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 JUNE 30, 1997
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 0-10474
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
(Exact name of registrant as specified in its charter)
California 94-2717330
(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 [ ]
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
REPORT ON FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996 4
Statements of Operations for the three and six months ended June 30, 1997 and 1996 (unaudited) 5
Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Presented herein are the Registrant's balance sheets as of June 30,
1997 and December 31, 1996, statements of operations for the three and
six months ended June 30, 1997 and 1996, and statements of cash flows
for the six months ended June 30, 1997 and 1996.
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(unaudited)
June 30, December 31,
1997 1996
Assets ---------- -----------
Current assets:
Cash and cash equivalents, includes $452,291 at June 30, 1997
and $656,038 at December 31, 1996 in interest-bearing accounts $ 460,281 $ 656,333
Net lease receivables due from Leasing Company
(notes 1 and 2) 124,958 252,850
---------- ----------
Total current assets 585,239 909,183
---------- ----------
Container rental equipment, at cost 2,442,653 3,173,384
Less accumulated depreciation 1,693,446 2,201,024
---------- ----------
Net container rental equipment 749,207 972,360
---------- ----------
$1,334,446 $1,881,543
========== ==========
Partners' Capital
Partners' capital:
General partners $ 656 $ 3,103
Limited partners 1,333,790 1,878,440
---------- ----------
Total partners' capital 1,334,446 1,881,543
---------- ----------
$1,334,446 $1,881,543
========== ==========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
-----------------------------------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net lease revenue (notes 1 and 3) $ 42,848 $158,713 $150,589 $365,530
Other operating expenses:
Other general and administrative expenses 11,330 8,943 21,422 18,436
-------- -------- -------- --------
Earnings from operations 31,518 149,770 129,167 347,094
Other income:
Interest income 5,535 11,296 12,635 21,604
Net gain on disposal of equipment 32,401 132,877 72,318 202,900
-------- -------- -------- --------
37,936 144,173 84,953 224,504
-------- -------- -------- --------
Net earnings $ 69,454 $293,943 $214,120 $571,598
======== ======== ======== ========
Allocation of net earnings:
General partners $ 5,565 $ 6,403 $ 8,764 $ 9,179
Limited partners 63,889 287,540 205,356 562,419
-------- -------- -------- --------
$ 69,454 $293,943 $214,120 $571,598
======== ======== ======== ========
Limited partners' per unit share of net earnings $ 2.13 $ 9.59 $ 6.85 $ 18.75
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-------------------------------------
June 30, June 30,
1997 1996
------------ -------------
Net cash provided by operating activities $ 234,208 $ 462,795
Cash flows provided by investing activities:
Proceeds from disposal of equipment 330,956 745,954
Cash flows used in financing activities:
Distribution to partners (761,216) (1,108,724)
--------- -----------
Net increase (decrease) in cash and cash equivalents (196,052) 100,025
Cash and cash equivalents at January 1 656,333 837,918
--------- -----------
Cash and cash equivalents at June 30 $ 460,281 $ 937,943
========= ===========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
IEA Marine Container Income Fund III (A California Limited
Partnership) (the "Partnership"), was organized under the laws of the
State of California on January 3, 1980 for the purpose of owning and
leasing marine dry 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 the business of the
partnership.
The Partnership commenced operations on April 3, 1981, when the
minimum subscription proceeds of $500,000 were obtained. The
Partnership offered 30,000 units of limited partnership interest at
$500 per unit, or $15,000,000. The offering terminated on June 26,
1981, at which time 30,000 limited partnership units had been
purchased.
As of June 30, 1997, 12% of the original equipment remained in the
Partnership's fleet and was comprised of 877 twenty-foot and 121
forty-foot marine dry cargo containers. Commencing in 1991, the
Partnership's 11th year of operations, the Partnership began focusing
its attention on the disposition of its fleet in accordance with
another of its original investment objectives, realizing the residual
value of its containers after the expiration of their economic useful
lives, estimated to be between 10 to 15 years after placement in
leased service. During this phase, the Partnership has actively
disposed of containers within its fleet, while cash proceeds from
equipment disposals, in addition to cash from operations, provided the
cash flow for distributions to the limited partners. The Partnership,
having just completed its 16th year of operations, will focus its
attention during 1997 on disposing its remaining fleet.
(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.
(Continued)
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IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(b) Leasing Company and Leasing Agent Agreement - (Continued)
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. Net lease
revenue is recorded by the Partnership in each period based upon its
leasing agent agreement with the Leasing Company. Net lease revenue is
generally dependent upon operating lease rentals from operating lease
agreements between the Leasing Company and its various lessees, less
direct operating expenses and management fees due in respect of the
containers specified in each operating lease agreement.
(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 preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires the Partnership to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
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)
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IEA MARINE CONTAINER INCOME FUND III
(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, base management
fees and incentive fees payable to CCC 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 June 30, 1997 and December 31, 1996 were as follows:
June 30, December 31,
1997 1996
--------- --------
Lease receivables, net of doubtful accounts
of $233,932 at June 30, 1997 and $199,540
at December 31, 1996 $217,027 $368,092
Less:
Direct operating payables and accrued expenses 50,155 71,137
Damage protection reserve 41,914 44,105
-------- --------
$124,958 $252,850
======== ========
(3) Net Lease Revenue
Net lease revenue is determined by deducting direct operating expenses and
base management fees to CCC 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 six-month periods
ended June 30, 1997 and 1996, was as follows:
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------- --------- ----------- -----------
Rental revenue $ 126,392 $ 288,836 $ 272,536 $ 638,393
Less:
Rental equipment operating expenses 57,408 79,744 66,583 159,294
Base management fees 26,136 50,379 55,364 113,569
-------- -------- -------- -------
$ 42,848 $ 158,713 $ 150,589 $ 365,530
======== ======= ======= =======
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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 June 30, 1997 and December
31, 1996.
As discussed in the Registrant's report for the year ended December 31,
1996, the Registrant entered 1997 with a view towards disposing its
remaining container fleet. During the first six months of 1997, the
Registrant disposed of 294 containers as part of its ongoing container
operations, contributing to a decline in the Registrant's operating
results and related cash balances. At June 30, 1997, 12% of the original
equipment remained in the Registrant's fleet, as compared to 16% at
December 31, 1996, and was comprised of the following:
20-Foot 40-Foot
------- -------
Containers on lease:
Term leases 74 8
Master lease 730 96
--- ----
Subtotal 804 104
Containers off lease 73 17
---- ----
Total container fleet 877 121
=== ===
20-Foot 40-Foot
---------------- --------------
Units % Units %
------ ---- ----- ----
Total purchases 7,257 100% 890 100%
Less disposals 6,380 88% 769 86%
----- ---- --- ----
Remaining fleet at June 30, 1997 877 12% 121 14%
====== ===== ==== =====
The Registrant's diminishing fleet size and its related operating
performance contributed to 51% decline in net lease receivables at June
30, 1997, when compared to December 31, 1996. During the second quarter of
1997, distributions from operations and sales proceeds amounted to
$305,292, reflecting distributions to the general and limited partners for
the first quarter of 1997. This represents a decline from the $455,924
distributed during the first quarter of 1997, reflecting distributions for
the fourth quarter of 1996. The Registrant's efforts to dispose of the
remaining fleet should produce lower operating results and, consequently,
lower distributions to its partners in subsequent quarters. Additionally,
the Registrant may refrain from distributing cash generated from
operations and sales proceeds to its partners, reserving all excess cash
as part of its working capital in order to maintain sufficient cash
reserves for expenses relating to its final liquidation and subsequent
dissolution.
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During 1996, ocean carriers and other transport companies moved away from
leasing containers outright, as declining container prices, favorable
interest rates and the abundance of available capital resulted in ocean
carriers and transport companies purchasing a larger share of equipment
for their own account, reducing the demand for leased containers. Once the
demand for leased containers began to fall, per-diem rental rates were
also adversely affected, contributing to an uncertain start to 1997. Since
the beginning of the year, the container leasing industry has experienced
an upward trend in container utilization. This trend can also be seen
within the Registrant's utilization rate, which increased from 90% at
December 31, 1996 to 91% at June 30, 1997. During 1996, shipping lines and
other transport companies had reduced their leased fleets to minimal
levels in an attempt to reduce costs. However, increasing cargo volumes
and continued equipment imbalances within the container fleets of shipping
lines and transport companies have established a need for these companies
to replenish their leased fleets.
Although there has been an improvement in container utilization rates,
per-diem rental rates continue to remain under pressure. The decline in
per-diem rental rates from those evidenced during 1996 can be attributed
to the following factors: three new leasing companies have offered new
containers and low rental rates in an effort to break into the leasing
market; established leasing companies have reduced rates to very low
levels; and a continued over supply of containers. Although these
conditions are expected to continue to impact the Registrant's financial
condition and operating performance throughout 1997, the long-term outlook
remains a positive one.
2) Material changes in the results of operations between the three and
six-month periods ended June 30, 1997 and the three and six-month periods
ended June 30, 1996.
Net lease revenue for the three and six-month periods ended June 30, 1997
was $42,848 and $150,589, respectively, a decline of 73% and 59% from the
same three and six-month periods in the prior year, respectively.
Approximately 47% and 34% of the Registrant's net earnings for the three
and six-month periods ended June 30, 1997, respectively, were from gain on
disposal of equipment, as compared to 45% and 35% for the same three and
six-month periods in the prior year, respectively. As the Registrant
continues the disposal of its containers in subsequent periods, net gain
on disposal should contribute significantly to the Registrant's net
earnings.
Gross rental revenue (a component of net lease revenue) for the three and
six-month periods ended June 30, 1997 was $126,392 and $272,536,
respectively, reflecting a decline of 56% and 57% from the same three and
six-month periods in 1996, respectively. During 1997, gross rental revenue
was impacted by the Registrant's diminishing fleet size and a decline in
per-diem rental rates. Average per-diem rental rates decreased
approximately 14% and 13%, when compared to the same three and six-month
periods in the prior year, respectively. Utilization rates increased when
compared to the same three and six-month periods in the prior year, as the
market demand for leased containers improved since 1996 and the
Registrant's continuing disposal of containers reduced the number of
off-hire containers. The Registrant's average fleet size and utilization
rates for the three and six-month periods ended June 30, 1997 and June 30,
1996 were as follows:
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----- ----- ----- -------
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 1,164 2,258 1,274 2,536
Average Utilization 92% 88% 91% 87%
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Rental equipment operating expenses were 45%, and 24%, of the Registrant's
gross lease revenue during the three and six-month periods ended June 30,
1997, respectively, as compared to 28% and 25% during the three and
six-month periods ended June 30, 1996, respectively. Contributing to the
increase for the three-month period ended June 30, 1997 were increases in
the provision for doubtful accounts and related legal expenses associated
with the collection actions against the doubtful accounts of certain
lessees.
As reported in the Registrant's Current Report on Form 8-K and Amendment
No. 1 to Current Report on Form 8-K, filed with the Commission on February
7, 1997 and February 26, 1997, respectively, Arthur Andersen, London,
England, resigned as auditors of The Cronos Group, a Luxembourg
Corporation headquartered in Orchard Lea, England (the "Parent Company"),
on February 3, 1997.
The Parent Company is the indirect corporate parent of Cronos Capital
Corp., the managing general partner of the Registrant. In its letter of
resignation to the Parent Company, Arthur Andersen states that it resigned
as auditors of the Parent Company and all other entities affiliated with
the Parent Company. While its letter of resignation was not addressed to
the managing general partner or the Registrant, Arthur Andersen confirmed
to the managing general partner that its resignation as auditors of the
entities referred to in its letter of resignation included its resignation
as auditors of Cronos Capital Corp. and the Registrant. Following Arthur
Andersen's resignation, the Parent Company subsequently received
notification from the Securities and Exchange Commission that it was
conducting a private investigation of the Parent Company regarding the
events and circumstances leading to Arthur Andersen's resignation. The
results of this investigation are still pending. Accordingly, the
Registrant does not, at this time, have sufficient information to
determine the impact, if any, that the Securities and Exchange Commission
investigation of the Parent Company and the concerns expressed by Arthur
Andersen in its letter of resignation may have on the future operating
results and financial condition of the Registrant or the Leasing Company's
ability to manage the Registrant's fleet in subsequent periods. However,
the managing general partner of the Registrant does not believe, based
upon the information currently available to it, that Arthur Andersen's
resignation was triggered by any concern over the accounting policies and
procedures followed by the Registrant.
Arthur Andersen's report on the financial statements of Cronos Capital
Corp. and the Registrant, for either of the previous two years, has not
contained an adverse opinion or a disclaimer of opinion, nor was any such
report qualified or modified as to uncertainty, audit scope, or accounting
principles. During the Registrant's previous two fiscal years and the
subsequent interim period preceding Arthur Andersen's resignation, there
have been no disagreements between Cronos Capital Corp. or the Registrant
and Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
The Registrant retained a new auditor, Moore Stephens, P.C. ("Moore
Stephens") on April 10, 1997, as reported in the Registrant's Current
Report on Form 8-K, filed April 14, 1997.
The President of the Leasing Company, a subsidiary of the Parent Company,
along with two marketing Vice Presidents, resigned in June 1997. These
vacancies were filled by qualified, long-time employees who average over
15 years of experience in the container leasing industry, therefore
providing continuity in the management of the Leasing Company. The
Registrant and managing general partner do not believe these changes will
have a material impact on the future operating results and financial
condition of the Registrant.
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Cautionary Statement
This Quarterly Report on Form 10-Q contains statements relating to future
results of the Registrant, including certain projections and business
trends, that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and
uncertainties, including but not limited to changes in: economic
conditions; trade policies; demand for and market acceptance of leased
marine cargo containers; competitive utilization and per-diem rental rate
pressures; as well as other risks and uncertainties, including but not
limited to those described in the above discussion of the marine container
leasing business under Item 2., Management's Discussion and Analysis of
Financial Condition and Results of Operations; and those detailed from
time to time in the filings of Registrant with the Securities and Exchange
Commission.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits
No. Description Method of Filing
---- ------------------------------------------------------------ ----------------
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of February 11, 1981
3(b) Certificate of Limited Partnership of the Registrant **
27 Financial Data Schedule Filed with this document
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K, April 14, 1997, reporting the
appointment of the Registrant's successor certifying accountant.
- ----------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated February 12, 1981, included as part of Registration
Statement on Form S-1 (No. 2-70401)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-70401)
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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 III
(A California Limited Partnership)
By Cronos Capital Corp.
The Managing General Partner
By /s/ JOHN KALLAS
-----------------------------------
John Kallas
Vice President, Treasurer
Principal Finance & Accounting Officer
Date: August 14, 1997
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EXHIBIT INDEX
Exhibits
No. Description Method of Filing
---- ------------------------------------------------------------ ----------------
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of February 11, 1981
3(b) Certificate of Limited Partnership of the Registrant **
27 Financial Data Schedule Filed with this document
- ----------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated February 12, 1981, included as part of Registration
Statement on Form S-1 (No. 2-70401)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-70401)