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 MARCH 31, 1998
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 0-14440
IEA INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
(Exact name of registrant as specified in its charter)
California 94-2942941
(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 INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997 4
Statements of Operations for the three months ended March 31,
1998 and 1997 (unaudited) 5
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (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 15
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Presented herein are the Registrant's balance sheets as of March 31,
1998 and December 31, 1997, statements of operations for the three
months ended March 31, 1998 and 1997, and statements of cash flows for
the three months ended March 31, 1998 and 1997.
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4
IEA INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
---------- ----------
Assets
Current assets:
Cash and cash equivalents, includes $1,063,874 at March 31, 1998 and
$1,274,162 at December 31, 1997 in interest-bearing accounts $1,068,637 $1,274,362
Net lease receivables due from Leasing Company
(notes 1 and 2) 275,147 319,299
---------- ----------
Total current assets 1,343,784 1,593,661
---------- ----------
Container rental equipment, at cost 8,763,446 9,491,785
Less accumulated depreciation 5,845,343 6,277,270
---------- ----------
Net container rental equipment 2,918,103 3,214,515
---------- ----------
$4,261,887 $4,808,176
========== ==========
Partners' Capital
Partners' capital:
General partners $ 6,476 $ 11,939
Limited partners 4,255,411 4,796,237
---------- ----------
Total partners' capital 4,261,887 4,808,176
---------- ----------
$4,261,887 $4,808,176
========== ==========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-----------------------
March 31, March 31,
1998 1997
-------- --------
Net lease revenue (notes 1 and 3) $269,586 $333,453
Other operating expenses:
Depreciation 66,379 182,573
Other general and administrative expenses 17,289 14,253
-------- --------
83,668 196,826
-------- --------
Earnings from operations 185,918 136,627
Other income:
Interest income 16,055 16,573
Net gain on disposal of equipment 95,328 125,861
-------- --------
111,383 142,434
-------- --------
Net earnings $297,301 $279,061
======== ========
Allocation of net earnings:
General partners $ 69,523 $ 78,848
Limited partners 227,778 200,213
-------- --------
$297,301 $279,061
======== ========
Limited partners' per unit share of net earnings $ 5.19 $ 4.56
======== ========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------
March 31, March 31,
1998 1997
----------- -----------
Net cash provided by operating activities $ 158,827 $ 392,955
Cash flows provided by investing activities:
Proceeds from disposal of equipment 479,038 531,109
Cash flows used in financing activities:
Distribution to partners (843,590) (964,102)
----------- -----------
Net decrease in cash and cash equivalents (205,725) (40,038)
Cash and cash equivalents at January 1 1,274,362 1,443,622
----------- -----------
Cash and cash equivalents at March 31 $ 1,068,637 $ 1,403,584
=========== ===========
The accompanying notes are an integral part of these financial statements.
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IEA INCOME FUND VI,
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
IEA Income Fund VI, A California Limited Partnership (the
"Partnership") is a limited partnership organized under the laws of
the State of California on August 1,1984 for the purpose of owning
and leasing marine cargo containers. The managing general partner is
Cronos Capital Corp. ("CCC"); the associate general partners are
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, 2006, unless
sooner terminated upon the occurrence of certain events.
The Partnership commenced operations on December 4, 1984, when the
minimum subscription proceeds of $1,000,000 were obtained. The
Partnership offered 60,000 units of limited partnership interest at
$500 per unit, or $30,000,000. The offering terminated on October
11, 1985, at which time 43,920 limited partnership units had been
purchased.
As of March 31, 1998, the Partnership owned and operated 2,213
twenty-foot, 1,216 forty-foot and 60 forty-foot high-cube 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.
(Continued)
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IEA INCOME FUND VI,
(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 March 31, 1998 and December 31, 1997 were as follows:
March 31, December 31,
1998 1997
-------- --------
Lease receivables, net of doubtful accounts of $89,448
at March 31, 1998 and $66,889 at December 31, 1997 $641,389 $718,470
Less:
Direct operating payables and accrued expenses 125,717 121,819
Damage protection reserve 108,087 107,833
Base management fees 45,032 66,228
Reimbursed administrative expenses 8,738 9,559
Incentive fees 78,668 93,732
-------- --------
$275,147 $319,299
======== ========
(Continued)
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IEA INCOME FUND VI,
(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-month periods ended March 31,
1998 and 1997 was as follows:
Three Months Ended
-----------------------
March 31, March 31,
1998 1997
-------- --------
Rental revenue $489,026 $695,391
Less:
Rental equipment operating expenses 74,561 169,831
Base management fees 34,134 48,901
Incentive fees 78,668 103,776
Reimbursed administrative expenses 32,077 39,430
-------- --------
$269,586 $333,453
======== ========
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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 March 31, 1998 and
December 31, 1997.
During the first quarter of 1998, the Registrant continued disposing of
containers as part of its ongoing container operations. Accordingly, 307
containers were disposed during the first quarter of 1998, contributing to
a decline in the Registrant's operating results. At March 31, 1998, 35% of
the original equipment remained in the Registrant's fleet, as compared to
38% at December 31, 1997, and was comprised of the following:
40-Foot
20-Foot 40-Foot High-Cube
------- ------- ---------
Containers on lease:
Term leases 187 90 6
Master leases 1,742 986 49
----- ----- -----
Subtotal 1,929 1,076 55
Containers off lease 284 140 5
----- ----- -----
Total container fleet 2,213 1,216 60
===== ===== =====
40-Foot
20-Foot 40-Foot High-Cube
---------------- ---------------- ----------------
Units % Units % Units %
----- ----- ----- ----- ----- -----
Total purchases 6,102 100% 3,753 100% 75 100%
Less disposals 3,889 64% 2,537 68% 15 20%
----- ----- ----- ----- ----- -----
Remaining fleet at March 31, 1998 2,213 36% 1,216 32% 60 80%
===== ===== ===== ===== ===== =====
During the first quarter of 1998, distributions from operations and sales
proceeds amounted to $843,590, reflecting distributions to the general and
limited partners for the fourth quarter of 1997. This represents an
increase from the $813,461 distributed during the fourth quarter of 1997,
reflecting distributions for the third quarter of 1997. The increase in
distributions is attributable to an increase in sales proceeds distributed
to its partners. The Registrant's continuing disposal of containers should
produce lower operating results and, consequently, lower distributions to
its partners in subsequent periods. Sales proceeds distributed to its
partners may fluctuate in subsequent periods, reflecting the level of
container disposals.
Market conditions that existed during 1997 persisted through the first
quarter of 1998. Low container prices, favorable interest rates and the
abundance of available capital continued to discourage ocean carriers and
other transport companies from leasing containers at levels comparable to
previous years.
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11
By the end of 1997, the volatility of the Hong Kong and other Asian
financial markets began to negatively impact trade, shipping and container
leasing. As a result, the Registrant's container utilization rate declined
from 89% at December 31, 1997 to 88% at March 31, 1998. Per-diem rental
rates continued 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. These leasing market conditions impacted the Registrant's
financial condition and operating performance during the first quarter of
1998.
2) Material changes in the results of operations between the three-month
period ended March 31, 1998 and the three-month period ended March 31,
1997.
Net lease revenue for the three-month period ended March 31, 1998 was
$269,586, a decline of 19% from the same three-month period in the prior
year. Approximately 32% of the Registrant's net earnings for the
three-month period ended March 31, 1998 were from gain on disposal of
equipment, as compared to 45% for the same three-month period in the prior
year. As the Registrant's disposals increase in subsequent periods, net
gain on disposal should contribute significantly to the Registrant's net
earnings and may fluctuate depending on the level of container disposals.
Gross rental revenue (a component of net lease revenue) for the
three-month period ended March 31, 1998 was $489,026, reflecting a decline
of 30% from the three-month period in 1997. Gross rental revenue was
primarily impacted by the Registrant's diminishing fleet size and a
decline in per-diem rental rates. Average per-diem rental rates decreased
approximately 6%, when compared to the same three-month period in the
prior year. Utilization rates increased when compared to the same
three-month period in the prior year, as the Registrant continued to
dispose of containers, thereby reducing the number of off-hire containers
within its fleet. The Registrant's average fleet size and utilization
rates for the three-month periods ended March 31, 1998 and March 31, 1997
were as follows:
Three Months Ended
----------------------
March 31, March 31,
1998 1997
--------- ---------
Average fleet size (measured in twenty-foot equivalent
units (TEU)) 4,992 7,626
Average Utilization 89% 78%
The Registrant's aging and declining fleet size contributed to a 64%
decline in depreciation expense when compared to the same three-month
period in the prior year. Rental equipment operating expenses were 15% of
the Registrant's gross lease revenue during the three-month period ended
March 31, 1998, as compared to 24% during the three-month period ended
March 31, 1997. Contributing to these declines were reductions in costs
associated with higher utilization levels, including storage and handling,
as well as a decline in expenses for repair and maintenance. The
Registrant's declining fleet size and related operating results also
contributed to a decline in base management fees, reimbursed
administrative expenses and incentive fees.
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 CCC, the General
Partner of the Registrant. In its letter of resignation to the Parent
Company, Arthur Andersen stated 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 CCC, Arthur Andersen
confirmed to CCC that its resignation as auditors of the entities referred
to in its letter of resignation included its resignation as auditors of
CCC and the Registrant.
CCC 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 CCC and the
Registrant, for years preceding 1996, 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 1995 fiscal year and the subsequent interim period
preceding Arthur Andersen's resignation, there were no disagreements
between CCC 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. on April 10,
1997, as reported in its Current Report on Form 8-K, filed April 14, 1997.
In connection with its resignation, Arthur Andersen also prepared a report
pursuant to the provisions of Section 10A(b)(2) of the Securities Exchange
Act of 1934, as amended, for filing by the Parent Company with the
Securities and Exchange Commission (the "SEC"). Following the report of
Arthur Andersen, the SEC, on February 10, 1997, commenced a private
investigation of the Parent Company for the purpose of investigating the
matters discussed in such report and related matters. The Registrant does
not believe that the focus of the SEC's investigation is upon the
Registrant or CCC. CCC is unable to predict the outcome of the SEC's
ongoing private investigation of the Parent Company.
In 1993, the Parent Company negotiated a credit facility (herinafter, the
"Credit Facility") with several banks for the use of the Parent Company
and its affiliates, including CCC. At December 31, 1996, approximately
$73,500,000 in principal indebtedness was outstanding under the Credit
Facility. As a party to the Credit Facility, CCC is jointly and severally
liable for the repayment of all principal and interest owed under the
Credit Facility. The obligations of CCC, and the five other subsidiaries
of the Parent Company that are borrowers under the Credit Facility, are
guaranteed by the Parent Company.
Following negotiations in 1997 with the banks providing the Credit
Facility, an Amended and Restated Credit Agreement was executed in June
1997, subject to various actions being taken by the Parent Company and its
subsidiaries, primarily relating to the provision of additional
collateral. This Agreement was further amended in July 1997 and the
provisions of the Agreement and its Amendment converted the facility to a
term loan, payable in installments, with a final maturity date of May 31,
1998. At December 31, 1997, approximately $37,600,000 was outstanding
under the Credit Facility.
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The terms of the Agreement and its Amendment also provide for additional
security over shares in the subsidiary of the Parent Company that owns the
head office of the Parent Company's container leasing operations. They
also provided for the loans to Stefan M. Palatin, the Chairman of the
Parent Company (the "Chairman") and its Chief Executive Officer (and a
Director of CCC), of approximately $5,990,000 and $3,700,000 (totaling
approximately $9,690,000) to be restructured as obligations of the
Chairman to another subsidiary of the Parent Company. These obligations
have been collaterally assigned to the lending banks, together with the
pledge of 1,000,000 shares of the Parent Company's Common Stock owned by
the Chairman. These 1,000,000 shares represent 11% of the issued and
outstanding shares of Common Stock of the Parent Company as of December
31, 1997. The shares of the Parent Company are traded on NASDAQ (CRNSF).
(The Chairman, including the 1,000,000 shares pledged to the banks, owns
approximately 55% of the issued and outstanding shares of Common Stock of
the Parent Company as of December 31, 1997). Additionally, CCC granted the
lending banks a security interest in the fees to which it is entitled for
the services it renders to the container leasing partnerships of which it
acts as general partner, including its fee income payable by the
Registrant.
The lending banks have indicated that they will not renew the Credit
Facility, and the Parent Company has yet to secure a source for repayment
of the balance due under the Credit Facility at May 31, 1998. CCC is
currently in discussions with the management of the Parent Company to
provide assurance that the management of the container leasing
partnerships managed by CCC, including the Registrant, is not disrupted
pending a refinancing or reorganization of the indebtedness of the Parent
Company and its affiliates.
The Registrant is not a borrower under the Credit Facility, and neither
the containers nor the other assets of the Registrant have been pledged as
collateral under the Credit Facility.
The Registrant is unable to determine the impact, if any, these concerns
may have on the future operating results and financial condition of the
Registrant or CCC and the Leasing Company's ability to manage the
Registrant's fleet in subsequent periods.
Year 2000
The Registrant relies upon the financial and operational systems provided
by the Leasing company and its affiliates, as well as the systems provided
by other independent third parties to service the three primary areas of
its business: investor processing/maintenance; container leasing/asset
tracking; and accounting finance. The Registrant has received confirmation
from its third-party investor processing/maintenance vendor that their
system is Year 2000 compliant. The Registrant does not expect a material
increase in it vendor servicing fee to reimburse Year 2000 costs.
Container leasing/asset tracking and accounting/finance services are
provided to the Registrant by CCC and its affiliate, Cronos Containers
Limited (the "Leasing Company"), pursuant to the respective Limited
Partnership Agreement and Leasing Agent Agreement. CCC and the Leasing
Company have initiated a program to prepare their systems and applications
for the Year 2000. Preliminary studies indicate that testing, conversion
and upgrading of system applications is expected to cost CCC and the
Leasing Company less than $500,000. Pursuant to the Limited Partnership
Agreement, CCC or the Leasing Company, may not seek reimbursement of data
processing costs associated with the Year 2000 program. The financial
impact of making these required system changes is not expected to be
material to the Registrant's financial position, results of operations or
cash flows.
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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
Exhibit
No. Description Method of Filing
------- ----------- ----------------
3(a) Limited Partnership Agreement of the Registrant, amended *
and restated as of October 11, 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 March 31, 1998.
- ----------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated October 12, 1984, included as part of Registration
Statement on Form S-1 (No. 2-92883)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement on
Form S-1 (No. 2-92883)
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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 VI
(A California Limited Partnership)
By Cronos Capital Corp.
The Managing General Partner
By /s/ Dennis J. Tietz
--------------------------------------------
Dennis J. Tietz
President and Director of Cronos
Capital Corp. ("CCC")
Principal Executive Officer of CCC
Date: May 15, 1998
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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 11, 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 12, 1984, included as part of Registration
Statement on Form S-1 (No. 2-92883)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement on
Form S-1 (No. 2-92883)