EXHIBIT 13
AMERICAN INCOME FUND I-B,
a Massachusetts Limited Partnership
Annual Report to the Partners, December 31, 2000
Dear Investor:
We are pleased to provide the 2000 Annual Report for American Income Fund I-B, a
Massachusetts Limited Partnership, which contains important information
concerning the recent operating results and current financial position of your
investment program. Please refer to the index on the following page for a
listing of information contained in this report.
If you have any questions about your investment program or, if you would like a
copy of Form 10-K for this program, please contact our Investor Services
Representatives at 1-800-247-3863.
Very truly yours,
/s/ GEOFFREY A. MACDONALD
Geoffrey A. MacDonald
Chairman and Co-founder
AMERICAN INCOME FUND I-B,
a Massachusetts 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................................... 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................ 8
Statement of Financial Position
at December 31, 2000 and 1999......................................... 9
Statement of Operations
for the years ended December 31, 2000, 1999 and 1998.................. 10
Statement of Changes in Partners' Capital
for the years ended December 31, 2000, 1999 and 1998.................. 11
Statement of Cash Flows
for the years ended December 31, 2000, 1999 and 1998.................. 12
Notes to the Financial Statements..................................... 13-23
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed............................... 24
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancing................................ 25
Schedule of Costs Reimbursed to the General
Partner and its Affiliates as Required by
Section 9.4 of the Amended and Restated
Agreement and Certificate of Limited Partnership...................... 26
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, 2000:
SUMMARY OF
OPERATIONS 2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- ----------- -----------
Lease revenue ....................... $ 186,799 $ 303,817 $ 352,921 $ 658,262 $ 779,404
Interest Income ..................... $ 62,529 $ 103,142 $ 82,442 $ 79,405 $ 83,113
Net (loss) income ................... $ (113,047) $ 103,359 $ (235,711) $ 238,231 $ 609,579
Per Unit:
Net (loss) income .............. $ (0.37) $ 0.34 $ (0.78) $ 0.79 $ 2.02
Cash distributions declared .... $ -- $ 0.75 $ 0.75 $ 0.94 $ 1.38
FINANCIAL POSITION
------------------
Total assets ........................ $ 2,154,172 $ 2,325,286 $ 2,480,535 $ 2,782,171 $ 3,576,563
Total long-term obligations ......... $ -- $ -- $ -- $ 22,990 $ 726,096
Partners' capital ................... $ 1,958,959 $ 2,072,006 $ 2,194,998 $ 2,657,060 $ 2,701,770
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1999 AND THE YEAR ENDED DECEMBER 31, 1999
COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Certain statements in this annual report of American Income Fund I-B, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual results
to differ materially from those expressed in any forward-looking statements made
herein. These factors include, but are not limited to, the outcome of the Class
Action Lawsuit described in Note 7 to the accompanying financial statements, the
remarketing of the Partnership's equipment, and the performance of the
Partnership's non-equipment assets.
OVERVIEW
The Partnership was organized in 1990 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 7 to the accompanying financial statements. Pursuant to the
Amended and Restated Agreement and Certificate of Limited Partnership (the
"Restated Agreement, as amended"), the Partnership is scheduled to be dissolved
by December 31, 2001. However, the General Partner does not expect that the
Partnership will be dissolved until such time that the Class Action Lawsuit is
settled or adjudicated.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"). The Partnership does not intend
to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
Act. If the Partnership were to be determined to be an investment company, its
business would be adversely affected. If necessary, the Partnership intends to
avoid being deemed an investment company by disposing of or acquiring certain
assets that it might not otherwise dispose of or acquire.
RESULTS OF OPERATIONS
For the year ended December 31, 2000, the Partnership recognized lease
revenue of $186,799, compared to $303,817 and $352,921 for the years ended
December 31, 1999 and 1998, respectively. The decrease in lease revenue from
both 1998 to 2000 resulted primarily from lease term expirations and the sale of
equipment. In the future, lease revenue will continue to decline due to lease
term expirations and equipment sales.
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 an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate
equipment ownership enabled the Partnership to further diversify its equipment
portfolio at inception by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could have resulted 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.
Interest income for the year ended December 31, 2000 was $62,529 compared
to $103,142 and $82,442 for the years ended December 31, 1999 and 1998,
respectively. Interest income is generated principally from temporary investment
of rental receipts and equipment sale proceeds in short-term investments. The
amount of future interest income is expected to fluctuate as a result of
changing interest rates and the amount of cash available for investment, among
other factors. On March 8, 2000, the Partnership utilized $1,310,000 of
available cash for a loan to Echelon Residential Holdings. The loan is presented
in the accompanying financial statements in accordance with the guidance set
forth in the Third Notice to Practitioners by the American Institute of
Certified Public Accountants in February 1986 entitled "ADC
3
Arrangements", and therefore the Partnership does not recognize interest income
related to this loan. (See further discussion included in Note 4 to the
financial statements herein).
During the year ended December 31, 2000, the Partnership sold equipment,
with a net book value of $1,931, to existing lessees and third parties. The
sales resulted in a net gain, for financial reporting purposes, of $33,599.
In 1999, the Partnership sold equipment having a net book value of $35,179
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $38,412 compared to a net gain in 1998 of
$6,520 on equipment having a net book value of $671,684.
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 EFG'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. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized for 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 $87,879, $99,072, and $213,530 for the years ended
December 31, 2000, 1999 and 1998, 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.
Management fees were $5,961, $10,590, and $13,384 for the years ended
December 31, 2000, 1999 and 1998, respectively. Management fees are based on 5%
of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses were $202,700, $232,350, and $450,680 for the years
ended December 31, 2000, 1999 and 1998, respectively. For the years ended
December 31, 2000, 1999 and 1998, operating expenses included approximately
$41,000, $50,000 and $262,000, respectively, related to the Class Action Lawsuit
described in Note 7 to the financial statements. In addition, the Partnership
incurred certain remarketing expenses in 1998 related to the sale of its
interest in an aircraft. Other operating expenses consist principally of
administrative charges, professional service costs, such as audit and legal
fees, as well as printing, distribution and other remarketing expenses. In
certain cases, equipment storage or repairs and maintenance costs may be
incurred in connection with equipment being remarketed.
For the year ended December 31, 2000, the Partnership's share of losses in
Echelon Residential Holdings were $99,434. The loss is reflected on the
Statement of Operations as "Partnership's share of unconsolidated real estate
venture's loss." See further discussion below.
4
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. 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 pay
management fees and operating costs and prior to 1999, were used to satisfy debt
service obligations. Operating activities generated net cash inflows of $53,237,
$180,054, and $187,610 in 2000, 1999 and 1998, respectively. Future renewal,
re-lease and equipment sale activities will cause a decline in the Partnership's
lease revenues and corresponding sources of operating cash. Overall, expenses
associated with rental activities, such as management fees, and net cash flow
from operating activities also will decline as the Partnership remarkets its
equipment. The amount of future interest income is expected to fluctuate as a
result of changing interest rates and the level of cash available for
investment, among other factors.
Cash realized from asset disposal transactions are reported under investing
activities on the accompanying Statement of Cash Flows. For the year ended
December 31, 2000, the Partnership realized $35,530 in equipment sale proceeds
compared to $73,591 and $678,204 in 1999 and 1998, 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.
At December 31, 2000, the Partnership was due aggregate future minimum
lease payments of $94,057 from contractual lease agreements (see Note 2 to the
financial statements). At the expiration of the individual primary and renewal
lease terms underlying the Partnership's future minimum lease payments, the
Partnership will sell the equipment or enter re-lease or renewal agreements when
considered advantageous by the General Partner and EFG. Such future remarketing
activities will result in the realization of additional cash inflows in the form
of equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease contracts,
while others may elect to return the equipment. In the latter instances, the
equipment could be re-leased to another lessee or sold to a third party.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 7 to the financial statements, the court permitted the
Partnership to invest in any new investment, including but not limited to new
equipment or other business activities, subject to certain limitations. On March
8, 2000, the Partnership loaned $1,310,000 to a newly formed real estate
company, Echelon Residential Holdings, to finance the acquisition of real estate
assets by that company. Echelon Residential Holdings, through a wholly owned
subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an independent Florida-based real estate company.
Echelon Residential Holding's interest in Echelon Residential LLC is pledged
pursuant to a pledge agreement to the partnerships as collateral for the loans.
The loan has a term of 30 months, maturing on September 8, 2002, and an annual
interest rate of 14% for the first 24 months and 18% for the final six months.
Interest accrues and compounds monthly and is payable at maturity.
As discussed in Note 4 to the Partnership's financial statements, the loan
is considered to be an investment in a real estate venture for accounting
purposes. In accordance with the provisions of Statement of Position No. 78-9,
"Accounting for Investments in Real Estate Ventures", the Partnership reports
its share of income or loss of Echelon Residential Holdings under the equity
method of accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and
will continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental
5
rules. A default by Echelon Residential Holdings could have a material adverse
effect on the future cash flow and operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to an
officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager. The officer made a $185,465
equity investment in Echelon Residential Holdings. His return on his equity
investment is restricted to the same rate of return as the partnerships realize
on their loans. There is a risk that the court may object to the general
partner's action in structuring the loan in this way and may require the
partnerships to restructure or divest the loan.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets.
Cash distributions to the General and Limited Partners had been declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is reported under financing
activities on the accompanying Statement of Cash Flows. No cash distributions
were declared for the year ended December 31, 2000, however, the fourth quarter
1999 cash distribution of $56,588 was paid in January 2000. In any given year,
it is possible that Limited Partners will be allocated taxable income in excess
of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on 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, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements). For instance, selling commissions and
organization and offering costs pertaining to syndication of the Partnership's
limited partnership units are not deductible for federal income tax purposes,
but are recorded as a reduction of partners' capital for financial reporting
purposes. Therefore, such differences are permanent differences between capital
accounts for financial reporting and federal income tax purposes. Other
differences between the bases of capital accounts for federal income tax and
financial reporting purposes occur due to timing differences. Such items include
the cumulative difference between income or loss for tax purposes and income tax
and financial reporting purposes. The principal components of the cumulative
difference between financial statement income or loss and tax income or loss
result from different depreciation policies for book and tax purposes and
different treatment for book and tax purposes related to the real estate
venture.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 2000. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
6
The outcome of the Class Action Lawsuit described in Note 7 to the
accompanying financial statements will be the principal factor in determining
the future of the Partnership's operations. The proposed settlement to that
lawsuit, if effected, will materially change the future organizational structure
and business interests of the Partnership, as well as its cash distribution
policies. In addition, commencing with the first quarter of 2000, the General
Partner suspended the payment of quarterly cash distributions pending final
resolution of the Class Action Lawsuit. Accordingly, future cash distributions
are not expected to be paid until the Class Action Lawsuit is settled or
adjudicated.
7
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Fund I-B,
a Massachusetts Limited Partnership:
We have audited the accompanying statements of financial position of American
Income Fund I-B, a Massachusetts Limited Partnership, as of December 31, 2000
and 1999, 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, 2000. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of Echelon Residential Holdings LLC, (a limited liability company to which the
Partnership has loaned $1,310,000), have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the financial
statements relates to data included for Echelon Residential Holdings LLC, it is
based solely on their report.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of American Income Fund I-B, a Massachusetts Limited
Partnership at December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
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
Tampa, Florida
March 30, 2001
8
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
ASSETS
Cash and cash equivalents ............................ 808,801 $ 2,086,622
Rents receivable ..................................... 300 2,500
Accounts receivable - affiliate ...................... 10,887 22,736
Investment in real estate venture .................... 1,210,566 --
Equipment at cost, net of accumulated
depreciation of $539,007 and $995,293
at December 31, 2000 and 1999, respectively ....... 123,618 213,428
----------- -----------
Total assets ................................. $ 2,154,172 $ 2,325,286
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities .................................. $ 180,888 $ 189,816
Accrued liabilities - affiliate ...................... 14,325 6,876
Cash distributions payable to partners ............... -- 56,588
----------- -----------
Total liabilities ............................ 195,213 253,280
----------- -----------
Partners' capital (deficit):
General Partner ................................... (219,423) (213,771)
Limited Partnership Interests
(286,711 Units; initial purchase price of $25 each) 2,178,382 2,285,777
----------- -----------
Total partners' capital ...................... 1,958,959 2,072,006
----------- -----------
Total liabilities and partners' capital ...... $ 2,154,172 $ 2,325,286
=========== ===========
The accompanying notes are an integral part of these financial statements.
9
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
--------- --------- ---------
Income:
Lease revenue ....................... $ 186,799 $ 303,817 $ 352,921
Interest income ..................... 62,529 103,142 82,442
Gain on sale of equipment ........... 33,599 38,412 6,520
--------- --------- ---------
Total income .................... 282,927 445,371 441,883
--------- --------- ---------
Expenses:
Depreciation ........................ 87,879 99,072 213,530
Equipment management fees ........... 5,961 10,590 13,384
Operating expenses - affiliate ...... 202,700 232,350 450,680
Partnership's share of unconsolidated
real estate venture's loss ...... 99,434 -- --
--------- --------- ---------
Total expenses .................. 395,974 342,012 677,594
--------- --------- ---------
Net (loss) income ........................ $(113,047) $ 103,359 $(235,711)
========= ========= =========
Net (loss) income
per limited partnership unit ........ $ (0.37) $ 0.34 $ (0.78)
========= ========= =========
Cash distributions declared
per limited partnership unit ........ $ -- $ 0.75 $ 0.75
========= ========= =========
The accompanying notes are an integral part of these financial statements.
10
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
GENERAL LIMITED PARTNERS
PARTNER ---------------------------
AMOUNT UNITS AMOUNT TOTAL
----------- ----------- ----------- -----------
Balance at December 31, 1997 .. $ (184,517) 286,711 $ 2,841,577 $ 2,657,060
Net loss - 1998 ........... (11,786) -- (223,925) (235,711)
Cash distributions declared (11,318) -- (215,033) (226,351)
----------- ----------- ----------- -----------
Balance at December 31, 1998 .. (207,621) 286,711 2,402,619 2,194,998
Net income - 1999 ......... 5,168 -- 98,191 103,359
Cash distributions declared (11,318) -- (215,033) (226,351)
----------- ----------- ----------- -----------
Balance at December 31, 1999 .. (213,771) 286,711 2,285,777 2,072,006
Net loss - 2000 ........... (5,652) -- (107,395) (113,047)
----------- ----------- ----------- -----------
Balance at December 31, 2000 .. $ (219,423) 286,711 $ 2,178,382 $ 1,958,959
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
11
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Cash flows provided by (used in) operating activities:
Net (loss) income .................................... $ (113,047) $ 103,359 $ (235,711)
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation ................................ 87,879 99,072 213,530
Gain on sale of equipment ................... (33,599) (38,412) (6,520)
Partnership's share of unconsolidated
real estate venture's loss .............. 99,434 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable ............................ 2,200 29,520 (1,669)
Accounts receivable - affiliate ............. 11,849 18,772 34,564
Increase (decrease) in:
Accrued interest ............................ -- -- (195)
Accrued liabilities ......................... (8,928) (32,684) 213,300
Accrued liabilities - affiliate ............. 7,449 427 (8,823)
Deferred rental income ...................... -- -- (20,866)
----------- ----------- -----------
Net cash provided by operating activities . 53,237 180,054 187,610
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from equipment sales ................... 35,530 73,591 678,204
Investment in real estate venture ............... (1,310,000) -- --
----------- ----------- -----------
Net cash (used in) provided by
investing activities .................. (1,274,470) 73,591 678,204
----------- ----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable .............. -- -- (22,990)
Distributions paid .............................. (56,588) (226,351) (226,351)
----------- ----------- -----------
Net cash used in financing activities ..... (56,588) (226,351) (249,341)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents . (1,277,821) 27,294 616,473
Cash and cash equivalents at beginning of year ....... 2,086,622 2,059,328 1,442,855
----------- ----------- -----------
Cash and cash equivalents at end of year ............. $ 808,801 $ 2,086,622 $ 2,059,328
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .......... $ -- $ -- $ 195
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
12
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
American Income Fund I-B, a Massachusetts Limited Partnership (the
"Partnership") was organized as a limited partnership under the Massachusetts
Uniform Limited Partnership Act (the "Uniform Act") on December 31, 1990, 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 General Partner (AFG Leasing VI Incorporated) and $100 from the
Initial Limited Partner (AFG Assignor Corporation). On March 1, 1991, the
Partnership issued 286,711 units of limited partnership interest (the "Units")
to 453 investors. The Partnership's General Partner, AFG Leasing VI
Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of
Equis Financial Group Limited Partnership (formerly known as American Finance
Group), a Massachusetts limited partnership ("EFG"). The General Partner is 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 ("Restated Agreement, as amended").
Significant operations commenced March 1, 1991 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 95% to the Limited Partners and 5% to the General
Partner.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 5).
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group", and its acronym, to a third-party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
13
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
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 federal agency
discount notes and 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, 2000, the Partnership had $690,619 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
REVENUE RECOGNITION
Effective January 1, 2000, the Partnership adopted the provisions of
Securities Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides
guidance for the recognition, presentation and disclosure of revenue in
financial statements. The adoption of SAB No. 101 had no impact on the
Partnership's financial statements.
Rents are payable to the Partnership monthly or quarterly 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. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and EFG would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 7 regarding the Class Action Lawsuit. Future minimum
rents of $94,057 are due as follows:
For the year ending December 31, 2001.................... $ 73,438
2002.................... 20,619
--------
Total $ 94,057
========
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is as
follows:
2000 1999 1998
------- ------- -------
Awin Leasing Company, Inc. ...... $91,451 $91,622 $91,622
General Motors Corporation ...... $34,477 $90,417 $94,977
Ford Motor Company .............. $27,611 $ -- $ --
Conwell Corporation ............. $21,173 $ -- $ --
Enseco Incorporated ............. $ -- $37,062 $38,616
Quanterra, Inc. ................. $ -- $31,506 $ --
Horizon Air Industries, Inc. .... $ -- $ -- $44,050
14
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS 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 EFG, one of its Affiliates or from
third-party sellers. Equipment Cost means the actual cost paid by the
Partnership to acquire the equipment, including acquisition fees. Where
equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the
actual price paid for the equipment by EFG or the Affiliate plus all actual
costs incurred by EFG or the Affiliate while carrying the equipment, including
all liens and encumbrances, less the amount of all primary term rents earned by
EFG or the Affiliate prior to selling the equipment. Where the seller of the
equipment was a third party, Equipment Cost reflects the seller's invoice price.
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 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.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG'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.
REAL ESTATE LOAN
The Partnership accounts for the loan to a real estate company using the
guidance set forth in the Third Notice to Practitioners by the American
Institute of Certified Public Accountants ("AICPA") in February 1986 entitled
"ADC Arrangements" (the "Third Notice"). The Partnership has evaluated this loan
and has determined that real estate accounting is appropriate. This
determination affects the Partnership's balance sheet classification of the loan
and the recognition of revenues derived therefrom. The Third Notice was issued
to address those real estate acquisition, development and construction
arrangements where a lender has virtually the same risk and potential rewards as
those of owners or joint ventures. Emerging Issues Task Force ("EITF") 86-21,
"Application of the AICPA Notice to Practitioners regarding Acquisition,
Development and Construction Arrangements to Acquisition of an Operating
Property" expanded the applicability of the Third Notice to entities other than
financial institutions.
Based on the applicability of the Third Notice, EITF 86-21 and
consideration of the economic substance of the transaction, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of the real estate company under the equity method of accounting.
15
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying value of long-lived assets, including equipment and the real
estate loan, will be reviewed for impairment whenever events or changes in
circumstances indicate that the recorded value cannot be recovered from
undiscounted future case flows.
ACCRUED LIABILITIES - AFFILIATE
Unpaid operating expenses and fees paid by EFG on behalf of the Partnership
and accrued but unpaid administrative charges and management fees are reported
as Accrued Liabilities - Affiliate (see Note 5).
CONTINGENCIES
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is probable.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated and remains
pending (See Note 7). The Partnership's estimated exposure for costs anticipated
to be incurred in pursuing the settlement proposal is approximately $353,000
consisting principally of legal fees and other professional service costs. These
costs are expected to be incurred regardless of whether the proposed settlement
ultimately is effected and, therefore, the Partnership expensed approximately
$262,000 of these costs in 1998 following the Court's approval of the settlement
plan. The cost estimate is subject to change and is monitored by the General
Partner based upon the progress of the settlement proposal and other pertinent
information. As a result, the Partnership expensed additional amounts of
approximately $41,000 and $50,000 for such costs during 2000 and 1999,
respectively.
ALLOCATION OF PROFITS AND LOSSES
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the Limited
Partners and 5% to the General Partner). See Note 6 for 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 286,711
Units outstanding during each of the three years in the period ended December
31, 2000 and computed after allocation of the General Partner's 5% 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.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 2000. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 2000 under contracted lease terms
and is presented as a range when more than one lease agreement is contained in
the stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
16
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- ------------------------------------------------------ --------------- ----------------- -----------------
Trailers/intermodal containers........................ 0-24 $ 536,143 GA/MI/OK
Materials handling.................................... 0 126,482 GA/MI/OH/UT
-----------------
Total equipment cost............................. 662,625
Accumulated depreciation......................... 539,007
-----------------
Equipment, net of accumulated depreciation....... $ 123,618
=================
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. 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 enabled the
Partnership to further diversify its equipment portfolio at inception by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could have resulted from a concentration in any single
equipment type, industry or lessee. At December 31, 2000, the Partnership's
equipment portfolio included equipment having a proportionate original cost of
$144,366, representing approximately 22% 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, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. At December 31, 2000, all of the
Partnership's equipment was subject to contracted leases or being leased on a
month-to-month basis.
NOTE 4 - INVESTMENT IN REAL ESTATE VENTURE
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships") collectively loaned $32 million to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate
company. Echelon Residential Holdings is owned by several investors, including
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities.
The Partnership's loan is $1,310,000. Echelon Residential Holdings, through
a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to
acquire various real estate assets from Echelon International Corporation, a
Florida-based real estate company. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity. In connection with the transaction, Echelon Residential
Holdings has pledged a security interest in all of its right, title and interest
in and to its membership interests in Echelon Residential LLC to the Exchange
Partnerships as collateral.
The loan is presented in accordance with the guidance for ADC Arrangements
as described in Note 2, Real Estate Loans, in the Partnership's financial
statements as of and for the year December 31, 2000. The loan is accounted for
as an investment in real estate venture and is presented net of the
Partnership's share of losses in Echelon Residential Holdings. For the period
ended December 31, 2000, the Partnership's share of losses in Echelon
Residential Holdings was $99,434 and is reflected on the Statement of Operations
as "Partnership's share of unconsolidated real estate venture's loss."
17
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
The summarized financial information for Echelon Residential Holdings as of
December 31, 2000 and for the period March 8, 2000 (commencement of operations)
through December 31, 2000 is as follows:
Total assets........................................ $ 68,580,891
Total liabilities................................... $ 70,183,162
Minority interest................................... $ 2,257,367
Total deficit ...................................... $ (3,859,638)
Total revenues...................................... $ 5,230,212
Total expenses, minority interest and equity
in loss of unconsolidated joint venture ........... $ 11,936,238
Net loss............................................ $ (6,706,026)
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2000 1999 1998
-------- -------- --------
Equipment management fees .......... $ 5,961 $ 10,590 $ 13,384
Administrative charges ............. 97,522 85,773 57,048
Reimbursable operating expenses
due to third parties ............ 105,178 146,577 393,632
-------- -------- --------
Total $208,661 $242,940 $464,064
======== ======== ========
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 2.23% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.
All equipment was purchased from EFG, one of its affiliates, including
other equipment leasing programs sponsored by EFG, or from third-party sellers.
The Partnership's Purchase Price is determined by the method described in Note
2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
EFG. EFG temporarily deposits collected funds in a separate interest-bearing
escrow account prior to remittance to the Partnership. At December 31, 2000, the
Partnership was owed $10,887 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 2001.
18
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
Certain affiliates of the General Partner own Units in the Partnership as
follows:
---------------------------------------- ----------------- -----------------------
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
---------------------------------------- ----------------- -----------------------
Atlantic Acquisition Limited Partnership 11,442 3.99%
---------------------------------------- ----------------- -----------------------
Old North Capital Limited Partnership 990 0.35%
--------------------------------------- ------------------ -----------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC") are both Massachusetts limited partnerships formed
in 1995. The general partners of AALP and ONC are controlled by Gary D. Engle.
EFG owns limited partnership interests, representing substantially all of the
economic benefit, of AALP and the limited partnership interests of ONC are owned
by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele and
President and Chief Executive Officer of EFG and sole shareholder and Director
of EFG's general partner.
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 (95% to the Limited Partners and 5% to the General Partner). 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 Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account. At December 31, 2000, the General Partner had a positive tax
capital account balance.
The following is a reconciliation between net income or loss reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
--------- --------- ---------
Net (loss) income ............................... $(113,047) $ 103,359 $(235,711)
Financial statement depreciation in
excess of (less than) tax depreciation 39,779 39,569 (11,073)
Deferred rental income ..................... -- -- (20,866)
Interest income - real estate venture ...... 159,975 -- --
Partnership's share of unconsolidated
real estate venture's loss ............. 99,434 -- --
Other ...................................... 1,624 39,693 649,684
--------- --------- ---------
Net income for federal income tax
reporting purposes ......................... $ 187,765 $ 182,621 $ 382,034
========= ========= =========
The principal component of "Other" consists of the difference between the
tax and financial statement gain or loss on equipment disposals.
19
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2000 and 1999:
2000 1999
----------- -----------
Partners' capital ......................................... $ 1,958,959 $ 2,072,006
Add back selling commissions and organization
and offering costs ................................ 801,375 801,375
Cumulative difference between federal income tax
and financial statement (loss) income ................ 171,468 (129,344)
----------- -----------
Partners' capital for federal income tax reporting purposes $ 2,931,802 $ 2,744,037
=========== ===========
Cumulative difference between federal income tax and financial statement
(loss) income represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 12, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided the
Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
In February 2000, counsel for the Plaintiffs and the Defendants entered
into a second amended stipulation of settlement (the "Second Amended
Stipulation") which modified certain of the settlement terms contained in the
Amended Stipulation. The Second Amended Stipulation was preliminarily approved
by the Court by its "Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000
Order"). Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold
20
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
a fairness hearing that will be open to all interested parties and permit any
party to object to the settlement. The investors of the Partnership and all
other plaintiff sub-class members will receive a Notice of Settlement and other
information pertinent to the settlement of their claims that will be mailed to
them in advance of the fairness hearing.
The settlement of the second sub-class is premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate principally as a finance company and would use
its best efforts to list its shares on the NASDAQ National Market or another
national exchange or market as soon after the Consolidation as Newco deems that
market conditions and its business operations are suitable for listing its
shares and Newco has satisfied all necessary regulatory and listing
requirements. The potential benefits and risks of the Consolidation will be
presented in a Solicitation Statement that will be mailed to all of the partners
of the Exchange Partnerships as soon as the associated regulatory review process
is completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provided, among other things, that commencing March 22,
1999, the Exchange Partnerships could collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively made a $32 million
loan as permitted by the Second Amended Stipulation approved by the Court. The
Partnership's portion of the aggregate loan is $1,310,000. The loan consists of
a term loan to Echelon Residential Holdings, a newly-formed real estate company
that is owned by several independent investors and, in his individual capacity,
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities. Echelon Residential Holdings, through a wholly-owned
subsidiary (Echelon Residential LLC), used the loan proceeds, along with the
loan proceeds from similar loans by 10 affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an independent Florida-based real estate company. The
loan has a term of 30 months maturing on September 8, 2002 and bears interest at
the annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. Echelon Residential Holdings has pledged its membership interests in
Echelon Residential LLC to the Exchange Partnerships as collateral for the loan.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of
21
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
the Exchange Partnerships with the opportunity to object to the participation of
their partnership in the Consolidation. Assuming the proposed settlement is
effected according to present terms, the Partnership's share of legal fees and
expenses related to the Class Action Lawsuit and the Consolidation is estimated
to be approximately $353,000, of which approximately $41,000, $50,000 and
$262,000 were expensed by the Partnership in 2000, 1999 and 1998, respectively.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permitted the partners to transfer Units to family members or as
a result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the Consolidation,
then that partnership will be excluded from the Consolidation. Notwithstanding
the extent of delays experienced thus far in achieving a final settlement of the
Class Action Lawsuit with respect to the Exchange Partnerships, the General
Partner and its affiliates, in consultation with counsel, continue to feel that
there is a reasonable basis to believe that a final settlement of the sub-class
involving the Exchange Partnerships ultimately will be achieved. However, in the
absence of a final settlement approved by the Court, the Defendants intend to
defend vigorously against the claims asserted in the Class Action Lawsuit.
Neither the General Partner nor its affiliates can predict with any degree of
certainty the cost of continuing litigation to the Partnership or the ultimate
outcome.
22
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999:
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
--------- --------- -------------- ------------ -------
2000
Total lease revenue .......... 81,082 44,731 29,972 31,014 186,799
Net income (loss) ............ 36,059 (3,076) (83,405) (62,625) (113,047)
Net income (loss) per
limited partnership unit ... 0.12 (0.01) (0.28) (0.20) (0.37)
1999
Total lease revenue .......... 73,393 80,743 74,004 75,677 303,817
Net income ................... 23,211 19,200 50,243 10,705 103,359
Net income per
limited partnership unit ... 0.08 0.06 0.17 0.03 0.34
23
ADDITIONAL FINANCIAL INFORMATION
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000, 1999 and 1998.
2000 1999 1998
---------- ---------- ----------
Rents earned prior to disposal of
equipment, net of interest charges .... $ 846,486 $1,056,983 $2,119,870
Sale proceeds realized upon disposition
of equipment .......................... 35,530 73,591 678,204
---------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds ........... 882,016 1,130,574 2,798,074
Original acquisition cost of equipment
disposed .............................. 546,096 651,241 2,706,744
---------- ---------- ----------
Excess of total cash generated to cost
of equipment disposed ................. $ 335,920 $ 479,333 $ 91,330
========== ========== ==========
24
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 2000
SALES AND
OPERATIONS REFINANCINGS TOTAL
----------- ----------- -----------
Net (loss) income ............................. $ (146,646) $ 33,599 $ (113,047)
Add:
Depreciation ............................. 87,879 -- 87,879
Management fees .......................... 5,961 -- 5,961
Book value of disposed equipment ......... -- 1,931 1,931
Partnership's share of unconsolidated
real estate venture's loss ............... 99,434 -- 99,434
----------- ----------- -----------
Cash from operations, sales and
refinancings ............................. 46,628 35,530 82,158
Less:
Management fees .......................... (5,961) -- (5,961)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings ................... 40,667 35,530 76,197
Other sources and uses of cash:
Cash and cash equivalents
at beginning of year ..................... 1,787,529 299,093 2,086,622
Net change in receivables and
accruals ................................. 12,570 -- 12,570
Investment in real estate venture ........ (1,031,965) (278,035) (1,310,000)
Less:
Cash distributions paid .................. -- (56,588) (56,588)
----------- ----------- -----------
Cash and cash equivalents at end of year ...... $ 808,801 $ -- $ 808,801
=========== =========== ===========
25
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 9.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
FOR THE YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2000, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 204,179