<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 JUNE 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 0-16834
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 JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 (unaudited) and December 31, 1995 4
Statements of Operations for the three and six months ended June 30, 1996 and 1995 (unaudited) 5
Statements of Cash Flows for the six months ended June 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 June 30,
1996 and December 31, 1995, statements of operations for the three and
six months ended June 30, 1996 and 1995, and statements of cash flows
for the six months ended June 30, 1996 and 1995.
3
<PAGE> 4
IEA INCOME FUND VII,
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Assets
Current assets:
Cash, includes $79,710 at June 30, 1996 and $132,105
at December 31, 1995 in interest-bearing accounts $ 79,812 $ 132,486
Short-term investments 225,000 251,219
Net lease receivables due from Leasing Company
(notes 1 and 2) 194,211 153,232
---------- ----------
Total current assets 499,023 536,937
---------- ----------
Container rental equipment, at cost 4,780,396 4,916,860
Less accumulated depreciation 2,342,552 2,282,549
---------- ----------
Net container rental equipment 2,437,844 2,634,311
---------- ----------
$2,936,867 $3,171,248
========== ==========
Partners' Capital
Partners' capital:
General partners $ 7,195 $ 5,025
Limited partners 2,929,672 3,166,223
---------- ----------
Total partners' capital 2,936,867 3,171,248
---------- ----------
$2,936,867 $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 Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net lease revenue (notes 1 and 3) $156,554 $241,269 $334,649 $470,246
Other operating expenses:
Depreciation 68,293 70,548 138,037 141,634
Other general and administrative expenses 4,619 12,279 9,077 19,267
-------- -------- -------- --------
72,912 82,827 147,114 160,901
-------- -------- -------- --------
Earnings from operations 83,642 158,442 187,535 309,345
Other income:
Interest income 4,054 4,816 8,319 9,087
Net gain on disposal of equipment 23,599 4,283 32,241 12,129
-------- -------- -------- --------
27,653 9,099 40,560 21,216
-------- -------- -------- --------
Net earnings $111,295 $167,541 $228,095 $330,561
======== ======== ======== ========
Allocation of net earnings:
General partners $ 23,336 $ 23,233 $ 48,417 $ 44,591
Limited partners 87,959 144,308 179,678 285,970
-------- ------- ------- -------
$111,295 $167,541 $228,095 $330,561
======== ======== ======== ========
Limited partners' per unit share of net earnings $ 9.44 $ 15.49 $ 19.29 $ 30.70
======== ======== ======== ========
</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>
Six Months Ended
-----------------------
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 328,000 $ 469,020
Cash flows provided by investing activities:
Proceeds from disposal of equipment 55,583 34,125
Cash flows used in financing activities:
Distribution to partners (462,476) (439,839)
------- -------
Net increase (decrease) in cash and cash equivalents (78,893) 63,306
Cash and cash equivalents at January 1 383,705 295,145
------- -------
Cash and cash equivalents at June 30 $ 304,812 $ 358,451
========= =========
</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 June 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Lease receivables, net of doubtful accounts
of $109,405 at June 30, 1996 and $89,590 at
December 31, 1995 $368,332 $348,445
Less:
Direct operating payables and accrued expenses 80,953 81,993
Damage protection reserve 36,871 42,177
Base management fees 29,884 35,812
Reimbursed administrative expenses 5,212 6,124
Incentive fees 21,201 29,107
-------- --------
$194,211 $153,232
======== ========
</TABLE>
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 and six-month periods ended
June 30, 1996 and 1995, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Rental revenue $292,949 $381,036 $619,085 $747,186
Rental equipment operating expenses 79,155 66,621 165,324 135,198
Base management fees 19,181 24,614 40,743 50,614
Reimbursed administrative expenses 16,858 19,785 34,889 39,383
Incentive fees 21,201 28,747 43,480 51,745
-------- -------- -------- --------
$156,554 $241,269 $334,649 $470,246
======== ======== ======== ========
</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 June 30, 1996 and December
31, 1995.
During the first six months of 1996, the Registrant disposed of 58
containers as part of its ongoing operations, contributing to the change
in the Registrant's financial condition. At June 30, 1996, 91% of the
original equipment remained in the Registrant's fleet, as compared to 94%
at December 31, 1995, comprised as follows:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 74 108
Master lease 637 687
--- ---
Subtotal 711 795
Containers off lease 216 196
--- ---
Total container fleet 927 991
=== ===
</TABLE>
<TABLE>
<CAPTION>
20-Foot 40-Foot
------------- -------------
Units % Units %
----- --- ----- ---
<S> <C> <C> <C> <C>
Total purchases 1,001 100% 1,104 100%
Less disposals 74 7% 113 10%
----- --- ----- ---
Remaining fleet at June 30, 1996 927 93% 991 90%
===== === ===== ===
</TABLE>
Net lease receivables at June 30, 1996 increased when compared to the
December 31, 1995 balance, as cash collections of outstanding lease
receivables slowed. The decline in fleet size and its operating
performance also contributed to the increase in net lease receivables, as
direct operating payables, reimbursed administrative expenses payable,
base management and incentive fees payable declined.
During the second quarter of 1996, distributions from operations and sales
proceeds amounted to $210,216, reflecting distributions to the general and
limited partners for the first quarter of 1996. This represents a decline
from the $252,260 distributed during the first quarter of 1996, reflecting
distributions for the fourth quarter of 1995. The Registrant's disposal
activity should produce lower operating results and, consequently, lower
distributions from operations to its partners in subsequent periods.
However, sales proceeds distributed to its partners may fluctuate in
subsequent periods, reflecting the level of container disposals.
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 six months
of 1996. At June 30, 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 79% at June 30, 1996.
Base per-diem rates have become subject to downward pressures arising from
a soft container leasing market. During the first six 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
these market conditions. Accordingly, ancillary per-diems have fluctuated,
favoring a downward trend, while free-day incentives offered to shipping
companies have risen. Currently, there are no visible signs of
improvements in the leasing market and hence further downward pressure on
rental rates can be expected in the ensuing quarters. As a result, these
leasing markets conditions, combined with the Registrant's disposal of
containers, will continue to 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 and
six-month periods ended June 30, 1996 and the three and six-month periods
ended June 30, 1995.
Net lease revenue for the three and six-month periods ended June 30, 1996
was $156,554, and $334,649, respectively, a decline of 35% and 29% from
the same three and six-month periods in the prior year, respectively.
Approximately 21% and 14% of the Registrant's net earnings for the three
and six-month periods ended June 30, 1996, respectively, were from gain on
disposal of equipment, as compared to 3% and 4% for the same three and
six-month periods in the prior year, respectively. As the Registrant
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 three and
six-month periods ended June 30, 1996 was $292,949, and $619,085,
respectively, reflecting a decline of 23% and 17% from the same three and
six-month periods in 1995, respectively. During 1996, gross rental revenue
was primarily impacted by the Registrant's lower per-diem rental rates and
utilization levels. Average per-diem rental rates decreased approximately
4% and 3%, when compared to the same three and six-month periods in the
prior year, respectively, as they became subject to the downward pressures
of an increasingly soft container leasing market. The Registrant's average
fleet size and utilization rates for the three and six-month periods ended
June 30, 1996 and June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average Fleet Size (measured in
twenty-foot equivalent units (TEU)) 2,941 3,045 2,966 3,063
Average Utilization 79% 88% 79% 88%
</TABLE>
The Registrant's declining fleet size contributed to a 3% decline in
depreciation expense in each of the three and six-month periods ended June
30, 1996, respectively, when compared to the same three and six-month
periods in the prior year, respectively. Rental equipment operating
expenses were 27% of the Registrant's gross lease revenue during each of
the three and six-month periods ended June 30, 1996, respectively, as
compared to 17% and 18% during the three and six-month periods ended June
30, 1995, respectively. This increase was largely attributable to a
decline in gross lease revenue resulting from lower per-diem rates, a
downward trend in ancillary per-diems, and an increase in free-day
incentives offered to shipping companies. Costs associated with lower
utilization levels, including handling, storage and repositioning also
contributed to the increase in the rental equipment operating expenses, as
a percentage of gross lease revenue. The Registrant's 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> <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 June 30, 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: August 13, 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 JUNE 30, 1996 (UNAUDITED) AND THE STATEMENT OF OPERATIONS FOR THE
QUARTERLY PERIOD ENDED JUNE 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 JUNE 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 304,812
<SECURITIES> 0
<RECEIVABLES> 194,211
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 499,023
<PP&E> 4,780,396
<DEPRECIATION> 2,342,552
<TOTAL-ASSETS> 2,936,867
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,936,867
<TOTAL-LIABILITY-AND-EQUITY> 2,936,867
<SALES> 0
<TOTAL-REVENUES> 334,649
<CGS> 0
<TOTAL-COSTS> 147,114
<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> 228,095
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
