserve estimate, after deductions had been taken against the reserve, from December 31, 2000. Depreciation Expense The decrease in depreciation expense of $478, or 20%, from the year ended December 31, 2002 to the comparable period in 2003 and the increase in depreciation expense of $24, or 1%, from the year ended December 31, 2001 to the comparable period in 2002 was primarily due to the Partnership revising its estimate for container salvage value in 2002. Effective July 1, 2002, the Partnership revised its estimate for container salvage value from a percentage of equipment cost to an estimated dollar residual value. The effect of this change resulted in an increased rate of depreciation. During the year ended December 31, 2002, the Partnership recorded additional depreciation expense of $42 for units that had not been fully depreciated prior to July 1, 2002 and additional depreciation expense of $496 to adjust the net book value of fully depreciated containers to the new estimated salvage values. For a further discussion of changes to depreciation, see "Critical Accounting Policies and Estimates" below. Write Down of Certain Containers Identified for Sale The Partnership stopped purchasing containers in 2001, but its leasing activities are affected by fluctuations in new container prices. New container prices steadily declined from 1995 through 1999 and have remained low through 2003. As a result, the cost of new containers purchased in recent years is significantly less than the average cost of containers purchased in prior years. The Partnership evaluated the recoverability of the recorded amount of container rental equipment at December 31, 2003 and 2002 for containers to be held for continued use and determined that a reduction to the carrying value of these containers was not required. The Partnership also evaluated the recoverability of the recorded amount of containers identified for sale in the ordinary course of business and determined that a reduction to the carrying value of some of these containers was required. The Partnership wrote down the value of these containers to their estimated net realizable value, which was based on recent sales prices less cost to sell. Write-down expense decreased $226, or 82%, from the year ended December 31, 2002 to 2003 primarily due to the decrease in the number of containers identified for sale and a lower average required write down. The number of containers identified for sale decreased primarily due to the decline in the number of containers located in low demand locations as detailed above. The decline in the average write down was primarily a result of the increased depreciation rate. Write-down expense decreased $122, or 31%, from the year ended December 31, 2001 to 2002. The decline was primarily due to the decrease in the number of containers identified for sale, offset by a greater average required write down. The number of containers identified for sale decreased primarily due to the decline in the number of containers located in low demand locations as detailed above. See "Critical Accounting Policies and Estimates" below. Gain and Loss on Sale of Containers The following details the gain (loss) on the sale of containers for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Loss on written-down containers $ (11) $ (7) $ (27) (Loss) gain on other containers (99) 110 (108) ----- --- ---- Total (loss) gain on container sales $(110) $103 $(135) ===== === ==== The Partnership recorded losses on the sale of written down containers for the years ended December 31, 2003, 2002 and 2001, as the estimated sales proceeds used to determine the write-down amount were greater than the actual sales price received on these containers. See "Critical Accounting Policies and Estimates" below. As the Partnership determines the number of containers identified for sale and the related write-down amount on a monthly basis, some containers are sold before they are written down. The (loss) gain on these containers is referred to in the table above as " (Loss) gain on other containers." The fluctuations in (loss) gain on the sale of these other containers was due to the Partnership selling containers for an average loss during the years ended December 31, 2003 and 2001 and average gains during the comparable period in 2002. The amount of gain or loss on the sale of these other containers has fluctuated due to the specific conditions of the containers sold, the type of container sold, the locations where the containers were sold and their net book value, rather than any identifiable trend. Container sales prices appear to have stabilized, after declining for the past several years, as the average sales price for containers sold by TEM on behalf of the Partnership as well as other container owners was comparable for the years ended December 31, 2003 and 2002. Management Fees and General and Administrative Costs Management fees to affiliates consist of equipment management fees, which are primarily based on rental income, and incentive management fees, which are based on the Partnership's limited and general partner distributions made from cash from operations and partners' capital. The following details these fees for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- Equipment management fees $328 $327 $419 Incentive management fees 116 92 194 --- --- --- Management fees to affiliates $444 $419 $613 === === === Equipment management fees fluctuated based on the fluctuations in rental income and were approximately 7% of rental income for the years ended December 31, 2003, 2002 and 2001. Fluctuations in incentive management fees between the periods were primarily due to fluctuations in the amount of distributions paid from cash from operations. General and administrative costs to affiliates decreased $19, or 8%, and $45 or 16%, from the years ended December 31, 2002 to 2003 and December 31, 2001 to 2002, respectively. These decreases were primarily due to decreases in overhead costs allocated from TEM, as the Partnership represented a smaller portion of the total fleet managed by TEM. Other general and administrative costs decreased $99, from the year ended December 31, 2002 to the same period in 2003 and increased $52, from the year ended December 31, 2001 to 2002. These fluctuations were primarily due to fluctuations in other service fees between the periods. Contractual Obligations The Partnership Agreement provides for the ongoing payment to the General Partners of the management fees and the reimbursement of the expenses discussed above. Since these fees and expenses are established by the Agreement, they cannot be considered the result of arms' length negotiations with third parties. The Partnership Agreement was formulated at the Partnership's inception and was part of the terms upon which the Partnership solicited investments from its limited partners. The business purpose of paying the General Partners these fees is to compensate the General Partners for the services they render to the Partnership. Reimbursement for expenses is made to offset some of the costs incurred by the General Partners in managing the Partnership and its container fleet. Since the Partnership Agreement requires the Partnership to continue to pay these fees and expenses to the General Partners and reimburse the General Partners for expenses incurred by them or other service providers selected by the General Partners, these payments are contractual obligations. The following details the amounts payable at December 31, 2003 for these obligations:
-------------------------------------------------------------------------------------- Payments due by period -------------------------------------------------- More Less than 1-3 3-5 than 5 Contractual Obligations Total 1 year years years years -------------------------------------------------------------------------------------- Equipment management fees $ 52 $ 52 * * * Incentive management fees 26 26 * * * Equipment liquidation fee (1) - - Reimbursement of general and administrative costs to: Affiliates 33 33 * * * Other service providers 83 83 * * * -------------------------------------------------------------------------------------- Total $194 $194 --------------------------------------------------------------------------------------
* The Partnership has not recorded liabilities for these fees and reimbursements related to periods subsequent to December 31, 2003, as these fees and reimbursements cannot be estimated as they are dependent on variable factors as detailed below: Acquisition fees 5% of equipment cost Equipment management fee 7% of gross operating lease revenues 2% of gross full payout lease revenues Incentive management fee 4% of distributable cash from operations Reimbursements to affiliates Dependent on the amount of expenses incurred and other service providers that are allocable to the Partnership Service fee to other service Monthly fee dependent on the number of provider limited partners (1) The Partnership is required to pay the General Partners an equipment liquidation fee, but this fee is payable only after limited partners receive a certain amount of distributions from the Partnership. The Partnership does not currently expect to pay this liquidation fee. For the amount of fees and reimbursements made to the General Partners for the years ended December 31, 2003, 2002 and 2001, see Note 2 to the Financial Statements in Item 8. For the amount of fees and reimbursements made to other service providers, see Other general and administrative expenses in the Statements of Earnings in Item 8. Net Earnings per Limited Partnership Unit 2003 2002 2001 ---- ---- ---- Net earnings per limited partnership unit $0.20 $0.01 $0.12 Net earnings allocated to limited partners $ 724 $ 50 $ 440 Net earnings per limited partnership unit fluctuates based on fluctuations in net earnings allocated to limited partners as detailed above. The allocation of net earnings for the years ended December 31, 2003, 2002 and 2001 included a special allocation of gross income to the General Partners of $29, $36, and $70, respectively, in accordance with the Partnership Agreement. Critical Accounting Policies and Estimates Certain estimates and assumptions were made by the Partnership's management that affect its financial statements. These estimates are based on historical experience and on assumptions believed to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying value of assets and liabilities. Actual results could differ. The Partnership's management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements. Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on management's current assessment of the financial condition of the Partnership's lessees and their ability to make their required payments. If the financial condition of the Partnership's lessees were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, which would adversely affect the Partnership's operating results. The General Partners have established a Credit Committee, which actively manages and monitors the collection of receivables on at least a monthly basis. This committee establishes credit limits for every lessee and potential lessee of equipment, monitors compliance with these limits, monitors collection activities, follows up on the collection of outstanding accounts, determines which accounts should be written-off and estimates allowances for doubtful accounts. As a result of actively managing these areas, the Partnership's allowance for bad debt as a percentage of accounts receivable has ranged from 6% to 16% and has averaged approximately 10% over the last 5 years. These allowances have historically covered all of the Partnership's bad debts. Container Depreciation Estimates: The Partnership depreciates its container rental equipment based on certain estimates related to the container's useful life and salvage value. The Partnership estimates a container's useful life to be 12 years, an estimate which it has used since the Partnership's inception. Prior to July 1, 2002, the Partnership estimated salvage value as a percentage of equipment cost. Effective July 1, 2002, the Partnership revised its estimate for container salvage value to an estimated dollar residual value, reflecting current expectations of ultimate residual values. The Partnership will evaluate the estimated residual values and remaining estimated useful lives on an on-going basis and will revise its estimates as needed. The Partnership will revise its estimate of residual values if it is determined that these estimates are no longer reasonable based on recent sales prices and revised assumptions regarding future sales prices. The Partnership will revise its estimate of container useful life if it is determined that the current estimates are no longer reasonable based on the average age of containers sold and revised assumptions regarding future demand for leasing older containers. As a result, depreciation expense could fluctuate significantly in future periods as a result of any revisions made to these estimates. A decrease in estimated residual values or useful lives of containers would increase depreciation expense, adversely affecting the Partnership's operating results. Conversely, any increase in these estimates would result in a lower depreciation expense, resulting in an improvement in operating results. These changes would not affect cash generated from operations, as depreciation is a non-cash item. Container Impairment Estimates: Write-downs of containers are made when it is determined that the recorded value of the containers exceeds their estimated fair value. Containers held for continued use and containers identified for sale in the ordinary course of business are considered to have different estimated fair values. In determining estimated fair value for a container held for continued use, management must estimate the future undiscounted cash flows for the container. Estimates of future undiscounted cash flows require estimates about future rental revenues to be generated by the container, future demand for leased containers, and the length of time for which the container will continue to generate revenue. To date, management has not found the estimates of future undiscounted cash flows to be less than the recorded value of the Partnership's containers. Therefore, the Partnership has not recorded any write-downs of containers to be held for continued use. Estimates regarding the future undiscounted cash flows for these containers could prove to be inaccurate. If these containers are sold prior to the end of their useful lives and before they are written down, as a result of being identified as for sale, the Partnership may incur losses on the sale of these containers. In determining estimated fair value for a container identified for sale, the current estimated sales price for the container, less estimated cost to sell, is compared to its recorded value. This recorded value has been found to be less than the estimated sales price, less cost to sell, for some containers and these containers have been written down. See "Write Down of Certain Containers Identified for Sale" above. The Partnership has, however, recorded some losses on the sale of these previously written-down containers. Losses were recorded because the estimated sales price was higher than the actual sales price realized. Estimated sales prices are difficult to predict, and management's estimates proved too high in these cases. See "Gain and Loss on Sale of Containers" above. The Partnership will continue to monitor the recoverability of its containers. If actual market conditions for leased containers are less favorable than those projected, if actual sales prices are lower than those estimated by the Partnership, or if the estimated useful lives of the Partnership's containers were shortened, additional write-downs may be required and/or losses may be incurred. Any additional write-downs or losses would adversely affect the Partnership's operating results. Risk Factors and Forward Looking Statements Although substantially all of the Partnership's income from operations is derived from assets employed in foreign operations, virtually all of this income is denominated in United States dollars. The Partnership's customers are international shipping lines, which transport goods on international trade routes. The domicile of the lessee is not indicative of where the lessee is transporting the containers. The Partnership's business risk in its foreign operations lies with the creditworthiness of the lessees, and the Partnership's ability to keep its containers under lease, rather than the geographic location of the containers or the domicile of the lessees. The containers are generally operated on the international high seas rather than on domestic waterways. The containers are subject to the risk of war or other political, economic or social occurrence where the containers are used, which may result in the loss of containers, which, in turn, may have a material impact on the Partnership's results of operations and financial condition. Other risks of the Partnership's leasing operations include competition, the cost of repositioning containers after they come off-lease, the risk of an uninsured loss, including bad debts, the risk of technological obsolescence, 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 "Critical Accounting Policies and Estimates" above for information on the Partnership's critical accounting policies and how changes in those estimates could adversely affect the Partnership's results of operations. The foregoing includes forward-looking statements and predictions about possible or future events, results of operations and financial condition. These statements and predictions may prove to be inaccurate, because of the assumptions made by the Partnership or the General Partners or the actual development of future events. No assurance can be given that any of these forward-looking statements or predictions will ultimately prove to be correct or even substantially correct. The risks and uncertainties in these forward-looking statements include, but are not limited to, changes in demand for leased containers, changes in global business conditions and their effect on world trade, future modifications in the way in which the Partnership's lessees conduct their business or of the profitability of their business, increases or decreases in new container prices or the availability of financing, alterations in the costs of maintaining and repairing used containers, increases in competition, changes in the Partnership's ability to maintain insurance for its containers and its operations, the effects of political conditions on worldwide shipping and demand for global trade or of other general business and economic cycles on the Partnership, as well as other risks detailed herein. The Partnership does not undertake any obligation to update forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Exchange Rate Risk 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 does pay a small amount of its expenses in various foreign currencies. For the year ended December 31, 2003, approximately 7% of the Partnership's expenses were paid in 17 different foreign currencies. As there are no significant payments made in any one foreign currency, the Partnership does not hedge these expenses. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Attached pages 20 to 32. 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, 2003 and 2002, and the related statements of earnings, partners' capital and cash flows for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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, 2003 and 2002, and the results of its operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP San Francisco, California February 19, 2004
TEXTAINER EQUIPMENT INCOME FUND II, L.P. (a California Limited Partnership) Balance Sheets December 31, 2003 and 2002 (Amounts in thousands) ------------------------------------------------------------------------------------------------------------ 2003 2002 --------------- -------------- Assets Container rental equipment, net of accumulated depreciation of $14,059 (2002: $14,580) (note 1(e)) $ 14,247 $ 17,097 Cash 423 373 Accounts receivable, net of allowance for doubtful accounts of $68 (2002: $81) 1,020 1,198 Due from affiliates, net (note 2) 102 55 Prepaid expenses 19 15 --------------- -------------- $ 15,811 $ 18,738 =============== ============== Liabilities and Partners' Capital Liabilities: Accounts payable $ 87 $ 74 Accrued liabilities 158 193 Accrued damage protection plan costs (note 1(i)) 190 126 Deferred quarterly distributions (note 1(g)) 30 47 Deferred damage protection plan revenue (note 1(j)) 82 83 --------------- -------------- Total liabilities 547 523 --------------- -------------- Partners' capital: General partners - - Limited partners 15,264 18,215 --------------- -------------- Total partners' capital 15,264 18,215 --------------- -------------- $ 15,811 $ 18,738 =============== ============== See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND II, L.P. (a California Limited Partnership) Statements of Earnings Years ended December 31, 2003, 2002, and 2001 (Amounts in thousands except for unit and per unit amounts) ---------------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- Rental income $ 4,687 $ 4,712 $ 6,053 ---------------- ---------------- ---------------- Costs and expenses: Direct container expenses 1,099 1,176 1,673 Bad debt expense (benefit) - 19 (21) Depreciation (note 1(e)) 1,906 2,384 2,360 Write-down of containers (note 1(e)) 51 277 399 Professional fees 26 48 30 Management fees to affiliates (note 2) 444 419 613 General and administrative costs to affiliates (note 2) 220 239 284 Other general and administrative costs 74 173 121 Loss (gain) on sale of containers, net (note 1(e)) 110 (103) 135 ---------------- ---------------- ---------------- 3,930 4,632 5,594 ---------------- ---------------- ---------------- Income from operations 757 80 459 ---------------- ---------------- ---------------- Interest income 4 7 56 ---------------- ---------------- ---------------- Net earnings $ 761 $ 87 $ 515 ================ ================ ================ Allocation of net earnings (note 1(g)): General partners $ 37 $ 37 $ 75 Limited partners 724 50 440 ---------------- ---------------- ---------------- $ 761 $ 87 $ 515 ================ ================ ================ Limited partners' per unit share of net earnings $ 0.20 $ 0.01 $ 0.12 ================ ================ ================ Limited partners' per unit share of distributions $ 0.99 $ 0.99 $ 1.97 ================ ================ ================ Weighted average number of limited partnership units outstanding (note 1(k)) 3,602,455 3,642,522 3,688,232 ================ ================ ================ 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, 2003, 2002, and 2001 (Amounts in thousands) -------------------------------------------------------------------------------------------------------------- Partners' Capital ---------------------------------------------------------- General Limited Total --------------- -------------- --------------- Balances at December 31, 2000 $ - $ 28,967 $ 28,967 Distributions (75) (7,257) (7,332) Redemptions (note 1(l)) - (106) (106) Net earnings 75 440 515 --------------- -------------- --------------- Balances at December 31, 2001 - 22,044 22,044 --------------- -------------- --------------- Distributions (37) (3,617) (3,654) Redemptions (note 1(l)) - (262) (262) Net earnings 37 50 87 --------------- -------------- --------------- Balances at December 31, 2002 - 18,215 18,215 --------------- -------------- --------------- Distributions (37) (3,575) (3,612) Redemptions (note 1(l)) - (100) (100) Net earnings 37 724 761 --------------- -------------- --------------- Balances at December 31, 2003 $ - $ 15,264 $ 15,264 =============== ============== =============== 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, 2003, 2002, and 2001 (Amounts in thousands) --------------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 -------------- -------------- ------------- Cash flows from operating activities: Net earnings $ 761 $ 87 $ 515 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and container write-down (note 1(e)) 1,957 2,661 2,759 Decrease in allowance for doubtful accounts (13) (33) (105) Loss (gain) on sale of containers 110 (103) 135 Decrease (increase) in assets: Accounts receivable 196 31 603 Due from affiliates, net (51) (2) 298 Prepaid expenses (4) (5) - Increase (decrease) in liabilities: Accounts payable and accrued liabilities (22) (112) (53) Accrued damage protection plan costs 64 19 (44) Deferred damage protection plan revenue (1) 11 21 -------------- -------------- ------------- Net cash provided by operating activities 2,997 2,554 4,129 -------------- -------------- ------------- Cash flows from investing activities: Proceeds from sale of containers 782 1,481 2,031 Container purchases - - (99) -------------- -------------- ------------- Net cash provided by investing activities 782 1,481 1,932 -------------- -------------- ------------- Cash flows from financing activities: Redemptions of limited partnership units (100) (262) (106) Distributions to partners (3,629) (3,666) (7,341) -------------- -------------- ------------- Net cash used in financing activities (3,729) (3,928) (7,447) -------------- -------------- ------------- Net increase (decrease) in cash 50 107 (1,386) Cash at beginning of period 373 266 1,652 -------------- -------------- ------------- Cash at end of period $ 423 $ 373 $ 266 ============== ============== ============= 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, 2003, 2002 and 2001 (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, 2003, 2002 and 2001, resulting in differences in amounts recorded and amounts of cash disbursed or received by the Partnership, as shown in the Statements of Cash Flows. 2003 2002 2001 ---- ---- ---- Container purchases included in: Container purchases payable............................................ $ - $ - $ - Distributions to partners included in: Due to affiliates...................................................... 4 4 2 Deferred quarterly distributions....................................... 30 47 61 Proceeds from sale of containers: Due from affiliates.................................................... 140 144 244 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, 2003, 2002, and 2001. 2003 2002 2001 ---- ---- ---- Container purchases recorded.............................................. $ - $ - $ 11 Container purchases paid.................................................. - - 99 Distributions to partners declared........................................ 3,612 3,654 7,332 Distributions to partners paid............................................ 3,629 3,666 7,341 Proceeds from sale of containers recorded................................. 778 1,381 1,996 Proceeds from sale of containers received................................. 782 1,481 2,031 The Partnership has entered into direct finance leases, resulting in the transfer of containers from container rental equipment to accounts receivable. The carrying values of containers transferred during the years ended December 31, 2003, 2002 and 2001 were $5, $28 and $29, 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, 2003, 2002 and 2001 (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. In July 2001, the Partnership began its liquidation phase. This phase may last up to six or more years. The final termination and winding up of the Partnership, as well as payment of liquidating and/or final distributions, will occur at the end of the liquidation phase when all or substantially all of the Partnership's containers have been sold and the Partnership begins its dissolution. Textainer Financial Services Corporation (TFS) is the managing general partner of the Partnership and is a wholly-owned subsidiary of Textainer Capital Corporation (TCC). Textainer Equipment Management Limited (TEM) and Textainer Limited (TL) are associate general partners of the Partnership. The managing general partner and the associate general partners are collectively referred to as the General Partners and are commonly owned by Textainer Group Holdings Limited (TGH). The General Partners also act in this capacity for other limited partnerships. The General Partners manage and control the affairs of the Partnership. (b) Basis of Accounting The Partnership utilizes the accrual method of accounting. Revenue is recorded when earned according to the terms of the equipment rental contracts. These contracts are classified as operating leases or direct finance leases based on the criteria of Statement of Financial Accounting Standards No. 13: "Accounting for Leases." (c) Critical Accounting Policies and 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. The Partnership's management evaluates its estimates on an on-going basis, including those related to the container rental equipment, accounts receivable, and accruals. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. The following critical accounting policies are used in the preparation of its financial statements. The Partnership maintains allowances for doubtful accounts for estimated losses resulting from the inability of its lessees to make required payments. These allowances are based on management's current assessment of the financial condition of the Partnership's lessees and their ability to make their required payments. The Partnership depreciates its container rental equipment based on certain estimates related to the container's useful life and salvage value. Additionally, the Partnership writes down the value of its containers if an evaluation indicates that the recorded amounts of containers are not recoverable based on estimated future undiscounted cash flows and sales prices. These estimates are based upon historical useful lives of containers and container sales prices as well as assumptions about future demand for leased containers and estimated sales prices. (d) Fair Value of Financial Instruments In accordance with 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, 2003 and 2002, the fair value of the Partnership's financial instruments (cash, accounts receivable and current liabilities) approximates 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 accumulated depreciation charged. Through June 30, 2002 depreciation of new containers was computed using the straight-line method over an estimated useful life of 12 years to a 28% salvage value. Used containers were depreciated based upon their estimated remaining useful life at the date of acquisition (from 2 to 11 years). Effective July 1, 2002, the Partnership revised its estimate for container salvage value from a percentage of equipment cost to an estimated dollar residual value, reflecting current expectations of ultimate residual values. The effect of this change for the year ended December 31, 2002 was an increase to depreciation expense of $538. 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 Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), the Partnership periodically compares the carrying value of the 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 sale are recorded at the lower of carrying amount or fair value less cost to sell. The Partnership evaluated the recoverability of the recorded amount of container rental equipment at December 31, 2003 and 2002 for containers to be held for continued use and determined that a reduction to the carrying value of these containers was not required. The Partnership also evaluated the recoverability of the recorded amount of containers identified for sale in the ordinary course of business and determined that a reduction to the carrying value of these containers was required. The Partnership wrote down the value of these containers to their estimated fair value, which was based on recent sales prices less cost of sales. These containers are included in container rental equipment in the balance sheets. During the years ended December 31, 2003, 2002 and 2001 the Partnership recorded write-down expenses of $51, $277 and $399, respectively on 151, 556 and 1,023 containers identified as for sale and requiring a reserve. During the years ended December 31, 2003 and 2002, the Partnership also transferred 8 and 89 containers from containers identified for sale to containers held for continued use due to the improvement in demand for leased containers in Asia. There were no transfers during the year ended December 31, 2001. At December 31, 2003 and 2002, the net book value of the 67 and 143 containers identified as for sale was $53 and $121, respectively. During the years ended December 31, 2003, 2002 and 2001, the Partnership sold 156, 746 and 816, respectively, of these previously written down containers for losses of $11, $7 and $27, respectively. The Partnership also sold containers that had not been written down and recorded gains/(losses) of ($99), $110 and ($108) during the years ended December 31, 2003, 2002 and 2001, respectively. (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, 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 rather than the geographic location of the containers or the domicile of the lessees. No single lessee generated lease revenue for the years ended December 31, 2003, 2002 and 2001 which was 10% or more of the total revenue of the Partnership. (g) Allocation of Net Earnings and Partnership Distributions In accordance with the Partnership Agreement, sections 3.08 through 3.12, net earnings or losses and distributions are generally allocated 1% to the General Partners and 99% to the Limited Partners. If the allocation of distributions exceeds the allocation of net earnings and creates a deficit in the General Partners' aggregate capital account, the Partnership Agreement provides for a special allocation of gross income equal to the amount of the deficit to be made to the General Partners. 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 $30 and $47 at December 31, 2003 and 2002, 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) 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 estimated future repair costs. DPP expenses are included in direct container expenses in the Statements of Earnings and the related reserve at December 31, 2003 and 2002, was $190 and $126, respectively. (j) Deferred Damage Protection Plan Revenue Under certain DPP coverage, the Partnership receives a prepayment of the DPP revenue. The Partnership records these prepayments as Deferred Damage Protection Plan Revenue and recognizes these amounts as revenue when the containers are returned by the lessee. At December 31, 2003 and 2002 these amounts were $82 and $83, respectively. (k) 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, 2003, 2002 and 2001, which were 3,602,455, 3,642,522, and 3,688,232, respectively.
(l) Redemptions The following redemption offerings were consummated by the Partnership during the years ended December 31, 2003, 2002 and 2001: Units Average Redeemed Redemption Price Amount Paid -------- ---------------- ----------- Total Partnership redemptions as of December 31, 2000..................... 54,194 $9.50 $515 ------- --- Year ended: December 31, 2001................ 17,521 $6.05 106 December 31, 2002................ 57,855 $4.53 262 December 31, 2003................ 25,864 $3.88 100 ------- --- Total Partnership redemptions as of December 31, 2003..................... 155,434 $6.32 $983 ======= ===
The redemption price is fixed by formula in accordance with the Partnership Agreement. (m) Reclassifications Certain reclassifications, not affecting net earnings (loss), have been made to prior year amounts in order to conform to the 2003 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 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 incurred $116, $92 and $194 of incentive management fees during each of the three years ended December 31, 2003, 2002 and 2001, respectively. No equipment liquidation fees were incurred during these periods. The Partnership's container fleet is managed by TEM. In its role as manager, TEM has authority to acquire, hold, manage, lease, sell and dispose of the 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, 2003 and 2002. 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, 2003, 2002 and 2001, equipment management fees totaled $328, $327 and $419, respectively. Certain indirect general and administrative costs such as salaries, employee benefits, taxes and insurance are incurred in performing administrative services necessary to the operation of the Partnership. These costs are incurred and paid by TFS and TEM. Total general and administrative costs allocated to the Partnership were as follows: 2003 2002 2001 ---- ---- ---- Salaries $127 $151 $171 Other 93 88 113 --- --- --- Total general and administrative costs $220 $239 $284 === === === 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 investors to the total number of investors of all limited partnerships managed by TFS or equally among all the limited partnerships managed by TFS. The General Partners allocated the following general and administrative costs to the Partnership during the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 ---- ---- ---- TEM $188 $207 $248 TFS 32 32 36 --- --- --- Total general and administrative costs $220 $239 $284 === === === At December 31, 2003 and 2002, due from affiliates, net, is comprised of: 2003 2002 ---- ---- Due from affiliates: Due from TEM................... $133 $92 --- -- Due to affiliates: Due to TL...................... - 1 Due to TCC..................... 5 10 Due to TFS..................... 26 26 --- -- 31 37 --- -- Due from affiliates, net $102 $55 === == These amounts receivable from and payable to affiliates were incurred in the ordinary course of business between the Partnership and its affiliates and represent timing differences in the accrual and remittance of expenses, fees and distributions described above and in the accrual and remittance of net rental revenues and container sales proceeds from TEM. Note 3. Lease Rental Income (unaudited) Leasing income arises principally from the renting of containers to various international shipping lines. Revenue is recorded when earned according to the terms of the container rental contracts. These contracts are typically for terms of five years or less. The following is the lease mix of the on-lease containers (in units) at December 31, 2003 and 2002: 2003 2002 ---- ---- On-lease under master leases 3,849 4,833 On-lease under long-term leases 3,264 3,160 ----- ----- Total on-lease containers 7,113 7,993 ===== ===== Under master lease agreements, the lessee is not committed to lease a minimum number of containers from the Partnership during the lease term and may generally return any portion or all the containers to the Partnership at any time, subject to certain restrictions in the lease agreement. Under long-term lease agreements, containers are usually leased from the Partnership for periods of between three to five years. Such leases are generally cancelable with a penalty at the end of each twelve-month period. Under direct finance leases, the containers are usually leased from the Partnership for the remainder of the container's useful life with a purchase option at the end of the lease term. The remaining containers are off-lease and are being stored primarily at a large number of storage depots. At December 31, 2003 and 2002 approximately 5% and 10%, respectively of the Partnership's off-lease containers had been specifically identified as for sale. Note 4. Income Taxes At December 31, 2003, 2002 and 2001, there were temporary differences of $12,420, $13,712 and $15,276, 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, 2003, 2002 and 2001 is as follows:
2003 2002 2001 ---- ---- ---- Net income per financial statements.................... $ 761 $ 87 $ 515 Decrease in provision for bad debt..................... (13) (33) (105) Depreciation for federal income tax purposes less than (in excess) of depreciation for financial statement purposes.................................... 359 287 (373) Gain on sale of fixed assets for federal income tax purposes in excess of gain/loss recognized for financial statement purposes.......................... 882 1,291 2,091 Increase (decrease) in damage protection plan costs............................................ 64 19 (44) ----- ----- ----- Net income for federal income tax purposes........................... $2,053 $1,651 $2,084 ===== ===== =====
TEXTAINER EQUIPMENT INCOME FUND II, L.P. (a California Limited Partnership) Selected Quarterly Financial Data (Unaudited) --------------------------------------------------------------------------------------------------------------------------- The following is a summary of selected quarterly financial data for the years ended December 31, 2003 and 2002: (Amounts in thousands) 2003 Quarters Ended --------------------------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 --------------------------------------------------------------------------- Rental income $1,202 $1,190 $1,162 $1,133 Income from operations $ 283 $ 145 $ 156 $ 173 Net earnings $ 284 $ 146 $ 157 $ 174 Limited partners' share of net earnings $ 274 $ 136 $ 148 $ 166 Limited partners' share of distributions $ 933 $ 993 $ 870 $ 779 2002 Quarters Ended --------------------------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 --------------------------------------------------------------------------- Rental income $1,136 $1,105 $1,207 $1,264 (Loss) income from operations $ (138) $ 70 $ (450) $ 598 Net (loss) earnings $ (137) $ 72 $ (448) $ 600 Limited partners' share of net (loss) earnings $ (146) $ 61 $ (456) $ 591 Limited partners' share of distributions $ 917 $ 974 $ 790 $ 936
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been none. ITEM 9.A. CONTROLS AND PROCEDURES Based on an evaluation of the Partnership's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934), the managing general partner's principal executive officer and principal financial officer have found those controls and procedures to be effective as of the end of the period covered by the report. There has been no change in the Partnership's internal control over financial reporting that occurred during the Partnership's last fiscal quarter (the Partnership's fourth fiscal quarter in the case of an annual report), and which has materially affected, or is reasonably likely materially to affect, the Partnership's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Registrant has no officers or directors. The Registrant's three general partners are TFS, TEM and TL. TFS is the Managing General Partner of the Partnership and is a wholly-owned subsidiary of TCC. TEM and TL are Associate General Partners of the Partnership. The Managing General Partner and Associate General Partners are collectively referred to as the General Partners. TCC, TEM and TL are wholly-owned subsidiaries of Textainer Group Holdings Limited (TGH). The General Partners act in this capacity for other limited partnerships. 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 were 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, 2003, all Section 16(a) filing requirements were complied with. No member of management, or beneficial owner, owned more than 10 percent of limited partnership 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. Code of Ethics -------------- The Registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Registrant has posted this code of ethics on its Internet website at the following address: www.textainer.com/sharehld/codeofethics.pdf. --------------------------------------------
Directors and Executive Officers of the General Partners -------------------------------------------------------- The directors and executive officers of the General Partners are as follows: Name Age Position ---- --- -------- Neil I. Jowell 70 Director and Chairman of TGH, TEM, TL, TCC and TFS John A. Maccarone 59 President, CEO and Director of TGH, TEM, TL, TCC and TFS James E. Hoelter 64 Director of TGH, TCC and TFS Philip K. Brewer 47 Senior Vice President - Asset Management Group and Director of TL Robert D. Pedersen 44 Senior Vice President - Leasing Group, Director of TEM Ernest J. Furtado 48 Senior Vice President, CFO and Secretary of TGH, TEM, TL, TCC and TFS, Director of TL, TCC and TFS Gregory W. Coan 40 Vice President and Chief Information Officer of TEM Wolfgang Geyer 50 Regional Vice President - Europe Mak Wing Sing 46 Regional Vice President - South Asia Masanori Sagara 48 Regional Vice President - North Asia Stefan Mackula 51 Vice President - Equipment Resale Anthony C. Sowry 51 Vice President - Corporate Operations and Acquisitions Richard G. Murphy 51 Vice President - Risk Management Janet S. Ruggero 55 Vice President - Administration and Marketing Services Jens W. Palludan 53 Regional Vice President - Americas and Logistics Isam K. Kabbani 69 Director of TGH James A. C. Owens 64 Director of TGH, TEM and TL S. Arthur Morris 70 Director of TGH, TEM and TL Dudley R. Cottingham 52 Assistant Secretary, Vice President and Director of TGH, TEM and TL Cecil Jowell 68 Director of TGH, TEM and TL Henrick van der Merwe 56 Director of TGH, TEM and TL James E. McQueen 59 Director of TGH, TEM and TL Harold J. Samson 81 Director of TCC and TFS Nadine Forsman 36 Controller of TCC and TFS
Unless otherwise noted, all directors have served as directors of the General Partners as detailed above at least since 1993 when the reorganization of the General Partners occurred, as described on the previous page. Neil I. Jowell is Director and Chairman of TGH, TEM, TL, TCC and TFS and a member of the Investment Advisory Committee and Audit Committee (see "Committees" below). Mr. Jowell became Director and Chairman of TEM in 1994. He has served on the Board of Trencor Ltd. (Trencor) since 1966 and as Chairman since 1973. He is also a Director of Mobile Industries Ltd. (Mobile) (1969 to present), which is the major shareholder in Trencor, a publicly traded company listed on the JSE Securities Exchange South Africa. Trencor's core businesses are the owning, financing, leasing and managing of marine cargo containers and returnable packaging units worldwide, finance related activities and supply chain management services. Other interests are the manufacture and export of tank containers for international markets and road trailer manufacturing. He is also a Director of a number of Mobile's and Trencor's subsidiaries. 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 TGH in 1992. Mr. Jowell has over 40 years' experience in the transportation industry. He holds an M.B.A. degree from Columbia University and Bachelor of Commerce and Ll.B. degrees from the University of Cape Town. Mr. Neil I. Jowell and Mr. Cecil Jowell are brothers. John A. Maccarone is President, CEO and Director of TGH, TEM, TL, TCC and TFS. Mr. Maccarone became President, CEO of TGH, TL, TCC and TFS in 1998 and a director of TEM in 1994. 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 TGH, TL, 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 Associates (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. James E. Hoelter is a director of TGH, TCC and TFS. In addition, Mr. Hoelter is a member of the Equipment Investment Committee, the Investment Advisory Committee and the Audit Committee (see "Committees", below). Mr. Hoelter was the President and Chief Executive Officer of TGH and TL from 1993 to 1998 and was a director of TEM and TL until March 2003. Mr. Hoelter serves as a consultant to Trencor (1999 to present). Mr. Hoelter became a director of Trencor in December 2002 and he serves as a director of Trenstar Ltd., a Trencor affiliate. 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. Philip K. Brewer is Senior Vice President - Asset Management Group and has been such since 1999. Mr. Brewer has been a director of TL since 2000 and was a director of TEM from August 2002 through March 2003. He 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 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, as Senior Vice President - Capital Markets for TGH and TL, 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 responsible for worldwide sales and marketing related activities and operations since 1999. Mr. Pederson has also served as a Director of TEM, since 1997. 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. Ernest J. Furtado is Senior Vice President, CFO and Secretary of TGH, TEM, TL, TCC and TFS and has been such since 1999. Mr. Furtado is a Director of TCC and TFS, and has served as such since 1997. He was a director of TEM from 2002 through March 2003 and became a director of TL in March 2003. As Senior Vice President, CFO and Secretary, he is responsible for all accounting, financial management, and reporting functions for TGH, TEM, TL, TCC and TFS. Additionally, he is a member of the Investment Advisory Committee for which he serves as Secretary, the Equipment Investment Committee and the Credit Committee (see "Committees", below). Prior to these positions, he held a number of accounting and financial management positions at Textainer, of increasing responsibility. 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. Gregory W. Coan is Vice President and Chief Information Officer of TEM and has served as such since 2001. In this capacity, Mr. Coan is responsible for the worldwide information systems of Textainer. He also serves on the Credit Committee (see "Committees", below). Prior to these positions, Mr. Coan was the Director of Communications and Network Services from 1995 to 1999, where he was responsible for Textainer's network and hardware infrastructure. Mr. Coan holds a Bachelor of Arts degree in political science from the University of California at Berkeley and an M.B.A. with an emphasis in telecommunications from Golden Gate University. Wolfgang Geyer is based in Hamburg, Germany and is Regional Vice President - Europe, responsible for coordinating all leasing activities in Europe, Africa and the Middle East/Persian Gulf and has served as such since 1997. 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), Southeast Asia and Australia/New Zealand and has served as such since 1996. Mr. Mak most recently was the Regional Manager, Southeast Asia, for Trans Ocean Leasing, 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 and has served as such since 1996. 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 and has served as such since 1993. 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 - Corporate Operations and Acquisitions and has served as such since 1996. He is also a member of the Equipment Investment Committee and the Credit Committee (see "Committees", below). Mr. Sowry supervises all international container operations, 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. Richard G. Murphy is Vice President - Risk Management, responsible for all credit and risk management functions and has served as such since 1996. 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 has held a number of positions at Textainer, including 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 and has served as such since 1993. 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 Regional Vice President - Americas and Logistics, responsible for container leasing activities in North/South America and for coordinating container logistics and has served as such since 2001. 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 at Maersk was that of General Manager, Equipment and Terminals, where he was responsible for the entire managed fleet. 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 was a director of TL through March 2003. 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 since been his principal business activity. 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, and beginning in March 2003, a director of TEM. 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 and has served as director of TGH and TL since 1998. 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 of non-U.S. companies. 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. Mr. Morris became a director of TL and TGH in 1993 and became a director of TEM in 1994. 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 (1977 to date). He is also President and director of Continental Management Limited (1977 to date) and Continental Trust Corporation Limited (1994 to date). Continental Management Limited is a Bermuda corporation that provides corporate representation, administration and management services and Continental Trust Corporation Limited is a Bermuda Corporation that provides corporate and individual trust administration services. He has also served as a director of Turks & Caicos First Insurance Company Limited since 1993. 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. Dudley R. Cottingham is Assistant Secretary, Vice President and a director of TGH, TEM and TL. Mr. Cottingham became a director of TEM in 1994 and has served in these other positions since 1993. 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) and Continental Trust Corporation Limited, which are all 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 Continental Trust Corporation Limited is a Bermuda corporation that provides corporate and individual trust administration services. He has also served as a director of Turks & Caicos First Insurance Company Limited since 1993. Mr. Cottingham has over 20 years experience in public accounting with responsibility for a variety of international and local clients. Cecil Jowell is a director of TGH, TEM and TL and has been such since March 2003. Mr. Jowell is also a Director and Chairman of Mobile Industries Ltd. (Mobile), which is a public company, quoted on the JSE Securities Exchange South Africa. Mr. Jowell has been a Director of Mobile since 1969 and was appointed Chairman in 1973. It is the major shareholder in Trencor Ltd. (Trencor), a publicly traded company listed on the JSE Securities Exchange South Africa. Trencor's core businesses are the owning, financing, leasing and managing of marine cargo containers and returnable packaging units worldwide, finance related activities and supply chain management services. Other interests are the manufacture and export of tank containers for international markets and road trailer manufacturing. He is an Executive Director of Trencor and has been an executive in that group for over 40 years. Mr. Jowell is also a Director of a number of Mobile's and Trencor's subsidiaries as well as a Director of Scientific Development and Integration (Pty) Ltd, a scientific research company. Mr. Jowell was a Director and Chairman of WACO International Ltd., an international industrial group listed on the JSE Securities Exchange South Africa, and with subsidiaries listed on the Sydney and London Stock Exchanges from 1997 through 2000. Mr. Jowell holds a Bachelor of Commerce and Ll.B. degrees from the University of Cape Town and is a graduate of the Institute of Transport. Mr. Cecil Jowell and Mr. Neil I. Jowell are brothers. Hendrik R. van der Merwe is a Director of TGH, TEM and TL and has served as such since March 2003. Mr. van der Merwe is also an Executive Director of Trencor Ltd. (Trencor) and has served as such since 1998. In this capacity, he is responsible for certain operating entities and strategic and corporate functions within the Trencor group of companies. Trencor is a publicly traded company listed on the JSE Securities Exchange South Africa. Its core businesses are the owning, financing, leasing and managing of marine cargo containers and returnable packaging units worldwide, finance related activities and supply chain management services. Other interests are the manufacture and export of tank containers for international markets and road trailer manufacturing. Mr. van der Merwe is currently also Chairman of TrenStar, Inc., based in Denver, Colorado and a Director of various companies in the TrenStar group and other companies in the wider Trencor group and has been such since 2000. Mr. van der Merwe served as Deputy Chairman for Waco International Ltd., an international industrial group listed on the JSE Securities Exchange South Africa and with subsidiaries listed on the Sydney and London Stock Exchanges from 1991 to 1998, where he served on the Boards of those companies. From 1990 to 1991, he held various senior executive positions in the banking sector in South Africa, lastly as Chief Executive Officer of Sendbank, the corporate/merchant banking arm of Bankorp Group Ltd. Prior to entering the business world, Mr. van der Merwe practiced as an attorney at law in Johannesburg, South Africa. Mr. van der Merwe holds a Bachelor of Arts and Ll.B. degrees from the University of Stellenbosch and an Ll.M (Taxation) degree from the University of the Witwatersrand. James E. McQueen is a Director of TGH, TEM and TL and has served as such since March 2003. Mr. McQueen joined Trencor Ltd. (Trencor) in June 1976 and has served on the Board of the company as Financial Director (CFO) since 1996. Trencor is a publicly traded company listed on the JSE Securities Exchange South Africa. Its core businesses are the owning, financing, leasing and managing of marine cargo containers and returnable packaging units worldwide, finance related activities and supply chain management services. Other interests are the manufacture and export of road tank containers for international markets and trailer manufacturing. Mr. McQueen is also a Director of a number of Trencor's subsidiaries. Prior to joining Trencor, Mr. McQueen was an accountant in public practice. He holds a Bachelor of Commerce degree from the University of Cape Town and is a Chartered Accountant (South Africa). Harold J. Samson is a director of TCC and TFS since 2003 and is a member of the Investment Advisory Committee and the Audit Committee (see Committees", below). He was a director of TGH and TL from 1993 and from 1994, respectively, and through December 31, 2002. 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. Nadine Forsman is the Controller of TCC and TFS and has served as such since 1996. Additionally, she is a member of the Investment Advisory Committee and Equipment Investment 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 these functions. Prior to joining Textainer in August 1996, Ms. Forsman was employed by KPMG LLP, holding various positions, the most recent of which was manager, from 1990 to 1996. Ms. Forsman is a Certified Public Accountant and holds a B.S. in Accounting and Finance from San Francisco State University. Committees The Managing General Partner has established the following 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. Further, the Managing General Partner has established an audit committee, as described below. Equipment Investment Committee. The Equipment Investment Committee reviews the equipment leasing operations of the Partnership on a regular basis with emphasis on matters involving equipment purchases, equipment remarketing issues, and decisions regarding ultimate disposition of equipment. The members of the committee are John A. Maccarone (Chairman), James E. Hoelter, Anthony C. Sowry, Richard G. Murphy (Secretary), Philip K. Brewer, Robert D. Pedersen, Ernest J. Furtado and Nadine Forsman. Credit Committee. The Credit Committee establishes credit limits for every lessee and potential lessee of equipment and periodically reviews these limits. In setting such limits, the Credit Committee considers 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, Anthony C. Sowry, Philip K. Brewer, Ernest J. Furtado, Robert D. Pedersen and Gregory W. Coan. Investment Advisory Committee. The Investment Advisory Committee reviews 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, Ernest J. Furtado (Secretary), Nadine Forsman, Harold J. Samson and Neil I. Jowell. Audit Committee. The Managing General Partner has established an audit committee to oversee the accounting and financial reporting processes and audits of the financial statements of the Partnership as well as other partnerships managed by the General Partners. The members of the audit committee are James E. Hoelter, Neil I. Jowell and Harold J. Samson. The Managing General Partner's board of directors has determined that the audit committee has a financial expert serving on it. That member is Harold J. Samson and he is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934. 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. See also Item 13(a) below.
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 investment of the Registrant. (b) Security Ownership of Management. As of January 1, 2004: Number Name of Beneficial Owner Of Units % All Units ------------------------ -------- ----------- James E. Hoelter 438 0.012% John A. Maccarone 500 0.014% Harold J. Samson 2,500 0.069% ----- ------ Directors, Officers and Management as a Group 3,438 0.095% ===== ======
(c) Changes in Control. Inapplicable. PART 201 (d) Securities Under Equity Compensation Plans. Inapplicable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Amounts in thousands) (a) Transactions with Management and Others. At December 31, 2003, due from affiliates, net, is comprised of: Due from affiliates: Due from TEM.................. $133 --- Due to affiliates: Due to TL..................... - Due to TCC.................... 5 Due to TFS.................... 26 --- 31 Due from affiliates, net $102 === These amounts receivable from and payable to affiliates were incurred in the ordinary course of business between the Partnership and its affiliates and represent timing differences in the accrual and remittance of expenses, fees and distributions and in the accrual and remittance of net rental revenues and container sales proceeds from TEM. In addition, for the year ended December 31, 2003, the Registrant paid or will pay the following amounts to the General Partners: Management fees in connection with the operations of the Registrant: TEM.................................. $354 TFS.................................. 90 --- Total................................ $444 === Reimbursement for administrative costs in connection with the operations of the Registrant: TEM.................................. $188 TFS.................................. 32 --- Total................................ $220 === For more information on these transactions, see Note 2 to the Financial Statements in Item 8. The Registrant contemplates that payments and reimbursements will be made to the General Partners under these same arrangements in the current fiscal year. (b) Certain Business Relationships. Inapplicable. (c) Indebtedness of Management. Inapplicable. (d) Transactions with Promoters. Inapplicable. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Registrant incurred the following accounting fees from KPMG LLP during the years ended December 31, 2003 and 2002: 2003 2002 ---- ---- Audit fees.................. $28 $24 == == The Registrant first established its audit committee in 2002. The Registrant's audit committee has approved the audit services for the preparation of the Registrant's current year's financial statements and any related, underlying business transactions, as well as tax consultation services up to a specified dollar amount, all subject to ongoing reports made to the audit committee. The committee has not otherwise authorized pre-approvals, or delegated its authority to grant pre-approvals, of audit or non-audit services. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Audited financial statements of the Registrant for the year ended December 31, 2003 are contained in Item 8 of this Report. 2. Financial Statement Schedules. (i) Independent Auditors' Report on Supplementary Schedule. (ii) Schedule II - Valuation and Qualifying Accounts. 3. Exhibits Exhibits 31.1 and 31.2 Certifications pursuant to Rules 13a-14 or 15d-14 of the Securities and Exchange Act of 1934. Exhibits 32.1 and 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted, and regarding Section 906 of the Sarbanes-Oxley Act of 2002. Exhibits incorporated by reference The Registrant's limited partnership agreement, Exhibit A to the Prospectus, as contained in Pre-Effective Amendment No. 2 to the Registrant's Registration Statement (No. 33-29990), 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. (b) During the year ended 2003, 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, 2004, we reported on the balance sheets of Textainer Equipment Income Fund II, L.P. (the Partnership) as of December 31, 2003 and 2002, and the related statements of earnings, partners' capital and cash flows for each of the years in the three-year period ended December 31, 2003, which are included in the 2003 annual report on Form 10-K. In connection with our audit of the aforementioned financial statements, we also audited the related financial statement schedule as listed in Item 15. 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. /s/ KPMG LLP San Francisco, California February 19, 2004
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 at End Beginning And of of Period Expenses Deduction Period ---------- -------- --------- ------- For the year ended December 31, 2003: Allowance for doubtful accounts $ 81 $ - $ (13) $ 68 --- --- ---- --- Accrued damage protection plan costs $126 $138 $ (74) $190 --- --- ---- --- For the year ended December 31, 2002: Allowance for doubtful accounts $114 $ 19 $ (52) $ 81 --- --- ---- --- Accrued damage protection plan costs $107 $ 87 $ (68) $126 --- --- ---- --- For the year ended December 31, 2001: Allowance for doubtful accounts $219 $(21) $ (84) $114 --- --- ---- --- Accrued damage protection plan costs $151 $157 $(201) $107 --- --- ---- ---
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 ____________________________________________ Ernest J. Furtado Chief Financial Officer Date: March 25, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Textainer Financial Services Corporation, the managing general partner of the Registrant, in the capacities and on the dates indicated: Signature Title Date _______________________________ Chief Financial Officer, Senior March 25, 2004 Ernest J. Furtado Vice President, Secretary and Director (Chief Financial and Principal Accounting Officer) _______________________________ Chief Executive Officer, President March 25, 2004 John A. Maccarone and Director _______________________________ Chairman of the Board and Director March 25, 2004 Neil I. Jowell
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/Ernest J. Furtado ________________________________________ Ernest J. Furtado Chief Financial Officer Date: March 25, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Textainer Financial Services Corporation, the managing general partner of the Registrant, in the capacities and on the dates indicated: Signature Title Date /s/ Ernest J. Furtado _____________________________________ Chief Financial Officer, Senior March 25, 2004 Ernest J. Furtado Vice President, Secretary and Director (Chief Financial and Principal Accounting Officer) /s/ John A. Maccarone ______________________________________ Chief Executive Officer, President March 25, 2004 John A. Maccarone and Director /s/ Neil I. Jowell ______________________________________ Chairman of the Board and Director March 25, 2004 Neil I. Jowell
EXHIBIT 31.1 CERTIFICATIONS I, John A. Maccarone, certify that: 1. I have reviewed this annual report on Form 10-K of Textainer Equipment Income Fund II, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a.) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 25, 2004 /s/ John A. Maccarone _______________________________________ John A. Maccarone Chief Executive Officer, President and Director of TFS EXHIBIT 31.2 CERTIFICATIONS I, Ernest J. Furtado, certify that: 1. I have reviewed this annual report on Form 10-K of Textainer Equipment Income Fund II, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a.) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c.) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 25, 2004 /s/ Ernest J. Furtado ___________________________________ Ernest J. Furtado Chief Financial Officer, Senior Vice President, Secretary and Director of TFS EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED, REGARDING SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Textainer Equipment Income Fund II, L.P., (the "Registrant") on Form 10-K for the year ended December 31, 2003, as filed on March 25, 2004 with the Securities and Exchange Commission (the "Report"), I, John A. Maccarone, the Chief Executive Officer, President and Director of Textainer Financial Services Corporation ("TFS") and Principal Executive Officer of TFS, the Managing General Partner of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted, regarding Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations and cash flows of the Registrant. March 25, 2004 By /s/ John A. Maccarone _________________________________________ John A. Maccarone Chief Executive Officer, President and Director of TFS A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED, REGARDING SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Textainer Equipment Income Fund II, L.P., (the "Registrant") on Form 10-K for the year ended December 31, 2003, as filed on March 25, 2004 with the Securities and Exchange Commission (the "Report"), I, Ernest J. Furtado, Chief Financial Officer, Senior Vice President, Secretary and Director of Textainer Financial Services Corporation ("TFS") and Principal Financial and Accounting Officer of TFS, the Managing General Partner of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted, regarding Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations and cash flows of the Registrant. March 25, 2004 By /s/ Ernest J. Furtado ____________________________________________ Ernest J. Furtado Chief Financial Officer, Senior Vice President, Secretary and Director of TFS A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.