EXHIBIT 13
AMERICAN INCOME FUND I-E,
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-E, 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-E,
a Massachusetts Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
PAGE
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SELECTED FINANCIAL DATA.................................................. 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 3-9
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................... 10
Statement of Financial Position
at December 31, 2000 and 1999............................................ 11
Statement of Operations
for the years ended December 31, 2000, 1999 and 1998..................... 12
Statement of Changes in Partners' Capital
for the years ended December 31, 2000, 1999 and 1998..................... 13
Statement of Cash Flows
for the years ended December 31, 2000, 1999 and 1998..................... 14
Notes to the Financial Statements........................................15-27
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed.................................. 28
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings.................................. 29
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......................... 30
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
--------------------- ------------ ------------ ------------ ------------- ------------
Operating and sales-type lease revenue........ $ 1,257,174 $ 2,106,199 $ 2,430,065 $ 5,115,146 $ 5,328,237
Interest income .............................. $ 261,010 $ 395,312 $ 306,920 $ 152,995 $ 158,602
Net (loss) income ............................ $ (240,313) $ 1,649,283 $ 137,523 $ 1,252,723 $ 1,062,652
Per Unit:
Net (loss) income ....................... $ (0.26) $ 1.77 $ 0.15 $ 1.35 $ 1.14
Cash distributions declared ............. $ -- $ 1.01 $ 1.01 $ 1.27 $ 2.40
FINANCIAL POSITION
------------------
Total assets ................................. $ 13,391,568 $ 14,289,258 $ 14,457,880 $ 15,908,093 $ 18,074,828
Total long-term obligations .................. $ 2,249,301 $ 2,651,371 $ 3,688,947 $ 4,768,982 $ 6,586,970
Partners' capital ............................ $ 10,589,711 $ 10,912,512 $ 10,136,041 $ 10,706,355 $ 10,865,261
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-E, 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 10 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 1991 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 10 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, 2002. 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 final settlement has not been effected and therefore
dissolution of the Partnership has been deferred until a later date.
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, the loan to Echelon Residential Holdings
LLC ("Echelon Residential Holdings") and its ownership of securities of Semele
Group, Inc. ("Semele"). 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 operating
lease revenue of $1,254,943 compared to $2,106,199 and $2,430,065 for the years
ended December 31, 1999 and 1998, respectively. The decrease in operating lease
revenue from 1999 to 2000 resulted primarily from the expiration of lease terms
related to the Partnership's interest in three Boeing 737-2H4 aircraft and a
McDonnell Douglas aircraft. The decrease in operating lease revenue from 1998 to
1999 resulted from lease term expirations and equipment sales. The amount of
operating lease revenue in the near term will increase due to the re-lease of
the McDonnell Douglas MD-82 aircraft and one of the Boeing 737-2H4 aircraft in
September 2000. Subsequently, operating lease revenue is expected to decline due
to primary and renewal lease term expirations and equipment sales. See
discussion below related to the Partnership's sales-type lease revenue for the
year ended December 31, 2000.
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
3
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.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership held a proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold resulting in $228,930 of proceeds to the Partnerships
and a net gain, for financial statement purposes, of $38,598 for the
Partnership's proportional interest in the aircraft. In September 2000, a second
Boeing 737-2H4 aircraft was re-leased with a lease term expiring in September
2003. Under the terms of this re-lease agreement, the Partnership will receive
rents of $316,980 over the term of the lease. The Partnership entered into a
conditional sales agreement to sell its interest in the remaining Boeing 737-2H4
aircraft as described below.
The lease term associated with a McDonnell Douglas MD-82 aircraft, in which
the Partnership holds an ownership interest, expired in January 2000. The
aircraft was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V.,
with a lease term expiring in September 2004. Under the terms of this re-lease
agreement, the Partnership will receive rents of $769,344 over the term of the
lease.
Interest income for the year ended December 31, 2000 was $261,010 compared
to $395,312 and $306,920 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 instruments. 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. Interest income included $93,872 in each of the years ended
December 31, 2000,1999 and 1998 earned on a note receivable from Semele (see
Note 6 to the accompanying financial statements). The note receivable from
Semele is scheduled to mature in April 2003. On March 8, 2000, the Partnership
utilized $4,790,000 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 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).
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft. The title to the aircraft
transfers to Royal Aviation Inc., at the expiration of the lease term. The sale
of the aircraft has been recorded by the Partnership as a sales-type lease, with
a lease term expiring in January 2002. For the year ended December 31, 2000, the
Partnership recorded a net gain on sale of equipment, for financial statement
purposes, of $81,911 for the Partnership's proportional interest in the aircraft
and recognized sales-type lease revenue of $2,231.
During the year ended December 31, 2000, the Partnership sold other
fully-depreciated equipment to existing lessees and third parties, resulting in
a net gain, for financial reporting purposes of $65,855.
During the year ended December 31, 1999, the Partnership sold equipment
having a net book value of $1,223,569 to existing lessees and third parties.
These sales resulted in a net gain, for financial statement purposes, of
$908,298 compared to a net gain in 1998 of $208,143 on equipment having a net
book value of $108,381.
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
4
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 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 may not be indicative of the total
residual value the Partnership achieved from leasing the equipment.
Depreciation expense was $698,894, $948,344, and $1,438,667 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 at the date of primary lease
expiration on a straight-line basis over such term. For purposes of this policy,
estimated residual values represent estimates of equipment values at the date of
primary lease expiration. To the extent that equipment is held beyond its
primary lease term, the Partnership continues to depreciate the remaining net
book value of the asset on a straight-line basis over the asset's remaining
economic life.
Interest expense was $222,126, $234,357 and $338,932 for the years ended
December 31, 2000, 1999, and 1998, respectively. Interest expense in the near
term will increase as a result of the Partnership's debt refinancing in February
2001. (See Note 12 to the financial statements.) Subsequently, interest expense
will decline as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt. See additional discussion
below regarding the refinancing of the debt in 2001.
Management fees were $60,456, $99,353, and $110,415 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.
Write-down of investment securities-affiliate was $377,849 for the year
ended December 31, 1998. The General Partner determined that the decline in
market value of its Semele common stock was other-than-temporary. As a result,
the Partnership wrote down the cost of the Semele common stock from $15 per
share to $4.125 per share (the quoted price of Semele stock on NASDAQ at
December 31, 1998). See further discussion below.
Operating expenses were $599,807, $478,472, and $541,742 for the years
ended December 31, 2000, 1999 and 1998, respectively. The primary reason for the
increase in operating expenses from 1999 to 2000 is storage, remarketing and
maintenance costs associated with the Partnership's aircraft. In 2000 and 1999,
the Partnership accrued approximately $97,000 and $131,000, respectively, for
the reconfiguration costs and completion of a D-Check incurred to facilitate the
remarketing of the McDonnell Douglas MD-82 aircraft released in September 2000.
In 2000, the Partnership also accrued approximately $131,000 for a required
D-check for a second McDonnell Douglas MD-82 aircraft. In addition, in 1999 the
Partnership incurred approximately $52,000 in connection with the remarketing of
an aircraft in which it held an ownership interest. The Partnership sold its
interest in this aircraft during 1999. Operating expenses in 2000, 1999 and 1998
also included approximately $41,000, $50,000 and $334,000, respectively, related
to the Class Action Lawsuit described in Note 10 to the financial statements.
Other operating expenses consist principally of professional service costs, such
as audit and other legal fees, as well as printing, distribution and other
remarketing expenses.
For the year ended December 31, 2000, the Partnership's share of losses in
Echelon Residential Holdings was $363,578. The loss is reflected on the
Statement of Operations as "Partnership's share of unconsolidated real estate
venture's loss". See further discussion below.
5
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
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $1,130,729, $1,469,365, and $2,642,701 for the years ended 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 will also
continue to decline as the Partnership remarkets its equipment. The Partnership,
however, may continue to incur significant costs to faciliate the successful
remarketing of its aircraft in the future. 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 is reported under investing
activities on the accompanying Statement of Cash Flows. During 2000, the
Partnership realized net proceeds of $294,785, compared to $2,131,867 and
$316,524 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 $2,535,833 from contractual operating and sales-type lease
agreements (see Note 2 to the financial statements), a portion of which will be
used to amortize the principal balance of notes payable of $2,249,301 (see Note
8 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 10 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 $4,790,000 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 bears interest at the annual 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,
6
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 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.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 42,574 shares of Semele common stock and a beneficial
interest in the Semele Note of $938,718. The Semele Note bears an annual
interest rate of 10% and is scheduled to mature in April 2003. The note also
requires mandatory principal reductions, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", marketable
equity securities classified as available-for-sale are carried at fair value.
During the year ended December 31, 1998, the Partnership decreased the carrying
value of its investment in Semele common stock to $4.125 per share (the quoted
price of the Semele stock on NASDAQ at December 31, 1998) resulting in an
unrealized loss in 1998 of $143,690. This loss was reported as a component of
comprehensive income, included in the Statement of Changes in Partners' Capital.
At December 31, 1998, the General Partner determined that the decline in market
value of the Semele common stock was other-than-temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $4.125 per share
for a total realized loss of $377,849 in 1998.
During the year ended December 31, 1999, the Partnership increased the
carrying value of its investment in Semele common stock to $5.75 per share (the
quoted price of the Semele stock on NASDAQ SmallCap market at December 31,
1999), resulting in an unrealized gain of $69,184. During the year ended
December 31, 2000, the Partnership decreased the carrying value of its
investment in Semele common stock to $3.8125 per share (the quoted price of the
Semele stock on NASDAQ Small Cap market nearest December 31, 2000), resulting in
an unrealized loss of $82,488. The unrealized gain in 1999 and unrealized loss
in 2000 were reported as a component of comprehensive income and loss,
respectively, included in the Statement of Changes in Partners' Capital.
The Semele Note and the Semele common stock are subject to a number of
risks including, Semele's ability to make loan payments which is dependent upon
the liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998, the General Partner determined that the decline in
market value of the stock was other-than-temporary and wrote down the
Partnership's investment. Subsequently, the market value of the Semele common
stock has fluctuated. The market value of the stock could decline in the future.
Gary D. Engle, President and Chief Executive Officer of EFG, the sole
shareholder of the General Partner, and is Chairman and Chief Executive Officer
of Semele and James A. Coyne, Executive Vice President of EFG is Semele's
President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members
of the Board of Directors of, and own significant stock in, Semele.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal related to such indebtedness are reported as a component
of financing activities in the Partnership's Statement of Cash Flows. The
corresponding note
7
agreements are recourse only to the specific equipment financed and to the
minimum rental payments contracted to be received during the debt amortization
period (which period generally coincides with the lease rental term). As rental
payments are collected, a portion or all of the rental payment is used to repay
the associated indebtedness. In the near term, the amount of cash used to repay
debt obligations will increase due to the refinancing discussed below.
Subsequently the amount of cash used will decline as the principal balance of
notes payable is reduced through the collection and application of rents.
However, the Partnership has a balloon payment obligation at the expiration of
the lease term related to aircraft leased by Reno Air, Inc. of $555,597, which
matures in January 2003.
In February 2000, the Partnership and certain affiliated investment
programs (collectively, the "Programs") refinanced the indebtedness, which
matured in January 2000 associated with a McDonnell Douglas MD-82 aircraft
re-leased in September 2000. In addition to refinancing the existing
indebtedness of $3,370,000, the Programs received additional debt proceeds of
$1,350,000 required to perform a D-Check on the aircraft. The Partnership
received $131,618 from such proceeds. The note had a fluctuating interest rate
based on LIBOR plus a margin with interest payments due monthly. The
Partnership's aggregate share of the refinanced and new indebtedness was
$458,801, which matured in August 2000. The Partnership paid interest-only on
the debt throughout 2000. In February 2001, the Programs refinanced the
outstanding indebtedness and accrued interest related to this aircraft. In
addition to refinancing the Programs' total existing indebtedness and accrued
interest of $4,758,845, the Programs received additional debt proceeds of
$3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $792,567 including $462,274 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $330,293 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft on lease to
Finnair OY of $85,579 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed
interest rate of 7.65%, principal is amortized monthly and the Partnership has a
balloon payment obligation at the expiration of the lease term of $264,310 in
September 2004.
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. In particular,
the Partnership must contemplate the potential liquidity risks associated with
its investment in commercial jet aircraft. The management and remarketing of
aircraft can involve, among other things, significant costs and lengthy
remarketing initiatives. Although the Partnership's lessees are required to
maintain the aircraft during the period of lease contract, repair, maintenance,
and/or refurbishment costs at lease expiration can be substantial. For example,
an aircraft that is returned to the Partnership meeting minimum airworthiness
standards, such as flight hours or engine cycles, nonetheless may require heavy
maintenance in order to bring its engines, airframe and other hardware up to
standards that will permit its prospective use in commercial air transportation.
At December 31, 2000, the Partnership's equipment portfolio included
ownership interests in four commercial jet aircraft, one of which is a Boeing
737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. The remaining three aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001, January 2003, and September 2004, respectively.
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 presented as a component of
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 $235,495 was paid in January 2000. In
any given year, it is possible that Limited Partners will be allocated taxable
income in excess of
8
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 9 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 consist
of the cumulative difference between income or loss for tax purposes and
financial statement income or loss and the treatment of unrealized gains or
losses on investment securities for book and tax purposes. The principal
component of the cumulative difference between financial statement income or
loss and tax income or loss results 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.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 10 to the accompanying financial statements. 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.
9
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Fund I-E,
a Massachusetts Limited Partnership:
We have audited the accompanying statements of financial position of American
Income Fund I-E, 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 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 $4,790,000), 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-E, 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
10
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents .................................. $ 2,087,671 $ 6,089,722
Rents receivable ........................................... 227,675 171,582
Accounts receivable - affiliate ............................ 85,244 555,112
Accounts receivable - other ................................ 32,056 --
Investment in real estate venture .......................... 4,426,422 --
Net investment in sales-type lease ......................... 215,215 --
Note receivable - affiliate ................................ 938,718 938,718
Investment securities - affiliate - at fair market value ... 162,313 244,801
Equipment at cost, net of accumulated
depreciation of $4,823,912 and $6,929,313
at December 31, 2000 and 1999, respectively ............. 5,216,254 6,289,323
------------ ------------
Total assets ....................................... $ 13,391,568 $ 14,289,258
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable .............................................. $ 2,249,301 $ 2,651,371
Accrued interest ........................................... 17,870 25,556
Accrued liabilities ........................................ 481,926 398,951
Accrued liabilities - affiliate ............................ 21,651 17,512
Deferred rental income ..................................... 31,109 47,861
Cash distributions payable to partners ..................... -- 235,495
------------ ------------
Total liabilities .................................. 2,801,857 3,376,746
------------ ------------
Partners' capital (deficit):
General Partner .......................................... (444,865) (428,725)
Limited Partnership Interests
(883,829.31 Units; initial purchase price of $25 each) ... 11,034,576 11,341,237
------------ ------------
Total partners' capital ............................ 10,589,711 10,912,512
------------ ------------
Total liabilities and partners' capital ............ $ 13,391,568 $ 14,289,258
============ ============
The accompanying notes are an integral part of these financial statements
11
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Income:
Operating lease revenue ....................... $ 1,254,943 $ 2,106,199 $ 2,430,065
Sales-type lease revenue ...................... 2,231 -- --
Interest income ............................... 167,138 301,440 213,048
Interest income - affiliate ................... 93,872 93,872 93,872
Gain on sale of equipment ..................... 186,364 908,298 208,143
----------- ----------- -----------
Total income .............................. 1,704,548 3,409,809 2,945,128
----------- ----------- -----------
Expenses:
Depreciation .................................. 698,894 948,344 1,438,667
Interest expense .............................. 222,126 234,357 338,932
Equipment management fees -
affiliate .................................. 60,456 99,353 110,415
Write-down of investment securities -
affiliate ................................... -- -- 377,849
Operating expenses - affiliate ................ 599,807 478,472 541,742
Partnership's share of unconsolidated
real estate venture's loss .................. 363,578 -- --
----------- ----------- -----------
Total expenses ............................ 1,944,861 1,760,526 2,807,605
----------- ----------- -----------
Net (loss) income .................................. $ (240,313) $ 1,649,283 $ 137,523
=========== =========== ===========
Net (loss) income
per limited partnership unit .................. $ (0.26) $ 1.77 $ 0.15
=========== =========== ===========
Cash distributions declared
per limited partnership unit .................. $ -- $ 1.01 $ 1.01
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
12
AMERICAN INCOME FUND I-E,
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 ....................... $ (439,033) 883,829.31 $ 11,145,388 $ 10,706,355
Net income - 1998 ............................... 6,877 -- 130,646 137,523
Unrealized loss on investment securities -
affiliate ..................................... (7,184) -- (136,506) (143,690)
Less: Reclassification adjustment for write-
down of investment securities - affiliate ..... 18,892 -- 358,957 377,849
------------ ---------- ------------ ------------
Comprehensive income ............................ 18,585 -- 353,097 371,682
Cash distributions declared ........................ (47,100) -- (894,896) (941,996)
------------ ---------- ------------ ------------
Balance at December 31, 1998 ....................... (467,548) 883,829.31 10,603,589 10,136,041
Net income - 1999 ............................... 82,464 -- 1,566,819 1,649,283
Unrealized gain on investment securities -
affiliate .................................... 3,459 -- 65,725 69,184
------------ ---------- ------------ ------------
Comprehensive income ............................ 85,923 -- 1,632,544 1,718,467
Cash distributions declared ..................... (47,100) -- (894,896) (941,996)
------------ ---------- ------------ ------------
Balance at December 31, 1999 ....................... (428,725) 883,829.31 11,341,237 10,912,512
Net loss - 2000 ................................. (12,016) -- (228,297) (240,313)
Unrealized loss on investment securities -
affiliate ..................................... (4,124) -- (78,364) (82,488)
------------ ---------- ------------ ------------
Comprehensive loss .............................. (16,140) -- (306,661) (322,801)
------------ ---------- ------------ ------------
Balance at December 31, 2000 ....................... $ (444,865) 883,829.31 $ 11,034,576 $ 10,589,711
============ ========== ============ ============
The accompanying notes are an integral part of these financial statements
13
AMERICAN INCOME FUND I-E,
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 .............................................. $ (240,313) $ 1,649,283 $ 137,523
Adjustments to reconcile net (loss) income
To net cash provided by operating activities:
Depreciation .............................................. 698,894 948,344 1,438,667
Sales-type lease revenue................................... (2,231) -- --
Gain on sale of equipment ................................. (186,364) (908,298) (208,143)
Write-down of investment securities - affiliate ........... -- -- 377,849
Partnership's share of unconsolidated
real estate venture's loss ............................ 363,578 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable ...................................... (56,093) 129,981 (90)
Accounts receivable - affiliate ....................... 469,868 (442,428) 696,759
Accounts receivable - other ........................... (32,056) -- --
Collections on net investment in sales-type lease...... 52,770 -- --
Increase (decrease) in:
Accrued interest ...................................... (7,686) (10,741) 4,801
Accrued liabilities ................................... 82,975 103,451 286,300
Accrued liabilities - affiliate ....................... 4,139 (80) (33,178)
Deferred rental income ................................ (16,752) (147) (57,787)
----------- ----------- -----------
Net cash provided by operating activities ........... 1,130,729 1,469,365 2,642,701
----------- ----------- -----------
Cash flows (used in) provided by investing activities:
Proceeds from equipment sales ............................. 294,785 2,131,867 316,524
Investment in real estate venture ......................... (4,790,000) -- --
----------- ----------- -----------
Net cash (used in) provided by
investing activities ...................... (4,495,215) 2,131,867 316,524
----------- ----------- -----------
Cash flows (used in) provided by financing activities:
Proceeds from notes payable ............................... 131,618 -- --
Principal payments - notes payable ........................ (533,688) (1,037,576) (1,080,035)
Distributions paid ........................................ (235,495) (941,996) (941,996)
----------- ----------- -----------
Net cash used in financing activities ............... (637,565) (1,979,572) (2,022,031)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ........... (4,002,051) 1,621,660 937,194
Cash and cash equivalents at beginning of year ................. 6,089,722 4,468,062 3,530,868
----------- ----------- -----------
Cash and cash equivalents at end of year ....................... $ 2,087,671 $ 6,089,722 $ 4,468,062
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 229,812 $ 245,098 $ 334,131
=========== =========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Equipment sold on sales-type lease......................... $ 265,754 $ -- $ --
=========== =========== ===========
See Note 6 to the financial statements regarding the carrying value of the
Partnership's investment securities - affiliate.
The accompanying notes are an integral part of these financial statements
14
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
American Income Fund I-E, a Massachusetts Limited Partnership (the
"Partnership") was organized as a limited partnership under the Massachusetts
Uniform Limited Partnership Act (the "Uniform Act") on August 29, 1991, 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 December 4, 1991, the
Partnership concluded an Interim Closing and issued 587,079.96 units of limited
partnership interest (the "Units") to 654 investors for a purchase price of
$14,569,875. Included in the 587,079.96 units were 4,284.96 bonus units. On
January 31, 1992, the Partnership concluded its Final Closing. An additional
296,749.35 units (including 626.35 bonus units) were purchased for an additional
purchase price of $7,403,075 and an additional 735 investors became Limited
Partners of the Partnership. As of January 31, 1992, an aggregate total of
883,829.31 units (including 4,911.31 bonus units) had been purchased for an
aggregate total purchase price of $21,972,950 and an aggregate of 1,089
investors had become Limited Partners of the Partnership. 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
(the "Restated Agreement, as amended").
Significant operations commenced on December 4, 1991 when the Partnership
made its initial equipment acquisition. 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 7).
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 Equipment 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.
15
AMERICAN INCOME FUND I-E,
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 in 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 $1,970,913 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 Commisssion 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, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The majority of 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 10 regarding the Class Action Lawsuit. Future
minimum rents for operating leases of $2,307,117 are due as follows:
For the year ending December 31, 2001...... $ 863,952
2002...... 807,482
2003...... 458,522
2004...... 177,161
----------
Total..... $2,307,117
==========
Future minimum rents for operating leases does not include the operating
leases for which the lease payments are based on the usage of the equipment
leased.
Lease payments for the sales-type lease are due monthly and the related
revenue is recognized by a method which produces a constant periodic rate of
return on the outstanding investment in the lease. Future minimum lease payments
for the sales-type lease of $228,716 are due in the year ending December 31,
2001. Unearned income is recognized sales-type lease revenue over the lease term
using the interest method.
16
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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
-------- -------- --------
Reno Air, Inc. ......................... $314,580 $302,809 $306,806
Finnair OY ............................. $226,908 $415,268 $418,516
General Motors Corporation ............. $210,609 $286,911 $363,440
Union Pacific Railroad Company ......... $195,745 $ -- $ --
Trans Ocean Container Corp. ............ $142,258 $ -- $279,105
Southwest Airlines, Inc. ............... $ -- $340,916 $338,112
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.
17
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
INVESTMENT SECURITIES - AFFILIATE
The Partnership's investment in Semele Group Inc. ("Semele") is considered
to be available-for-sale and as such is carried at fair value with unrealized
gains and losses reported as a separate component of partners' capital.
Other-than-temporary declines in market value are recorded as write-down of
investment in the Statement of Operations (see Note 6). Unrealized gains or
losses on the Partnership's available-for-sale securities are required to be
included in comprehensive (loss) income.
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.
NET INVESTMENT IN SALES-TYPE LEASE
For leases that qualify as sales-type leases, the Partnership recognizes
profit or loss at lease inception to the extent the fair value of the property
leased differs from the carrying value. For balance sheet purposes, the
aggregate lease payments receivable are recorded on the balance sheet net of
unearned income, representing interest, as net investment in sales-type lease.
Unearned income is recognized as sales-type lease revenue over the lease term
using the interest method.
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 cash flows.
ACCRUED LIABILITIES - AFFILIATE
Unpaid operating expenses 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 7).
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 10). The Partnership's estimated exposure for costs
anticipated to be incurred in pursuing the settlement proposal is approximately
$425,000 consisting principally of legal fees and other professional service
costs. These costs are expected to be incurred regardless of whether
18
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
the proposed settlement ultimately is effected and, therefore, the Partnership
expensed approximately $334,000 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 9 for allocation of income or
loss for income tax purposes.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," effective in 1998, requires the disclosure of
comprehensive income (loss) to reflect changes in partners' capital that result
from transaction and economic events from nonowner sources. Accumulated other
comprehensive income (loss) for the years ended December 31, 2000, 1999 and 1998
primarily represents the Partnership's unrealized gains (losses) on the
investment in Semele:
2000 1999 1998
--------- --------- ---------
Beginning balance ....................... $ 69,184 $ -- $(234,159)
Adjustments primarily related to the
Partnership's investment in Semele .... (82,488) 69,184 234,159
--------- --------- ---------
Ending balance .......................... $ (13,304) $ 69,184 $ --
========= ========= =========
NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT
Net income (loss) and cash distributions per Unit are based on 883,829.31
Units outstanding during each of the three years in the period ended December
31, 2000 and are 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 separate 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.
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- ------------------------------------------------------ ----------- ------------ -----------------
Aircraft.............................................. 4-44 $ 5,659,663 NV/Foreign
Trailers/intermodal containers........................ 30 1,756,524 CA
Railroad.............................................. 39 1,522,810 NE
Materials handling.................................... 0-12 1,093,020 CT/IL/MI/PA/SC/TX
Photocopying.......................................... 0 8,149 CA
-----------
Total equipment cost.............................. 10,040,166
Accumulated depreciation.......................... 4,823,912
-----------
Equipment, net of accumulated depreciation........ $ 5,216,254
===========
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
19
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
Partnership's equipment portfolio included equipment having a proportionate
original cost of $8,940,072, representing approximately 89% of total equipment
cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $6,610,000
and a net book value of approximately $4,506,000 at December 31, 2000 (see Note
8).
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 participation in the loan is $4,790,000. 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 year
ended December 31, 2000, the Partnership's share of losses in Echelon
Residential Holdings was $363,578 and is reflected on the Statement of
Operations as "Partnership's share of unconsolidated real estate venture's
loss."
20
AMERICAN INCOME FUND I-E,
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 - NET INVESTMENT IN SALES-TYPE LEASE
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft transfers to Royal
Aviation Inc., at the expiration of the lease term. The sale of the aircraft has
been recorded by the Partnership as a sales-type lease, with a lease term
expiring in January 2002. For the year ended December 31, 2000, the Partnership
recorded a net gain on sale of equipment, for financial statement purposes, of
$81,911 for the Partnership's proportional interest in the aircraft and
recognized sales-type lease revenue of $2,231. The net book value of equipment
sold on sales-type lease totaled $265,754, which was a non-cash transaction. The
components of the net investment in the sales-type lease are as follows:
Total minimum lease payments to be received ........................ $228,716
Less: Unearned income ............................................. 13,501
--------
Total .................................. $215,215
========
Unearned income is being amortized to revenue over the lease term, expiring
in January 2002.
NOTE 6 - INVESTMENT SECURITIES - AFFILIATE - AT FAIR MARKET VALUE AND NOTE
RECEIVABLE - AFFILIATE
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 42,574 shares of Semele common stock. The Partnership also
received a beneficial interest in a note receivable from Semele ("the Semele
Note") of $938,718 in connection with the exchange.
In accordance with the Financial Accounting Standard Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
marketable equity securities classified as available-for-sale are required to be
carried at fair value. During the year ended December 31, 1998, the Partnership
decreased the carrying value of its investment in Semele common stock to $4.125
per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998)
resulting in an unrealized loss in 1998 of $143,690. This loss was reported as a
component of comprehensive income, included in the Statement of Changes in
Partners' Capital. At December 31, 1998, the General Partner determined that the
decline in market value of the Semele common stock was other-than-temporary. As
a result, the Partnership wrote down the cost of the Semele common stock to
$4.125 per share for a total realized loss of $377,849 in 1998.
During the year ended December 31, 1999, the Partnership increased the
carrying value of its investment in Semele common stock to $5.75 per share (the
quoted price of the Semele stock on NASDAQ Small Cap market at December 31,
1999), resulting in an unrealized gain of $69,184. During the year ended
December 31, 2000, the Partnership decreased the carrying value of its
investment in Semele common stock to $3.8125 per share (the quoted price of the
Semele stock on NASDAQ Small Cap market at the date the stock traded closest to
21
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
December 31, 2000), resulting in an unrealized loss of $82,488. The unrealized
gain in 1999 and the unrealized loss in 2000 were reported as a component of
comprehensive income and loss, respectively, included in the Statement of
Changes in Partners' Capital.
The Semele Note bears an annual interest rate of 10% and is scheduled to
mature in April 2003.The note requires mandatory principal reductions, if and to
the extent that net proceeds are received by Semele from the sale or refinancing
of its principal real estate asset consisting of an undeveloped 274-acre parcel
of land near Malibu, California. The Partnership recognized interest income
related to the Semele Note of $93,872 in each of the years ended December 31,
2000, 1999 and 1998.
NOTE 7 - 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 ..................... $ 60,456 $ 99,353 $110,415
Administrative charges ........................ 118,142 115,923 66,924
Reimbursable operating expenses
due to third parties ..................... 481,665 362,549 474,818
-------- -------- --------
Total .......... $660,263 $577,825 $652,157
======== ======== ========
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 revenue
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 acquired from EFG, one of its Affiliates or from
third-party sellers. The Partnership's acquisition cost was determined by the
method described in Note 2, "Equipment on Lease".
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. 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 $85,244 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2001.
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 23,472 2.66%
- ----------------------------------------------- -------------------------- ------------------------
Old North Capital Limited Partnership 87,118.15 9.86%
- ----------------------------------------------- -------------------------- ------------------------
22
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 Engle. EFG
owns limited partnership interests, representing substantially all of the
economic benefit, in AALP and the limited partnership interests of ONC are owned
by Semele. Gary D. Engle is Chairman and Chief Financial Officer of Semele and
President and Chief Executive Officer of EFG and sole shareholder and Director
of EFG's general partner. James A. Coyne, Executive Vice President of EFG, is
Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both
members of the Board of Directors of, and own significant stock in, Semele.
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 2000 consisted of installment notes of
$2,249,301 payable to banks and institutional lenders. The installment notes
bear an interest rate of either 8.22% or a fluctuating interest rate based on
LIBOR (approximately 6.7% at December 31, 2000) plus a margin. All of the
installment notes are non-recourse and are collateralized by the equipment and
assignment of the related lease payments. The Partnership has a $555,597 balloon
payment obligation to be paid at the expiration of the lease term related to
aircraft leased by Reno Air, Inc. in January 2003. The Partnership also had a
balloon payment obligation of due at the expiration of the lease term related to
an aircraft leased to Finnair OY. The Finnair indebtedness was due to mature in
2001. In addition, the Partnership had a balloon obligation of $458,501, which
matured in August 2000. The Partnership paid interest-only on this debt through
2000 and in February 2001, the Partnership and certain affiliated investment
programs refinanced this indebtedness and repaid the outstanding indebtedness
related to the Finnair OY aircraft. See Note 12 - Subsequent Event, regarding
this refinancing.
Management believes that the carrying amount of notes payable approximates
fair value at December 31, 2000 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the installment notes payable at December 31,
2000, reflecting the maturity of the notes in consideration of the February 2001
refinancing discussed above, are as follows:
For the year ending December 31, 2001 $ 470,927
2002 558,317
2003 837,160
2004 382,897
----------
Total $2,249,301
==========
NOTE 9 - 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 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 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.
23
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 .................................. $ (240,313) $ 1,649,283 $ 137,523
Financial statement depreciation
less than tax depreciation ................. (409,157) (722,770) (586,707)
Deferred rental income ........................ (16,752) (147) (57,787)
Interest income - real estate venture ......... 584,948 -- --
Partnership's share of unconsolidated
real estate venture's loss ................. 363,578 -- --
Other ......................................... 76,515 1,244,412 448,330
----------- ----------- -----------
Net income (loss) for federal income tax
reporting purposes ............................ $ 358,819 $ 2,170,778 $ (58,641)
=========== =========== ===========
The principal component of "Other" consists of the difference between the
tax and financial statement gain or loss on equipment disposals.
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 ........................................................ $ 10,589,711 $ 10,912,512
Add back selling commissions and organization and offering costs .... 2,466,957 2,466,957
Unrealized loss/(gain) on investment securities - affiliate ......... 13,304 (69,184)
Cumulative difference between federal income tax
and financial statement income (loss) ............................... (1,583,555) (2,182,687)
------------ ------------
Partners' capital for federal income tax reporting purposes .............. $ 11,486,417 $ 11,127,598
============ ============
Unrealized loss/(gain) on investment securities and cumulative difference
between federal income tax and financial statement income (loss) represent
timing differences.
NOTE 10 - 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".
24
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 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.
25
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 $4,790,000. 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 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. 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 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 $425,000, of which approximately $334,000 was expensed by the
Partnership in 1998 and additional amounts of approximately $41,000 and $50,000
were expensed in 2000 and 1999, 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
26
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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.
NOTE 11 - 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 operating and sales-type
lease revenue .......................... $324,453 $294,311 $ 289,953 $ 348,457 $1,257,174
Net income (loss) ...................... 97,104 42,906 (223,596) (156,727) (240,313)
Net income (loss) per
limited partnership unit ............. 0.10 0.05 (0.24) (0.17) (0.26)
1999
----
Total lease revenue .................... $519,367 $599,836 $507,181 $479,815 $2,106,199
Net income ............................. 201,588 741,730 228,275 477,690 1,649,283
Net income per
limited partnership unit ............. 0.22 0.80 0.25 0.50 1.77
NOTE 12 - SUBSEQUENT EVENT
In February 2001, the Partnership and certain affiliated investment
programs (collectively "the Programs") refinanced the outstanding indebtedness
and accrued interest related to an aircraft on lease to Aerovias de Mexico, S.A.
de C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $792,567, including $462,274 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $330,293 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft on lease to
Finnair OY of $85,579 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed
interest rate of 7.65%, principal is amortized monthly and the Partnership has a
balloon payment obligation at the expiration of the lease term of $264,310 in
September 2004.
27
ADDITIONAL FINANCIAL INFORMATION
AMERICAN INCOME FUND I-E,
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 ......... $3,114,612 $5,548,630 $2,495,772
Sale proceeds realized upon disposition
of equipment ............................... 294,785 2,131,867 316,524
---------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds ................ 3,409,397 7,680,497 2,812,296
Original acquisition cost of equipment
disposed ................................... 2,605,499 5,359,549 2,214,718
---------- ---------- ----------
Excess of total cash generated to cost
of equipment disposed ...................... $ 803,898 $2,320,948 $ 597,578
========== ========== ==========
28
AMERICAN INCOME FUND I-E,
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 .................................. $ (344,766) $ 104,453 $ (240,313)
Add:
Depreciation .................................. 698,894 -- 698,894
Collections on net investment in
sales-type lease............................. 52,770 -- 52,770
Management fees ............................... 60,456 -- 60,456
Book value of disposed equipment .............. -- 190,332 190,332
Partnership's share of unconsolidated
real estate venture's loss .................... 363,578 -- 363,578
Less:
Non-cash gain on sales-type lease ............. (81,911) -- (81,911)
Sales-type lease revenue....................... (2,231) -- (2,231)
Principal reduction of notes payable .......... (533,688) -- (533,688)
----------- ----------- -----------
Cash from operations, sales and
refinancings .................................. 213,102 294,785 507,887
Less:
Management fees ............................... (60,456) -- (60,456)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings ........................ 152,646 294,785 447,431
Other sources and uses of cash:
Cash and cash equivalents at .................. 4,899,851 1,189,871 6,089,722
beginning of year
Net change in receivables and
accruals ...................................... 444,395 -- 444,395
Investment in real estate venture ............. (3,540,839) (1,249,161) (4,790,000)
Proceeds from notes payable ................. 131,618 -- 131,618
Less:
Cash distributions paid ....................... -- (235,495) (235,495)
----------- ----------- -----------
Cash and cash equivalents at end of year ........... $ 2,087,671 $ -- $ 2,087,671
=========== =========== ===========
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AMERICAN INCOME FUND I-E,
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 $ 512,693
30