-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHD7Tfjsx16NjwcYB/YEjeX/kKDR7DUEaKm2V/cR+J3AZGKjaS+VIqajAKg8aL2t h2Huh071pACKQGSCgOYmTw== 0000950149-97-002025.txt : 19971111 0000950149-97-002025.hdr.sgml : 19971111 ACCESSION NUMBER: 0000950149-97-002025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IEA INCOME FUND VII CENTRAL INDEX KEY: 0000803511 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 942966976 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16834 FILM NUMBER: 97711249 BUSINESS ADDRESS: STREET 1: 444 MARKET ST 15TH FLR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4156778990 10-Q 1 IEA INCOME FUND VII 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 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 . --- --- 2 IEA INCOME FUND VII, (A CALIFORNIA LIMITED PARTNERSHIP) 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
2 3 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. 3 4 IEA INCOME FUND VII, (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 ---------- ---------- Assets Current assets: Cash and cash equivalents, includes $212,078 at September 30, 1997 and $330,894 at December 31, 1996 in interest-bearing accounts $ 330,966 $ 331,167 Net lease receivables due from Leasing Company (notes 1 and 2) 106,561 126,589 ---------- ---------- Total current assets 437,527 457,756 ---------- ---------- Container rental equipment, at cost 4,361,934 4,666,319 Less accumulated depreciation 2,435,439 2,414,262 ---------- ---------- Net container rental equipment 1,926,495 2,252,057 ---------- ---------- $2,364,022 $2,709,813 ========== ========== Partners' Capital Partners' capital: General partners $ 13,493 $ 9,390 Limited partners 2,350,529 2,700,423 ---------- ---------- Total partners' capital 2,364,022 2,709,813 ---------- ---------- $2,364,022 $2,709,813 ========== ===========
The accompanying notes are an integral part of these financial statements. 4 5 IEA INCOME FUND VII, (A CALIFORNIA LIMITED PARTNERSHIP) 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) $121,550 $151,376 $355,780 $486,025 Other operating expenses: Depreciation 61,956 67,336 192,191 205,373 Other general and administrative expenses 6,966 6,267 19,428 15,344 -------- -------- -------- -------- 68,922 73,603 211,619 220,717 -------- -------- -------- -------- Earnings from operations 52,628 77,773 144,161 265,308 Other income: Interest income 2,925 4,345 9,074 12,664 Net gain on disposal of equipment 23,812 18,911 54,006 51,152 -------- -------- -------- -------- 26,737 23,256 63,080 63,816 -------- -------- -------- -------- Net earnings $ 79,365 $101,029 $207,241 $329,124 ======== ======== ======== ======== Allocation of net earnings: General partners $ 20,719 $ 20,831 $ 59,407 $ 69,248 Limited partners 58,646 80,198 147,834 259,876 -------- -------- -------- -------- $ 79,365 $101,029 $207,241 $329,124 ======== ======== ======== ======== Limited partners' per unit share of net earnings $ 6.29 $ 8.61 $ 15.87 $ 27.90 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 5 6 IEA INCOME FUND VII, (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended ----------------------------- September 30, September 30, 1997 1996 ------------- ------------ Net cash provided by operating activities $ 386,248 $ 509,542 Cash flows provided by investing activities: Proceeds from disposal of equipment 166,583 117,319 Cash flows used in financing activities: Distribution to partners (553,032) (653,288) ------- ------- Net decrease in cash and cash equivalents (201) (26,427) Cash and cash equivalents at January 1 331,167 383,705 ------- ------- Cash and cash equivalents at September 30 $ 330,966 $ 357,278 ======= =======
The accompanying notes are an integral part of these financial statements. 6 7 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 September 30, 1997, the Partnership owned and operated 854 twenty-foot and 888 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. (Continued) 7 8 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 September 30, 1997 and December 31, 1996 were as follows:
September 30, December 31, 1997 1996 -------- -------- Lease receivables, net of doubtful accounts of $89,614 at September 30, 1997 and $87,523 at December 31, 1996 $259,197 $287,953 Less: Direct operating payables and accrued expenses 77,162 67,041 Damage protection reserve 24,983 40,733 Base management fees 23,644 26,630 Reimbursed administrative expenses 4,208 4,681 Incentive fees 22,639 22,279 -------- -------- $106,561 $126,589 ======== ========
(Continued) 8 9 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 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 $225,696 $282,936 $697,624 $902,021 Less: Rental equipment operating expenses 53,297 71,150 192,917 236,474 Base management fees 15,624 19,439 48,274 60,182 Reimbursed administrative expenses 12,587 16,895 38,846 51,784 Incentive fees 22,638 24,076 61,807 67,556 -------- -------- -------- -------- $121,550 $151,376 $355,780 $486,025 ======== ======== ======== ========
9 10 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 December 31, 1996. During the first nine months of 1997, the Registrant disposed of 126 containers as part of its ongoing operations. At September 30, 1997, 83% 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 65 104 Master lease 628 642 --- --- Subtotal 693 746 Containers off lease 161 142 --- --- Total container fleet 854 888 === ===
20-Foot 40-Foot ------- ------- Units % Units % ----- ---- ----- ---- Total purchases 1,001 100% 1,104 100% Less disposals 147 15% 216 20% ----- --- ----- ---- Remaining fleet at September 30, 1997 854 85% 888 80% ===== === ===== ====
During the third quarter of 1997, distributions from operations and sales proceeds amounted to $184,344, reflecting distributions to the general and limited partners for the second quarter of 1997. This represents an increase from the $168,174 distributed during the second quarter of 1997, reflecting distributions for the first quarter of 1997. The increase in distributions is attributable to an increase in sales proceeds distributed to its partners. The Registrant's disposal activity should produce lower operating results and, consequently, lower distributions from operations to its partners in subsequent periods. 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 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 73% at December 31, 1996 to 83% 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. 10 11 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 $121,550 and $355,780, respectively, a decline of approximately 20% and 27%, respectively, from the same three and nine-month periods in the prior year. Approximately 30% and 26% of the Registrant's net earnings for the three and nine-month periods ended September 30, 1997, respectively, were from gain on disposal of equipment, as compared to 19% and 16%, respectively, for the same three and nine-month periods in the prior year. 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 nine-month periods ended September 30, 1997 was $225,696 and $697,624, respectively, reflecting a decline of 20% and 23%, respectively, from the same three and nine-month periods in 1996. During 1997, gross rental revenue was primarily impacted by the Registrant's fleet size and a decline in per-diem rental rates. Average per-diem rental rates decreased approximately 14% and 13%, respectively, when compared to the same three and nine-month periods in the prior year. Utilization of the Registrant's fleet of containers, which steadily increased since December 31, 1996, did not recover to the same level averaged during the nine-month period ended September 30, 1996. 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)) 2,659 2,888 2,748 2,940 Average Utilization 79% 78% 76% 79%
The Registrant's declining fleet size contributed to a respective 8% and 6% decline in depreciation expense when compared to the same three and nine-month periods in the prior year. Rental equipment operating expenses were 24% and 28%, respectively, of the Registrant's gross lease revenue during the three and nine-month periods ended September 30, 1997, as compared to 25% and 26%, respectively, during the three and nine-month periods ended September 30, 1996. Lower repair and maintenance expenses, as well as a decline in the provision for doubtful accounts were partially off-set by increases in costs associated with slightly lower utilization levels, including storage and handling. 11 12 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. 12 13 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 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 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) 13 14 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: November 10, 1997 14 15 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) 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENE TO SUCH FINANCIAL STATEMENTS INCLUDED AS PART OF ITS QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD SEPTEMBER 30, 1997. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 330,966 0 106,561 0 0 437,527 4,361,934 2,435,439 2,364,022 0 0 0 0 0 2,364,022 2,364,022 0 355,780 0 211,619 0 0 0 0 0 0 0 0 0 207,241 0 0
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