UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
-----------------------
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 No. 33-35148-01
AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3097216
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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
-----
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at September 30, 2001 and December 31, 2000 3
Statement of Operations
for the three and nine months ended September 30, 2001 and 2000 4
Statement of Cash Flows
for the nine months ended September 30, 2001 and 2000 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION:
Item 1 - 6 15
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
September 30, December 31,
. 2001 2000
ASSETS . (Restated)
--------------- --------------
Cash and cash equivalents $ 589,926 $ 791,204
Accounts receivable - affiliate 3,754 5,069
Prepaid expenses 1,803 -
Interest receivable - loan, net of allowance of $267,795
at September 30, 2001 - 202,209
Loan receivable, net of allowance of $144,375
at September 30, 2001 1,505,625 1,650,000
Equipment at cost, net of accumulated depreciation
of $276,019 and $342,411 at September 30, 2001
and December 31, 2000, respectively - -
--------------- --------------
Total assets $ 2,101,108 $ 2,648,482
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 181,890 $ 188,216
Accrued liabilities - affiliate 19,810 13,606
--------------- --------------
Total liabilities 201,700 201,822
--------------- --------------
Partners' capital (deficit):
General Partner (221,915) (194,552)
Limited Partnership Interests
(286,274 Units; initial purchase price of $25 each) 2,121,323 2,641,212
--------------- --------------
Total partners' capital 1,899,408 2,446,660
--------------- --------------
Total liabilities and partners' capital $ 2,101,108 $ 2,648,482
=============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
. For the three months ended For the nine months ended
. September 30, September 30,
2001 2000 2001 2000
. (Restated) . (Restated)
INCOME
Lease revenue $ 9,367 $ 9,694 $ 37,073 $ 45,055
Interest income 5,387 13,755 20,909 56,611
Interest income - loan - 62,457 65,586 137,491
Gain on sale of equipment - 1,500 9,500 8,800
----------- -------- ----------- --------
Total income 14,754 87,406 133,068 247,957
----------- -------- ----------- --------
EXPENSES
Equipment management fees - affiliate 186 485 1,571 2,253
Operating expenses - affiliate 78,871 87,955 266,579 152,031
Write-down of impaired loan and interest
receivable - - 412,170 -
----------- -------- ----------- --------
Total expenses 79,057 88,440 680,320 154,284
----------- -------- ----------- --------
Net income (loss) $ (64,303) $(1,034) $ (547,252) $ 93,673
=========== ======== =========== ========
Net income (loss) per limited partnership unit $ (0.21) $ - $ (1.82) $ 0.31
=========== ======== =========== ========
Cash distributions declared
per limited partnership unit $ - $ - $ - $ -
=========== ======== =========== ========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
. (Restated)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (547,252) $ 93,673
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sale of equipment (9,500) (8,800)
Write-down of impaired loan and interest receivable 412,170 -
Changes in assets and liabilities:
Rents receivable - 14,630
Accounts receivable - affiliate 1,315 6,590
Prepaid expenses (1,803) -
Interest receivable - loan (65,586) (137,491)
Accrued liabilities (6,326) (1,529)
Accrued liabilities - affiliate 6,204 13,412
Other liabilities - (25,000)
----------- ------------
Net cash used in operating activities (210,778) (44,515)
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 9,500 8,800
Loan receivable - (1,650,000)
----------- ------------
Net cash provided by (used in) investing activities 9,500 (1,641,200)
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Distributions paid - (56,502)
----------- ------------
Net cash used in financing activities - (56,502)
----------- ------------
Net decrease in cash and cash equivalents (201,278) (1,742,217)
Cash and cash equivalents at beginning of period 791,204 2,593,713
----------- ------------
Cash and cash equivalents at end of period $ 589,926 $ 851,496
=========== ============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
accounting principles generally accepted in the United States for interim
financial reporting and the instructions for preparing Form 10-Q under Rule
10-01 of Regulation S-X of the Securities and Exchange Commission and are
unaudited. As such, these financial statements do not include all information
and footnote disclosures required under accounting principles generally accepted
in the United States for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein,
there has been no material change to the information presented in the footnotes
to the 2000 Annual Report.
Subsequent to the issuance of the Partnership's financial statements for the
year ended December 31, 2000, the Partnership determined that the loan
receivable from Echelon Residential Holdings LLC ("Echelon Residential
Holdings") should be accounted for consistent with its legal form and the
Partnership should recognize the interest income, as calculated per the
contractual terms of the loan agreement to the extent such interest income was
evaluated as likely to be collected. Accordingly, the Partnership reversed the
proportionate share of losses in Echelon Residential Holdings for the nine
months ended September 30, 2000 of $37,329 previously recorded and recognized
interest income of $137,491, resulting in a decrease in the net loss for the
nine months ended September 30, 2000 of $174,820, or $.58 per limited
partnership unit. As a result, the accompanying financial statements for the
three and nine months ended September 30, 2000 and as of December 31, 2000 have
been restated from the amounts previously reported.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 2001 and December 31, 2000 and results of operations
for the three and nine month periods ended September 30, 2001 and 2000 have been
made and are reflected. Operating results for the nine months ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the entire year.
NOTE 2 - CASH
- ----------------
At September 30, 2001, American Income Fund I-A, a Massachusetts Limited
Partnership (the "Partnership") had $527,666 invested in federal agency discount
notes, repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities, or other highly liquid overnight investments.
NOTE 3 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly or quarterly 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. In certain instances, the Partnership
may enter renewal or re-lease agreements which expire beyond the Partnership's
anticipated dissolution date. This circumstance is not expected to prevent the
orderly wind-up of the Partnership's business activities as the General Partner
and Equis Financial Group Limited Partnership ("EFG") would seek to sell the
then-remaining equipment assets either to the lessee or to a third party, taking
into consideration the amount of future noncancellable rental payments
associated with the attendant lease agreements. See also Note 7 regarding the
Class Action Lawsuit. As of September 30, 2001, the Partnership has no future
minimum rents due under contractual lease agreements, however all of the
Partnership's equipment was being leased on a month-to-month basis.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at September
30, 2001. Remaining Lease Term (Months), as used below, represents the number
of months remaining from September 30, 2001 under contracted lease terms. A
Remaining Lease Term equal to zero reflects equipment either held for sale or
re-lease or being leased on a month-to-month basis. In the opinion of EFG, the
acquisition cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------------------------------- ----------- -----------
Materials handling 0 $ 276,019
Accumulated depreciation . (276,019)
-----------
Equipment, net of accumulated depreciation . $ --
===========
At September 30, 2001, all of the Partnership's equipment was being leased on a
month-to-month basis.
NOTE 5 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the ''Exchange
Partnerships'') collectively loaned $32 million to Echelon Residential Holdings
LLC (''Echelon Residential Holdings''), a newly formed real estate company.
Echelon Residential Holdings is owned by several investors, including James A.
Coyne, Executive Vice President of EFG. In addition, certain affiliates of the
General Partner made loans to Echelon Residential Holdings in their individual
capacities.
The Partnership's original loan was $1,650,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral. Echelon Residential
Holdings has no material business interests other than those connected with the
real estate properties owned by Echelon Residential LLC.
The summarized financial information for Echelon Residential Holdings as of and
for the periods ended September 30, 2001 and 2000, respectively, is as follows:
(Unaudited)
As of and for the periods ended
September 30,
2001 2000
------------- ------------
Total assets $ 81,508,282 $63,457,759
Total liabilities $ 89,882,493 $61,693,359
Minority interest $ 1,688,330 $ 2,527,750
Total deficit $(10,062,541) $ (763,350)
Total revenues $ 9,371,321 $ 1,565,618
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 15,574,223 $ 5,109,324
Net loss $ (6,202,902) $(3,543,706)
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $144,375, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $267,795 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $412,170 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
The write-down was precipitated principally by a slowing U.S. economy and its
effects on the real estate development industry. The economic outlook for the
properties that existed when the loan was funded has deteriorated and inhibited
the ability of Echelon Residential Holdings' management to secure low-cost
sources of development capital, including but not limited to joint-venture or
equity partners. In response to these developments and lower risk tolerances in
the credit markets, the management of Echelon Residential Holdings decided in
the second quarter of 2001 to concentrate its prospective development activities
within the southeastern United States and, therefore, to dispose of development
sites located elsewhere. In May 2001, Echelon Residential Holdings closed its
Texas-based development office; and since the beginning of 2001, the company has
sold three of nine properties (two in July 2001 and one in October 2001). As of
November 2001, one additional property is under contract to be sold, subject to
due diligence that remains pending. As a result of these developments, the
General Partner does not believe that Echelon Residential Holdings will realize
the profit levels originally believed to be achievable from either selling these
properties as a group or developing all of them as multi-family residential
communities.
NOTE 6 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the nine month periods ended September 30,
2001 and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- --------
Equipment management fees $ 1,571 $ 2,253
Administrative charges 47,151 42,265
Reimbursable operating expenses
due to third parties 219,428 109,766
-------- --------
Total $268,150 $154,284
======== ========
All rents and proceeds from the sale of equipment are paid directly to EFG. EFG
temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At September 30, 2001, the
Partnership was owed $3,754 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in October 2001.
The discussion of the loan to Echelon Residential Holdings in Note 5 above is
incorporated herein by reference.
NOTE 7 - LEGAL PROCEEDINGS
- ------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, the Partnership is a Nominal Defendant in a Class
Action Lawsuit, the outcome of which could significantly alter the nature of the
Partnership's organization and its future business operations.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") had completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether the parties
requested the Court to schedule a hearing for final approval of the proposed
settlement or were withdrawing the proposed settlement from judicial
consideration and resuming the litigation of the Plaintiffs' claims.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase any security or engage in any business in interstate
commerce. Accordingly, Section 7 would prohibit any partnership that is an
unregistered investment company from engaging in any business in interstate
commerce, except transactions that are merely incidental to its dissolution.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and to special 1940
Act counsel's submissions to the SEC staff setting forth the reasons why the
1940 Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, if asked, counsel would be willing to issue an
opinion of the firm that none of the partnerships is an investment company under
the 1940 Act. The Defendants stated their belief that the proposed settlement
is still viable and in the best interests of the parties and that final approval
should be pursued. The Defendants advised the court that they believe that if
the court were to address the issue of whether or not the 1940 Act applies to
the partnerships and the proposed consolidation, it could remove the major
obstacle to the settlement being finally consummated. The Defendants also
requested that the court schedule a hearing to address on a preliminary basis
the objection to the proposed settlement raised in the staff's May 10, 2001
letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referred the case to mediation and
referred discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel have continued to negotiate toward a settlement and have reached
agreement as to its principal business terms. As part of the settlement, EFG
has agreed to buy the loans made by the Exchange Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date.
Upon completion of a stipulation of settlement, the parties will submit the
settlement to the court for approval.
There can be no assurance that a settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Certain statements in this quarterly report of American Income Fund I-A, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, the remarketing of the Partnership's equipment, and the
performance of the Partnership's non-equipment assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"). The Partnership does not intend
to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. If the Partnership were determined to be an unregistered
investment company, its business would be adversely affected. The 1940 Act,
among other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that it is not an investment company. The
General Partner has determined to take action to resolve the Partnership's
status under the 1940 Act by means that may include disposing or acquiring
certain assets that it might not otherwise dispose or acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The
letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and to special 1940
Act counsel's submissions to the SEC staff setting forth the reasons why the
1940 Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, if asked, counsel would be willing to issue an
opinion of the firm that none of the partnerships is an investment company under
the 1940 Act. The Defendants stated their belief that the proposed settlement
is still viable and in the best interests of the parties and that final approval
should be pursued. The Defendants advised the court that they believe that if
the court were to address the issue of whether or not the 1940 Act applies to
the partnerships and the proposed consolidation, it could remove the major
obstacle to the settlement being finally consummated. The Defendants also
requested that the court schedule a hearing to address on a preliminary basis
the objection to the proposed settlement raised in the staff's May 10, 2001
letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referred the case to mediation and
referred discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel have continued to negotiate toward a settlement and have reached
agreement as to its principal business terms. As part of the settlement, EFG
has agreed to buy the loans made by the Exchange Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date.
Upon completion of a stipulation of settlement, the parties will submit the
settlement to the court for approval.
There can be no assurance that a settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome. See Note 7 to the financial statements for additional
discussion.
Three and nine months ended September 30, 2001 compared to the three and nine
- --------------------------------------------------------------------------------
months ended September 30, 2000:
- ------------------------------------
The Partnership was organized in 1990 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. (See Note 7 to the financial statements.) Pursuant to the Amended
and Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended"), the Partnership is scheduled to be dissolved by
December 31, 2001. However, the General Partner does not expect that the
Partnership will be dissolved until such time that the Class Action Lawsuit is
settled or adjudicated.
The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Partnership's assets and the
Partnership's ability to negotiate future lease agreements. Notwithstanding the
foregoing, it currently is not possible for the General Partner to determine the
long-term effects, if any, that these events may have on the economic
performance of the Partnership's equipment portfolio.
Results of Operations
- -----------------------
For the three and nine months ended September 30, 2001, the Partnership
recognized lease revenue of $9,367 and $37,073, respectively, compared to $9,694
and $45,055, respectively, for the same periods in 2000. The decrease in lease
revenue from 2000 to 2001 resulted primarily from lease term expirations and
equipment sales. In the future, lease revenue will decline due to lease term
expirations and the sale of equipment.
Interest income for the three and nine month periods ended September 30, 2001
was $5,387 and $86,495, respectively, compared to $76,212 and $194,102,
respectively, for the same periods in 2000. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and included interest earned on the loan
receivable from Echelon Residential Holdings. The amount of future interest
income from short-term investments is expected to fluctuate as a result of
changing interest rates and the amount of cash available for investment, among
other factors.
Interest income during the nine months ended September 30, 2001 included $65,586
earned on the loan receivable from Echelon Residential Holdings, compared to
$62,457 and $137,491, respectively, for the three and nine months ended
September 30, 2000. During the second quarter of 2001, the General Partner
determined that recoverability of the loan receivable had been impaired and at
June 30, 2001 recorded an impairment of $144,375, reflecting the General
Partner's current assessment of the amount of loss that is likely to be incurred
by the Partnership. In addition to the write-down recorded at June 30, 2001,
the Partnership reserved all accrued interest of $267,795 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $412,170 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
During the nine months ended September 30, 2001 and the three and nine month
periods ended September 30, 2000, the Partnership sold fully depreciated
equipment to existing lessees and third parties, resulting in net gains, for
financial statement purposes, of $9,500, $1,500 and $8,800, respectively. There
were no equipment sales in the three months ended September 30, 2001. The
results of future sales of equipment will be dependent upon the condition and
type of equipment being sold and its marketability at the time of sale.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG'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. EFG 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 revenue 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.
Management fees were $186 and $1,571, respectively, during the three and nine
months ended September 30, 2001 compared to $485 and $2,253, respectively, for
the same periods in 2000. Management fees are based on 5% of gross lease
revenue generated by operating leases.
Operating expenses were $78,871 and $266,579, respectively, for the three and
nine months ended September 30, 2001 compared to $87,955 and $152,031,
respectively, for the same periods in 2000. In 2001, operating expenses
included approximately $84,000 related to the Class Action Lawsuit discussed in
Note 7 to the financial statements herein. Other operating expenses consist
principally of administrative charges, professional service costs, such as audit
and legal fees, as well as printing, distribution and other remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
Liquidity and Capital Resources and Discussion of Cash Flows
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The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from asset rental transactions. The
Partnership's principal source of cash from operations for the nine months ended
September 30, 2001 and 2000 was provided by the collection of periodic rents and
the receipt of interest income, respectively. Cash inflows are used to pay
management fees and operating costs. Operating activities generated a net cash
outflow of $210,778 and $44,515 during the nine months ended September 30, 2001
and 2000, respectively. The amount of future cash from interest income is
expected to fluctuate as a result of changing interest rates and the level of
cash available for investment, among other factors. The loan to Echelon
Residential Holdings and accrued interest thereon is due in full at maturity on
September 8, 2002. Future renewal, re-lease and equipment sale activities will
cause a 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 also continue
to decline as the Partnership remarkets its equipment.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the nine months
ended September 30, 2001 and 2000, the Partnership realized equipment sale
proceeds of $9,500 and $8,800, 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.
At September 30, 2001, no future minimum lease payments were due from
contractual lease agreements however, all the Partnership's equipment was being
leased on a month-to-month basis. At the expiration of the individual lease
terms underlying the Partnership's future minimum lease payments, the
Partnership will sell the equipment or enter re-lease or renewal agreements when
considered advantageous by the General Partner and EFG. Such future remarketing
activities will result in the realization of additional cash inflows in the form
of equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease
contracts, while others may elect to return the equipment. In the latter
instances, the equipment could be re-leased to another lessee or sold to a third
party.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 7 to the accompanying financial statements, the court
permitted the Partnership to invest in any new investment, including but not
limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $1,650,000 to a newly
formed real estate company, Echelon Residential Holdings, to finance the
acquisition of real estate assets by that company. Echelon Residential Holdings,
through a wholly owned subsidiary (Echelon Residential LLC), used the loan
proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships, representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an unrelated Florida-based
real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.
During the second quarter of 2001 the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $144,375, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $267,795 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $412,170 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
The write-down was precipitated principally by a slowing U.S. economy and its
effects on the real estate development industry. The economic outlook for the
properties that existed when the loan was funded has deteriorated and inhibited
the ability of Echelon Residential Holdings' management to secure low-cost
sources of development capital, including but not limited to joint-venture or
equity partners. In response to these developments and lower risk tolerances in
the credit markets, the management of Echelon Residential Holdings decided in
the second quarter of 2001 to concentrate its prospective development activities
within the southeastern United States and, therefore, to dispose of development
sites located elsewhere. In May 2001, Echelon Residential Holdings closed its
Texas-based development office; and since the beginning of 2001, the company has
sold three of nine properties (two in July 2001 and one in October 2001). As of
November 2001, one additional property is under contract to be sold, subject to
due diligence that remains pending. As a result of these developments, the
General Partner does not believe that Echelon Residential Holdings will realize
the profit levels originally believed to be achievable from either selling these
properties as a group or developing all of them as multi-family residential
communities.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
general partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates and the court's statement in its order permitting New
Investments that all other provisions of the Partnership Agreements governing
the investment objectives and policies of the Partnership shall remain in full
force and effect. The court may require the partnerships to restructure or
divest the loan.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base consists of fewer revenue-producing assets that are available to
cover prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining assets.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is reported under financing activities on the
accompanying Statement of Cash Flows. No cash distributions were declared for
either of the nine month periods ended September 30, 2001 or 2000. In any given
year, it is possible that Limited Partners will be allocated taxable income in
excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions when paid to the Limited Partners generally consist of both a
return of and a return on 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 rents, the generation of renewal
and/or re-lease rents, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements presented in the Partnership's 2000
Annual Report). For instance, selling commissions and organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes, but are recorded as a
reduction of partners' capital for financial reporting purposes. Therefore,
such differences are permanent differences between capital accounts for
financial reporting and federal income tax purposes. Other differences between
the bases of capital accounts for federal income tax and financial reporting
purposes occur due to timing differences. Such items consist of the cumulative
difference between income or loss for tax purposes and financial statement
income or loss. The principal component of the cumulative difference between
financial statement income or loss and tax income or loss results from different
depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at September 30, 2001. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance, which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
The outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, will be the principal factor in determining the future of
the Partnership's operations. Commencing with the first quarter of 2000, the
General Partner suspended the payment of quarterly cash distributions pending
final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
settled or adjudicated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and earns interest at a fixed annual rate of 14% for the first 24 months
and a fixed annual rate of 18% for the last 6 months of the loan, with interest
due at maturity. The effect of interest rate fluctuations on the Partnership
for the nine months ended September 30, 2001 was not material.
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 7 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response: None
Item 6(b). Reports on Form 8-K
. Response: None
SIGNATURE PAGE
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.
AMERICAN INCOME FUND I-A, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ Michael J. Butterfield
-----------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: November 14, 2001
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