AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
------
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
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 12-19
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 20
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 21
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 22
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 $ 988,217 $ 1,848,626 $ 2,099,057 $ 4,359,224 $ 5,319,789
Net income (loss) $ (138,635) $ 699,271 $ 387,803 $ (243,574) $ (539,206)
Per Unit:
Net income (loss) $ (0.12) $ 0.61 $ 0.34 $ (0.21) $ (0.47)
Cash distributions $ 1.12 $ 2.00 $ 2.00 $ 1.50 $ 3.12
Financial
Position
- ------------------------
Total assets $ 4,495,572 $ 6,464,885 $ 8,503,879 $ 10,835,606 $ 16,013,399
Total long-term
obligations -- $ 223,620 $ 591,954 $ 1,117,971 $ 4,041,438
Partners' capital $ 4,194,601 $ 5,614,292 $ 7,192,455 $ 9,082,086 $ 11,033,736
-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-B
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
revenue 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, including 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 $988,217 compared to $1,848,626 and $2,099,057 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 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 was fully depreciated to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $470,835 compared to a net gain of $199,001 and
$516,300 on equipment having a net book value of $4,926 and $461,140 in 1994 and
1993, 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.
-3-
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 $709,153, $1,125,714 and $1,994,828 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, $762,100 ($0.67 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 $726 or less than 1% of lease revenue in 1995,
$23,228 or 1.3% of lease revenue in 1994 and $58,308 or 2.8% of lease revenue in
1993. 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 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 12.1%,
8.6% and 5.1% of lease revenue in 1995, 1994 and 1993, respectively. Operating
expenses in 1994 include repair, maintenance, legal and other 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
-4-
inflows of $1,234,405, $1,547,716 and $2,478,853 in 1995, 1994 and 1993,
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.
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 these
agreement, Northwest will continue to lease the aircraft until September 3,
2000. The Partnership, which owns a 2.05% interest in these aircraft, will
receive $61,542 each year through December 31, 1999 and $46,157 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. During 1994, the Partnership capitalized
$18,346 in connection with the upgrade of an L1011-50 aircraft. In 1995, the
Partnership realized $470,835 in equipment sale proceeds compared to $203,927
and $977,440 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 were reported as components of financing activities.
Cash inflows of $125,631 in 1993 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. No leveragings of
equipment occurred in 1994 and 1995.
Each note payable was 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 coincided with the lease rental
term). As rental payments were collected, a portion or all of the rental payment
was used to repay the associated indebtedness.
Cash distributions to the General Partners and Recognized Owners 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 $1,281,056. 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 $1,268,245, and the General Partners were allocated 1%,
or $12,811. The fourth quarter 1995 cash distribution was paid on January 22,
1996.
Cash distributions paid to the Recognized Owners 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-B Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners III-B Limited Partnership as of December 31, 1995 and
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-B 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-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
ASSETS 1995 1994
- ------ ---------- ----------
Cash and cash equivalents $ 802,718 $ 958,005
Rents receivable, net of allowance for
doubtful accounts of $60,000 3,044 225,496
Accounts receivable - affiliate 5,490 125,811
Equipment at cost, net of accumulated
depreciation of $7,839,693 and $10,675,416
at December 31, 1995 and 1994, respectively 3,684,320 5,155,573
---------- ----------
Total assets $4,495,572 $6,464,885
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ -- $ 223,620
Accrued interest -- 8,572
Accrued liabilities 20,000 15,500
Accrued liabilities - affiliate 15,216 3,557
Deferred rental income 52,247 29,985
Cash distributions payable to partners 213,508 569,359
---------- ----------
Total liabilities 300,971 850,593
---------- ----------
Partners' capital (deficit):
General Partners (205,925) (191,728)
Limited Partnership Interests (1,127,330
Units; initial purchase price of $25 each) 4,400,526 5,806,020
---------- ----------
Total partners' capital 4,194,601 5,614,292
---------- ----------
Total liabilities and partners' capital $4,495,572 $6,464,885
========== ==========
The accompanying notes are an integral part
of these financial statements.
-8-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ----------- -----------
Income:
Lease revenue $ 988,217 $ 1,848,626 $ 2,099,057
Interest income 42,891 51,202 37,642
Gain on sale of equipment 470,835 199,001 516,300
------------ ----------- -----------
Total income 1,501,943 2,098,829 2,652,999
------------ ----------- -----------
Expenses:
Depreciation 709,153 1,125,714 1,994,828
Write-down of equipment 762,100 -- --
Interest expense 726 23,228 58,308
Equipment management
fees - affiliate 49,411 92,431 104,953
Operating expenses - affiliate 119,188 158,185 107,107
------------ ----------- -----------
Total expenses 1,640,578 1,399,558 2,265,196
------------ ----------- -----------
Net income (loss) $ (138,635) $ 699,271 $ 387,803
============ =========== ===========
Net income (loss) $ (0.12) $ 0.61 $ 0.34
per limited partnership unit ============ =========== ===========
Cash distributions declared per limited
partnership unit $ 1.12 $ 2.00 $ 2.00
============ =========== ===========
The accompanying notes are an integral part
of these financial statements.
-9-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
General Recognized Owners
Partners -----------------------------------
Amount Units Amount Total
------------ ------------- ----------- ------------
Balance at December 31, 1992 $ (157,051) 1,127,330 $ 9,239,137 $ 9,082,086
Net income - 1993 3,878 -- 383,925 387,803
Cash distributions declared (22,774) -- (2,254,660) (2,277,434)
------------ ------------- ----------- ------------
Balance at December 31, 1993 (175,947) 1,127,330 7,368,402 7,192,455
Net income - 1994 6,993 -- 692,278 699,271
Cash distributions declared (22,774) -- (2,254,660) (2,277,434)
------------ ------------- ----------- ------------
Balance at December 31, 1994 (191,728) 1,127,330 5,806,020 5,614,292
Net loss - 1995 (1,386) -- (137,249) (138,635)
Cash distributions declared (12,811) -- (1,268,245) (1,281,056)
------------ ------------- ----------- ------------
Balance at December 31, 1995 $ (205,925) 1,127,330 $ 4,400,526 $ 4,194,601
============ ============= =========== ============
The accompanying notes are an integral part
of these financial statements.
-10-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------- ------------- -------------
Cash flows from (used in) operating activities:
Net income (loss) $ (138,635) $ 699,271 $ 387,803
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 709,153 1,125,714 1,994,828
Write-down of equipment 762,100 -- --
Gain on sale of equipment (470,835) (199,001) (516,300)
Decrease in allowance for doubtful accounts -- (53,000) --
Changes in assets and liabilities:
Decrease in:
rents receivable 222,452 64,267 195,495
accounts receivable - affiliate 120,321 2,962 475,446
Increase (decrease) in:
accrued interest (8,572) (18,060) (15,820)
accrued liabilities 4,500 (49,000) (8,000)
accrued liabilities - affiliate 11,659 (7,976) (22,997)
deferred rental income 22,262 (17,461) (11,602)
------------- ------------- -------------
Net cash from operating activities 1,234,405 1,547,716 2,478,853
------------- ------------- -------------
Cash flows from (used in) investing activities:
Purchase of equipment -- (18,346) --
Proceeds from equipment sales 470,835 203,927 977,440
------------- ------------- -------------
Net cash from investing activities 470,835 185,581 977,440
------------- ------------- -------------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- -- 125,631
Principal payments - notes payable (223,620) (368,334) (651,648)
Distributions paid (1,636,907) (2,277,434) (2,135,094)
------------- ------------- -------------
Net cash used in financing activities (1,860,527) (2,645,768) (2,661,111)
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents (155,287) (912,471) 795,182
Cash and cash equivalents at beginning of year 958,005 1,870,476 1,075,294
------------- ------------- -------------
Cash and cash equivalents at end of year $ 802,718 $ 958,005 $ 1,870,476
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 9,298 $ 41,288 $ 74,128
============= ============= =============
The accompanying notes are an integral part
of these financial statements.
-11-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 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 June 29,
1987, for the purpose of acquiring and leasing to third parties a diversified
portfolio of capital equipment. Partners' capital initially consisted of
contributions of $1,000 from the Managing General Partner (AFG Leasing
Incorporated) and $100 from the Initial Limited Partner (AFG Assignor
Corporation). On September 29, 1987 the Partnership issued 1,127,330 units
representing assignments of limited partnership interests (the "Units") to 2,125
investors. Unitholders and Limited Partners (other than the Initial Limited
Partner) are collectively referred to as Recognized Owners. Subsequent to the
Partnership's Closing on September 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
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 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 September 29, 1987 when the
Partnership made its initial equipment purchase. Pursuant to the Restated
Agreement, as amended, Distributable Cash From Operations and Distributable Cash
From Sales or Refinancings 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-B 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 $800,000 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
$1,336,884 are due as follows:
For the year ending December 31, 1996 $ 666,013
1997 501,630
1998 61,542
1999 61,542
2000 46,157
----------
Total $1,336,884
==========
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. $ 402,598 $ 493,661 $ 585,067
ING Aviation Lease $ 197,624 -- --
Contract Transportation Systems Co. $ 100,603 -- --
The Denver and Rio Grande Western Railroad $ 100,260 -- --
Equicor, Incorporated -- $ 213,939 $ 226,302
Bally's Health and Tennis Corporation -- -- $ 256,798
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 2.05% interest in these aircraft, will
receive $61,542 each year through December 31, 1999 and $46,157 during the year
ending December 31, 2000.
During 1994, the Managing General Partner lowered the aggregate amount
reserved against potentially uncollectable rents to $60,000. This caused an
increase in lease revenue of $53,000 in 1994. The reserve was reviewed and
considered adequate as of December 31, 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-B 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.
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 5 concerning
allocation of income or loss for income tax purposes.
-14-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Net Income (Loss) and Cash Distributions Per Unit
- -------------------------------------------------
Net income (loss) and cash distributions per Unit are based on 1,127,330
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.
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities Affiliate. (See Note 4.)
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 of 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.
Lease
Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------- ------ ------------ -----------------------
Aircraft 36-108 $ 8,412,409 MN/Foreign
Motor vehicles 12-72 1,177,235 IL
Manufacturing 24-72 663,153 OH
Communications 1-60 618,182 KS/MD/NJ/NY/TX
Locomotives 57-60 438,017 GA/MI/MO/OH/OK
Materials handling 1-84 212,396 CA/MO/NJ/TX
Computers and peripherals 1-60 2,621 PA
------------
Total equipment cost 11,524,013
Accumulated depreciation (7,839,693)
------------
Equipment, net of accumulated depreciation $ 3,684,320
============
-15-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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
$10,030,246, representing approximately 87% of total equipment cost.
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 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 the
expiration of the primary lease terms. At December 31, 1995, the Partnership was
not holding any equipment for sale or re-lease.
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, $762,100 ($0.67 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 $ 49,411 $ 92,431 $ 104,953
Administrative charges 21,000 12,000 14,955
Reimbursable operating expenses due
to third parties 98,188 146,185 92,152
------------- ------------- -------------
Total $ 168,599 $ 250,616 $ 212,060
============= ============= =============
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 revenue or (ii) fees
which the Managing General Partner reasonably believes to be competitive for
similar services
-16-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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 purchased from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party sellers.
The Partnership's Purchase Price was determined by the method described in
Note 2.
All rents and proceeds from the sale of equipment 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 $5,490 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 (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 limited partners of the
Partnership tendered approximately 99,540 units or 8.83% 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 - 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 net
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
-17-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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:
1995 1994 1993
------------- ------------- -------------
Net income (loss) $ (138,635) $ 699,271 $ 387,803
Financial statement depreciation in
excess of tax depreciation 352,477 288,498 965,303
Write-down of equipment 762,100 -- --
Prepaid rental income 22,262 (17,461) (11,602)
Other -- (111,399) 621,715
------------- ------------- -------------
Net income for federal income tax
reporting purposes $ 998,204 $ 858,909 $ 1,963,219
============= ============= =============
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 $ 4,194,601 $ 5,614,292
Add back selling commissions and
organization and offering costs 1,188,909 1,188,909
Financial statement distributions in excess
of tax distributions 2,135 5,694
Cumulative difference between federal income
tax and financial statement income (loss) (2,288,907) (3,425,746)
------------- ------------
Partners' capital for federal income tax
reporting purposes $ 3,096,738 $ 3,383,149
============= ============
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 6 - LEGAL PROCEEDINGS
- --------------------------
In 1991, a lessee of the Partnership, Healthcare Financial Services,
Inc. and Healthcare International, Inc., the guarantor of certain lease
obligations of Healthcare Financial Services, Inc., (collectively, the
"Debtors") filed for bankruptcy protection under Chapter 11 of the Bankruptcy
Code. The Partnership and certain other AFG-sponsored programs filed a proof of
claim in this case. All of the Partnership's affected equipment, having an
-18-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
original cost of $116,689 and representing approximately 1% of the Partnership's
aggregate equipment portfolio prior to its sale, was fully depreciated and was
partially assumed by a successor sub-lessee. In November 1993, the successor
sub-lessee ceased paying rent. AFG, on behalf of the Partnership and other AFG-
sponsored programs, filed a complaint on November 23, 1994 in the Superior Court
of the State of California to recover such unpaid rentals (including late fees,
interest and other related damages) from the successor sub-lessee. The Chapter
11 proceeding of the Debtors were dismissed on July 21, 1994. On November 27,
1995, the Partnership sold the affected equipment recognizing a nominal net gain
for financial statement purposes.
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
Chapter 11 proceeding remains pending. Certain unpaid rents due to the
Partnership were scheduled by the Debtor as unsecured claims. 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. In
addition, the Partnership sold a portion of the equipment, having an original
cost of $159,647, during 1994. This disposition resulted in a net gain of $3,600
for financial statement purposes. At December 31, 1995, the Partnership's
equipment portfolio included other equipment on lease to the Debtor with an
original cost of approximately $31,000, which is fully depreciated for financial
reporting purposes and which represents less than 1% of the Partnership's
aggregate equipment portfolio. Renewal rental schedules for this equipment are
currently in effect by order of the Bankruptcy Court. 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 7 - 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.
-19-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1995, 1994, 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 revenue, 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 $ 4,157,961 $ 2,708,776 $ 5,634,384
Sale proceeds realized upon disposition of
equipment 470,835 203,927 977,440
------------- ------------- -------------
Total cash generated from rents and
equipment sale proceeds 4,628,796 2,912,703 6,611,824
Original acquisition cost of equipment
disposed 4,306,976 2,208,353 6,135,896
-------------- -------------- --------------
Excess of total cash generated to cost of
equipment disposed $ 321,820 $ 704,350 $ 475,928
============== ============== ==============
-20-
AMERICAN INCOME PARTNERS III-B 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) $ (609,470) $ 470,835 $ (138,635)
Add back:
Depreciation 709,153 -- 709,153
Write-down of equipment 762,100 -- 762,100
Management fees 49,411 -- 49,411
Less:
Principal reduction of notes payable (223,620) -- (223,620)
------------------ ------------------ ------------------
Cash from operations, sales and
refinancings 687,574 470,835 1,158,409
Less:
Management fees (49,411) -- (49,411)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 638,163 470,835 1,108,998
Other sources and uses of cash:
Cash at beginning of year 958,005 -- 958,005
Net change in receivables
and accruals 372,622 -- 372,622
Less:
Cash distributions paid (1,166,072) (470,835) (1,636,907)
------------------ ------------------ ------------------
Cash at end of year $ 802,718 -- $ 802,718
================== ================== ==================
-21-
AMERICAN INCOME PARTNERS III-B LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1995
For the year ended December 31, 1995, the Partnership reimbursed the
Managing General Partner and its Affiliates for the following costs:
Operating expenses $ 101,719
-22-