AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1994 and 1993 9
Statement of Operations
for the years ended December 31, 1994, 1993 and 1992 10
Statement of Changes in Partners' Capital
for the years ended December 31, 1994, 1993 and 1992 11
Statement of Cash Flows
for the years ended December 31, 1994, 1993 and 1992 12
Notes to the Financial Statements 13-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 23
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 24
Schedule of Costs Reimbursed to the
Managing General Partner and its Affiliates
as Required by Section 10.4 of the Amended
and Restated Agreement and Certificate of
Limited Partnership 25
[CAPTION]
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the financial statements.
For each of the five years in the period ended December 31, 1994:
Summary of
Operations 1994 1993 1992 1991 1990
Lease revenue $ 1,576,139 $ 2,031,903 $ 4,039,951 $ 5,297,113 $ 6,452,114
Net income
(loss) $ 682,540 $ 194,656 $(1,016,535) $ (314,002) $ 933,561
Per Unit:
Net income
(loss) $ 0.67 $ 0.19 $ (1.00) $ (0.31) $ 0.92
Cash
distributions $ 2.00 $ 2.00 $ 1.50 $ 2.06 $ 2.33
Financial
Position
Total assets $ 5,703,303 $ 7,468,387 $ 9,875,321 $15,740,678 $21,690,901
Total long-term
obligations $ 245,685 $ 560,198 $ 1,186,537 $ 4,250,940 $ 6,989,793
Partners'
capital $ 4,886,947 $ 6,242,819 $ 8,086,575 $10,631,919 $13,048,034
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1994 compared to the year
ended December 31, 1993 and the year ended December 31, 1993
compared to the year ended December 31, 1992
Overview
As an equipment leasing partnership, American Income Partners III-A
Limited Partnership (the "Partnership") was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Partnership was designed to progress through three
principal phases: acquisitions, operations, and liquidation. During the
operations phase, a period of approximately six years, all equipment in the
Partnership's portfolio will progress through various stages. Initially, all
equipment will generate rental revenues under primary term lease agreements.
During the life of the Partnership, these agreements will expire on an
intermittent basis and equipment held pursuant to the related leases will be
renewed, re-leased or sold, depending on prevailing market conditions and the
assessment of such conditions by American Finance Group ("AFG") to obtain the
most advantageous economic benefit. Over time, a greater portion of the
Partnership's original equipment portfolio will become available for
remarketing and cash generated from operations and from sales or refinancings
will begin to fluctuate. Ultimately, all equipment will be sold and the
Partnership will be dissolved. The Partnership's operations commenced in 1987.
Results of Operations
For the year ended December 31, 1994, the Partnership recognized lease
revenue of $1,576,139 compared to $2,031,903 and $4,039,951 for the years ended
December 31, 1993 and 1992, respectively. The decrease in lease revenue
between 1992 and 1994 was expected and resulted principally from primary
lease term expirations and the sale of equipment.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by AFG or an affiliated equipment leasing program
sponsored by AFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
At December 31, 1992, the Managing General Partner increased the aggregate
amount reserved against potentially uncollectable rents to $185,000. This
caused a decrease in lease revenue of $50,000 in 1992. The reserve was
reviewed and considered adequate as of December 31, 1993. During 1994, the
Managing General Partner lowered the reserve to $140,000, resulting in an
increase in lease revenue of $45,000 in 1994. It cannot be determined
whether the Partnership will recover any past due rents in the future;
however, the Managing General Partner will pursue the collection of all such
items.
Interest income for the year ended December 31, 1994 was $44,218 compared
to $32,331 and $12,411 in 1993 and 1992, respectively. Interest income is
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. The increase in interest income from 1992
to 1994 is attributable to a greater availability of cash used for investment
prior to distribution to the Partners and an increase in interest rates. The
amount of future interest income is expected to fluctuate in relation to
prevailing interest rates, the level of lease revenue and the proceeds from
equipment sales.
In 1994, the Partnership sold equipment having a net book value of $88,268
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $269,648 compared to a net gain in 1993 of
$682,980, on equipment having a net book value of $52,421 and a net loss in
1992 of $506,958, on equipment having a net book value of $1,868,573.
In 1990, a lessee of the Partnership, Affiliated Land Corporation
("Affiliated"), filed for protection under Chapter 11 of the Bankruptcy Code.
Equipment leased by Affiliated consisted of office furniture and fixtures (the
"Equipment") having an original cost to the Partnership of $1,753,848. To
finance the purchase of the Equipment, the Partnership had borrowed $1,338,653
on a non-recourse basis from a third-party lending institution. On April 16,
1992, the Equipment was transferred to the financing lender in lieu of
foreclosure, in full satisfaction of all outstanding indebtedness under the
note agreements. The Partnership recorded a loss on the forfeiture of the
Equipment of $23,730 or $.02 per limited partnership unit. At the time of
disposition, the Equipment had a net book value of $829,672 and the amount of
indebtedness forgiven was $805,942, including accrued interest of $64,476.
As the Partnership will be unable to realize any future residual value from the
Equipment, future cash distributions will be adversely affected.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological
advances, and many other events can converge to enhance or detract from asset
values at any given time. AFG attempts to monitor these changes in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenues generated from that asset,
together with its residual value. The latter consists of cash proceeds
realized upon the asset's sale in addition to all other cash receipts
obtained from renting the asset on a re-lease, renewal or month-to-month
basis. The Partnership classifies such residual rental payments as lease
revenue. Consequently, the amount of gain or loss reported in the financial
statements is not necessarily indicative of the total residual value the
Partnership achieved from leasing the equipment.
Depreciation and amortization expense was $976,507, $2,291,765 and
$3,953,885 for the years ended December 31, 1994, 1993 and 1992, respectively.
For financial reporting purposes, to the extent that an asset is held on
primary lease term, the Partnership depreciates the difference between (i)
the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of
primary lease expiration. To the extent that an asset is held beyond its
primary lease term, the Partnership continues to depreciate the remaining net
book value of the asset on a straight-line basis over the asset's remaining
economic life. (See Note 2 to the financial statements herein.)
In 1992, the Partnership changed its estimates of end-of-lease residual
values to reflect anticipated deterioration in market values for the
Partnership's equipment over the remainder of their primary lease terms. This
change in estimate increased depreciation expense and reduced net income by
$923,832 ($0.91 per limited partnership unit) in 1992.
Interest expense was $9,855 or less than 1% of lease revenue in 1994,
$54,907 or 2.7% of lease revenue in 1993 and $225,538 or 5.6% of lease revenue
in 1992. Interest expense in future years will continue to decline as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt.
Management fees were 5% of lease revenue in each of the years ended
December 31, 1994, 1993 and 1992 and will not change as a percentage of lease
revenue in future years.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment
being remarketed. Collectively, operating expenses represented approximately
9%, 5.1% and 3.9% of lease revenue in 1994, 1993 and 1992, respectively.
Operating expenses in 1994 include repair, maintenance, legal and other
costs incurred in connection with the re-lease of an L1011-100 aircraft
formerly leased to British Airways, Plc. ("the L1011-100") to Ing Aviation
Lease ("Ing Aviation"). In 1993, legal costs were incurred in connection
with the bankruptcy proceedings of certain lessees (See Note 7 to the
financial statements - Legal Proceedings). Operating expenses in 1992
included a provision for estimated storage and remarketing costs for the
L1011-100. The amount of future operating expenses cannot be predicted with
certainty; however, such expenses are usually higher during the acquisition
and liquidation phases of a partnership. Other fluctuations typically occur
in relation to the volume and timing of remarketing activities.
The relatively low inflation rates in 1994, 1993 and 1992 and the economic
recession may have caused some re-lease and sale proceeds to be lower than that
which may have been achieved in a stronger economic environment. In other
cases, the economic recession may have had an adverse effect on the ability of
certain lessees to fulfill all of their financial obligations under the leases.
These factors will result in the investors achieving a rate-of-return lower
than that anticipated at the Partnership's commencement date.
Liquidity and Capital Resources and Discussion of Cash Flows
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
derive from asset rental transactions. Accordingly, the Partnership's
principal source of cash from operations is provided by the collection of
periodic rents. These cash inflows are used to satisfy debt service
obligations associated with leveraged leases, and to pay management fees and
operating costs. Operating activities generated net cash inflows of
$1,344,655, $2,727,721 and $2,629,500 in 1994, 1993 and 1992, respectively.
Future renewal, re-lease and equipment sale activities will cause a gradual
decline in the Partnership's lease revenues and corresponding sources of
operating cash. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as
the Partnership experiences a higher frequency of remarketing events.
During 1994, the Partnership and other affiliated partnerships, executed a
renewal lease agreement in connection with an MD-82 aircraft leased by
Northwest Airlines, Inc. ("Northwest"). Pursuant to the agreement, Northwest
will continue to lease the aircraft until July 31, 1997. The Partnership,
which owns a 14% interest in this aircraft, will receive $278,815 in lease
revenue during the years ending December 31, 1995 and 1996 and $162,642
during the year ending December 31, 1997.
The Partnership re-leased the L1011-100, in which it owns a 23.46%
interest, to Ing Aviation in 1994. This re-lease will generate approximately
$556,000 in additional lease revenue for the Partnership through December 1997.
Ultimately, the Partnership will dispose of all assets under lease. This
will occur principally through sale transactions whereby each asset will be
sold to the existing lessee or to a third party. Generally, this will occur
upon expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of
an asset. Such circumstances are infrequent and usually result in the
collection of stipulated cash settlements pursuant to terms and conditions
contained in the underlying lease agreements.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions is reported under investing activities on the
accompanying Statement of Cash Flows. In 1994, the Partnership capitalized
$16,420 in connection with an upgrade of the L1011-100 aircraft. During
1994, the Partnership realized $357,916 in equipment sale proceeds compared
to $735,401 and $1,361,615 in 1993 and 1992, respectively. Future inflows of
cash from asset disposals will vary in timing and amount and will be
influenced by many factors including, but not limited to, the frequency and
timing of lease expirations, the type of equipment being sold, its condition
and age, and future market conditions.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as a component of financing activities.
Cash inflows of $182,044 in 1993 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. No leveragings of
equipment occurred in 1994 or 1992.
Each note payable is recourse only to the specific equipment financed and
to the minimum rental payments contracted to be received during the debt
amortization period (which period generally coincides with the lease rental
term). As rental payments are collected, a portion or all of the rental
payment is used to repay the associated indebtedness. In future years, the
amount of cash used to repay debt obligations will decline as the principal
balance of notes payable is reduced through the collection and application of
rents.
Cash distributions to the Recognized Owners and General Partners are
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is presented as a
component of financing activities. For the year ended December 31, 1994, the
Partnership declared total cash distributions of Distributable Cash From
Operations and Distributable Cash From Sales and Refinancings of $2,038,412.
In accordance with the Amended and Restated Agreement and Certificate of
Limited Partnership (the "Restated Agreement, as amended"), the Recognized
Owners were allocated 99% of these distributions, or $2,018,028, and the
General Partners were allocated 1%, or $20,384. The fourth quarter 1994 cash
distribution was paid on January 13, 1995.
Cash distributions paid to the Partners consist of both a return of and a
return on capital. To the extent that cash distributions consist of Cash From
Sales or Refinancings, substantially all of such cash distributions should be
viewed as a return of capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset
at its disposal date. Future market conditions, technological changes, the
ability of AFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The legal proceedings referred to in Note 7 to the financial statements
herein, are not expected to have a material adverse effect on the financial
position of the Partnership. However, the Partnership's future cash
distributions will be adversely affected by the 1990 bankruptcy of Affiliated.
This bankruptcy will result in the Partnership's loss of any future interest in
the residual value of the equipment Affiliated leased from the Partnership.
However, the final yield on capital will be dependent upon the collective
performance results of all of the Partnership's equipment leases.
The future liquidity of the Partnership will be influenced by the
foregoing and will be greatly dependent upon the collection of contractual
rents and the outcome of residual activities. The Managing General Partner
anticipates that cash proceeds resulting from these sources will satisfy the
Partnership's future expense obligations. However, the amount of cash
available for distribution in future periods will fluctuate. Equipment
lease expirations and asset disposals will cause the Partnership's net cash
from operating activities to diminish over time; and equipment sale proceeds
will vary in amount and period of realization. Accordingly, fluctuations in
the level of quarterly cash distributions will occur during the life of the
Partnership.
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Partners III-A Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners III-A Limited Partnership as of December 31, 1994 and
1993, and the related statements of operations, changes in partners' capital,
and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income Partners
III-A Limited Partnership at December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation
to the basic financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
February 24, 1995
[CAPTION]
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1994 and 1993
1994 1993
ASSETS
Cash and cash equivalents $ 819,430 $ 1,486,204
Rents receivable, net of allowance
for doubtful accounts of $140,000
and $185,000 at December 31, 1994
and 1993, respectively 147,870 238,646
Accounts receivable - affiliate 145,904 105,083
Equipment at cost, net of accumulated
depreciation of $9,246,109 and $11,062,913
at December 31, 1994 and 1993, respectively 4,590,099 5,638,454
Total assets $ 5,703,303 $ 7,468,387
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 245,685 $ 560,198
Accrued interest 5,627 23,541
Accrued liabilities 15,500 64,000
Accrued liabilities - affiliate 2,776 12,662
Deferred rental income 37,165 55,564
Cash distributions payable to partners 509,603 509,603
Total liabilities 816,356 1,225,568
Partners' capital (deficit):
General Partners (172,875) (159,316)
Limited Partnership Interests
(1,009,014 Units; initial purchase
price of $25 each) 5,059,822 6,402,135
Total partners' capital 4,886,947 6,242,819
Total liabilities and partners' capital $ 5,703,303 $ 7,468,387
[CAPTION]
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
Income:
Lease revenue $ 1,576,139 $ 2,031,903 $ 4,039,951
Interest income 44,218 32,331 12,411
Gain (loss) on sale/forfeiture
of equipment 269,648 682,980 (530,688)
Total income 1,890,005 2,747,214 3,521,674
Expenses:
Depreciation and amortization 976,507 2,291,765 3,953,885
Interest expense 9,855 54,907 225,538
Equipment management fees - affiliate 78,807 101,595 201,997
Operating expenses - affiliate 142,296 104,291 156,789
Total expenses 1,207,465 2,552,558 4,538,209
Net income (loss) $ 682,540 $ 194,656 $(1,016,535)
Net income (loss)
per limited partnership unit $ 0.67 $ 0.19 $ (1.00)
Cash distributions declared
per limited partnership unit $ 2.00 $ 2.00 $ 1.50
[CAPTION]
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1994, 1993 and 1992
General
Partners Recognized Owners
Amount Units Amount Total
Balance at December 31, 1991 $ (115,426) 1,009,014 $10,747,345 $10,631,919
Net loss - 1992 (10,165) -- (1,006,370) (1,016,535)
Cash distributions declared (15,288) -- (1,513,521) (1,528,809)
Balance at December 31, 1992 (140,879) 1,009,014 8,227,454 8,086,575
Net income - 1993 1,947 -- 192,709 194,656
Cash distributions declared (20,384) -- (2,018,028) (2,038,412)
Balance at December 31, 1993 (159,316) 1,009,014 6,402,135 6,242,819
Net income - 1994 6,825 -- 675,715 682,540
Cash distributions declared (20,384) -- (2,018,028) (2,038,412)
Balance at December 31, 1994 $ (172,875) 1,009,014 $ 5,059,822 $ 4,886,947
[CAPTION]
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
Cash flows from (used in) operating activities:
Net income (loss) $ 682,540 $ 194,656 $(1,016,535)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 976,507 2,291,765 3,953,885
(Gain) loss on sale/forfeiture of equipment (269,648) (682,980) 530,688
Increase (decrease) in allowance
for doubtful accounts (45,000) -- 50,000
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 135,776 90,630 312,839
accounts receivable - affiliate (40,821) 897,890 (1,002,973)
Increase (decrease) in:
accrued interest (17,914) (12,786) 3,415
accrued liabilities (48,500) (8,500) 34,522
accrued liabilities - affiliate (9,886) (7,500) (217,706)
deferred rental income (18,399) (35,454) (18,635)
Net cash from operating activities 1,344,655 2,727,721 2,629,500
Cash flows from (used in) investing activities:
Purchase of equipment (16,420) -- --
Proceeds from equipment sales 357,916 735,401 1,361,615
Net cash from investing activities 341,496 735,401 1,361,615
Cash flows from (used in) financing activities:
Proceeds from notes payable -- 182,044 --
Principal payments - notes payable (314,513) (808,383) (2,322,937)
Distributions paid (2,038,412) (1,911,011) (1,521,539)
Net cash used in financing activities (2,352,925) (2,537,350) (3,844,476)
Net increase (decrease) in cash
and cash equivalents (666,774) 925,772 146,639
Cash and cash equivalents at beginning of year 1,486,204 560,432 413,793
Cash and cash equivalents at end of year $ 819,430 $ 1,486,204 $ 560,432
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 27,769 $ 67,693 $ 222,123
Supplemental disclosure of non-cash investing and financing activities:
During 1992, the Partnership forfeited equipment to a lender in consideration of
forgiveness of the related debt and interest of $805,942.
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1994
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on
April 16, 1987, for the purpose of acquiring and leasing to third parties a
diversified portfolio of capital equipment. Partners' capital initially
consisted of contributions of $1,000 from the Managing General Partner (AFG
Leasing Incorporated) and $100 from the Initial Limited Partner (AFG Assignor
Corporation). On June 29, 1987 the Partnership issued 1,009,014 units,
representing assignments of limited partnership interests (the "Units") to
2,007 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The
1,009,014 Units include 54 bonus units. Subsequent to the Partnership's
Closing on June 29, 1987, the Partnership had five General Partners: AFG
Leasing Incorporated, a Massachusetts corporation, Kestutis J. Makaitis,
Daniel J. Roggemann, Martin F. Laughlin and Geoffrey A. MacDonald
(collectively the "General Partners"). Messrs. Makaitis, Roggemann and
Laughlin subsequently elected to withdraw as Individual General Partners.
The General Partners, each of which is affiliated with American Finance Group
("AFG"), a Massachusetts partnership, are not required to make any other
capital contributions to the Partnership, except as may be required under
the Uniform Act and Section 6.1(b) of the Restated Agreement, as amended.
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various
aspects of the equipment leasing business. In 1990, certain members of AFG's
management, principally Geoffrey A. MacDonald, Chief Executive Officer and
co-founder of AFG, established AFG Holdings (Massachusetts) Limited
Partnership ("Holdings Massachusetts") to acquire ownership and control of
AFG. Holdings Massachusetts effected this event by acquiring all of the
equity interests of AFG's two partners, AFG Holdings Illinois Limited
Partnership ("Holdings Illinois") and AFG Corporation. Holdings
Massachusetts incurred significant indebtedness to finance this acquisition,
a significant portion of which was scheduled to mature in 1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings
Illinois and AFG Corporation and sold all such interests to GDE Acquisitions
Limited Partnership, a Massachusetts limited partnership owned and controlled
entirely by Gary D. Engle, President and member of the Executive Committee of
AFG. As a result of this transaction, GDE Acquisitions Limited Partnership
acquired all of the assets, rights and obligations of AFG from the Senior
Lender and assumed control of AFG. Geoffrey A. MacDonald remains as Chief
Executive Officer of AFG and member of its Executive Committee.
In 1991, Clou Investments (U.S.A.), Inc. ("CLOU"), a newly formed and
wholly-owned subsidiary of Clou Containers GmbH, purchased approximately a five
percent (5%) non-voting limited partnership interest (the "Minority Interest")
in Holdings Illinois. On October 29, 1992, AFG repurchased the Minority
Interest at the purchase price originally paid by CLOU.
Significant operations commenced June 29, 1987 when the Partnership made
its initial equipment purchase. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From Sales
or Refinancings will be allocated 99% to the Recognized Owners and 1% to the
General Partners until Payout and 85% to the Recognized Owners and 15% to the
General Partners after Payout. Payout will occur when the Recognized Owners
have received distributions equal to their original investment plus a
cumulative annual return of 10% (compounded quarterly) on undistributed
invested capital.
Under the terms of a Management Agreement between the Partnership and AFG,
management services are provided by AFG to the Partnership at fees which the
Managing General Partner believes to be competitive for similar services.
(Also see Note 4.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
For purposes of the statement of cash flows, the Partnership considers
liquid investment instruments purchased with a maturity of three months or less
to be cash equivalents. From time to time, the Partnership invests excess cash
with large institutional banks in reverse repurchase agreements with overnight
maturities. Under the terms of the agreements, title to the underlying
securities passes to the Partnership. The securities underlying the agreements
are book entry securities. At December 31, 1994, the Partnership had $815,000
invested in reverse repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities.
Revenue Recognition
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. Future minimum rents of
$1,851,477 are due as follows:
For the year ending December 31, 1995 $ 817,177
1996 637,016
1997 392,209
1998 2,900
1999 2,175
Total $ 1,851,477
Revenue from Northwest Airlines, Inc. of $441,827, $523,635 and $522,221
accounted for 10% or more of the Partnership's lease revenue during the years
ended December 31, 1994, 1993 and 1992, respectively.
During 1994, the Partnership and other affiliated partnerships, executed a
renewal lease agreement in connection with an MD-82 aircraft leased by
Northwest. Pursuant to the agreement, Northwest will continue to lease the
aircraft until July 31, 1997. The Partnership, which owns a 14% interest in
this aircraft, will receive $278,815 in lease revenue during the years ending
December 31, 1995 and 1996 and $162,642 during the year ending
December 31, 1997. Such rents are included in the future minimum rents above.
The Partnership re-leased the L1011-100, in which it owns a 23.46%
interest, to Ing Aviation in 1994. This re-lease will generate approximately
$556,000 in additional lease revenue for the Partnership through December 1997.
At December 31, 1992, the Managing General Partner increased the aggregate
amount reserved against potentially uncollectable rents to $185,000. This
caused a decrease in lease revenue of $50,000 in 1992. The reserve was
reviewed and considered adequate as of December 31, 1993. During 1994, the
Managing General Partner lowered the reserve to $140,000, resulting in an
increase in lease revenue of $45,000 in 1994. It cannot be determined
whether the Partnership will recover any past due rents in the future;
however, the Managing General Partner will pursue the collection of all such
items.
Equipment on Lease
All equipment was acquired from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party
sellers. Equipment cost represents asset base price plus acquisition fees
and was determined in accordance with the Restated Agreement, as amended, and
certain regulatory guidelines. Asset base price is affected by the
relationship of the seller to the Partnership as summarized herein. Where
the seller of the equipment was AFG or an affiliate, asset base price was the
lower of (i) the actual price paid for the equipment by AFG or the affiliate
plus all actual costs accrued by AFG or the affiliate while carrying the
equipment less the amount of all rents earned by AFG or the affiliate prior
to selling the equipment or (ii) fair market value as determined by the
Managing General Partner in its best judgment, including all liens and
encumbrances on the equipment and other actual expenses. Where the seller of
the equipment was a third party who did not manufacture the equipment, asset
base price was the lower of (i) the price invoiced by the third party or (ii)
fair market value as determined by the Managing General Partner. Where the
seller of the equipment was a third party who also manufactured the
equipment, asset base price was the manufacturer's invoice price, which price
was considered to be representative of fair market value.
Depreciation and Amortization
The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each
asset's primary lease term, which term generally represents the period of
greatest revenue potential for each asset. Accordingly, to the extent that
an asset is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the asset and (ii) the estimated residual
value of the asset on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of equipment
values at the date of primary lease expiration. To the extent that an asset
is held beyond its primary lease term, the Partnership continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Organization costs are amortized using the straight-line method over a
period of five years.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities - Affiliate. (See Note 4.)
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (99% to the
Recognized Owners and 1% to the General Partners). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) and Cash Distributions Per Unit
Net income (loss) and cash distributions per Unit are based on 1,009,014
Units outstanding during each of the three years in the period ended
December 31, 1994 and computed after allocation of the General Partners' 1%
share of net income (loss) and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
[CAPTION]
NOTE 3 - EQUIPMENT
The following is a summary or equipment owned by the Partnership at
December 31, 1994. In the opinion of AFG, the carrying value of the equipment
does not exceed its fair market value.
Lease
Term Equipment
Equipment Type (Months) at Cost Location
Aircraft 36-60 $ 7,649,166 MN/Foreign
Retail store fixtures 1-72 1,431,673 GA/IN/SC
Motor vehicles 12-72 1,086,176 IL
Communications 1-60 816,309 CA/MD/MI/NC/NJ/NY
VA
Trailers/intermodal containers 36-84 760,402 MI/NC
Medical 10-60 733,242 NY/TX
Research & test 17-84 564,602 IN/MI/OH/TX
Locomotives 57-60 378,818 GA/MI/MO/OH/OK
Tractors & heavy duty trucks 1-72 274,972 LA/NJ/NY/OR
Materials handling 1-84 84,993 MI/TX
Computers & peripherals 1-60 54,663 CA/DC/DE/IL/NJ/OH
PA/VA
Photocopying 1-36 1,192 KS
Total equipment cost 13,836,208
Accumulated depreciation (9,246,109)
Equipment, net of accumulated depreciation $ 4,590,099
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by AFG or
an affiliated equipment leasing program sponsored by AFG. The Partnership and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Partnership to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee. At December 31, 1994, the Partnership's equipment
portfolio included equipment having a proportionate original cost of
$10,912,632, representing approximately 79% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately
$2,491,000 which had been fully depreciated at December 31, 1994. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's equipment are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon the sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the equipment upon
expiration of the primary lease terms. At December 31, 1994, the Partnership
held equipment for sale or re-lease with a cost of approximately $571,000 which
had been fully depreciated. The Managing General Partner is actively seeking
the sale or re-lease of all equipment not on lease.
In 1992, the Partnership changed its estimates of end-of-lease residual
values to reflect anticipated deterioration in market values for the
Partnership's equipment over the remainder of their primary lease terms. This
change in estimate increased depreciation expense and reduced net income by
$923,832 ($0.91 per limited partnership unit) in 1992.
[CAPTION]
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by AFG on
behalf of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1994, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1994 1993 1992
Equipment management fees $ 78,807 $ 101,595 $ 201,997
Administrative charges 12,000 14,955 12,000
Reimbursable operating expenses
due to third parties 130,296 89,336 144,789
Total $ 221,103 $ 205,886 $ 358,786
As provided under the terms of the Management Agreement, AFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG is compensated by an amount equal to 4.75% of Equipment Base
Price paid by the Partnership. For management services, AFG is compensated
by an amount equal to the lesser of (i) 5% of gross lease rental revenues or
(ii) fees which the Managing General Partner reasonably believes to be
competitive for similar services for similar equipment. Both of these fees
are subject to certain limitations defined in the Management Agreement.
Compensation to AFG for services connected to the sale of equipment is
calculated as the lesser of (i) 3% of gross sale proceeds or (ii) one-half of
reasonable brokerage fees otherwise payable under arm's length circumstances.
Payment of the remarketing fee is subordinated to Payout and is subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to AFG, pursuant to Section
10.4 of the Restated Agreement, as amended, for persons employed by AFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by AFG on behalf
of the Partnership which are reimbursed to AFG.
All equipment was acquired from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party
sellers. The Partnership's Purchase Price was determined by the method
described in Note 2.
All rents and proceeds from the sale of equipment are paid directly to
either AFG or to a lender. AFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the
Partnership. At December 31, 1994, the Partnership was owed $145,904 by AFG
for such funds and the interest thereon. These funds were remitted to the
Partnership in January 1995.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1994 consisted of installment notes of
$245,685 payable to banks and institutional lenders. All of the installment
notes are non-recourse, with interest rates ranging between 6.25% and 9.63% and
are collateralized by the equipment and assignment of the related lease
payments. The installment notes will be fully amortized by noncancellable
rents.
The annual maturities of the installment notes payable are as follows:
For the year ending December 31, 1995 $ 236,780
1996 8,905
Total $ 245,685
NOTE 6 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (99% to the Recognized Owners and 1% to the General Partners).
This convention differs from the income or loss allocation requirements for
income tax and Dissolution Event purposes as delineated in the Restated
Agreement, as amended. For income tax purposes, the Partnership allocates
net income or loss in accordance with the provisions of such agreement. The
Restated Agreement, as amended, requires that upon dissolution of the
Partnership, the General Partners will be required to contribute to the
Partnership an amount equal to any negative balance which may exist in the
General Partners' tax capital account. At December 31, 1994, the General
Partners had a positive tax capital account balance.
[CAPTION]
The following is a reconciliation between net income or loss reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1994, 1993 and 1992:
1994 1993 1992
Net income (loss) $ 682,540 $ 194,656 $(1,016,535)
Financial statement depreciation
in excess of tax depreciation 395,126 1,562,320 3,381,030
Prepaid rental income (18,399) (35,454) (18,635)
Other (7,446) 71,392 (186,359)
Net income for federal income
tax reporting purposes $ 1,051,821 $ 1,792,914 $ 2,159,501
[CAPTION]
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1994 and 1993:
1994 1993
Partners' capital $ 4,886,947 $ 6,242,819
Add back selling commissions and
organization and offering costs 1,063,602 1,063,602
Financial statement distributions
in excess of tax distributions 5,096 5,096
Cumulative difference between federal income
tax and financial statement income (loss) (2,911,498) (3,280,779)
Partners' capital for federal income
tax reporting purposes $ 3,044,147 $ 4,030,738
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
In 1991, a lessee of the Partnership, Healthcare Financial Services, Inc.
and Healthcare International, Inc., the guarantor of certain lease obligations
of Healthcare Financial Services, Inc., (collectively, the "Debtors") filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code. The Partnership
and certain other AFG-sponsored programs filed a proof of claim in this case.
The Debtors settled this claim with respect to the Partnership and purchased
all of the remaining equipment in 1994, which resulted in a net gain of
approximately $6,000 for financial statement purposes. The Chapter 11
proceeding of the Debtors was dismissed on July 21, 1994. This bankruptcy did
not have a material adverse effect on the financial position of the
Partnership.
In 1991 and 1992, respectively, Linda Vista Community Hospital and Florida
Hospital Corporation (collectively, the "Debtors"), lessees of the Partnership,
filed for protection under Chapters 7 and 11, respectively, of the Bankruptcy
Code. The Partnership and certain other AFG-sponsored programs, filed proofs
of claim in each case. Pursuant to a Release Agreement, the Debtors settled
all outstanding claims on February 28, 1994 by acquiring all affected equipment
owned by the Partnership for $20,007. This resulted in a net gain of $20,007,
for financial statement purposes, which was recorded in March 1994. These
bankruptcies did not have a material adverse effect on the financial position
of the Partnership.
On March 15, 1993, Herman's Sporting Goods, Inc., a lessee of the
Partnership (the "Debtor"), filed for protection under Chapter 11 of the
Bankruptcy Code in the United States District Court, Trenton, New Jersey. The
Chapter 11 proceeding remains pending. Certain unpaid rents were scheduled by
the Debtor as unsecured claims. Upon order of the Bankruptcy Court, renewal
rental schedules for all equipment leased to the Debtor were executed and are
currently in effect. On August 23, 1994, the Court confirmed the Debtor's
First Modified Plan of Reorganization, as Amended and Modified, and the
Partnership received payment from the Debtor with respect to its unsecured
claims. The Partnership's equipment portfolio includes equipment on lease to
this lessee with an original cost of approximately $52,000, which is fully
depreciated for financial reporting purposes and represents less than 1% of
the Partnership's aggregate equipment portfolio at December 31, 1994. All
scheduled lease rents from this lessee have been collected to date and the
Partnership has not experienced any material losses as a result of this
bankruptcy.
In July 1993, Fred Meyer, Inc. (the "Plaintiff"), in anticipation of a
declaration of lease default by AFG, filed a complaint against AFG (the
"Defendant") in the Circuit Court of the State of Oregon as a result of a
dispute which arose between the Plaintiff and the Defendant concerning holdover
rents due to the Partnership with respect to certain equipment and the fair
market value of such equipment leased by the Partnership to the Plaintiff. AFG
filed an answer to the Plaintiff's complaint and asserted a counterclaim
seeking monetary damages. A Settlement Agreement, including dismissal of
this case, was executed on June 22, 1994 and resulted in the Plaintiff's
payment of $161,822 to the Partnership for rent and residual proceeds. The
equipment dispositions resulted in a net gain of $37,167, for financial
statement purposes, which the Partnership recorded in June 1994. This
settlement did not have a material adverse effect on the financial position
of the Partnership.
In 1993, Healthcare Enterprises of North Texas Ltd. (d.b.a. "Wylie
Hospital"), a lessee of the Partnership, filed for protection under Chapter 11
of the Bankruptcy Code in the Eastern District of Texas. The Chapter 11
proceeding remains pending. AFG, on behalf of the Partnership and certain
other AFG-sponsored programs, filed a proof of claim in this matter. At
December 31, 1994, equipment leased to this lessee had a cost of $36,517,
which was fully depreciated for financial reporting purposes. Pursuant to
order of the U.S. District Bankruptcy Court, Wylie Hospital must pay $11,000
to the Partnership for settlement of this matter. To date, Wylie Hospital
has paid $8,250 towards the settlement amount. In the event that Wylie
Hospital defaults on its payment obligations, American Healthcare Management,
the Guarantor of this lessee's obligations, is responsible for making payment
to the Partnership. This bankruptcy is not expected to have a material
adverse effect on the financial position of the Partnership.
NOTE 8 - SUBSEQUENT EVENT
On January 10, 1995, AFG entered into a series of agreements (the
"Agreements") with PLM International, Inc., a Delaware corporation
headquartered in San Francisco, California ("PLM"), whereby PLM will: (i)
purchase certain of AFG's assets and (ii) provide certain accounting, asset
management, and investor services to AFG and AFG's affiliates, including the
Partnership and all other equipment leasing programs currently managed by
AFG. The Agreements specify several terms and conditions necessary to effect
a closing, which event is expected to occur between July 1, 1995 and
September 30, 1995. However, the parties may choose to consummate or
terminate the transaction at an earlier date by mutual agreement. Commencing
with the transaction closing date (hereafter the "Effective Date"), AFG will
be prohibited by agreement from sponsoring any equipment leasing investment
program or pursuing certain other business interests which compete with PLM
for a period of five years.
PLM has organized American Finance Group Corporation ("AFGC") pursuant to
the laws of the State of Florida to assume substantially all of PLM's
contractual obligations to AFG and AFG's affiliates under the Agreements,
including all accounting, asset management, and investor services for the
Partnership. AFG will continue to be Manager for the Partnership and will
retain ownership and control of the Managing General Partner and all authority
with respect thereto. The majority of AFG's existing employees, including its
lease origination and general operations staff, will become employees of AFGC
at the Effective Date. Gary D. Engle, President and Chief Operating Officer of
AFG, will assume a similar role with AFGC at such date. AFG's executive
management believes this transaction represents a positive development which
will not adversely affect the Partnership or the other equipment leasing
programs sponsored and managed by AFG.
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1994, 1993 and 1992
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book
value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition, may not reflect the aggregate residual
proceeds realized by the Partnership for such equipment.
[CAPTION]
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1994, 1993 and 1992.
1994 1993 1992
Rents earned prior to
disposal of equipment,
net of interest charges $ 2,914,616 $ 4,652,725 $ 6,094,668
Sale proceeds, including
forgiveness of debt,
realized upon disposition
of equipment 357,916 735,401 2,167,557
Total cash generated from rents
and equipment sale proceeds 3,272,532 5,388,126 8,262,225
Original acquisition cost of
equipment disposed 2,881,579 4,931,614 7,969,935
Excess of total cash generated
to cost of equipment disposed $ 390,953 $ 456,512 $ 292,290
[CAPTION]
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1994
Sales and
Operations Refinancings Total
Net income $ 412,892 $ 269,648 $ 682,540
Add back:
Depreciation 976,507 -- 976,507
Management fees 78,807 -- 78,807
Book value of disposed equipment -- 88,268 88,268
Decrease in allowance for
doubtful accounts (45,000) -- (45,000)
Less:
Principal reduction of notes
payable (314,513) -- (314,513)
Cash from operations, sales
and refinancings 1,108,693 357,916 1,466,609
Less:
Management fees (78,807) -- (78,807)
Distributable cash from operations,
sales and refinancings 1,029,886 357,916 1,387,802
Other sources and uses of cash:
Cash at beginning of year 1,486,204 -- 1,486,204
Purchase of equipment (16,420) -- (16,420)
Net change in receivables
and accruals 256 -- 256
Less:
Cash distributions paid (1,680,496) (357,916) (2,038,412)
Cash at end of year $ 819,430 $ -- $ 819,430
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES AS REQUIRED BY SECTION 10.4 OF THE AMENDED AND
RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1994
For the year ended December 31, 1994, the Partnership reimbursed the
Managing General Partner and its Affiliates for the following costs:
Operating expenses $ 142,606