<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, 2000
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, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 2000 and December 31, 1999 (unaudited) 4
Condensed Statements of Operations for the three and six months ended June
30, 2000 and 1999 (unaudited) 5
Condensed Statements of Cash Flows for the six months ended June 30, 2000 and 1999
(unaudited) 6
Notes to Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
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 condensed balance sheets as of
June 30, 2000 and December 31, 1999, condensed statements of operations
for the three and six months ended June 30, 2000 and 1999, and
condensed statements of cash flows for the six months ended June 30,
2000 and 1999.
3
<PAGE> 4
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents, includes $180,717 at June 30, 2000 and
$182,946 at December 31, 1999 in interest-bearing accounts $ 196,218 $ 183,046
Net lease receivables due from Leasing Company
(notes 1 and 2) 15,783 47,207
------------- -------------
Total current assets 212,001 230,253
------------- -------------
Container rental equipment, at cost 2,225,655 2,606,588
Less accumulated depreciation 1,476,646 1,708,194
------------- -------------
Net container rental equipment 749,009 898,394
------------- -------------
Total assets $ 961,010 $ 1,128,647
============= =============
Partners' Capital
Partners' capital:
General partners $ 36,236 $ 35,249
Limited partners 924,774 1,093,398
------------- -------------
Total partners' capital $ 961,010 $ 1,128,647
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 5
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net lease revenue (notes 1 and 3) $ 34,939 $ 48,443 $ 86,300 $125,493
Other operating expenses:
Depreciation 12,769 33,977 26,204 84,363
Other general and administrative expenses 15,851 3,866 23,328 13,381
-------- -------- -------- --------
28,620 37,843 49,532 97,744
-------- -------- -------- --------
Income from operations 6,319 10,600 36,768 27,749
Other income:
Interest income 2,003 3,575 3,795 6,736
Net gain (loss) on disposal of equipment (656) 44,741 19,026 80,940
-------- -------- -------- --------
1,347 48,316 22,821 87,676
-------- -------- -------- --------
Net income $ 7,666 $ 58,916 $ 59,589 $115,425
======== ======== ======== ========
Allocation of net income(loss):
General partners $ 10,712 $ 31,012 $ 24,465 $ 52,654
Limited partners (3,046) 27,904 35,124 62,771
-------- -------- -------- --------
$ 7,666 $ 58,916 $ 59,589 $115,425
======== ======== ======== ========
Limited partners' per unit share of net income (loss) $ (0.33) $ 3.00 $ 3.77 $ 6.74
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE> 6
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 104,088 $ 162,493
Cash provided by investing activities:
Proceeds from disposal of equipment 136,310 331,593
Cash used in financing activities:
Distribution to partners (227,226) (446,306)
--------- ---------
Net increase in cash and cash equivalents 13,172 47,780
Cash and cash equivalents at January 1 183,046 278,140
--------- ---------
Cash and cash equivalents at June 30 $ 196,218 $ 325,920
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
6
<PAGE> 7
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED 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 worldwide to ocean carriers. To this extent, the
Partnership's operations are subject to the fluctuations of world
economic and political conditions. Such factors may affect the pattern
and levels of world trade. The Partnership believes that the
profitability of, and risks associated with, leases to foreign
customers is generally the same as those of leases to domestic
customers. The Partnership's leases generally require all payments to
be made in United States currency.
The managing general partner is Cronos Capital Corp. ("CCC"); the
associate general partners include six individuals. CCC, with its
affiliate Cronos Containers Limited (the "Leasing Company"), manages
the business of the Partnership. CCC and the Leasing Company also
manage the container leasing business for other partnerships affiliated
with the managing general partner. 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.
(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 one 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 condensed financial statements.
7 (Continued)
<PAGE> 8
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED 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 condensed 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
condensed 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 accounting
principles generally accepted in the United States (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. The
results of operations for such interim periods are not necessarily
indicative of the results to be expected for the full year.
(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 June
30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Gross lease receivables $ 134,312 $ 154,580
Less:
Direct operating payables and accrued expenses 12,458 25,448
Damage protection reserve 8,168 14,388
Base management fees payable 27,371 31,194
Reimbursed administrative expenses 6,438 1,809
Allowance for doubtful accounts 50,439 21,598
Incentive fees 13,655 12,936
------------- -------------
Net lease receivables $ 15,783 $ 47,207
============= =============
</TABLE>
8 (Continued)
<PAGE> 9
IEA INCOME FUND VII,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED 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 revenues for the three and six-month periods ended
June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Rental revenue (note 4) $ 90,299 $ 126,335 $ 197,160 $ 292,005
Less:
Rental equipment operating expenses 29,400 33,936 59,200 72,447
Base management fees 5,079 10,613 11,444 22,869
Reimbursed administrative expenses 7,225 7,469 14,341 15,497
Incentive fees 13,656 25,874 25,875 55,699
--------- --------- --------- ---------
$ 34,939 $ 48,443 $ 86,300 $ 125,493
========= ========= ========= =========
</TABLE>
(4) Operating Segment
The Financial Accounting Standards Board has issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which changes the way public business enterprises report financial and
descriptive information about reportable operating segments. An operating
segment is a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses, of which operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance, and about which separate financial information is
available. Management operates the Partnership's container fleet as a
homogenous unit and has determined, after considering the requirements of
SFAS No. 131, that as such it has a single reportable operating segment.
The Partnership derives its revenues from dry cargo marine containers. As
of June 30, 2000, the Partnership operated 472 twenty-foot and 384
forty-foot dry cargo marine containers.
Due to the Partnership's lack of information regarding the physical
location of its fleet of containers when on lease in the global shipping
trade, it is impracticable to provide the geographic area information
required by SFAS No. 131.
******
9 (Continued)
<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, 2000 and December
31, 1999.
During the first six months of 2000, the Registrant disposed of 156
containers as part of its ongoing operations. At June 30, 2000, 41% of the
original equipment remained in the Registrant's fleet, as compared to 48%
at December 31, 1999, and was comprised of the following:
<TABLE>
<CAPTION>
20-Foot 40-Foot
------- -------
<S> <C> <C>
Containers on lease:
Term leases 47 71
Master leases 350 271
--- ---
Subtotal 397 342
Containers off lease 75 42
--- ---
Total container fleet 472 384
=== ===
</TABLE>
<TABLE>
<CAPTION>
20-Foot 40-Foot
---------------- ----------------
Units % Units %
----- ----- ----- -----
<S> <C> <C> <C> <C>
Total purchases 1,001 100% 1,104 100%
Less disposals 529 53% 720 65%
----- ----- ----- -----
Remaining fleet at June 30, 2000 472 47% 384 35%
===== ===== ===== =====
</TABLE>
The Registrant's allowance for doubtful accounts increased from $21,598 at
December 31, 1999 to $50,439 at June 30, 2000. This increase was
attributable to the delinquent account receivable balances of approximately
eight lessees. The Leasing Company has either negotiated specific payment
terms with these lessees or is pursuing other alternatives to collect the
outstanding balances. In each instance, the Registrant believes it has
provided sufficient reserves for all doubtful accounts.
During the second quarter of 2000, distributions issued from operations and
sales proceeds amounted to $110,798, reflecting distributions due to the
general and limited partners for the first quarter of 2000. This represents
a decline from the $116,428 issued during the first quarter of 2000,
reflecting distributions due for the fourth quarter of 1999. The
Registrant's continuing disposal of containers should produce lower
operating results and, consequently, lower distributions from operations to
its partners in subsequent periods. Sales proceeds distributed to its
partners may fluctuate in subsequent periods, reflecting the level of
container disposals.
The growth in the volume of world trade, a rise in exports to the Far East,
and the global effects of a strong U.S. economy have resulted in improved
market conditions for the container leasing industry. As a result of these
and other factors, including repositioning initiatives implemented earlier
in the year, utilization of the Registrant's fleet of containers has
exhibited steady improvement in recent months. In addition, new container
prices, as well as interest rates, have been rising from historically low
levels. During such times, ocean carriers tend to reduce their capital
spending to supplement their owned fleets of containers in favor of
leasing. The pressure on per diem rates has impacted the Registrant's
revenues, but there has been some rate stabilization in recent months. The
Registrant will continue to take advantage of improving market conditions
by repositioning equipment to locations of greatest demand as well as
seeking out leasing opportunities that will strengthen utilization and
enhance the performance of the fleet.
10 (Continued)
<PAGE> 11
2) Material changes in the results of operations between the three and
six-month periods ended June 30, 2000 and the three and six-month periods
ended June 30, 1999.
Net lease revenue for the three and six-month periods ended June 30, 2000
was $34,939 and $86,300, respectively, a decrease of approximately 28% and
31% from the respective three and six-month periods in the prior year. None
of the Registrant's net income was from gain on disposal of equipment
during the three-month period ended June 30, 2000, compared with 76% for
the same period ended June 30, 1999. Approximately 32% of the Registrant's
net income for the six-month period ended June 30, 2000 was from gain on
disposal of equipment, as compared to 70% for the same six-month period in
the prior year.
Gross rental revenue (a component of net lease revenue) for the three and
six-month periods ended June 30, 2000 was $90,299 and $197,160,
respectively, reflecting a decline of 29% and 32% from the respective three
and six-month periods in 1999. Gross rental revenue was primarily impacted
by the reduction in the Registrant's fleet size and a decline in per-diem
rental rates. Average per-diem rental rates decreased approximately 16% and
18%, respectively, when compared to the same three and six-month periods in
the prior year. The Registrant's average fleet size and utilization rates
for the three and six-month periods ended June 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average fleet size (measured in
twenty-foot equivalent units (TEU)) 1,258 1,849 1,353 1,960
Average utilization 88% 80% 85% 80%
</TABLE>
The Registrant's declining fleet size contributed to reductions in
depreciation expense of 62% and 69%, respectively, for the three and
six-month periods ended June 30, 2000, when compared to the same three and
six-month periods in the prior year. Rental equipment operating expenses as
a percent of the Registrant's gross lease revenue were 33% and 30%,
respectively, during the three and six-month periods ended June 30, 2000,
as compared to 27% and 25%, respectively, during the three and six-month
periods ended June 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
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, 2000.
-------------
* 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/ Dennis J. Tietz
--------------------------------------------
Dennis J. Tietz
President and Director of Cronos Capital
Corp. ("CCC")
Principal Executive Officer of CCC
Date: August 14, 2000
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)
