Exhibit 13
AMERICAN INCOME FUND I
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Annual Report to the Partners, December 31, 1999
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1999 and 1998 8
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1999, 1998 and 1997 10
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 11
Notes to the Financial Statements 12-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 23
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 24
Schedule of Costs Reimbursed to the General
Partner and its Affiliates as Required by
Section 9.4 of the Amended and Restated
Agreement and Certificate of Limited Partnership 25
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1999:
Summary of
Operations 1999 1998 1997 1996 1995
- --------------------------- -------------- -------------- -------------- -------------- --------------
Lease revenue $ 134,514 $ 415,447 $ 515,362 $ 585,768 $ 813,318
Net income (loss) $ 773,675 $ (52,700) $ 136,727 $ 197,908 $ 385,102
Per Unit:
Net income (loss) $ 2.57 $ (0.17) $ 0.45 $ 0.66 $ 1.28
Cash distributions $ 0.75 $ 0.75 $ 0.94 $ 1.38 $ 2.25
Financial Position
- ---------------------------
Total assets $ 2,619,983 $ 2,511,172 $ 2,144,122 $ 2,341,360 $ 2,583,424
Total long-term obligations $ -- $ -- $ -- $ -- $ 5,186
Partners' capital $ 2,328,948 $ 1,781,279 $ 2,059,985 $ 2,205,765 $ 2,422,201
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to the year
ended December 31, 1998 and the year ended December 31, 1998
compared to the year ended December 31, 1997
Certain statements in this annual 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 6 to the accompanying financial statements and
the remarketing of the Partnership's equipment.
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. See Note 6 to the accompanying 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.
Year 2000 Issue
The Partnership uses information systems provided by Equis Financial Group
Limited Partnership ("EFG") and has no information systems of its own. EFG
completed all Year 2000 readiness work prior to December 31, 1999 and did not
experience any significant problems. Additionally, EFG is not aware of any
outside customer or vendor that experienced a Year 2000 issue that would have a
material effect on the Partnership's results of operations, liquidity, or
financial position. However, EFG has no means of ensuring that all customers,
vendors and third-party servicers have conformed to Year 2000 standards. The
effect of this risk to the Partnership is not determinable.
Results of Operations
For the year ended December 31, 1999, the Partnership recognized lessees
revenue of $134,514 compared to $415,447 and $515,362 for the years ended
December 31, 1998 and 1997, respectively. The decrease in lease revenue between
1998 and 1999 resulted principally from lease term expirations and the sale of
the Partnership's equipment including its interest in two aircraft which
provided a total of $4,775 and $187,649 of lease revenue for the years ended
December 31, 1999 and 1998, respectively (see further discussion below). The
decrease in lease revenue between 1997 and 1998 also resulted principally from
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 also earns interest income from temporary investments of rental
receipts and equipment sales proceeds in short-term instruments.
The Partnership's equipment portfolio (until the second quarter of 1999)
included certain assets in which the Partnership held a proportionate ownership
interest. In such cases, the remaining interests were owned by an affiliated
equipment leasing program sponsored by 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 reported, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
In 1999, the Partnership sold equipment having a net book value of $68,040,
to existing lessees and third parties resulting in a net gain, for financial
statement purposes, of $789,110. This gain includes $720,760 related
3
to the sale of the Partnership's interests in two aircraft (see further
discussion below). In 1998, the Partnership sold fully depreciated equipment to
existing lessees and third parties. These sales resulted in a net gain, for
financial purposes, of $65,000 compared to a net gain in 1997 of $37,438 on
equipment having a net book value of $14,538.
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 for 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.
Depreciation expense was $23,214, $159,602, and $265,532 for the years
ended December 31, 1999, 1998 and 1997, respectively. The Partnership's
equipment was fully depreciated during 1999.
Management fees were approximately 4.9%, 5%, and 4.9% of lease revenue
during the years ended December 31, 1999, 1998 and 1997, respectively.
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 $261,782, $446,969, and $208,042 for the years
ended December 31, 1999, 1998 and 1997, respectively. Operating expenses in 1999
include approximately $13,000 related to the refurbishment of an aircraft engine
(see discussion below) and approximately $50,000 accrued for certain legal and
Consolidation expenses related to the Class Action Lawsuit described in Note 6
to the financial statements. During 1998, the Partnership incurred or accrued
approximately $269,000 for such expenses related to the Class Action Lawsuit. In
addition, the Partnership expensed $43,384 in 1998 related to the refurbishment
of the aircraft engine and engine leasing costs (see Note 6 to the financial
statements). Significant operating expenses were incurred during 1997 due to
heavy maintenance costs incurred in connection with the Partnership's interests
in two Boeing 727 aircraft. Other operating expenses consist principally of
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
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 6 to the accompanying financial statements, the
Partnership is permitted to invest in new equipment or other business
activities, subject to certain limitations. On March 8, 2000, the Partnership
invested $1,650,000 in a debt instrument that matures in September 2002. (See
Notes 6 and 7 to the accompanying financial statements for additional
information concerning this transaction.)
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Historically, the Partnership's principal source of
cash from operations was provided by the collection of periodic rents, however,
in 1999 the principal source of such cash resulted from the receipt of interest
income. These cash inflows are used to pay management fees and operating costs.
Operating activities generated a net cash outflow of 6,754 in 1999 and net cash
inflows of $337,723 and $320,582 in 1998 and 1997, respectively. The amount of
future interest income is expected to fluctuate as a result of changing interest
rates and the level of cash available for investment, among other factors.
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 experiences a higher frequency of remarketing events.
4
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the year ended
December 31, 1999, the Partnership realized $857,150 in equipment sale proceeds
compared to $65,000 and $51,976 in 1998 and 1997, respectively. Sale proceeds in
1999 include $788,800 related to the Partnership's interests in two Boeing
727-251 ADV jet aircraft (see discussion below). 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.
In January 1999, upon expiration of the lease term, the Partnership and
certain affiliated investment programs (collectively, the "Programs") entered
into an agreement to sell a Boeing 727-251 ADV jet aircraft to the lessee for
$2,450,000. In aggregate, the Partnership received $284,200 for its interest in
this aircraft. The Partnership's interest in the aircraft had a cost of
$1,080,617 and was fully depreciated, resulting in a net gain, for financial
statement purposes, of $284,200.
In November 1998, the Programs entered into a separate agreement to sell
their ownership interests in a different Boeing 727-251 ADV jet aircraft and
three engines (collectively the "Aircraft") to a third party (the "Purchaser")
for $4,350,000. In December 1998, the Purchaser remitted $3,350,000 for the
Aircraft, excluding one of three engines which had been damaged while the
Aircraft was leased to Transmeridian Airlines ("Transmeridian"). (See Note 6 to
the accompanying financial statements regarding legal action undertaken by the
Programs related to Transmeridian and the damaged engine). The Purchaser also
deposited $1,000,000 into a third-party escrow account (the "Escrow") pending
repair of the damaged engine and re-installation of the refurbished engine on
the Aircraft. Upon installation, the escrow agent was obligated to transfer the
Escrow amount plus interest thereon to the Programs. The engine was refurbished
at the expense of the Programs. The associated cost was approximately $374,000,
of which the Partnership's share was approximately $43,000. The Partnership
accrued $30,000 of these costs in 1998 and the balance was incurred in the year
ended December 31, 1999.
The Programs also were required to reimburse the Purchaser for its cost to
lease a substitute engine during the period that the damaged engine was being
repaired. This cost was approximately $114,000, of which the Partnership's share
was approximately $13,000, all of which was accrued in 1998 in connection with
the litigation referenced above.
In addition, the purchase and sale agreement permitted the Purchaser to
return the Aircraft to the Programs, subject to a number of conditions, for
$4,350,000, reduced by an amount equivalent to $450 multiplied by the number of
flight hours since the Aircraft's most recent C Check. Among the conditions
precedent to the Purchaser's returning the Aircraft, the Purchaser must have
completed its intended installation of hush-kitting on the Aircraft to conform
to Stage 3 noise regulations. This work was completed in January 1999. The
Purchaser's return option was to expire on May 15, 1999.
Due to the contingent nature of the sale, the Partnership deferred
recognition of the sale and a resulting gain until expiration of the Purchaser's
return option on May 15, 1999. The Partnership's share of the December proceeds
was $388,600, which amount was deposited into EFG's customary escrow account and
transferred to the Partnership, together with the Partnership's other December
rental receipts, in January 1999. At December 31, 1998, the entire amount was
classified as other liabilities, with an equal amount included in accounts
receivable - affiliate on the accompanying Statement of Financial Position. Upon
the installation of the refurbished engine on the Aircraft, the remainder of the
sale consideration, or $1,000,000 and the interest thereon, was released from
the escrow account to the Programs. The Partnership's share of this payment was
$117,838, including interest of $1,838. In aggregate, the Partnership received
sales proceeds of $504,600 for its interest in the Aircraft. The Partnership's
interest in the Aircraft had a cost and net book value of $1,207,637 and
$68,040, resulting in a net gain, for financial statement purposes, of $436,560.
At December 31, 1999, the Partnership was due aggregate future minimum
lease payments of $7,110 from contractual lease agreements (see Note 2 to the
financial statements). 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.
5
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
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. 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 are 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. For the year ended December 31, 1999, the
Partnership declared total cash distributions of Distributable Cash from
Operations and Distributable Cash From Sales and Refinancings of $226,006. In
accordance with the Restated Agreement, as amended, the Limited Partners were
allocated 95% of these distributions, or $214,706, and the General Partner was
allocated 5%, or $11,300. The fourth quarter 1999 cash distribution was paid on
January 14, 2000.
Cash distributions paid to the Limited Partners 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, and the residual value realized for each asset at
its disposal date.
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 5 to the financial statements). 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 and the difference between distributions
(declared vs. paid) for income tax and financial reporting purposes. 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 December 31, 1999. 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, 1999, the General Partner had a positive tax capital account
balance.
The outcome of the Class Action Lawsuit described in Note 6 to the
accompanying financial statements will be the principal factor in determining
the future of the Partnership's operations. The proposed settlement to that
lawsuit, if effected, will materially change the future organizational structure
and business interests of the Partnership, as well as its cash distribution
policies. In addition, commencing with the first quarter of 2000, the General
Partner believes that it will be in the Partnership's best interests to suspend
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 adjudicated.
6
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Fund I-A,
a Massachusetts Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Fund I-A, a Massachusetts Limited Partnership, as of December
31, 1999 and 1998, and the related statements of operations, changes in
partners' capital, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income Fund I-A, a
Massachusetts Limited Partnership at December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 2000
7
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
1999 1998
------------------- -------------------
ASSETS
Cash and cash equivalents $ 2,593,713 $ 1,969,323
Rents receivable 17,000 28,778
Accounts receivable - affiliate 9,270 421,817
Equipment at cost, net of accumulated
depreciation of $423,985 and $3,550,111
at December 31, 1999 and 1998, respectively -- 91,254
------------------- -------------------
Total assets $ 2,619,983 $ 2,511,172
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 204,068 $ 273,884
Accrued liabilities - affiliate 5,465 6,132
Deferred rental income -- 4,775
Other liabilities 25,000 388,600
Cash distributions payable to partners 56,502 56,502
------------------- -------------------
Total liabilities 291,035 729,893
------------------- -------------------
Partners' capital (deficit):
General Partner (200,437) (227,821)
Limited Partnership Interests
(286,274 Units; initial purchase price of $25 each) 2,529,385 2,009,100
------------------- -------------------
Total partners' capital 2,328,948 1,781,279
------------------- -------------------
Total liabilities and partners' capital $ 2,619,983 $ 2,511,172
=================== ===================
The accompanying notes are an integral part of
these financial statements.
8
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ------------------
Income:
Lease revenue $ 134,514 $ 415,447 $ 515,362
Interest income 141,591 94,196 82,978
Gain on sale of equipment 789,110 65,000 37,438
------------------ ------------------ ------------------
Total income 1,065,215 574,643 635,778
------------------ ------------------ ------------------
Expenses:
Depreciation 23,214 159,602 265,532
Equipment management fees
- affiliate 6,544 20,772 25,477
Operating expenses - affiliate 261,782 446,969 208,042
------------------ ------------------ ------------------
Total expenses 291,540 627,343 499,051
------------------ ------------------ ------------------
Net income (loss) $ 773,675 $ (52,700) $ 136,727
================== ================== ==================
Net income (loss)
per limited partnership unit $ 2.57 $ (0.17) $ 0.45
================== ================== ==================
Cash distributions declared
per limited partnership unit $ 0.75 $ 0.75 $ 0.94
================== ================== ==================
The accompanying notes are an integral part of
these financial statements.
9
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1999, 1998 and 1997
General Limited Partners
Partner ----------------------------------
Amount Units Amount Total
-------------- -------------- -------------- -------------
Balance at December 31, 1996 $ (206,597) 286,274 $ 2,412,362 $ 2,205,765
Net income - 1997 6,836 -- 129,891 136,727
Cash distributions declared (14,125) -- (268,382) (282,507)
-------------- -------------- -------------- -------------
Balance at December 31, 1997 (213,886) 286,274 2,273,871 2,059,985
Net loss - 1998 (2,635) -- (50,065) (52,700)
Cash distributions declared (11,300) -- (214,706) (226,006)
-------------- -------------- -------------- -------------
Balance at December 31, 1998 (227,821) 286,274 2,009,100 1,781,279
Net income - 1999 38,684 -- 734,991 773,675
Cash distributions declared (11,300) -- (214,706) (226,006)
-------------- -------------- -------------- -------------
Balance at December 31, 1999 $ (200,437) 286,274 $ 2,529,385 $ 2,328,948
============== ============== ============== =============
The accompanying notes are an integral part of
these financial statements.
10
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- ---------------- ----------------
Cash flows from (used in) operating activities:
Net income (loss) $ 773,675 $ (52,700) $ 136,727
Adjustments to reconcile net income (loss)
to net cash from (used in) operating activities:
Depreciation 23,214 159,602 265,532
Gain on sale of equipment (789,110) (65,000) (37,438)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 11,778 4,002 (4,878)
Accounts receivable - affiliate 412,547 (353,937) (6,736)
Increase (decrease) in:
Accrued liabilities (69,816) 264,684 (21,670)
Accrued liabilities - affiliate (667) (6,791) (10,022)
Deferred rental income (4,775) (737) (933)
Other liabilities (363,600) 388,600 --
--------------- ---------------- ----------------
Net cash from (used in) operating activities (6,754) 337,723 320,582
--------------- ---------------- ----------------
Cash flows from investing activities
Proceeds from equipment sales 857,150 65,000 51,976
--------------- ---------------- ----------------
Net cash from investing activities 857,150 65,000 51,976
--------------- ---------------- ----------------
Cash flows used in financing activities:
Cash distributions paid (226,006) (226,006) (301,340)
--------------- ---------------- ----------------
Net cash used in financing activities (226,006) (226,006) (301,340)
--------------- ---------------- ----------------
Net increase in cash and cash equivalents 624,390 176,717 71,218
Cash and cash equivalents at beginning of year 1,969,323 1,792,606 1,721,388
--------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 2,593,713 $ 1,969,323 $ 1,792,606
=============== ================ ================
The accompanying notes are an integral part of
these financial statements.
11
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
American Income Fund I-A, a Massachusetts Limited Partnership (the
"Partnership") was organized as a limited partnership under the Massachusetts
Uniform Limited Partnership Act (the "Uniform Act") on March 6, 1990, for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Partners' capital initially consisted of contributions of
$1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the
Initial Limited Partner (AFG Assignor Corporation). On December 31, 1990, the
Partnership issued 286,274 units of limited partnership interest (the "Units")
to 359 investors. The Partnership's General Partner, AFG Leasing VI
Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of
Equis Financial Group Limited Partnership (formerly known as American Finance
Group), a Massachusetts limited partnership ("EFG"). The General Partner is not
required to make any other capital contributions except as may be required under
the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and
Certificate of Limited Partnership ("Restated Agreement, as amended").
Significant operations commenced December 31, 1990 when the Partnership
made its initial equipment purchase. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Limited Partners and 5% to the General
Partner.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group", and its acronym, to a third-party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
12
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in repurchase
agreements with overnight maturities. Under the terms of the agreements, title
to the underlying securities passes to the Partnership. The securities
underlying the agreements are book entry securities. At December 31, 1999, the
Partnership had $2,479,125 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.
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 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 6 regarding the Class Action Lawsuit. Future minimum
rents of $7,110 are due for the year ending December 31, 2000.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is as
follows:
1999 1998 1997
------------------ ------------------ ------------------
General Motors Corporation $ 30,318 $ -- $ --
Ford Motor Company $ 29,070 $ -- $ 64,515
Bergen Brunswig Medical Inc. (formerly
Durr Medical) $ 27,051 $ 64,921 $ 59,511
American National Can Company $ 19,895 $ 71,395 $ 143,116
Transmeridian Airlines $ -- $ 97,169 $ 74,511
Sunworld International Airlines, Inc. $ -- $ 90,480 $ 90,480
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment Cost means the actual cost paid by the
Partnership to acquire the equipment, including acquisition fees. Where
equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the
actual price paid for the equipment by EFG or the Affiliate plus all actual
costs incurred by EFG or the Affiliate while carrying the equipment, including
all liens
13
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
and encumbrances, less the amount of all primary term rents earned by EFG or the
Affiliate prior to selling the equipment. Where the seller of the equipment was
a third party, Equipment Cost reflects the seller's invoice price.
Depreciation
The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. 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.
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.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).
Contingencies
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is likely to be
incurred.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated and remains
pending (See Note 6). The Partnership's estimated exposure for costs anticipated
to be incurred in pursuing the settlement proposal is approximately $319,000
consisting principally of legal fees and other professional service costs. These
costs are expected to be incurred regardless of whether the proposed settlement
ultimately is effected and, therefore, the Partnership accrued approximately
$269,000 of these costs in 1998 following the Court's approval of the settlement
plan. The cost estimate is subject to change and is monitored by the General
Partner based upon the progress of the settlement proposal and other pertinent
information. As a result, the Partnership accrued and expensed an additional
$50,000 for such costs during 1999.
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the Limited
Partners and 5% to the General Partner). See Note 5 for allocation of income or
loss for income tax purposes.
14
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
Net Income (Loss) and Cash Distributions Per Unit
Net income (loss) and cash distributions per Unit are based on 286,274
Units outstanding during each of the three years in the period ended December
31, 1999 and computed after allocation of the General Partner's 5% share of net
income (loss) and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1999. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1999 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. 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 Location
- ------------------------------- -------------- ----------------- -----------------------------
Materials handling 0-8 $ 423,985 CA/DE/IL/KY/MI/NC/NV/WI
Accumulated depreciation (423,985)
-----------------
Equipment, net of accumulated depreciation $ --
=================
Generally, the costs associated with maintaining, insuring and operating
the Partnership's equipment are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. At December 31, 1999, the Partnership was
not holding any equipment not subject to a lease and no equipment was held for
sale or re-lease.
In November 1998, the Partnership and certain affiliated investment
programs (collectively, the "Programs") entered into an agreement to sell their
ownership interests in a Boeing 727-251 ADV jet aircraft and three engines
(collectively the "Aircraft") to a third party (the "Purchaser") for $4,350,000.
In December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding
one of three engines which had been damaged while the Aircraft was leased to
Transmeridian Airlines ("Transmeridian"). (See Note 6 regarding legal action
undertaken by the Programs related to Transmeridian and the damaged engine). The
Purchaser also deposited $1,000,000 into a
15
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
third-party escrow account (the "Escrow") pending repair of the damaged engine
and re-installation of the refurbished engine on the Aircraft. Upon
installation, the escrow agent was obligated to transfer the Escrow amount plus
interest thereon to the Programs. The engine was refurbished at the expense of
the Programs. The associated cost was approximately $374,000, of which the
Partnership's share was approximately $43,000. The Partnership accrued $30,000
of these costs in 1998 and the balance was incurred in the year ended December
31, 1999.
The Programs also were required to reimburse the Purchaser for its cost to
lease a substitute engine during the period that the damaged engine was being
repaired. This cost was approximately $114,000, of which the Partnership's share
was approximately $13,000, all of which was accrued in 1998 in connection with
the litigation referenced above.
In addition, the purchase and sale agreement permitted the Purchaser to
return the Aircraft to the Programs, subject to a number of conditions, for
$4,350,000, reduced by an amount equivalent to $450 multiplied by the number of
flight hours since the Aircraft's most recent C Check. Among the conditions
precedent to the Purchaser's returning the Aircraft, the Purchaser must have
completed its intended installation of hush-kitting on the Aircraft to conform
to Stage 3 noise regulations. This work was completed in January 1999. The
Purchaser's return option was to expire on May 15, 1999.
Due to the contingent nature of the sale, the Partnership deferred
recognition of the sale and a resulting gain until expiration of the Purchaser's
return option on May 15, 1999. The Partnership's share of the December proceeds
was $388,600, which amount was deposited into EFG's customary escrow account and
transferred to the Partnership, together with the Partnership's other December
rental receipts, in January 1999. At December 31, 1998, the entire amount was
classified as other liabilities, with an equal amount included in accounts
receivable - affiliate on the accompanying Statement of Financial Position. Upon
the installation of the refurbished engine on the Aircraft, the remainder of the
sale consideration, or $1,000,000 and the interest thereon, was released from
the escrow account to the Programs. The Partnership's share of this payment was
$117,838, including interest of $1,838. In aggregate, the Partnership received
sales proceeds of $504,600 for its interest in the Aircraft. The Partnership's
interest in the Aircraft had a cost and net book value of $1,207,637 and
$68,040, resulting in a net gain, for financial statement purposes, of $436,560.
NOTE 4 - 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 years ended December 31,
1999, 1998 and 1997, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
1999 1998 1997
------------------ ------------------ ------------------
Equipment management fees $ 6,544 $ 20,772 $ 25,477
Administrative charges 83,864 57,492 54,006
Reimbursable operating expenses
due to third parties 177,918 389,477 154,036
------------------ ------------------ ------------------
Total $ 268,326 $ 467,741 $ 233,519
================== ================== ==================
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG
16
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
was compensated by an amount equal to 2.23% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
5% of gross operating lease rental revenue and 2% of gross full payout lease
rental revenue received by the Partnership. Both acquisition and management fees
are subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. The Partnership's Purchase Price was determined by the
method described in Note 2, Equipment on Lease.
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 December 31, 1999, the
Partnership was owed $9,270 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 2000.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
---------------------------------------------- ----------------------- -------------------------
Number of Percent of Total
Affiliate Units Owned Outstanding Units
---------------------------------------------- ----------------------- -------------------------
Old North Capital Limited Partnership 4,000 1.40%
---------------------------------------------- ----------------------- -------------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
NOTE 5 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Limited Partners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax purposes, the Partnership allocates net income or net
loss in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon 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, 1999, the General Partner had a positive tax
capital account balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1999, 1998 and 1997:
17
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
1999 1998 1997
------------------ ------------------ ------------------
Net income (loss) $ 773,675 $ (52,700) $ 136,727
Financial statement depreciation in excess
of (less than) tax depreciation (83,853) (54,536) 51,394
Deferred rental income (4,775) (737) (933)
Other (247,171) 16,384 (13,458)
------------------ ------------------ ------------------
Net income (loss) for federal income tax
reporting purposes $ 437,876 $ (91,589) $ 173,730
================== ================== ==================
The principal component of "Other" consists of the difference between the
tax and financial statement gain on equipment disposals.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999 and 1998:
1999 1998
------------------ ------------------
Partners' capital $ 2,328,948 $ 1,781,279
Add back selling commissions and organization
and offering costs 800,146 800,146
Financial statement distributions in excess of
tax distributions -- 2,825
Cumulative difference between federal income tax
and financial statement income -- 335,799
------------------ ------------------
Partners' capital for federal income tax reporting purposes $ 3,129,094 $ 2,920,049
================== ==================
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 6 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
Limited Partnership, et al., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
18
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 12, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided the
Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
In February 2000, counsel for the Plaintiffs and the Defendants entered
into a second amended stipulation of settlement (the "Second Amended
Stipulation") which modified certain of the settlement terms contained in the
Amended Stipulation. The Second Amended Stipulation was preliminarily approved
by the Court by its "Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000
Order"). Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold a fairness hearing that
will be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff sub-class
members will receive a Notice of Settlement and other information pertinent to
the settlement of their claims that will be mailed to them in advance of the
fairness hearing.
The settlement of the second sub-class is premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate principally as a finance company and would use
its best efforts to list its shares on the NASDAQ National Market or another
national exchange or market as soon after the Consolidation as Newco deems that
market conditions and its business operations are suitable for listing its
shares and Newco has satisfied all necessary regulatory and listing
requirements. The potential benefits and risks of the Consolidation will be
presented in a Solicitation Statement that will be mailed to all of the partners
of the Exchange Partnerships as soon as the associated regulatory review process
is completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the
19
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
Partnership's customary business operations until all of its assets are disposed
in the ordinary course of business. To facilitate the realization of this
objective, the Amended Stipulation provided, among other things, that commencing
March 22, 1999, the Exchange Partnerships could collectively invest up to 40% of
the total aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively invested $32
million as permitted by the Second Amended Stipulation approved by the Court.
The Partnership's portion of the aggregate investment is $1,650,000. The
investment consists of a term loan to Echelon Residential Holdings LLC, a
newly-formed real estate development company that will be owned by several
investors, including James A. Coyne, Executive Vice President of EFG. Mr.
Coyne, in his individual capacity, is the only investor in Echelon
Residential Holdings LLC who is related to EFG. The loan proceeds were used
by Echelon Residential Holdings LLC in the formation of a subsidiary, Echelon
Residential LLC, that in turn acquired 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 7, 2002 and bears interest
at the annual rate of 14% for the first 24 months and 18% for the final six
months of the term. Interest accrues and compounds monthly but is not payable
until maturity. Echelon Residential Holdings LLC 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.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of the Exchange
Partnerships with the opportunity to object to the participation of their
partnership in the Consolidation. Assuming the proposed settlement is effected
according to present terms, the Partnership's share of legal fees and expenses
related to the Class Action Lawsuit and the Consolidation is estimated to be
approximately $ 319,000, of which approximately $269,000 was accrued and
expensed by the Partnership in 1998 and approximately $50,000 was accrued and
expensed in 1999.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permitted the partners to transfer Units to family members or as
a result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the Consolidation,
then that partnership will be excluded from the Consolidation.
20
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
Notwithstanding the extent of delays experienced thus far in achieving a final
settlement of the Class Action Lawsuit with respect to the Exchange
Partnerships, the General Partner and its affiliates, in consultation with
counsel, continue to feel that there is a reasonable basis to believe that a
final settlement of the sub-class involving the Exchange Partnerships ultimately
will be achieved. 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.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions as
described below:
Action involving Transmeridian Airlines
On November 9, 1998, First Security Bank, N.A., as trustee of the
Partnership and certain affiliated investment programs (collectively, the
"Plaintiffs), filed an action in Superior Court of the Commonwealth of
Massachusetts in Suffolk County against Prime Air, Inc. d/b/a Transmeridian
Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and Apple Vacations,
West, Inc., both d/b/a Apple Vacations, asserting various causes of action for
declaratory judgment and breach of contract. The action subsequently was removed
to United States District Court for the District of Massachusetts. Transmeridian
filed counterclaims for breach of contract, quantum meruit, conversion, breach
of the implied covenant of good faith and fair dealing, and violation of M.G.L.
c. 93A. The Plaintiffs subsequently filed an Amended Complaint asserting claims
for breaches of contract and covenant of good faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
The Plaintiffs are seeking damages for, among other things, breach of
contract arising out of Transmeridian's refusal to repair or replace burned
engine blades found in one engine during a pre-return inspection of an aircraft
leased by Transmeridian from the Plaintiffs, a Boeing 727-251 ADV aircraft (the
"Aircraft"). The estimated cost to repair the engine and lease a substitute
engine during the repair period was approximately $488,000. Repairs were
completed in June 1999. The Plaintiffs intend to enforce written guarantees
issued by Apple Vacations that absolutely and unconditionally guarantee
Transmeridian's performance under the lease agreement and are seeking recovery
of all costs, lost revenue and monetary damages in connection with this matter.
Notwithstanding the foregoing, the Plaintiffs were required to advance the cost
of repairing the engine and leasing a substitute engine and cannot be certain
whether the guarantees will be enforced. Therefore, the Partnership accrued and
expensed its share of these costs, or approximately $43,000 in 1998 and $13,000
in 1999. Discovery is ongoing and a trial date has been tentatively scheduled
for January 15, 2001. The General Partner plans to vigorously pursue this
action; however, it is too early to predict the Plaintiffs' likelihood of
success. This aircraft was sold in June 1999.
Action involving Northwest Airlines, Inc.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in favor of the
Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United
States District Court Judge adopted the Magistrate Judge's recommendation and
entered partial summary judgment in favor of the Plaintiffs on their claims for
declaratory
21
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
judgment. The Plaintiffs have made a demand upon Northwest for settlement. If no
settlement is reached, the Plaintiffs will proceed to trial for an assessment of
damages. No firm trial date has been established at this time; however, if a
trial should become necessary, it is not expected to occur before November 2000.
The General Partner believes that the Plaintiff's claims ultimately will prevail
and that the Partnership's financial position will not be adversely affected by
the outcome of this action.
NOTE 7 - SUBSEQUENT EVENT
On March 8, 2000, the Exchange Partnerships (see Note 6) collectively
loaned $32 million to Echelon Residential Holdings LLC, a newly-formed real
estate development company that will be owned by several investors, including
James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his individual
capacity, is the only investor in Echelon Residential Holdings LLC who is
related to EFG.
The Partnership's participation in the loan is $1,650,000. Echelon
Residential Holdings LLC, through a 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 7, 2002 and bears interest at the
annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. In connection with the transaction, Echelon Residential Holdings
LLC 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.
22
ADDITIONAL FINANCIAL INFORMATION
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1999, 1998 and 1997
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
------------------ ------------------ ------------------
Rents earned prior to disposal of
equipment, net of interest charges $ 3,053,556 $ 462,256 $ 506,246
Sale proceeds realized upon disposition
of equipment 857,150 65,000 51,976
------------------ ------------------ ------------------
Total cash generated from rents
and equipment sale proceeds 3,910,706 527,256 558,222
Original acquisition cost of equipment
disposed 3,217,380 329,820 396,587
------------------ ------------------ ------------------
Excess of total cash generated to cost
of equipment disposed $ 693,326 $ 197,436 $ 161,635
================== ================== ==================
23
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1999
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
Net income (loss) $ (15,435) $ 789,110 $ 773,675
Add:
Depreciation 23,214 -- 23,214
Management fees 6,544 -- 6,544
Book value of disposed equipment -- 68,040 68,040
------------------ ------------------ ------------------
Cash from operations, sales and
refinancings 14,323 857,150 871,473
Less:
Management fees (6,544) -- (6,544)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 7,779 857,150 864,929
Other sources and uses of cash:
Cash at beginning of year 1,969,323 -- 1,969,323
Net change in receivables and accruals (14,533) -- (14,533)
Less:
Cash distributions paid -- (226,006) (226,006)
------------------ ------------------ ------------------
Cash at end of year $ 1,962,569 $ 631,144 $ 2,593,713
================== ================== ==================
24
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 9.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1999
For the year ended December 31, 1999, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 331,302
25