American Income Partners III
American Income Partners III-B Limited Partnership
Annual Report to the Partners, December 31, 1996
AMERICAN INCOME PARTNERS III-B 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 Managing General Partner
and its Affiliates as Required by Section 10.4 of the Amended
and Restated Agreement and Certificate of Limited Partnership 25
AMERICAN INCOME PARTNERS III-B 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 $ 904,997 $ 988,217 $ 1,848,626 $ 2,099,057 $ 4,359,224
Net income (loss) $ (113,610) $ (138,635) $ 699,271 $ 387,803 $ (243,574)
Per Unit:
Net income (loss) $ (0.10) $ (0.12) $ 0.61 $ 0.34 $ (0.21)
Cash distributions $ 3.27 $ 1.12 $ 2.00 $ 2.00 $ 1.50
FINANCIAL POSITION
Total assets -- $ 4,495,572 $ 6,464,885 $ 8,503,879 $10,835,606
Total long-term obligations -- -- $ 223,620 $ 591,954 $ 1,117,971
Partners' capital -- $ 4,194,601 $ 5,614,292 $ 7,192,455 $ 9,082,086
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 Partners III-B Limited Partnership (the Partnership) was
established in 1987 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
$28,183,250 from its Recognized Owners and $1,000 from its Managing General
Partner. Following its inception, the Partnership acquired a diversified pool of
capital equipment at an aggregate cost of $45,936,281, 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 76% 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 $30,016,574. In accordance with the Partnership's Amended
and Restated Agreement and Certificate of Limited Partnership, the Partnership's
Recognized Owners were paid 99% of such cash distributions, or $29,716,408
($26.36 per unit) and the General Partners were paid 1% of such distributions,
or $300,166. At December 31, 1996, the Partnership had a contingency reserve
balance of $360,236. 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 $356,634,
representing $0.32 per unit, to the Recognized Owners and 1%, or $3,602, to the
General Partners.
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 NWA Aircraft, in which the Partnership owned a proportionate
interest of 16%, was purchased by the lessee pursuant to a separate negotiation.
The Partnership realized $993,316 of net sale proceeds for the Sale Assets, as
Revised and $2,083,223 for the NWA Aircraft. The latter included early
termination rental payments of $259,604 from the lessee. At the date of sale,
the Sale Assets, as Revised and the NWA Aircraft had net book values of $825,284
and $1,885,025, respectively. In aggregate, the Partnership and the Other
Affected Partnerships realized, prior to transaction costs, $32,997,000 for all
of the Sale Assets, as Revised and $13,200,000 for the NWA Aircraft. Net
proceeds from the NWA Aircraft were allocated to the owners of the NWA Aircraft
according to their respective percentage ownership interests. Net proceeds from
the Sale Assets, as Revised were allocated to the Partnership and to each of the
Other Affected Partnerships 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 $106,626
in connection with both sale transactions. In addition, the Partnership
recognized a net gain of $21,254 during the nine months ended September 30, 1996
from the sale of other equipment which had a net book value of $5,951 for
financial reporting purposes at the date of sale.
For the year ended December 31, 1996, the Partnership recognized lease revenue
of $904,997. 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 Managing General Partner entered into a Cross
Partnership Agreement (the Agreement) with the general partners of certain of
the Other Affected Partnerships participating in the sales transactions
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 sales transactions will directly
reduce that partnership's reserve balance, whereas costs pertaining to the sales
transactions 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
4
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 $360,236. 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.
In connection with the wind-up effort, AFG Leasing Incorporated, the Managing
General Partner of the Partnership, was merged with and into AFG Leasing IV
Incorporated effective October 17, 1996. Accordingly, AFG Leasing IV
Incorporated became the Managing General Partner of the Partnership commencing
October 17, 1996. AFG Leasing IV Incorporated was established in 1987 and is
also the general partner or 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 Managing 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 Partners III-B Limited Partnership:
We have audited the accompanying statements of financial position of American
Income Partners III-B 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 Managing General Partner
of American Income Partners III-B 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 Partners III-B
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 PARTNERS III-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
ASSETS
ASSETS:
Cash and cash equivalents $ 802,718
Rents receivable, net of allowance for doubtful
accounts of $60,000 3,044
Accounts receivable--affiliate 5,490
Equipment at cost, net of accumulated depreciation
of $7,839,693 3,684,320
-----------
Total assets $ 4,495,572
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accrued liabilities $ 20,000
Accrued liabilities--affiliate 15,216
Deferred rental income 52,247
Cash distributions payable to partners 213,508
-----------
Total liabilities 300,971
-----------
PARTNERS' CAPITAL (DEFICIT):
General Partners (205,925)
Limited Partnership Interests (1,127,330 Units, initial
purchase price of $25 each) 4,400,526
-----------
Total partners' capital 4,194,601
-----------
Total liabilities and partners' capital $ 4,495,572
===========
The accompanying notes are an integral part of these financial statements.
7
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD OCTOBER 1, 1996 TO DECEMBER 31, 1996
INTEREST INCOME $ 9,553
OPERATING EXPENSES--AFFILIATE (19,735)
LIQUIDATING DISTRIBUTION (360,236)
---------
NET DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD (370,418)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD 370,418
---------
NET ASSETS IN LIQUIDATION, END OF PERIOD $ --
=========
The accompanying notes are an integral part of these financial statements.
8
AMERICAN INCOME PARTNERS III-B 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 ENDED
TO SEPTEMBER 30, DECEMBER 31,
1996 1995 1994
INCOME:
Lease revenue $ 904,997 $ 988,217 $1,848,626
Interest income 36,623 42,891 51,202
Gain on sale of equipment 127,880 470,835 199,001
---------- ---------- ----------
Total income 1,069,500 1,501,943 2,098,829
---------- ---------- ----------
EXPENSES:
Depreciation 368,060 709,153 1,125,714
Write-down of equipment 600,000 762,100 --
Interest expense -- 726 23,228
Equipment management fees--affiliate 45,250 49,411 92,431
Operating expenses--affiliate 159,618 119,188 158,185
---------- ---------- ----------
Total expenses 1,172,928 1,640,578 1,399,558
---------- ---------- ----------
NET INCOME (LOSS) $ (103,428) $ (138,635) $ 699,271
========== ========== ==========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.09) $ (0.12) $ 0.61
========== ========== ==========
CASH DISTRIBUTIONS DECLARED PER
LIMITED PARTNERSHIP UNIT $ 3.27 $ 1.12 $ 2.00
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
9
AMERICAN INCOME PARTNERS III-B 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 RECOGNIZED OWNERS
AMOUNT UNITS AMOUNT TOTAL
BALANCE, DECEMBER 31, 1993 $ (175,947) 1,127,330 $ 7,368,402 $ 7,192,455
Net income--1994 6,993 -- 692,278 699,271
Cash distributions declared (22,774) -- (2,254,660) (2,277,434)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 (191,728) 1,127,330 5,806,020 5,614,292
Net loss--1995 (1,386) -- (137,249) (138,635)
Cash distributions declared (12,811) -- (1,268,245) (1,281,056)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 (205,925) 1,127,330 4,400,526 4,194,601
Net loss for the period January 1, 1996 to
September 30, 1996 (1,034) -- (102,394) (103,428)
Cash distributions declared (37,208) -- (3,683,547) (3,720,755)
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 $ (244,167) 1,127,330 $ 614,585 $ 370,418
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
10
AMERICAN INCOME PARTNERS III-B 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
JANUARY 1, 1996 FOR THE YEARS ENDED
TO SEPTEMBER 30, DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (103,428) $ (138,635) $ 699,271
Adjustments to reconcile net income (loss) to cash
from operating activities-
Depreciation 368,060 709,153 1,125,714
Write-down of equipment 600,000 762,100 --
Gain on sale of equipment (127,880) (470,835) (199,001)
Decrease in allowance for doubtful accounts (60,000) -- (53,000)
Changes in assets and liabilities-
Decrease (increase) in-
Rents receivable 63,044 222,452 64,267
Accounts receivable--affiliate (322,554) 120,321 2,962
Increase (decrease) in-
Accounts payable 90,728 -- --
Accrued interest -- (8,572) (18,060)
Accrued liabilities 47,994 4,500 (49,000)
Accrued liabilities--affiliate 5,277 11,659 (7,976)
Deferred rental income (52,247) 22,262 (17,461)
----------- ----------- -----------
Net cash from operating activities 508,994 1,234,405 1,547,716
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of equipment -- -- (18,346)
Proceeds from equipment sales 27,205 470,835 203,927
----------- ----------- -----------
Net cash from investing activities 27,205 470,835 185,581
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments--notes payable -- (223,620) (368,334)
Distributions paid (640,524) (1,636,907) (2,277,434)
----------- ----------- -----------
Net cash used in financing activities (640,524) (1,860,527) (2,645,768)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (104,325) (155,287) (912,471)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 802,718 958,005 1,870,476
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 698,393 $ 802,718 $ 958,005
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 9,298 $ 41,288
=========== =========== ===========
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 $993,316, that were deposited into an escrow account and transferred to
the Partnership on October 3, 1996.
As discussed in Notes 1 and 4, the Partnership entered into an additional
sale transaction to dispose of its interest in an aircraft leased to
Northwest Airlines, Inc. This transaction was settled on September 30,
1996. The net sales proceeds of $1,823,619 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 PARTNERS III-B 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 June 29,
1987, for the purpose of acquiring and leasing to third parties a
diversified portfolio of capital equipment. Partners' capital initially
consisted of contributions of $1,000 from the Managing General Partner (AFG
Leasing Incorporated) and $100 from the Initial Limited Partner (AFG
Assignor Corporation). On September 29, 1987, the Partnership issued
1,127,330 units, representing assignments of limited partnership interests
(the Units) to 2,125 investors. Unitholders and Limited Partners (other
than the Initial Limited Partner) are collectively referred to as
Recognized Owners. On December 31, 1996, the General Partners of the
Partnership caused the Partnership's Amended and Restated Agreement and
Certificate of Limited Partnership (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.
The Partnership originally had five General Partners: AFG Leasing
Incorporated, a Massachusetts corporation and wholly owned subsidiary of
American Finance Group (AFG), a Massachusetts general partnership, which
subsequently became Equis Financial Group Limited Partnership (collectively
referred to herein as AFG), Kestutis J. Makaitis, Daniel J. Roggemann,
Martin F. Laughlin and Geoffrey A. MacDonald (collectively the General
Partners). Messrs. Makaitis, Roggemann, and Laughlin subsequently elected
to withdraw as Individual General Partners. In connection with the
Partnership's wind-up and dissolution, the General Partner interest of AFG
Leasing Incorporated was merged with and into AFG Leasing IV Incorporated
effective October 17, 1996. Accordingly, AFG Leasing IV Incorporated became
the Managing General Partner of the Partnership commencing October 17,
1996. 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 managing general partner of certain affiliated
partnerships sponsored by AFG.
Significant operations commenced September 29, 1987 when the Partnership
made its initial equipment purchase. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings were allocated 99% to the Recognized Owners and 1% to
the General Partners.
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 Managing General Partner believed to be competitive for similar
services (Also see Note 4).
12
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) ORGANIZATION AND PARTNERSHIP MATTERS (Continued)
Organization (Continued)
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 PARTNERS III-B 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,
excluding its interest in an aircraft, for $993,316. 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) and certain of which entered
into a collective purchase and sale agreement with Northwest Airlines, Inc.
(NWA), to sell all or a portion of their equipment assets (the Sale
Assets). Certain of these partnerships, including the Partnership, sold
their collective interest in a McDonnell Douglas MD-82 aircraft (NWA
Aircraft) to NWA. The net consideration for this aircraft was allocated
first to remaining lease rental obligations and second to sale proceeds.
The Partnership's proportionate share of this consideration was $2,083,223,
including $1,823,619 representing net sale proceeds. (See Note 4.)
On October 15, 1996, the Partnership paid a cash distribution of $3,293,739
of which $3,260,802 was paid to the Limited Partners and $32,937 was paid
to the Managing General Partner. As discussed in Note 4, the Partnership
had a contingency reserve of $360,236 at December 31, 1996.
The Managing General Partner approved a plan of liquidation on September
30, 1996 and commenced liquidation on October 1, 1996. On December 31,
1996, the Managing 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.
14
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 minimum rents are due.
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. $ 540,295 $ 402,598 $ 493,661
ING Aviation Lease $ 164,064 $ 197,624 --
Contract Transportation Systems Co. -- $ 100,603 --
The Denver and Rio Grande Western
Railroad -- $ 100,260 --
Equicor, Inc. -- -- $ 213,939
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, or 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 Managing General Partner in its best judgment, including
all liens and encumbrances on the
15
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equipment on Lease (Continued)
equipment and other actual expenses. Where the seller of the equipment was
a third party who did not manufacture the equipment, asset base price was
the lower of (i) the price invoiced by the third party or (ii) fair market
value as determined by the Managing General Partner. Where the seller of
the equipment was a third party who also manufactured the equipment, asset
base price was the manufacturer's invoice price, which price was considered
to be representative of fair market value.
Depreciation
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.
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
Recognized Owners and 1% to the General Partners). See Note 5 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) and Cash Distributions Per Unit
Net income (loss) and cash distributions per Unit were based on 1,127,330
Units outstanding during each of the three years in the period ended
December 31, 1996 and computed after allocation of the General Partners' 1%
share of net income (loss) and cash distributions.
Accrued Liabilities--Affiliate
Unpaid operating expenses paid by AFG on behalf of the Partnership were
reported as Accrued Liabilities - Affiliate (see Note 4).
16
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
(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 years ended
December 31, 1996 and 1995. The resulting charges, $600,000 ($0.53 per
limited partnership unit) in 1996, and $762,100 ($0.67 per limited
partnership unit) in 1995 were 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 $ 45,250 $ 49,411 $ 92,431
Administrative charges 29,270 21,000 12,000
Reimbursable operating expenses
due to third parties 150,083 98,188 146,185
--------- --------- ---------
Total $ 224,603 $ 168,599 $ 250,616
========= ========= =========
17
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
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 revenue or
(ii) fees which the Managing 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.
Administrative charges represent amounts owed to AFG, pursuant to Section
10.4 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 acquired from AFG, one of its affiliates, including other
equipment leasing programs sponsored by AFG, or from third-party sellers.
The Partnership's Purchase Price was determined by the method described in
Note 2.
All rents and proceeds from the sale of equipment 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 Plaintiff filed an appeal in this matter. On November 26, 1996,
the United States Court of Appeals
18
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
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 Recognized Owners of
the Partnership tendered 100,180 units or 8.89% of the total outstanding
units of the Partnership to AALP. In September 1996, AALP sold these units
to Equis for $326,860.
The remarketing effort described in Note 1 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.
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., hereafter the Sale Assets, as
Revised. The NWA Aircraft, in which the Partnership owned a proportionate
interest of 16%, was purchased by the lessee pursuant to a separate
negotiation. The Partnership realized $993,316 of net sale proceeds for the
Sale Assets, as Revised and $2,083,223 for the NWA Aircraft. The latter
included early termination rental payments of $259,604 from the lessee. At
the date of sale, the Sale Assets, as Revised and the NWA Aircraft had net
book values of $825,284 and $1,885,025, respectively. In aggregate, the
Partnership and the Other Affected Partnerships realized, prior to
transaction costs, $32,997,000 for all of the Sale Assets, as Revised and
$13,200,000 for the NWA Aircraft. Net proceeds from the NWA Aircraft were
allocated to the owners of the NWA Aircraft according to their respective
percentage ownership interests. Net proceeds from the Sale Assets, as
Revised were allocated to the Partnership and to each of the Other Affected
Partnerships 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.
The Buyer is a limited partnership established to acquire the Sale Assets,
as Revised, and has no direct affiliation with the Partnership, the Other
Affected Partnerships, the General Partners 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.
19
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
On October 10, 1996, the Managing General Partner entered into a Cross
Partnership Agreement (the Agreement) with the general partners of certain
of the Other Affected Partnerships participating in the sales transactions
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 sales transactions will
directly reduce that partnership's reserve balance, whereas costs
pertaining to the sales transactions 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 $360,236. 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.
In connection with the wind-up effort, AFG Leasing Incorporated, the
Managing General Partner of the Partnership, was merged with and into AFG
Leasing IV Incorporated effective October 17, 1996. Accordingly, AFG
Leasing IV Incorporated became the Managing General Partner of the
Partnership commencing October 17, 1996. AFG Leasing IV Incorporated was
established in 1987 and is also the general partner or 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 Recognized Owners and 1% to the General Partners).
This convention differs from the income or loss allocation requirements for
income tax and Dissolution Event purposes as delineated in the Restated
Agreement, as amended. For income tax purposes, the Partnership allocated
net income or net loss in accordance with such agreement.
20
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) INCOME TAXES (Continued)
The following is a reconciliation between net income (loss) 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 (loss) $ (113,610) $ (138,635) $ 699,271
Financial statement depreciation
in excess of tax depreciation 195,965 352,477 288,498
Write-down of equipment 600,000 762,100 --
Prepaid rental income (52,247) 22,262 (17,461)
Other 1,381,959 -- (111,399)
---------- ---------- ----------
Net income for federal income tax
reporting purposes
$2,012,067 $ 998,204 $ 858,909
========== ========== ==========
The principal component of Other consists of the difference between the tax
gain on equipment disposals and the financial statement gain on disposals.
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 $ 4,194,601
Add back selling commissions and
organization and offering costs 1,188,909
Financial statement distributions in
excess of tax distributions 2,135
Cumulative difference between federal
income tax and financial statement
income (loss) (2,288,907)
-----------
Partners' capital for federal income tax
reporting purposes $ 3,096,738
===========
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 PARTNERS III-B 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 revenue, 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 $ 13,053,069 $ 4,157,961 $ 2,708,776
Sale proceeds realized upon disposition of
equipment 2,844,140 470,835 203,927
------------ ------------ ------------
Total cash generated from rents and equipment
sale proceeds 15,897,209 4,628,796 2,912,703
Original acquisition cost of equipment disposed 11,524,013 4,306,976 2,208,353
------------ ------------ ------------
Excess of total cash generated to cost of
equipment disposed $ 4,373,196 $ 321,820 $ 704,350
============ ============ ============
23
AMERICAN INCOME PARTNERS III-B 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) $ (241,490) $ 127,880 $ (113,610)
ADD BACK:
Depreciation 368,060 -- 368,060
Write-down of equipment 600,000 -- 600,000
Decrease in allowance for doubtful accounts (60,000) -- (60,000)
Management fees 45,250 -- 45,250
Book value of disposed equipment -- 2,716,260 2,716,260
------------ ------------ ------------
Cash from operations, sales and refinancings 711,820 2,844,140 3,555,960
LESS:
Management fees (45,250) -- (45,250)
------------ ------------ ------------
Distributable cash from operations,
sales and refinancings 666,570 2,844,140 3,510,710
OTHER SOURCES AND USES OF CASH:
Cash, beginning of year 802,718 -- 802,718
Net change in receivables and accruals (18,929) -- (18,929)
LESS:
Cash distributions paid (1,090,123) (2,844,140) (3,934,263)
Liquidating distribution (360,236) -- (360,236)
------------ ------------ ------------
CASH, END OF YEAR $ -- $ -- $ --
============ ============ ============
24
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE MANAGING GENERAL PARTNER
AND ITS AFFILIATES AS REQUIRED BY SECTION 10.4 OF THE AMENDED
AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
DECEMBER 31, 1996
For the year ended December 31, 1996, the Partnership reimbursed the Managing
General Partner and its Affiliates for the following costs:
Operating expenses $ 179,315
25