<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, 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 0-16834
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 .
--- ---
<PAGE> 2
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
REPORT ON FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 1996 (unaudited) and December 31, 1995 4
Statements of Operations for the three months ended March 31, 1996 and 1995 (unaudited) 5
Statements of Cash Flows for the three months ended March 31, 1996 and 1995 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
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 March 31,
1996 and December 31, 1995, statements of operations for the three
months ended March 31, 1996 and 1995, and statements of cash flows for
the three months ended March 31, 1996 and 1995.
3
<PAGE> 4
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
------
Current assets:
Cash, includes $121,801 at March 31, 1996 and $132,105
at December 31, 1995 in interest-bearing accounts $ 128,895 $ 132,486
Short-term investments 200,403 251,219
Net lease receivables due from Leasing Company
(notes 1 and 2) 165,510 153,232
---------- ----------
Total current assets 494,808 536,937
---------- ----------
Container rental equipment, at cost 4,868,137 4,916,860
Less accumulated depreciation 2,327,157 2,282,549
---------- ----------
Net container rental equipment 2,540,980 2,634,311
---------- ----------
$3,035,788 $3,171,248
========== ==========
Partners' Capital
-----------------
Partners' capital:
General partners $ 4,880 $ 5,025
Limited partners 3,030,908 3,166,223
---------- ----------
Total partners' capital 3,035,788 3,171,248
---------- ----------
$3,035,788 $3,171,248
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Net lease revenue (notes 1 and 3) $178,095 $228,977
Other operating expenses:
Depreciation 69,744 71,086
Other general and administrative expenses 4,458 6,988
-------- --------
74,202 78,074
-------- --------
Earnings from operations 103,893 150,903
Other income:
Interest income 4,265 4,271
Net gain on disposal of equipment 8,642 7,846
-------- --------
12,907 12,117
-------- --------
Net earnings $116,800 $163,020
======== ========
Allocation of net earnings:
General partners $ 25,081 $ 21,358
Limited partners 91,719 141,662
-------- --------
$116,800 $163,020
======== ========
Limited partners' per unit share of net earnings $ 9.85 $ 15.21
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $(185,851) $ 253,038
Cash flows provided by investing activities:
Proceeds from disposal of equipment 383,704 15,050
Cash flows used in financing activities:
Distribution to partners (252,260) (206,983)
--------- ---------
Net increase (decrease) in cash and cash equivalents (54,407) 61,105
Cash and cash equivalents at January 1 383,705 295,145
--------- ---------
Cash and cash equivalents at March 31 $ 329,298 $ 356,250
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 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 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 INCOME FUND VII,
(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 payable, reimbursed administrative expenses, 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 March 31, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Lease receivables, net of doubtful accounts
of $96,039 at March 31, 1996 and $89,590
at December 31, 1995 $346,118 $348,445
Less:
Direct operating payables and accrued expenses 73,841 81,993
Damage protection reserve 46,685 42,177
Base management fees 31,272 35,812
Reimbursed administrative expenses 5,453 6,124
Incentive fees 23,357 29,107
-------- --------
$165,510 $153,232
======== ========
</TABLE>
(Continued)
8
<PAGE> 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,
management fees and reimbursed administrative expenses 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-month periods ended March 31,
1996 and 1995, was as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Rental revenue $326,136 $366,150
Rental equipment operating expenses 86,169 68,577
Base management fees 21,562 26,000
Reimbursed administrative expenses 18,031 19,598
Incentive fees 22,279 22,998
-------- --------
$178,095 $228,977
======== ========
</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, 1996 and
December 31, 1995.
During the first quarter of 1996, the Registrant disposed of 18 containers
as part of its ongoing operations, contributing to the change in the
Registrant's financial condition. At March 31, 1996, 93% of the original
equipment remained in the Registrant's fleet, as compared to 94% at
December 31, 1995, and was comprised of the following:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 74 120
Master lease 657 680
--- -----
Subtotal 731 800
Containers off lease 210 217
--- -----
Total container fleet 941 1,017
=== =====
</TABLE>
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
Units % Units %
----- - ----- -
<S> <C> <C> <C> <C>
Total purchases 1,001 100% 1,104 100%
Less disposals 60 6% 87 8%
----- --- ----- ---
Remaining fleet at March 31, 1996 941 94% 1,017 92%
===== === ===== ===
</TABLE>
Net lease receivables at March 31, 1996 increased when compared to
December 31, 1995, as cash collections of outstanding receivables slowed.
The decline in fleet size and related operating results also contributed
to the increase in net lease receivables, as direct operating payables,
reimbursed administrative expenses payable, base management and incentive
fees payable declined.
The statements contained in the following discussion are based on current
expectations. These statements are forward looking and actual results may
differ materially. The container leasing market generally softened during
the fourth quarter of 1995 and has remained so during the first quarter of
1996. At March 31, 1996, container inventories remained at
larger-than-usual levels, resulting in a decline in the Registrant's
utilization rate from 87% at December 31, 1995 to 80% at March 31, 1996.
During the first quarter 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 these market conditions. The Leasing Company expects
the Registrant to recognize the benefits of these efforts during the next
few quarters of 1996. However, base per-diem rental rates have recently
become subject to downward pressures within the container leasing market.
A reduction in per-diem rental rates, combined with current utilization
levels, could impact the Registrant's results from operations during the
remainder of 1996.
10
<PAGE> 11
2) Material changes in the results of operations between the three-month
period ended March 31, 1996 and the three-month period ended March 31,
1995.
Net lease revenue for the first quarter of 1996 was $178,095, a decline of
approximately 22% from the first quarter of 1995. Approximately 7% of the
Registrant's net earnings for the three-month period ended March 31, 1996
were from gain on disposal of equipment, as compared to 5% for the same
three-month period in the prior year. As the Registrant's container
disposals increase in subsequent periods, net gain on disposal will
contribute significantly to the Registrant's net earnings.
Gross rental revenue (a component of net lease revenue) for the quarter
ended March 31, 1996 was $326,136, reflecting a decline of 11% from the
same three-month period in 1995. During 1996, gross rental revenue was
primarily impacted by the Registrant's diminishing fleet size and
utilization levels. Average per-diem rental rates remained relatively
stable 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, 1996 and March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 2,991 3,074
Average Utilization 80% 87%
</TABLE>
The Registrant's declining fleet size contributed to a 2% decline in
depreciation expense when compared to the same period in the prior year.
Rental equipment operating expenses were 26% of the Registrant's gross
lease revenue during the three-month period ended March 31, 1996, as
compared to 19% during the three-month period ended March 31, 1995. This
increase was largely attributable to an increase in costs associated with
lower utilization levels, including handling, storage and repositioning.
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> <C>
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
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 1996
- ------------------------
* 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)
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 INCOME FUND VII,
A California Limited Partnership
By Cronos Capital Corp.
The Managing General Partner
By /s/ JOHN KALLAS
-------------------
John Kallas
Vice President, Chief Financial Officer
Principal Accounting Officer
Date: May 14, 1996
13
<PAGE> 14
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 December 1, 1986
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 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1996 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 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 MARCH 31, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 329298
<SECURITIES> 0
<RECEIVABLES> 165510
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 494808
<PP&E> 4868137
<DEPRECIATION> 2327157
<TOTAL-ASSETS> 3035788
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3035788
<TOTAL-LIABILITY-AND-EQUITY> 3035788
<SALES> 0
<TOTAL-REVENUES> 178095
<CGS> 0
<TOTAL-COSTS> 74202
<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> 116800
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
