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 0-16834
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
(Exact name of registrant as specified in its charter)
California 94-2966976
(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 INCOME FUND VII,
(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 Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
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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 INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1997 1996
---------- ------------
Assets
------
Current assets:
Cash and cash equivalents, includes $296,945 at June 30, 1997
and $330,894 at December 31, 1996 in interest-bearing accounts $ 309,254 $ 331,167
Net lease receivables due from Leasing Company
(notes 1 and 2) 115,388 126,589
---------- ----------
Total current assets 424,642 457,756
---------- ----------
Container rental equipment, at cost 4,491,820 4,666,319
Less accumulated depreciation 2,447,461 2,414,262
---------- ----------
Net container rental equipment 2,044,359 2,252,057
---------- ----------
$2,469,001 $2,709,813
========== ==========
Partners' Capital
-----------------
Partners' capital:
General partners $ 11,209 $ 9,390
Limited partners 2,457,792 2,700,423
---------- ----------
Total partners' capital 2,469,001 2,709,813
---------- ----------
$2,469,001 $2,709,813
========== ==========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VII,
(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 199
---------- ---------- ------- ---------
1996
Net lease revenue (notes 1 and 3) $ 112,900 $ 156,554 $234,230 $ 334,649
Other operating expenses:
Depreciation 64,500 68,293 130,235 138,037
Other general and administrative expenses 6,898 4,619 12,462 9,077
---------- ---------- -------- ---------
71,398 72,912 142,697 147,114
---------- ---------- -------- ---------
Earnings from operations 41,502 83,642 91,533 187,535
Other income:
Interest income 2,998 4,054 6,149 8,319
Net gain on disposal of equipment 20,351 23,599 30,194 32,241
---------- ---------- -------- ---------
23,349 27,653 36,343 40,560
---------- ---------- -------- ---------
Net earnings $ 64,851 $ 111,295 $127,876 $ 228,095
========== ========== ======== =========
Allocation of net earnings:
General partners $ 18,634 $ 23,336 $ 38,688 $ 48,417
Limited partners 46,217 87,959 89,188 179,678
---------- ---------- -------- ---------
$ 64,851 $ 111,295 $127,876 $ 228,095
========== ========== ======== =========
Limited partners' per unit share of net earnings $ 4.97 $ 9.44 $ 9.58 $ 19.29
========== ========== ======== =========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
--------- ---------
Net cash provided by operating activities $ 259,828 $ 328,000
Cash flows provided by investing activities:
Proceeds from disposal of equipment 86,947 55,583
Cash flows used in financing activities:
Distribution to partners (368,688) (462,476)
--------- ---------
Net decrease in cash and cash equivalents (21,913) (78,893)
Cash and cash equivalents at January 1 331,167 383,705
--------- ---------
Cash and cash equivalents at June 30 $ 309,254 $ 304,812
========= =========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
IEA Income Fund VII, A California Limited Partnership (the
"Partnership") was organized under the laws of the State of California
on June 27, 1985 for the purpose of owning and leasing marine cargo
containers. The managing general partner is Cronos Capital Corp.
("CCC"); the associate general partners include seven individuals, one
is an officer of CCC. CCC, with its affiliate Cronos Containers
Limited (the "Leasing Company"), manages the business of the
Partnership. The Partnership shall continue until December 31, 2007,
unless sooner terminated upon the occurrence of certain events.
The Partnership commenced operations on February 2, 1987, when the
minimum subscription proceeds of $1,000,000 were obtained. The
Partnership offered 40,000 units of limited partnership interest at
$500 per unit, or $20,000,000. The offering terminated on August 31,
1987, at which time 9,314 limited partnership units had been
purchased.
As of June 30, 1997, the Partnership owned and operated 878
twenty-foot and 918 forty-foot marine dry cargo containers.
(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.
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IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED 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.
(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 payable, reimbursed administrative expenses, 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 $88,154 at June 30, 1997 and $87,523
at December 31, 1996 $283,479 $287,953
Less:
Direct operating payables and accrued expenses 82,005 67,041
Damage protection reserve 34,724 40,733
Base management fees 26,786 26,630
Reimbursed administrative expenses 4,093 4,681
Incentive fees 20,483 22,279
-------- --------
$115,388 $126,589
======== ========
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IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(3) Net Lease Revenue
Net lease revenue is determined by deducting direct operating expenses,
base management and incentive fees and reimbursed administrative expenses
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 $232,019 $292,949 $471,928 $619,085
Less:
Rental equipment operating expenses 70,277 79,155 139,620 165,324
Base management fees 15,909 19,181 32,650 40,743
Reimbursed administrative expenses 12,450 16,858 26,259 34,889
Incentive fees 20,483 21,201 39,169 43,480
-------- -------- -------- --------
$112,900 $156,554 $234,230 $334,649
======== ======== ======== ========
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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.
During the first six months of 1997, the Registrant disposed of 72
containers as part of its ongoing operations. At June 30, 1997, 85% of the
original equipment remained in the Registrant's fleet, as compared to 89%
at December 31, 1996, and was comprised of the following:
20-Foot 40-Foot
------- -------
Containers on lease:
Term leases 82 94
Master lease 577 608
--- ---
Subtotal 659 702
Containers off lease 219 216
--- ---
Total container fleet 878 918
=== ===
20-Foot 40-Foot
--------------- ----------------
Units % Units %
------ ----- ------ -----
Total purchases 1,001 100% 1,104 100%
Less disposals 123 12% 186 17%
------ ---- ------ ----
Remaining fleet at June 30, 1997 878 88% 918 83%
====== ==== ====== ====
During the second quarter of 1997, distributions from operations and sales
proceeds amounted to $168,174, reflecting distributions to the general and
limited partners for the first quarter of 1997. This represents a decline
from the $200,514 distributed during the first quarter of 1997, reflecting
distributions for the fourth quarter of 1996. The Registrant's disposal
activity should produce lower operating results and, consequently, lower
distributions from operations to its partners in subsequent periods.
However, sales proceeds distributed to its partners may fluctuate in
subsequent periods, reflecting the level of container disposals.
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 73% at
December 31, 1996 to 76% 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.
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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 $112,900 and $234,230, respectively, a decline of approximately 28%
and 30% from the same three and six-month periods in the prior year,
respectively. Approximately 31% and 24% 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 21% and 14% for
the same three and six-month periods in the prior year, respectively. As
the Registrant's container disposals increase in subsequent periods, net
gain on disposal should contribute significantly to the Registrant's net
earnings and may fluctuate dependent on the level of container disposals.
Gross rental revenue (a component of net lease revenue) for the three and
six-month periods ended June 30, 1997 was $232,019 and $471,928,
respectively, reflecting a decline of 21% and 24% from the same three and
six-month periods in 1996, respectively. During 1997, gross rental revenue
was impacted by the Registrant's fleet size, a decline in per-diem rental
rates and a decline in utilization. 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 of the
Registrant's fleet of containers, which steadily increased since December
31, 1996, did not recover to the same levels experienced during the three
and six-month periods ended June 30, 1996. 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)) 2,750 2,941 2,786 2,966
Average Utilization 75% 79% 74% 79%
The Registrant's declining fleet size contributed to a 6% decline in
depreciation expense in each of the three and six-month periods ended June
30, 1997, respectively, when compared to the same three and six-month
periods in the prior year. Rental equipment operating expenses were 30%
and 29% of the Registrant's gross lease revenue during the three and
six-month periods ended June 30, 1997, respectively, as compared to 27% in
each of the three and six-month periods ended June 30, 1996. These
increases were largely attributable to increases in costs associated with
lower utilization levels, including handling and storage.
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.
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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.
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
Exhibit
No. Description Method of Filing
------- ----------- ----------------
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of December 1, 1986
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 December 3, 1986, included as part of Registration
Statement on Form S-1 (No. 33-9351)
** Incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 (No. 33-9351)
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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 INCOME FUND VII,
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
Exhibit
No. Description Method of Filing
------- ----------- ----------------
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of December 1, 1986
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 December 3, 1986, included as part of Registration
Statement on Form S-1 (No. 33-9351)
** Incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 (No. 33-9351)