UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
--------------------
For Quarter Ended March 31, 1996 Commission File No. 0-15623
American Income 7 Limited Partnership
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2932747
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- --------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
--------------
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes _____ No _____
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1996 and December 31, 1995 3
Statement of Operations
for the three months ended March 31, 1996 and 1995 4
Statement of Cash Flows
for the nine months ended March 31, 1996 and 1995 5
Notes to the Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II. OTHER INFORMATION:
Items 1 - 6 12
2
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
March 31, 1996 and December 31, 1995
(Unaudited)
March 31, December 31,
1996 1995
----------- ------------
ASSETS
- ------
Cash and cash equivalents $ 283,428 $ 316,150
Rents receivable, net of allowance
for doubtful accounts of $10,000 3,898 20,124
Accounts receivable - affiliate 53,929 194,735
Equipment at cost, net of accumulated
depreciation of $10,144,706 and
$9,931,106 at March 31, 1996 and
December 31, 1995, respectively 3,452,948 3,679,301
---------- ----------
Total assets $3,794,203 $4,210,310
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 18,833 $ 65,165
Accrued interest 96 835
Accrued liabilities 19,750 20,000
Accrued liabilities - affiliate 5,380 1,715
Deferred rental income 51,228 252,724
Cash distributions payable to partners 45,080 180,319
---------- ----------
Total liabilities 140,367 520,758
---------- ----------
Partners' capital (deficit):
General Partner (120,144) (119,787)
Limited Partnership Interests
(71,406 Units; initial purchase
price of $250 each) 3,773,980 3,809,339
---------- ----------
Total partners' capital 3,653,836 3,689,552
---------- ----------
Total liabilities and partners'
capital $3,794,203 $4,210,310
========== ==========
The accompanying notes are an integral part
of these financial statements.
3
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the three months ended March 31, 1996 and 1995
(Unaudited)
1996 1995
--------- ---------
Income:
Lease revenue $260,896 $398,544
Interest income 4,936 11,592
Gain on sale of equipment 500 6,300
-------- --------
Total income 266,332 416,436
-------- --------
Expenses:
Depreciation 226,353 232,228
Interest expense 497 18,248
Equipment management fees - affiliate 13,045 19,927
Operating expenses - affiliate 17,073 24,447
-------- --------
Total expenses 256,968 294,850
-------- --------
Net income $ 9,364 $121,586
======== ========
Net income
per limited partnership unit $ 0.13 $ 1.69
======== ========
Cash distribution declared
per limited partnership unit $ 0.63 $ 5.00
======== ========
The accompanying notes are an integarl part
of these financial statements.
4
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1996 and 1995
(Unaudited)
1996 1995
---------- ----------
Cash flows from (used in) operating
activities: $ 9,364 $ 121,586
Net income
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 226,353 232,228
Gain on sale of equipment (500) ( 6,300)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 16,226 5,046
accounts receivable - affiliate 140,806 (12,577)
Increase (decrease) in:
accrued interest (739) 2,806
accrued liabilities (250) (5,500)
accrued liabilities - affiliate 3,665 (1,726)
deferred rental income (201,496) (79,411)
--------- ---------
Net cash from operating 193,429 256,152
activities --------- ---------
Cash flows from investing activities
Proceeds from equipment sales 500 6,300
--------- ---------
Net cash from investing 500 6,300
activities --------- ---------
Cash flows used in financing activities:
Principal payments - notes payable (46,332) (38,646)
--------- ---------
Distributions paid (180,319) (360,637)
--------- ---------
Net cash used in financing
activities (226,651) (399,283)
--------- ---------
Net decrease in cash and cash
equivalents (32,722) (136,831)
Cash and cash equivalents at beginning
of period 316,150 992,497
--------- ---------
Cash and cash equivalents at end of
period $ 283,428 $ 855,666
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 1,236 $ 15,442
========= =========
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME 7 LIMITED PARTNERSHIP
Notes to the Financial Statements
March 31, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the 1995 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1996 and December 31, 1995 and results of operations for
the three month periods ended March 31, 1996 and 1995 have been made and are
reflected.
NOTE 2 - CASH
- -------------
The Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. The reverse repurchase
agreements are secured by U.S. Treasury Bills or interests in U.S. Government
securities.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$3,642,594 are due as follows:
For the year ending March 31, 1997 $ 871,043
1998 838,269
1999 792,676
2000 792,676
2001 347,930
-----------
Total $3,642,594
===========
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at March 31,
1996. In the opinion of American Finance Group ("AFG"), the acquisition cost of
the equipment did not exceed its fair market value.
6
AMERICAN INCOME 7 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------
Aircraft 36-60 $ 8,179,070
Flight simulators 60 4,290,414
Manufacturing 36-60 598,850
Motor vehicles 12-72 312,696
Communications 36 83,873
Computer and peripherals 12-60 54,612
Tractors and heavy duty trucks 2-60 50,696
Materials handling 2-60 27,443
------------
Total equipment cost 13,597,654
Accumulated depreciation (10,144,706)
------------
Equipment, net of accumulated depreciation $ 3,452,948
============
At March 31, 1996, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $12,782,230, representing approximately
94% of total equipment cost.
The summary above includes fully depreciated equipment held for re-lease or
sale with a cost of approximately $19,000 at March 31, 1996.
Effective January 1, 1996, the Partnership adopted Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Adoption of this statement did not have a material impact on the financial
statements of the Partnership.
NOTE 5 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by AFG on behalf
of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three month
periods ended March 31, 1996 and 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1996 1995
-------- --------
Equipment management fees $13,045 $19,927
Administrative charges 3,939 3,000
Reimbursable operating expenses
due to third parties 13,134 21,447
------- -------
Total $30,118 $44,374
======= =======
7
AMERICAN INCOME 7 LIMITED PARTNERSHIP
Notes to Financial Statements
(Continued)
All rents and proceeds from the sale of equipment are paid directly to either
AFG or to a lender. AFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At
March 31, 1996, the Partnership was owed $53,929 by AFG for such funds and the
interest thereon. These funds were remitted to the Partnership in April 1996.
NOTE 6 - NOTES PAYABLE
- ----------------------
Notes payable at March 31, 1996 consisted of one installment note of $18,833
payable to a bank. The installment note is non-recourse, with an interest rate
of 6.35% and is collateralized by the equipment and assignment of the related
lease payments. The carrying amount of notes payable approximates fair value at
March 31, 1996. The installment note will be fully amortized by noncancelable
rents during the year ending March 31, 1997.
NOTE 7 - LEGAL PROCEEDINGS
- --------------------------
On March 15, 1993, Herman's Sporting Goods, Inc., a lessee of the
Partnership (the "Debtor"), filed for protection under Chapter 11 of the
Bankruptcy Code in the United States District Court, Trenton, New Jersey (the
"District Court"). Certain unpaid rents due to the Partnership were scheduled by
the Debtor as unsecured claims. Upon order of the District Court, renewal
rental schedules for all equipment leased to the Debtor by the Partnership were
executed and are currently in effect. On August 23, 1994, the District Court
confirmed the Debtor's First Modified Plan of Reorganization, as Amended and
Modified, and the Partnership has received two of the three scheduled payments
from the Debtor with respect to its unsecured claims. On April 26, 1996, the
Debtor refiled for protection under Chapter 11 of the Bankruptcy Code in the
District Court. Rents due to the Partnership pursuant to the renewal schedules
due to expire on June 30, 1996, aggregating $1,725, were scheduled by the
Debtor as unsecured claims. In addition, the third scheduled payment under the
1993 schedule of unsecured claims of $1,011 has not been received by the
Partnership. The Partnership's equipment portfolio includes equipment on lease
to the Debtor with an original cost of approximately $83,873, which is fully
depreciated for financial reporting purposes and represents less than 1% of the
Partnership's aggregate equipment portfolio at March 31, 1996. This equipment is
expected to be returned to the Partnership to be held for sale or release and
the General Partner will pursue collection of all outstanding amounts from the
Debtor. The Partnership does not expect to experience any material loss as a
result of these bankruptcies.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------
Pursuant to its agreements with PLM International, Inc., referred to in Note 8
of the Partnership's 1995 financial statements, American Finance Group agreed to
change its name and logo, except where they are used in connection with the
Partnership and other affiliated investment programs. For all other purposes,
American Finance Group will operate as Equis Financial Group effective April 2,
1996.
8
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Three months ended March 31, 1996 compared to the three months ended March 31,
- ------------------------------------------------------------------------------
1995.
- -----
Overview
- --------
As an equipment leasing partnership, the Partnership was organized to acquire
a diversified portfolio of capital equipment subject to lease agreements with
third parties. The Partnership was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations
phase, a period of approximately six years, all equipment in the Partnership's
portfolio progresses through various stages. Initially, all equipment generates
rental revenues under primary term lease agreements. During the life of the
Partnership, these agreements expire on an intermittent basis and equipment held
pursuant to the related leases are renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by AFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Partnership's original equipment portfolio becomes available for remarketing
and cash generated from operations and from sales or refinancings begins to
fluctuate. Ultimately, all equipment will be sold and the Partnership will be
dissolved. In accordance with the Partnership's stated investment objectives
and policies, the General Partner is considering the winding-up of the
Partnership's operations, including the liquidation of its entire portfolio.
The Partnership's operations commenced in 1986.
.
Results of Operations
- ---------------------
For the three months ended March 31, 1996 the Partnership recognized lease
revenue of $260,896 compared to $398,544 for the same period in 1995. The
decrease in lease revenue between 1995 and 1996 was expected and resulted
principally from renewal lease term expirations and the sale of equipment. The
Partnership also earns interest income from temporary investments of rental
receipts and equipment sales proceeds in short-term instruments.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by AFG or an affiliated equipment leasing program
sponsored by AFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
For the three months ended March 31, 1996 and 1995 the Partnership sold fully
depreciated equipment which resulted in net gains, for financial statement
purposes, of $500 and $ 6,300, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
9
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM10-Q
PART I. FINANCIAL INFORMATION
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership
classifies such residual rental payments as lease revenue. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.
Depreciation expense was $226,353 for the three months ended March 31, 1996,
compared to $232,228 for the same period in 1995. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the
Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of primary lease expiration. To the
extent that an asset is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a straight-
line basis over the asset's remaining economic life.
Interest expense was $497 or less than 1% of lease revenue for the three
months ended March 31, 1996, compared to $18,248 or 4.6% of lease revenue for
the same period in 1995. In the future, interest expense will be minimal due to
the scheduled maturity of the Partnership's debt obligation in June 1996.
Management fees were 5% of lease revenue during each of the periods ended
March 31, 1996 and 1995 and will not change as a percentage of lease revenue in
future periods.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed. Collectively, operating expenses represented approximately 6.5% of
lease revenue for the three months ended March 31, 1996, compared to 6.1% of
lease revenue for the same period in 1995. The amount of future operating
expenses cannot be predicted with certainty; however, such expenses are usually
higher during the acquisition and liquidation phases of a partnership. Other
fluctuations typically occur in relation to the volume and timing of remarketing
activities.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These
cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $193,429 and $256,152 for the three
months ended March 31, 1996 and 1995, respectively. Future renewal, re-lease
and equipment sale activities will cause a gradual decline in the Partnership's
lease revenue and corresponding sources of operating cash. Overall, expenses
associated with rental activities, such as management fees, and net cash flow
from operating activities will decline as the Partnership experiences a higher
frequency of remarketing events.
The Partnership's lease agreement in connection with its 21.37% ownership
interest in a SAAB SF340A aircraft is scheduled to expire in June 1996. The
Partnership's proportionate interest in the aircraft had a cost and net book
value of $1,676,561 and $553,374, respectively, at March 31, 1996. The General
partner is actively pursuing the remarketing of this aircraft.
10
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Ultimately, the Partnership will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash realized from asset disposal transactions are reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 1996, the Partnership realized $500 in equipment sale proceeds
compared to $6,300 for the same period in 1995. Future inflows of cash from
asset disposals will vary in timing and amount and will be influenced by many
factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. The Partnership's notes payable will be fully
amortized by noncancellable rents in June 1996.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the period ended March 31, 1996, the Partnership declared total
cash distributions of Distributable Cash From Operations and Distributable Cash
From Sales and Refinancings of $45,080. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership, the Limited Partners
were allocated 99% of these distributions, or $44,629, and the General Partner
was allocated 1%, or $451. The first quarter 1996 cash distribution was paid on
April 15, 1996.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of AFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.
11
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 7 herein and to Note 7 in
the 1995 Annual Report
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
12
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME 7 LIMITED PARTNERSHIP
By: AFG Leasing Associates II, a Massachusetts
general partnership and the General Partner of
the Registrant.
By: AFG Leasing Incorporated, a Massachusetts
corporation and general partner in such general
partnership.
By: /s/ Michael J. Butterfield
---------------------------
Michael J. Butterfield
Treasurer of AFG Leasing Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 13, 1996
-------------------------
By: /s/ Gary Romano
---------------------------
Gary M. Romano
Clerk of AFG Leasing Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 13, 1996
-------------------------
13