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 March 31, 2002
-------------------
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. 33-35148-02
AMERICAN INCOME FUND I-B, A MASSACHUSETTS LIMITED PARTNERSHIP
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3106525
(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____
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AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2002 and December 31, 2001 3
Statement of Operations
for the three months ended March 31, 2002 and 2001 4
Statement of Cash Flows
for the three months ended March 31, 2002 and 2001 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION:
Item 1 - 6 15
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
March 31, December 31,
2002 2001
... ------------ ------------
-------------- --------------
ASSETS
Cash and cash equivalents $ 683,752 $ 737,209
Accounts receivable - affiliate 2,826 11,895
Prepaid expenses 3,963 550
Interest receivable - loan, net of allowance of $212,613
at March 31, 2002 and December 31, 2001 - -
Loan receivable, net of allowance of $114,625
at March 31, 2002 and December 31, 2001 1,195,375 1,195,375
Equipment at cost, net of accumulated depreciation
of $266,370 and $261,682 at March 31, 2002
and December 31, 2001, respectively 14,069 18,757
-------------- --------------
Total assets $ 1,899,985 $ 1,963,786
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 149,918 $ 190,720
Accrued liabilities - affiliate 16,896 6,247
-------------- --------------
Total liabilities 166,814 196,967
-------------- --------------
Partners' capital (deficit):
General Partner (230,712) (229,030)
Limited Partnership interests
(286,711 Units; initial purchase price of $25 each) 1,963,883 1,995,849
-------------- --------------
Total partners' capital 1,733,171 1,766,819
-------------- --------------
Total liabilities and partners' capital $ 1,899,985 $ 1,963,786
============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
... ------------ ------------
INCOME
Lease revenue $ 5,555 $ 30,146
Interest income 3,176 8,132
Interest income - loan - 52,071
-------------- --------------
Total income 8,731 90,349
-------------- --------------
EXPENSES
Depreciation 4,688 21,770
Equipment management fees - affiliate 123 671
Operating expenses - affiliate 37,568 74,420
-------------- --------------
Total expenses 42,379 96,861
-------------- --------------
Net loss $ (33,648) $ (6,512)
============== ==============
Net loss per limited partnership unit $ (0.11) $ (0.02)
============== ==============
Cash distributions declared
per limited partnership unit $ - $ -
============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (33,648) $ (6,512)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 4,688 21,770
Changes in assets and liabilities:
Accounts receivable - affiliate 9,069 425
Prepaid expenses (3,413) (5,528)
Interest receivable - loan - (52,071)
Accrued liabilities (40,802) (17,284)
Accrued liabilities - affiliate 10,649 10,446
-------------- --------------
Net cash used in operating activities (53,457) (48,754)
-------------- --------------
Cash and cash equivalents at beginning of period 737,209 808,801
-------------- --------------
Cash and cash equivalents at end of period $ 683,752 $ 760,047
============== ==============
The accompanying notes are an integral part of these financial statements.
------
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles 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 generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of American Income Fund I-B, a Massachusetts Limited
Partnership (the "Partnership"). Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the 2001 Annual
Report included in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2002 and December 31, 2001 and results of operations for
the three month periods ended March 31, 2002 and 2001 have been made and are
reflected.
NOTE 2 - 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,
wholly owned by 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. Future minimum rents
of $15,464 are due for the year ending March 31, 2003.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at March 31,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2002 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. 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.
... Remaining
... Lease Term Equipment
Equipment Type (Months) at Cost
- --------------------------------------------- ----------- -----------
Trailers/intermodal containers 0-9 $ 153,957
Materials handling 0 126,482
-----------
Total equipment cost . . . . . . . . . . . - 280,439
Accumulated depreciation . - (266,370)
-----------
Equipment, net of accumulated depreciation - $ 14,069
===========
At March 31, 2002, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $133,000, representing approximately 47%
of total equipment cost.
At March 31, 2002, all of the Partnership's equipment was subject to contracted
leases or being leased on a month-to-month basis.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''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 $1,310,000. 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, an unrelated 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 6 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 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.
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 $114,625, 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 $212,613 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the quarters ended March 31, 2002 and 2001 is as follows:
2002 2001
------------- ------------
Total assets $ 89,635,923 $72,861,183
Total liabilities $100,468,976 $76,780,082
Minority interest $ 1,507,536 $ 1,906,448
Total deficit $(12,340,589) $(5,825,347)
Total revenues $ 3,559,971 $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 5,358,501 $ 3,096,648
Net loss $ (1,798,530) $(2,033,209)
NOTE 5 - 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 three month periods ended March 31,
2002 and 2001 which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2002 2001
------- -------
Equipment management fees $ 123 $ 671
Administrative charges 28,974 18,342
Reimbursable operating expenses
due to third parties 8,594 56,078
------- -------
Total $37,691 $75,091
======= =======
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 March 31, 2002, the
Partnership was owed $2,826 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in April 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 6 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al., the outcome of which could significantly alter the nature of the
- -------
Partnership's organization and its future business operations.
- ------
The Defendant's and Plaintiff's Counsel have reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the 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 of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. The
court held a hearing on March 1, 2002 to consider the Revised Settlement. After
the hearing, the court issued an order preliminarily approving the Revised
Settlement and providing for the mailing of notice to the Operating Partnership
Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on
the terms and conditions set forth in the Revised Settlement is fair, reasonable
and adequate and should be finally approved by the court and a final judgment
entered in the matter.
AMERICAN INCOME FUND I-B,
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-B, 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, 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 unintentionally may have engaged,
or may in the future engage, in an activity or activities that may be construed
to fall within the scope of the 1940 Act. The General Partner has been 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. In a letter dated May
10, 2001, the staff of the SEC informed the general partner that the staff
believes that the Partnership and seven of its affiliated partnerships are
unregistered investment companies as defined in Section 3(a)(1)(C) of the 1940
Act. 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 the Partnership is not
an investment company. If the Partnership were determined to be an unregistered
investment company, its business would be adversely affected. 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.
As part of the Revised Settlement, EFG has agreed to buy the loans made by the
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 of September 8, 2002. The Revised Settlement also
provides for the liquidation of the Partnerships' assets, a cash distribution
and the dissolution of the Partnerships including the liquidation and
dissolution of this Partnership. The court held a hearing on March 1, 2002 to
consider the Revised Settlement. After the hearing, the court issued an order
preliminarily approving the Revised Settlement and providing for the mailing of
notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to
determine whether the settlement on the terms and conditions set forth in the
Revised Settlement is fair, reasonable and adequate and should be finally
approved by the court and a final judgment entered in the matter.
While there can be no assurance that the Revised Settlement will receive final
Court approval and be effected, if it is, the assets of the Partnership will be
liquidated and the Partnership dissolved. The dissolution of the Partnership
may resolve its status under the 1940 Act. 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.
Overview
- --------
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. Pursuant to the Amended and Restated Agreement and Certificate of
Limited Partnership (the "Restated Agreement, as amended"), the Partnership
dissolution was scheduled for 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 final settlement has not
been effected and therefore dissolution of the Partnership has been deferred
until a later date.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
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 majority of the Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred.
Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. 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 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 the 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.
Allowance for loan losses: The Partnership periodically evaluates the
- ----------------------------
collectibility of its loan's contractual principal and interest and the
- ----
existence of loan impairment indicators, including contemporaneous economic
- ----
conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. Adjustments to reduce the net
- -----
carrying value of equipment are recorded in those instances where estimated net
- --
realizable value is considered to be less than net carrying value. Inherent in
the Partnership's estimate of net realizable values are assumptions regarding
estimated future cash flows. If these assumptions or estimates change in the
future, the Partnership could be required to record impairment charges for these
assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. In addition, the
Partnership is also involved in a class action lawsuit. The ultimate legal and
financial liability with respect to such matters cannot be estimated with
certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
- -----------------------
For the three months ended March 31, 2002, the Partnership recognized lease
revenue of $5,555 compared to $30,146 for the same period in 2001. The decrease
in lease revenue from 2001 to 2002 resulted primarily from renewal lease term
expirations and equipment sales. In the future, lease revenue will continue to
decline due to lease term expirations and equipment sales.
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 an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate
equipment ownership enabled the Partnership to further diversify its equipment
portfolio at inception by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could have resulted 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.
Interest income for the three months ended March 31, 2002 was $3,176 compared to
$60,203 for the same period in 2001. Interest income is generated principally
from temporary investment of rental receipts and equipment sale proceeds in
short-term instruments and interest earned on the loan receivable from Echelon
Residential Holdings. In the future, the amount of cash from interest income
from the short-term instruments is expected to fluctuate as a result of changing
interest rates and the amount of cash available for investment, among other
factors.
Interest income also included $52,071 for the three months ended March 31, 2001,
earned on the loan receivable from Echelon Residential Holdings. The
Partnership ceased accruing interest on this loan, effective April 1, 2001. See
further discussion below.
There were no equipment sales during either of the three month periods ended
March 31, 2002 or March 31, 2001. The results of future equipment sales 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 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 any future gain or loss reported in the financial statements may not
necessarily be indicative of the total residual value the Partnership achieved
from leasing the equipment.
Depreciation expense for the three months ended March 31, 2002 was $4,688
compared to $21,770 for the same period in 2001. 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.
Management fees were $123 and $671, respectively, during the three months ended
March 31, 2002 and 2001. Management fees are based on 5% of gross lease revenue
generated by operating leases and 2% of gross lease revenue generated by full
payout leases.
Operating expenses were $37,568 for the three months ended March 31, 2002,
compared to $74,420 for the same period in 2001. During the quarter ended March
31, 2001, operating expenses included approximately $27,000 related to the Class
Action Lawsuit. Operating expenses consist primarily of administrative charges,
professional service costs, such as audit and other 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.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Partnership by its nature is a limited life entity. 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
pay management fees and operating costs. Operating activities generated net
cash outflows of $53,457 and $48,754 during the three months ended March 31,
2002 and 2001, respectively. 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 decline as the Partnership remarkets its equipment. In the
future, the amount of 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 are due in full at maturity on September 8, 2002.
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 March 31, 2002, the Partnership was due aggregate future minimum lease
payments of $15,464 from contractual lease agreements. 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 accordance with the Partnership's investment objectives and
the terms of its Partnership Agreement, the Partnership generally sells its
equipment as the related leases expire. Additionally, the Partnership sells, on
a selective basis, equipment before the expiration of the related lease.
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. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
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 $114,625, 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 $212,613 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
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.
No cash distributions have been declared since 1999. In any given year, it is
possible that the 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 contracted 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).
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 March 31, 2002. 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, 2001, the
General Partner had a positive tax capital account balance.
The outcome of the Class Action Lawsuit 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
- --------------------------------------------------------------------------
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 currently earns interest at a fixed annual rate of 18% with interest
due at maturity (see discussion above). Investments earning a fixed rate of
interest may have their fair market value adversely impacted due to a rise in
interest rates. The effect of interest rate fluctuations on the Partnership in
the quarter ended March 31, 2002 was not material.
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 6 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-B, 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: May 14, 2002
--------------
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-B, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By:
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: