TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
November 11, 1998
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, 1998.
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 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 [ ]
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<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998
Table of Contents
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Page
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Item 1. Financial Statements
Balance Sheets - September 30, 1998 (unaudited) and December 31, 1997........................ 3
Statements of Earnings for the three and nine months
ended September 30, 1998 and 1997 (unaudited)................................................. 4
Statements of Partners' Capital for the nine months
ended September 30, 1998 and 1997 (unaudited)................................................. 5
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited)................................................. 6
Notes to Financial Statements (unaudited)..................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 14
</TABLE>
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<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Balance Sheets
September 30, 1998 and December 31, 1997
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
------------- -------------
(unaudited)
Assets
Container rental equipment, net of accumulated
depreciation of $9,373 (1997: $9,854) $ 13,950 $ 15,874
Cash 2,471 1,166
Net investment in direct financing leases (note 9) 17 129
Accounts receivable, net of allowance for doubtful
accounts of $166 (1997: $635) (note 10) 998 1,342
Due from affiliates, net (note 7) 178 8
Prepaid expenses 4 41
------------- -------------
$ 17,618 $ 18,560
============= =============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 117 $ 130
Accrued liabilities 39 7
Accrued recovery costs (note 2) 19 28
Accrued damage protection plan costs (note 3) 97 101
Accrued maintenance and repair costs (note 4) 28 47
Warranty claims (note 5) 148 196
------------- -------------
Total liabilities 448 509
------------- -------------
Partners' capital:
General partners (36) (36)
Limited partners 17,206 18,087
------------- -------------
Total partners' capital 17,170 18,051
------------- -------------
$ 17,618 $ 18,560
============= =============
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Earnings
For the three and nine months ended September 30, 1998 and 1997
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
---------------- ---------------- --------------- ---------------
Rental income $ 1,088 $ 1,208 $ 3,361 $ 3,596
---------------- ---------------- --------------- ---------------
Costs and expenses:
Direct container expenses 221 226 685 633
Bad debt expense (benefit) 10 4 (36) 32
Depreciation 319 360 984 1,112
Professional fees 9 10 25 31
Management fees to affiliates (note 7) 107 118 303 349
General and administrative costs to affiliates (note 7) 54 64 190 221
Other general and administrative costs 12 18 38 46
---------------- ---------------- -------------- ---------------
732 800 2,189 2,424
---------------- ---------------- --------------- ---------------
Income from operations 356 408 1,172 1,172
---------------- ---------------- --------------- ---------------
Other income:
Interest income 29 11 71 40
(Loss) gain on sale of containers (2) 44 136 141
---------------- ---------------- --------------- ---------------
27 55 207 181
---------------- ---------------- --------------- ---------------
Net earnings $ 383 $ 463 $ 1,379 $ 1,353
================ ================ =============== ===============
Allocation of net earnings (note 7):
General partners $ 8 $ 8 $ 23 $ 23
Limited partners 375 455 1,356 1,330
---------------- ---------------- --------------- ---------------
$ 383 $ 463 $ 1,379 $ 1,353
================ ================ =============== ===============
Limited partners' per unit share
of net earnings $ 0.26 $ 0.31 $ 0.92 $ 0.90
================ ================ =============== ===============
Limited partners' per unit share
of distributions $ 0.50 $ 0.50 $ 1.50 $ 1.50
================ ================ =============== ===============
Weighted average number of limited
partnership units outstanding 1,469,029 1,471,779 1,471,412 1,471,779
================ ================ =============== ===============
See accompanying notes to financial statements
</TABLE>
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<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Partners' Capital
For the nine months ended September 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
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<S><C> <C> <C> <C>
Partners' Capital
-----------------------------------------------------
General Limited Total
------------- -------------- -------------
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
============= ============== =============
Balances at January 1, 1998 $ (36) $ 18,087 $ 18,051
Distributions (23) (2,208) (2,231)
Redemptions (note 11) - (29) (29)
Net earnings 23 1,356 1,379
------------- -------------- -------------
Balances at September 30, 1998 $ (36) $ 17,206 $ 17,170
============= ============== =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
- -----------------------------------------------------------------------------------------------------------------
<S><C> <C> <C>
1998 1997
-------------- -------------
Cash flows from operating activities:
Net earnings $ 1,379 $ 1,353
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 984 1,112
Decrease in allowance for doubtful accounts, excluding
write-off (note 10) (78) (11)
Gain on sale of containers (136) (141)
(Increase) decrease in:
Accounts receivable, excluding write-off (note 10) 422 172
Net investment in direct financing leases 125 248
Due from affiliates, net (269) 1,006
Prepaid expenses 37 10
Increase (decrease) in:
Accounts payable and accrued liabilities 19 73
Accrued recovery costs (9) 9
Accrued damage protection plan costs (4) (36)
Maintenance and repair costs (19) (9)
Warranty claims (48) (48)
-------------- -------------
Net cash provided by operating activities 2,403 3,738
-------------- -------------
Cash flows from investing activities:
Proceeds from sale of containers 1,188 1,246
Container purchases (26) (2,757)
-------------- -------------
Net cash provided by (used in) investing activities 1,162 (1,511)
-------------- -------------
Cash flows from financing activities:
Redemptions of limited partnership units (29) -
Distributions to partners (2,231) (2,231)
-------------- -------------
Net cash used in financing activities (2,260) (2,231)
-------------- -------------
Net increase (decrease) in cash 1,305 (4)
Cash at beginning of period 1,166 1,253
-------------- -------------
Cash at end of period $ 2,471 $ 1,249
============== =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the nine months ended September 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
- --------------------------------------------------------------------------------
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 as of September 30, 1998 and 1997, and December 31, 1997 and 1996,
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, 1998 and 1997.
<S><C> <C> <C> <C> <C>
Sept. 30 Dec. 31 Sept. 30 Dec. 31
1998 1997 1997 1996
----------- ----------- ------------- ----------
Container purchases included in:
Due to affiliates.............................. $ - $ 12 $ - $ 1
Container purchases payable.................... - - 138 269
Distributions to partners included in:
Due to affiliates.............................. 2 2 2 2
Proceeds from sale of containers included in:
Due from affiliates............................ 185 296 338 327
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
nine-month periods ended September 30, 1998 and 1997.
1998 1997
---- ----
Container purchases recorded...................................................... $ 14 $2,625
Container purchases paid.......................................................... 26 2,757
Distributions to partners declared................................................ 2,231 2,231
Distributions to partners paid.................................................... 2,231 2,231
Proceeds from sale of containers recorded......................................... 1,077 1,257
Proceeds from sale of containers received......................................... 1,188 1,246
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Notes To Financial Statements
For the three and nine months ended September 30, 1998 and 1997
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- --------------------------------------------------------------------------------
Note 1. General
TCC Equipment Income Fund (the Partnership), a California limited
partnership with a maximum life of 20 years, was formed in 1987. The
Partnership owns a fleet of intermodal marine cargo containers which are
leased 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, 1998 and December 31, 1997, and the
results of its operations, changes in partners' capital and cash flows for
the three- and nine-month periods ended September 30, 1998 and 1997, 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, 1997, in the Annual Report filed on Form 10-K.
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 to the 1998 financial statement presentation.
Note 2. Recovery Costs
The Partnership accrues an estimate for recovery costs as a result of
defaults under its leases that it expects to incur, which are in excess of
estimated insurance proceeds. At September 30, 1998 and December 31, 1997,
the amounts accrued were $19 and $28, respectively.
Note 3. Damage Protection Plan
The Partnership offers a Damage Protection Plan (DPP) to lessees of its
containers. Under the terms of DPP, the Partnership earns additional
revenues on a daily basis and, in return, has agreed to bear certain
repair costs. It is the Partnership's policy to recognize revenue when
earned and to provide a reserve sufficient to cover the Partnership's
obligation for estimated future repair costs. DPP expenses are included in
direct container expenses in the Statements of Earnings, and at September
30, 1998 and December 31, 1997, the related reserves were $97 and $101,
respectively.
Note 4. Maintenance and Repair
The Partnership accrues maintenance and repair costs on damaged containers
in depots. At September 30, 1998 and December 31, 1997, the amounts
accrued were $28 and $47, respectively.
Note 5. Warranty Claims
During 1992 and 1995, the Partnership settled warranty claims against an
equipment manufacturer relating to certain containers. The Partnership is
amortizing the settlement amounts over the remaining estimated useful life
of these containers (seven years), reducing maintenance and repair costs
over that time. At September 30, 1998 and December 31, 1997, the
unamortized portion of the settlement amount was $148 and $196,
respectively.
Note 6. Acquisition of Containers
Primarily because the Partnership is now in its ninth full year of
operations, effective January 1, 1998, the Partnership is no longer
purchasing additional containers (note 12). During the nine-month period
ended September 30, 1997, the Partnership purchased containers with a cost
of $2,625.
Note 7. 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 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
containers outside the United States on behalf of the Partnership. TCC,
TEM, TL and TAS are subsidiaries of Textainer Group Holdings Limited
(TGH). The General Partners manage and control the affairs of the
Partnership.
In accordance with the Partnership Agreement, net earnings or losses 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 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 acquisition fee, an equipment management
fee, an incentive management fee and an equipment liquidation fee. These
fees are for various services provided in connection with the
administration and management of the Partnership. There were no
acquisition fees incurred during the nine-month period ending September
30, 1998. The Partnership capitalized $131 of container acquisition fees
as a component of container costs during the nine-month period ended
September 30, 1997. The Partnership incurred $31 and $93 of incentive
management fees during each of the three- and nine-month periods ended
September 30, 1998 and 1997, respectively. No equipment liquidation fees
were incurred during these periods.
The Partnership's container fleet is managed by TEM. In its role as
manager, TEM has authority to acquire, hold, manage, lease, sell and
dispose of the Partnership's containers. TEM holds, for the payment of
direct operating expenses, a reserve of cash that has been collected from
leasing operations; such cash is included in due from affiliates, net at
September 30, 1998 and December 31, 1997.
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 three-
and nine-month periods ended September 30, 1998, these fees totaled $76
and $210, respectively, and $87 and $256, respectively, for the comparable
periods in 1997. The Partnership's container fleet is leased by TEM to
third party lessees on operating master leases, spot leases, term leases
and direct finance leases. The majority of the container fleet is leased
under operating master leases with limited terms and no purchase option.
Certain indirect general and administrative costs such as salaries,
employee benefits, taxes and insurance are incurred in performing
administrative services necessary to the operation of the Partnership.
These costs are incurred and paid by TFS and TEM. Total general and
administrative costs allocated to the Partnership were as follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Salaries $ 25 $ 37 $ 79 $122
Other 29 27 111 99
---- ---- --- ---
Total general and
administrative costs $ 54 $ 64 $190 $221
==== ==== === ===
TEM allocates these general and administrative costs based on the ratio of
the Partnership's interest in the managed containers to the total
container fleet managed by TEM during the period. TFS allocates these
costs based on the ratio of the Partnership's containers to the total
container fleet of all limited partnerships managed by TFS. The General
Partners allocated the following general and administrative costs to the
Partnership:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
TEM $ 49 $ 58 $172 $193
TFS 5 6 18 28
---- ---- --- ---
Total general and
administrative costs $ 54 $ 64 $190 $221
==== ==== === ===
The General Partners or TAS may acquire containers in their own name and
hold title on a temporary basis for the purpose of facilitating the
acquisition of such containers for the Partnership. The containers may
then be resold to the Partnership on an all-cash basis at a price equal to
the actual cost, as defined in the Partnership Agreement. In addition, the
General Partners or TAS are entitled to an acquisition fee for any
containers resold to the Partnership.
At September 30, 1998 and December 31, 1997, due from affiliates, net is
comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM................................... $ 194 $ 38
---- ----
Due to affiliates:
Due to TCC..................................... 4 4
Due to TAS..................................... - 13
Due to TFS..................................... 12 13
---- ----
16 30
---- ----
Due from affiliates, net $ 178 $ 8
==== ====
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 and 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 amounts due to the General Partners which are outstanding for
more than one month, to the extent such balances relate to loans for
container 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 amounts due to the General Partners for the three- and
nine-month periods ended September 30, 1998 and 1997.
Note 8. Rentals Under Long-Term Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at September 30, 1998. Although the leases are
generally cancelable at the end of each twelve-month period with a
penalty, the following schedule assumes that the leases will not be
terminated.
Year ending September 30:
1999............................................. $ 277
2000............................................. 39
2001............................................. 15
----
Total minimum future rentals receivable.......... $ 331
====
Note 9. Direct Financing Leases
The components of the net investment in direct financing leases at
September 30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Future minimum lease payments receivable............ $ 20 $ 135
Residual value...................................... 2 2
Less: unearned income.............................. (5) (8)
---- ----
Net investment in direct financing leases........... $ 17 $ 129
==== ====
The following is a schedule by year of minimum lease payments receivable
under the eleven direct financing leases as of September 30, 1998:
Year ending September 30:
1999............................................... $ 14
2000............................................... 5
2001............................................... 1
----
Total minimum lease payments receivable............ $ 20
====
Rental income for the three- and nine-month periods ended September 30,
1998 includes $2 and $48 of income from direct financing leases and
includes $11 and $37, respectively, of income from direct financing leases
for the comparable periods in 1997.
Note 10. Accounts Receivable Write-Off
During March 1998, the Partnership wrote-off $391 of delinquent
receivables from two lessees against which reserves were recorded in 1994
and 1995.
Note 11. Redemptions
The following redemption offerings were consummated by the Partnership
during the nine-month period ended September 30, 1998:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
Inception through December 31, 1997........ 2,775 $ 8.29 $ 23
Quarter ended:
September 30, 1998................... 2,750 $10.54 29
----- ----
Partnership to date........................ 5,525 $ 9.41 $ 52
===== ====
The redemption price is fixed by formula.
</TABLE>
Note 12. Subsequent Event
The Partnership is now in its liquidation phase, which may last between
two to six or more years depending on whether the containers are sold to
investors in one or more large transactions or are sold gradually as they
reach the end of their useful marine lives.
The Partnership anticipates that all excess cash, after regular quarterly
distributions, redemptions, and working capital reserves, will be
distributed to the general and limited partners in the form of special
distributions. The Partnership declared a special distribution to limited
partners of $735, which was paid on October 31, 1998.
The final termination and winding up of the Partnership, as well as
payment of final distributions with respect to the Partnership's
dissolution, will occur at the end of the liquidation phase when all or
substantially all of the Partnership's containers have been sold.
<PAGE>
ITEM 2 - 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 three- and nine-month periods
ended September 30, 1998 and 1997. 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 offered limited
partnership interests to the public. The Partnership received its minimum
subscription amount of $1,000 on April 8, 1988, and 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, which is set by formula. Up to 2% of the
Partnership's outstanding units may be redeemed each year, although the 2% limit
may be exceeded at the managing general partner's discretion. All redemptions
are subject to the managing general partner's good faith determination that
payment for the redeemed units will not (i) cause the Partnership to be taxed as
a corporation, (ii) impair the capital or operations of the Partnership, or
(iii) impair the ability of the Partnership to pay distributions in accordance
with its distribution policy. During the nine-month period ended September 30,
1998, the Partnership redeemed 2,750 units for a total dollar amount of $29. The
Partnership used cash flow from operations to pay for the redeemed units.
The Partnership invests working capital and cash flow from operations prior to
its distribution to the partners in short-term, liquid investments. The
Partnership's cash is affected by cash provided by or used in operating,
investing and financing activities. These activities are discussed in detail
below.
During the nine-month period ended September 30, 1998, the Partnership declared
cash distributions to limited partners pertaining to the fourth quarter of 1997
through the second quarter of 1998, in the amount of $2,208. These distributions
represent a return of 10% on original capital (measured on an annualized basis)
on each unit. On a cash basis, all of these distributions were from operations.
On a GAAP basis, $852 of these distributions was a return of capital and the
balance was from net income.
Net cash provided by operating activities for the nine-month periods ending
September 30, 1998 and 1997, was $2,403 and $3,738, respectively. The decrease
of $1,335, or 36%, was primarily attributable to the fluctuation in due from
affiliates, net which increased $269 in the nine-month period ended September
30, 1998 compared to a decrease of $1,006 in the equivalent period in 1997.
Fluctuations in due from affiliates, net result from timing differences in
payment of expenses and fees and in the remittance of net rental revenues from
TEM.
For the nine-month period ending September 30, 1998, net cash provided by
investing activities (the purchase and sale of containers) was $1,162 compared
to net cash used in investing activities of $1,511 for the comparable period in
1997. Net cash provided by investing activities increased $2,673 primarily
because the Partnership is no longer purchasing containers. Effective January 1,
1998, the General Partners determined that it is in the best interest of the
Partnership to no longer purchase containers, as the Partnership was in its
ninth full year of operations. The Partnership will sell the containers to
investors as discussed below or will continue to sell containers as they reach
the end of their useful lives. Additionally, TEM anticipates selling certain
older containers in surplus locations where demand is weak, rather than
incurring additional storage charges while waiting for market conditions to
improve or incurring expensive repositioning costs transporting the containers
to demand locations. Market conditions are discussed more fully under "Results
of Operations".
The Partnership is now in its liquidation phase, which may last between two to
six or more years depending on whether the containers are sold to investors in
one or more large transactions or are sold gradually as they reach the end of
their useful marine lives.
The Partnership anticipates that all excess cash, after regular quarterly
distributions, redemptions, and working capital reserves, will be distributed to
the general and limited partners in the form of special distributions. These
distributions will consist of cash from operations and/or cash from sales
proceeds. The Partnership declared a special distribution to limited partners of
$735 to be paid in October 1998. On a cash basis, $166 of this distribution will
be from operations and the remaining balance of $569 will be a return of
capital. On a GAAP basis the entire distribution will be a return of capital. As
the Partnership's container fleet decreases, cash from operations is expected to
decrease, while cash from investing activities is expected to increase as more
containers are sold. Consequently, a greater portion of all future distributions
will be considered a return of capital.
The final termination and winding up of the Partnership, as well as payment of
final distributions with respect to the Partnership's dissolution, will occur at
the end of the liquidation phase when all or substantially all of the
Partnership's containers have been sold.
Results of Operations
The Partnership's income from operations, which consists primarily of rental
income, container depreciation, direct container expenses, management fees, and
reimbursement of administrative expenses was directly related to the size of the
container fleet during the nine-month periods ended September 30, 1998 and 1997,
as well as certain other factors as discussed below. The following is a summary
of the container fleet (in units) available for lease during those periods:
1998 1997
---- ----
Beginning container fleet............... 7,887 7,849
Ending container fleet.................. 7,044 7,938
Average container fleet................. 7,466 7,894
The decline in the average container fleet of 5% from the nine months ended
September 30, 1997 to the equivalent period in 1998 resulted from the
Partnership having sold more containers than it purchased since September 30,
1997. Average container fleet size will continue to decline as the Partnership
sells containers that have reached the end of their useful lives since, as noted
above, the Partnership does not plan to purchase additional containers. The
Partnership also expects that the size of its container fleet will decline due
to the Partnership's sale of certain containers in low demand locations, as
discussed above under "Liquidity and Capital Resources". This decline is
expected to be limited by the fact that only 5% of the Partnership's container
fleet was in these lower demand locations as of October 15, 1998. The decline in
the container fleet has contributed to an overall decline in rental income from
the nine-month period ending September 30, 1997 to the equivalent period in
1998. This decline is expected to continue in future years as the size of the
Partnership's container fleet decreases.
Rental income and direct container expenses are also affected by the utilization
of the container fleet, which was 81% and 79% on average during the nine-month
periods ended September 30, 1998 and 1997, respectively. In addition, rental
income is affected by daily rental rates and leasing incentives.
The following is a comparative analysis of the results of operations for the
nine-month periods ended September 30, 1998 and 1997.
The Partnership's income from operations for the nine-month periods ending
September 30, 1998 and 1997 was $1,172 for both periods on rental income of
$3,361 and $3,596, respectively. The decrease in rental income of $235, or 7%,
from the nine-month period ended September 30, 1997 to the comparable period in
1998 was primarily attributable to a decrease in income from container rentals,
the major component of total revenue, which decreased $268, or 8%. This decrease
was primarily due to decreases in average rental rates and the average container
fleet of 5% each, and was offset by an increase in the average on-hire
(utilization) percentage of 3% and a decrease in leasing incentives of 29%.
Container utilization and rental rates declined during 1996 and 1997 primarily
due to decreased demand for leased containers and increased competition. The
decrease in demand for leased containers resulted from changes in the business
of shipping line customers consisting primarily of (i) over-capacity resulting
from the 1995 and 1996 additions of new, larger ships to the existing container
ship fleet at a rate in excess of the growth rate in containerized cargo trade;
(ii) shipping line alliances and other operational consolidations that have
allowed shipping lines to operate with fewer containers; and (iii) shipping
lines reducing their ratio of leased versus owned containers by purchasing
containers. This decreased demand, along with the entry of new leasing company
competitors offering low container rental rates to shipping lines, resulted in
downward pressure on rental rates, and caused leasing companies to offer higher
leasing incentives and other discounts to shipping lines. The decline in the
purchase price of new containers during this period, which continued into 1998,
has also caused additional downward pressure on rental rates.
Additionally, the weakening of many Asian currencies in 1998 has resulted in a
significant increase in exports from Asia to North America and Europe and a
corresponding decrease in imports into Asia from North America and Europe. This
trade imbalance has created a strong demand for containers in Asia and a weak
demand for containers in North America and Europe. This imbalance has resulted
in the stabilization of average utilization and the decline in leasing
incentives, but also resulted in an unusually high build-up of containers in
lower demand locations during the nine-month period ended September 30, 1998
compared to the equivalent period in 1997. Although average utilization rates
have stabilized, utilization rates have been slowly declining since late 1997.
In order to improve utilization and alleviate the container build-up, TEM has
begun an aggressive effort to reposition newer containers to demand locations
and anticipates selling certain older containers in these lower demand
locations, where repositioning costs are high. The Partnership anticipates
incurring increased direct container expenses and some losses on the sale of
containers as a result of repositioning and selling containers in these lower
demand locations. These losses are anticipated to be limited by the fact that
only 5% of the Partnership's container fleet was in these lower demand locations
as of October 15, 1998. However, the expected increase in repositioning costs
may have a material negative effect on the Partnership's results of operations.
For the near term, the General Partners do not foresee material changes in
existing market conditions and caution that both utilization and lease rates
could decline, adversely affecting the Partnership's operating results.
Substantially all of the Partnership's rental income was generated from the
leasing of the Partnership's containers under short-term operating leases. At
September 30, 1998 and 1997, there were 24 and 111 containers under direct
financing leases, respectively.
The balance of other rental income consists of other lease-related items,
primarily income from charges to lessees for dropping off containers in surplus
locations less credits granted to lessees for leasing containers from surplus
locations (location income), income from charges to lessees for handling and
returning containers (handling income) and income from charges to lessees for a
Damage Protection Plan (DPP). For the nine-month period ended September 30,
1998, the total of these other rental income items was $415, an increase of $33
from the equivalent period in 1997. The increase was primarily due to an
increase in location income of $132, offset by decreases in handling and DPP
income of $39 and $24, respectively. Location income increased due to a decrease
in credits given to lessees for picking up containers from certain locations and
due to the inclusion of certain credits received during 1997 and 1998 which had
been previously applied against repositioning expense. Handling income decreased
due to the decrease in container movement, and DPP income decreased due to a
decrease in the average DPP price charged per container.
Direct container expenses increased $52, or 8%, from the nine-month period
ending September 30, 1997 to the equivalent period in 1998. The increase was
primarily due to an increase in repositioning expense of $107, offset by
decreases in storage and handling expenses of $36 and $25, respectively.
Repositioning expense increased due to an increase in the average repositioning
cost per container, an increase in the number of containers repositioned and the
removal of certain credits from repositioning costs to other rental income as
discussed above. Storage expense decreased primarily due to the increase in
average utilization noted above, and handling expense decreased due to the
decrease in container movement.
Bad debt expense decreased from an expense of $32 for the nine-month period
ended September 30, 1997 to a benefit of $36 in the comparable period in 1998.
The benefit recorded for the period ending September 30, 1998 resulted from the
effect of insurance proceeds received for certain receivables against which
reserves had been recorded in 1994 and 1995, as well as to the resolution of
payment issues with one lessee.
Depreciation expense decreased $128, or 12%, from the nine-month period ended
September 30, 1997 to the comparable period in 1998 primarily due to the decline
in average fleet size and due to certain containers, which were acquired used,
that have now been fully depreciated.
Management fees to affiliates decreased $46, or 13%, from the nine-month period
ended September 30, 1997 to the comparable period in 1998 due to a decrease in
equipment management fees. Equipment management fees decreased due to an
adjustment resulting from the write-off of receivables for two lessees and due
to the decrease in rental income upon which equipment management fees are
primarily based.
General and administrative costs to affiliates decreased $31, or 14%, from the
nine-month period ended September 30, 1997 to the comparable period in 1998 due
to a decrease in overhead costs allocated by TFS and TEM.
Other income increased $26, or 14%, primarily due to an increase in interest
income of $31 from the nine-month period ending September 30, 1997 to the
equivalent period in 1998.
Net earnings per limited partnership unit increased from $0.90 to $0.92 from the
nine-month period ending September 30, 1997 to the same period in 1998,
reflecting the increase in net earnings allocated to limited partners from
$1,330 to $1,356, respectively.
The following is a comparative analysis of the results of operations for the
three-month periods ended September 30, 1998 and 1997.
The Partnership's income from operations for the three-month periods ending
September 30, 1998 and 1997 was $356 and $408, respectively, on rental income of
$1,088 and $1,208 respectively. The decrease in rental income of $120, or 10%,
from the three-month period ended September 30, 1997 to the comparable period in
1998 was primarily due to a decrease in income from container rentals of $135,
or 13%. This decrease was primarily due to the decrease in the average container
fleet of 11% and the decrease in average rental rates of 3%, and was offset by
the decrease in leasing incentives of 67%.
Other rental income was $145 for the three-month period ended September 30,
1998, an increase of $15 from the equivalent period in 1997. The increase was
primarily due to an increase in location income of $47, offset by a decrease in
handling income of $24. Location income increased due to a decrease in credits
given to lessees for picking up containers from certain locations. Handling
income decreased due to a decrease in container movement, offset by a higher
average handling price charged per container.
Direct container expenses decreased $5, or 2%, from the three-month period
ending September 30, 1997 to the equivalent period in 1998. The decrease was
primarily due to a decrease in handling expense of $21 offset by an increase in
DPP expense of $14. Handling expense decreased primarily due to the decrease in
container movement, offset by a higher average handling cost charged per
container. DPP expense increased primarily due to an increase in the number of
containers requiring repairs, offset by a decrease in the average repair cost
per container.
Bad debt expense remained fairly comparable for the three-month periods ending
September 30, 1998 and 1997.
Depreciation expense decreased $41, or 11%, from the three-month period ended
September 30, 1997 to the comparable period in 1998 due to the reduction in the
average fleet size and due to certain containers which were acquired used that
have now been fully depreciated.
Management fees to affiliates decreased $11, or 9%, from the three-month period
ended September 30, 1997 to the comparable period in 1998, due to a decrease in
equipment management fees resulting primarily from the decrease in rental
income.
General and administrative costs to affiliates decreased $10, or 16%, from the
three-month period ended September 30, 1997 to the comparable period in 1998 due
to a decrease in overhead costs allocated by TFS and TEM.
Other income decreased $28, or 51%, due to a decrease in gain on sale of
containers, from a gain of $44 to a loss of $2, offset by an increase in
interest income of $18 from the three-month period ending September 30, 1997 to
the same period in 1998.
Net earnings per limited partnership unit decreased from $0.31 to $0.26 from the
three-month period ending September 30, 1997 to the same period in 1998,
reflecting the decrease in net earnings allocated to limited partners from $455
to $375, respectively.
Although substantially all of the Partnership's income from operations is
derived from assets employed in foreign operations, virtually all of this income
is denominated in United States dollars. The Partnership's customers are
international shipping lines, which transport goods on international trade
routes. The domicile of the lessee is not indicative of where the lessee is
transporting the containers. The Partnership's business risk in its foreign
operations lies with the creditworthiness of the lessees, and the Partnership's
ability to keep its containers under lease, rather than the geographic location
of the containers or the domicile of the lessees. The containers are generally
operated on the international high seas rather than on domestic waterways. The
containers are subject to the risk of war or other political, economic or social
occurrence where the containers are used, which may result in the loss of
containers, which, in turn, may have a material impact on the Partnership's
results of operations and financial condition. The General Partners are not
aware of any conditions as of September 30, 1998, which would result in such a
risk materializing.
Other risks of the Partnership's leasing operations include competition, the
cost of repositioning containers after they come off-lease, the risk of an
uninsured loss, increases in maintenance expenses or other costs of operating
the containers, and the effect of world trade, industry trends and/or general
business and economic cycles on the Partnership's operations. See "Risk Factors"
in the Partnership's Prospectus, as supplemented, for additional information on
risks of the Partnership's business.
Readiness for Year 2000
Many computer systems may experience difficulty processing dates beyond the year
1999; as a consequence, some computer hardware and software at most companies
will need to be modified or replaced prior to the year 2000 in order to remain
functional. The Partnership relies on the financial and operating systems
provided by the General Partners; these systems include both information
technology (IT) systems as well as non-information technology (non-IT) systems.
For IT and non-IT systems developed by independent third parties
(externally-developed) the General Partners have obtained representations from
their vendors and suppliers that these systems are Year 2000 compliant and have
internally tested significant systems as operational. The General Partners have
reviewed all internally-developed IT and non-IT systems for Year 2000 issues and
identified certain of these systems which required revision. The General
Partners have completed the revision and testing of these identified systems,
and these revised systems are now operational.
The cost of the revisions and testing relating to these systems was incurred by
TEM and a portion of the cost was allocated to the Partnership as part of
general and administrative costs allocated from TEM. While Year 2000 remediation
costs were not specifically identified, it is estimated that total Year 2000
related expenses included in allocated overhead from TEM were less than $10. The
Partnership and the General Partners do not anticipate incurring significant
additional remediation costs related to the Year 2000 issue. There has been no
material effect on the Partnership's financial condition and results of
operations as a result of TEM's delay in routine maintenance and repair projects
as a result of Year 2000 remediation.
Year 2000 compliance testing was undertaken by the General Partners on both
externally- and internally-developed systems. Standard transactions were
processed under simulated operating conditions for dates crossing over January
1, 2000 as well as for other critical dates such as February 29, 2000. In the
standard business scenarios tested, the identified systems appeared to function
correctly. Under nonstandard conditions or unforeseen scenarios, the results may
be different. Therefore, these tests, regardless of how carefully they were
conducted, cannot guarantee that the General Partners' systems will function
without error in the Year 2000 and beyond. If these systems are not operational
in the Year 2000, the General Partners have determined that they can operate
manually for approximately two to three months while correcting the system
problems before experiencing material adverse effects on the Partnership's and
the General Partners' business and results of operations. However, shifting
portions of the daily operations to manual processes may result in time delays
and increased processing costs. Additionally, the Partnership and General
Partners may not be able to provide lessees with timely and pertinent
information, which may negatively affect customer relations and lead to the
potential loss of lessees, even though the immediate monetary consequences of
this would be limited by the standard Partnership lease agreements between the
lessees and the Partnership.
The Partnership and the General Partners are also continuing their assessment of
Year 2000 issues with third parties, comprised of lessees, manufacturers,
depots, and other vendors and suppliers, with whom the Partnership and the
General Partners have a material business relationship (Third Parties).
Currently, the Partnership and the General Partners believe that if a
significant portion of its lessees is non-compliant for a substantial length of
time, the Partnership's operations and financial condition would be materially
adversely affected. Non-compliance by other Third Parties is not expected to
have a material effect on the Partnership's results of operations and financial
condition. The General Partners have sent letters to lessees and other Third
Parties requesting representations on their Year 2000 readiness. The General
Partners have received responses to fewer than 50% of the letters sent. The
General Partners will follow up with non-respondents and will continue to
identify additional Third Parties whose Year 2000 readiness should be assessed.
As this assessment has not been completed, the General Partners have not yet
assumed that a lack of response means that the Third Party will not be Year 2000
compliant.
Nevertheless, the Partnership and the General Partners believe that they are
likely to encounter Year 2000 problems with Third Parties, particularly those
with significant operations within countries that are not actively promoting
correction of Year 2000 issues. In the event that the systems of these Third
Parties are not Year 2000 compliant by January 1, 2000, the Partnership's
business may be disrupted and results of operations may be adversely affected.
Possible consequences of Year 2000 non-compliance among Third Parties include,
but are not limited to, (i) TEM's inability to provide service to certain areas
of the world, (ii) delays in container movement, (iii) payment and collection
difficulties, and (iv) invoicing errors due to late reporting of transactions.
These types of problems could result in additional operating costs and loss of
lessee business. As discussed above, the General Partners are prepared to shift
portions of their daily operations to manual processes in the event of Third
Party non-compliance. With respect to manufacturers, vendors and other
suppliers, the General Partners would also attempt to find alternate sources for
goods and services. With respect to depots and agents who handle, inspect or
repair containers, if the majority of the computer systems and networks of TEM
are operational, the General Partners believe that they will be able to
compensate manually for these Third Parties' failures (e.g., one field office
performing data entry for another, communication with depots conducted without
computers), using temporary personnel at additional cost. Although costs will be
incurred to pay for the temporary personnel, the Partnership and the General
Partners do not expect these costs to be material to the Partnership. With
respect to lessees' non-compliance, the General Partners would compensate for
communications failures manually. If a lessee's noncompliance is broad enough to
disrupt significantly the operations of its shipping business, the resulting
loss of revenue could result in the lessee renting fewer containers, adversely
affecting the Partnership's business. The Partnership and the General Partners
are unable to estimate the financial impact of these problems, but to the extent
that lessees problems result in weakening demand for containers, the
Partnership's results of operations would likely be adversely affected. If Year
2000 problems result in delays in collections, either because of the additional
time required to communicate with lessees or because of lessees' loss of
revenues, the Partnership's cash flow could be affected and distributions to
general and limited partners could be reduced. The Partnership and the General
Partners believe that these risks are inherent in the industry and are not
specific to the Partnership or General Partners.
Forward Looking Statements and Other Risk Factors
The foregoing analysis of Year 2000 issues includes forward-looking statements
and predictions about possible or future events, results of operations and
financial condition. As such, this analysis may prove to be inaccurate, because
of the assumptions made by the Partnership and the General Partners or the
actual development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct. Some of the risks relating to Year 2000
compliance are described above. In addition, in analyzing Year 2000 issues, the
Partnership and the General Partners have assumed that the infrastructure of the
United States and most other countries, including ports and customs, remains
intact. If the infrastructure of one or more countries were to fail, the
resulting business disruption would likely have an adverse effect on the
Partnership and the General Partners.
Various other risks and uncertainties could also affect the Partnership and
could affect the Year 2000 analysis causing the effect on the Partnership to be
more severe than discussed above. These risks and uncertainties include, but are
not limited to, the following. As noted above, the Partnerships' and the General
Partners' Year 2000 compliance testing cannot guarantee that all computer
systems will function without error beyond the Year 2000. Tests were only
conducted of normal business scenarios, and no independent verification or
testing was used. Risks also exist with respect to Year 2000 compliance by Third
Parties, such as the risk that an external party, who may have no relationship
to the Partnership or General Partners, but who has a significant relationship
with one or more Third Parties, may have a system failure that adversely affects
the Partnership's ability to conduct its business. While the Partnership and the
General Partners are attempting to identify such external parties, no assurance
can be given that they will be able to do so. Furthermore, Third Parties with
direct relationships with the Partnership, whose systems have been identified as
likely to be Year 2000 compliant, may suffer a breakdown due to unforeseen
circumstances. It is also possible that the information collected by the General
Partners from these Third Parties regarding their compliance with Year 2000
issues may be incorrect. Finally, it should be noted that the foregoing
discussion of Year 2000 issues assumes that to the extent the General Partners'
systems fail, either because of unforeseen complications or because of Third
Parties failure, switching to manual operations will allow the Partnership to
continue to conduct its business. While the Partnership and the General Partners
believe this assumption to be reasonable, if it is incorrect, the Partnership's
results of operations would likely be adversely affected.
<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 11, 1998
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> <C>
________________________ Executive Vice President, November 11, 1998
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive November 11, 1998
Philip K. Brewer Officer)
</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 11, 1998
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> <C>
/s/John R. Rhodes Executive Vice President, November 11, 1998
________________________ (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/Philip K. Brewer President (Principal Executive November 11, 1998
________________________ Officer)
Philip K. Brewer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TCC 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,471
<SECURITIES> 0
<RECEIVABLES> 1,359
<ALLOWANCES> 166
<INVENTORY> 0
<CURRENT-ASSETS> 4
<PP&E> 23,323
<DEPRECIATION> 9,373
<TOTAL-ASSETS> 17,618
<CURRENT-LIABILITIES> 448
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,170
<TOTAL-LIABILITY-AND-EQUITY> 17,618
<SALES> 0
<TOTAL-REVENUES> 3,361
<CGS> 0
<TOTAL-COSTS> 2,189
<OTHER-EXPENSES> (207)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,379
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,379
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
