<PAGE> 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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-10474
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
(Exact name of registrant as specified in its charter)
California 94-2717330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
444 Market Street, 15th Floor, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 677-8990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
<PAGE> 2
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
REPORT ON FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1996 (unaudited) and December 31, 1995 4
Statements of Operations for the three and nine months ended September 30, 1996 and 1995 (unaudited) 5
Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 (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 12
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Presented herein are the Registrant's balance sheets as of September
30, 1996 and December 31, 1995, statements of operations for the three
and nine months ended September 30, 1996 and 1995, and statements of
cash flows for the nine months ended September 30, 1996 and 1995.
3
<PAGE> 4
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash, includes $136,054 at September 30, 1996 and $212,798
at December 31, 1995 in interest-bearing accounts $ 136,405 $ 212,918
Short-term investments 626,096 625,000
Net lease receivables due from Leasing Company
(notes 1 and 2) 325,951 408,952
---------- ----------
Total current assets 1,088,452 1,246,870
---------- ----------
Container rental equipment, at cost 3,747,258 6,678,748
Less accumulated depreciation 2,604,347 4,660,856
---------- ----------
Net container rental equipment 1,142,911 2,017,892
---------- ----------
$2,231,363 $3,264,762
========== ==========
Partners' Capital
Partners' capital:
General partners $ 2,664 $ 4,657
Limited partners 2,228,699 3,260,105
---------- ----------
Total partners' capital 2,231,363 3,264,762
---------- ----------
$2,231,363 $3,264,762
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net lease revenue (notes 1 and 3) $157,011 $220,910 $ 522,541 $ 838,974
Other operating expenses:
Other general and administrative expenses 9,475 7,110 27,911 33,666
-------- -------- ---------- ----------
Earnings from operations 147,536 213,800 494,630 805,308
Other income:
Interest income 12,706 12,424 34,310 43,545
Net gain on disposal of equipment 73,368 122,814 276,268 341,024
-------- -------- ---------- ----------
86,074 135,238 310,578 384,569
-------- -------- ---------- ----------
Net earnings $233,610 $349,038 $ 805,208 $1,189,877
======== ======== ========== ==========
Allocation of net earnings:
General partners $ 8,674 $ 15,071 $ 17,853 $ 30,142
Limited partners 224,936 333,967 787,355 1,159,735
-------- -------- ---------- ----------
$233,610 $349,038 $ 805,208 $1,189,877
======== ======== ========== ==========
Limited partners' per unit share of net earnings $ 7.50 $ 11.30 $ 26.25 $ 39.04
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1996 1995
--------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 640,752 $ 947,375
Cash flows provided by investing activities:
Proceeds from disposal of equipment 1,122,439 973,527
Cash flows used in financing activities:
Distribution to partners (1,838,608) (2,120,200)
----------- -----------
Net decrease in cash and cash equivalents (75,417) (199,298)
Cash and cash equivalents at January 1 837,918 1,116,858
----------- -----------
Cash and cash equivalents at September 30 $ 762,501 $ 917,560
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
IEA Marine Container Income Fund III (A California Limited
Partnership) (the "Partnership") was organized under the laws of
the State of California on January 3, 1980 for the purpose of
owning and leasing marine cargo containers. The managing general
partner is Cronos Capital Corp. ("CCC"); the associate general
partner is Smith Barney Shearson, Inc. CCC, with its affiliate
Cronos Containers Limited (the "Leasing Company"), manages and
controls the business of the Partnership.
(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.
(c) Basis of Accounting
The Partnership utilizes the accrual method of accounting. Revenue
is recognized when earned.
The Partnership has determined that for accounting purposes the
Leasing Agent Agreement is a lease, and the receivables, payables,
gross revenues and operating expenses attributable to the
containers managed by the Leasing Company are, for accounting
purposes, those of the Leasing Company and not of the Partnership.
Consequently, the Partnership's balance sheets and statements of
operations display the payments to be received by the Partnership
from the Leasing Company as the Partnership's receivables and
revenues.
(Continued)
7
<PAGE> 8
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(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.
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 and incentive fees payable to CCC, the Leasing Company, 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, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Lease receivables, net of doubtful accounts
of $213,164 at September 30, 1996 and $198,828 at
December 31, 1995 $470,051 $634,228
Less:
Direct operating payables and accrued expenses 70,852 141,780
Damage protection reserve 73,248 69,808
Incentive fees -- 13,688
-------- --------
$325,951 $408,952
======== ========
</TABLE>
(Continued)
8
<PAGE> 9
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(3) Net Lease Revenue
Net lease revenue is determined by deducting direct operating expenses
and management fees to CCC and the Leasing Company, 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, 1996 and 1995,
was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental revenue $235,248 $472,996 $873,641 $1,555,488
Rental equipment operating expenses 36,788 130,906 196,082 360,018
Base management fees 41,449 79,555 155,018 260,871
Incentive fees -- 41,625 -- 95,625
-------- -------- -------- ----------
$157,011 $220,910 $522,541 $ 838,974
======== ======== ======== ==========
</TABLE>
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1) Material changes in financial condition between September 30, 1996 and
December 31, 1995.
As discussed in the Registrant's report for the year ended December 31,
1995, the Registrant entered 1996 with a view towards accelerating the
disposition of its container fleet. During the first nine months of 1996,
the Registrant increased the quantity of container disposals in response
to the slower growth in containerized trade and its impact on the
container leasing industry. Accordingly, 1,186 containers were disposed
during the first nine months of 1996, contributing to an increase in cash
generated from sales proceeds. At September 30, 1996, 19% of the original
equipment remained in the Registrant's fleet, as compared to 33% at
December 31, 1995, comprised as follows:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 137 10
Master lease 1,045 164
----- ---
Subtotal 1,182 174
Containers off lease 146 25
----- ---
Total container fleet 1,328 199
===== ===
<CAPTION>
20-Foot 40-Foot
---------------- -----------------
Units % Units %
----- ---- ----- ----
<S> <C> <C> <C> <C>
Total purchases 7,257 100% 890 100%
Less disposals 5,929 82% 691 78%
----- --- --- ---
Remaining fleet at September 30, 1996 1,328 18% 199 22%
===== === === ===
</TABLE>
Net lease receivables at September 30, 1996 declined when compared to
December 31, 1995. Contributing to this decline were favorable collections
of the Registrant's lease receivables, a diminishing fleet size, and its
related operating performance.
During the third quarter of 1996, distributions from operations and sales
proceeds amounted to $729,884, reflecting distributions to the general and
limited partners for the second quarter of 1996. This represents an
increase from the $483,670 distributed during the second quarter of 1996
due to an increase in distributions from sales proceeds. The Registrant's
efforts to dispose of the remaining fleet should produce lower operating
results and, consequently, lower distributions from operations to its
partners in subsequent periods. However, sales proceeds distributed to its
partners will continue to fluctuate in subsequent periods, dependent on
the level of container disposals.
10
<PAGE> 11
The statements contained in the following discussion are based on current
expectations. These statements are forward looking and actual results may
differ materially. Indicative of the cyclical nature of the container
leasing business, containerized trade growth slowed in the last quarter of
1995, and excess inventories began to develop. This slowdown has resulted
in reduced equipment utilization and lower per-diem rental rates in the
container leasing industry during the first nine months of 1996. However,
as a result of the Registrant's policy of disposing off-hire containers,
utilization at September 30, 1996 averaged 87%, an increase from the
average utilization rate of 86% at December 31, 1995. Additionally, during
the first nine months of 1996, the Leasing Company implemented various
marketing strategies, including but not limited to, offering incentives to
shipping companies and repositioning containers to high demand locations
in order to counter the market conditions. Ancillary revenues have fallen,
and free-day incentives offered to the shipping lines have increased.
These leasing market conditions, combined with the Registrant's disposal
of containers, are expected to adversely impact the results from
operations through the remainder of 1996 and into 1997.
2) Material changes in the results of operations between the three and
nine-month periods ended September 30, 1996 and the three and nine-month
periods ended September 30, 1995.
Net lease revenue for the three and nine-month periods ended September 30,
1996 was $157,011 and $522,541, respectively, a decline of 29% and 38%
from the same three and nine-month periods in the prior year,
respectively. Approximately 31% and 34% of the Registrant's net earnings
for the three and nine-month periods ended September 30, 1996,
respectively, were from gain on disposal of equipment, as compared to 35%
and 29% for the same three and nine-month periods in the prior year,
respectively. As the Registrant continues the disposal of its containers
in subsequent periods, net gain on disposal should contribute
significantly to the Registrant's net earnings.
Gross rental revenue (a component of net lease revenue) for the three and
nine-month periods ended September 30, 1996 was $235,248, and $873,641,
respectively, reflecting a decline of 50% and 44% from the same three and
nine-month periods in 1995, respectively. During 1996, gross rental
revenue was primarily impacted by the Registrant's diminishing fleet size.
Average per-diem rental rates decreased approximately 3% and 2%, when
compared to the same three and nine-month periods in the prior year,
respectively, as they became subject to the downward pressures of an
increasingly soft container leasing market. Utilization rates increased
slightly when compared to the same three-month period in the prior year,
and remained unchanged when compared to the same nine-month period in the
prior year, as the Registrant's continued disposal of containers
significantly reduced the number of off-hire containers unavailable for
lease. The Registrant's average fleet size and utilization rates for the
three and nine-month periods ended September 30, 1996 and September 30,
1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 1,838 3,519 2,303 3,953
Average Utilization 90% 87% 87% 87%
</TABLE>
Rental equipment operating expenses were 16% and 22% of the Registrant's
gross lease revenue for the three and nine-month periods ended September
30, 1996, respectively, as compared to 28% and 23% during the three and
nine-month periods ended September 30, 1995, respectively. These declines
were primarily attributable to a reduction in the provision for doubtful
accounts, and the costs associated with the recovery actions against the
doubtful accounts of certain lessees. Costs associated with utilization
levels, including storage, handling and repositioning, also declined,
contributing to the decline in rental equipment operating expenses, as a
percentage of gross lease revenue. The Registrant's declining fleet size
and related operating performance contributed to the decline in base
management and incentive fees, when compared to the same periods in the
prior year.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --------- ------------- ----------------
<S> <C>
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of February 11, 1981
3(b) Certificate of Limited Partnership of the Registrant **
27 Financial Data Schedule Filed with this document
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 30, 1996
- -------------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated February 12, 1981, included as part of Registration
Statement on Form S-1 (No. 2-70401)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-70401)
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
IEA MARINE CONTAINER INCOME FUND III
(A California Limited Partnership)
By Cronos Capital Corp.
The Managing General Partner
By /s/ JOHN KALLAS
------------------------------------
John Kallas
Vice President, Treasurer
Principal Financial & Accounting Officer
Date: November 11, 1996
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --------- ------------- ----------------
<S> <C>
3(a) Limited Partnership Agreement of the Registrant, amended and *
restated as of February 11, 1981
3(b) Certificate of Limited Partnership of the Registrant **
27 Financial Data Schedule Filed with this document
</TABLE>
- -------------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the
Registrant dated February 12, 1981, included as part of Registration
Statement on Form S-1 (No. 2-70401)
** Incorporated by reference to Exhibit 3.4 to the Registration Statement
on Form S-1 (No. 2-70401)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1996 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED AS PART OF ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD SEPTEMBER 30, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 762,501
<SECURITIES> 0
<RECEIVABLES> 325,951
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,088,452
<PP&E> 3,747,258
<DEPRECIATION> 2,604,347
<TOTAL-ASSETS> 2,231,363
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,231,363
<TOTAL-LIABILITY-AND-EQUITY> 2,231,363
<SALES> 0
<TOTAL-REVENUES> 522,541
<CGS> 0
<TOTAL-COSTS> 27,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 805,208
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
