<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 MARCH 31, 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 0-10474
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 MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1997 (unaudited) and December 31, 1996 4
Statements of Operations for the three months ended March 31, 1997 and 1996 (unaudited) 5
Statements of Cash Flows for the three months ended March 31, 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
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Presented herein are the Registrant's balance sheets as of March 31,
1997 and December 31, 1996, statements of operations for the three
months ended March 31, 1997 and 1996, and statements of cash flows for
the three months ended March 31, 1997 and 1996.
3
<PAGE> 4
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents, includes $477,490 at March 31, 1997
and $656,038 at December 31, 1996 in interest-bearing accounts $ 507,946 $ 656,333
Net lease receivables due from Leasing Company
(notes 1 and 2) 207,617 252,850
---------- ----------
Total current assets 715,563 909,183
---------- ----------
Container rental equipment, at cost 2,794,369 3,173,384
Less accumulated depreciation 1,939,647 2,201,024
---------- ----------
Net container rental equipment 854,722 972,360
---------- ----------
$1,570,285 $1,881,543
========== ==========
Partners' Capital
-----------------
Partners' capital:
General partners $ 382 $ 3,103
Limited partners 1,569,903 1,878,440
---------- ----------
Total partners' capital 1,570,285 1,881,543
---------- ----------
$1,570,285 $1,881,543
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Net lease revenue (notes 1 and 3) $107,741 $206,817
Other operating expenses:
Other general and administrative expenses 10,092 9,493
-------- --------
Earnings from operations 97,649 197,324
Other income:
Interest income 7,100 10,308
Net gain on disposal of equipment 39,917 70,023
-------- --------
47,017 80,331
-------- --------
Net earnings $144,666 $277,655
======== ========
Allocation of net earnings:
General partners $ 3,199 $ 2,776
Limited partners 141,467 274,879
-------- --------
$144,666 $277,655
======== ========
Limited partners' per unit share of net earnings $ 4.72 $ 9.16
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- --------
<S> <C> <C>
Net cash provided by operating activities $ 124,965 $ 229,518
Cash flows provided by investing activities:
Proceeds from disposal of equipment 182,572 245,939
Cash flows used in financing activities:
Distribution to partners (455,924) (625,054)
--------- ---------
Net decrease in cash and cash equivalents (148,387) (149,597)
Cash and cash equivalents at January 1 656,333 837,918
--------- ---------
Cash and cash equivalents at March 31 $ 507,946 $ 688,321
========= =========
</TABLE>
The accompanying notes are an integral part of these financial 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 dry 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 the business of the partnership.
The Partnership commenced operations on April 3, 1981, when the minimum
subscription proceeds of $500,000 were obtained. The Partnership
offered 30,000 units of limited partnership interest at $500 per unit,
or $15,000,000. The offering terminated on June 26, 1981, at which time
30,000 limited partnership units had been purchased.
As of March 31, 1997, 14% of the original equipment remained in the
Partnership's fleet and was comprised of 1,003 twenty-foot and 137
forty-foot marine dry cargo containers. Commencing in 1991, the
Partnership's 11th 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, having just
completed its 16th year of operations, will focus its attention during
1997 on disposing 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.
7
<PAGE> 8
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(b) Leasing Company and Leasing Agent Agreement - (Continued)
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. 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.
8
<PAGE> 9
IEA MARINE CONTAINER INCOME FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(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 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, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Lease receivables, net of doubtful accounts
of $194,910 at March 31, 1997 and $199,540
at December 31, 1996 $318,081 $368,092
Less:
Direct operating payables and accrued expenses 70,562 71,137
Damage protection reserve 39,902 44,105
-------- --------
$207,617 $252,850
======== ========
</TABLE>
(3) Net Lease Revenue
Net lease revenue is determined by deducting direct operating expenses
and base management fees 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, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1997 1996
-------- ---------
<S> <C> <C>
Rental revenue $146,144 $349,557
Less:
Rental equipment operating expenses 9,175 79,550
Base management fees 29,228 63,190
-------- --------
$107,741 $206,817
======== ========
</TABLE>
9
<PAGE> 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 March 31, 1997 and December
31, 1996.
As discussed in the Registrant's report for the year ended December 31,
1996, the Registrant entered 1997 with a view towards disposing its
remaining container fleet. During the first quarter of 1997, the
Registrant continued disposing of containers as part of its ongoing
container operations. Accordingly, 152 containers were disposed during
the first quarter of 1997, contributing to a decline in the
Registrant's operating results and related cash balances. At March 31,
1997, 14% of the original equipment remained in the Registrant's fleet,
as compared to 16% at December 31, 1996, and was comprised of the
following:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 70 11
Master lease 827 106
----- -----
Subtotal 897 117
Containers off lease 106 20
----- -----
Total container fleet 1,003 137
===== =====
</TABLE>
<TABLE>
<CAPTION>
20-Foot 40-Foot
------------ -----------
Units % Units %
----- --- ----- ---
<S> <C> <C> <C> <C>
Total purchases 7,257 100% 890 100%
Less disposals 6,254 86% 753 85%
----- --- --- ---
Remaining fleet at March 31, 1997 1,003 14% 137 15%
===== === === ===
</TABLE>
The Registrant's diminishing fleet size and its related operating
performance contributed to an 18% decline in net lease receivables at
March 31, 1997, when compared to December 31, 1996. During the first
quarter of 1997, distributions from operations and sales proceeds
amounted to $455,924, reflecting distributions to the general and
limited partners for the fourth quarter of 1996. This represents a
decline from the $559,997 distributed during the fourth quarter of
1996, reflecting distributions for the third quarter of 1996. 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. Additionally, the Registrant may
refrain from distributing cash generated from operations and sales
proceeds to its partners, reserving all excess cash as part of its
working capital in order to maintain sufficient cash reserves for
expenses relating to its final liquidation and subsequent dissolution.
10
<PAGE> 11
During 1996, ocean carriers and other transport companies moved away
from leasing containers outright, as declining container prices,
favorable interest rates and the abundance of available capital
resulted in ocean carriers and transport companies purchasing a larger
share of equipment for their own account, reducing the demand for
leased containers. Once the demand for leased containers began to fall,
per-diem rental rates were also adversely affected. These conditions
continued to exist throughout the first quarter of 1997. However, the
Registrant's average utilization rate at March 31, 1997 was 90%,
unchanged from December 31, 1996, a direct result of the Registrant's
policy to dispose of its off-hire containers. The Leasing Company
continues to implement various marketing strategies, including but not
limited to, offering incentives to shipping companies, repositioning
containers to high demand locations and focusing towards term leases
and other leasing opportunities including the leasing of containers for
local storage, in order to counter current leasing market conditions.
Although these conditions are expected to continue throughout 1997, the
Registrant's liquidity and capital resources will be primarily impacted
by its decision to liquidate its remaining fleet.
2) Material changes in the results of operations between the three-month
period ended March 31, 1997 and the three-month period ended March 31,
1996.
Net lease revenue for the first quarter of 1997 was $107,741, a decline
of approximately 48% from the first quarter of 1996. Approximately 28%
of the Registrant's net earnings for the three-month period ended March
31, 1997 were from gain on disposal of equipment, as compared to 25%
for the same three-month period in the prior year. As the Registrant
disposes of its remaining containers, 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 quarter
ended March 31, 1997 was $146,144 reflecting a decline of 58% from the
same three-month period in 1996. During 1997, gross rental revenue was
primarily impacted by the Registrant's diminishing fleet size. However,
the sluggish container leasing market conditions that existed during
1996 and throughout the first quarter of 1997 also contributed to lower
average per-diem rental rates, which declined approximately 14% when
compared to the same period in the prior year. The Registrant's average
fleet size and utilization rates for the three-month periods ended
March 31, 1997 and March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 1,325 2,813
Average Utilization 90% 84%
</TABLE>
Rental equipment operating expenses were 6% of the Registrant's gross
lease revenue during the three-month period ended March 31, 1997, as
compared to 23% during the three-month period ended March 31, 1996.
Contributing to the decline were reductions in costs associated with
higher utilization levels, including storage, handling and
repositioning, and the reduction of certain expenses such as repair and
maintenance, no longer incurred at levels comparable to prior periods.
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.
11
<PAGE> 12
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.
The Registrant does not, at this time, have sufficient information to
determine the impact, if any, that 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 past 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 two most recent 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.
Due to the nature and timing of Arthur Andersen's resignation, the
Parent Company and Managing General Partner were unable to name a
successor auditor on behalf of the Registrant until it retained 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.
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
<PAGE> 13
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> <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
The Registrant filed a Report on Form 8-K, dated February 7, 1997 and
Amendment No. 1 to Report on Form 8-K dated February 26, 1997,
reporting the resignation of the Registrant's certifying accountant.
The Registrant filed a Report on Form 8-K, April 14, 1997, reporting
the appointment of the Registrant's successor certifying accountant.
- ---------------------
* Incorporated by reference to Exhibit "A" to the Prospectus of the Registrant
dated 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)
13
<PAGE> 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 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 Finance & Accounting Officer
Date: June 16, 1997
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
------- ----------- ----------------
<S> <C> <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 MARCH 31, 1997 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1997 (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 MARCH 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 507,946
<SECURITIES> 0
<RECEIVABLES> 207,617
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 715,563
<PP&E> 2,794,369
<DEPRECIATION> 1,939,647
<TOTAL-ASSETS> 1,570,285
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,570,285
<TOTAL-LIABILITY-AND-EQUITY> 1,570,285
<SALES> 0
<TOTAL-REVENUES> 107,741
<CGS> 0
<TOTAL-COSTS> 10,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 144,666
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,666
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
