TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 13, 1997
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of 1934, we are
submitting herewith for filing on behalf of TCC Equipment Income Fund (the
"Company") the Company's Quarterly Report on Form 10-Q for the Third Quarter
ended September 30, 1997.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
<PAGE>
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, 1997
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>
TCC Equipment Income Fund
(a California Limited Partnership)
Quarterly Report on Form 10Q for the
Quarter Ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 1997 (unaudited) and December 31, 1996................................3
Statements of Earnings for the nine and three months
ended September 30, 1997 and 1996 (unaudited)........................................................4
Statements of Partners' Capital for the nine months
ended September 30, 1997 and 1996 (unaudited)........................................................5
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (unaudited)........................................................6
Notes to Financial Statements (unaudited)............................................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Balance Sheets
September 30, 1997 and December 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $9,881 (1996: $10,343) $15,996 $15,601
Cash 1,249 1,253
Net investment in direct financing leases (note 8) 215 461
Accounts receivable, net of allowance
for doubtful accounts of $676 (1996: $687) 1,393 1,554
Due from affiliates, net (note 6) 176 1,170
Prepaid expenses - 10
---------------- ---------------
$19,029 $20,049
================ ===============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $153 $133
Accrued liabilities 62 -
Accrued damage protection plan costs (note 2) 94 130
Accrued maintenance and repair costs (note 3) 36 45
Warranty claims (note 4) 212 260
Equipment purchases payable 138 269
---------------- ---------------
Total liabilities 695 837
---------------- ---------------
Partners' capital:
General partners (36) (36)
Limited partners 18,370 19,248
---------------- ---------------
Total partners' capital 18,334 19,212
---------------- ---------------
$19,029 $20,049
================ ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Earnings
For the nine and three months ended September 30, 1997 and 1996
(Dollar amounts in thousands except for unit and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Rental income $1,208 $1,286 $3,596 $4,135
------------------- ---------------- ---------------- ----------------
Costs and expenses:
Direct container expenses 226 208 633 721
Bad debt expense 4 18 32 41
Depreciation 360 355 1,112 1,093
Professional fees 10 6 31 23
Management fees to affiliates (note 6) 118 122 349 385
General and administrative costs to affiliates
(note 6) 64 69 221 238
Other general and administrative costs 18 16 46 47
------------------- ---------------- ---------------- ----------------
800 794 2,424 2,548
------------------- ---------------- ---------------- ----------------
Income from operations 408 492 1,172 1,587
------------------- ---------------- ---------------- ----------------
Other income:
Interest income, net 11 5 40 9
Gain on sale of equipment 44 125 141 341
------------------- ---------------- ---------------- ----------------
55 130 181 350
------------------- ---------------- ---------------- ----------------
Net earnings $463 $622 $1,353 $1,937
=================== ================ ================ ================
Allocation of net earnings (note 6):
General partners $8 $8 $23 $23
Limited partners 455 614 1,330 1,914
------------------- ---------------- ---------------- ----------------
$463 $622 $1,353 $1,937
=================== ================ ================ ================
Limited partners' per unit share
of net earnings $ 0.31 $ 0.42 $ 0.90 $ 1.30
=================== ================ ================ ================
Limited partners' per unit share
of distributions $ 0.50 $ 0.50 $ 1.50 $ 1.50
=================== ================ ================ ================
Weighted average number of limited
partnership units outstanding 1,471,779 1,471,779 1,471,779 1,471,779
=================== ================ ================ ================
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Partners' Capital
For the nine months ended September 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Partners' Capital
--------------------------------------------------------
General Limited Total
------------- --------------- ---------------
<S> <C> <C> <C>
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
============= =============== ===============
Balances at January 1, 1997 ($36) $19,248 $19,212
Distributions (23) (2,208) (2,231)
Net earnings 23 1,330 1,353
------------- --------------- ---------------
Balances at September 30, 1997 ($36) $18,370 $18,334
============= =============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $1,353 $1,937
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 1,112 1,093
(Decrease) increase in allowance for doubtful accounts (11) 22
Gain on sale of equipment (141) (341)
Changes in assets and liabilities:
Decrease in accounts receivable 172 141
Proceeds from principal payments of
direct financing leases 248 231
Decrease (increase) in due from affiliates, net 1,006 (161)
Increase (decrease) in accounts payable and
accrued liabilities 82 (33)
(Decrease) increase in accrued maintenance
and repair costs (9) 13
(Decrease) increase in accrued
damage protection plan costs (36) 10
Decrease in warranty claim (48) (48)
Decrease in prepaid expenses 10 10
--------------- ---------------
Net cash provided by operating activities 3,738 2,874
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of equipment 1,246 1,001
Equipment purchases (2,757) (716)
--------------- ---------------
Net cash (used in) provided by investing activities (1,511) 285
--------------- ---------------
Cash flows from financing activities:
Repayment of borrowings from affiliates - (435)
Distributions to partners (2,231) (2,244)
--------------- ---------------
Net cash used in financing activities (2,231) (2,679)
--------------- ---------------
Net (decrease) increase in cash (4) 480
Cash at beginning of period 1,253 492
--------------- ---------------
Cash at end of period $1,249 $972
=============== ===============
Interest paid during the period $0 $14
=============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the nine months ended September 30, 1997 and 1996
(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, 1997 and 1996, and December 31, 1996 and 1995,
resulting in differences in amounts recorded and amounts of cash disbursed or
received by the Partnership, as shown in the Statements of Cash Flows for the
nine-month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30 Dec. 31
1997 1996 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Equipment purchases included in:
Due to affiliates.............................. $ - $ 1 $ 11 $ 44
Equipment purchases payable.................... 138 269 5 430
Distributions to partners included in:
Due to affiliates.............................. 2 2 2 15
Proceeds from sale of Equipment included in:
Accounts receivable............................ - - - 1
Due from affiliates............................ 338 327 313 229
</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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment purchases recorded...................................................... $ 2,625 258
Equipment purchases paid.......................................................... 2,757 716
Distributions to partners declared................................................ 2,231 2,231
Distributions to partners paid.................................................... 2,231 2,244
Proceeds from sale of Equipment recorded.......................................... 1,257 1,084
Proceeds from sale of Equipment received.......................................... 1,246 1,001
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Notes To Financial Statements
September 30, 1997
(Dollar amounts in thousands except for 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 containers (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, 1997 and December 31, 1996, and the
results of its operations, changes in partners' capital and cash flows for
the nine- and three-month periods ended September 30, 1997 and 1996, 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, 1996.
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.
Note 2. Damage Protection Plan
The Partnership offers a Damage Protection Plan (DPP) to lessees of its
Equipment. Under the terms of DPP, 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 future repair costs. At September 30, 1997 and
December 31, 1996, this reserve was equal to $94 and $130, respectively.
Note 3. Maintenance and Repair
The Partnership accrues maintenance and repair costs on damaged units in
depots. At September 30, 1997 and December 31, 1996, the amount accrued
was $36 and $45, respectively.
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, 1997 and December 31, 1996, the unamortized portion of the settlement
amount was equal to $212 and $260, respectively.
Note 5. Acquisition of Equipment
During the nine-month periods ended September 30, 1997 and 1996, the
Partnership purchased Equipment with a cost of $2,625 and $258,
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. The General
Partners manage and control the affairs of the Partnership. 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,
TEM, TL and TAS are subsidiaries of Textainer Group Holdings Limited
(TGH). 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, and subject to special
allocations described therein, net earnings or losses and partnership
distributions are generally 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 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 as well
as reimburse the General Partners for certain administrative costs. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership
capitalized $131 and $33 of equipment acquisition fees as part of
container costs during the nine-month periods ended September 30, 1997 and
1996, respectively. The Partnership incurred $93 and $31 of incentive
management fees during the nine- and three-month periods ended September
30, 1997 and $92 and $31 for the comparable periods in 1996. No equipment
liquidation fees were incurred during either period.
The Partnership's Equipment is managed by TEM. In its role as manager, TEM
has authority to acquire, hold, manage, lease, sell and dispose of the
Partnership's 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, net at
September 30, 1997 and December 31, 1996.
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. These fees
totaled $256 and $87 for the nine- and three-month periods ended September
30, 1997 and $293 and $91 for the comparable periods in 1996. The
Partnership's Equipment is leased by TEM to third party lessees on
operating master leases, spot leases and term leases. The majority of the
Equipment is leased under operating master leases with limited terms and
no purchase option.
Certain general and administrative costs such as salaries, employee
benefits, taxes and insurance are incurred in performing administrative
services necessary to the operation of the Partnership. These costs are
borne by TFS and TEM. Total general and administrative costs allocated to
the Partnership were $221 and $64 for the nine- and three-month periods
ended September 30, 1997 of which $122 and $37, respectively, were for
salaries. For the nine- and three-month periods ended September 30, 1996,
total general and administrative costs allocated to the Partnership were
$238 and $69, of which $123 and $40, respectively were for salaries.
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the managed Equipment to the total Equipment
managed by TEM during the period. TFS allocates these costs based on the
ratio of the Partnership's Equipment to the total Equipment of all limited
partnerships managed by TFS. General and administrative costs allocated to
the Partnership by TEM were $193, $58, $208 and $60 for the nine- and
three-month periods ended September 30, 1997 and 1996, respectively. TFS
allocated $28, $6, $30 and $9 of general and administrative costs to the
Partnership during the nine- and three-month periods ended September 30,
1997 and 1996, respectively.
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, 1997 and December 31, 1996, due from affiliates, net is
comprised of:
1997 1996
---- ----
Due from affiliates:
Due from TEM................................... $191 $ 1,190
==== =======
Due to affiliates:
Due to TCC..................................... $ 3 $ 6
Due to TFS..................................... 12 14
---- -------
$ 15 $ 20
===== =========
These amounts receivable from and payable to affiliates were incurred in
the ordinary course of business between the Partnership and its affiliates
and represent timing differences in the accrual and remittance of expenses
and fees described above or in the accrual and remittance of net rental
revenues from TEM.
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 such balances relate to loans for Equipment
purchases. Interest is charged at a rate not greater than the General
Partners' or affiliates' own cost of funds. There was no interest expense
incurred on intercompany balances for the nine- and three-month periods
ended September 30, 1997. 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.
Note 7. Rentals Under Operating Leases
The following is a schedule by year of minimum future rentals receivable
on noncancelable operating leases at September 30, 1997:
Year ending September 30:
1998............................................. $ 279
1999............................................. 12
2000............................................. 10
----
$ 301
Note 8. Direct Financing Leases
The components of the net investment in direct financing leases at
September 30, 1997 and December 31, 1996 are as follows:
1997 1996
---- ----
Future minimum lease payments receivable............$ 229 $ 515
Residual value...................................... 2 2
Less: unearned income.............................. (16) (56)
---- ---
Net investment in direct financing leases...........$ 215 $ 461
==== =====
The following is a schedule by year of minimum lease payments receivable
under the five direct financing leases at September 30, 1997:
Year ending September 30:
1998............................................... $ 224
1999............................................... 4
2000............................................... 1
-----
Total minimum lease payments receivable............ $ 229
====
Rental income for the nine- and three-month periods ended September 30,
1997 and 1996 includes $37, $11 and $92, $26, respectively, of income from
direct financing leases.
Note 9. Redemptions
No redemption offerings were consummated during the nine-month period
ended September 30, 1997. The total number of units redeemed since
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 are outstanding.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in thousands of dollars except for 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, 1997 and 1996. 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.
From time to time, the Partnership redeems units from limited partners 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. During the nine months ended September 30, 1997,
the Partnership did not redeem Partnership units.
The Partnership invests working capital and cash flow from operations prior to
its distribution to the partners in short-term, liquid investments. The
Partnership's cash is affected by cash provided by or used in operating,
investing and financing activities. These activities are discussed in detail
below.
During the nine-month period ended September 30, 1997, the Partnership declared
cash distributions to limited partners pertaining to the first and second
quarters of 1997 and to the fourth quarter of 1996 in the amount of $2,208.
These distributions represent 10% of original capital (measured on an annualized
basis) on each unit. On a GAAP basis, $878 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, 1997, the Partnership had net cash
provided by operating activities of $3,738 compared with $2,874 for the
equivalent period in 1996. The increase of $864 or 30% is primarily attributable
to the decrease in due from affiliates, net of $1,006, offset by a decrease in
net earnings of $584. The decrease in due from affiliates, net, was due to
timing differences in the accrual and payment of expenses and fees or in the
accrual and remittance of net rental revenues. The decrease in net earnings of
30% in the nine-month period ended September 30, 1997 compared to the comparable
period in 1996 was primarily due to a 13% decrease in rental revenues. The
decrease in rental revenues between periods was due to a decline in utilization,
fleet size and rental rates. These decreases are discussed more fully below
under "Results of Operations". As explained below under "Results of Operations",
demand for leased containers has declined compared to the prior period, and this
decline has affected the Partnership's financial condition.
Net cash used in investing activities (the purchase and sale of rental
equipment) for the nine-month period ended September 30, 1997 was $1,511
compared to net cash provided by investing activities of $285 for the comparable
period in 1996. This difference reflects that, on a cash basis, the Partnership
purchased more Equipment during the nine months ended September 30, 1997 than in
the same period in 1996. The General Partners believe that these differences
reflect normal fluctuations in equipment sales and purchases. Moreover, the
Partnership has a significant amount of Equipment that was purchased used in its
portfolio and expects to sell this Equipment periodically when it reaches the
end of its useful marine life. Consistent with the 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 future Equipment sales in additional Equipment. Such
additional units of Equipment purchased may not, however, equal the number of
units sold, and such purchases may cease sometime after 1999, when the
Partnership enters its liquidation phase.
Results of Operations
The Partnership's operations, which consist of rental income, container
depreciation, direct container expenses, management fees, and reimbursement of
administrative expenses were directly related to the size of the container fleet
(inventory) during the nine-month periods ended September 30, 1997 and 1996, as
well as certain other factors as discussed below. The following is a summary of
the container fleet (in units) available for lease during those periods:
1997 1996
Opening inventory....................... 7,849 8,471
Closing inventory....................... 7,938 7,941
Average................................. 7,894 8,206
The decline in the size of the average container fleet of 4% from the nine-month
period ended September 30, 1996 to the equivalent period in 1997 was primarily
due to the sale of certain Equipment. Although sales proceeds were used to
purchase new Equipment, fewer units were bought than sold, resulting in a net
decrease in the size of the Equipment fleet. Since the Fund is now in its ninth
year of operations, an increasing portion of its fleet may be sold in future
years, and the sales proceeds are not likely to be sufficient to replace all of
the Equipment sold. Therefore, the decline in the size of the fleet is likely to
continue, even though the Partnership is still reinvesting funds in new
Equipment. The decline in the container fleet contributed to an overall decline
in rental income from the nine- and three-month periods ended September 30, 1996
to the equivalent period in 1997.
In addition to fleet size, rental income and direct container expenses are
affected by lease utilization percentages for the Equipment which averaged 79%
and 82% during the nine-month periods ended September 30, 1997 and 1996,
respectively. In addition, rental income is affected by daily rental rates,
which declined.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 1997 and 1996.
The Partnership's income from operations for the nine-month periods ended
September 30, 1997 and 1996 was $1,172 and $1,587, respectively, on rental
income of $3,596 and $4,135, respectively. The decrease in rental income of
$539, or 13%, from the nine-month period ended September 30, 1996 to the same
period in 1997 was primarily attributable to income from container rentals, the
major component of total revenue, which decreased by $521, or 14%. As noted
above, income from container 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 4%,
average on-hire utilization decreased 4% and average daily rental rates
decreased 7% from the nine-month period ended September 30, 1996 to the
comparable period in 1997.
Container utilization began to decline in late 1995 and that decline persisted
throughout 1996 and into the first quarter of 1997. The General Partners believe
that this decrease in demand for leased containers is the result of adverse
changes in the business of its shipping line customers. These changes consist
principally of: (i) a general slowdown in the growth of world containerized
cargo trade, particularly in the Asia-North America and Asia-Europe trade
routes; (ii) over-capacity resulting from the 1996 and 1997 additions of new,
larger ships to the existing container ship fleet at a rate in excess of the
growth rate in containerized cargo trade; and (iii) shipping line alliances and
other operational consolidations that have allowed shipping lines to operate
with fewer containers, thereby decreasing the demand for leased containers. The
container ship over-capacity in particular led to lower shipping rates,
resulting in shipping lines' need to reduce operating costs. The drive to reduce
costs, coupled with the availability of inexpensive financing and lower
container prices, encouraged shipping lines to purchase, rather than lease, a
greater number of new containers in 1996 than in previous years. All of these
factors have led to downward pressure on container lease rates, a decline in
utilization of leased containers, and an increase in leasing incentives and
other discounts being granted to shipping lines by container lessors, further
eroding Partnership profitability. The decline in demand for leased containers
has been accompanied by a drop in the purchase price of new containers.
During the second and third quarters there was an improvement in utilization for
the total fleet managed by TEM for affiliates and other unrelated third parties,
however lease rates declined and leasing incentives remained high due to high
levels of off-lease inventory in low demand locations. The General Partners do
not foresee material changes in current market conditions and caution that both
utilization and lease rates could decline further, and leasing incentives could
remain high, adversely affecting the Partnership's results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's containers under short-term operating leases. There
were five direct financing leases at September 30, 1997.
The balance of rental income consists of other lease-related items, primarily
income for handling and returning containers, income from charges to lessees for
a damage protection plan (DPP), and income from charges to the lessees for
pick-up of containers from prime locations less credits granted to lessees for
leasing containers from surplus locations (location income). For the nine-month
period ended September 30, 1997, the total of these other rental income items
was $382, a decrease of $18, or 4%, compared to the equivalent period in 1996.
The primary component of this net decrease was a decrease in location income of
$53 offset by an increase in handling income of $41. This decline in location
income is mainly due to lower demand, which required an increase in credits to
lessees for picking up units from surplus locations. Handling income increased
due to an increase in container movement, partially offset by lower average
handling charges to lessees from the nine-month period ended September 30, 1996
to the comparable period in 1997.
Direct container expenses decreased by $88, or 12% from the nine-month periods
ended September 30, 1996 to the same period in 1997. The primary components of
this decrease were decreases in DPP costs of $62 and maintenance and repair
costs of $52, offset by an increase in storage expenses of $31. DPP and
maintenance and repair expenses decreased due to a lower per container repair
cost as well as fewer containers needing repairs. Storage expense increased as a
result of lower utilization rates in the nine-month period ended September 30,
1997 compared to the same period in 1996.
Bad debt expense decreased by $9 or 22% from the nine-month period ended
September 30, 1997 to the same period in 1996, primarily due to lower reserve
requirements.
Depreciation expense increased $19 or 2% from the nine month period ended
September 30, 1996 to the comparable period in 1997 despite a 4% decrease in
fleet size. The increase is primarily due to a charge to depreciation expense of
$33 to write down the value of refrigerated containers to their estimated fair
value.
Management fees to affiliates decreased by $37, or 13%, from the nine-month
period ended September 30, 1996 to the equivalent period in 1997 due to a
decline in Equipment management fees. Equipment management fees, which are based
primarily on gross revenue, decreased as a result of the decrease in rental
income and were approximately 7% of gross revenue for both periods. Incentive
management fees, which are based on the Partnership's limited and general
partner distribution percentage and partners' capital, remained constant at $93
and $92 for the nine months ended September 30, 1997 and 1996, respectively.
General and administrative costs to affiliates decreased by $17, or 7%, in the
nine-month period ended September 30, 1997 compared to the same period in 1996.
The decrease was primarily the result of a decline in overhead costs allocable
from TEM and TFS.
Other income was $181 for the nine months ended September 30, 1997, representing
a decrease of $169, or 48%, from the equivalent period in 1996. The decrease was
attributable to a $200 decrease in gain on sale of Equipment, offset by a $31
increase in net interest income.
Net earnings per limited partnership unit decreased from $1.30 to $0.90 from the
nine-month period ended September 30, 1996 to the same period in 1997,
reflecting the decrease in net earnings from $1,914 to $1,330 for the respective
periods.
The following is a comparative analysis of the results of operations for the
three-month periods ended September 30, 1997 and 1996.
The Partnership's income from operations for the three-month periods ended
September 30, 1997 and 1996 was $463 and $622, respectively, on rental income of
$1,208 and $1,286, respectively. The decrease in rental income of $78, or 6%,
from the three-month period ended September 30, 1996 to the same period in 1997,
was primarily attributable to a decrease in income from container rentals which
decreased by $109, or 9%. This decline was primarily due to decreases in average
daily rental rates of 8% and average inventory of 3%.
The balance of other rental income items comprising total income for the
three-month period ending September 30, 1997 was $130, an increase of $31
compared to the equivalent period in 1996. The increase in other rental income
was primarily due to increased handling income of $20 which increased due to
increased container movement, offset slightly by lower average charges to
lessees for the three months ended September 30, 1997 compared to the same
period in 1996.
Direct container expenses increased $18, or 9%, for the three-month period ended
September 30, 1997 compared to the same period in 1996. The primary components
of this increase were increases in repositioning and handling expenses offset by
a decrease in maintenance expense. Repositioning expense increased due to an
increased number of containers being transported from surplus locations to
higher demand locations at a higher per container cost. Handling expense
increased as a result of an increase in container movement and a higher average
cost per container. Maintenance expense decreased due to a decrease in the
average repair cost per container.
Bad debt expense decreased by $14, or 78%, for the three-month period ended
September 30, 1997 from the same period in 1996, due to lower reserve
requirements.
Depreciation expense remained fairly constant for the three-month periods ending
September 30, 1997 and 1996.
Management fees to affiliates decreased by $4, or 3%, from the three-month
period ended September 30, 1996 to the equivalent period in 1997, due to a
decline in Equipment management fees which resulted from the decrease in rental
income.
General and administrative costs to affiliates decreased $5, or 7%, between the
three-month period ending September 30, 1997 and the equivalent period in 1996,
due to a decline in overhead costs allocated from TFS and TEM.
Other income was $55 for the three months ended September 30, 1997, representing
a decrease of $75, or 58%, over the equivalent period in 1996. The decrease was
attributable to a $81 decrease in gain on sale of Equipment offset by a $6
increase in interest income.
Net earnings per limited partnership unit decreased from $0.42 to $0.31 from the
three-month period ended September 30, 1996 to the same period in 1997,
reflecting the decrease in net earnings from $614 to $455 for the respective
periods.
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 at profitable rates, 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
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, 1997 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, industry trends and/or general
business and economic cycles on the Partnership's operations. See "Risk Factors"
in the Partnership's Prospectus, as supplemented, for additional information on
risks of the Partnership's business.
<PAGE>
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 ________________________
John R. Rhodes
Executive Vice President
Date: November 13, 1997
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>
________________________ Executive Vice President, November 13, 1997
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive November 13, 1997
James E. Hoelter Officer) and Director
</TABLE>
<PAGE>
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 13, 1997
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/John R. Rhodes Executive Vice President, November 13, 1997
- ------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/James E. Hoelter President (Principal Executive November 13, 1997
- ----------------------- Officer) and Director
James E. Hoelter
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Textainer Equipment Income Fund
</LEGEND>
<CIK> 0000820083
<NAME> TCC Equipment Income Fund
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,249
<SECURITIES> 0
<RECEIVABLES> 2,460
<ALLOWANCES> 676
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 25,877
<DEPRECIATION> 9,881
<TOTAL-ASSETS> 19,029
<CURRENT-LIABILITIES> 695
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,334
<TOTAL-LIABILITY-AND-EQUITY> 19,029
<SALES> 0
<TOTAL-REVENUES> 3,596
<CGS> 0
<TOTAL-COSTS> 2,424
<OTHER-EXPENSES> (181)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,353
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,353
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
