TEXTAINER FINANCIAL SERVICES CORPORATION
650 California Street, 16th Floor
San Francisco, CA 94108
March 29, 1999
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
"Partnership") the Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
The financial statements included in the enclosed Annual Report on Form 10-K do
not reflect a change from the preceding year in any accounting principles or
practices, or in the method of applying any such principles or practices.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Nadine Forsman
Controller
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP DEPOSITARY UNITS (THE "UNITS")
(TITLE OF CLASS)
LIMITED PARTNERSHIP INTERESTS (UNDERLYING THE UNITS)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
State the aggregate market value of the voting stock held by nonaffiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and ask prices of such
stock, as of a specified date within 60 days prior to the date of the filing.
Not Applicable.
Documents Incorporated by Reference
The Registrant's Prospectus as contained in Post-effective Amendment No. 2 to
the Registrant's Registration Statement, as filed with the Commission on
November 30, 1988 as supplemented by Supplement No. 6 filed with the Commission
under Rule 424(b)(3) of the Securities Act of 1933 on October 16, 1989.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
For more detailed information about the Registrant's business, see "Business of
the Partnership" in the Registrant's Prospectus as supplemented.
(a) General Development of Business
The Registrant is a California Limited Partnership formed as of
August 3, 1987 to purchase, own, operate, lease, and sell equipment
used in the containerized cargo shipping industry. The Registrant
commenced offering units representing limited partnership interests
(Units) to the public on October 26, 1987 in accordance with its
Registration Statement and ceased to offer such Units as of October
26, 1989. The Registrant raised a total of $29,491,000 from the
offering and invested a substantial portion of the money raised in
equipment. The Registrant has since engaged in leasing this and
other equipment in the international shipping industry.
See Item 10 herein for a description of the Registrant's General
Partners. See Item 7 herein for a description of current market
conditions affecting the Registrant's business.
(b) Financial Information About Industry Segments
Inapplicable.
(c) Narrative Description of Business
(c)(1)(i) A container leasing company generally, and the Registrant
specifically, is an operating business comparable to a rental car
business. A customer can lease a car from a bank leasing department
for a monthly charge which represents the cost of the car, plus
interest, amortized over the term of the lease; or the customer can
rent the same car from a rental car company at a much higher daily
lease rate. The customer is willing to pay the higher daily rate for
the convenience and value-added features provided by the rental
car company, the most important of which is the ability to pick
up the car where it is most convenient, use it for the desired
period of time, and then drop it off at a location convenient to
the customer. Rental car companies compete with one another on the
basis of lease rates, availability of cars, and the provision
of additional services. They generate revenues by maintaining the
highest lease rates and the highest utilization factors that market
conditions will allow, and by augmenting this income with proceeds
from sales of insurance, drop-off fees, and other special charges.
A large percentage of lease revenues earned by car rental
companies are generated under corporate rate agreements wherein,
for a stated period of time, employees of a participating
corporation can rent cars at specific terms, conditions and rental
rates.
Container leasing companies and the Registrant operate in a similar
manner by owning and leasing a worldwide fleet of new and used
transportation containers to international shipping companies hauling
various types of goods among numerous trade routes. All lessees pay a
daily rental rate and in certain markets may pay special handling
fees and/or drop-off charges. In addition to these fees and charges,
a lessee must either provide physical damage and liability insurance
or purchase a damage waiver from the Registrant, in which case the
Registrant agrees to pay the cost of repairing any physical damage to
containers caused by lessees. Container leasing companies compete
with one another on the basis of lease rates, availability of
equipment and services provided. To ensure the availability of
equipment, container leasing companies and the Registrant may
reposition containers from low demand locations to higher demand
locations. By maintaining the highest lease rates and the highest
equipment utilization factors allowed by market conditions, the
Registrant generates revenue and profit. Rental revenues are
primarily generated under master leases, which are comparable to the
corporate rate agreements used by rental car companies. The master
leases provide that the lessee, for a specified period of time, may
rent containers at specific terms, conditions and rental rates.
Although the terms of the master lease governing each container under
lease do not vary, the number of containers in use can vary from time
to time within the term of the master lease. The terms and conditions
of the master lease provide that the lessee pays a daily rental rate
for the entire time the container is in his possession (whether or
not he is actively using it), is responsible for any damage, and must
insure the container against liabilities. For a more detailed
discussion of the leases for the Registrant's equipment, see "Leasing
Policy" under "Business of the Partnership" in the Registrant's
Prospectus as supplemented. The Registrant also sells containers in
the course of its business if opportunities arise or at the end of
the container's useful life. See "Business of the Partnership" in
Registrant's Prospectus, as supplemented.
(c)(1)(ii) Inapplicable.
(c)(1)(iii)Inapplicable.
(c)(1)(iv) Inapplicable.
(c)(1)(v) Inapplicable.
(c)(1)(vi) Inapplicable.
(c)(1)(vii)No single lessee had revenue for the years ended December 31, 1998,
1997 and 1996 which was 10% or more of the total revenue of the
Registrant.
(c) (1)(viii)Inapplicable.
(c)(1)(ix) Inapplicable.
(c)(1)(x) There are approximately 80 container leasing companies of which the
top ten control approximately 93% of the total equipment held by
all container leasing companies. The top two container leasing
companies combined control approximately 39% of the total equipment
held by all container leasing companies. Textainer Equipment
Management Limited, an Associate General Partner of the Registrant
and the manager of its marine container equipment, is the third
largest container leasing company and manages approximately 10% of
the equipment held by all container leasing companies. The
Registrant alone is not a material participant in the worldwide
container leasing market. The principal methods of competition
are price, availability and the provision of worldwide service to
the international shipping community. Competition in the container
leasing market has increased over the past few years. Since 1996,
shipping alliances and other operational consolidations among
shipping lines have allowed shipping lines to begin operating with
fewer containers, thereby decreasing the demand for leased
containers. This decrease in demand, along with the entry of new
leasing company competitors offering low container rental rates
to shipping lines, has increased competition among container lessors
such as the Registrant.
(c)(1)(xi) Inapplicable.
(c)(1)(xii)Inapplicable.
(c)(1)(xiii) The Registrant has no employees. Textainer Financial Services
Corporation (TFS), the Managing General Partner of the Registrant, is
responsible for the overall management of the business of the
Registrant and at December 31, 1998 had 6 employees. Textainer
Equipment Management Limited (TEM), an Associate General Partner, is
responsible for the management of the leasing operations of the
Registrant and at December 31, 1998 had a total of 162 employees.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales.
The Registrant is involved in the leasing of shipping containers to
international shipping companies for use in world trade and
approximately 20%, 14% and 16%, of the Registrant's rental revenue
during the years ended December 31, 1998, 1997, and 1996,
respectively, was derived from operations sourced or terminated
domestically. These percentages do not reflect the proportion of the
Partnership's income from operations generated domestically or in
domestic waterways. Substantially all of the Partnership's income
from operations is derived from assets employed in foreign
operations. See "Business of the Partnership", and for a discussion
of the risks of leasing containers for use in world trade, "Risk
Factors" in the Registrant's Prospectus, as supplemented.
ITEM 2. PROPERTIES
As of December 31, 1998, the Registrant owned the following types and quantities
of equipment:
20-foot standard dry freight containers 2,993
40-foot standard dry freight containers 2,474
40-foot high cube dry freight containers 1,302
-----
6,769
=====
During December 1998, approximately 76% of these containers were on lease to
international shipping companies, and the balance were being stored at a large
number of storage depots located worldwide.
For information about the Registrant's property, see "Business of the
Partnership" in the Registrant's Prospectus, as supplemented.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not subject to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 201:
(a) Market Information.
(a)(1)(i) The Registrant's limited partnership Units are not publicly traded
and there is no established trading market for such Units. The
Registrant has a program whereby Limited Partners may redeem Units
for a specified redemption price. The program operates only when the
Managing General Partner determines, among other matters, that the
payment for redeemed units will not impair the capital or operations
of the Registrant.
(a)(1)(ii) Inapplicable.
(a)(1)(iii)Inapplicable.
(a)(1)(iv) Inapplicable.
(a)(1)(v) Inapplicable.
(a)(2) Inapplicable.
(b) Holders.
(b)(1) As of January 1, 1999, there were 1,985 holders of record of
limited partnership interests in the Registrant.
(b)(2) Inapplicable.
(c) Dividends.
Inapplicable.
For details of the distributions which are made quarterly by the Registrant to
its limited partners, see Item 6, "Selected Financial Data."
ITEM 701: Inapplicable.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(Amounts in thousands except for per unit amounts)
Year Ended December 31,
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Rental income....................... $ 4,358 $ 4,784 $ 5,383 $ 6,479 $ 6,158
Net earnings........................ $ 1,569 $ 1,814 $ 2,382 $ 2,668 $ 1,792
Net earnings per unit
of limited partnership
Interest.......................... $ 1.02 $ 1.21 $ 1.60 $ 1.79 $ 1.20
Distributions per unit of
limited partnership
Interest.......................... $ 2.50 $ 2.00 $ 2.00 $ 1.95 $ 1.68
Distributions per unit of
limited partnership
interest representing
a return of capital............... $ 1.48 $ 0.79 $ 0.40 $ 0.16 $ 0.48
Total assets........................ $ 16,271 $ 18,560 $ 20,049 $ 20,914 $ 20,613
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Amounts in thousands except for unit and per unit amounts)
The Financial Statements contain information, which will assist in evaluating
the financial condition of the Partnership for the years ended December 31,
1998, 1997 and 1996. Please refer to the Financial Statements and Notes thereto
in connection with the following discussion.
Liquidity and Capital Resources
From October 1987 until October 1989, the Partnership 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 year ended December 31, 1998, the
Partnership redeemed 3,000 units for a total dollar amount of $31. The
Partnership used cash flow from investing activities to pay for the redeemed
units.
The Partnership invests working capital and cash flow from operations and
investing activities prior to its distribution to the partners in short-term,
liquid investments. 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 year ended December 31, 1998, the Partnership declared cash
distributions to limited partners pertaining to the fourth quarter of 1997
through the third quarter of 1998, in the amount of $3,677. This amount includes
a special distribution of $735 or 2.5% on original capital, which was paid in
October 1998. Exclusive of this special distribution, these distributions
represent 10% on original capital (measured on an annualized basis) on each
unit. On a cash basis, $3,042 of total distributions was from operations and the
balance was a return of capital. On a GAAP basis, $2,183 of total distributions
was a return of capital and the balance was from net income.
Net cash provided by operating activities for the year ended December 31, 1998
and 1997, was $3,042 and $4,640, respectively. The decrease of $1,598, or 34%,
was primarily attributable to the fluctuation in due from affiliates, net which
increased $311 in the year ended December 31, 1998 compared to a decrease of
$1,120 in the equivalent period in 1997. Fluctuations in due from affiliates,
net result from timing differences in the payment of expenses and fees and in
the remittance of net rental revenues from TEM.
For the year ended December 31, 1998, net cash provided by investing activities
(the purchase and sale of containers) was $1,498 compared to net cash used in
investing activities of $1,752 for the comparable period in 1997. Net cash
provided by investing activities increased $3,250 primarily because the
Partnership is no longer purchasing containers. Effective January 1, 1998, the
General Partners determined that it was not in the best interest of the
Partnership to continue purchasing containers, as the Partnership was in its
ninth full year 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 in one or more large transactions or are sold gradually as
they reach the end of their useful marine lives. Regardless of these liquidation
plans, due to current market conditions, the Partnership has sold and plans to
continue to sell certain older containers in surplus locations where demand is
weak and repositioning costs are high. Market conditions are discussed more
fully under "Results of Operations".
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 second special distribution to limited
partners of $735 to be paid in January 1999. On a cash basis and 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 years ended December 31, 1998, 1997 and 1996, as well
as certain other factors as discussed below. The following is a summary of the
container fleet (in units) available for lease during those periods:
1998 1997 1996
---- ---- ----
Beginning container fleet............... 7,887 7,849 8,471
Ending container fleet.................. 6,769 7,887 7,849
Average container fleet................. 7,328 7,868 8,160
The decline in the average container fleet of 7% from the year ended December
31, 1997 to the equivalent period in 1998 resulted from the Partnership having
sold more containers than it purchased since December 31, 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.
Additionally, the Partnership expects that the size of its container fleet will
further decline due to the Partnership's plan to sell certain containers in low
demand locations until market conditions improve. The decline in the container
fleet has contributed to an overall decline in rental income from the year ended
December 31, 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
continues to decrease.
Rental income and direct container expenses are also affected by the average
utilization of the container fleet, which was 80%, 79% and 81% during the years
ended December 31, 1998, 1997 and 1996, 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
years ended December 31, 1998, 1997 and 1996.
The Partnership's income from operations for the years ended December 31, 1998
and 1997 was $1,407 and $1,536, respectively, on rental income of $4,358 and
$4,784, respectively. The decrease in rental income of $426, or 9%, from the
year ended December 31, 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 $445, or 10%. This decrease was primarily due
to decreases in average rental rates of 4% and the average container fleet of
7%, and was offset by an increase in average on-hire utilization of 1% and a
decrease in leasing incentives of 43%.
The Partnership's income from operations for the years ended December 31, 1997
and 1996 was $1,536 and $1,945, respectively, on rental income of $4,784 and
$5,383, respectively. The decrease in rental income of $599, or 11%, from the
year ended December 31, 1996 to the year ended December 31, 1997, was primarily
attributable to income from container rentals. Income from container rentals
decreased $616, or 13%, from 1996 to 1997 primarily due to decreases in average
inventory of 4%, average on-hire utilization of 2%, average daily rental rates
of 6% and due to the increase in leasing incentives of 75%.
Container utilization and rental rates have been declining since 1996. This
resulted from changes in the business of shipping line customers consisting
primarily of (i) over-capacity resulting from the 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 purchasing containers to take advantage of
low prices and favorable interest rates. 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 and excess industry capacity
have 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. While this imbalance has
resulted in the decline in leasing incentives, it has also contributed to the
further decline in average utilization and rental rates for the fleet managed by
TEM. This imbalance has also resulted in an unusually high build-up of
containers in lower demand locations during the year ended December 31, 1998
compared to 1997. In an effort to improve utilization and to alleviate the
container build-up, the Partnership has repositioned and plans to continue to
reposition, newer containers to higher demand locations. The Partnership
incurred increased direct container expenses as a result of repositioning
containers from these lower demand locations during 1998 and anticipates
incurring additional direct container costs in 1999 as it continues its
repositioning efforts. The Partnership has also sold and plans to continue to
sell certain older containers located in lower demand locations. The decision to
sell such containers was based on the high costs to reposition these containers
and on the current low demand for containers manufactured prior to 1993. The
General Partners believe that the especially low demand for these older
containers is a temporary situation caused by the market conditions discussed
above.
The low demand for these older containers has had an adverse effect on rental
income and has resulted in the Partnership incurring losses on the sale of these
older containers. Until market conditions improve, rental income will continue
to be adversely affected and additional losses may be incurred if more older
containers are sold. Should the especially low demand for these older containers
turn out to be a permanent situation, the Partnership may be required to
increase its depreciation rate for container rental equipment. 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 further
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
December 31, 1998, 1997 and 1996, there were 26, 112 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 lower
demand locations less credits granted to lessees for leasing containers from
lower demand 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 year ended December 31,
1998, the total of these other rental income items was $536, an increase of $19
from the equivalent period in 1997. The increase was primarily due to an
increase in location income of $140, offset by decreases in handling and DPP
income of $54 and $31, respectively. Location income increased due to a decrease
in credits granted to lessees for picking up containers from certain locations.
Handling income decreased primarily due to the decrease in container movement,
and DPP income decreased due to a decrease in the average DPP price charged per
container, partially offset by an increase in the number of containers
participating in DPP.
For the year ended December 31, 1997, the total of these other rental income
items increased $17, or 3%, from the equivalent period in 1996. The increase was
primarily due to an increase in handling income of $45 offset by a decrease in
location income of $23. Handling income increased due to an increase in
container movement, partially offset by lower average handling charges per
container from 1996 to 1997. The decline in location income was due to lower
average drop-off charges per container, which reduced drop-off charges to
lessees during 1997 compared to 1996.
Direct container expenses remained fairly constant, increasing $7, or 1%, from
the year ended December 31, 1997 to the equivalent period in 1998. The increase
was primarily due to an increase in repositioning expense of $141, offset by
decreases in maintenance and handling expenses of $53 and $33, respectively.
Repositioning expense increased due to an increase in the average repositioning
cost per container and an increase in the number of containers repositioned.
Maintenance expense decreased primarily due to the decrease in the average
repair cost per container and due to a decrease in the number of containers
requiring repair. Handling expense decreased primarily due to the decrease in
container movement.
Direct container expenses decreased $51, or 6%, from the year ended December 31,
1996, to the same period in 1997. The primary components of this decrease were
decreases in DPP and maintenance expenses of $53 and $29, respectively, offset
by an increase in handling expense of $31. DPP and maintenance expenses
decreased due to a lower average repair cost per container in the year ended
December 31, 1997, compared to the year ended December 31, 1996. Handling
expenses increased primarily due to the increased container movement partially
offset by lower average handling charges per container in 1997 compared to 1996.
Bad debt expense decreased from an expense of $57 for the year ended December
31, 1997 to a recovery of $40 for the year ended December 31, 1998. The recovery
recorded for the year ended December 31, 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 from the resolution of payment issues
with one lessee. Bad debt expense remained fairly constant between the years
ending December 31, 1997 and 1996.
Depreciation expense decreased $120, or 8%, and $75, or 5%, from the years ended
December 31, 1997 to 1998 and December 31, 1996 to 1997, respectively. The
decreases were primarily due to the decline in the average fleet size and due to
certain containers, acquired used, which have now been fully depreciated, offset
by additional charges to depreciation as described below.
New container prices have been declining since 1995, and the cost of purchasing
new containers at year-end 1998 was significantly less than the cost of
containers purchased in the last several years. The Partnership has evaluated
the recoverability of the recorded amount of container rental equipment and
determined that a reduction to the carrying value of the containers was not
required, but that a write-down in value of certain containers identified for
sale was required. In the fourth quarter of 1998, the Partnership recorded a
charge of $61 for the expected loss on disposal of these containers. These
containers were manufactured prior to 1993 and were located in certain low
demand locations. This charge is only for those containers specifically
identified as being for sale. If other containers manufactured prior to 1993,
whether situated in these or other locations, are subsequently identified as
available for sale, the Partnership may incur additional losses.
In the fourth quarter of 1996 and the second quarter of 1997, charges of $114
and $33, respectively, were recorded to write down the value of the refrigerated
containers owned by the Partnership. During 1996, the carrying value of these
containers was written down to an amount equal to the estimated future
undiscounted cash flows from these containers as there had been no recent sales
of this equipment type. The carrying value was further written down during 1997,
based on the sales proceeds received in recent sales of these containers.
Management fees to affiliates decreased $28, or 6%, from the year ended December
31, 1997 to the comparable period in 1998 due to a decrease in equipment
management fees, offset by an increase in incentive management fees. Equipment
management fees decreased $59, or 18%, 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. Incentive
management fees, which are based on the Partnership's limited and general
partner distribution percentage and partners' capital, increased $31, or 25%,
due to the special distribution paid in October 1998.
Management fees to affiliates decreased $45, or 9%, between the years ended
December 31, 1997 and 1996 due to the decrease in equipment management fees.
Equipment management fees decreased correspondingly with the decline in rental
income and were approximately 7% of gross revenue for both years. Incentive
management fees remained constant at $124 for the years ending December 31, 1997
and 1996.
General and administrative costs to affiliates decreased $55, or 19%, and $13,
or 4%, from the years ended December 31, 1997 to 1998 and December 31, 1996 to
1997, respectively. These decreases were due to decreases in overhead costs
allocated by TFS and TEM and the decreases in fleet size.
Other income decreased $116, or 42%, from the year ended December 31, 1997 to
the year ended December 31, 1998, due to a decrease in gain on sale of
containers of $155, offset by an increase in interest income of $39. Gain on
sale of containers decreased primarily due to the Partnership selling containers
located in low demand locations at a younger age than they would have been sold
during previous years, as a result of current market conditions. As noted above,
if other containers are identified as available for sale, the Partnership may
incur additional losses.
Other income decreased $159, or 36%, from the year ended December 31, 1996 to
the year ended December 31, 1997, due to a decrease in gain on sale of
containers of $192, offset by an increase in interest income of $33.
Net earnings per limited partnership unit decreased from $1.21 to $1.02 from the
year ended December 31, 1997 to the same period in 1998, reflecting the decrease
in net earnings allocated to limited partners from $1,783 to $1,494,
respectively. Net earnings per limited partnership unit decreased from $1.60 to
$1.21 from the year ended December 31, 1996 to the same period in 1997,
reflecting the decrease in net earnings allocated to limited partners from
$2,352 to $1,783, 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 December 31, 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 many 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 mission critical 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 systems projects as a result of
Year 2000 remediation.
As noted above, 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 53% of the letters sent with all but three
respondents representing that they are or will be Year 2000 compliant.
Non-compliance by these three respondents is not expected to have a material
adverse effect on the Partnership's operations or financial condition. The
General Partners are continuing to 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 any non-responding Third
Parties will not be Year 2000 compliant.
Nevertheless, the Partnership and the General Partners believe that they are
likely to encounter Year 2000 problems with certain Third Parties, particularly
those with significant operations within countries that are not actively
promoting correction of Year 2000 issues. 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), by 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. The Partnership and
the General Partners are unable to estimate the financial impact of these
problems, but to the extent that lessee's 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 Relating to the Year 2000
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. The Partnership and General Partners are
unable to determine a reasonably likely worst case scenario in the event of an
infrastructure failure or failures.
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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Attached pages 13 to 25.
<PAGE>
Independent Auditors' Report
The Partners
TCC Equipment Income Fund:
We have audited the accompanying balance sheets of TCC Equipment Income Fund (a
California limited partnership) as of December 31, 1998 and 1997, and the
related statements of earnings, partners' capital and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TCC Equipment Income Fund as of
December 31, 1998 and 1997, and the results of its operations, its partners'
capital, and its cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
San Francisco, California
February 19, 1999
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Balance Sheets
December 31, 1998 and 1997
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Assets
Container rental equipment, net of accumulated
depreciation of $9,373 (1997: $9,854) $ 13,153 $ 15,874
Cash 1,959 1,166
Net investment in direct financing leases (note 4) 18 129
Accounts receivable, net of allowance
for doubtful accounts of $134 (1997: $635) (note 6) 896 1,342
Due from affiliates, net (note 2) 239 8
Prepaid expenses 6 41
----------------- ----------------
$ 16,271 $ 18,560
================= ================
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 128 $ 130
Accrued liabilities 18 7
Accrued recovery costs (note 1(j)) 22 28
Accrued damage protection plan costs (note 1(k)) 83 101
Accrued maintenance and repair costs (note 1(l)) 15 47
Warranty claims (note 1(m)) 132 196
----------------- ----------------
Total liabilities 398 509
----------------- ----------------
Partners' capital:
General partners - (36)
Limited partners 15,873 18,087
----------------- ----------------
Total partners' capital 15,873 18,051
----------------- ----------------
$ 16,271 $ 18,560
================= ================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands except for unit and per unit amounts)
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Rental income $ 4,358 $ 4,784 $ 5,383
----------------- ----------------- -----------------
Costs and expenses:
Direct container expenses 883 876 927
Bad debt (recovery) expense (40) 57 59
Depreciation (note 1(e)) 1,352 1,472 1,547
Professional fees 39 39 31
Management fees to affiliates (note 2) 433 461 506
General and administrative costs
to affiliates (note 2) 233 288 301
Other general and administrative costs 51 55 67
----------------- ----------------- -----------------
2,951 3,248 3,438
----------------- ----------------- -----------------
Income from operations 1,407 1,536 1,945
----------------- ----------------- -----------------
Other income:
Interest income, net 94 55 22
Gain on sale of containers 68 223 415
----------------- ----------------- -----------------
162 278 437
----------------- ----------------- -----------------
Net earnings $ 1,569 $ 1,814 $ 2,382
================= ================= =================
Allocation of net earnings (note 1(g)):
General partners $ 75 $ 31 $ 30
Limited partners 1,494 1,783 2,352
----------------- ----------------- -----------------
$ 1,569 $ 1,814 $ 2,382
================= ================= =================
Limited partners' per unit share
of net earnings $ 1.02 $ 1.21 $ 1.60
================= ================= =================
Limited partners' per unit share
of distributions $ 2.50 $ 2.00 $ 2.00
================= ================= =================
Weighted average number of limited
partnership units outstanding (note 1(n)) 1,470,342 1,471,779 1,471,779
================= ================= =================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------
Partners' Capital
---------------------------------------------------------
General Limited Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1995 $ (36) $ 19,840 $ 19,804
Distributions (30) (2,944) (2,974)
Net earnings 30 2,352 2,382
--------------- --------------- ---------------
Balances at December 31, 1996 (36) 19,248 19,212
--------------- --------------- ---------------
Distributions (31) (2,944) (2,975)
Net earnings 31 1,783 1,814
--------------- --------------- ---------------
Balances at December 31, 1997 (36) 18,087 18,051
--------------- --------------- ---------------
Distributions (39) (3,677) (3,716)
Redemptions (note 1(o)) - (31) (31)
Net earnings 75 1,494 1,569
--------------- --------------- ---------------
Balances at December 31, 1998 $ - $ 15,873 $ 15,873
=============== =============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,569 $ 1,814 $ 2,382
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation (note 1(e)) 1,352 1,472 1,547
(Decrease) increase in allowance for doubtful
accounts, excluding write-off (note 6) (110) (52) 26
Gain on sale of containers (68) (223) (415)
(Increase) decrease in assets:
Net investment in direct financing leases 130 335 306
Accounts receivable, excluding write-off (note 6) 556 264 124
Due from affiliates, net (311) 1,120 49
Prepaid expenses 35 (31) -
Increase (decrease) in liabilities:
Accounts payable and accrued liablilties 9 21 (82)
Accrued recovery costs (6) 11 15
Accrued damage protection plan costs (18) (29) 1
Accrued maintenance and repair costs (32) 2 18
Warranty claim (64) (64) (64)
--------------- --------------- ---------------
Net cash provided by operating activities 3,042 4,640 3,907
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from sale of containers 1,524 1,590 1,348
Container purchases (26) (3,342) (1,072)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 1,498 (1,752) 276
--------------- --------------- ---------------
Cash flows from financing activities:
Repayment to affiliates - - (435)
Redemptions of limited partnership units (31) - -
Distributions to partners (3,716) (2,975) (2,987)
--------------- --------------- ---------------
Net cash used in financing activities (3,747) (2,975) (3,422)
--------------- --------------- ---------------
Net increase (decrease) in cash 793 (87) 761
Cash at beginning of period 1,166 1,253 492
--------------- --------------- ---------------
Cash at end of period $ 1,959 $ 1,166 $ 1,253
=============== =============== ===============
Interest paid during the period $ - $ - $ 14
=============== =============== ===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Statements of Cash Flows--Continued
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Supplemental schedule of non-cash investing and financing activities:
The following table summarizes the amounts of container purchases, distributions
to partners, and proceeds from sale of containers which had not been paid or
received by the Partnership as of December 31, 1998, 1997, 1996 and 1995,
resulting in differences in amounts recorded and amounts of cash disbursed or
received by the Partnership, as shown in the Statements of Cash Flows.
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Container purchases included in:
Due to affiliates........................................ $ - $ 12 $ 1 $ 44
Container purchases payable.............................. - - 269 430
Distributions to partners included in:
Due to affiliates........................................ 2 2 2 15
Proceeds from sale of containers
Accounts receivable...................................... - - - 1
Due from affiliates...................................... 204 296 327 229
The following table summarizes the amounts of container purchases, distributions
to partners, and proceeds from sale of containers recorded by the Partnership
and the amounts paid or received as shown in the Statements of Cash Flows for
the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
Container purchases recorded.............................................. $ 14 $ 3,084 $ 868
Container purchases paid.................................................. 26 3,342 1,072
Distributions to partners declared........................................ 3,716 2,975 2,974
Distributions to partners paid............................................ 3,716 2,975 2,987
Proceeds from sale of containers recorded................................. 1,432 1,559 1,445
Proceeds from sale of containers received................................. 1,524 1,590 1,348
See accompanying notes to financial statements
</TABLE>
<PAGE>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Notes to Financial Statements
Years ended December 31, 1998, 1997 and 1996
(Amounts in thousands except for unit and per unit amounts)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
(a) Nature of Operations
TCC Equipment Income Fund (TEIF or the Partnership), a California
limited partnership with a maximum life of 20 years, was formed on
August 3, 1987. The Partnership was formed to engage in the business
of owning, leasing and selling both new and used equipment related to
the international containerized cargo shipping industry, including,
but not limited to, containers, trailers, and other container-related
equipment. TEIF offered units representing limited partnership
interests (Units) to the public until October 26, 1989, the close of
the offering period, when a total of 1,474,559 Units had been
purchased for a total of $29,491.
In October 1998, the Partnership began its liquidation phase. This
phase may last between two to six or more years depending on whether
the containers are sold in one or more large transactions or are sold
gradually as they reach the end of their useful lives. 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.
Textainer Financial Services Corporation (TFS) is the managing general
partner of the Partnership and is a wholly-owned subsidiary of
Textainer Capital Corporation (TCC). Textainer Equipment Management
Limited (TEM) and Textainer Limited (TL) are associate general
partners of the Partnership. The managing general partner and the
associate general partners are collectively referred to as the General
Partners and are commonly owned by Textainer Group Holdings Limited
(TGH). The General Partners also act in this capacity for other
limited partnerships. Prior to its liquidation in October 1998,
Textainer Acquisition Services Limited (TAS), a former affiliate of
the General Partners, performed services related to the acquisition of
containers outside the United States on behalf of the Partnership.
Effective November 1998, these services are being performed by TEM.
The General Partners manage and control the affairs of the
Partnership.
(b) Basis of Accounting
The Partnership utilizes the accrual method of accounting. Revenue is
recorded when earned according to the terms of the equipment rental
contracts. These contracts are classified as operating leases or
direct financing leases if they so qualify under Statement of
Financial Accounting Standards No. 13: "Accounting for Leases".
Substantially all of the Partnership's rental income was generated
from the leasing of the Partnership's containers under short-term
operating leases.
(c) Use of Estimates
Certain estimates and assumptions were made by the Partnership's
management that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
(d) Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments," the
Partnership calculates the fair value of financial instruments and
includes this additional information in the notes to the financial
statements when the fair value is different than the book value of
those financial instruments. At December 31, 1998 and 1997, the fair
value of the Partnership's financial instruments approximates the
related book value of such instruments.
(e) Container Rental Equipment
Container rental equipment is recorded at the cost of the assets
purchased, which includes acquisition fees, less depreciation charged.
Depreciation of new containers is computed using the straight-line
method over an estimated useful life of 12 years to a 28% salvage
value. Used containers are depreciated based upon their estimated
remaining useful life at the date of acquisition (from 2 to 11 years).
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the equipment accounts and
any resulting gain or loss is recognized in income for the period.
In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" (SFAS 121), the Partnership
periodically compares the carrying value of the containers to expected
future cash flows for the purpose of assessing the recoverability of
the recorded amounts. If the carrying value exceeds expected future
cash flows, the assets are written down to estimated fair value. In
addition, containers identified for disposal are recorded at the lower
of carrying amount or fair value less cost to sell.
New container prices have been declining since 1995, and the cost of
purchasing new containers at year-end 1998 was significantly less
than the cost of containers purchased in the last several years. The
Partnership has evaluated the recoverability of the recorded amount of
container rental equipment and determined that a reduction to the
carrying value of the containers was not required, but that a write-
down in value of certain containers identified for sale was required.
In the fourth quarter of 1998, the Partnership recorded a charge of
$61 for the expected loss on disposal of these containers. These
containers were manufactured prior to 1993 and were located in certain
low demand locations. This charge is only for those containers
specifically identified as being for sale. If other containers
manufactured prior to 1993, whether situated in these or other
locations, are subsequently identified as available for sale, the
Partnership may incur additional losses.
In the fourth quarter of 1996, a charge of $114 was recorded to write
down the value of certain refrigerated containers. The write-down was
the result of an evaluation of the Partnership's ability to recover
the net book value of these containers given the changes in market
conditions for this specific container type. The estimated
undiscounted cash flows anticipated from these containers indicated
that a write-down to fair value was required under SFAS 121. The
carrying value of these containers was written down to an amount equal
to the estimated future undiscounted cash flows from these containers,
as there had been no recent sales of this container type to indicate
fair value. During 1997, it was determined that an additional
write-down of $33 was required based on 1997 sales of this container
type.
The write-downs were recorded as additional depreciation expense
during the years ended December 31, 1998, 1997 and 1996.
(f) Nature of Income from Operations
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 that
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 rather than the
geographic location of the containers or the domicile of the lessees.
No single lessee accounted for more than 10% of the Partnership's
revenues for the years ended December 31, 1998, 1997 and 1996.
(g) Allocation of Net Earnings and Partnership Distributions
In accordance with the Partnership Agreement, net earnings or losses
and distributions are generally allocated 1% to the General Partners
and 99% to the Limited Partners. However, notwithstanding this general
allocation, each year gains on sales of containers are specially
allocated to the General Partners to the extent necessary to cause
their aggregate Capital Account balance to be not less than zero.
Actual cash distributions to the Limited Partners differ from the
allocated net earnings as presented in these financial statements
because cash distributions are based on cash available for
distribution. Cash distributions are paid to the general and limited
partners on a quarterly basis in accordance with the provisions of the
Partnership Agreement.
(h) Income Taxes
The Partnership is not subject to income taxes. Accordingly, no
provision for income taxes has been made. The Partnership files
federal and state information returns only. Taxable income or loss is
reportable by the individual partners.
(i) Acquisition Fees
In accordance with the Partnership Agreement, acquisition fees equal
to 5% of the container purchase price were paid to TEM beginning in
November 1998 and TAS through October 1998. These fees are capitalized
as part of the cost of the containers.
(j) 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 December 31, 1998 and 1997,
the amounts accrued were $22 and $28, respectively.
(k) 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 the related reserve at December 31, 1998 and 1997, was
$83 and $101, respectively.
(l) Maintenance and Repair
The Partnership accrues maintenance and repair costs on damaged units
in depots. At December 31, 1998 and 1997, the amount accrued was $15
and $47, respectively.
(m) Warranty Claims
During 1992 and 1995, the Partnership settled warranty claims against
a container manufacturer. The Partnership is amortizing the settlement
amounts over the remaining estimated useful life of the applicable
containers (seven years), reducing maintenance and repair costs over
that time. At December 31, 1998 and 1997, the unamortized portion of
the settlement amounts was equal to $132 and $196, respectively.
(n) Limited Partners' Per Unit Share of Net Earnings and Distributions
Limited partners' per unit share of both net earnings and
distributions were computed using the weighted average number of units
outstanding during each year of the Partnership's operations which was
1,470,342, 1,471,779, and 1,471,779 during the years ended December
31, 1998, 1997 and 1996, respectively.
(o) Redemptions
The following redemption offerings were consummated by the Partnership
during the year ended 1998:
<TABLE>
<CAPTION>
Units Average
Redeemed Redemption Price Amount Paid
-------- ---------------- -----------
<S> <C> <C> <C> <C>
Balance forward at Dec. 31, 1997....... 2,775 $ 8.34 $ 23
----- ---
Year ended December 31, 1998:
3rd quarter...................... 2,750 $ 10.53 29
4th quarter...................... 250 $ 9.81 2
----- ---
3,000 $ 10.47 31
----- ---
Partnership to date................... 5,775 $ 9.45 $ 54
===== ===
</TABLE>
There were no units redeemed during 1996 and 1997. The redemption
price is fixed by formula.
Note 2. Transactions with Affiliates
As part of the operation of the Partnership, the Partnership is to pay
to the General Partners, or TAS prior to its liquidation, 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. The Partnership capitalized $1, $159 and $49 of
equipment acquisition fees as part of container rental equipment costs
during the years ended December 31, 1998, 1997 and 1996, respectively.
The Partnership incurred $155, $124 and $124 of incentive management
fees during the years ended December 31, 1998, 1997 and 1996,
respectively. No equipment liquidation fees were incurred during these
periods.
The Partnership's containers are managed by TEM. In its role as
manager, TEM has authority to acquire, hold, manage, lease, sell and
dispose of the 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 December 31, 1998 and 1997.
Subject to certain reductions, TEM receives a monthly equipment
management fee equal to 7% of gross lease revenues attributable to
operating leases and 2% of gross lease revenues attributable to full
payout net leases. For the year ended December 31, 1998, 1997 and
1996, equipment management fees totaled $278, $337, and $382,
respectively. The Partnership's containers are leased by TEM to third
party lessees on operating master leases, spot leases, full payout net
leases and term leases. The majority of the Partnership's leases are
operating 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 TEM and TFS. Total general and
administrative costs allocated to the Partnership were as follows:
1998 1997 1996
---- ---- ----
Salaries $ 126 $ 157 $ 158
Other 107 131 143
--- --- ---
Total general and
administrative costs $ 233 $ 288 $ 301
=== === ===
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:
1998 1997 1996
---- ---- ----
TEM $ 211 $ 253 $ 260
TFS 22 35 41
--- --- ---
Total general and
administrative costs $ 233 $ 288 $ 301
=== === ===
The General Partners, or TAS through October 1998, 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 and,
prior to its liquidation, TAS are entitled to an acquisition fee for
any containers resold to the Partnership.
At December 31, due from affiliates, net is comprised of:
1998 1997
---- ----
Due from affiliates:
Due from TL......................... $ 1 $ -
Due from TEM........................ 254 38
--- ---
255 38
--- ---
Due to affiliates:
Due to TCC.......................... 6 4
Due to TFS.......................... 10 13
Due to TAS.......................... - 13
--- ---
16 30
--- ---
Due from affiliates, net $ 239 $ 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 payment
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. The
Partnership incurred interest expense of $10 on amounts due to the
General Partners for the year ended December 31, 1996. No such
interest was incurred during the years ended December 31, 1998 and
1997.
Note 3. Rentals Under Operating Leases
The following are the future minimum rent receivables under cancelable
long-term operating leases at December 31, 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 December 31,
1999................................................ $ 223
2000................................................ 27
2001................................................ 17
2002................................................ 16
2003................................................ 13
----
Total minimum future rentals receivable............. $ 296
====
Note 4. Direct Financing Leases
The Partnership has leased containers under direct finance leases with
terms ranging from eighteen months to three years. The components of
the net investment in direct financing leases as of December 31, 1998
and 1997 are as follows:
1998 1997
---- ----
Future minimum lease payments receivable........... $ 20 $ 135
Residual value..................................... 2 2
Less: unearned income.............................. (4) (8)
---- ----
Net investment in direct financing leases.......... $ 18 $ 129
==== ====
The following is a schedule by year of minimum lease payments
receivable under the direct financing leases at December 31, 1998
Year ending December 31:
1999............................................ $ 12
2000............................................ 6
2001............................................ 2
---
Total minimum lease payments receivable......... $ 20
===
Rental income for the years ended December 31, 1998, 1997, and 1996
includes $50, $45, and $98, respectively, of income from direct
financing leases.
Note 5. Income Taxes
At December 31, 1998, 1997 and 1996, there were temporary differences
of $8,070, $8,378, and $9,344, respectively between the financial
statement carrying value of certain assets and liabilities and the
federal income tax basis of such assets and liabilities. The
reconciliation of net income for financial statement purposes to net
income for federal income tax purposes for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income per financial statements.................... $ 1,569 $ 1,814 $ 2,382
(Decrease) increase in provision for bad debt.......... (501) (52) 26
Depreciation for income tax purposes in excess of
depreciation for financial statement purposes........ (429) (246) (92)
Gain on sale of fixed assets for federal income
tax purposes in excess of gain recognized for
financial statement purposes......................... 1,320 1,357 973
(Decrease) increase in damage protection
plan reserve......................................... (18) (29) 1
Warranty reserve income for tax purposes in
excess of financial statement purposes............... (64) (64) 125
----- ----- -----
Net income for
federal income tax purposes.......................... $ 1,877 $ 2,780 $ 3,415
===== ===== =====
</TABLE>
Note 6. Accounts Receivable Write-Off
During 1998, the Partnership wrote-off $391 of delinquent receivables
from two lessees against which reserves were recorded in 1994 and
1995.
Note 7. 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 many 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 systems
as well as non-information technology systems. There can be no
assurance that issues related to the Year 2000 will not have a
material impact on the financial condition, results of operations or
cash flows of the Partnership.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been none.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant has no officers or directors.
As described in the Prospectus, the Registrant's three original general partners
were TCC, TEM and Textainer Inc. (TI), which comprised the Textainer Group.
Effective October 1, 1993, the Textainer Group streamlined its organization by
forming a new holding company, Textainer Group Holdings Limited (TGH), and the
shareholders of the underlying companies which include the General Partners
accepted shares in TGH in exchange for their shares in the individual companies.
Textainer Financial Services Corporation (TFS) is the Managing General Partner
of the Partnership (prior to its name change on April 4, 1994, TFS was known as
Textainer Capital Corporation). TFS is a wholly-owned subsidiary of Textainer
Capital Corporation (TCC) (prior to its name change on April 4,1994, TCC was
known as Textainer (Delaware) Inc.). Textainer Equipment Management Limited
(TEM) is an Associate General Partner of the Partnership. TI was an Associate
General Partner of the Partnership through September 30, 1993 when it was
replaced in that capacity by Textainer Limited (TL), pursuant to a corporate
reorganization effective October 1, 1993, which caused TFS, TEM and TL to fall
under the common ownership of TGH. Pursuant to this restructuring, TI
transferred substantially all of its assets including all of its rights and
duties as Associate General Partner to TL. This transfer was effective from
October 1, 1993. The end result was that TFS now serves as Managing General
Partner and TEM and TL now serve as Associate General Partners. The Managing
General Partner and Associate General Partners are collectively referred to as
the General Partners and are wholly-owned or substantially-owned subsidiaries of
TGH. The General Partners also act in this capacity for other limited
partnerships. Prior to its liquidation in October 1998, Textainer Acquisition
Services Limited (TAS) was an affiliate of the General Partners and performed
services related to the acquisition of equipment outside the United States on
behalf of the Partnership. Effective November 1998, these services are performed
by TEM.
TFS, as the Managing General Partner, is responsible for managing the
administration and operation of the Registrant, and for the formulation and
administration of investment policies.
TEM, an Associate General Partner, manages all aspects of the operation of the
Registrant's equipment.
TL, an Associate General Partner, owns a fleet of container rental equipment
which is managed by TEM. TL provides advice to the Partnership regarding
negotiations with financial institutions, manufacturers and equipment owners,
and regarding the terms upon which particular items of equipment are acquired.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Partnership's General Partners, policy-making officials and persons who
beneficially own more than ten percent of the Units to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Copies of these reports must also be furnished to the
Partnership.
Based solely on a review of the copies of such forms furnished to the
Partnership or on written representations that no forms were required to
be filed, the Partnership believes that with respect to its most recent
fiscal year ended December 31, 1998, all Section 16(a) filing requirements
were complied with. No member of management, or beneficial owner owned
more than 10 percent of any interest in the Partnership. None of the
individuals subject to section 16(a) failed to file or filed late any
reports of transactions in the Units.
The directors and executive officers of the General Partners are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Neil I. Jowell 65 Director and Chairman of TGH, TEM, TL, TCC and TFS
John A. Maccarone 54 President, CEO and Director of TGH, TEM, TL, TCC and TFS
John R. Rhodes 49 Executive Vice President, CFO, and Secretary of TGH, TEM, TL, TCC and TFS
and Director of TEM, TCC and TFS
James E. Hoelter 59 Director of TGH, TEM, TL, TCC and TFS
Alex M. Brown 60 Director of TGH, TEM, TL, TCC and TFS
Harold J. Samson 77 Director of TGH and TL
Philip K. Brewer 42 Senior Vice President - Asset Management Group, Director of TCC and TFS
Robert D. Pedersen 40 Senior Vice President - Leasing Group, Director of TEM
Wolfgang Geyer 45 Regional Vice President - Europe/Middle East/Persian Gulf
Mak Wing Sing 41 Regional Vice President - South Asia
Masanori Sagara 43 Regional Vice President - North Asia
Stefan Mackula 46 Vice President - Equipment Resale
Anthony C. Sowry 46 Vice President - Operations and Acquisitions
Ernest J. Furtado 43 Vice President - Finance and Assistant Secretary of TGH, TL, TEM, TCC and
TFS, Director of TCC and TFS
Brian W. Anderson 42 Vice President - Information Systems
Richard G. Murphy 46 Vice President - Risk Management
Janet S. Ruggero 50 Vice President - Administration and Marketing Services
Jens W. Palludan 48 Vice President - Logistics Division
Isam K. Kabbani 64 Director of TGH and TL
James A. C. Owens 59 Director of TGH and TL
S. Arthur Morris 65 Director of TGH, TEM and TL
Dudley R. Cottingham 47 Assistant Secretary, Vice President and Director of TGH, TEM and TL
Cara D. Smith 36 Member of Investment Advisory Committee
Nadine Forsman 31 Controller of TCC and TFS
</TABLE>
Neil I. Jowell is Director and Chairman of TGH, TEM, TL, TCC and TFS
and a member of the Investment Advisory Committee (see "Committees" below). He
has served on the Board of Trencor Ltd. since 1966 and as Chairman since 1973.
He is also a director of Mobile Industries, Ltd. (1969 to present), an Affiliate
of Trencor, and a non-executive director of Forward Corporation Ltd. (1993 to
present). Trencor is a publicly traded diversified industrial group listed on
the Johannesburg Stock Exchange. Its business is the leasing, owning, managing
and financing of marine cargo containers worldwide and the manufacture and
export of containers for international markets. In South Africa, it is engaged
in manufacturing, transport, trading and exports of general commodities. Trencor
also has an interest in Forward Corporation Ltd., a publicly traded holding
company listed on the Johannesburg Stock Exchange. It has interests in
industrial and consumer businesses operating in South Africa and abroad. Mr.
Jowell became affiliated with the General Partners and its affiliates when
Trencor became, through its beneficial ownership in two controlled companies, a
major shareholder of the Textainer Group in 1992. Mr. Jowell has over 36 years'
experience in the transportation industry. He holds an M.B.A. degree from
Columbia University and a Bachelor of Commerce L.L.B. from the University of
Cape Town.
John A. Maccarone is President, CEO and director of TGH, TEM, TL, TCC
and TFS. In this capacity he is responsible for overseeing the management of and
coordinating the activities of Textainer's worldwide fleet of marine cargo
containers and the activities of TCC and TFS. Additionally, he is Chairman of
the Equipment Investment Committee, the Credit Committee and the Investment
Advisory Committee (see "Committees", below). Mr. Maccarone was instrumental in
co-founding Intermodal Equipment Association (IEA), a marine container leasing
company based in San Francisco, and held a variety of executive positions with
IEA from 1979 until 1987, when he joined the Textainer Group. Mr. Maccarone was
previously a Director of Marketing for Trans Ocean Leasing Corporation in Hong
Kong with responsibility for all leasing activities in Southeast Asia. From 1969
to 1977, Mr. Maccarone was a marketing representative for IBM Corporation. He
holds a Bachelor of Science degree in Engineering Management from Boston
University and an M.B.A. from Loyola University of Chicago.
John R. Rhodes is Executive Vice President, Chief Financial Officer
and Secretary of TGH, TEM, TL, TCC and TFS and a director of TEM, TCC and TFS.
In this capacity he is responsible for all accounting, financial management, and
reporting functions for the Textainer Group. He is also a member of the
Equipment Investment Committee, the Credit Committee and Investment Advisory
Committee (see "Committees", below). Prior to joining Textainer in November
1987, Mr. Rhodes was Vice President of Finance for Greenbrier Capital
Corporation in San Francisco, a trailer leasing and management company, from
1986 to 1987; from 1981 to 1985, he was employed by Gelco Rail Services, an
intermodal refrigerated trailer company in San Francisco, first in the capacity
of Vice President and Controller and then as Senior Vice President and General
Manager. Mr. Rhodes' earlier business affiliations include serving as Vice
President and General Manager of Itel Capital Corporation and as senior
accountant with Arthur Andersen & Co., both in San Francisco. He is a Certified
Public Accountant and holds a B.A. in economics from Stanford University and an
M.B.A. in accounting from Golden Gate University.
James E. Hoelter is a director of TGH, TEM, TL, TCC and TFS. In
addition, Mr. Hoelter is a member of the Equipment Investment Committee and the
Investment Advisory Committee (see "Committees", below). Mr Hoelter was the
president and chief executive officer of TGH and TL from 1993 to 1998. Prior to
joining the Textainer Group in 1987, Mr. Hoelter was president of IEA. Mr.
Hoelter co-founded IEA in 1978 with Mr. Maccarone and was president from
inception until 1987. From 1976 to 1978, Mr. Hoelter was vice president for
Trans Ocean Ltd., San Francisco, a marine container leasing company, where he
was responsible for North America. From 1971 to 1976, he worked for Itel
Corporation, San Francisco, where he was director of financial leasing for the
container division. Mr. Hoelter received his B.B.A. in finance from the
University of Wisconsin, where he is an emeritus member of its Business School's
Dean's Advisory Board, and his M.B.A. from the Harvard Graduate School of
Business Administration.
Alex M. Brown is a director of TGH, TEM, TL, TCC and TFS.
Additionally, he is a member of the Equipment Investment Committee and the
Investment Advisory Committee (see "Committees", below). Among other
directorships, Mr. Brown is a director of Trencor Ltd. (1996 to present) and
Forward Corporation (1997 to present). Both companies are publicly traded and
are listed on the Johannesburg Stock Exchange. Mr. Brown became affiliated with
the Textainer Group in April 1986. From 1987 until 1993, he was President and
Chief Executive Officer of Textainer, Inc. and the Chairman of the Textainer
Group. Mr. Brown was the managing director of Cross County Leasing in England
from 1984 until it was acquired by Textainer in 1986. From 1993 to 1997, Mr.
Brown was Chief Executive Officer of AAF, a company affiliated with Trencor
Ltd. Mr. Brown was also Chairman of WACO International Corporation, based in
Cleveland, Ohio until 1997.
Harold J. Samson is a director of TGH and TL and is a member of
the Investment Advisory Committee (see "Committees", below). Mr. Samson served
as a consultant to various securities firms from 1981 to 1989. From 1974 to 1981
he was Executive Vice President of Foster & Marshall, Inc., a New York Stock
Exchange member firm based in Seattle. Mr. Samson was a director of IEA from
1979 to 1981. From 1957 to 1984 he served as Chief Financial Officer in several
New York Stock Exchange member firms. Mr. Samson holds a B.S. in Business
Administration from the University of California, Berkeley and is a California
Certified Public Accountant.
Philip K. Brewer was President of TCC and TFS from January 1, 1998 to
December 31, 1998 until his appointment as Senior Vice President - Asset
Management Group. As President of TCC, Mr. Brewer was responsible for overseeing
the management of, and coordinating the activities of TCC and TFS. As Senior
Vice President, he is responsible for optimizing the capital structure of and
identifying new sources of finance for Textainer, as well as overseeing the
management of and coordinating the activities of Textainer's risk management,
logistics and the resale divisions. Mr. Brewer is a member of the Equipment
Investment Committee, the Credit Committee and was a member of the Investment
Advisory Committee through December 31, 1998 (see "Committees" below). Prior to
joining Textainer in 1996, Mr. Brewer worked at Bankers Trust from 1990 to 1996,
starting as a Vice President in Corporate Finance and ending as Managing
Director and Country Manager for Indonesia; from 1989 to 1990, he was Vice
President in Corporate Finance at Jarding Fleming; from 1987 to 1989, he was
Capital Markets Advisor to the United States Agency for International
Development; and from 1984 to 1987 he was an Associate with Drexel Burnham
Lambert in New York. Mr. Brewer holds an M.B.A. in Finance from the Graduate
School of Business at Columbia University, and a B.A. in Economics and Political
Science from Colgate University.
Robert D. Pedersen is Senior Vice-President - Leasing Group and a
Director of TEM, responsible for worldwide sales and marketing related
activities and operations. Mr. Pedersen is a member of the Equipment Investment
Committee and the Credit Committee (see "Committees" below). He joined Textainer
in 1991 as Regional Vice President for the Americas Region. Mr. Pedersen has
extensive experience in the industry having held a variety of positions with
Klinge Cool, a manufacturer of refrigerated container cooling units (from 1989
to 1991), where he was worldwide sales and marketing director, XTRA, a container
lessor (from 1985 to 1988) and Maersk Line, a container shipping line (from 1978
to 1984). Mr. Pedersen is a graduate of the A.P. Moller shipping and
transportation program and the Merkonom Business School in Copenhagen, majoring
in Company Organization.
Wolfgang Geyer is based in Hamburg, Germany and is Regional Vice
President - Europe/ Middle East/ Persian Gulf, responsible for coordinating all
leasing activities in these areas of operation. Mr. Geyer joined Textainer in
1993 and was the Marketing Director in Hamburg through July 1997. From 1991 to
1993, Mr. Geyer most recently was the Senior Vice President for Clou Container
Leasing, responsible for its worldwide leasing activities. Mr. Geyer spent the
remainder of his leasing career, 1975 through 1991, with Itel Container, during
which time he held numerous positions in both operations and marketing within
the company.
Mak Wing Sing is based in Singapore and is the Regional Vice President
- - South Asia, responsible for container leasing activities in North/Central
People's Republic of China, Hong Kong, South China (PRC), and Southeast Asia.
Mr. Mak most recently was the Regional Manager, Southeast Asia, for Trans Ocean
Leasing, working there from 1994 to 1996. From 1987 to 1994, Mr. Mak worked with
Tiphook as their Regional General Manager, and with OOCL from 1976 to 1987 in a
variety of positions, most recently as their Logistics Operations Manager.
Masanori Sagara is based in Yokohama, Japan and is the Regional Vice
President - North Asia, responsible for container leasing activities in Japan,
Korea, and Taiwan. Mr. Sagara joined Textainer in 1990 and was the company's
Marketing Director in Japan through 1996. From 1987 to 1990, he was the
Marketing Manager at IEA. Mr. Sagara's other experience in the container leasing
business includes marketing management at Genstar from 1984 to 1987 and various
container operations positions with Thoresen & Company from 1979 to 1984. Mr.
Sagara holds a Bachelor of Science degree in Economics from Aoyama Bakuin
University.
Stefan Mackula is Vice President - Equipment Resale, responsible for
coordinating the worldwide sale of equipment into secondary markets. Mr. Mackula
also served as Vice President - Marketing from 1989 to 1991 where he was
responsible for coordinating all leasing activities in Europe, Africa, and the
Middle East. Mr. Mackula joined Textainer in 1983 as Leasing Manager for the
United Kingdom. Prior to joining Textainer, Mr. Mackula held, beginning in 1972,
a variety of positions in the international container shipping industry.
Anthony C. Sowry is Vice President - Operations and Acquisitions. He
is also a member of the Equipment Investment Committee and the Credit Committee
(see "Committees", below). Mr. Sowry supervises all international container
operations and maintenance and technical functions for the fleets under
Textainer's management. In addition, he is responsible for the acquisition of
all new and used containers for the Textainer Group. He began his affiliation
with Textainer in 1982, when he served as Fleet Quality Control Manager for
Textainer Inc. until 1988. From 1980 to 1982, he was operations manager for
Trans Container Services in London; and from 1978 to 1982, he was a technical
representative for Trans Ocean Leasing, also in London. He received his B.A.
degree in business management from the London School of Business. Mr. Sowry is a
member of the Technical Committee of the International Institute of Container
Lessors and a certified container inspector.
Ernest J. Furtado is Vice President - Finance and Assistant Secretary
of TGH, TL, TEM, TCC and TFS and a Director of TCC and TFS, in which capacity he
is responsible for all accounting, financial management, and reporting functions
for TGH, TL, TEM, TCC and TFS. Additionally, he is a member of the Equipment
Investment Committee and the Investment Advisory Committee for which he serves
as Secretary (see "Committees", below). Prior to joining Textainer in May 1991,
Mr. Furtado was Controller for Itel Instant Space and manager of accounting for
Itel Containers International Corporation, both in San Francisco, from 1984 to
1991. Mr. Furtado's earlier business affiliations include serving as audit
manager for Wells Fargo Bank and as senior accountant with John F. Forbes & Co.,
both in San Francisco. He is a Certified Public Accountant and holds a B.S. in
business administration from the University of California at Berkeley and an
M.B.A. in information systems from Golden Gate University.
Brian Anderson is Vice President of Information Systems. In this
capacity, he is responsible for the worldwide information systems of Textainer.
He has been in the container industry since 1991 and has more than 15 years of
Information Systems/Information Technology experience. Prior to joining
Textainer in 1994, Mr. Anderson was the Vice-President of Information Systems
for Trans-Ocean Leasing Corporation from 1991 to 1994. Mr. Anderson is a
Certified Public Accountant and in the past has been technology consultant with
Price Waterhouse and several Silicon Valley startups. Mr. Anderson holds
Bachelors degrees in Philosophy and English and Masters degrees in Information
Technology and Accounting.
Richard G. Murphy is Vice President, Risk Management, responsible for
all credit and risk management functions. He also supervises the administrative
aspects of equipment acquisitions. He is a member of and acts as secretary to
the Equipment Investment and Credit Committees (see "Committees", below). He
previously served as TEM's Director of Credit and Risk Management from 1989 to
1991 and as Controller from 1988 to 1989. Prior to the takeover of the
management of the Interocean Leasing Ltd. fleet by TEM in 1988, Mr. Murphy held
various positions in the accounting and financial areas with that company from
1980, acting as Chief Financial Officer from 1984 to 1988. Prior to 1980, he
held various positions with firms of public accountants in the U.K. Mr. Murphy
is an Associate of the Institute of Chartered Accountants in England and Wales
and holds a Bachelor of Commerce degree from the National University of Ireland.
Janet S. Ruggero is Vice President, Administration and Marketing
Services. Ms. Ruggero is responsible for the tracking and billing of fleets
under TEM management, including direct responsibility for ensuring that all data
is input in an accurate and timely fashion. She assists the marketing and
operations departments by providing statistical reports and analyses and serves
on the Credit Committee (see "Committees", below). Prior to joining Textainer in
1986, Ms. Ruggero held various positions with Gelco CTI over the course of 15
years, the last one as Director of Marketing and Administration for the North
American Regional office in New York City. She has a B.A. in education from
Cumberland College.
Jens W. Palludan is based in Hackensack, New Jersey and is the Vice
President - Logistics Division, responsible for coordinating container
logistics. He joined Textainer in 1993 as Regional Vice President - Americas/
Africa/Australia, responsible for coordinating all leasing activities in North
and South America, Africa and Australia/New Zealand. Mr. Palludan spent his
career from 1969 through 1992 with Maersk Line of Copenhagen, Denmark in a
variety of key management positions in both Denmark and overseas. Mr. Palludan's
most recent position was that of General Manager, Equipment and Terminals, where
he was responsible for a fleet of over 200,000 TEUs. Mr. Palludan holds an
M.B.A. from the Centre European D'Education Permanente, Fontainebleau, France.
Sheikh Isam K. Kabbani is a director of TGH and TL. He is Chairman and
principal stockholder of the IKK Group, Jeddah, Saudi Arabia, a manufacturing
and trading group which is active both in Saudi Arabia and internationally. In
1959 Sheikh Isam Kabbani joined the Saudi Arabian Ministry of Foreign Affairs,
and in 1960 moved to the Ministry of Petroleum for a period of ten years. During
this time he was seconded to the Organization of Petroleum Exporting Countries
(OPEC). After a period as Chief Economist of OPEC, in 1967 he became the Saudi
Arabian member of OPEC's Board of Governors. In 1970 he left the ministry of
Petroleum to establish his own business, the National Marketing Group, which has
been his principal business activity for the past 18 years. Sheikh Kabbani holds
a B.A. degree from Swarthmore College, Pennsylvania, and an M.A. degree in
Economics and International Relations from Columbia University.
James A. C. Owens is a director of TGH and TL. Mr. Owens has been
associated with the Textainer Group since 1980. In 1983 he was appointed to the
Board of Textainer Inc., and served as President of Textainer Inc. from 1984
to 1987. From 1987 to 1998, Mr. Owens served as an alternate director on the
Boards of TI, TGH and TL. Apart from his association with the Textainer Group,
Mr.Owens has been involved in insurance and financial brokerage companies and
captive insurance companies. He is a member of a number of Boards of Directors.
Mr. Owens holds a Bachelor of Commerce degree from the University of South
Africa.
S. Arthur Morris is a director of TGH, TEM and TL. He is a founding
partner in the firm of Morris and Kempe, Chartered Accountants (1962-1977) and
currently functions as a correspondent member of a number of international
accounting firms through his firm Arthur Morris and Company (1978 to date). He
is also President and director of Continental Management Limited (1977 to date).
Continental Management Limited is a Bermuda corporation that provides corporate
representation, administration and management services and corporate and
individual trust administration services. Mr. Morris has over 30 years
experience in public accounting and serves on numerous business and charitable
organizations in the Cayman Islands and Turks and Caicos Islands. Mr. Morris
became a director of TL and TGH in 1993, and TEM in 1994.
Dudley R. Cottingham is Assistant Secretary, Vice President and a
director of TGH, TEM and TL. He is a partner with Arthur Morris and Company
(1977 to date) and a Vice President and director of Continental Management
Limited (1978 to date), both in the Cayman Islands and Turks and Caicos Islands.
Continental Management Limited is a Bermuda corporation that provides corporate
representation, administration and management services and corporate and
individual trust administration services. Mr. Cottingham has over 20 years
experience in public accounting with responsibility for a variety of
international and local clients. Mr. Cottingham became a director of TL and TGH
in 1993, and TEM in 1994.
Cara D. Smith is a member of the Investment Advisory Committee (see
"Committees", below). Ms. Smith was the President and Chief Executive Officer
of TCC Securities Corporation through June 1997 and a director of TCC and TFS
through August 1997. Ms. Smith joined Textainer in 1992, and prior to 1996,
was Vice President of Marketing. Ms. Smith has worked in the securities industry
for the past 13 years. Ms. Smith's extensive experience ranges from compliance
and investor relations to administration and marketing of equipment leasing,
multi-family housing and tax credit investment programs. She holds five
securities licenses and is a registered principal. Ms. Smith is also a member
of the International Association of Financial Planners.
Nadine Forsman is the Controller of TCC and TFS. Additionally, she is a
member of the Investment Advisory Committee (See "Committees" below). As
controller of TCC and TFS, she is responsible for accounting, financial
management and reporting functions for TCC and TFS as well as overseeing all
communications with the Limited Partners and as such, supervises personnel in
performing this function. Prior to joining Textainer in August 1996, Ms. Forsman
was employed by KPMG Peat Marwick LLP, holding various positions, the most
recent of which was manager, from 1990 to 1996. Ms. Forsman holds a B.S. in
Accounting and Finance from San Francisco State University and holds a general
securities license and a financial and operations principal securities license.
Committees
The Managing General Partner has established the following three committees to
facilitate decisions involving credit and organizational matters, negotiations,
documentation, management and final disposition of equipment for the Partnership
and for other programs organized by the Textainer Group:
Equipment Investment Committee. The Equipment Investment Committee
will review the equipment leasing programs of the Partnership on a regular
basis with emphasis on matters involving equipment purchases, the equipment
mix in the Partnership's portfolio, equipment remarketing issues, and decisions
regarding ultimate disposition of equipment. The members of the committee
are John A. Maccarone (Chairman), James E. Hoelter, John R. Rhodes, Anthony C.
Sowry, Richard G. Murphy (Secretary), Alex M. Brown, Philip K. Brewer, Robert D.
Pedersen and Ernest J. Furtado.
Credit Committee. The Credit Committee will establish credit limits
for every lessee and potential lessee of equipment and periodically review these
limits. In setting such limits, the Credit Committee will consider such factors
as customer trade routes, country, political risk, operational history, credit
references, credit agency analyses, financial statements, and other information.
The members of the Credit Committee are John A. Maccarone (Chairman), Richard G.
Murphy (Secretary), Janet S. Ruggero, John R. Rhodes, Anthony C. Sowry, Philip
K. Brewer and Robert D. Pedersen.
Investment Advisory Committee. The Investment Advisory Committee will
review investor program operations on at least a quarterly basis, emphasizing
matters related to cash distributions to investors, cash flow management,
portfolio management, and liquidation. The Investment Advisory Committee
is organized with a view to applying an interdisciplinary approach, involving
management, financial, legal and marketing expertise, to the analysis of
investor program operations. The members of the Investment Advisory Committee
are John A. Maccarone (Chairman), James E. Hoelter, Cara D. Smith, Ernest J.
Furtado (Secretary), John R. Rhodes, Nadine Forsman, Harold J. Samson, Alex M.
Brown and Neil I. Jowell.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant has no executive officers and does not reimburse TFS, TEM or TL
for the remuneration payable to their executive officers. For information
regarding reimbursements made by the Registrant to the General Partners, see
note 2 of the Financial Statements in Item 8.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
There is no person or "Group" who is known to the Registrant to be the
beneficial owner of more than five percent of the outstanding units of
limited partnership investment of the Registrant.
(b) Security Ownership of Management.
As of January 1, 1999:
Number
Name of Beneficial Owner Of Units % All Units
James E. Hoelter 2,500 0.17%
John A. Maccarone 1,915 0.13%
----- -----
Officers and Management as a Group 4,415 0.30%
===== =====
(c) Changes in Control.
Inapplicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Amounts in thousands)
(a) Transactions with Management and Others.
At December 31, 1998 and 1997, due from affiliates, net is comprised
of:
1998 1997
---- ----
Due from affiliates:
Due from TL........................... $ 1 $ -
Due from TEM.......................... 254 38
------ -------
255 38
------ -------
Due to affiliates:
Due to TCC............................ 6 4
Due to TFS............................ 10 13
Due to TAS............................ - 13
------ -------
16 30
------ -------
Due from affiliates, net $ 239 $ 8
====== =======
All 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 payment
of expenses and fees and in the accrual and remittance of net rental
revenues from TEM.
In addition, the Registrant paid or will pay the following amounts to
the General Partners or TAS:
Acquisition fees in connection with the purchase of containers on
behalf of the Registrant:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
TAS.......................................... $ 1 $ 159 $ 49
===== ====== =====
Management fees in connection with the operations of the Registrant:
1998 1997 1996
---- ---- ----
TEM........................................... $ 309 $ 362 $ 407
TFS........................................... 124 99 99
----- ----- -----
Total......................................... $ 433 $ 461 $ 506
===== ===== =====
Reimbursement for administrative costs in connection with the
operations of the Registrant:
1998 1997 1996
---- ---- ----
TEM........................................... $ 211 $ 253 $ 260
TFS........................................... 22 35 41
----- ----- -----
Total......................................... $ 233 $ 288 $ 301
===== ===== =====
</TABLE>
(b) Certain Business Relationships.
Inapplicable.
(c) Indebtedness of Management
Inapplicable.
(d) Transactions with Promoters
Inapplicable.
See the "Management" and "Compensation of General Partners and Affiliates"
sections of the Registrant's Prospectus, as supplemented, and the Notes to
Financial Statements in Item 8.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Audited financial statements of the Registrant for the year ended
December 31, 1998 are contained in Item 8 of this Report.
2. Financial Statement Schedules.
(i) Independent Auditors' Report on Supplementary Schedule.
(ii) Schedule II - Valuation and Qualifying Accounts.
3. Exhibits Incorporated by reference
(i) The Registrant's Prospectus as contained in Post-effective
Amendment No. 2 to the Registrant's Registration Statement
(No. 33-16447), as filed with the Commission on November 30,
1988, as supplemented by Supplement No. 6 as filed with the
Commission under Rule 424(b)(3) of the Securities Act of 1933 on
October 16, 1989.
(ii) The Registrant's limited partnership agreement, Exhibit A to the
Prospectus.
(b) During the year ended 1998, no reports on Form 8-K have been filed by the
Registrant.
<PAGE>
Independent Auditors' Report on Supplementary Schedule
The Partners
TCC Equipment Income Fund:
Under the date of February 19, 1999, we reported on the balance sheets of TCC
Equipment Income Fund (the Partnership) as of December 31, 1998 and 1997, and
the related statements of earnings, partners' capital and cash flows for each of
the years in the three-year period ended December 31, 1998, which are included
in the 1998 annual report on Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule as listed in Item 14. This financial statement schedule is
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
San Francisco, California
February 19, 1999
<PAGE>
<TABLE>
<CAPTION>
TCC EQUIPMENT INCOME FUND
(a California Limited Partnership)
Schedule II - Valuation and Qualifying Accounts
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------
Charged Balance
Balance at to Costs Charged at End
Beginning and to Other of
of Period Expenses Accounts Deduction Period
--------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1998:
Allowance for
doubtful accounts $ 635 $ (40) $ (391) $ (70) $ 134
----- ----- ------ ------- -----
Recovery cost reserve $ 28 $ 53 $ - $ (59) $ 22
----- ----- ------ ------- -----
Damage protection
plan reserve $ 101 $ 103 $ - $ (121) $ 83
----- ----- ------ ------- -----
Maintenance and repair reserve $ 47 $ 48 $ - $ (80) $ 15
----- ----- ------ ------- -----
For the year ended December 31, 1997:
Allowance for
doubtful accounts $ 687 $ 57 $ - $ (109) $ 635
----- ----- ------ ------- -----
Recovery cost reserve $ 17 $ 60 $ - $ (49) $ 28
----- ----- ------ ------- -----
Damage protection
plan reserve $ 130 $ 87 $ - $ (116) $ 101
----- ----- ------ ------- -----
Maintenance and repair reserve $ 45 $ 104 $ - $ (102) $ 47
----- ----- ------ ------- -----
For the year ended December 31, 1996:
Allowance for
doubtful accounts $ 661 $ 59 $ - $ (33) $ 687
----- ----- ------ ------- -----
Recovery cost reserve $ 2 $ 57 $ - $ (42) $ 17
----- ----- ------ ------- -----
Damage protection
plan reserve $ 129 $ 140 $ - $ (139) $ 130
----- ----- ------ ------- -----
Maintenance and repair reserve $ 27 $ 133 $ - $ (115) $ 45
------ ----- ------ ------- -----
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the managing general partner of the Registrant, in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
____________________ Executive Vice President March 29, 1999
John R. Rhodes (Principal Financial and
Accounting Officer), Secretary
and Director
____________________ President(Principal Executive March 29, 1999
John A. Maccarone Officer), Director
____________________ Vice President Finance, March 29, 1999
Ernest J. Furtado Assistant Secretary and Director
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Textainer Financial
Services Corporation, the managing general partner of the Registrant, in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John R. Rhodes Executive Vice President March 29, 1999
____________________ (Principal Financial and
John R. Rhodes Accounting Officer), Secretary
and Director
/s/ John A. Maccarone President (Principal Executive March 29, 1999
____________________ Officer), Director
John A. Maccarone
/s/ Ernest J. Furtado Vice President Finance, March 29, 1999
____________________ Assistant Secretary and Director
Ernest J. Furtado
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1998 TCC Equipment Income Fund 10K
</LEGEND>
<CIK> 0000820083
<NAME> TCC Equipment Income Fund, LP
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,959
<SECURITIES> 0
<RECEIVABLES> 1,287
<ALLOWANCES> 134
<INVENTORY> 0
<CURRENT-ASSETS> 6
<PP&E> 22,526
<DEPRECIATION> 9,373
<TOTAL-ASSETS> 16,271
<CURRENT-LIABILITIES> 398
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,873
<TOTAL-LIABILITY-AND-EQUITY> 16,271
<SALES> 0
<TOTAL-REVENUES> 4,358
<CGS> 0
<TOTAL-COSTS> 2,951
<OTHER-EXPENSES> (162)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,569
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,569
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
