<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-17688
TCC EQUIPMENT INCOME FUND
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3045888
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
650 CALIFORNIA STREET, 16TH FLOOR
SAN FRANCISCO, CA 94108
(Address of Principal Executive Offices) (ZIP Code)
(415) 434-0551
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
<PAGE> 2
TCC Equipment Income Fund
(A CALIFORNIA LIMITED PARTNERSHIP)
QUARTERLY REPORT ON FORM 10Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets - September 30, 1996 (unaudited) and December 31, 1995... 3
Statements of Earnings for the nine and three months
ended September 30, 1996 and 1995 (unaudited) .......................... 4
Statements of Partners' Capital for the nine months
ended September 30, 1996 and 1995 (unaudited) .......................... 5
Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (unaudited) .......................... 6
Notes to Financial Statements (unaudited) .............................. 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................. 13
</TABLE>
2
<PAGE> 3
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
September 30, 1996 and December 31, 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
---------- ------
(UNAUDITED)
<S> <C> <C>
ASSETS
Container rental equipment, net of accumulated
depreciation of $ 10,399 (1995: $ 10,681) $15,702 17,317
Net investment in direct financing leases (note 8) 567 760
Cash 972 492
Accounts receivable, net of allowance
for doubtful accounts of $ 683 (1995: $ 661) 1,540 1,705
Due from affiliates (note 6) 1,385 1,139
Prepaid expenses -- 10
------- ------
$20,166 21,423
======= ======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable $ 125 150
Accrued liabilities 42 50
Accrued maintenance and repair costs (note 2) 40 27
Accrued damage protection plan costs (note 3) 139 129
Warranty claims (note 4) 276 324
Due to affiliates (note 6) 29 509
Equipment purchases payable 5 430
------- ------
Total liabilities 656 1,619
------- ------
Partners' capital:
General partners (36) (36)
Limited partners 19,546 19,840
------- ------
TOTAL PARTNERS' CAPITAL 19,510 19,804
------- ------
$20,166 21,423
======= ======
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF EARNINGS
For the nine and three months ended September 30, 1996 and 1995
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1996 SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental Income $ 4,135 1,286 4,866 1,582
---------- ---------- ---------- ----------
Costs and expenses:
Direct container expenses 721 208 652 201
Bad debt expense 41 18 177 105
Depreciation 1,093 355 1,423 477
Professional fees 23 6 28 6
Management fees to affiliates (note 6) 385 122 437 143
General and administrative costs
to affiliates (note 6) 238 69 318 106
Other general and administrative costs 47 16 60 17
---------- ---------- ---------- ----------
2,548 794 3,095 1,055
---------- ---------- ---------- ----------
Income from operations 1,587 492 1,771 527
---------- ---------- ---------- ----------
Other income:
Interest income, net 9 5 11 5
Gain on sales of containers 341 125 191 109
---------- ---------- ---------- ----------
350 130 202 114
---------- ---------- ---------- ----------
Net earnings $ 1,937 622 1,973 641
========== ========== ========== ==========
Allocation of net earnings (note 6):
General partners $ 23 8 21 7
Limited partners 1,914 614 1,952 634
---------- ---------- ---------- ----------
$ 1,937 622 1,973 641
========== ========== ========== ==========
Limited partners' per unit share
of net earnings $ 1.30 $ 0.42 $ 1.33 $ 0.43
Limited partners' per unit share
of distributions $ 1.50 $ 0.50 $ 1.45 $ 0.50
Weighted average number of limited
partnership units outstanding 1,471,779 1,471,779 1,472,529 1,472,529
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1995 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
---------------------------------
GENERAL LIMITED TOTAL
------- ------- -----
<S> <C> <C> <C>
Balances at January 1, 1995 $(36) 20,090 20,054
Distributions (21) (2,135) (2,156)
Redemptions (note 9) -- (4) (4)
Net earnings 21 1,952 1,973
---- ------ ------
Balances at September 30, 1995 $(36) 19,903 19,867
==== ====== ======
Balances at January 1, 1996 $(36) 19,840 19,804
Distributions (23) (2,208) (2,231)
Net earnings 23 1,914 1,937
---- ------ ------
Balances at September 30, 1996 $(36) 19,546 19,510
==== ====== ======
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,937 1,973
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,093 1,423
Increase in allowance for doubtful accounts 22 72
Gain on sale of rental equipment (341) (191)
Changes in assets and liabilities:
Decrease in accounts receivable 141 54
(Increase) decrease in due from affiliates, net (161) 1
Proceeds from principal payments
on direct financing leases 231 192
Decrease in prepaid expenses 10 11
(Decrease) increase in accounts payable and
accrued liabilities (33) 43
Increase (decrease) in accrued maintenance and 13 (3)
repair costs
Decrease in warranty payable (48) (28)
Increase (decrease) in accrued
damage protection plan costs 10 (26)
------- ------
Net cash provided by operating activities 2,874 3,521
------- ------
Cash flows from investing activities:
Proceeds from sale of container rental equipment 1,001 575
Container purchases (716) (1,739)
------- ------
Net cash provided by (used in) investing activities 285 (1,164)
------- ------
Cash flows from financing activities:
Repayment of borrowings from affiliates (435) --
Redemptions of limited partnership units -- (4)
Distributions to partners (2,244) (2,157)
------- ------
Net cash used in financing activities (2,679) (2,161)
------- ------
Net increase in cash 480 196
Cash at beginning of period 492 192
------- ------
Cash at end of period $ 972 388
======= ======
Interest paid during the period $ 14 --
======= ======
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS--CONTINUED
For the nine months ended September 30, 1996 and 1995
(Amounts in thousands)
(unaudited)
SUPPLEMENTAL DISCLOSURES:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of Equipment purchases, distributions
to partners, and proceeds from sale of Equipment which had not been paid or
received as of September 30, 1996 and 1995, and December 31, 1995 and 1994,
resulting in differences in amounts recorded and amounts of cash disbursed or
received by the Partnership, as shown in the Statements of Cash Flows for the
nine-month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Sept 30, Dec. 31, Sept 30, Dec. 31,
1996 1995 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates ..................... $ 11 44 43 12
Equipment purchases payable ........... 5 430 567 5
Distributions to partners included in:
Due to affiliates ..................... 2 15 4 5
Proceeds from sale of Equipment included in:
Accounts receivable ................... -- 1 48 1
Due from affiliates ................... 313 229 197 169
</TABLE>
The following table summarizes the amounts of Equipment purchases, distributions
to partners, and proceeds from sale of Equipment recorded by the Partnership and
the amounts paid or received as shown in the Statements of Cash Flows for the
nine-month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Equipment purchases recorded .............. $ 258 2,332
Equipment purchases paid .................. 716 1,739
Distributions to partners declared ........ 2,231 2,156
Distributions to partners paid ............ 2,244 2,157
Proceeds from sale of Equipment recorded... 1,084 650
Proceeds from sale of Equipment received... 1,001 575
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 8
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(Unaudited)
NOTE 1. GENERAL
TCC Equipment Income Fund (the Partnership) is a California Limited
Partnership formed in 1987. The Partnership owns and leases a fleet of
intermodal marine cargo container equipment (the Equipment) to
international shipping lines.
The accompanying interim comparative financial statements have not been
audited by an independent public accountant. However, all adjustments
(which were only normal and recurring adjustments) which are, in the
opinion of management, necessary to fairly present the financial position
of the Partnership as of September 30, 1996 and December 31, 1995, and the
results of its operations, changes in partners' capital and cash flows for
the nine- and three-month periods ended September 30, 1996 and 1995, have
been made.
The financial information presented herein should be read in conjunction
with the audited financial statements and other accompanying Notes
included in the Partnership's annual audited financial statements as of
December 31, 1995.
Certain estimates and assumptions were made by the Partnership's
management that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications of prior year amounts have been made in order to
conform with the 1996 financial statement presentation.
For the nine months ended September 30, 1996, the revenue from one lessee
accounted for 10.13% of the Partnership's revenues. No other single lessee
accounted for more than 10% of the Partnership's revenues and it is not
anticipated that the loss of any single customer or small group of
customers, would have a material adverse effect on the business of the
Partnership.
NOTE 2. MAINTENANCE AND REPAIR
The Partnership accrues maintenance and repair costs on damaged units in
depots. At September 30, 1996 and December 31, 1995, the amount accrued
was $40 and $27, respectively.
NOTE 3. DAMAGE PROTECTION PLAN
The Partnership offers a Damage Protection Plan (the Plan) to lessees of
its Equipment. Under the terms of the Plan, the Partnership earns
additional revenues on a daily basis and, as a result, has agreed to bear
certain repair costs. It is the Partnership's policy to recognize revenue
when earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated repair costs. At September 30, 1996 and December
31, 1995, this reserve was equal to $139 and $129, respectively.
8
<PAGE> 9
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4. WARRANTY CLAIMS
During 1992 and 1995, the Partnership settled warranty claims against an
Equipment manufacturer. The Partnership is amortizing the settlement
amounts over the remaining estimated useful life of the Equipment (seven
years), reducing maintenance and repair costs over that time. At September
30, 1996 and December 31, 1995, the unamortized portion of the settlement
amount was $276 and $324, respectively.
NOTE 5. ACQUISITION OF EQUIPMENT
During the nine-month periods ended September 30, 1996 and 1995, the
Partnership purchased Equipment with a cost of $258 and $2,332,
respectively.
NOTE 6. TRANSACTIONS WITH AFFILIATES
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership. TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC). Textainer Equipment Management Limited (TEM)
and Textainer Limited (TL) are associate general partners of the
Partnership. The managing general partner and the associate general
partners are collectively referred to as the General Partners and are
commonly owned by Textainer Group Holdings Limited (TGH). The General
Partners also act in this capacity for other limited partnerships.
Textainer Acquisition Services Limited (TAS) is an affiliate of the
General Partners which performs services relative to the acquisition of
Equipment outside the United States on behalf of the Partnership. TCC
Securities Corporation (TSC), a licensed broker and dealer in securities
and an affiliate of the General Partners, was the managing sales agent for
the offering of Units for sale.
In accordance with the Partnership Agreement, net earnings or losses,
syndication and offering costs and partnership distributions are allocated
1% to the general partners and 99% to the limited partners, with the
exception of gains on sales of containers. Such gains are allocated to the
General Partners to the extent that their partners' capital accounts'
deficits exceed the portion of syndication and offering costs allocated to
them. On termination of the Partnership, the General Partners shall be
allocated gross income equal to their allocations of syndication and
offering costs.
As part of the operation of the Partnership, the Partnership is to pay to
the General Partners or TAS an incentive management fee, an acquisition
fee, an equipment management fee and an equipment liquidation fee. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $33 and $84 of equipment acquisition fees as a component of
container costs during the nine-month periods ended September 30, 1996 and
1995, respectively. The Partnership incurred $92 and $31 of incentive
management fees during the nine- and three-month periods ended September
30, 1996, respectively, and $93 and $31 for the comparable periods ended
September 30, 1995. No equipment liquidation fees were incurred during
either period.
The Equipment is managed by TEM. Prior to the sale of the Partnership's
storage fleet during 1995, TEM had entered into an agreement with its
wholly-owned subsidiary Textainer Storage Services (TSS) to manage storage
containers owned by the Partnership and other owners (note 10). In its
role as manager, TEM has authority to acquire, hold, manage, lease, sell
and dispose of the
9
<PAGE> 10
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Equipment. Additionally, TEM holds, for the payment of direct operating
expenses, a reserve of cash that has been collected from leasing
operations; such cash is included in due from affiliates at September 30,
1996 and December 31,1995.
Subject to certain reductions, TEM receives a monthly equipment management
fee equal to 7% of gross revenues attributable to operating leases and 2%
of gross revenues attributable to full payout net leases. For the nine-
and three-month periods ended September 30, 1996, these fees totaled $293
and $91, respectively, and $344 and $112 for the comparable periods ended
September 30, 1995. Such fees are either retained by TEM or, prior to the
sale of the storage fleet, the fees allocable to TSS, if any, were passed
through to TSS by TEM for services rendered. The Equipment is or was
leased by TEM and TSS to third party lessees on operating master leases,
spot leases and term leases. The majority of the Equipment is leased under
operating leases with limited terms and no purchase option.
Certain indirect general and administrative costs incurred in performing
administrative services necessary to the operation of the Partnership are
borne by TEM and, prior to the sale of the storage fleet, TSS. Such costs
are allocated to the Partnership based on the ratio of the Partnership's
interest in managed Equipment to the total equipment managed by TEM and
TSS. Indirect general and administrative costs allocated to the
Partnership were $208 and $60 for the nine- and three-month periods ended
September 30, 1996, respectively, and $268 and $89 for the comparable
periods ended September 30, 1995.
TFS, in its capacity as managing general partner, also incurred general
and administrative costs of $30 and $9 for the nine- and three-month
periods ended September 30, 1996, respectively, and $50 and $17 for the
comparable periods ended September 30, 1995, which were reimbursed by the
Partnership.
The General Partners or TAS may acquire Equipment in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such Equipment for the Partnership. The Equipment may then
be resold to the Partnership on an all-cash basis at a price equal to the
actual cost, as defined in the Partnership Agreement. In addition, the
General Partners or TAS are entitled to an acquisition fee for any
Equipment resold to the Partnership.
At September 30, 1996 and December 31, 1995, due from and to affiliates
are comprised of:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Due from affiliates:
Due from TEM and TSS ...... $1,385 1,139
====== =====
Due to affiliates:
Due to TL ................. $ -- 2
Due to TCC ................ 5 5
Due to TAS ................ 11 37
Due to TFS ................ 13 464
Due to TGH ................ -- 1
------ -----
$ 29 509
====== =====
</TABLE>
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual
10
<PAGE> 11
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
and payment of expenses and fees described above or in the accrual and
payment of net rental revenues from TEM and TSS.
It is the policy of the Partnership and the General Partners to charge
interest on intercompany balances which are outstanding for more than one
month to the extent that such balances relate to loans for Equipment
purchases. Interest is charged at the Prime Rate plus certain margins
based on TGH's leverage ratio. The Partnership incurred interest expense
of $10 on such intercompany balances payable to TFS during the nine-month
period ended September 30, 1996. No such interest was incurred during the
three-month period ended September 30, 1996 or the nine- and three-month
periods ended September 30, 1995.
NOTE 7. RENTALS UNDER OPERATING LEASES
The following is a schedule by year of minimum future rentals receivable
on noncancelable operating leases as of September 30, 1996:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997....................................... $326
1998....................................... 39
----
Total minimum future rentals receivable.... $365
====
</TABLE>
NOTE 8. DIRECT FINANCING LEASES
The components of the net investment in direct financing leases as of
September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Future minimum lease payments receivable .... $ 690 $ 890
Residual value .............................. 2 5
Less: unearned income ...................... (125) (135)
----- -----
Net investment in direct financing leases ... $ 567 $ 760
===== =====
</TABLE>
The following is a schedule by year of minimum lease payments receivable
under the eight direct financing leases as of September 30, 1996:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997 ...................................... $419
1998 ...................................... 257
1999 ...................................... 14
----
Total minimum lease payments receivable ... $690
====
</TABLE>
Rental income includes income from direct financing leases of $92, $26,
$104 and $32 for the nine- and three-month periods ended September 30,
1996 and 1995, respectively.
11
<PAGE> 12
TCC EQUIPMENT INCOME FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 9. REDEMPTIONS
No redemption offerings were consummated during the nine-month period
ended September 30, 1996. The total number of units redeemed since the
inception of the redemption program is 2,775, at a total cost of $23,
representing an average redemption price of $8.31 per unit. The redemption
price is fixed by formula and varies depending on the length of time the
units have been outstanding.
NOTE 10. SALE OF STORAGE FLEET
In August 1995, the Partnership sold its container storage fleet, managed
by TSS, to an unrelated purchaser. The proceeds from the sale were $20
compared to the Partnership's cost basis of $15. The resulting gain from
the sale was $5. The Partnership invested the proceeds from the sale into
additional Equipment.
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar 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 nine- and three-month periods
ended September 30, 1996 and 1995. Please refer to the Financial Statements and
Notes thereto in connection with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
From October 1987 until October 1989 the Partnership was involved in the
offering of limited partnership interests to the public. On October 26, 1989,
the Partnership's offering of limited partnership interests was closed at
$29,491.
The Partnership has set up a program whereby limited partners may redeem units
for a specified redemption value. The redemption price is set by formula and
varies depending on length of time the units are outstanding. 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. The Partnership did not redeem any units during
the nine-month period ended September 30, 1996. From the inception of the
Partnership through September 30, 1996, the Partnership has redeemed a total of
2,775 units for $23, representing an average redemption price of $8.31 per unit.
The Partnership has used cash flow from operations to pay for the redeemed
units.
Prior to its distribution or reinvestment in additional equipment, the
Partnership invests working capital and cash flow from operations in short-term,
highly liquid investments. It is the policy of the Partnership to maintain a
minimum working capital reserve in an amount which is the lesser of (i) 1% of
capital contributions, or (ii) $100. At September 30, 1996, the Partnership's
cash of $972 was invested in a market-rate account.
During the nine-month period ended September 30, 1996, the Partnership declared
cash distributions to limited partners pertaining to the fourth quarter of 1995
and the first two quarters of 1996 in the amount of $2,208. These distributions
represent a return of 10% of original capital (measured on an annualized basis)
on each unit. On a GAAP basis $294 of these distributions was a return of
capital and the balance was from net earnings. On a cash basis all of these
distributions were from operations.
For the nine-month period ended September 30, 1996, the Partnership had net cash
provided by operating activities of $2,874 compared with $3,521 for the
equivalent period in 1995. This decrease was due to a decrease in rental income
and an increase in direct costs as well as an increase in due from affiliates.
The decrease in rental income and increase in direct costs resulted primarily
from a lower utilization rate and drop in rental rates for the Partnership
equipment. The increase in due from affiliates reflects timing differences in
the accrual and payment of net rental revenues, fees and other expenses to or
from TEM and affiliates.
The Partnership's principal lessees, shipping lines, are currently experiencing
over-capacity, in part due to the delivery of new, large capacity ships. This
over-capacity has caused shipping lines to reduce freight rates and has affected
the profitability of their business, resulting in the need to reduce costs. This
is producing downward pressure on lease rates. Delays in the remittance of
rental payments, and in extreme cases, bankruptcy of some shipping lines may
occur if profitability continues to erode. As noted above and discussed more
fully below under "Results of Operations", utilization rates have reflected a
lower demand for containers, and this over-capacity could also further affect
utilization.
13
<PAGE> 14
Net cash provided by investing activities (the purchase and sale of Equipment)
for the nine-month period ended September 30, 1996 was $285 compared to net cash
used in investing activities of $1,164 for the equivalent period in 1995. This
difference is due to the Partnership purchasing more Equipment, on a cash basis,
in 1995 than in the same period in 1996. Additionally, the Partnership had
greater proceeds from the sale of Equipment in the nine-month period ended
September 30, 1996 than in the same period in 1995. The General Partners believe
that these differences reflect normal fluctuations in equipment sales and
purchases. The Partnership has a significant amount of used Equipment in its
portfolio and expects to sell this Equipment periodically when it reaches the
end of its useful marine life. Consistent with its investment objectives and the
General Partners' determination that the Equipment can be profitably sold or
bought at any time, the Partnership intends to reinvest all or a significant
amount of proceeds from Equipment sales in additional Equipment.
RESULTS OF OPERATIONS
The Partnership's operations, which consist of rental income, Equipment
depreciation, direct operating expenses, management fees, and reimbursement of
administrative expenses were directly related to the size of the Equipment fleet
(inventory) during the nine-month periods ended September 30, 1996 and 1995, as
well as certain other factors as discussed below. The following is a summary of
the Equipment (in units) available for lease during those periods:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Opening inventory.............. 8,471 8,245
Closing inventory.............. 7,941 8,623
Average........................ 8,206 8,434
</TABLE>
Rental income and direct operating expenses are affected by lease utilization
percentages for the Equipment which were 82% and 90% on average during the
nine-month periods ended September 30, 1996 and 1995, respectively. In addition,
rental income is affected by daily rental rates which have also decreased, as
discussed below.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 1996 and 1995.
The Partnership's income from operations for the nine-month periods ended
September 30, 1996 and 1995 was $1,587 and $1,771, respectively, on rental
income of $4,135 and $4,866, respectively. The decrease in rental income of
$731, or 15%, from the nine-month period ended September 30, 1995 to the same
period in 1996 was primarily attributable to income from Equipment rentals, the
major component of total revenue, which decreased by $599, or 14%, between the
two periods. Income from Equipment rentals is largely dependent upon three
factors: Equipment available for lease (average inventory), average on-hire
(utilization) percentage, and average daily rental rates. Average inventory
decreased 3%, average utilization decreased by 9% and average daily rental rates
decreased by 4% from the nine-month period ended September 30, 1995 to the
comparable period in 1996.
Utilization began to decrease in the last quarter of 1995 and has continued to
decline in the first three quarters of 1996. The General Partners believe that
this softening in demand has been due, in part, to a slow-down in activity in
the Asia-North America trade route. Additionally, as noted above, the
Partnership's principal lessees, shipping lines, are currently experiencing
over-capacity, which may adversely affect rental payments and/or rates and
utilization which is likely affecting rental rates. Rental rates have also been
restrained by quantity rate discounts granted to the Partnership's larger
Equipment lessees.
Substantially all of the Partnership's rental income was generated from the
leasing of the Equipment under short-term operating leases. There were eight
direct financing leases at September 30, 1996.
14
<PAGE> 15
The balance of rental income consists of other lease-related items, primarily
income from charges to the lessees for dropping off Equipment at less desirable
locations as adjusted by credits granted to the lessees for picking up Equipment
from less desirable locations (location income), income from handling and
returning Equipment and income from charges to lessees for a damage protection
plan. For the nine-month period ended September 30, 1996, the total of these
other revenue items decreased by $131, or 21%, over the equivalent period in
1995. The primary cause of the decrease in other revenue was location income,
which decreased by $124 or 52%. The decline in location income is mainly due to
an increase in pick-up credits given to lessees for pick-up of Equipment from
less desirable locations. Pick-up credits are largely driven by decreased demand
for Equipment. There was also a decrease in drop-off charges to lessees for
Equipment returned in less desirable locations, which primarily resulted from
drop-off charges to a specific lessee in the first quarter of 1995 that did not
re-occur in the same period in 1996.
Direct operating expenses, excluding bad debt expense, increased by $69 or 11%,
from the nine-month period ended September 30, 1995 to the same period in 1996.
The primary components of this increase were costs incurred for storage, which
increased by $95 between periods mainly due to lower utilization rates.
Additionally, maintenance expenses associated with the damage protection plan
increased by $34 from the nine-month period ended September 30, 1995 to the same
period in 1996, due to an increase in the average repair costs for units covered
under the plan.
Bad debt expense decreased from $177 in the first nine-month period of 1995 to
$41 in the same period of 1996. The decrease of $136 was primarily due to
reduced reserve requirements for two specific lessees in the nine-month period
ended September 30, 1996 compared to the same period in 1995.
Depreciation expense decreased by $330, or 23%, from the nine-month period ended
September 30, 1995 to the same period in 1996. This decrease is primarily
attributable to certain Equipment, acquired used, which has now been fully
depreciated coupled with a drop in average inventory of 3%.
Management fees were 9.3% and 9.0% of rental income for the nine months ended
September 30, 1996 and 1995, respectively. Incentive management fees, which are
based on the Partnership's limited and general partner distribution percentage
and capital raised, were 2.2% of gross revenue in the nine-months ended
September 30, 1996 and 1.9% of gross revenue in the comparative period in 1995.
Equipment management fees were 7% of gross revenue for both periods.
General and administrative costs to affiliates decreased by $80, or 25%, in the
nine-month period ended September 30, 1996 compared to the same period in 1995.
The decrease was primarily the result of a decline in overhead costs allocated
from TEM.
Other income (expense) includes a gain on sales of Equipment of $341 for the
nine-month period ended September 30, 1996 compared to a gain of $191 for the
equivalent period ended in 1995.
Net earnings per limited partnership unit decreased from $1.33 to $1.30 from the
nine-month period ended September 30, 1995 to the same period in 1996,
reflecting the decrease in net earnings from $1,973 to $1,937 for the respective
periods.
The following is a comparative analysis of the results of operations for the
three-month periods ended September 30, 1996 and 1995.
The Partnership's income from operations for the three-month period ended
September 30, 1996 was $492, compared to $527 in the same period in 1995, a
decrease of $35, or 7%, compared to the same period in 1995, on gross rental
revenues of $1,286 and $1,582, respectively. The decrease in total revenue of
$296, or 19%, from the three-month period ended September 30, 1995 to the
equivalent period in 1996 was primarily attributable to rental income, the major
component of total rental revenue, which decreased by $269, or 19%, from 1995 to
1996. This decline in rental income primarily resulted
15
<PAGE> 16
from a decrease in average inventory of 5%, a decrease in utilization of 10%,
and a decrease in average daily rental rates of 4% from period to period.
The balance of total revenue for the three-month period ended September 30, 1996
was $125 compared to $152 for the same period in 1995, a decrease of $27 or 18%.
The primary component of this net decrease was a decrease in location income of
$41 from the three-month period ended September 30, 1996 compared to the same
period in 1995. The decrease in location income was due to an increase in
pick-up credits given to lessees for leasing from less desirable locations,
spurred by the decline in utilization and the lower demand for Equipment.
Direct operating expenses, excluding bad debt expense, increased by $7, or 4%,
from the three-month period ended September 30, 1995 to the equivalent period in
1996. The primary component of this increase was costs incurred for storage
which increased by $36 due to a decrease in utilization of 10%.
Bad debt expense decreased by $87 from the three-month period ended September
30, 1995 to the same period in 1996. The decrease was due primarily to a
decrease in reserve requirements for specific lessees recorded during the
three-month period ended September 30, 1996 compared to the same period in 1995.
Depreciation expense decreased by $122 or 26% from the three-month period ended
September 30, 1996 to the equivalent period in 1995. This decrease is primarily
attributable to certain Equipment, acquired used, which has now been fully
depreciated coupled with a decrease in average inventory of 5%.
Management fees to affiliates were lower by $21 in the three-month period ended
September 30, 1996 than in the same period in 1995 due to a decline in rental
income.
General and administrative costs to affiliates decreased by $37 or 35% from the
three-month period ended September 30, 1996 when compared with the same period
in 1995. The decrease was primarily the result of a decline in overhead costs
allocated from TEM.
Other income includes a gain on sales of Equipment of $125 for the three-month
period ended September 30, 1996 compared to a gain of $109 for the three-month
period ended September 30, 1995.
Net earnings per limited partnership unit decreased from $0.43 for the
three-month period ended September 30, 1995 to $0.42 for the equivalent period
in 1996, reflecting the decrease in net earnings from $641 for the three-month
period ended September 30, 1995 to $622 for the same period in 1996.
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 Equipment. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep the Equipment under lease, rather than the geographic location
of the Equipment or the domicile of the lessees. The Equipment is generally
operated on the international high seas rather than on the domestic waterways.
The Equipment is subject to the risk of war or other political, economic or
social occurrence where the Equipment is used, which may result in the loss of
Equipment, which, in turn, may have a material impact on the Partnership's
results of operations and financial condition. The General Partners are not
aware of any conditions as of September 30, 1996 which would result in such risk
materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning equipment after it comes off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the Equipment, and the effect of world trade and/or general business and
economic cycles on the Partnership's operations.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TCC EQUIPMENT INCOME FUND
A California Limited Partnership
By Textainer Financial Services Corporation
The Managing General Partner
By /s/John R. Rhodes
----------------------------------------
John R. Rhodes
Executive Vice President
Date: November 14, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the Managing General Partner of the Registrant, in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/James E. Hoelter President (Principal Executive November 14, 1996
- ------------------- Officer) and Director
James E. Hoelter
/s/John R. Rhodes Executive Vice President, November 14, 1996
- ------------------- (Principal Financial and
John R. Rhodes Accounting Officer),
Secretary and Treasurer
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 972
<SECURITIES> 0
<RECEIVABLES> 4,175
<ALLOWANCES> 683
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 26,101
<DEPRECIATION> 10,399
<TOTAL-ASSETS> 20,168
<CURRENT-LIABILITIES> 656
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,510
<TOTAL-LIABILITY-AND-EQUITY> 20,166
<SALES> 0
<TOTAL-REVENUES> 4,135
<CGS> 0
<TOTAL-COSTS> 2,548
<OTHER-EXPENSES> (350)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,937
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,937
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
