TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
August 13, 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 10Q for the Second Quarter
ended June 30, 1998.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
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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 June 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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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Quarterly Report on Form 10Q for the
Quarter Ended June 30, 1998
Table of Contents
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Page
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Item 1. Financial Statements
Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997.................................. 3
Statements of Earnings for the three and six months
ended June 30, 1998 and 1997 (unaudited).......................................................... 4
Statements of Partners' Capital for the six months
ended June 30, 1998 and 1997 (unaudited).......................................................... 5
Statements of Cash Flows for the six months
ended June 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......................................................................... 13
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Balance Sheets
June 30, 1998 and December 31, 1997
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------
1998 1997
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(unaudited)
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Assets
Container rental equipment, net of accumulated
depreciation of $9,600 (1997: $9,854) $ 14,614 $ 15,874
Cash 2,191 1,166
Net investment in direct financing leases (note 9) 17 129
Accounts receivable, net of allowance for doubtful
accounts of $159 (1997: $635) (note 10) 1,051 1,342
Due from affiliates, net (note 7) 89 8
Prepaid expenses 27 41
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$ 17,989 $ 18,560
============= =============
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 106 $ 130
Accrued liabilities 25 7
Accrued recovery costs (note 2) 14 28
Accrued damage protection plan costs (note 3) 95 101
Accrued maintenance and repair costs (note 4) 25 47
Warranty claims (note 5) 164 196
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Total liabilities 429 509
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Partners' capital:
General partners (36) (36)
Limited partners 17,596 18,087
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Total partners' capital 17,560 18,051
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$ 17,989 $ 18,560
============= =============
See accompanying notes to financial statements
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Earnings
For the three and six months ended June 30, 1998 and 1997
(Amounts in thousands except for unit and per unit amounts)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
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Rental income $ 1,100 $ 1,181 $ 2,273 $ 2,388
------------- ------------- ------------- -------------
Costs and expenses:
Direct container expenses 218 223 464 407
Bad debt (benefit) expense (32) 17 (46) 28
Depreciation 329 389 665 752
Professional fees 10 14 16 21
Management fees to affiliates (note 7) 110 115 196 231
General and administrative costs to affiliates (note 7) 62 78 136 157
Other general and administrative costs 12 14 26 28
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709 850 1,457 1,624
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Income from operations 391 331 816 764
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Other income:
Interest income 24 15 42 29
Gain on sale of containers 22 19 138 97
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46 34 180 126
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Net earnings $ 437 $ 365 $ 996 $ 890
============= ============= ============= =============
Allocation of net earnings (note 7):
General partners $ 7 $ 7 $ 15 $ 15
Limited partners 430 358 981 875
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$ 437 $ 365 $ 996 $ 890
============= ============= ============= =============
Limited partners' per unit share
of net earnings $ 0.29 $ 0.24 $ 0.67 $ 0.59
============= ============= ============= =============
Limited partners' per unit share
of distributions $ 0.50 $ 0.50 $ 1.00 $ 1.00
============= ============= ============= =============
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
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Partners' Capital
For the six months ended June 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
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Partners' Capital
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General Limited Total
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Balances at January 1, 1997 $ (36) $ 19,248 $ 19,212
Distributions (15) (1,472) (1,487)
Net earnings 15 875 890
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Balances at June 30, 1997 $ (36) $ 18,651 $ 18,615
============= =============== =============
Balances at January 1, 1998 $ (36) $ 18,087 $ 18,051
Distributions (15) (1,472) (1,487)
Net earnings 15 981 996
------------- --------------- -------------
Balances at June 30, 1998 $ (36) $ 17,596 $ 17,560
============= =============== =============
See accompanying notes to financial statements
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Cash Flows
For the six months ended June 30, 1998 and 1997
(Amounts in thousands)
(unaudited)
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1998 1997
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Cash flows from operating activities:
Net earnings $ 996 $ 890
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 665 752
Decrease in allowance for doubtful accounts, excluding
write-off (note 10) (85) (6)
Gain on sale of containers (138) (97)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, excluding
write-off (note 10) 376 (37)
Proceeds from principal payments of
direct financing leases 124 163
(Increase) decrease in due from affiliates, net (199) 1,056
Decrease in prepaid expenses 14 7
(Decrease) increase in accounts payable and
accrued liabilities (6) 72
(Decrease) increase in accrued recovery costs (14) 1
Decrease in accrued damage protection plan costs (6) (25)
(Decrease) increase in maintenance and repair costs (22) 2
Decrease in warranty claims (32) (32)
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Net cash provided by operating activities 1,673 2,746
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Cash flows from investing activities:
Proceeds from sale of containers 856 698
Container purchases (17) (2,311)
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Net cash provided by (used in) investing activities 839 (1,613)
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Cash flows from financing activities:
Distributions to partners (1,487) (1,487)
------------- -------------
Net cash used in financing activities (1,487) (1,487)
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Net increase (decrease) in cash 1,025 (354)
Cash at beginning of period 1,166 1,253
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Cash at end of period $ 2,191 $ 899
============= =============
See accompanying notes to financial statements
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements Of Cash Flows--Continued
For the six months ended June 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 June 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 six-month
periods ended June 30, 1998 and 1997.
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Jun. 30 Dec. 31 Jun. 30 Dec. 31
1998 1997 1997 1996
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Container purchases included in:
Due to affiliates.............................. $ - $ 12 $ 12 $ 1
Container purchases payable.................... - - 335 269
Distributions to partners included in:
Due to affiliates.............................. 2 2 2 2
Proceeds from sale of containers included in:
Due from affiliates............................ 166 296 393 327
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
six-month periods ended June 30, 1998 and 1997.
1998 1997
---- ----
Container purchases recorded...................................................... $ 5 $ 2,388
Container purchases paid.......................................................... 17 2,311
Distributions to partners declared................................................ 1,487 1,487
Distributions to partners paid.................................................... 1,487 1,487
Proceeds from sale of containers recorded......................................... 726 764
Proceeds from sale of containers received......................................... 856 698
See accompanying notes to financial statements
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TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Notes To Financial Statements
For the six months ended June 30, 1998 and 1997
(Amounts in thousands except for per unit amounts)
(unaudited)
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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 and leases 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 June 30, 1998 and December 31, 1997, and the
results of its operations, changes in partners' capital and cash flows for
the three- and six-month periods ended June 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 10K.
Certain estimates and assumptions were made by the Partnership's
management that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications of prior year amounts have been made in order to
conform with the 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 June 30, 1998 and December 31, 1997, the
amounts accrued were $14 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 June 30,
1998 and December 31, 1997, the related reserve was $95 and $101,
respectively.
Note 4. Maintenance and Repair
The Partnership accrues maintenance and repair costs on damaged containers
in depots. At June 30, 1998 and December 31, 1997, the amounts accrued
were $25 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 June 30, 1998 and December 31, 1997, the unamortized
portion of the settlement amount was $164 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 will no longer
purchase additional containers. During the six-month period ended June 30,
1997, the Partnership purchased containers with a cost of $2,388.
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 incentive management fee, an acquisition
fee, an equipment management fee and an equipment liquidation fee. These
fees are for various services provided in connection with the
administration and management of the Partnership. The Partnership incurred
$31 and $62 of incentive management fees during the three- and six-month
periods ended June 30, 1998 and 1997. There were no acquisition fees
incurred during the six-month period ending June 30, 1998. The Partnership
capitalized $110 of container acquisition fees as a component of container
costs during the six-month period ended June 30, 1997. No equipment
liquidation fees were incurred during either period.
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
June 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 six-month periods ended June 30, 1998, these fees totaled $79 and
$134, respectively, and $84 and $169, 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. For the three- and
six-month periods ended June 30, 1998, total general and administrative
costs allocated to the Partnership were $62 and $136, respectively, of
which $27 and $57 were for salaries. Total general and administrative
costs allocated to the Partnership for the three- and six-month periods
ended June 30, 1997 were $78 and $157, respectively, of which $43 and $84
were for salaries.
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. General and
administrative costs allocated to the Partnership by TEM were $56 and $122
for the three- and six-month periods ended June 30, 1998 and were $66 and
$135, respectively, for the comparable periods in 1997. TFS allocated $6
and $14, respectively, of general and administrative costs to the
Partnership for the three- and six-month periods ended June 30, 1998 and
$12 and $22 for the comparable periods in 1997.
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 June 30, 1998 and December 31, 1997, due from affiliates, net is
comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TEM................................... $ 119 $ 38
---- ---
Due to affiliates:
Due to TCC..................................... 18 4
Due to TAS..................................... - 13
Due to TFS..................................... 12 13
---- ----
30 30
---- ----
Due from affiliates, net $ 89 $ 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 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 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
six-month periods ended June 30, 1998 and 1997.
Note 8. Rentals Under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at June 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 June 30:
1999............................................. $ 231
2000............................................. 24
2001............................................. 2
-----
Total minimum future rentals receivable.......... $ 257
=====
Note 9. Direct Financing Leases
The components of the net investment in direct financing leases at June
30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Future minimum lease payments receivable............ $ 23 $ 135
Residual value...................................... 2 2
Less: unearned income.............................. (8) (8)
---- ----
Net investment in direct financing leases........... $ 17 $ 129
==== ====
The following is a schedule by year of minimum lease payments receivable
under the ten direct financing leases as of June 30, 1998:
Year ending June 30:
1999............................................... $ 17
2000............................................... 4
2001............................................... 2
----
Total minimum lease payments receivable............ $ 23
====
Rental income for the three- and six-month periods ended June 30, 1998
includes $40 and $45 of income from direct financing leases and includes
$12 and $26 of income from direct financing leases for the comparable
periods in 1997.
Note 10. Accounts Receivable Write-Off
During the six-month period ending June 30, 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 Partnership did not redeem any units during the six-month periods
ended June 30, 1998 or 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.
<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 six-month periods
ended June 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 six-month period ended June 30, 1998,
the Partnership did not redeem any 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 six-month period ended June 30, 1998, the Partnership declared cash
distributions to limited partners pertaining to the fourth quarter of 1997 and
the first quarter of 1998, in the amount of $1,472. 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, $491 of these distributions was a return of capital and the
balance was from net income.
Net cash provided by operating activities for the six-month periods ending June
30, 1998 and 1997, was $1,673 and $2,746, respectively. The decrease of $1,073,
or 39%, is primarily attributable to a fluctuation in due from affiliates, net
which increased $199 in the six-month period ended June 30, 1998 compared to a
decrease of $1,056 in the equivalent period in 1997. Fluctuations in due from
affiliates, net result from timing differences in payment of expenses and fees
and/or in the remittance of net rental revenues.
For the six-month period ending June 30, 1998, net cash provided by investing
activities (the purchase and sale of containers) was $839 compared to net cash
used in investing activities of $1,613 for the comparable period in 1997. Net
cash provided by investing activities increased $2,452 primarily because the
Partnership is no longer purchasing containers. The General Partners have
determined that it is in the best interest of the Partnership to no longer
purchase additional containers, as the Partnership is now in its ninth full year
of operations. The Partnership intends to use the anticipated cash from sales
proceeds to redeem limited partnership units and/or make special cash
distributions.
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 six-month periods ended June 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
---- ----
Opening container fleet................. 7,887 7,849
Closing container fleet................. 7,297 8,177
Average container fleet................. 7,592 8,013
The decline in the average container fleet of 5% from the six months ended June
30, 1997 to the equivalent period in 1998 resulted from the Partnership having
sold more containers than it purchased since June 30, 1997. Average 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 invest sales proceeds in additional containers. The decline in the
container fleet has contributed to an overall decline in rental income from the
six-month period ending June 30, 1997 to the equivalent period in 1998 and will
likely continue to do so in future years.
Rental income and direct container expenses are also affected by the utilization
of the container fleet, which was 81% and 78% on average during the six-month
periods ended June 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
six-month periods ended June 30, 1998 and 1997.
The Partnership's income from operations for the six-month periods ending June
30, 1998 and 1997 was $816 and $764, respectively, on rental income of $2,273
and $2,388, respectively. The decrease in rental income of $115, or 5%, from the
six-month period ended June 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 $133, or 6%. This decrease was
primarily due to the decrease in average rental rates of 6% and the decrease in
the average container fleet of 5%, and was offset by the increase in average
on-hire (utilization) percentage of 4% and a decrease in leasing incentives of
25%.
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. Rental rates were also
adversely affected by a drop in the purchase price of new containers, which
resulted in additional downward pressure on rental rates.
Average utilization for the three- and six-month periods ended June 30, 1998 was
greater than the average utilization for the comparable periods in 1997. Despite
the improvement in average utilization from the prior year, utilization has been
slowly declining over the last six months. Rental rates have also been declining
and average rental rates for the six-month period ended June 30, 1998 are lower
than average rental rates for the same period in 1997. These decreases were
offset by decreased leasing incentives during the six-month period ended June
30, 1998 as compared to the same period in 1997. The improvement in utilization
over the prior year and the overall improvement in leasing incentives, is
primarily due to increased demand in Asia. The weakening of many Asian
currencies resulted in a significant increase in exports from Asia, which has
created a strong demand for containers in certain locations. However, the
weakening of these currencies has also lowered demand in Asia for imports from
North America and Europe resulting in a lower demand for containers in these
areas. For the near term, the General Partners do not foresee material changes
in existing market conditions and caution that both utilization and rental rates
could continue declining, 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
June 30, 1998 and 1997, there were 22 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 and income from charges to lessees for a Damage Protection
Plan (DPP). For the six-month period ended June 30, 1998, the total of these
other rental income items was $270, an increase of $18 from the equivalent
period in 1997. The primary component of this increase was an increase in
location income of $85. Location income increased due to the inclusion of
certain credits received during 1997 and 1998 which had been previously applied
against repositioning expense and due to a decrease in credits given to lessees
for picking up containers from certain locations.
Direct container expenses increased $57, or 14%, from the six-month period
ending June 30, 1997 to the equivalent period in 1998. The increase was
primarily due to an increase in repositioning expense of $98 offset by a
decrease in storage expense of $33. Repositioning expense increased due to the
removal of certain credits from repositioning costs to other rental income as
discussed above and due to an increase in the average repositioning cost per
container offset by a decrease in the number of containers repositioned. Storage
expense decreased primarily due to the increase in average utilization.
Bad debt expense decreased from an expense of $28 for the six-month period ended
June 30, 1997 to a benefit of $46 for the comparable period in 1998. The
write-off of certain receivables that had reserves in excess of the receivable,
due to insurance proceeds received, as well as the resolution of payment issues
with one lessee, resulted in the benefit recorded in 1998.
Depreciation expense decreased $87, or 12%, from the six-month period ended June
30, 1997 to the comparable period in 1998 primarily due to the smaller average
fleet size and due to certain containers acquired used, which have now been
fully depreciated.
Management fees to affiliates decreased $35, or 15%, from the six-month period
ended June 30, 1997 to the comparable period in 1998 due to a decrease in
equipment management fees. Equipment management fees decreased due to an
adjustment made to reduce fees 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 $21, or 13%, from the
six-month period ended June 30, 1997 to the comparable period in 1998 due to a
decrease in overhead costs allocated by TFS and TEM.
Other income increased $54, or 43%, primarily due to an increase in gain on sale
of containers of $41 from the six-month period ending June 30, 1997 to the
equivalent period in 1998.
Net earnings per limited partnership unit increased from $0.59 to $0.67 from the
six-month period ending June 30, 1997 compared to the same period in 1998,
reflecting the increase in net earnings allocated to limited partners from $875
to $981, respectively.
The following is a comparative analysis of the results of operations for the
three-month periods ended June 30, 1998 and 1997.
The Partnership's income from operations for the three-month periods ending June
30, 1998 and 1997 was $391 and $331, respectively, on rental income of $1,100
and $1,181 respectively. The decrease in rental income of $81, or 7%, from the
three-month period ended June 30, 1997 to the comparable period in 1998 was
primarily due to a decrease in income from container rentals of $39, or 4%. This
decrease was primarily due to the decrease in average rental rates of 3% and the
decrease in the average container fleet of 4%, and was offset by the increase in
average utilization of 5% and the decrease in leasing incentives of 38%.
Direct container expenses decreased $5, or 2%, from the three-month period
ending June 30, 1997 to the equivalent period in 1998. The decrease was
primarily due to decreases in storage and handling expenses offset by an
increase in repositioning expense. Storage expense decreased primarily due to
the increase in average utilization and a decrease in container movement
resulted in a lower handling expense. Repositioning expense increased primarily
due to an increase in the average repositioning cost per container, offset by a
decrease in the number of containers repositioned.
Bad debt expense decreased from an expense of $17 for the three-month period
ended June 30, 1997 to a benefit of $32 for the comparable period in 1998. The
benefit recorded in 1998 was primarily due to the resolution of payment issues
with one lessee.
Depreciation expense decreased $60, or 15%, from the three-month period ended
June 30, 1997 to the comparable period in 1998 due to the reduction in the
average fleet size and due to certain containers acquired used, which now have
been fully depreciated.
Management fees to affiliates decreased $5, or 4%, from the three-month period
ended June 30, 1997 to the comparable period in 1998, due to a decrease in
equipment management fees resulting from the decrease in rental income.
General and administrative costs to affiliates decreased $16, or 21%, from the
three-month period ended June 30, 1997 to the comparable period in 1998 due to a
decrease in overhead costs allocated by TFS and TEM.
Other income increased $12, or 35%, primarily due to increases in interest
income and gain on sale of containers from the three-month period ending June
30, 1997 to the same period in 1998.
Net earnings per limited partnership unit increased from $0.24 to $0.29 from the
three-month period ending June 30, 1997 to the same period in 1998, reflecting
the increase in net earnings allocated to limited partners from $358 to $430,
respectively.
Many computer systems may experience difficulty processing dates beyond the year
1999 and, as such, some computer hardware and software will need to be modified
prior to the year 2000 to remain functional. Certain of the General Partners and
Partnership's core internal systems, where Year 2000 issues have been identified
are currently being revised. Based on its initial evaluation, the Partnership
and the General Partners do not believe that the cost of remedial actions
relating to these systems will have a material adverse effect on the
Partnership's results of operations and financial condition. Additionally, the
Partnership and the General Partners are continuing their assessment of Year
2000 issues not related to their core systems, including issues surrounding
systems that interface with external third parties. If external third party
systems are not Year 2000 compliant, those external third parties may have
difficulty conducting ordinary operations, which could have an adverse affect on
the General Partners and the Partnership.
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 June 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.
<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: August 13, 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, August 13, 1998
John R. Rhodes (Principal Financial and
Accounting Officer) and
Secretary
________________________ President (Principal Executive August 13, 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: August 13, 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, August 13, 1998
- ------------------------- (Principal Financial and
John R. Rhodes Accounting Officer) and
Secretary
/s/Philip K. Brewer President (Principal Executive August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,191
<SECURITIES> 0
<RECEIVABLES> 1,316
<ALLOWANCES> 159
<INVENTORY> 0
<CURRENT-ASSETS> 27
<PP&E> 24,214
<DEPRECIATION> 9,600
<TOTAL-ASSETS> 17,989
<CURRENT-LIABILITIES> 429
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,560
<TOTAL-LIABILITY-AND-EQUITY> 17,989
<SALES> 0
<TOTAL-REVENUES> 2,273
<CGS> 0
<TOTAL-COSTS> 1,457
<OTHER-EXPENSES> (180)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 996
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 996
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
