TEXTAINER CAPITAL CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
March 30, 2005
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 V,
L.P. (the "Partnership") the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
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, 2004
Commission file number 0-25946
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(Exact name of Registrant as specified in its charter)
California 93-1122553
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 California Street, 16th Floor
San Francisco, CA 94108
(Address of Principal Executive Offices) (ZIP Code)
(415) 434-0551
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP INTERESTS
(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 I of this report, the information in Item 8.01 in the
Registrant's Report on Form 8-K, filed with the Commission on March 22, 2005;
Incorporated into Part IV of this report, the Asset Sale Agreement between the
Registrant and RFH, Ltd., Appendix A to the Proxy Statement for Special Meeting
of Limited Partners, as filed with the Commission under Section 14 of the
Securities Exchange Act of 1934 on January 20, 2005; and the Registrant's
limited partnership agreement, Exhibit A to the Prospectus as contained in
Pre-Effective Amendment No. 3 to the Registrant's Registration Statement, as
filed with the Commission on April 8, 1994, as supplemented by Post-Effective
Amendment No. 2 as filed under Section 8(c) of the Securities Act of 1933 on May
5, 1995 and as supplemented by Supplement No. 5 as filed under Rule 424(b) of
the Securities Act of 1933 on March 18, 1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General Development of Business
The Registrant is a California Limited Partnership ("the
Partnership") formed on July 15, 1993 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 May 1, 1994 in accordance with its Registration Statement and
ceased to offer such Units as of April 29, 1996. The Registrant
raised a total of $89,305,260 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. The Registrant is a
finite life entity, with a term ending on December 31, 2014.
The Partnership, along with five other limited partnerships
managed by the general partners and their affiliates, has
negotiated a sale of substantially all of its assets in one
transaction (the "Asset Sale" or the "Proposed Asset Sale") to
RFH, Ltd. ("RFH" or the "Buyer"). The Asset Sale was subject to
the approval of limited partners holding a majority of the
Partnership's limited partnership units at a Special Meeting of
the limited partners. On March 21, 2005, the Special Meeting of
limited partners was held and the limited partners approved the
sale and the Partnership's termination and dissolution. For more
information on the meeting and its results, see Item 4 below. On
that same date, an Asset Sale Agreement between the Partnership
and RFH became binding on the Partnership. As part of this sale
transaction, RFH will engage Textainer Equipment Management
Limited, one of the general partners, to manage the equipment RFH
is buying, pursuant to a management agreement which is more fully
disclosed under Item 13 below.
Although the limited partners have approved the Asset Sale, it is
not known whether or not the Asset Sale will close because of two
lawsuits filed in March of 2005 and described in Item 3. The
Asset Sale Agreement, provides, among other things, that the
Buyer is not obligated to close unless specified conditions
precedent are satisfied. At least two of those conditions are
affected by the lawsuits discussed in Item 3. One of those
conditions precedent is that no preliminary or permanent
injunction or other order issued by any federal or state court of
competent jurisdiction in the United States or by any United
States federal or state governmental or regulatory body which
restrains, enjoins or otherwise prohibits the transactions
contemplated by the Asset Sale Agreement shall be in effect, nor
shall any request for any such injunction be pending. The
lawsuits do seek such an injunction. Another condition is that
the following representation by the Partnership be true in all
material respects as of the closing:
"There are no actions, suits or proceedings pending, or to
Seller's knowledge, threatened, against Seller or the Sale
Containers and the other Sold Assets before any court,
arbitrator, administrative or governmental body that, if
adversely determined, would hinder or prevent Seller's
ability to carry out the transactions contemplated by this
Agreement or affect the right, title or interest of Seller
in the Sale Containers or the other Sold Assets, and, to
Seller's knowledge, there is no basis for any such suits or
proceedings."
The pendency of the lawsuits means that this representation,
though true when the Asset Sale Agreement was executed, is not
now correct. The Asset Sale Agreement provides that unless the
Buyer expressly waives these conditions (and any other conditions
that are not satisfied) in writing, the Buyer is not obligated to
consummate the purchase and sale of assets under the Asset Sale
Agreement. The Buyer has not notified the Partnership of what it
intends to do.
If the sale is completed in accordance with the terms of the
Asset Sale Agreement as executed on November 30, 2004, it will be
effective as of January 1, 2005. In that case, the Partnership
had originally planned to distribute to the partners the net
proceeds of this sale, plus any previously undistributed cash
from operations and proceeds from the normal sale of containers,
less estimated expenses expected to be incurred through the final
winding up and termination of the Partnership. The plans to make
these distributions appear to be contested by at least one of the
lawsuits. The Partnership plans to terminate its existence after
payment of the liquidating distributions, but these plans may
alter depending on the course of the lawsuits. In the event the
Asset Sale is not completed, the Partnership will proceed as
provided under its partnership agreement as amended.
See Item 3 herein for a discussion of legal proceedings related
to the above sale. 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 Partnership
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 Partnership 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 Partnership, in which case the Partnership agrees to pay the
cost of repairing certain physical damage to containers. (This
later arrangement is called the "Damage Protection Plan.") The
Partnership, 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 Partnership 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
Partnership attempts to generate revenue and profit.
The majority of the Partnership'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 Partnership 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 also sells containers in the course of its
business as opportunities arise, at the end of a container's
useful life, or if market and economic conditions indicate that a
sale would be beneficial. Sales are generally made when a
container comes off lease. Additionally, when a lessee loses or
completely damages a container, the Registrant is reimbursed by
the lessee for the value of that container. See Item 7 herein.
The Registrant also buys containers, primarily with the proceeds
from the sale of containers. The Registrant's business plan calls
for it to stop buying containers at some time during or after its
ninth full year of operations, measured from the end of the
securities offering period. This plan is subject to the General
Partners' discretion to alter the time frame depending on market
conditions. This period of the Registrant's operations, when no
new containers are bought, is called its liquidation phase.
Regular leasing operations will continue during this phase, but
the Registrant will allow its fleet to permanently diminish
through sales of containers. See Item 1(a) and Item 7 herein.
(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, 2004, 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 the various leasing companies, the top ten control
approximately 87% 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 Partnership and the
manager of its marine container equipment, is one of the largest
standard dry freight container leasing company and manages
approximately 13% of the equipment held by all container leasing
companies. The customers for leased containers are primarily
international shipping lines. The Partnership 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 in the past
several years, 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 Partnership.
Furthermore, changes in worldwide demand for shipping can create
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
Partnership'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. The number and size of
these low demand locations has recently been decreasing, due to
improved global demand for shipping, but no assurance can be
given that this trend will continue.
Beginning in 2004, a worldwide steel shortage caused significant
increases in new container prices and limited the number of new
containers being built. As a result, demand for leased containers
increased in the first quarter of 2004 and has remained strong
through 2004.
(c)(1)(xi) Inapplicable.
(c)(1)(xii) Inapplicable.
(c)(1)(xiii) The Registrant has no employees. Textainer Capital Corporation
(TCC), the Managing General Partner of the Registrant, is
responsible for the overall management of the business of the
Registrant and at December 31, 2004 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, 2004 had a total of 148
employees.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
The Registrant is involved in the leasing of shipping containers
to international shipping lines for use in world trade and
approximately 17%, 9% and 6% of the Registrant's rental revenue
during the years ended December 31, 2004, 2003 and 2002,
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, 2004, the Registrant owned the following types and quantities
of equipment:
20-foot standard dry freight containers 9,686
40-foot standard dry freight containers 9,507
40-foot high cube dry freight containers 4,973
------
24,166
======
During December 2004, approximately 96% 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.
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
On March 8, 2005, a lawsuit was filed in the United States District Court for
the Northern District of California, captioned: Robert Lewis and City
Partnerships Co., Plaintiffs v. Textainer Equipment Income Fund II, L.P.;
Textainer Equipment Income Fund III, L.P.; Textainer Equipment Income Fund IV,
L.P.; Textainer Equipment Income Fund V, L.P.; Textainer Equipment Income Fund
VI, L.P.; Textainer Equipment Management Limited; Textainer Financial Services
Corporation; Textainer Capital Corporation; Textainer Group Holdings Limited;
John A. Maccarone; and RFH, LTD., Defendants, Case No. C 05 0969 MMC (the
"complaint"). The complaint seeks certification as a class action on behalf of
holders of limited partnership units of the Registrant and the other
partnerships named in the complaint.
The complaint refers to the proxy statement sent on or about January 20, 2005 in
connection with the Special Meeting of Limited Partners held on March 21, 2005
for the Partnership. The complaint alleges securities law violations, by
material misstatements and omissions in the proxy statement, and also breaches
of fiduciary duties by the General Partners. Plaintiffs claim that the proxy
statement fails to disclose facts that suggest that the purchase price the
Partnership is receiving from the Asset Sale is inadequate. The alleged omitted
fact is that the prices of shipping containers have risen since the time that
the terms of sale were initially agreed to in July 2004. The General Partners
are also alleged to have had conflicts of interest and self dealing unfair to
the Limited Partners in that they required that any purchaser retain one of the
general partner entities as managing agent for the containers purchased in the
Asset Sale, thereby continuing to profit from the increased prices of shipping
containers. The complaint further alleges that the Buyer aided and abetted the
General Partners in the breach of fiduciary duties.
The complaint seeks an injunction against proceeding with the Special Meeting,
an injunction against engaging in the Asset Sale or in the alternative if the
injunction is not granted, a rescission of the Asset Sale or damages in an
unspecified amount.
On March 18, 2005, the request for a temporary restraining order was denied.
On March 21, 2005, a second lawsuit was filed in the United States District
Court for the Northern District of California, captioned "Alan P. Gordon, as
Trustee for the Gordon Family Trust, individually and on behalf of all others
similarly situated, Plaintiffs, v. Textainer Financial Services Corporation;
Textainer Equipment Management Limited; Textainer Limited; Textainer Capital
Corporation; Textainer Group Holdings Limited; John A. Maccarone; and RFH, LTD.,
Defendants, and TCC Equipment Income Fund, a California Limited Partnership;
Textainer Equipment Income Fund II, L.P.; Textainer Equipment Income Fund III,
L.P.; Textainer Equipment Income Fund IV, L.P.; Textainer Equipment Income Fund
V, L.P.; and Textainer Equipment Income Fund VI, L.P., Nominal Defendants," Case
No. C 05 1146 CRB (the "second complaint").
The second complaint seeks certification as a class action on behalf of holders
of limited partnership units of the Registrant and the other partnerships named
in the complaint. This second complaint also alleges material misstatements and
omissions in the proxy statement, resulting in securities law violations, which
in turn are alleged to have deprived the plaintiffs of a legitimate voting
process with respect to the Asset Sale. One of the material misstatements and/or
omissions alleged in the proxy statement is that the price at which the assets
are to be sold is materially lower than current market values for the assets.
The plaintiffs are alleged to suffer substantial damages upon consummation of
the Asset Sale. This second complaint further alleges breaches of fiduciary duty
by the general partners, Textainer Group Holdings Limited, and Mr. Maccarone,
due to the facts that (i) solicitation of bids with respect to the Asset Sale
was conditioned on the buyer's acceptance of a management agreement with one of
the general partners covering the assets sold, which condition is alleged to
have deterred competing container leasing companies from bidding for the assets
and (ii) the Asset Sale Agreement allowed for the purchase price paid to be
adjusted downward during a time when the prices for used containers are alleged
to have been increasing. A further breach of fiduciary duty is alleged on
account of the failure to disclose all material facts concerning transactions in
which the defendants named in the preceding sentence had a financial interest.
The Buyer, RFH, is also alleged to have aided and abetted these breaches of
fiduciary duty.
The second complaint seeks an injunction against the Asset Sale, or if the Asset
Sale is consummated, the imposition of a constructive trust on the assets sold
and the sales proceeds received, a constructive trust on the receipt of fees
paid under the management agreement between one of the general partners and RFH
and disgorgement of those fees to the plaintiffs, damages in an unspecified
amount, interest, reasonable attorneys' and experts' fees and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Proxies were solicited beginning in January of 2005 and a Special Meeting of
Limited Partners was held on March 21, 2005. Matters for which proxies were
solicited and votes taken at the Special Meeting were (i) the approval of the
sale of substantially all of the assets of the Registrant for cash and the
authorization of the dissolution, winding up and termination of the Registrant;
(ii) the approval of certain amendments to the Registrant's limited partnership
agreement giving the managing general partner the power and authority to sell
the Registrant's assets if the Asset Sale is not completed; and (iii) the
adjournment of the special meeting to solicit additional proxies, if necessary.
The number of votes cast for and against, as well as the number of abstentions
is detailed under Item 8.01 in the Form 8-K filed with the Securities and
Exchange Commission on March 22, 2005, which information is incorporated by
reference.
For additional information concerning the Asset Sale referred to in subparagraph
(i) and the associated plan for liquidation, see Item 1(a) above, "General
Development of Business."
PART II
ITEM 5. MARKET FOR THE 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 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, 2005, there were 4,766 holders of record of
limited partnership interests in the Registrant.
(b)(2) Inapplicable.
(c) Dividends.
For the years ended December 31, 2004 and 2003, the Registrant paid
distributions at an annualized rate equal to 5% of a Unit's initial cost, or
$1.00 per Unit. Distributions were made monthly by the Registrant to its limited
partners.
For information about the amount of distributions paid during the five most
recent fiscal years, see Item 6, "Selected Financial Data."
The Partnership made a January 2005 distribution related to 2004 operations.
Since the Proposed Asset Sale would be effective January 1, 2005, if completed
in accordance with the terms of the Asset Sale Agreement as executed on November
30, 2004, the Partnership has temporarily suspended distributions. While there
is no guarantee that the Asset Sale will be completed, if it is completed, the
Partnership had originally planned to make liquidating distributions as
described in Item 1(a) above. If the Asset Sale is not completed, the
Partnership will resume paying monthly distributions.
Part 701: Inapplicable.
Part 703: Inapplicable.
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands except for per unit amounts)
Years Ended December 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Rental income........................... $ 11,799 $ 11,301 $ 9,600 $ 10,169 $ 12,584
(Loss) income from operations (1)....... $ (2,577) $ 1,015 $ (526) $ 37 $ 3,143
Net (loss) earnings..................... $ (2,539) $ 1,028 $ (512) $ 108 $ 3,278
Net (loss) earnings per unit of
limited partner interest.............. $ (0.59) $ 0.22 $ (0.12) $ 0.01 $ 0.72
Distributions per unit of
limited partner interest.............. $ 1.00 $ 1.00 $ 1.00 $ 1.23 $ 1.40
Distributions per unit of limited
partner interest representing
return of capital..................... $ 1.00 $ 0.78 $ 1.00 $ 1.22 $ 0.68
Total assets............................ $ 35,500 $ 43,239 $ 46,236 $ 51,721 $ 57,638
(1) The loss from operations reported for the year ended December 31, 2004 was
primarily due to the write down of the Partnership's containers. For information
regarding the write down, 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, 2004,
2003 and 2002. Please refer to the Financial Statements and Notes thereto in
connection with the following discussion.
Textainer Capital Corporation (TCC) is the Managing General Partner of the
Partnership. 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 reduce
revenues further by offering lessees incentives such as free rental periods or
credits. Conversely, in times of increased demand, rental revenues increase
because the Partnership has more containers on lease, rental rates sometimes
rise, and expenses will drop because the Partnership no longer incurs as many
charges to store or reposition off-lease containers. 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. 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. Due to the recent rise in price for new
containers, though demand for leased containers by shipping lines has increased.
Current demand and related market conditions for containers are discussed below
under "Results of Operations; Current Market Conditions for Leased Containers."
In addition to leasing containers, the Partnership also sells containers from
time to time. 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 a 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.
Through December 31, 2004, the Partnership has generally sold containers
individually. As discussed below under "Possible Sale of Partnership Assets,"
the Partnership has entered into an Asset Sale Agreement to sell all of its
remaining container fleet.
When the Partnership has sold its containers individually, sales have primarily
been made 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 has received 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, from 1998 through 2002, used
container prices declined, causing the Partnership to realize less from the sale
of its used containers. Used container sales prices stabilized in 2002 and 2003
and increased in 2004.
The Partnership's operations and financial results are also affected by the
price of new containers. The price for new containers fell from 1995 through
2003. This decrease significantly depressed rental rates. This decrease has
worked to the Partnership's advantage though, when, from time to time, the
Partnership has bought new containers. New containers are bought primarily with
a portion of the proceeds received from the sale of containers and a portion of
cash provided by operations. In the discussion below, this process is referred
to as reinvestment in containers.
Generally, reinvestment in containers replaces some, but not all, of the
containers sold by the Partnership. Therefore, over time, the Partnership's
container fleet shrinks, and rental revenues decrease, because there are fewer
containers available for lease.
During 2004, new container prices have increased significantly due to a
worldwide shortage of steel, which has resulted in limited availability of new
containers. The increase in new container prices and the limited availability of
new containers has improved demand for the Partnership's containers. See
"Results of Operations: Current Market Conditions for Leased Containers" for a
further discussion.
In June 2004, the Partnership compared the carrying value of its containers to
the anticipated estimated price to be realized in the proposed sale. Despite the
improvement in the market for used containers, the Partnership still found that
the carrying value of some of its older, more expensive containers was higher
than the anticipated estimated price to be realized in the sale. The Partnership
determined that these containers were impaired and recorded a write down expense
to reduce the carrying value of these containers to their anticipated sales
price. See "Other Income and Expenses: Write Down of Containers" below.
Possible Sale of Partnerships Assets
In November 2004, the Partnership and five other limited partnerships managed by
the General Partners and their affiliates entered into Asset Sale Agreements
with RFH, Ltd. to sell substantially all of their assets. At a Special Meeting
of Limited Partners, held on March 21, 2005, the limited partners of the
Partnership approved the Proposed Asset Sale.
It is not currently known whether the Asset Sale will be completed because of
two lawsuits regarding the Asset Sale, which were filed in March of 2005. As a
result of these lawsuits, the Partnership is unable to represent that it is not
subject to certain kinds of litigation, as required by the Asset Sale Agreement.
The Buyer may proceed with the Asset Sale if it chooses, but the Buyer is not
now obligated to consummate the Asset Sale. The Buyer has not notified the
Partnership of what it intends to do. The lawsuits are further described in Item
3 above. If the Asset Sale is completed, the Partnership had originally planned
to distribute to the partners the net proceeds of this sale, plus any previously
undistributed cash from operations and proceeds from the normal sale of
containers, less estimated expenses expected to be incurred through the final
winding up and termination of the Partnership. The plans to make these
distributions appear to be contested by at least one of the lawsuits. The
Partnership plans to terminate its existence after payment of the liquidating
distributions, but these plans may alter depending on the course of the
lawsuits. In the event the Asset Sale is not completed, the Partnership will
continue operations.
Liquidity and Capital Resources
Historical
From May 1, 1994 until April 29, 1996, the Partnership offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $5 on August 23, 1994 and on April 29, 1996 the
Partnership's offering of limited partnership interests was closed at $89,305.
Sources of Cash
If the Asset Sale is completed, in accordance with the terms of the Asset Sale
Agreement as executed on November 30, 2004, it will be effective as of January
1, 2005, which will mean that almost all of the Partnership's sources of cash in
2005 will be the proceeds from the Asset Sale. If the Asset Sale is not
completed, expected sources of cash are described below.
Rental income and proceeds from container sales are the Partnership's principal
sources of liquidity, and the source of funds for distributions and
reinvestment. 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 proceeds from container sales, a
component of cash from 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, 2004
and 2003, was $7,894 and $6,660, respectively. Net cash provided by operating
activities increased $1,234, or 19%, between the periods primarily due to the
increase in net (loss) earnings, adjusted for non-cash items, offset by
fluctuations in accounts payable and accrued liabilities and accrued damage
protection plan costs. Net (loss) earnings, adjusted for non-cash items,
increased primarily due to the decrease in direct container expenses and
increase in rental income. These items are discussed more fully under "Results
of Operations." The fluctuations in accounts payable and accrued liabilities and
accrued damage protection plan costs resulted from timing differences in the
payment of expenses, fees and distributions and the remittance of net rental
revenues as well as fluctuations in these amounts.
Cash from Sale of Containers
Current Sources: For the year ended December 31, 2004 and 2003, cash provided
from the sale of containers was $1,639 and $399, respectively. The increase of
$1,240, or 311%, was primarily due to the Partnership selling significantly more
off-lease containers and receiving a slightly higher average sales price during
the year ended December 31, 2004, compared to the equivalent period in 2003.
Fluctuations between periods in the number of containers sold and in the sales
price 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 in sales price between the periods can also be affected
by the number of containers bought by lessees, who reimburse the Partnership for
any containers that are lost or completely damaged beyond repair. These
reimbursement amounts are frequently higher than the average sales price for a
container sold in the open market when it comes off-lease.
Effect of Market Conditions: Market conditions can affect the Partnership's
decision to sell an off-lease container. If demand for leased containers is low,
the Partnership is more likely to sell a container rather than incur the cost to
reposition the container to a location where it can be re-leased. If demand is
strong, the Partnership is less likely to identify the container as for sale, as
it is anticipated that the container can be released in its current location or
repositioned to another location where demand is high. Although there were fewer
off-lease containers in low demand locations during 2004, compared to 2003, as a
result of the improved demand, the Partnership sold more containers during 2004
compared to 2003. The increase in the number of container sold was primarily due
to an increase in the number of off lease containers sold as a result of the
aging of the Partnership's fleet and increases in the average sale price of
these containers. Some of the market conditions affecting the sale of containers
are discussed below under "Comparative Results of Operations." Primarily as a
result of an industry-wide decline in the number of containers being offered for
sale, average sales price of used containers increased in 2004 with respect to
the sale of off-lease containers in certain geographic markets.
Effect of Container Sales on Future Cash Flows and Container Fleet: Through
2003, a significant amount of the containers sold have been containers that have
been lost or completely damaged by lessees. The sales price received on these
containers is based on the container's book value. These sales prices are higher
than the sales prices received for off-lease containers. The number of off-lease
containers sold through 2003 has been limited because of the young age of the
Partnership's fleet. If the Proposed Asset Sale of the Partnership's fleet does
not occur and the fleet continues to age, the Partnership expects the number of
off-lease containers sold to continue to increase and the average sales price
received for its containers to continue to decrease. The decline in average
sales price will leave smaller amounts available for reinvestment, which will be
one of the factors reducing the Partnership's fleet size in the future.
Uses of Cash
Cash from operations is primarily used to pay distributions to partners and
redeem limited partnership units. Cash from operations may also be used to
purchase containers. The amount of cash from operations available to reinvest in
additional containers, is dependent on (i) operating results and timing of
payments made and received; (ii) the amount of distributions paid to partners;
(iii) the amount of redemptions and (iv) working capital. The amounts of
distributions, redemptions and working capital are subject to the General
Partners' authority to set these amounts as provided in the Partnership
Agreement.
Another source of funds for the purchase of new containers (or reinvestment) is
the proceeds from the sale of the Partnership's containers. The number of
containers sold and the average sales price also affect how much the Partnership
can reinvest in new containers using these proceeds.
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.
Distributions, container purchases and redemptions are discussed in detail
below.
Distributions: During the year ended December 31, 2004, the Partnership declared
cash distributions to limited partners pertaining to the period from December
2003 through November 2004 in the amount of $4,393, which represented $1.00 per
unit. On a cash basis, as reflected in the Statements of Cash Flows, after
paying redemptions and general partner distributions, all of these distributions
were from current year operating activities. On an accrual basis, as reflected
on the Statements of Partners' Capital, after paying redemptions, all of these
distributions were a return of capital.
The Partnership made a monthly distribution payment of $366 in January 2005
related to 2004 operations. Since the Proposed Asset Sale would be effective
January 1, 2005, if completed as contemplated by the Asset Sale Agreement as
executed on November 30, 2004, the Partnership has temporarily suspended
distributions. If the Asset Sale is completed, the Partnership had originally
planned to make two final liquidating distribution payments. These distributions
would consist of the net proceeds from the Asset Sale and any previously
undistributed cash received from operations and proceeds from normal sales of
containers, less estimated expenses expected to be incurred through the final
winding up and termination of the Partnership. As noted under "Possible Sale of
Partnership Assets," it is not currently known whether the Asset Sale will be
completed. If the sale is completed, the Partnership's plans to pay these
liquidating distributions, and the amount and timing of these distributions may
be affected by events in the lawsuits discussed above.
If the Asset Sale is not completed, monthly distributions will resume and
partners will continue to receive distributions in accordance with the
Partnership's previous distribution policy.
Capital Commitments: Container purchases
For the years ended December 31, 2004 and 2003, cash used for the purchase of
containers was $548 and $1,972, respectively. The decline in cash used to
purchase containers was primarily due to significant increases in new container
prices in 2004 and then due to the Proposed Asset Sale. In general, fluctuations
between the periods in the number of containers purchased reflect (i) the amount
of cash available to purchase containers; (ii) demand for leasing new
containers; (iii) the type of container purchased and (iv) the purchase price of
the container.
At December 31, 2004, the Partnership had no commitments to purchase containers.
If the Proposed Asset Sale is not completed, the Partnership anticipates
purchasing containers through the remainder of its operating period.
Capital Commitments: Redemptions
During the year ended December 31, 2004, the Partnership redeemed 13,102 units
for a total dollar amount of $93. The Partnership used cash 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 (loss) income from operations, which consists primarily of
rental income less costs and expenses (including container depreciation and
write downs, 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, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Beginning container fleet.......... 25,499 24,682 24,885
Ending container fleet............. 24,166 25,499 24,682
Average container fleet............ 24,833 25,091 24,784
Utilization
Rental income and direct container expenses are also affected by the average
utilization of the container fleet, which was 92%, 84% and 68% on average during
the years ended December 31, 2004, 2003 and 2002, respectively. The remaining
container fleet is off-lease and is being stored primarily at a large number of
storage depots. At December 31, 2004, 2003 and 2002, utilization was 96%, 83%
and 84%, respectively, and the Partnership's off-lease containers (in units)
were located in the following locations:
2004 2003 2002
---- ---- ----
Americas 286 1,241 1,963
Europe 184 667 1,292
Asia 502 2,445 562
Other 12 109 155
--- ----- -----
Total off-lease containers 984 4,462 3,972
=== ===== =====
Rental Rates
In addition to utilization, rental income is affected by daily rental rates.
Daily rental rates are different under different lease types. The two primary
lease types for the Partnership's containers are long term leases and master
leases. The average daily rental rate for the Partnership's containers decreased
5% and 7% from the years ended December 31, 2003 to 2004 and December 31, 2002
to 2003, respectively, due to the declines in both master lease and long term
lease rates. 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, 2004, 2003 and 2002, 43%, 44%, and 36% 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, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Rental income $11,799 $11,301 $9,600
(Loss) income from operations ($ 2,577) $ 1,015 ($ 526)
Percent change from previous
year in:
Utilization 10% 24% 6%
Average container fleet ( 1%) 1% 0%
Average rental rates ( 5%) ( 7%) (12%)
The Partnership's rental income increased $498, or 4%, and $1,701, or 18%, from
the years ended December 31, 2003 to 2004 and December 31, 2002 to 2003,
respectively. The increases were due to increases in container rental income and
other rental income, which is discussed below. Income from container rentals,
the major component of total revenue, increased $495, or 5%, and $1,484, or 18%,
from the years ended December 31, 2003 to 2004, and December 31, 2002 to 2003,
respectively. These increases were primarily due to the increase in average
on-hire utilization, offset by the declines in average rental rates as detailed
in the above table.
The loss from operations for the year ended December 31, 2004 resulted primarily
from the write down of the Partnership's containers. See "Other Income and
Expenses: Write Down of Containers," and "Critical Accounting Policies and
Estimates: Container Impairment Estimates."
Current Market Conditions for Leased Containers: Utilization was stable for most
of 2003 and demand remained strong during the first quarter of 2004 and
increased through the end of 2004. Beginning in 2004, a worldwide steel shortage
caused significant increases in new container prices and limited the number of
new containers being built. As a result, demand for leased containers increased
further beginning in March of 2004 and has remained strong through the beginning
of 2005.
Sale of Containers in Lower Demand Locations: Despite the increase in demand,
areas of lower demand for containers still exist due to a continuing trade
imbalance between Asia and the Americas and Europe. However, the number of
off-lease containers in these low demand locations has decreased, as lessees
have returned fewer containers to these locations and have also leased
containers from some of these locations. The continuing sale of these off-lease
containers has also reduced the number of containers in these locations. In
recent years, market conditions in these low demand locations have driven a
small number of sales of off-lease containers. These sales resulted from the
container's age and the high cost of repositioning containers from these areas.
Before incurring high repositioning costs, the Partnership generally weighs
those costs against the expected future rental stream from a container. If the
repositioning costs are too high when compared to the anticipated future rental
revenues, the container will be identified for sale, rather than repositioned.
Older containers, in particular, have been identified as for sale in low demand
locations because their expected future rental stream is reduced by their
shorter remaining marine life and by the shipping lines' preference for newer
containers. Since older containers were the most likely containers to be sold in
low demand locations, the relatively young age of the Partnership's fleet
through 2003 limited the number of sales in these areas. If the currently
contemplated sale of the Partnership's fleet does not occur and the
Partnership's fleet continues to age, sales of off-lease containers in these low
demand locations may continue, despite the improved conditions in these areas.
The number of the Partnership's off-lease containers in the Americas and Europe,
where most of these lower demand locations occur, is detailed above in
"Utilization."
Other Income and Expenses
The following is a discussion of other income earned and expenses incurred by
the Partnership:
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, 2004, other rental income was $1,551, an
increase of $3 from the equivalent period in 2003. The increase was primarily
due to an increase in DPP income of $40, offset by a decrease in handling and
location income of $27 and $10, respectively.
Other rental income was $1,548 for the year ended December 31, 2003 an increase
of $217 from the equivalent period in 2002. The increase was primarily due to
increases in DPP and location income of $232 and $149, respectively, offset by a
decrease in handling income of $173.
Direct Container Expenses
Direct container expenses decreased $1,082, or 35%, from the year ended December
31, 2003 to the same period in 2004. The decrease was primarily due to the
decreases in repositioning and storage expenses of $658 and $338, respectively.
The decline in repositioning expense was primarily due to fewer containers being
repositioned during the year ended December 31, 2004 than in the same period in
2003, partially offset by a higher average repositioning cost per container.
Storage expense decreased primarily due to the increase in utilization noted
above, offset by a slight increase in the average storage cost per container.
Direct container expenses decreased $191, or 6%, from the year ended December
31, 2002 to the equivalent period in 2003. The decrease was primarily due to
declines in storage and handling expenses of $859 and $92, respectively, offset
by increases in repositioning and DPP expenses of $582 and $147, respectively.
These changes are discussed in detail below.
Storage expense decreased due to the increase in utilization noted above and a
decline in the average storage cost per container. The decrease in handling
expense was primarily due to the decline in container movement. Repositioning
expense increased primarily 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. This increase was partially offset by the decline in the
number of containers repositioned between the periods. DPP expense increased
primarily due to the increase in the number of containers covered under DPP.
Bad Debt Expense
Bad debt expense was $165, $65 and $37 for the years ended December 31, 2004,
2003 and 2002, respectively. Fluctuations in bad debt expense 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. The expenses recorded during the years ended December 31,
2004, 2003 and 2002 reflect higher reserve estimates, after deductions had been
taken against the reserve, from December 31, 2003, 2002 and 2001, respectively.
Depreciation Expense
Depreciation expense decreased $1,059, or 19%, from the year ended December 31,
2003 to the same period in 2004, primarily due to the write-down recorded in
June 2004, which reduced the carrying value of certain containers and resulted
in a lower depreciation expense during the second half of 2004.
The increase in depreciation expense of $270, or 5%, from the year ended
December 31, 2002 to 2003 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 for the last half of 2002
and all of 2003. For a discussion of the Partnership's depreciation policy, see
"Critical Accounting Policies and Estimates: Container Depreciation Estimates."
Write Down of Containers
Write Down of Containers Held for Continued Use: The Partnership evaluated the
recorded value of its container fleet at June 30, 2004, taking into
consideration the container sales prices in the letter of intent relating to the
sale of the Partnership's container fleet. The Partnership recorded a write down
of $6,254 to reduce the carrying value of some of the containers to their
anticipated per unit sales price. The Partnership evaluated the recoverability
of these containers at December 31, 2004 based on the January 1, 2005 sales
prices in the Asset Sale Agreement and determined that there was no impairment.
See "Critical Accounting Policies and Estimates: Container Impairment Estimates.
Specific Containers Identified for Sale: The Partnership also evaluates the
recoverability of the recorded amount of container rental equipment for
individual containers identified for sale in the ordinary course of business and
determines whether a reduction to the carrying value of these containers is
required. To date, there have been no write downs recorded for specific
containers identified for sale.
Gain (Loss) on Sale of Containers
The following details the gain (loss) on the sale of containers for the years
ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Gain (loss) on container sales $ 193 $ (32) $ 12
Gain on sale of containers increased $225 from the year ended December 31, 2003
to the same period in 2004. The increase was primarily due to the significant
reduction in net book value as a result of the June 2004 write-down and
increases in container sales prices. The amount gain on the sale of 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. Nevertheless, and as discussed
above under "Liquidity and Capital Resources" and "Comparative Results of
Operations: Sale of Containers in Lower Demand Locations," the Partnership does
expect that the average sales price for containers sold may decline in the
future, due to (i) the sale of a higher number of off-lease containers, as
opposed to on-lease containers that were lost or completely damaged by the
lessee; and (ii) the sale of more containers in low demand locations. Both of
these factors are related to the aging of the Partnership's fleet. The
fluctuations in gain on sale of containers will also be dependent on used
container sales prices, which can fluctuate between periods.
Management and Professional 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, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Equipment management fees $ 826 $791 $668
Incentive management fees 184 184 166
----- --- ---
Management fees to affiliates $1,010 $975 $834
===== === ===
Equipment management fees were comparable between the periods and were
approximately 7% of rental income for the years ended December 31, 2004, 2003
and 2002. Incentive management fees were comparable between the periods as the
amount of distributions paid from cash from operations was comparable.
Professional fees increased $41 from the year ended December 31, 2003 to 2004,
primarily due to increases in legal, tax and accounting expenses. The decrease
in professional fees of $23, from the year ended December 31, 2002 to 2003, was
primarily due to declines in tax and accounting expenses.
General and administrative costs to affiliates increased $41, or 7%, and $15, or
3%, from the years ended December 31, 2003 to 2004 and December 31, 2002 to
2003, respectively. The increases were due to the increases in overhead costs
allocated from TEM and TCC as the Partnership represented a larger portion of
the total fleets managed by TEM and TCC.
Other general and administrative costs decreased $15 and $124, from the years
ended December 31, 2003 to 2004 and December 31, 2002 to 2003, respectively.
These fluctuations were primarily due to declines 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, 2004 for these
obligations:
-----------------------------------------------------------------------------------------------
Payments due by period
-----------------------------------------------------------
Less
than 1 1-3 3-5 More than
Contractual Obligations Total year years years 5 years
-----------------------------------------------------------------------------------------------
Acquisition fees $ - - * * *
Equipment management fees 134 134 * * *
Incentive management fees 46 46 * * *
Equipment liquidation fee (1) - -
Reimbursement of general and
administrative costs to:
Affiliates 123 123 * * *
Other service providers 36 36 * * *
-----------------------------------------------------------------------------------------------
Total $339 $339
-----------------------------------------------------------------------------------------------
* The Partnership has not recorded liabilities for these fees and reimbursements
related to periods subsequent to December 31, 2004, as these fees and
reimbursements cannot be estimated as they are dependent on variable factors as
detailed below:
Acquisition fees 5% of equipment cost
Equipment management fee 7% of gross operating lease revenues
2% of gross full payout lease revenues
Incentive management fee 4% of distributable cash from operations
Reimbursements to affiliates Dependent on the amount of expenses incurred
and other service providers that are allocable to the Partnership
Service fee to other service Monthly fee dependent on the number of limited partners
provider
(1) The Partnership is required to pay the General Partners an equipment
liquidation fee, but this fee is payable only after limited partners receive a
certain amount of distributions from the Partnership. The Partnership does not
currently expect to pay this liquidation fee.
For the amount of fees and reimbursements made to the General Partners for the
years ended December 31, 2004, 2003 and 2002, see Note 2 to the Financial
Statements in Item 8. For the amount of fees and reimbursements made to other
service providers, see Other general and administrative costs in the Statements
of Operations in Item 8.
Net Loss or Earnings per Limited Partnership Unit
2004 2003 2002
---- ---- ----
Net (loss) earnings per limited
partnership unit ($ 0.59) $0.22 ($0.12)
Net (loss) earnings allocated
to limited partners ($2,578) $986 ($ 553)
Net loss/earnings per limited partnership unit fluctuates based on fluctuations
in net loss/earnings allocated to limited partners as detailed above. The
allocation of net loss/earnings for the years ended December 31, 2004, 2003 and
2002 included a special allocation of gross income to the General Partners of
$64, $32, and $46, respectively, in accordance with the Partnership Agreement.
As discussed above, the write down of some of the Partnership's containers was
the primary reason for the net loss incurred by the Partnership during the year
ended December 31, 2004.
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.
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 13% and has averaged approximately 8% 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 estimates the future undiscounted cash flows for the container and
considers other relevant information. 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.
At June 30, and December 31, 2004, management used a different estimated fair
value for containers held for continued use, which took into account the
possible sale of the Partnership's entire container fleet to determine whether
the containers were impaired. The estimated fair value used at June 30 was the
anticipated sales price from the letter of intent regarding this sale. The
estimated fair value used at December 31 was the sales prices at January 1,
2005, detailed in the Asset Sale Agreement between the Partnership and RFH, Ltd.
When these estimated fair values were compared to the recorded values of the
Partnership's containers at June 30, and December 31, some of the recorded
values at June 30, were found to be higher. The Partnership wrote down the
containers with the higher recorded values to the estimated sales price from the
letter of intent, even though they continued to be held for continued use.
As noted above, the Partnership also evaluates the recorded value of those
containers identified for sale in the ordinary course of its business,
separately from containers held for continued use. Containers identified for
sale in the ordinary course of business include those containers that have been
sold prior to the proposed arrangement for the sale of the Partnership's entire
container fleet, as well as those containers that are being sold individually
(usually when they come off-lease) without regard to that proposed sale. For
these routine sales made in the ordinary course of business, the Partnership has
used an estimated fair value of the estimated sales price for the container,
less estimated cost to sell. If this estimate is lower than the recorded value
of the container identified for sale, the container identified for sale would be
written down. To date, the Partnership has not recorded any write-downs of
containers identified for sale. See "Write-Down of Containers" above.
The Partnership will continue to monitor the recoverability of its containers.
Any 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 Partnership has discussed the Asset Sale Agreement pertaining to the sale of
its container fleet above under "Possible Sale of Partnership Assets." This sale
is subject to the Buyer's willingness to waive certain conditions contained in
the Asset Sale Agreement and other conditions. There is no assurance that the
sale under the Asset Sale Agreement will be completed.
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,
2004, approximately 6% of the Partnership's expenses were paid in 15 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 SUPPLEMENTARY DATA
Attached pages 25 to 37.
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Partners
Textainer Equipment Income Fund V, L.P.:
We have audited the accompanying balance sheets of Textainer Equipment Income
Fund V, L.P. (a California limited partnership) as of December 31, 2004 and
2003, and the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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
V, L.P. as of December 31, 2004 and 2003, and the results of its operations, and
its cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
March 22, 2005
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Balance Sheets
December 31, 2004 and 2003
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------
2004 2003
---------------- ---------------
Assets
Container rental equipment, net of accumulated
depreciation of $357 (2003: $41,500) (note 1(e)) $ 27,081 $ 39,346
Cash 5,830 1,376
Accounts receivable, net of allowance
for doubtful accounts of $320 (2003: $157) 2,138 2,241
Due from affiliates, net (note 2) 430 243
Prepaid expenses 21 33
---------------- ---------------
$ 35,500 $ 43,239
================ ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 108 $ 253
Accrued liabilities 178 270
Accrued damage protection plan costs (note 1(j)) 464 388
Container purchases payable - 507
Deferred damage protection plan revenue (note 1(k)) 174 175
Deferred quarterly distributions (note 1(g)) 61 60
---------------- ---------------
Total liabilities 985 1,653
---------------- ---------------
Partners' capital:
General partners 13 20
Limited partners 34,502 41,566
---------------- ---------------
Total partners' capital 34,515 41,586
---------------- ---------------
$ 35,500 $ 43,239
================ ===============
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands except for unit and per unit amounts)
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Rental income $ 11,799 $ 11,301 $ 9,600
----------------- ----------------- -----------------
Costs and expenses
Direct container expenses 1,997 3,079 3,270
Bad debt expense 165 65 37
Depreciation (note 1(e)) 4,421 5,480 5,210
Write-down of containers (note 1 (e)) 6,254 - -
Professional fees 75 34 57
Management fees to affiliates (note 2) 1,010 975 834
General and administrative costs to affiliates (note 2) 588 547 532
Other general and administrative costs 59 74 198
(Gain) loss on sale of containers (note 1(e)) (193) 32 (12)
----------------- ----------------- -----------------
14,376 10,286 10,126
----------------- ----------------- -----------------
(Loss) income from operations (2,577) 1,015 (526)
----------------- ----------------- -----------------
Interest income 38 13 14
----------------- ----------------- -----------------
Net (loss) earnings $ (2,539) $ 1,028 $ (512)
================= ================= =================
Allocation of net (loss) earnings (note 1(g)):
General partners $ 39 $ 42 $ 41
Limited partners (2,578) 986 (553)
----------------- ----------------- -----------------
$ (2,539) $ 1,028 $ (512)
================= ================= =================
Limited partners' per unit share of net (loss) earnings $ (0.59) $ 0.22 $ (0.12)
================= ================= =================
Limited partners' per unit share of distributions $ 1.00 $ 1.00 $ 1.00
================= ================= =================
Weighted average number of limited
partnership units outstanding (note 1(l)) 4,392,017 4,415,984 4,441,722
================= ================= =================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Partners' Capital
-----------------------------------------------------------
General Limited Total
----------------- ----------------- -----------------
Balances at December 31, 2001 $ 29 $ 50,352 $ 50,381
Distributions (46) (4,443) (4,489)
Redemptions (note 1(m)) - (132) (132)
Net earnings (loss) 41 (553) (512)
----------------- ----------------- -----------------
Balances at December 31, 2002 24 45,224 45,248
----------------- ----------------- -----------------
Distributions (46) (4,418) (4,464)
Redemptions (note 1(m)) - (226) (226)
Net earnings 42 986 1,028
----------------- ----------------- -----------------
Balances at December 31, 2003 20 41,566 41,586
----------------- ----------------- -----------------
Distributions (46) (4,393) (4,439)
Redemptions (note 1(m)) - (93) (93)
Net earnings (loss) 39 (2,578) (2,539)
----------------- ----------------- -----------------
Balances at December 31, 2004 $ 13 $ 34,502 $ 34,515
================= ================= =================
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Cash flows from operating activities:
Net (loss) earnings $ (2,539) $ 1,028 $ (512)
Adjustments to reconcile net (loss) earnings to net cash provided
by operating activities:
Depreciation (note 1(e)) 4,421 5,480 5,210
Write down of containers (note 1(e)) 6,254 - -
Increase (decrease) in allowance for doubtful accounts 163 23 (20)
(Gain) loss on sale of containers (193) 32 (12)
Decrease (increase) in assets:
Accounts receivable 60 24 (254)
Due from affiliates, net (122) (74) 41
Prepaid expenses 12 (8) (13)
(Decrease) increase in liabilities:
Accounts payable and accrued liabilities (237) 19 (207)
Deferred damage protection plan revenue (1) - (8)
Accrued damage protection plan costs 76 136 49
------------- ------------- -------------
Net cash provided by operating activities 7,894 6,660 4,274
------------- ------------- -------------
Cash flows from investing activities
Proceeds from sale of containers 1,639 399 471
Container purchases (548) (1,972) (187)
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,091 (1,573) 284
------------- ------------- -------------
Cash flows from financing activities:
Redemptions of limited partnership units (93) (226) (132)
Distributions to partners (4,438) (4,461) (4,488)
------------- ------------- -------------
Net cash used in financing activities (4,531) (4,687) (4,620)
------------- ------------- -------------
Net increase (decrease) in cash 4,454 400 (62)
Cash at beginning of period 1,376 976 1,038
------------- ------------- -------------
Cash at end of period $ 5,830 $ 1,376 $ 976
============= ============= =============
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Statements of Cash Flows - Continued
Years ended December 31, 2004, 2003 and 2002
(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, 2004, 2003 and 2002, resulting in
differences in amounts recorded and amounts of cash disbursed or received by the
Partnership, as shown in the Statements of Cash Flows.
2004 2003 2002
---- ---- ----
Container purchases included in:
Due to affiliates................................................. $ - $ 19 $ -
Container purchases payable....................................... - 507 -
Distributions to partners included in:
Due to affiliates................................................. 3 3 3
Deferred quarterly distributions.................................. 61 60 57
Proceeds from sale of containers included in:
Due from affiliates............................................... 174 128 50
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, 2004, 2003 and 2002.
2004 2003 2002
---- ---- ----
Container purchases recorded......................................... $ 22 $2,498 $ 163
Container purchases paid............................................. 548 1,972 187
Distributions to partners declared................................... 4,439 4,464 4,489
Distributions to partners paid....................................... 4,438 4,461 4,488
Proceeds from sale of containers recorded............................ 1,685 477 440
Proceeds from sale of containers received............................ 1,639 399 471
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, 2004, 2003 and 2002 were $120, $17 and $58, respectively.
See accompanying notes to financial statements
TEXTAINER EQUIPMENT INCOME FUND V, L.P.
(a California Limited Partnership)
Notes to Financial Statements
Years ended December 31, 2004, 2003 and 2002
(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 V, L.P. (TEIF V or the Partnership), a
California limited partnership, with a maximum life of 20 years, was formed
on July 15, 1993. The Partnership was formed to engage in the business of
owning, leasing and selling both new and used equipment related to the
international containerized cargo shipping industry, including, but not
limited to, containers, trailers and other container-related equipment.
TEIF V offered units representing limited partnership interests (Units) to
the public from May 1, 1994 until April 29, 1996, the close of the offering
period, when a total of 4,465,263 Units had been purchased for a total of
$89,305.
Textainer Capital Corporation (TCC) is the managing general partner of the
Partnership. 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 container 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, 2004 and 2003, 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 $418. 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 its
containers to expected future cash flows or other relevant information 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. When assets are determined to be impaired and are written down, the
Partnership writes off the accumulated depreciation and reduces the cost
basis of these asset to arrive at a new cost basis.
The Partnership evaluated the recoverability of the recorded amount of
container rental equipment for containers to be held for continued use and
determined that a reduction to the carrying value of these containers was
not required at December 31, 2003 and 2002. Based on an impairment analysis
performed at June 30, 2004, which considered the possible sale of the
Partnership's remaining container fleet (see Note 5), the Partnership
determined that certain