<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 0-16834
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, 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 10
Operations
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 INCOME FUND VII,
(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 $275,902 at March 31, 1997
and $330,894 at December 31, 1996 in interest-bearing accounts $ 296,318 $ 331,167
Net lease receivables due from Leasing Company
(notes 1 and 2) 110,688 126,589
---------- ----------
Total current assets 407,006 457,756
---------- ----------
Container rental equipment, at cost 4,620,803 4,666,319
Less accumulated depreciation 2,455,486 2,414,262
---------- ----------
Net container rental equipment 2,165,317 2,252,057
---------- ----------
$2,572,323 $2,709,813
========== ==========
Partners' Capital
-----------------
Partners' capital:
General partners $ 9,393 $ 9,390
Limited partners 2,562,930 2,700,423
---------- ----------
Total partners' capital 2,572,323 2,709,813
---------- ----------
$2,572,323 $2,709,813
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial 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,
1997 1996
--------- ---------
<S> <C> <C>
Net lease revenue (notes 1 and 3) $121,330 $178,095
Other operating expenses:
Depreciation 65,735 69,744
Other general and administrative expenses 5,564 4,458
-------- --------
71,299 74,202
-------- --------
Earnings from operations 50,031 103,893
Other income:
Interest income 3,151 4,265
Net gain on disposal of equipment 9,843 8,642
-------- --------
12,994 12,907
-------- --------
Net earnings $ 63,025 $116,800
======== ========
Allocation of net earnings:
General partners $ 20,054 $ 25,081
Limited partners 42,971 91,719
-------- --------
$ 63,025 $116,800
======== ========
Limited partners' per unit share of net earnings $ 4.61 $ 9.85
======== ========
</TABLE>
The accompanying notes are an integral part of these financial 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,
1997 1996
------------------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 127,913 $(185,851)
Cash flows provided by investing activities:
Proceeds from disposal of equipment 37,752 383,704
Cash flows used in financing activities:
Distribution to partners (200,514) (252,260)
------- -------
Net decrease in cash and cash equivalents (34,849) (54,407)
Cash and cash equivalents at January 1 331,167 383,705
------- -------
Cash and cash equivalents at March 31 $ 296,318 $ 329,298
======= =======
</TABLE>
The accompanying notes are an integral part of these financial 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 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 March 31, 1997, the Partnership owned and operated 902
twenty-foot, 949 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
<PAGE> 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 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 $84,929 at March 31, 1997 and $87,523
at December 31, 1996 $ 276,586 $287,953
Less:
Direct operating payables and accrued expenses 78,659 67,041
Damage protection reserve 37,844 40,733
Base management fees 26,224 26,630
Reimbursed administrative expenses 4,485 4,681
Incentive fees 18,686 22,279
-------- --------
$ 110,688 $ 126,589
======= =======
</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,
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-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 $ 239,909 $ 326,136
Less:
Rental equipment operating expenses 69,343 86,169
Base management fees 16,741 21,562
Reimbursed administrative expenses 13,809 8,031
Incentive fees 18,686 22,279
-------- --------
$ 121,330 $ 178,095
======= =======
</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.
During the first quarter of 1997, the Registrant disposed of 17 containers
as part of its ongoing operations. At March 31, 1997, 88% of the original
equipment remained in the Registrant's fleet, as compared to 89% at
December 31, 1996, and was comprised of the following:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 68 110
Master lease 580 585
--- ---
Subtotal 648 695
Containers off lease 254 254
--- ---
Total container fleet 902 949
=== ===
</TABLE>
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
Units % Units %
----- - ----- -
<S> <C> <C> <C> <C>
Total purchases 1,001 100% 1,104 100%
Less disposals 99 10% 155 14%
------ ---- ------ ----
Remaining fleet at March 31, 1997 902 90% 949 86%
====== ==== ====== ====
</TABLE>
The Registrant's operating performance contributed to a 13% 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 $200,514, reflecting distributions to the general and
limited partners for the fourth quarter of 1996. This represents a decline
from the $216,684 distributed during the fourth quarter of 1996, reflecting
distributions for the third quarter of 1996.
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, contributing to the decline in the Registrant's
average utilization rate from 78% at December 31, 1996 to 73% at March 31,
1997. 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. These conditions are expected to continue throughout 1997,
impacting the Registrant's liquidity and capital resources.
10
<PAGE> 11
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 $121,330, a decline of
approximately 32% from the first quarter of 1996. Approximately 16% 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 7% for the same
three-month period 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 quarter
ended March 31, 1997 was $239,909, reflecting a decline of 26% from the
same three-month period in 1996. During 1997, gross rental revenue was
primarily impacted by the Registrant's 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 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)) 2,808 2,991
Average Utilization 73% 80%
</TABLE>
The Registrant's declining fleet size contributed to a 6% decline in
depreciation expense when compared to the same period in the prior year.
Rental equipment operating expenses were 29% of the Registrant's gross
lease revenue during the three-month period ended March 31, 1997, as
compared to 26% during the three-month period ended March 31, 1996. This
increase was largely attributable to an increase in costs associated with
lower utilization levels, including handling and storage.
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.
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.
11
<PAGE> 12
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 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
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 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
<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 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: 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 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, 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> 296,318
<SECURITIES> 0
<RECEIVABLES> 110,688
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 407,006
<PP&E> 4,620,803
<DEPRECIATION> 2,455,486
<TOTAL-ASSETS> 2,572,323
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,572,323
<TOTAL-LIABILITY-AND-EQUITY> 2,572,323
<SALES> 0
<TOTAL-REVENUES> 121,330
<CGS> 0
<TOTAL-COSTS> 71,299
<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> 63,025
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
