10-Q 1 e10-q.txt QUARTER REPORT 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 [ ]. 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

2 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 4 IEA INCOME FUND VII, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these condensed financial statements. 4 5 IEA INCOME FUND VII, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these condensed financial statements. 5 6 IEA INCOME FUND VII, A CALIFORNIA LIMITED PARTNERSHIP CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these condensed financial statements. 6 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) 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:

8 (Continued) 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:

(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) 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:

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) 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:

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 12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits

(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 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 14 EXHIBIT INDEX

------------- * 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)

IEA INCOME FUND VII 10-Q