UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 1996
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OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter Ended June 30, 1996 Commission File No. 0-15320
American Income 4 Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2917030
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
---------------------------
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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
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AMERICAN INCOME 4 LIMITED PARTNERSHIP
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1996 and December 31, 1995 3
Statement of Operations
for the three and six months ended June 30, 1996 and 1995 4
Statement of Cash Flows
for the six months ended June 30, 1996 and 1995 5
Notes to the Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION:
Items 1 - 6 11
2
AMERICAN INCOME 4 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
- ------
Cash and cash equivalents $ 216,181 $ 338,294
Rents receivable, net of allowance for
doubtful accounts of $32,500 at
December 31, 1995 --- 24,584
Accounts receivable - affiliate 108,226 148,983
Equipment at cost, net of accumulated
depreciation of $8,478,101 and
$8,090,953 at June 30, 1996 and
December 31, 1995, respectively 2,954,980 3,342,128
---------- ----------
Total assets $3,279,387 $3,853,989
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ --- $ 91,441
Accrued interest --- 1,132
Accrued liabilities 11,750 20,000
Accrued liabilities - affiliate 5,859 10,156
Deferred rental income 58,475 209,149
Cash distributions payable to partners 50,504 252,525
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Total liabilities 126,588 584,403
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Partners' capital (deficit):
General Partner (144,135) (142,967)
Limited Partnership Interests
(80,000 Units; initial purchase
price of $250 each) 3,296,934 3,412,553
---------- ----------
Total partners' capital 3,152,799 3,269,586
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Total liabilities and partners'
capital $3,279,387 $3,853,989
========== ==========
The accompanying notes are an integral part
of these financial statements.
3
AMERICAN INCOME 4 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
--------------- -------------- ---------- ---------
Income:
Lease revenue $205,436 $346,489 $435,738 $716,436
Interest income 2,021 4,286 5,976 8,186
Gain on sale of equipment --- 80,600 --- 81,634
-------- -------- -------- --------
Total income 207,457 431,375 441,714 806,256
-------- -------- -------- --------
Expenses:
Depreciation 193,574 208,313 387,148 416,625
Interest expense 118 3,490 816 8,750
Equipment management fees
- affiliate 10,272 17,325 21,787 35,822
Operating expenses
- affiliate 27,938 22,398 47,742 50,104
-------- -------- -------- --------
Total expenses 231,902 251,526 457,493 511,301
-------- -------- -------- --------
Net income (loss) $(24,445) $179,849 $(15,779) $294,955
======== ======== ======== ========
Net income (loss)
per limited partnership unit $ (0.30) $ 2.23 $ (0.20) $ 3.65
======== ======== ======== ========
Cash distributions declared
per limited partnership unit $ 0.62 $ 3.12 $ 1.25 $ 6.25
======== ======== ======== ========
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INCOME 4 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
---------- ----------
Cash flows from (used in) operating
activities:
Net income (loss) $ (15,779) $ 294,955
Adjustments to reconcile net income
(loss)to net cash from operating
activities:
Depreciation 387,148 416,625
Gain on sale of equipment --- (81,634)
Decrease in allowance for
doubtful accounts (32,500)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 57,084 (326)
accounts receivable - affiliate 40,757 1,638
Decrease in:
accrued interest (1,132) (558)
accrued liabilities (8,250) (250)
accrued liabilities - affiliate (4,297) (977)
deferred rental income (150,674) ---
--------- ---------
Net cash from operating activities 272,357 629,473
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Cash flows from investing activities:
Proceeds from equipment sales --- 81,634
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Net cash from investing activities --- 81,634
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Cash flows used in financing activities:
Principal payments - notes payable (91,441) (158,953)
Distributions paid (303,029) (505,050)
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Net cash used in financing
activities (394,470) (664,003)
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Net increase (decrease) in cash and
cash equivalents (122,113) 47,104
Cash and cash equivalents at beginning
of period 338,294 299,032
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Cash and cash equivalents at end of
period $ 216,181 $ 346,136
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 1,948 $ 9,308
========= =========
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME 4 LIMITED PARTNERSHIP
Notes to the Financial Statements
June 30, 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 June 30, 1996 and December 31, 1995 and results of operations for
the three and six month periods ended June 30, 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
$2,883,572 are due as follows:
For the year ending June 30, 1997 $ 696,768
1998 696,768
1999 696,768
2000 696,768
2001 96,500
----------
Total $2,883,572
==========
6
AMERICAN INCOME 4 LIMITED PARTNERSHIP
-------------------------------------
Notes to the Financial Statements
---------------------------------
(Continued)
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NOTE 4 - EQUIPMENT
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The following is a summary of equipment owned by the Partnership at June 30,
1996. In the opinion of American Finance Group ("AFG"), the acquisition cost of
the equipment did not exceed its fair market value.
Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------------------------- -------------- ------------
Aircraft 36-60 $ 8,630,452
Flight simulators 60 2,409,250
Materials handling 12-60 210,099
Trailers and intermodal containers 48-60 119,952
Photocopying 12-36 63,328
-----------
Total equipment cost 11,433,081
Accumulated depreciation (8,478,101)
-----------
Equipment, net of accumulated depreciation $ 2,954,980
===========
At June 30, 1996, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $11,039,702, representing approximately
97% of total equipment cost.
The summary above includes fully depreciated equipment held for re-lease or
sale with a cost of approximately $119,950 which is not subject to an active
lease agreement.
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 six month
periods ended June 30, 1996 and 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1996 1995
-------- --------
Equipment management fees $21,787 $35,822
Administrative charges 10,500 10,500
Reimbursable operating expenses
due to third parties 37,242 39,604
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Total $69,529 $85,926
======= =======
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 June
30, 1996, the Partnership was owed $108,226 by AFG for such funds and the
interest thereon. These funds were remitted to the Partnership in July 1996.
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AMERICAN INCOME 4 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Three and six months ended June 30, 1996 compared to the three and six months
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ended June 30, 1995:
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Overview
- --------
The Partnership was organized in 1986 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The Partnership's stated investment
objectives and policies contemplated that the Partnership would wind-up its
operations within approximately seven years of its inception. Accordingly, the
Managing General Partner is pursuing the remarketing of all of the Partnership's
remaining equipment and has engaged an investment adviser to solicit interested
third-party buyers. This effort is being undertaken in conjunction with certain
other affiliated partnerships and, if successful, would result in the sale of
each affected partnership's assets to a selected buyer. The Managing General
Partner believes this approach will (i) maximize the disposition prices of each
partnership's assets and (ii) prevent the incidence of future expenses to
operate a publicly-registered limited partnership with a declining asset base.
The Managing General Partner is evaluating expressions of interest submitted by
the investment adviser from a number of potential buyers, but is under no
obligation to accept any proposal. If successful, the Managing General Partner
anticipates that it would wind-up the operations of the Partnership and make a
liquidating distribution to the Partners, net of any cash reserves which the
Managing General Partner may consider appropriate, on or before December 31,
1996.
Results of Operations
- ---------------------
For the three and six months ended June 30, 1996, the Partnership recognized
lease revenue of $205,436 and $435,738, respectively, compared to $346,489 and
$716,436 for the same periods in 1995. The decrease in lease revenue from 1995
to 1996 was expected and resulted from renewal lease term expirations and the
sale of equipment. The Partnership also earns interest income from temporary
investments of rental receipts and equipment sale proceeds
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.
During the three and six months ended June 30, 1995, the Partnership sold
fully depreciated equipment which resulted in net gains, for financial statement
purposes, of $80,600 and $81,634, respectively. There were no equipment sales
during the three and six months ended June 30, 1996.
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.
8
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.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenues 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 for the three and six months ended June 30, 1996 was
$193,574 and $387,148, respectively, compared to $208,313 and $416,625 for the
same periods 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 at the date of primary lease expiration 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 equipment 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 $118 and $816 or less than 1% of lease revenue for each
of the three and six months ended June 30, 1996, respectively, compared to
$3,490 and $8,750 or 1% and 1.2% of lease revenue for the same periods in 1995.
Interest expense is not expected to be incurred in future periods due to the
retirement of all outstanding debt obligations.
Management fees were 5% of lease revenue during each of the periods ended June
30, 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 13.6% and 11% of lease revenue
during the three and six months ended June 30, 1996, respectively, compared to
6.5% and 7% of lease revenue for the same periods 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 $272,357 and $629,473 for the six
months ended June 30, 1996 and 1995, respectively. Future renewal, re-lease and
equipment sale activities will cause a gradual decline in the Partnership's
lease revenues and corresponding sources of operating cash. Overall, expenses
associated with rental activities, such as management fees, and net cash flow
9
from operating activities will decline as the Partnership experiences a higher
frequency of remarketing events.
The Partnership's lease agreement in connection with its 30% ownership
interest in a SAAB SF340A aircraft expired in June 1996. The Partnership's
proportionate interest in the aircraft had a cost and net book value of
$2,514,884 and $650,009, respectively, at June 30, 1996. The lessee has agreed
to release the aircraft on a month to month basis at a base rent to the
Partnership of $11,250. This agreement may be terminated by either party with
sixty days notice. The General Partner is actively pursuing the further
remarketing of this aircraft.
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 is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 1995, the Partnership realized $81,634 in equipment sale
proceeds. There were no asset disposals during the six months ended June 30,
1996. 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. All of the Partnership's
outstanding debt obligations have been retired.
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 six months ended June 30, 1996, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $101,008. In accordance with the Amended
and Restated Agreement and Certificate of Limited Partnership, the Limited
Partners were allocated 99% of these distributions, or $99,998, and the General
Partner was allocated 1%, or $1,010. The second quarter 1996 cash distribution
was paid on July 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 contracted rents, the generation of renewal
and/or re-lease rents, and the residual value realized for each asset at its
disposal date. 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.
10
AMERICAN INCOME 4 LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
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
11
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 4 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: August 13, 1996
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By: /s/ Gary M. Romano
-------------------
Gary M. Romano
Clerk of AFG Leasing Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 13, 1996
---------------
12