1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission file number 0-11163 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) (Exact name of registrant as specified in its charter) California 93-0798850 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 444 Market Street, 15th Floor, San Francisco, California 94111 (Address of principal executive offices) (Zip Code) (415) 677-8990 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- 2 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 TABLE OF CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - September 30, 1995 (unaudited) and December 31, 1994 2 Statements of Operations for the three and nine months ended September 30, 1995 and 1994 3 (unaudited) Statements of Cash Flows for the nine months ended September 30, 1995 and 1994 4 (unaudited) Notes to Financial Statements (unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7 Operations PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presented herein are the Registrant's balance sheets as of September 30, 1995 and December 31, 1994, statements of operations for the three and nine months ended September 30, 1995 and 1994, and statements of cash flows for the nine months ended September 30, 1995 and 1994. 4 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS (UNAUDITED) September 30, December 31, 1995 1994 ------------- ------------ Assets ------ Current assets: Cash, includes $286,352 at September 30, 1995 and $246,731 at December 31, 1994 in interest-bearing accounts $ 286,895 $ 258,196 Short-term investments 1,350,000 1,650,000 Net lease receivables due from Leasing Company (notes 1 and 2) 673,105 1,075,455 ----------- ----------- Total current assets 2,310,000 2,983,651 ----------- ----------- Container rental equipment, at cost 14,963,884 17,372,943 Less accumulated depreciation 10,002,874 11,074,433 ----------- ----------- Net container rental equipment 4,961,010 6,298,510 ----------- ----------- Other assets, net -- 278 ----------- ----------- $ 7,271,010 $ 9,282,439 =========== =========== Liabilities and Partners' Capital --------------------------------- Current liabilities: Current portion of equipment debt $ -- $ 283,547 Interest payable -- 2,578 ----------- ----------- Total current liabilities -- 286,125 ----------- ----------- Partners' capital: General partners $ 37,978 $ 47,386 Limited partners 7,233,032 8,948,928 ----------- ----------- Total partners' capital 7,271,010 8,996,314 ----------- ----------- $ 7,271,010 $ 9,282,439 =========== =========== The accompanying notes are an integral part of these statements. 2 5 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 30, September 30, September 30, September 30, 1995 1994 1995 1994 ------------- ------------- ------------- ------------- Net lease revenue (notes 1 and 3) $ 391,050 $ 597,754 $ 1,375,823 $ 2,032,204 Other operating expenses: Depreciation 180,342 221,369 569,329 684,426 Other general and administrative expenses 4,643 17,081 39,528 55,504 ---------- ---------- ------------ ------------ 184,985 238,450 608,857 739,930 ---------- ---------- ------------ ------------ Earnings from operations 206,065 359,304 766,966 1,292,274 Other income (expenses): Interest income 23,304 22,336 76,689 55,924 Interest expense - (20,148) (5,156) (81,849) Net gain on disposal of equipment 158,327 158,803 455,248 376,149 ---------- ---------- ------------ ------------ 181,631 160,991 526,781 350,224 ---------- ---------- ------------ ------------ Net earnings $ 387,696 $ 520,295 $ 1,293,747 $ 1,642,498 ========== ========== ============ ============ Allocation of net earnings: General partners $ 3,877 $ 5,203 $ 12,938 $ 16,425 Limited partners 383,819 515,092 1,280,809 1,626,073 ---------- ---------- ------------ ------------ $ 387,696 $ 520,295 $ 1,293,747 $ 1,642,498 ========== ========== ============ ============ Limited partners' per unit share of net earnings $ 14 $ 19 $ 46 $ 59 ========== ========== ============ ============ The accompanying notes are an integral part of these statements. 3 6 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended --------------------------------- September 30, September 30, 1995 1994 ------------- ------------- Net cash provided by operating activities $ 1,758,512 $ 1,923,315 Cash flows provided by investing activities: Proceeds from disposal of equipment 1,272,507 1,036,277 Cash flows used in financing activities: Principal payment of long-term debt (283,270) (784,857) Distribution to partners (3,019,050) (2,269,458) ----------- ----------- Net cash used in financing activities (3,302,320) (3,054,315) ----------- ----------- Net decrease in cash and cash equivalents (271,301) (94,723) Cash and cash equivalents at January 1 1,908,196 2,110,768 ----------- ----------- Cash and cash equivalents at September 30 $ 1,636,895 $ 2,016,045 =========== =========== Supplemental disclosure for cash flow information: Cash paid during the period for: Interest $ 7,734 $ 88,984 =========== =========== The accompanying notes are an integral part of these statements. 4 7 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (1) Summary of Significant Accounting Policies (a) Nature of Operations IEA Marine Container Income Fund IV (A California Limited Partnership) (the "Partnership") was organized under the laws of the State of California on November 25, 1981 for the purpose of owning and leasing marine cargo containers. The managing general partner is Cronos Capital Corp. ("CCC"); the associate general partner is Smith Barney Shearson, Inc. CCC, with its affiliate Cronos Containers Limited (the "Leasing Company"), manages and controls the business of the Partnership. (b) Leasing Company and Leasing Agent Agreement Pursuant to the Limited Partnership Agreement of the Partnership, all authority to administer the business of the Partnership is vested in CCC. CCC has entered into a Leasing Agent Agreement whereby the Leasing Company has the responsibility to manage the leasing operations of all equipment owned by the Partnership. Pursuant to the Agreement, the Leasing Company is responsible for leasing, managing and re-leasing the Partnership's containers to ocean carriers and has full discretion over which ocean carriers and suppliers of goods and services it may deal with. The Leasing Agent Agreement permits the Leasing Company to use the containers owned by the Partnership, together with other containers owned or managed by the Leasing Company and its affiliates, as part of a single fleet operated without regard to ownership. Since the Leasing Agent Agreement meets the definition of an operating lease in Statement of Financial Accounting Standards (SFAS) No. 13, it is accounted for as a lease under which the Partnership is lessor and the Leasing Company is lessee. The Leasing Agent Agreement generally provides that the Leasing Company will make payments to the Partnership based upon rentals collected from ocean carriers after deducting direct operating expenses and management fees to CCC. The Leasing Company leases containers to ocean carriers, generally under operating leases which are either master leases or term leases (mostly two to five years). Master leases do not specify the exact number of containers to be leased or the term that each container will remain on hire but allow the ocean carrier to pick up and drop off containers at various locations; rentals are based upon the number of containers used and the applicable per-diem rate. Accordingly, rentals under master leases are all variable and contingent upon the number of containers used. Most containers are leased to ocean carriers under master leases; leasing agreements with fixed payment terms are not material to the financial statements. Since there are no material minimum lease rentals, no disclosure of minimum lease rentals is provided in these financial statements. (c) Basis of Accounting The Partnership utilizes the accrual method of accounting. Revenue is recognized when earned. (d) Financial Statement Presentation These financial statements have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting procedures have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and accompanying notes in the Partnership's latest annual report on Form 10-K. The interim financial statements presented herewith reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the financial condition and results of operations for the interim periods presented. (Continued) 5 8 IEA MARINE CONTAINER INCOME FUND IV (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO UNAUDITED FINANCIAL STATEMENTS (2) Net Lease Receivables Due from Leasing Company Net lease receivables due from the Leasing Company are determined by deducting direct operating payables and accrued expenses, and incentive fees payable to CCC, the Leasing Company, and its affiliates from the rental billings payable by the Leasing Company to the Partnership under operating leases to ocean carriers for the containers owned by the Partnership. Net lease receivables at September 30, 1995 and December 31, 1994 were as follows: September 30, December 31, 1995 1994 ------------- ------------ Lease receivables, net of doubtful accounts of $283,589 at September 30, 1995 and $230,408 at December 31, 1994 $ 1,453,136 $ 1,773,027 Less: Direct operating payables and accrued expenses 358,120 276,411 Damage protection reserve 125,713 232,013 Incentive fees 296,198 189,148 ------------ ------------ $ 673,105 $ 1,075,455 ============ ============ (3) Net Lease Revenue Net lease revenue is determined by deducting direct operating expenses and management fees to CCC and the Leasing Company, from the rental revenue billed by the Leasing Company under operating leases to ocean carriers for the containers owned by the Partnership. Net lease revenue for the three and nine-month periods ended September 30, 1995 and 1994, was as follows: Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 30, September 30, September 30, September 30, 1995 1994 1995 1994 ------------- ------------- ------------- ------------- Rental revenue $ 1,171,953 $ 1,383,183 $ 3,678,672 $ 4,187,336 Rental equipment operating expenses 278,375 459,164 768,544 1,017,386 Base management fees 206,330 253,521 642,594 776,434 Incentive fees 296,198 72,744 891,711 361,312 ------------ ------------ ------------ ------------ $ 391,050 $ 597,754 $ 1,375,823 $ 2,032,204 ============ ============ ============ ============ 6 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations It is suggested that the following discussion be read in conjunction with the Registrant's most recent annual report on Form 10-K. 1) Material changes in financial condition between September 30, 1995 and December 31, 1994. The Registrant disposed of 1,227 containers, an amount approximately equal to 11% of its original fleet size, during the nine-month period ended September 30, 1995, in accordance with one of its original investment objectives - to realize the residual value of its containers after the expiration of their economic useful lives. The diminishing fleet size and its effect on operations contributed to the reductions in short-term investments and net lease receivables due from the Leasing Company. The Registrant extinguished the remaining balance of its equipment debt during the first quarter of 1995. Since December 31, 1994, the Managing General Partner has monitored the Registrant's fleet size and results of operations, as well as various alternatives and opportunities for selling the remaining containers. The Managing General Partner expects to continue monitoring these factors throughout the 1996 fiscal year. However, during this period, the Registrant will continue disposing its containers as opportunities arise. The Registrant's continuing efforts to dispose of the remaining fleet should produce lower operating results and, consequently, lower distributions to its partners in subsequent periods. The Registrant's cash balances at September 30, 1995 included sales proceeds from equipment disposals in the amount of $459,033. The Registrant will distribute these sales proceeds and $571,626 of cash from operations during the fourth quarter of 1995, representing distributions to its limited partners for the third quarter of 1995. 2) Material changes in the results of operations between the three and nine-month periods ended September 30, 1995 and the three and nine-month periods ended September 30, 1994. Net lease revenue for the third quarter of 1995 was $391,050, a decrease of 35% over the third quarter of 1994. Gross rental revenue (a component of net lease revenue) for the quarter was $1,171,953, a decline of 15% from the same period last year. For the first nine months of 1995, net lease revenue was $1,375,823, a decline of 32% from the first nine months of 1994. Gross rental revenue declined 12% to $3,678,672 over the same nine-month period. Gross rental revenue for the third quarter and first nine months of 1995 was primarily affected by the Registrant's diminishing fleet size. Utilization rates increased from those levels experienced during the same periods in the prior year. However, competitive pressures within the container leasing market, as well as the Leasing Company's efforts to improve the credit quality of its customer portfolio, combined to create a resistance to higher per-diem rental rates. Accordingly, average per-diem rental rates remained relatively stable when compared to the same periods in the prior year. The Registrant expects to gain long-term benefits from the improvement in the credit quality of this customer portfolio, as the allowance for doubtful accounts and related expenses should decline. The Registrant's average fleet size and utilization rates for the three and nine-month periods ended September 30, 1995 and 1994 were as follows: Three Months Ended Nine Months Ended ------------------------------ ------------------------------ September 30, September 30, September 30, September 30, 1995 1994 1995 1994 ------------- ------------- ------------- ------------- Average Fleet Size (measured in twenty-foot equivalents (TEU)) 9,625 11,743 10,197 12,143 Average Utilization 88% 85% 88% 85% 7 10 During the third quarter of 1995, the container leasing market began to experience the effects of increasingly competitive market conditions, including, but not limited to, a resistance to higher per-diem rental rates, slightly lower utilization rates resulting from an expanding supply of marine cargo containers within the container industry, and the economic condition of the shipping industry, which has experienced a current trend toward consolidation. Accordingly, the Registrant expects a stable container leasing market during the remainder of 1995 and first half of 1996. The declining fleet size and higher utilization rates contributed to a $180,789 and $248,842 decline in rental equipment operating expenses during the three and nine-month periods ended September 30, 1995, respectively. Accordingly, base management fees also declined. The extinguishment of the Registrant's debt during the first quarter of 1995 contributed to an increase in incentive fees, which are a performance based fee, subject to the operating results of the fleet, and the cash generated and distributed from operations. Approximately 41% and 35% of the Registrant's net earnings for the three and nine-month periods ended September 30, 1995, respectively, were from gain on disposal of equipment, as compared to 31% and 23% for the same three and nine-month periods in the prior year. As the Registrant accelerates the disposal of its containers in subsequent periods, net gain on disposal will contribute significantly to the Registrant's net earnings. 8 11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description Method of Filing ------ ----------- ---------------- 27 Financial Data Schedule Filed with this Document (b) There were no reports on Form 8-K during the three-month period ended September 30, 1995. 9 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. IEA MARINE CONTAINER INCOME FUND IV (A California Limited Partnership) By Cronos Capital Corp. The Managing General Partner By /s/ JOHN KALLAS --------------------------------------- John Kallas Vice President, Chief Financial Officer Principal Accounting Officer Date: November 13, 1995 10 13 EXHIBIT INDEX Exhibit No. Description ------- ----------- 27 Financial Data Schedule