AMERICAN INCOME PARTNERS II
AMERICAN INCOME 7 LIMITED PARTNERSHIP
ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1996
AMERICAN INCOME 7 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 3-5
FINANCIAL STATEMENTS:
Report of Independent Auditors 6
Statement of Financial Position at December 31, 1995 7
Statement of Changes in Net Assets in Liquidation for the
Period October 1, 1996 to December 31, 1996 8
Statement of Operations for the Period January 1, 1996 to
September 30, 1996 and for the Years Ended December 31, 1995
and 1994 9
Statement of Changes in Partners' Capital for the Period
January 1, 1996 to September 30, 1996 and for the Years
Ended December 31, 1995 and 1994 10
Statement of Cash Flows for the Period January 1, 1996 to
September 30, 1996 and for the Years Ended December 31,
1995 and 1994 11
Notes to the Financial Statements 12-21
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
AMERICAN INCOME 7 LIMITED PARTNERSHIP
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. The discussion of the 1996 results, presented
below, incorporates the nine month operating period ended September 30,
1996 and the three month liquidation period ended December 31, 1996.
For each of the five years in the period ended December 31, 1996:
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
Lease revenue $798,196 $1,430,156 $2,012,246 $2,015,753 $ 2,895,344
Net income (loss) $ 18,578 $ 380,795 $ 878,577 $ 946,162 $ (641,514)
Per Unit:
Net income (loss) $ 0.26 $ 5.28 $ 12.18 $ 13.12 $ (8.89)
Cash distributions $ 46.80 $ 14.38 $ 16.25 $ 15.00 $ 27.50
FINANCIAL POSITION
Total assets -- $4,210,310 $5,737,177 $7,116,973 $ 8,049,801
Total long-term obligations -- $ 65,165 $ 850,256 $2,101,899 $ 2,704,816
Partners' capital -- $3,689,552 $4,345,587 $4,639,078 $ 4,774,823
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31, 1995
COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Results of Operations and Liquidity and Capital Resources
American Income 7 Limited Partnership (the Partnership) was established in
1986 as a direct-participation equipment leasing program. The Partnership's
principal purpose was (i) to acquire and lease a diversified portfolio of
capital equipment to third-party lessees and (ii) to distribute the net
cash flow realized from the Partnership's business operations to its
Partners. The Partnership was capitalized with equity contributions of
$17,851,500 from its Limited Partners and $1,000 from its General Partner.
Following its inception, the Partnership acquired a diversified pool of
capital equipment at an aggregate cost of $32,788,141, a significant
portion of which was financed by third-party banks or other institutional
lenders. On September 30, 1996, the Partnership sold substantially all of
its assets and thereafter wound up its operations. The Partnership was
dissolved on December 31, 1996.
Organized as a limited-life entity, the Partnership was anticipated to be
dissolved within approximately seven years of its formation. A significant
portion of the Partnership's equipment assets, representing 59% of its
original equipment portfolio, was sold in the ordinary course of business
prior to September 30, 1996. On September 30, 1996, the remainder of the
Partnership's equipment portfolio was sold to RSL Finance Limited
Partnership II (the Buyer). Accordingly, the financial statements
accompanying this discussion were prepared using the liquidation basis of
accounting for the period October 1, 1996 through December 31, 1996. The
Statement of Changes in Net Assets in Liquidation reflects the liquidation
of assets during that period.
A comparison of current and prior years' financial results is not presented
because it is not considered meaningful due the dissolution of the
Partnership and the liquidation of its assets.
Prior to its dissolution, the Partnership's principal sources of revenue
consisted of rental income from equipment leases and sales proceeds
generated from the disposition of its equipment assets. Rental income was
used first to extinguish indebtedness and second to pay the Partnership's
management fees and operating expenses. Net cash flow from all sources,
after satisfaction of debt service, management fees and operating expenses,
was used to pay cash distributions to the Partners. Over its lifetime, the
Partnership paid aggregate cash distributions of $19,057,839. In accordance
with the Partnership's Amended and Restated Agreement and Certificate of
Limited Partnership, the Partnership's Limited Partners were paid 99% of
such cash distributions, or $18,867,261 ($264.23 per limited partnership
unit) and the General Partner was paid 1% of such distributions, or
$190,578. At December 31, 1996, the Partnership had a contingency reserve
balance of $332,573. These funds will be used to satisfy any expenses of
the Partnership which may arise after its dissolution date. To the extent
that these funds are not utilized for such purposes, they will be paid to
the Partners according to their respective allocation percentages, 99%, or
$329,247, representing $4.61 per limited partnership unit, to the Limited
Partners and 1%, or $3,326, to the General Partner.
3
During the second quarter of 1996, the Partnership engaged an investment
adviser to solicit potential buyers for the Partnership's remaining
equipment assets and associated lease contracts. The remarketing effort was
undertaken jointly by 15 individual equipment leasing programs, consisting
of the Partnership and 14 affiliated partnerships (the Other Affected
Partnerships). Thirteen of the programs, including the Partnership, sold
all of their equipment assets (the Liquidated Programs); and two programs
sold only their proportionate ownership interests in certain assets owned
jointly with one or more of the Liquidated Programs (collectively, the Sale
Assets). Substantially all of the Partnership's equipment assets of
material value represented partial ownership interests whereby the
Partnership owned less than a 100% interest in the equipment it sold. The
remaining interests in such assets were owned by one or more of the Other
Affected Partnerships.
On September 30, 1996, the Partnership and each of the Other Affected
Partnerships executed individual purchase and sale agreements with the
Buyer for all of the Sale Assets, except for one McDonnell Douglas MD-82
aircraft leased to Northwest Airlines, Inc. (the NWA Aircraft), hereafter
the Sales Assets, as Revised. The Partnership, which had no interest in the
NWA Aircraft, sold all of its remaining equipment, having a net book value
of $2,971,698, to the Buyer for $3,094,185. In aggregate, the Partnership
and the Other Affected Partnerships realized $32,997,000, prior to
transaction costs, for all of the Sale Assets, as Revised. The amounts
allocated to the Partnership and to each of the Other Affected Partnerships
were determined based upon an apportionment of the sales price among all
equipment comprising the Sale Assets, as Revised according to each asset's
estimated re-sale value, as determined by an independent appraiser. For
financial reporting purposes, the Partnership recognized a net gain of
$122,487 in connection with this sale. In addition, the Partnership
recognized a net gain of $7,843 during the nine months ended September 30,
1996 from the sale of other equipment, all of which had been fully
depreciated for financial reporting purposes at the date of sale.
For the year ended December 31, 1996, the Partnership recognized lease
revenue of $798,196. In addition, the Partnership earned interest income
from temporary cash investments. Operating expenses consisted principally
of administrative charges, professional service costs, such as legal and
accounting fees, as well as printing, distribution, and remarketing
expenses, including equipment storage and repairs and maintenance costs.
Operating costs for 1996 include all identified costs anticipated to be
incurred in connection with the Partnership's wind-up and dissolution.
On October 10, 1996, the General Partner entered into a Cross Partnership
Agreement (the Agreement) with the general partners of certain of the Other
Affected Partnerships participating in the sale transaction described
above. Pursuant to the Agreement, the Partnership and each of the other
partnerships agreed to set aside a contingency reserve for future
liabilities. The Agreement provides that obligations of any individual
partnership which are not associated with the sale transaction will
directly reduce that partnership's reserve balance, whereas costs
pertaining to the sale transaction will be allocated against the reserve
balances of the Partnership and each of the other partnerships on a
proportionate basis. If the reserve balance of the Partnership is depleted
to zero, the reserve balances contributed by the other partnerships will be
debited on a proportionate basis to cover the deficit. If the reserve
balances of any one of the other partnerships is depleted to zero, the
reserve balance of the Partnership and any other partnerships having a
positive reserve balance shall be debited on a proportionate basis to cover
the deficit. Upon termination of the Agreement, any remaining monies will
be distributed to the partners of those partnerships with positive reserve
balances. At December 31, 1996, the Partnership had a contingency reserve
balance of $332,573. To the extent that this contingency reserve is not
necessary to satisfy any unforeseen liabilities of the Partnership, it will
be remitted to the Partners.
4
In connection with the wind-up effort, certain general partner interests in
AFG Leasing Associates II, a Massachusetts general partnership, and the
original General Partner of the Partnership, including the individual
general partner interest owned by Geoffrey A. MacDonald, were transferred
to AFG Leasing IV Incorporated, resulting in AFG Leasing IV Incorporated
and AFG Leasing Incorporated becoming the two general partners of AFG
Leasing Associates II. AFG Leasing Incorporated thereupon was merged with
and into AFG Leasing IV Incorporated. Accordingly, effective October 17,
1996, AFG Leasing IV Incorporated became the sole General Partner of the
Partnership. AFG Leasing IV Incorporated was established in 1987 and is
also the general partner or the managing general partner of certain
affiliated partnerships sponsored by AFG.
The dissolution of the Partnership was recorded at the Office of the
Secretary of State of the Commonwealth of Massachusetts on December 31,
1996. The Partnership's business operations were concluded on that date.
Immediately following the filing of the Partnership's 1996 Form 10-K, the
General Partner of the Partnership will file Form 15, Certification and
Notice of Termination of Registration under Section 12(g) of the Securities
Exchange Act of 1934 or Suspension of Duty to File Reports Under Sections
13 and 15(d) of the Securities Exchange Act of 1934, with the United States
Securities and Exchange Commission.
5
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income 7 Limited Partnership:
We have audited the accompanying statement of financial position of
American Income 7 Limited Partnership as of December 31, 1995, and the
related statements of operations, changes in partners' capital and cash
flows for each of the two years ended December 31, 1995 and for the period
from January 1, 1996 to September 30, 1996. In addition, we have audited
the statement of changes in net assets in liquidation for the period from
October 1, 1996 to December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the General Partner of
American Income 7 Limited Partnership approved a plan of liquidation on
September 30, 1996, and the Partnership commenced liquidation shortly
thereafter. As a result, the Partnership has changed its basis of
accounting for periods subsequent to September 30, 1996 from the
going-concern basis to a liquidation basis. The liquidation was completed
and the Partnership was dissolved on December 31, 1996.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income 7
Limited Partnership as of December 31, 1995, the results of its operations
and its cash flows for each of the two years ended December 31, 1995, and
for the period from January 1, 1996 to September 30, 1996, and the changes
in its net assets in liquidation for the period from October 1, 1996 to
December 31, 1996, in conformity with generally accepted accounting
principles applied on the bases described in the preceding paragraph.
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 7, 1997
6
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
ASSETS
ASSETS:
Cash and cash equivalents $ 316,150
Rents receivable, net of allowance for doubtful
accounts of $10,000 20,124
Accounts receivable--affiliate 194,735
Equipment at cost, net of accumulated depreciation
of $9,931,106 3,679,301
---------------
Total assets $ 4,210,310
===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable $ 65,165
Accrued interest 835
Accrued liabilities 20,000
Accrued liabilities--affiliate 1,715
Deferred rental income 252,724
Cash distributions payable to partners 180,319
---------------
Total liabilities 520,758
---------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (119,787)
Limited Partnership Interests (71,406 Units, initial
purchase price of $250 each) 3,809,339
---------------
Total partners' capital 3,689,552
---------------
Total liabilities and partners' capital $ 4,210,310
===============
The accompanying notes are an integral part of these financial statements.
7
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD OCTOBER 1, 1996 TO DECEMBER 31, 1996
INTEREST INCOME $ 7,520
OPERATING EXPENSES--AFFILIATE (52,744)
LIQUIDATING DISTRIBUTION (332,573)
---------------
NET DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD (377,797)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD 377,797
---------------
NET ASSETS IN LIQUIDATION, END OF PERIOD $ -
===============
The accompanying notes are an integral part of these financial statements.
8
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
FOR THE PERIOD
JANUARY 1, 1996 FOR THE YEARS
TO SEPTEMBER 30, ENDED DECEMBER 31,
1996 1995 1994
INCOME:
Lease revenue $798,196 $1,430,156 $2,012,246
Interest income 15,931 33,156 46,427
Gain on sale of equipment 130,330 65,555 59,429
-------- ---------- ----------
Total income 944,457 1,528,867 2,118,102
-------- ---------- ----------
EXPENSES:
Depreciation 607,603 956,703 950,091
Write-down of equipment 100,000 -- --
Interest expense 581 46,657 119,472
Equipment management fees--affiliate 39,910 71,508 100,612
Operating expenses--affiliate 132,561 73,204 69,350
-------- ---------- ----------
Total expenses 880,655 1,148,072 1,239,525
-------- ---------- ----------
NET INCOME $ 63,802 $ 380,795 $ 878,577
======== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .88 $ 5.28 $ 12.18
======== ========== ==========
CASH DISTRIBUTIONS DECLARED
PER LIMITED PARTNERSHIP UNIT $ 46.80 $ 14.38 $ 16.25
======== ========== ==========
The accompanying notes are an integral part of these financial statements.
9
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
PARTNER LIMITED PARTNERS
AMOUNT UNITS AMOUNT TOTAL
BALANCE, DECEMBER 31, 1993 $(110,292) 71,406 $ 4,749,370 $ 4,639,078
Net income--1994 8,786 -- 869,791 878,577
Cash distributions declared (11,721) -- (1,160,347) (1,172,068)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1994 (113,227) 71,406 4,458,814 4,345,587
Net income--1995 3,808 -- 376,987 380,795
Cash distributions declared (10,368) -- (1,026,462) (1,036,830)
--------- ------ ----------- -----------
BALANCE, DECEMBER 31, 1995 (119,787) 71,406 3,809,339 3,689,552
Net income for the period
January 1, 1996
to September 30, 1996 638 -- 63,164 63,802
Cash distributions declared (33,756) -- (3,341,801) (3,375,557)
--------- ------ ----------- -----------
BALANCE, SEPTEMBER 30, 1996 $(152,905) 71,406 $ 530,702 $ 377,797
========= ====== =========== ===========
The accompanying notes are an integral part of these financial statements.
10
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
FOR THE PERIOD FOR THE YEARS
JANUARY 1, 1996 ENDED
TO SEPTEMBER 30, DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 63,802 $ 380,795 $ 878,577
Adjustments to reconcile net income to cash
from operating activities-
Depreciation 607,603 956,703 950,091
Write-down of equipment 100,000 -- --
Gain on sale of equipment (130,330) (65,555) (59,429)
Decrease in allowance for doubtful
accounts (10,000) -- (16,000)
Changes in assets and liabilities-
Decrease (increase) in-
Rents receivable 30,124 (3,996) 61,000
Accounts receivable--affiliate 138,243 (102,187) 89,636
Increase (decrease) in-
Accrued interest (835) (1,272) (35,088)
Accrued liabilities 49,751 4,500 1,500
Accrued liabilities--affiliate 9,919 (2,811) (978)
Deferred rental income (252,724) 94,160 64,664
--------- ----------- -----------
Net cash from operating activities 605,553 1,260,337 1,933,973
--------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of equipment -- -- (1,818)
Proceeds from equipment sales 7,843 65,555 321,057
--------- ----------- -----------
Net cash from investing activities 7,843 65,555 319,239
--------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments--notes payable (65,165) (785,091) (1,251,643)
Distributions paid (270,479) (1,217,148) (1,036,828)
--------- ----------- -----------
Net cash used in financing activities (335,644) (2,002,239) (2,288,471)
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 277,752 (676,347) (35,259)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 316,150 992,497 1,027,756
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 593,902 $ 316,150 $ 992,497
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 1,416 $ 47,929 $ 154,560
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
As discussed in Notes 1 and 4, the Partnership entered
into a sale transaction to dispose of its equipment portfolio.
This transaction was closed on September 30, 1996. The
Partnership received net sales proceeds of $3,094,185 that
were deposited into an escrow account and transferred to the
Partnership on October 3, 1996.
The accompanying notes are an integral part of these financial statements.
11
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND PARTNERSHIP MATTERS
Organization
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the Uniform Act) on
September 29, 1986, for the purpose of acquiring and leasing to third
parties a diversified portfolio of capital equipment. On December 30, 1986,
the Partnership issued 71,406 limited partnership units (the Units) to
1,116 Limited Partners, including four Units purchased by its Initial
Limited Partner. In accordance with the Amended and Restated Agreement and
Certificate of Limited Partnership (the Restated Agreement, as amended),
American Finance Group (AFG), a Massachusetts general partnership, which
subsequently became Equis Financial Group Limited Partnership (collectively
referred to herein as AFG), purchased 1,786 Units, representing 2.5%
($446,500) of total capital contributions received by the Partnership at
its inception. In 1995, AFG tendered all of its Units to Atlantic
Acquisition Limited Partnership (see Note 4 herein). On December 31, 1996,
the General Partner of the Partnership caused the Restated Agreement, as
amended to be canceled by filing a Certificate of Cancellation with the
Massachusetts Secretary under the Uniform Act. Accordingly, the Partnership
was dissolved on December 31, 1996.
Partners' capital initially consisted of contributions of $1,000 from the
General Partner (AFG Leasing Associates II, a Massachusetts general
partnership) and $1,000 from the Initial Limited Partner. The General
Partner originally had the following five general partners: AFG Leasing
Incorporated, a Massachusetts corporation and wholly-owned subsidiary of
AFG, Kestutis J. Makaitis, Daniel J. Roggemann, Martin F. Laughlin, and
Geoffrey A. MacDonald. Messrs. Makaitis, Roggemann, and Laughlin each
subsequently elected to withdraw as Individual General Partners. In
connection with the Partnership's wind-up and dissolution, the General
Partner interests of AFG Leasing Associates II, including the Individual
General Partner interest owned by Geoffrey A. MacDonald, were transferred
to AFG Leasing IV Incorporated, resulting in AFG Leasing IV Incorporated
and AFG Leasing Incorporated becoming the two general partners of AFG
Leasing Associates II. AFG Leasing Incorporated thereupon was merged with
and into AFG Leasing IV Incorporated. Accordingly, effective October 17,
1996, AFG Leasing IV Incorporated became the sole General Partner of the
Partnership. AFG Leasing IV Incorporated is a Massachusetts corporation
established in 1987 and a wholly owned subsidiary of AFG and is also the
general partner or the managing general partner of certain affiliated
partnerships sponsored by AFG.
Significant operations commenced December 30, 1986 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 were allocated 99% to the Limited Partners and 1% to
the General Partner.
12
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) ORGANIZATION AND PARTNERSHIP MATTERS (Continued)
Organization (Continued)
Under the terms of a Management Agreement between the Partnership and AFG,
management services were provided by AFG to the Partnership at fees which
the General Partner believed to be competitive for similar services. (Also
see Note 4.)
Equis Financial Group Limited Partnership (Equis) is a Massachusetts
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. Equis and its subsidiaries (collectively, the Company) are engaged in
various aspects of the equipment leasing business, including Equis' role as
Equipment Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored
by AFG (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 Equis, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by
Gary D. Engle, its President and Chief Executive Officer. Equis Corporation
also owns a controlling 1% general partner interest in Equis' 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 (the Buyer). AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms of the sale agreements, Equis agreed not to compete with
the Buyer's lease origination business for a period of five years; however,
Equis is permitted to originate certain equipment leases, principally those
involving noninvestment grade lessees and ocean-going vessels, which are
not in competition with the Buyer. In addition, the sale agreements
specifically reserved to Equis 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, including the right
to satisfy all required equipment acquisitions utilizing either brokers or
the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and Gary D.
Engle agreed not to compete with the sold business on terms and conditions
similar to those for the Company.
13
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) ORGANIZATION AND PARTNERSHIP MATTERS (Continued)
Basis of Presentation
On September 30, 1996, the Partnership sold all of its equipment assets for
$3,094,185. The entire remarketing effort was undertaken jointly by 15
individual equipment leasing programs, consisting of the Partnership and 14
affiliated partnerships, each of which individually executed separate
purchase and sale agreements with RSL Finance Limited Partnership II (the
Buyer) for all or a portion of their equipment assets. (See Note 4.)
On October 15, 1996, the Partnership paid a cash distribution of $3,285,397
of which $3,252,543 was paid to the Limited Partners and $32,854 was paid
to the General Partner. As discussed in Note 4, the Partnership had a
contingency reserve of $332,573 at December 31, 1996.
The General Partner approved a plan of liquidation on September 30, 1996
and commenced liquidation on October 1, 1996. On December 31, 1996, the
General Partner dissolved the Partnership in accordance with the Restated
Agreement, as amended.
The financial statements presented have been prepared on a going-concern
basis through September 30, 1996. Due to the dissolution of the Partnership
requiring liquidation and distribution of its net assets, the Partnership
changed its basis of accounting from going-concern to liquidation basis
effective October 1, 1996. Liquidation basis requires that statements be
prepared based on anticipated liquidating values of assets and liabilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considered liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time,
the Partnership invested excess cash with large institutional banks in
reverse repurchase agreements with overnight maturities. Under the terms of
the agreements, title to the underlying securities passed to the
Partnership. The securities underlying the agreements were book entry
securities.
Revenue Recognition
Rents were payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts were calculated on factors other than the
passage of time. The leases were accounted for as operating leases and were
noncancellable. Rents received prior to their due dates were deferred. The
Partnership's entire equipment portfolio was sold on September 30, 1996. No
future rents are due.
14
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during each of the past three years is as follows:
1996 1995 1994
Northwest Airlines, Inc. $444,166 $859,549 $999,133
United Technologies Corporation $202,961 $322,429 $397,048
Roundup Company -- -- $203,174
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 AFG, one of its affiliates, including other
equipment leasing programs sponsored by AFG, and from third-party sellers.
Equipment cost represented asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and
certain regulatory guidelines. Asset base price was affected by the
relationship of the seller to the Partnership as summarized herein. Where
the seller of the equipment was AFG or an affiliate, asset base price was
the lower of (i) the actual price paid for the equipment by AFG or the
affiliate plus all actual costs accrued by AFG or the affiliate while
carrying the equipment less the amount of all rents earned by AFG or the
affiliate prior to selling the equipment or (ii) fair market value as
determined by the General Partner in its best judgment, including all liens
and encumbrances on the equipment and other actual expenses. Where the
seller of the equipment was a third party who did not manufacture the
equipment, asset base price was the lower of (i) the price invoiced by the
third party or (ii) fair market value as determined by the General Partner.
Where the seller of the equipment was a third party who also manufactured
the equipment, asset base price was the manufacturer's invoice price, which
price was considered to be representative of fair market value.
15
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation
The Partnership's depreciation policy was intended to allocate the cost of
equipment over the period during which it produced economic benefit. The
principal period of economic benefit was considered to correspond to each
asset's primary lease term, which term generally represented the period of
greatest revenue potential for each asset. Accordingly, to the extent that
an asset was held on primary lease term, the Partnership depreciated 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 represented estimates of
equipment values at the date of primary lease expiration. To the extent
that an asset was held beyond its primary lease term, the Partnership
continued to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.
Accrued Liabilities--Affiliate
Unpaid operating expenses paid by AFG on behalf of the Partnership were
reported as Accrued Liabilities--Affiliate. (See Note 4.)
Allocation of Profits and Losses
For financial statement purposes, net income or loss was allocated to each
Partner according to their respective ownership percentages (99% to the
Limited Partners and 1% to the General Partner). See Note 5 concerning
allocation of income or loss for income tax purposes.
Net Income and Cash Distributions Per Unit
Net income and cash distributions per Unit were based on 71,406 Units
outstanding during each of the three years in the period ended December 31,
1996 and computed after allocation of the General Partner's 1% share of net
income 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.
16
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) EQUIPMENT
At September 30, 1996, the Partnership disposed of its entire equipment
portfolio.
As equipment was sold to third parties, or otherwise disposed of, the
Partnership recognized 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 Partnership recorded a write-down of the carrying value of its interest
in an L1011-50 aircraft, representing an impairment, during the year ended
December 31, 1996. The resulting charge, $100,000 ($1.39 per limited
partnership unit) in 1996, was based on a comparison of the estimated net
realizable value and corresponding carrying value for the Partnership's
interest in the aircraft.
(4) RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership were paid by AFG on
behalf of the Partnership, and AFG was reimbursed at its actual cost for
such expenditures. Fees and other costs incurred during each of the three
years in the period ended December 31, 1996, which were paid or accrued by
the Partnership to AFG or its Affiliates, are as follows:
1996 1995 1994
Equipment management fees $ 39,910 $ 71,508 $100,612
Administrative charges 29,151 15,756 12,000
Reimbursable operating expenses
due to third parties 156,154 57,448 57,350
-------- -------- --------
Total $225,215 $144,712 $169,962
======== ======== ========
As provided under the terms of the Management Agreement, AFG was
compensated for its services to the Partnership. Such services included all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG was compensated by an amount equal to 4.75% of Equipment Base
Price paid by the Partnership. For management services, AFG was compensated
by an amount equal to the lesser of (i) 5% of gross lease rental revenues
earned by the Partnership or (ii) fees which the General Partner reasonably
believed to be competitive for similar services for similar equipment. Both
of these fees were subject to certain limitations defined in the Management
Agreement. As Payout was not achieved, AFG received no compensation for
services connected to the sale of equipment under its subordinated
remarketing agreement.
17
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
Administrative charges represent amounts owed to AFG, pursuant to Section
9.4 of the Restated Agreement, as amended, for persons employed by AFG who
were engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid
by AFG on behalf of the Partnership which were reimbursed to AFG.
All equipment was purchased from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party
sellers. The Partnership's Purchase Price was determined by the method
described in Note 2.
All rents and proceeds from the sale of equipment were paid directly to
either AFG or to a lender. AFG temporarily deposited collected funds in a
separate interest-bearing escrow account prior to remittance to the
Partnership.
On August 18, 1995, Atlantic Acquisition Limited Partnership (AALP), a
newly formed Massachusetts limited partnership owned and controlled by
certain principals of AFG, commenced a voluntary cash Tender Offer (the
Offer) for up to approximately 45% of the outstanding units of limited
partner interest in this Partnership and 20 affiliated partnerships
sponsored and managed by AFG. The Offer was subsequently amended and
supplemented in order to provide additional disclosure to unitholders;
increase the offer price; reduce the number of units sought to
approximately 35% of the outstanding units; and extend the expiration date
of the Offer to October 20, 1995. Following commencement of the Offer,
certain legal actions were initiated by interested persons against AALP,
each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action
brought in the United States District Court for the District of
Massachusetts (the Court) on behalf of the unitholders (limited partners),
sought to enjoin the Offer and obtain unspecified monetary damages. A
settlement of this litigation was approved by the Court on November 15,
1995. The Plaintiffs filed an appeal in this matter. On November 26, 1996,
the United States Court of Appeals for the First Circuit handed down a
decision affirming the Court's approval of the settlement. A second class
action, brought in the Superior Court of the Commonwealth of Massachusetts
(the Superior Court) seeking to enjoin the Offer, obtain unspecified
monetary damages, and intervene in the first class action, was dismissed by
the Superior Court. The limited partners of the Partnership tendered 7,179
units or 10.05% of the total outstanding units of the Partnership to AALP.
In September 1996, AALP sold these units to Equis for $371,915.
18
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
The remarketing effort described in Note 1 to the financial statements was
undertaken jointly by 15 individual equipment leasing programs, consisting
of the Partnership and 14 affiliated partnerships (Other Affected
Partnerships). Thirteen of the programs, including the Partnership, sold
all of their equipment assets (the Liquidated Programs); and two programs
sold only their proportionate ownership interests in certain assets owned
jointly with one or more of the Liquidated Programs. Substantially all of
the Partnership's equipment assets of material value represented partial
ownership interests whereby the Partnership owned less than a 100% interest
in the equipment it sold. The remaining interests in such assets were owned
by one or more of the Other Affected Partnerships. Ultimately, the Sale
Assets were sold for an aggregate adjusted sale price of approximately
$32,997,000, of which the Partnership's proportionate share, net of
associated costs, was determined to be $3,094,185. The Partnership's
proportionate share in this transaction was net of certain third-party
advisory fees incurred in connection with the equipment sale.
The Buyer is a limited partnership established to acquire the Sale Assets
and has no direct affiliation with the Partnership, the Other Affected
Partnerships, the General Partner or AFG. The sole general partner of the
Buyer is RSL Holdings, Inc. (RSL). An affiliate of RSL purchased a
significant limited partnership interest in a direct-participation
equipment leasing program co-sponsored by AFG in 1992. AFG acquired this
interest in 1993 for cash and assumption of indebtedness. There have been
no other business dealings between the Buyer and AFG and their affiliates.
On October 10, 1996, the General Partner entered into a Cross Partnership
Agreement (the Agreement) with the general partners of certain of the Other
Affected Partnerships participating in the sale transaction described
above. Pursuant to the Agreement, the Partnership and each of the other
partnerships agreed to set aside a contingency reserve for future
liabilities. The Agreement provides that obligations of any individual
partnership which are not associated with the sale transaction will
directly reduce that partnership's reserve balance, whereas costs
pertaining to the sale transaction will be allocated against the reserve
balances of the Partnership and each of the other partnerships on a
proportionate basis. If the reserve balance of the Partnership is depleted
to zero, the reserve balances contributed by the other partnerships will be
debited on a proportionate basis to cover the deficit. If the reserve
balances of any one of the other partnerships is depleted to zero, the
reserve balance of the Partnership and any other partnerships having a
positive reserve balance shall be debited on a proportionate basis to cover
the deficit. Upon termination of the Agreement, any remaining monies will
be distributed to the partners of those partnerships with positive reserve
balances. At December 31, 1996, the Partnership had a contingency reserve
balance of $332,573. To the extent that this contingency reserve is not
necessary to satisfy any unforeseen liabilities of the Partnership, it will
be remitted to the Partners.
19
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
In connection with the wind-up effort, certain general partner interests in
AFG Leasing Associates II, a Massachusetts general partnership, and the
original General Partner of the Partnership, including the individual
general partner interest owned by Geoffrey A. MacDonald, were transferred
to AFG Leasing IV Incorporated, resulting in AFG Leasing IV Incorporated
and AFG Leasing Incorporated becoming the two general partners of AFG
Leasing Associates II. AFG Leasing Incorporated thereupon was merged with
and into AFG Leasing IV Incorporated. Accordingly, effective October 17,
1996, AFG Leasing IV Incorporated became the sole General Partner of the
Partnership. AFG Leasing IV Incorporated was established in 1987 and is
also the general partner or the managing general partner of certain
affiliated partnerships sponsored by AFG.
(5) INCOME TAXES
The Partnership was not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes was recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocated net income or
loss to each class of partner according to their respective ownership
percentages (99% to the Limited Partners and 1% to the General Partner).
This convention differed 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 reporting purposes, the Partnership
allocated net income or net loss in accordance with such agreement.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended
December 31, 1996, 1995 and 1994:
1996 1995 1994
Net income $ 18,578 $ 380,795 $ 878,577
Financial statement depreciation in
excess of tax depreciation 607,603 954,885 945,895
Write-down of equipment 100,000 -- --
Prepaid rental income (252,724) 94,160 64,664
Other 2,572,198 -- 245,629
----------- ---------- ----------
Net income for federal income tax
reporting purposes $ 3,045,655 $1,429,840 $2,134,765
=========== ========== ==========
The principal component of Other consists of the difference between the tax
gain on equipment disposals and the financial statement gain on disposals.
20
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) INCOME TAXES (Continued)
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the year
ended December 31, 1995. A reconciliation for the year ended December 31,
1996 has not been presented, as partners' capital for financial statement
and federal income tax reporting purposes is zero.
Partners' capital $ 3,689,552
Add back selling commissions and organization
and offering costs 2,084,208
Financial statement distributions in excess
of tax distributions 1,803
Cumulative difference between federal income
tax and financial statement income (loss) (3,328,443)
______________
Partners' capital for federal income tax
reporting purposes $ 2,447,120
==============
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement
income (loss) represent timing differences.
21
ADDITIONAL FINANCIAL INFORMATION
22
AMERICAN INCOME 7 LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH
GENERATED TO COST OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Partnership classified all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment was sold,
rented on a month-to-month basis or re-leased for a defined period under a
new or extended lease agreement. The proceeds generated from selling or
re-leasing the equipment, in addition to any month-to-month revenues,
represented 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 during the years ended December 31, 1996, 1995 and
1994.
1996 1995 1994
Rents earned prior to disposal of
equipment, net of interest charges $16,111,387 $1,618,132 $1,813,030
Sale proceeds realized upon
disposition of equipment
3,102,028 65,555 321,057
----------- ---------- ----------
Total cash generated from rents and
equipment sale proceeds 19,213,415 1,683,687 2,134,087
Original acquisition cost of equipment
disposed 13,610,407 1,430,223 1,441,549
----------- ---------- ----------
Excess of total cash generated to cost
of equipment disposed $ 5,603,008 $ 253,464 $ 692,538
=========== ========== ==========
23
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH
FROM OPERATIONS, SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
SALES AND
OPERATIONS REFINANCINGS TOTAL
NET INCOME (LOSS) $(111,752) $ 130,330 $ 18,578
ADD BACK:
Depreciation 607,603 -- 607,603
Write-down of equipment 100,000 -- 100,000
Decrease in allowance for
doubtful accounts (10,000) -- (10,000)
Management fees 39,910 -- 39,910
Book value of disposed equipment -- 2,971,698 2,971,698
LESS:
Principal reduction of notes payable (65,165) -- (65,165)
--------- ----------- -----------
Cash from operations, sales
and refinancings 560,596 3,102,028 3,662,624
LESS:
Management fees (39,910) -- (39,910)
--------- ----------- -----------
Distributable cash from
operations, sales and refinancings 520,686 3,102,028 3,622,714
OTHER SOURCES AND USES OF CASH:
Cash, beginning of year 316,150 -- 316,150
Net change in receivables and accruals (50,415) -- (50,415)
LESS:
Cash distributions paid (453,848) (3,102,028) (3,555,876)
Liquidating distribution (332,573) -- (332,573)
--------- ----------- -----------
CASH, END OF YEAR $ -- $ -- $ --
========= =========== ===========
24
AMERICAN INCOME 7 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, 1996
For the year ended December 31, 1996, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $171,598
25