AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1995 and 1994 8
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993 10
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 11
Notes to the Financial Statements 12-20
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 21
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 22
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 23
-1-
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1995:
Summary of
Operations 1995 1994 1993 1992 1991
- ------------------------- ------------- ------------- ------------- -------------- --------------
Lease revenue $ 915,325 $ 1,576,139 $ 2,031,903 $ 4,039,951 $ 5,297,113
Net income (loss) $ (376,288) $ 682,540 $ 194,656 $ (1,016,535) $ (314,002)
Per Unit:
Net income (loss) $ (0.37) $ 0.67 $ 0.19 $ (1.00) $ (0.31)
Cash distributions $ 1.00 $ 2.00 $ 2.00 $ 1.50 $ 2.06
Financial
Position
- -------------------------
Total assets $ 3,803,973 $ 5,703,303 $ 7,468,387 $ 9,875,321 $ 15,740,678
Total long-term
obligations $ 8,904 $ 245,685 $ 560,198 $ 1,186,537 $ 4,250,940
Partners' capital $ 3,491,454 $ 4,886,947 $ 6,242,819 $ 8,086,575 $ 10,631,919
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1995 compared to the year
ended December 31, 1994 and the year ended December 31, 1994
compared to the year ended December 31, 1993
Overview
- --------
As an equipment leasing partnership, American Income Partners III-A
Limited 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 American
Finance Group ("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 Managing General Partner is
considering the winding-up of the Partnership's operations, the liquidation of
its entire portfolio. The Partnership's operations commenced in 1987.
Results of Operations
- ---------------------
For the year ended December 31, 1995, the Partnership recognized lease
revenue of $915,325 compared to $1,576,139 and $2,031,903 for the years ended
December 31, 1994 and 1993, respectively. The decrease in lease revenue between
1993 and 1995 was expected and resulted principally from primary and 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.
In 1995, the Partnership sold equipment which had been fully
depreciated to existing lessees and third parties. These sales resulted in a net
gain, for financial statement purposes, of $170,679 compared to a net gain in
1994 of $269,648, on equipment having a net book value of $88,268 and a net gain
in 1993 of $682,980, on equipment having a net book value of $52,421.
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.
-3-
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 was $599,372, $976,507, and $2,291,765 for the
years ended December 31, 1995, 1994 and 1993, respectively. 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. (See Note 2 to the
financial statements herein.)
The Partnership recorded a write-down of the carrying value of its
interest in an L1011-50 aircraft representing an impairment, during the year
ended December 31, 1995. The resulting charge, $734,600 ($0.72 per limited
partnership unit) in 1995 was based on a comparison of the estimated net
realizable value and corresponding carrying value for the Partnership's interest
in the aircraft.
Net realizable value was estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) AFG's assessment of prevailing market
conditions for similar aircraft. In recent years, market values for used
commercial jet aircraft have deteriorated. Consistent price competition and
other pressures within the airline industry have inhibited sustained
profitability for many carriers. Most major airlines have had to re-evaluate
their aircraft fleets and operating strategies. Such issues complicate the
determination of net realizable value for specific aircraft, and particularly
used aircraft, because cost-benefit and market considerations may differ
significantly between major airlines. Aircraft condition, age, passenger
capacity, distance capability, fuel efficiency, and other factors also influence
market demand and market value for passenger jet aircraft.
Interest expense was $2,095 or less than 1% of lease revenue in 1995,
$9,855 or less than 1% of lease revenue in 1994, and $54,907 or 2.7% of lease
revenue in 1993. In the future, interest expense will be minimal due to the
scheduled maturity of the Partnership's debt obligations in 1996.
Management fees were 5% of lease revenue in each of the years ended
December 31, 1995, 1994 and 1993 and will not change as a percentage of lease
revenue in future years.
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 11.8%,
9%, and 5.1% of lease revenue in 1995, 1994 and 1993, respectively. Operating
expenses in 1994 include repair and maintenance costs incurred in connection
with the re-lease of an L1011-50 aircraft to a third party. 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 $1,114,799, $1,344,655, and $2,727,721
in 1995, 1994 and 1993, respectively. Future renewal, re-lease and equipment
sale activities will cause a gradual decline in the Partnership's lease
4
revenues and corresponding sources of operating cash. Overall, expenses
associated with rental activities, such as management fees, and net cash flow
from operating activities will decline as the Partnership experiences a higher
frequency of remarketing events.
During 1995, the Partnership and other affiliated partnerships,
executed a renegotiated and extended lease agreement in connection with two DC-
10-40 aircraft leased by Northwest Airlines, Inc. ("Northwest"). Pursuant to the
agreement, Northwest will continue to lease these aircraft until September 3,
2000. The Partnership, which owns a 1.84% interest in these aircraft, will
receive $55,080 each year through December 31, 1999 and $41,310 during the year
ending December 31, 2000.
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 expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. In 1994, the Partnership capitalized
$16,420 in connection with an upgrade of the L1011-50 aircraft. During 1995, the
Partnership realized $170,679 in equipment sale proceeds compared to $357,916
and $735,401 in 1994 and 1993, respectively. 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 origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities. Cash
inflows of $182,044 in 1993 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. No leveragings of
equipment occurred in 1995 or 1994.
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 in 1996.
Cash distributions to the Recognized Owners and General 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 year ended December 31, 1995, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $1,019,205. In accordance with
the Amended and Restated Agreement and Certificate of Limited Partnership (the
"Restated Agreement, as amended"), the Recognized Owners were allocated 99% of
these distributions, or $1,009,013, and the General Partners were allocated 1%,
or $10,192. The fourth quarter 1995 cash distribution was paid on January 22,
1996.
Cash distributions paid to the 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.
5
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 Managing 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.
6
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of American Income Partners III-A Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners III-A Limited Partnership as of December 31, 1995 and
1994, and the related statements of operations, changes in partners' capital,
and cash flows for each of the three years in the period ended December 31,
1995. 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Income
Partners III-A Limited Partnership at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
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.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1996
7
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
ASSETS 1995 1994
------ ------------ ------------
Cash and cash equivalents $ 530,418 $ 819,430
Rents receivable, net of allowance for doubtful
accounts of $97,000 and $140,000 at
December 31, 1995 and 1994, respectively 13,711 147,870
Accounts receivable - affiliate 3,717 145,904
Equipment at cost, net of accumulated
depreciation of $7,354,059 and $9,246,109
at December 31, 1995 and 1994, respectively 3,256,127 4,590,099
------------ ------------
Total assets $ 3,803,973 $ 5,703,303
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Notes payable $ 8,904 $ 245,685
Accrued interest 27 5,627
Accrued liabilities 42,500 15,500
Accrued liabilities - affiliate 19,181 2,776
Deferred rental income 50,808 37,165
Cash distributions payable to partners 191,099 509,603
------------ ------------
Total liabilities 312,519 816,356
------------ ------------
Partners' capital (deficit):
General Partners (186,830) (172,875)
Limited Partnership Interests (1,009,014
Units; initial purchase price of $25 each) 3,678,284 5,059,822
------------ ------------
Total partners' capital 3,491,454 4,886,947
------------ ------------
Total liabilities and partners' capital $ 3,803,973 $ 5,703,303
============ ============
The accompanying notes are an integral part
of these financial statements.
8
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ----------- -----------
Income:
Lease revenue $ 915,325 $ 1,576,139 $ 2,031,903
Interest income 27,917 44,218 32,331
Gain on sale of equipment 170,679 269,648 682,980
------------ ----------- -----------
Total income 1,113,921 1,890,005 2,747,214
------------ ----------- -----------
Expenses:
Depreciation 599,372 976,507 2,291,765
Write-down of equipment 734,600 -- --
Interest expense 2,095 9,855 54,907
Equipment management
fees - affiliate 45,766 78,807 101,595
Operating expenses - affiliate 108,376 142,296 104,291
------------ ----------- -----------
Total expenses 1,490,209 1,207,465 2,552,558
------------ ----------- -----------
Net income (loss) $ (376,288) $ 682,540 $ 194,656
============ =========== ===========
Net income (loss)
per limited partnership unit $ (0.37) $ 0.67 $ 0.19
============ =========== ===========
Cash distributions declared
per limited partnership unit $ 1.00 $ 2.00 $ 2.00
============ =========== ===========
9
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31,
1995, 1994 and 1993
General Recognized Owners
Partners -------------------------------
Amount Units Amount Total
-------------- ----------- ----------- ------------
Balance at December 31, 1992 $ (140,879) 1,009,014 $ 8,227,454 $ 8,086,575
Net income - 1993 1,947 -- 192,709 194,656
Cash distributions declared (20,384) -- (2,018,028) (2,038,412)
------------- ----------- ----------- ------------
Balance at December 31, 1993 (159,316) 1,009,014 6,402,135 6,242,819
Net income - 1994 6,825 -- 675,715 682,540
Cash distributions declared (20,384) -- (2,018,028) (2,038,412)
------------- ----------- ----------- ------------
Balance at December 31, 1994 (172,875) 1,009,014 5,059,822 4,886,947
Net loss - 1995 (3,763) -- (372,525) (376,288)
Cash distributions declared (10,192) -- (1,009,013) (1,019,205)
------------- ----------- ----------- ------------
Balance at December 31, 1995 $ (186,830) 1,009,014 $ 3,678,284 $ 3,491,454
============= =========== =========== ============
The accompanying notes are an integral part
of these financial statements
10
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------- ------------- -------------
Cash flows from (used in) operating activities:
Net income (loss) $ (376,288) $ 682,540 $ 194,656
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 599,372 976,507 2,291,765
Write-down of equipment 734,600 -- --
Gain on sale of equipment (170,679) (269,648) (682,980)
Decrease in allowance for doubtful accounts (43,000) (45,000) --
Changes in assets and liabilities:
Decrease (increase) in:
rents receivable 177,159 135,776 90,630
accounts receivable - affiliate 142,187 (40,821) 897,890
Increase (decrease) in:
accrued interest (5,600) (17,914) (12,786)
accrued liabilities 27,000 (48,500) (8,500)
accrued liabilities - affiliate 16,405 (9,886) (7,500)
deferred rental income 13,643 (18,399) (35,454)
--------- --------- ---------
Net cash from operating activities 1,114,799 1,344,655 2,727,721
--------- --------- ---------
Cash flows from (used in) investing activities:
Purchase of equipment -- (16,420) --
Proceeds from equipment sales 170,679 357,916 735,401
--------- --------- ---------
Net cash from investing activities 170,679 341,496 735,401
--------- --------- ---------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- -- 182,044
Principal payments - notes payable (236,781) (314,513) (808,383)
Distributions paid (1,337,709) (2,038,412) (1,911,011)
--------- --------- ---------
Net cash used in financing activities (1,574,490) (2,352,925) (2,537,350)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (289,012) (666,774) 925,772
Cash and cash equivalents at beginning of year 819,430 1,486,204 560,432
--------- --------- ---------
Cash and cash equivalents at end of year $ 530,418 $ 819,430 $ 1,486,204
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 7,695 $ 27,769 $ 67,693
11
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1995
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on April 16,
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 June 29, 1987 the Partnership issued 1,009,014 units,
representing assignments of limited partnership interests (the "Units") to 2,007
investors. Unitholders and Limited Partners (other than the Initial Limited
Partner) are collectively referred to as Recognized Owners. The 1,009,014 Units
include 54 bonus units. Subsequent to the Partnership's Closing on June 29,
1987, the Partnership had five General Partners: AFG Leasing Incorporated, a
Massachusetts corporation, 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. The General Partners, each of which is affiliated
with American Finance Group ("AFG"), a Massachusetts partnership, are not
required to make any other capital contributions to the Partnership, except as
may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended").
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various aspects
of the equipment leasing business. In 1990, certain members of AFG's management,
principally Geoffrey A. MacDonald, Chief Executive Officer and co-founder of
AFG, established AFG Holdings (Massachusetts) Limited Partnership ("Holdings
Massachusetts") to acquire ownership and control of AFG. Holdings Massachusetts
effected this event by acquiring all of the equity interests of AFG's two
partners, AFG Holdings Illinois Limited Partnership ("Holdings Illinois") and
AFG Corporation. Holdings Massachusetts incurred significant indebtedness to
finance this acquisition, a significant portion of which was scheduled to mature
in 1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings Illinois
and AFG Corporation and sold all such interests to GDE Acquisitions Limited
Partnership, a Massachusetts limited partnership owned and controlled entirely
by Gary D. Engle, President and member of the Executive Committee of AFG. As a
result of this transaction, GDE Acquisitions Limited Partnership acquired all of
the assets, rights and obligations of AFG from the Senior Lender and assumed
control of AFG. Geoffrey A. MacDonald remains as Chief Executive Officer of AFG
and member of its Executive Committee.
Significant operations commenced June 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 will be allocated 99% to the Recognized Owners and 1% to the
General Partners until Payout and 85% to the Recognized Owners and 15% to the
General Partners after Payout. Payout will occur when the Recognized Owners have
received distributions equal to their original investment plus a cumulative
annual return of 10% (compounded quarterly) on undistributed invested capital.
Under the terms of a Management Agreement between the Partnership and
AFG, management services are provided by AFG to the Partnership at fees which
the Managing General Partner believes to be competitive for similar services.
(Also see Note 4.)
12
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Statement of Cash Flows
- -----------------------
The Partnership considers liquid investment instruments purchased with
a maturity of three months or less to be cash equivalents. From time to time,
the Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities. At December 31,
1995, the Partnership had $525,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
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 $1,234,458 are due as follows:
For the year ending December 31, 1996 $ 630,624
1997 447,289
1998 57,980
1999 57,255
2000 41,310
----------
Total $1,234,458
==========
Revenue from major individual lessees which accounted for 10% or more
of lease revenue in each of the past three years is as follows:
1995 1994 1993
---------------- --------------- ---------------
Northwest Airlines, Inc. $ 360,285 $ 441,827 $ 523,635
ING Aviation Lease $ 176,874 -- --
During 1995, the Partnership and other affiliated partnerships,
executed a renegotiated and extended lease agreement in connection with two
DC-10-40 aircraft leased by Northwest Airlines, Inc. ("Northwest"). Pursuant to
the agreement, Northwest will continue to lease these aircraft until September
3, 2000. The Partnership which owns a 1.84% interest in these aircraft, will
receive $55,080 each year through December 31, 1999 and $41,310 during the year
ending December 31, 2000.
During 1994, the Managing General Partner lowered the aggregate amount
reserved against potentially uncollectable rents to $140,000. This resulted in
an increase to lease revenue of $45,000 in 1994. During 1995, this reserve was
further reduced to $97,000 resulting in an increase to lease revenue of $43,000
in 1995. It cannot be determined whether the Partnership will recover any past
due rents in the future; however, the Managing General Partner will pursue the
collection of all such items.
13
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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 represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines. Asset base price is 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
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 is intended to allocate the cost
of equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the Managing General Partner evaluates the net carrying value of
equipment to determine whether it exceeds estimated net realizable value.
Adjustments to reduce the net carrying value of equipment are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value. Such adjustments are reflected separately on the accompanying
Statement of Operations as Write-Down of Equipment.
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.
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities Affiliate. (See Note 4.)
14
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Allocation of Profits and Losses
- --------------------------------
For financial statement purposes, net income or loss is allocated to
each Partner according to their respective ownership percentages (99% to the
Recognized Owners and 1% to the General Partners). See Note 6 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 are based on
1,009,014 Units outstanding during each of the three years in the period ended
December 31, 1995 and computed after allocation of the General Partners' 1%
share of net income (loss) and cash distributions.
Provision for Income Taxes
- --------------------------
No provision or benefit from income taxes is included in the
accompanying financial statements. The Partners are responsible for reporting
their proportionate shares of the Partnership's taxable income or loss and other
tax attributes on their tax returns.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued
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. The
Partnership will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the impact of adoption to be material to
the financial statements of the Partnership.
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary or equipment owned by the Partnership at
December 31, 1995. In the opinion of AFG, the acquisition cost of the equipment
did not exceed its fair market value.
15
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Lease
Term Equipment
Equipment Type (Months) at Cost Location
- -------------------------------- -------- ----------- ----------------
Aircraft 36-108 $ 7,649,166 MN/Foreign
Motor vehicles 12-72 1,086,176 IL
Trailers/intermodal containers 36-84 760,402 MI/NC
Locomotives 57-60 378,818 GA/MI/MO/OH/OK
Retail store fixtures 1-72 351,938 IN
Tractors and heavy-duty trucks 1-72 139,915 LA/OR
Research and test 17-84 105,268 MI/OH
Materials handling 1-84 84,993 MI/TX
Communications 1-60 51,508 NJ/NY
Computers and peripherals 1-60 2,002 PA
-----------
Total equipment cost 10,610,186
Accumulated depreciation (7,354,059)
-----------
Equipment, net of accumulated depreciation $ 3,256,127
===========
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by AFG or an
affiliated equipment leasing program sponsored by AFG. 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. 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. At December 31, 1995, the Partnership's equipment
portfolio included equipment having a proportionate original cost of $9,116,147,
representing approximately 86% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $352,000
which had been fully depreciated at December 31, 1995. (See Note 5.)
Generally, the costs associated with maintaining, insuring and
operating the Partnership's equipment are incurred by the respective lessees
pursuant to terms specified in their individual lease agreements with the
Partnership.
As equipment is sold to third parties or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon the sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the equipment upon
expiration of the primary lease terms. At December 31, 1995, the Partnership
held equipment for sale or re-lease with a cost of approximately $111,000 which
had been fully depreciated. The Managing General Partner is actively seeking the
sale or re-lease of all equipment not on lease.
16
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
The Partnership recorded a write-down of the carrying value of its
interest in an L1011-50 aircraft representing an impairment, during the year
ended December 31, 1995. The resulting charge, $734,600 ($0.72 per limited
partnership unit) in 1995 was based on a comparison of the estimated net
realizable value and corresponding carrying value for the Partnership's interest
in the aircraft.
NOTE 4 - 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 years in
the period ended December 31, 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1995 1994 1993
------------ ------------ -----------
Equipment management fees $ 45,766 $ 78,807 $ 101,595
Administrative charges 21,000 12,000 14,955
Reimbursable operating expenses
due to third parties 87,376 130,296 89,336
------------ ------------ -----------
Total $ 154,142 $ 221,103 $ 205,886
============ ============ ===========
As provided under the terms of the Management Agreement, AFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG is compensated by an amount equal to 4.75% of Equipment Base Price
paid by the Partnership. For management services, AFG is compensated by an
amount equal to the lesser of (i) 5% of gross lease rental revenues or (ii) fees
which the Managing General Partner reasonably believes to be competitive for
similar services for similar equipment. Both of these fees are subject to
certain limitations defined in the Management Agreement. Compensation to AFG for
services connected to the sale of equipment is calculated as the lesser of
(i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees
otherwise payable under arm's length circumstances. Payment of the remarketing
fee is subordinated to Payout and is subject to certain limitations defined in
the Management 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 are 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 are 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 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 December 31, 1995, the Partnership was owed $3,717 by AFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1996.
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
17
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
(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. 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 Plaintiffs have filed an appeal in this matter. The Recognized Owners
of the Partnership tendered approximately 101,615 units or 10.07% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
are not expected to be adversely affected by these proceedings or settlements.
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1995 consisted of installment notes of
$8,904 payable to a bank. All of the installment notes are non-recourse, with an
interest rate of 7.13% and are collateralized by the equipment and assignment of
the related lease payments. The installment notes will be fully amortized by
noncancellable rents in the year ending December 31, 1996.
NOTE 6 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax
purposes. Accordingly, no provision for income taxes has been recorded in the
accounts of the Partnership.
For financial statement purposes, the Partnership allocates net income
or loss to each class of partner according to their respective ownership
percentages (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 allocates net income or loss
in accordance with the provisions of such agreement. The Restated Agreement, as
amended, requires that upon dissolution of the Partnership, the General Partners
will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partners' tax capital account.
At December 31, 1995, the General Partners had a positive tax capital account
balance.
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, 1995, 1994 and 1993.
18
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
1995 1994 1993
------------ ------------- ------------
Net income (loss) $ (376,288) $ 682,540 $ 194,656
Financial statement depreciation in
excess of tax depreciation 270,656 395,126 1,562,320
Write-down of equipment 734,600 -- --
Prepaid rental income 13,643 (18,399) (35,454)
Other (20,500) (7,446) 71,392
------------ ------------- ------------
Net income for federal income tax
reporting purposes $ 622,111 $ 1,051,821 $ 1,792,914
============ ============= ============
The following is a reconciliation between partners' capital reported
for financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 and 1994:
1995 1994
------------- ------------
Partners' capital $ 3,491,454 $ 4,886,947
Add back selling commissions and
organization and offering costs 1,063,602 1,063,602
Financial statement distributions
in excess of tax distributions 1,911 5,096
Cumulative difference between federal income
tax and financial statement income (loss) (1,913,099) (2,911,498)
------------- ------------
Partners' capital for federal income
tax reporting purposes $ 2,643,868 $ 3,044,147
============= ============
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
- --------------------------
In 1993, Healthcare Enterprises of North Texas Ltd. (d.b.a. "Wylie
Hospital"), a lessee of the Partnership, filed for protection under Chapter 11
of the Bankruptcy Code in the Eastern District of Texas. The Chapter 11
proceeding remains pending. AFG, on behalf of the Partnership and certain other
AFG-sponsored programs, filed a proof of claim in this matter. Equipment leased
to this lessee had a cost of approximately $36,500 at the time of the bankruptcy
filing. The Partnership sold the equipment in May 1995 and recognized a net gain
of $455 for financial statement purposes. Pursuant to the order of the
Bankruptcy Court, Wylie Hospital was required to pay $11,000 to the Partnership
for settlement of this matter, which amount was paid in full as of April 1995.
This bankruptcy did not have a material adverse effect on the financial position
of the Partnership.
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
19
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Chapter 11 proceeding remains pending. Certain unpaid rents due to the
Partnership were scheduled by the Debtor as unsecured claims. Upon order of the
Bankruptcy 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 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. The Partnership's equipment portfolio includes equipment on lease to the
Debtor with an original cost of approximately $52,000, which is fully
depreciated for financial reporting purposes and represents less than 1% of the
Partnership's aggregate equipment portfolio at December 31, 1995. All scheduled
renewal lease rents from the Debtor have been collected to date and the
Partnership has not experienced any material losses as a result of this
bankruptcy.
NOTE 8 - SUBSEQUENT EVENT
- -------------------------
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase, in a multi-step
transaction, certain of AFG's assets and (ii) provide accounting, asset
management and investor services to AFG and certain of AFG's affiliates,
including the Partnership and all other equipment leasing programs managed by
AFG (the "Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995
agreements whereby PLM purchased: (i) AFG's lease origination business and
associated contracts, (ii) the rights to the name "American Finance Group" and
associated logo, and (iii) certain furniture, fixtures and computer software.
PLM hired AFG's marketing force and certain other support personnel effective
January 1, 1996 in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing trustees of the Investment Programs; and AFG, as
Manager, will continue to provide accounting, asset management and investor
services to the Partnership.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain
of its affiliates agreed not to compete with the lease origination business sold
to PLM for a period of five years. AFG reserved the right to satisfy all
equipment needs of the Partnership and all other Investment Programs and
reserved certain other rights not material to the Partnership. AFG also agreed
to change its name, except where it is used in connection with the Investment
Programs. AFG's management considers the amendment to the 1995 agreements to be
in the best interest of AFG and the Partnership.
20
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1995, 1994 and 1993
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1995, 1994 and 1993.
1995 1994 1993
------------ ------------- ------------
Rents earned prior to disposal of
equipment, net of interest charges $ 3,305,414 $ 2,914,616 $ 4,652,725
Sale proceeds realized upon
disposition of equipment 170,679 357,916 735,401
--------- --------- ---------
Total cash generated from rents
and equipment sale proceeds 3,476,093 3,272,532 5,388,126
Original acquisition cost of
equipment disposed 3,226,022 2,881,579 4,931,614
--------- --------- ---------
Excess of total cash generated
to cost of equipment disposed $ 250,071 $ 390,953 $ 456,512
========= ========= =========
21
AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1995
Sales and
Operations Refinancings Total
---------------- ---------------- ----------------
Net income (loss) $ (546,967) $ 170,679 $ (376,288)
Add back:
Depreciation 599,372 -- 599,372
Write-down of equipment 734,600 -- 734,600
Management fees 45,766 -- 45,766
Decrease in allowance for doubtful account (43,000) -- (43,000)
Less:
Principal reduction of notes payable (236,781) -- (236,781)
---------------- ---------------- ----------------
Cash from operations, sales and refinancings 552,990 170,679 723,669
Less:
Management fees (45,766) -- (45,766)
---------------- ---------------- ----------------
Distributable cash from operations, sales
and refinancings 507,224 170,679 677,903
Other sources and uses of cash:
Cash at beginning of year 819,430 -- 819,430
Net change in receivables and accruals 370,794 -- 370,794
Less:
Cash distributions paid (1,167,030) (170,679) (1,337,709)
---------------- ---------------- ----------------
Cash at end of year $ 530,418 -- $ 530,418
================ ================ ================
22
AMERICAN INCOME PARTNERS III-A 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, 1995
For the year ended December 31, 1995, the Partnership reimbursed the
Managing General Partner and its Affiliates for the following costs:
Operating expenses $ 92,699
23