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, 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 2-86324
IEA MARINE CONTAINER INCOME FUND V(A)
(Exact name of registrant as specified in its charter)
California 94-2911062
(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 V(A)
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1997 (unaudited) and December 31,
1996 4
Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 (unaudited) 5
Statements of Cash Flows for the nine months ended September 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 September
30, 1997 and December 31, 1996, statements of operations for the three
and nine months ended September 30, 1997, and 1996, and statements of
cash flows for the nine months ended September 30, 1997 and 1996.
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IEA MARINE CONTAINER INCOME FUND V(A)
BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
---------- ----------
Assets
Current assets:
Cash and cash equivalents, includes $112,690 at September 30, 1997
and $218,930 at December 31, 1996 in interest-bearing accounts $ 150,339 $ 219,151
Net lease receivables due from Leasing Company
(notes 1 and 2) 43,160 81,880
---------- ----------
Total current assets 193,499 301,031
---------- ----------
Container rental equipment, at cost 1,034,198 1,414,770
Less accumulated depreciation 734,071 962,385
---------- ----------
Net container rental equipment 300,127 452,385
---------- ----------
$ 493,626 $ 753,416
========== ==========
Partners' Capital
Partners' capital:
General partners $ 466 $ 1,068
Limited partners 493,160 752,348
---------- ----------
Total partners' capital 493,626 753,416
---------- ----------
$ 493,626 $ 753,416
========== ==========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND V(A)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------- ---------------------------
September 30,September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net lease revenue (notes 1 and 3) $ 35,050 $ 55,892 $105,370 $189,278
Other operating expenses:
Depreciation -- 21,602 16,915 75,271
Other general and administrative expenses 6,009 5,347 18,816 13,765
-------- -------- -------- --------
6,009 26,949 35,731 89,036
-------- -------- -------- --------
Earnings from operations 29,041 28,943 69,639 100,242
Other income:
Interest income 1,300 4,004 5,150 10,368
Net gain on disposal of equipment 11,005 29,251 48,620 90,196
-------- -------- -------- --------
12,305 33,255 53,770 100,564
-------- -------- -------- --------
Net earnings $ 41,346 $ 62,198 $123,409 $200,806
======== ======== ======== ========
Allocation of net earnings:
General partners $ 9,008 $ 22,755 $ 33,460 $ 53,890
Limited partners 32,338 39,443 89,949 146,916
-------- -------- -------- --------
$ 41,346 $ 62,198 $123,409 $200,806
======== ======== ======== ========
Limited partners' per unit share of net earnings $ 4.43 $ 5.40 $ 12.32 $ 20.12
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND V(A)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
1997 1996
--------- ---------
Net cash provided by operating activities $ 136,575 $ 213,156
Cash flows provided by investing activities:
Proceeds from disposal of equipment 177,812 381,418
Cash flows used in financing activities:
Distribution to partners (383,199) (606,104)
--------- ---------
Net decrease in cash and cash equivalents (68,812) (11,530)
Cash and cash equivalents at January 1 219,151 269,720
--------- ---------
Cash and cash equivalents at September 30 $ 150,339 $ 258,190
========= =========
The accompanying notes are an integral part of these financial statements.
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IEA MARINE CONTAINER INCOME FUND V(A)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
IEA Marine Container Income Fund V(A) (the "Partnership") is a limited
partnership organized under the laws of the State of California on
August 8, 1983 for the purpose of owning and leasing marine cargo
containers. The managing general partner is Cronos Capital Corp.
("CCC"); the associate general partners include four individuals. CCC,
with its affiliate Cronos Containers Limited (the "Leasing Company"),
manages the business of the Partnership. The Partnership shall continue
until December 31, 2005, unless sooner terminated upon the occurrence
of certain events.
The Partnership commenced operations on March 5, 1984, when the minimum
subscription proceeds of $1,000,000 were obtained. The Partnership
offered 10,000 units of limited partnership interest at $500 per unit,
or $5,000,000. The offering terminated on March 31, 1984, at which time
7,302 limited partnership units had been purchased.
As of September 30, 1997, 24% of the original equipment remained in the
Partnership's fleet and was comprised of 262 twenty-foot, 84 forty-foot
and 60 forty-foot high-cube marine dry cargo containers. Commencing in
1991, the Partnership's 8th 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,
in its 14th year of operations, will focus its attention during the
remainder of 1997 and subsequent periods on disposing of 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.
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.
(Continued)
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IEA MARINE CONTAINER INCOME FUND V(A)
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 September 30,
1997 and December 31, 1996 were as follows:
September 30, December 31,
1997 1996
-------- --------
Lease receivables, net of doubtful accounts
of $70,827 at September 30, 1997 and $58,042
at December 31, 1996 $ 83,017 $147,872
Less:
Direct operating payables and accrued expenses 18,396 32,709
Damage protection reserve 4,785 5,271
Base management fees 5,105 8,822
Reimbursed administrative expenses 996 1,658
Incentive fees 10,575 17,532
-------- --------
$ 43,160 $ 81,880
======== ========
(Continued)
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IEA MARINE CONTAINER INCOME FUND V(A)
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 nine-month periods ended
September 30, 1997 and 1996, was as follows:
Three Months Ended Nine Months Ended
-------------------------- ----------------------------
September 30,September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
Rental revenue $ 58,084 $108,770 $199,603 $385,623
Less:
Rental equipment operating expenses 5,617 18,690 35,796
82,681
Base management fees 4,030 7,669 13,130 26,313
Reimbursed administrative expenses 2,812 5,649 9,687
20,843
Incentive fees 10,575 20,870 35,620 66,508
-------- -------- -------- --------
$ 35,050 $ 55,892 $105,370 $189,278
======== ======== ======== ========
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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 September 30, 1997 and
ecember 31, 1996.
As discussed in the Registrant's report for the year ended December 31,
1996, the Registrant entered 1997 with a view towards accelerating the
disposal of its fleet. During the first nine months of 1997, the Registrant
disposed of 163 containers as part of its ongoing container operations,
contributing to a decline in the Registrant's operating results. At
September 30, 1997, 24% of the original equipment remained in the
Registrant's fleet, as compared to 34% at December 31, 1996, and was
comprised of the following:
40-Foot
20-Foot 40-Foot High-Cube
------- ------- ---------
Containers on lease:
Term leases 18 3 7
Master lease 223 68 46
--- --- ---
Subtotal 241 71 53
Containers off lease 21 13 7
--- --- ---
Total container fleet 262 84 60
=== === ===
40-Foot
20-Foot 40-Foot High-Cube
------------- ------------ -----------
Units % Units % Units %
------ --- ----- --- ----- ---
Total purchases 1,230 100% 358 100% 75 100%
Less disposals 968 79% 274 77% 15 20%
----- --- --- --- -- ---
Remaining fleet at September 30, 1997 262 21% 84 23% 60 80%
===== === === === == ===
The Registrant's diminishing fleet size and its related operating
performance contributed to a 47% decline in net lease receivables at
September 30, 1997, when compared to December 31, 1996. During the third
quarter of 1997, distributions from operations and sales proceeds amounted
to $100,183, reflecting distributions to the general and limited partners
for the second quarter of 1997. This represents a decline from the $125,228
distributed during the second quarter of 1997, reflecting distributions for
the first quarter of 1997. 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.
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 their need for leased containers. Once the
demand for leased containers began to fall, per-diem rental rates were also
adversely affected. Since the beginning of 1997, the container leasing
industry has experienced a modest recovery as indicated by an upward trend
in container utilization. This trend can also be seen within the
Registrant's utilization rate, which increased from 85% at December 31,
1996 to 89% at September 30, 1997. Increasing cargo volumes and continuing
equipment imbalances within the container fleets of shipping lines and
transport companies have re-established a need for these companies to
replenish their leased fleets during 1997.
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Although there has been an improvement in container utilization rates,
per-diem rental rates continue to remain under pressure as a result of the
following factors: start-up leasing companies offering new containers and
low rental rates in an effort to break into the leasing market; established
leasing companies reducing rates to very low levels; and a continuing
oversupply of containers. The recent volatility of the Hong Kong and other
Asian financial markets and its impact on trade, shipping, and container
leasing, especially intra-Asia and Asia-Europe routes, has yet to be
determined. While these conditions could impact the Registrant's financial
condition and operating performance through the remainder of 1997 and first
half of 1998, the Registrant is well positioned to take advantage of
further improvements in the container leasing market.
2) Material changes in the results of operations between the three and
nine-month periods ended September 30, 1997 and the three and nine-month
periods ended September 30, 1996.
Net lease revenue for the three and nine-month periods ended September 30,
1997 was $35,050 and $105,370, respectively, a decline of 37% and 44%,
respectively, from the same three and nine-month periods in the prior year.
Approximately 27% and 39%, respectively, of the Registrant's net earnings
for the three and nine-month periods ended September 30, 1997, were from
gain on disposal of equipment, as compared to 47% and 45%, respectively,
for the same three and nine-month periods in the prior year. As the
Registrant continues the disposal of its containers in subsequent periods,
net gain on disposal may fluctuate and should contribute significantly to
the Registrant's net earnings.
Gross rental revenue (a component of net lease revenue) for the three and
nine-month periods ended September 30, 1997 was $58,084 and $199,603,
respectively, reflecting a decline of 47% and 48% from the same three and
nine-month periods in 1996, respectively. During 1997, gross rental revenue
was primarily impacted by the Registrant's diminishing fleet size and lower
utilization levels. Average per-diem rental rates decreased approximately
16% and 12%, respectively, when compared to the same three and nine-month
periods in the prior year. Utilization rates increased when compared to the
same three and nine-month periods in the prior year, as the demand for
leased containers improved and the Registrant continued disposing of
containers, reducing the number of off-hire containers within its fleet.
The Registrant's average fleet size and utilization rates for the three and
nine-month periods ended September 30, 1997 and September 30, 1996 were as
follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ----------- ------------
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 575 920 661 1,095
Average Utilization 90% 87% 89% 85%
Rental equipment operating expenses were 10% and 18%, respectively, of the
Registrant's gross lease revenue during the three and nine-month periods
ended September 30, 1997, as compared to 17% and 21%, respectively, during
the three and nine-month periods ended September 30, 1996. Contributing to
these declines were reductions in costs associated with higher utilization
levels, including storage and handling, as well as a decline in repair and
maintenance. The Registrant's declining fleet size and related operating
results also contributed to a decline in base management and incentive
fees, when compared to the same periods in the prior year. The Registrant's
fleet became fully depreciated during the first quarter of 1997,
contributing to the decline in depreciation expense.
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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.
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 October 27, 1984
3(b) Certificate of Limited Partnership of the Registrant **
27 Financial Data Schedule Filed with this document
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
September 30, 1997.
- ------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated October 28, 1984, included as part of Registration
Statement on Form S-1 (No. 2-86324)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-86324)
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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 V(A)
By Cronos Capital Corp.
The Managing General Partner
By /s/ JOHN KALLAS
--------------------------------------
John Kallas
Vice President, Treasurer
Principal Finance & Accounting Officer
Date: November 10, 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 October 27, 1984
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 October 28, 1984, included as part of Registration
Statement on Form S-1 (No. 2-86324)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-86324)
15