UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission File No. 0-20029
AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3127244
- --------------------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 BROAD STREET, BOSTON, MA 02110
- --------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2001 and December 31, 2000 3
Statement of Operations
for the three months ended March 31, 2001 and 2000 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 2001 5
Statement of Cash Flows
for the three months ended March 31, 2001 and 2000 6
Notes to the Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION:
Items 1 - 6 22
2
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 2,376,217 $ 2,087,671
Rents receivable 157,241 227,675
Accounts receivable - other -- 32,056
Accounts receivable - affiliate 155,528 85,244
Interest receivable - affiliate 23,403 --
Prepaid expenses 12,418 --
Investment in real estate venture 4,328,117 4,426,422
Net investment in sales-type lease 165,385 215,215
Note receivable - affiliate 938,718 938,718
Investment securities - affiliate - at fair market value 141,026 162,313
Equipment at cost, net of accumulated depreciation
of $4,990,419 and $4,823,912 at March 31, 2001
and December 31, 2000, respectively 5,041,598 5,216,254
------------ ------------
Total assets $ 13,339,651 $ 13,391,568
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 2,351,498 $ 2,249,301
Accrued interest 15,816 17,870
Accrued liabilities 365,966 481,926
Accrued liabilities - affiliate 33,565 21,651
Deferred rental income 34,069 31,109
------------ ------------
Total liabilities 2,800,914 2,801,857
------------ ------------
Partners' capital (deficit):
General Partner (447,414) (444,865)
Limited Partnership Interests
(883,829.31 Units; initial purchase price of $25 each) 10,986,151 11,034,576
------------ ------------
Total partners' capital 10,538,737 10,589,711
------------ ------------
Total liabilities and partners' capital $ 13,339,651 $ 13,391,568
============ ============
The accompanying notes are an integral part of these financial statements.
3
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
--------- ---------
INCOME
Operating lease revenue $ 337,288 $ 324,453
Sales-type lease revenue 3,001 --
Interest income 22,621 73,168
Interest income - affiliate 23,403 23,403
Gain on sale of equipment 50 6,100
--------- ---------
386,363 427,124
--------- ---------
EXPENSES
Depreciation 174,656 187,634
Interest expense 31,091 55,725
Equipment management fees - affiliate 18,456 15,140
Operating expenses - affiliate 93,542 66,834
Write-down of investment securities - affiliate 34,591 --
Partnership's share of unconsolidated
real estate venture's loss 98,305 4,687
--------- ---------
Total expenses 450,641 330,020
--------- ---------
Net income (loss) $ (64,278) $ 97,104
========= =========
Net income (loss) per limited partnership unit $ (0.07) $ 0.10
========= =========
Cash distributions declared
per limited partnership unit $ -- $ --
========= =========
The accompanying notes are an integral part of these financial statements.
4
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
GENERAL LIMITED PARTNERS
PARTNER ----------------------------
AMOUNT UNITS AMOUNT TOTAL
------------ ---------- ------------ ------------
Balance at December 31, 2000 $ (444,865) 883,829.31 $ 11,034,576 $ 10,589,711
Net loss (3,214) -- (61,064) (64,278)
Less: Reclassification adjustment for
write-down of investment securities -
affiliate 665 -- 12,639 13,304
------------ ---------- ------------ ------------
Comprehensive loss (2,549) -- (48,425) (50,974)
------------ ---------- ------------ ------------
Balance at March 31, 2001 $ (447,414) 883,829.31 $ 10,986,151 $ 10,538,737
============ ========== ============ ============
The accompanying notes are an integral part of these financial statements.
5
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (64,278) $ 97,104
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 174,656 187,634
Sales-type lease revenue (3,001) --
Write-down of investment securities - affiliate 34,591 --
Gain on sale of equipment (50) (6,100)
Partnership's share of unconsolidated
real estate venture's loss 98,305 4,687
Changes in assets and liabilities:
Rents receivable 70,434 4,386
Accounts receivable - other 32,056 --
Accounts receivable - affiliate (70,284) 469,777
Interest receivable - affiliate (23,403) --
Prepaid expenses (12,418) --
Collections on net investment in sales-type lease 52,831 --
Accrued interest (2,054) (2,568)
Accrued liabilities (115,960) (160,719)
Accrued liabilities - affiliate 11,914 2,863
Deferred rental income 2,960 (16,909)
----------- -----------
Net cash provided by operating activities 186,299 580,155
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 50 6,100
Investment in real estate venture -- (4,790,000)
----------- -----------
Net cash provided by (used in) investing activities 50 (4,783,900)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 330,293 131,618
Principal payments - notes payable (228,096) (129,776)
Distributions paid -- (235,495)
----------- -----------
Net cash provided by (used in) financing activities 102,197 (233,653)
----------- -----------
Net increase (decrease) in cash and cash equivalents 288,546 (4,437,398)
Cash and cash equivalents at beginning of period 2,087,671 6,089,722
----------- -----------
Cash and cash equivalents at end of period $ 2,376,217 $ 1,652,324
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 33,145 $ 52,293
=========== ===========
See Note 7 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 2001 and 2000.
See Note 9 to the financial statements regarding the refinancing of one of the
Partnership's notes payable in February 2001.
The accompanying notes are an integral part of these financial statements.
6
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not include
all information and footnote disclosures required under generally accepted
accounting principles for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
2000 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2001 and December 31, 2000 and results of operations for
the three month periods ended March 31, 2001 and 2000 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 2001, American Income Fund I-E, a Massachusetts Limited Partnership
(the "Partnership") had $2,088,811 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.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. 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 Equis Financial Group Limited Partnership ("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 to the
financial statements regarding the Class Action Lawsuit. Future minimum rents
for operating leases of $2,052,152 are due as follows:
For the year ending March 31, 2002 $ 810,857
2003 729,047
2004 432,107
2005 80,141
-----------
Total $ 2,052,152
===========
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.
7
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 $175,886 are due through the date of the lease expiration in
January 2002.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2001 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
- ------------------------------------------------------ ---------- ------------
Aircraft 1-41 $ 5,659,663
Trailers and intermodal containers 27 1,756,524
Locomotives 36 1,522,810
Materials handling 0-9 1,093,020
------------
Total equipment cost 10,032,017
Accumulated depreciation (4,990,419)
------------
Equipment, net of accumulated depreciation $ 5,041,598
============
At March 31, 2001, the 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 $5,250,000 and a
net book value of approximately $3,500,000 at March 31, 2001 (see Note 9).
At March 31, 2001, all of the Partnership's equipment was subject to contracted
leases or being leased on a month to month basis. In April 2001, the lease with
Finnair OY related to the McDonnell-Douglas MD-82 aircraft, in which the
Partnership holds an interest, expired and the aircraft was returned to the
General Partner. The General Partner is attempting to remarket this aircraft,
which had a cost to the Partnership of $1,359,450.
NOTE 5 - 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 original loan was $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.
8
The loan is presented, 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", as an investment in
real estate venture and is presented net of the Partnership's share of losses in
Echelon Residential Holdings. The Partnership is allocated its proportionate
share of the unconsolidated real estate venture's net income or loss, adjusted
for interest on the ADC arrangements, based on the balance of its ADC
arrangement in relation to the real estate venture's total equity and notes
payable, including the ADC arrangements. For the periods ended March 31, 2001
and 2000, the Partnership's share of losses in Echelon Residential Holdings were
$98,305 and $4,687, respectively, and are reflected on the Statement of
Operations as "Partnership's share of unconsolidated real estate venture's
loss."
The Partnership took into consideration the following characteristics of the
loan in determining that the loan should be accounted for as an investment in a
real estate venture: (i) the Exchange Partnerships who made the loans
collectively have provided substantially all of the necessary funds to acquire
the underlying properties without taking title to such properties, (ii) by
virtue of a pledged security interest in the wholly owned subsidiary of Echelon
Residential Holdings that holds title to the properties, the Partnership's loan
is secured only by the underlying properties, (iii) Echelon Residential Holdings
will only repay the Partnership at maturity, including all interest accrued on
the loan through maturity, (iv) it is expected that Echelon Residential Holdings
can only repay the loan through sales of undeveloped and developed property; and
(v) the structure of the loan (i.e. no payments due until maturity) makes it
unlikely that the properties will be taken in foreclosure as a result of
delinquency.
The summarized financial information for Echelon Residential Holdings as of
March 31, 2001 and for the quarter ended March 31, 2001 is as follows:
(Unaudited)
Total assets $ 72,861,183
Total liabilities $ 76,780,082
Minority interest $ 1,906,448
Total deficit $ (5,825,347)
Total revenues $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 3,096,648
Net loss $ (2,033,209)
NOTE 6 - 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 quarter ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,001 from this lease. At March 31,
2001, the components of the net investment in the sales-type lease are as
follows:
Total minimum lease payments to be received $ 175,886
Less: Unearned income 10,501
---------
Total $ 165,385
=========
Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.
9
NOTE 7 - INVESTMENT SECURITIES - AFFILIATE 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 Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$938,718. The Semele Note matures in April 2003 and bears an annual interest
rate of 10% with mandatory principal reductions prior to maturity, 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 of
$23,403 related to the Semele Note for both of the three months ended March 31,
2001 and 2000.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
note has been extended. Since the Semele Note was received as consideration for
the sale of the cargo vessels to an unaffiliated party and the extension of the
maturity of the Semele Note is documented in an amendment to the existing Semele
Note and not as a new loan, the general partners of the owner partnerships do
not consider the Semele Note to be within the prohibition in the Partnership
Agreements against loans to or from the general partner and its affiliates.
Nonetheless, the extension of the maturity date might be construed to be in
violation of the making of a loan to an affiliate of the general partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
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-dale are carried at fair value.
During the three months ended March 31, 2000, the Partnership increased the
carrying value of it investment in Semele common stock to $5.375 per share (the
quoted price on the NASDAQ SmallCap market at March 31, 2000), resulting in an
unrealized loss of $15,966. This loss was reported as a component of
comprehensive income included in the Statement of Changes in Partner's Capital.
At March 31, 2001, the Partnership determined that the decline in the 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 to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $34,591.
NOTE 8 - 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 three month periods ended March 31,
2001 and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- --------
Equipment management fees $ 18,456 $ 15,140
Administrative charges 23,766 27,020
Reimbursable operating expenses
due to third parties $ 69,776 39,814
-------- --------
Total $111,998 $ 81,974
======== ========
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 March
31, 2001, the Partnership was owed $155,528 by EFG for such funds and the
interest thereon. These funds were remitted to the Partnership in April 2001.
10
NOTE 9 - NOTES PAYABLE
Notes payable at March 31, 2001 consisted of installment notes of $2,351,498
payable to banks and institutional lenders. The installment notes bear an
interest rate of either 6.76% or 7.65% or a fluctuating interest rate based on
LIBOR (approximately 5.19% at March 31, 2001) 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 installment notes amortize monthly
and, in addition the Partnership has balloon payment obligations at the
expiration of the respective lease terms related to aircraft leased to Reno Air,
Inc. and Aerovias de Mexico, S.A. de C.V. of $555,597 in January 2003 and
$264,310 in September 2004, respectively.
In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the 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 then on lease to
Finnair OY of $85,579 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000.
Management believes that the carrying amount of notes payable approximates fair
value at March 31, 2001 based on its experience and understanding of the market
for instruments with similar terms.
The annual maturities of the notes payable are as follows:
For the year ending March 31, 2002 $ 575,485
2003 1,095,778
2004 348,147
2005 332,088
-----------
Total $ 2,351,498
===========
NOTE 10 - LEGAL PROCEEDINGS
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, 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.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") has completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether parties request the
Court to schedule a hearing for final approval of the proposed settlement or are
withdrawing the proposed settlement from judicial consideration and resuming the
litigation of the Plaintiffs' claims. The Court also directed the parties to use
their best efforts to assist the SEC so that its regulatory review may be
completed on or before May 15, 2001. The Court continued the Final Approval
Settlement Hearing until a date to be scheduled in July 2001 after receipt from
the parties of a request to schedule a hearing. There are a number of issues to
be resolved with the staff of the SEC before the staff's review of the
solicitation materials is completed.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the
11
"Designated Partnerships") are investment companies as defined in Section
3(a)(1)(c) of the Investment Company Act of 1940, as amended (the "1940 Act").
The SEC staff noted that Section 7 of the 1940 Act makes it unlawful for an
unregistered investment company to offer or sell or purchase any security or
engage in any business in interstate commerce. Accordingly, Section 7 would
prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC staff
asserts that the notes evidencing the loans to Echelon Residential Holdings are
investment securities and the ownership of the notes by said partnerships cause
them to be investment companies and that, in the case of American Income
Partners V-A Limited Partnership and American Income Partners V-B Limited
Partnership, they may have become investment companies when they received the
Semele securities as part of the compensation for the sale of a vessel to Semele
in 1997. The general partners have consulted with counsel who specializes in the
1940 Act and, based on counsel's advise, do not believe that the Designated
Partnerships are investment companies.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a proposed
settlement, and that the SEC staff's views, as expressed in the letter, are
relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has yet
to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion.
Apart from the language of the order, the Court has not stated what action it
might order if the SEC's review were not completed by May 15, 2001. If the Court
were to decline to continue the date for the Final Approval Settlement Hearing
and there is no settlement alternative offered by the parties that meets the
Court's approval, the Court may direct that the parties resume the litigation
and abandon the proposed settlement and consolidation.
12
AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements in this quarterly 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.
The Investment Company Act of 1940 (the "1940 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 1940 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 1940 Act. The General
Partner is engaged in discussions with the staff of the Securities and Exchange
Commission ("SEC") regarding whether or not the Partnership may be an
inadvertent investment company as a consequence of the above-referenced loan.
The General Partner has consulted counsel and believes that the Partnership is
not an investment company. If the Partnership were determined to be an
unregistered investment company, its business would be adversely affected. The
1940 Act, among other things, prohibits an unregistered investment company from
offering securities for sale or engaging in any business in interstate commerce
and, consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. If necessary, the Partnership
intends to avoid being deemed an investment company by disposing or acquiring
certain assets that it might not otherwise dispose or acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company to offer or sell or purchase any security or engage in any
business in interstate commerce. Accordingly, Section 7 would prohibit any
partnership that is an unregistered investment company from engaging in any
business in interstate commerce, except transactions that are merely incidental
to its dissolution. The SEC staff asked that the general partners advise them
within the next 30 days as to what steps the Designated Partnerships will take
to address their status under the 1940 Act. The SEC staff asserts that the notes
evidencing the loans to Echelon Residential Holdings are investment securities
and the ownership of the notes by said partnerships cause them to be investment
companies and that, in the case of American Income Partners V-A Limited
Partnership and American V-B Limited Partnership, they may have become
investment companies when they received the Semele securities as part of the
compensation for the sale of a vessel to Semele in 1997. The general partners
have consulted with counsel who specializes in the 1940 Act and, based on
counsel's advice, do not believe that the Designated Partnerships are investment
companies.
13
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a proposed
settlement, and that the SEC staff's views, as expressed in the letter, are
relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the SEC staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has yet
to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. See Note 10 to the
financial statements for additional discussion.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000:
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 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 as the Class Action Lawsuit is
settled or adjusted.
RESULTS OF OPERATIONS
For the three months ended March 31, 2001, the Partnership recognized operating
lease revenue of $337,288 compared to $324,453 for the same period in 2000. The
increase in operating lease revenue from 2000 to 2001 resulted from the re-lease
of a McDonnell-Douglas MD-82 aircraft and a Boeing 737-2H4 aircraft in September
2000. These increases were partially offset by the affects on operating lease
revenue of lease term expirations and sales of equipment. In the future,
operating lease revenue is expected to decline due to lease expirations and
equipment sales.
The lease term associated with the Boeing 737-2H4, in which the Partnership
holds an ownership interest, expired in December 1999. The aircraft was
re-leased in September 2000 to Air Slovakia BWJ Ltd., with a lease term
14
expiring in September 2003. The Partnership recognized operating lease revenue
of $26,415 for the quarter ended March 31, 2001 related to its interest in this
aircraft.
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. The Partnership recognized operating lease
revenue of $48,084 and $19,028 related to this aircraft during the three months
ended March 31, 2001 and 2000, respectively.
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. This aircraft had been
stored in the warehouse from January 2000 through the date of the conditional
sale 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 three months ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,001.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate
equipment ownership enabled the Partnership to further diversify its equipment
portfolio at inception by participating in the ownership of selected assets,
thereby reducing the general levels of risk, which could have resulted from a
concentration in any single equipment type, industry or lessee. The Partnership
and each affiliate individually report, in proportion to their respective
ownership interests, their respective shares of assets, liabilities, revenues,
and expenses associated with the equipment.
Interest income for the three months ended March 31, 2001 was $46,024 compared
to $96,571 for the same period in 2000. Interest income is typically generated
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 during both the
three months ended March 31, 2001 and 2000 included $23,403, earned on a note
receivable from Semele (see Note 7 to the financial statements herein).
During the three months ended March 31, 2001 and 2000, the Partnership sold
fully-depreciated equipment to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $50 and $6,100,
respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment will be
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. Consequently, the amount
of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.
Depreciation expense for the three months ended March 31,2001 was $174,656
compared to $187,634 for the same period in 2000. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the
Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
15
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.
For the three months ended March 31, 2001 and 2000, the Partnership incurred
interest expense of $31,091 and $55,725, respectively. Interest expense in the
near term will increase as a result of the Partnership's debt refinancing in
February 2001 as described below. Subsequently, interest expense will decline as
the principal balance of notes payable is reduced through the application of
rent receipts to outstanding debt.
Management fees were $18,456 and $15,140, respectively, for the three month
periods ended March 31, 2001 and 2000. Management fees are based on 5% of gross
lease revenue generated by operating leases and 2% of gross lease revenue
generated by full payout leases.
Operating expenses were $93,542 for the three months ended March 31, 2001
compared to $66,834 for the same period in 2000. In 2001, operating expenses
included approximately $27,000 related to the Class Action Lawsuit discussed in
Note 10 to the financial statements herein. Other operating expenses consist
principally of administrative charges, professional service costs, such as audit
and legal fees, as well as printing, distribution and other remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with other equipment being remarketed.
At March 31, 2001, the Partnership determined that the decline in the 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 to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $34,591.
For the three months ended March 31, 2001 and 2000, the Partnership's share of
losses in Echelon Residential Holdings were $98,305 and $4,687, respectively.
The losses are reflected on the Statement of Operations as "Partnership's share
of unconsolidated real estate venture's loss". See further discussion below.
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 $186,299 and $580,155 for the three months ended March 31, 2001 and
2000, 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 decline
as the Partnership remarkets its assets. The Partnership, however, may continue
to incur significant costs to facilitate the successful remarketing of its
aircraft in the future.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 2001 and 2000, the Partnership realized equipment sale proceeds
of $50 and $6,100, 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 March 31, 2001, the Partnership was due aggregate future minimum lease
payments of $2,228,038 from contractual operating and sales-type lease
agreements (see Note 3 to the financial statements), a portion of which will be
used to amortize the principal balance of notes payable of $2,351,498 (see Note
9 to the financial statements). At the expiration of the individual 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
16
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 an annual
interest rate of 14% for the first 24 months and 18% for the final six months.
Interest accrues and compounds monthly and is payable at maturity.
As discussed in Note 5 to the Partnership's financial statements, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of Echelon Residential Holdings under the equity method of
accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental 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 of Echelon Residential Holdings. 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 since the officer may be
deemed an affiliate and the loans in violation of the prohibition against loans
to affiliates and the court's statement in its order permitting New Investments
that all other provisions of the Partnership Agreements governing the investment
objectives and policies of the Partnership shall remain in full force and
effect. The court 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 holds a beneficial
interest in a note from Semele (the "Semele Note") of $938,718. The Semele Note
matures in April 2001 and bears an annual interest rate of 10% with mandatory
principal reductions prior to maturity, 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 exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general
17
partners as members of the board of directors. At that point, Semele became
affiliated with EFG and the general partners. The maturity date of the note has
been extended. Since the Semele Note was received as consideration for the sale
of the cargo vessels to an unaffiliated party and the extension of the maturity
of the Semele Note is documented in an amendment to the existing Semele Note and
not as a new loan, the general partners of the owner partnerships do not
consider the Semele Note to be within the prohibition in the Partnership
Agreements against loans to or from the general partner and its affiliates.
Nonetheless, the extension of the maturity date might be construed to be in
violation of the making of a loan to an affiliate of the general partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
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 three months ended March 31, 2000, the Partnership decreased the
carrying value of its investment in Semele common stock to $5.375 per share (the
quoted price on the NASDAQ SmallCap Market at March 31, 2000), resulting in an
unrealized loss of $15,966. This loss was reported as a component of
comprehensive income included in the Statement of Changes in Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the 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 to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $34,591.
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
the market value of the stock was other-than-temporary and wrote down the
Partnership's investment. Again in the quarter ended March 31, 2001, the General
Partner made the same determination 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 and a Director of the General Partner 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. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities in the
accompanying Statement of Cash Flows. The corresponding note agreements are
recourse only to the specific aircraft financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
generally coincides with the lease term). As rental payments are collected, a
portion or all of the rental payment is used to repay 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. In addition, to the obligation
described below, the Partnership has a $555,597 balloon payment obligation to be
paid at the expiration of the lease term related to an aircraft leased by Reno
Air, Inc. in January 2003.
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 then 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 Partnership has a
balloon payment obligation at the expiration of the lease term of $264,310 in
September 2004. In the three
18
months ended March 31, 2000, the Partnership refinanced the indebtedness
associated with the same aircraft and, in addition to refinancing the existing
indebtedness, received additional debt proceeds of $131,618.
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 March 31, 2001, 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. In April
2001, upon its lease expiration, Finnair OY returned a McDonnell Douglas MD-82
aircraft which the General Partner is attempting to remarket.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is reported under financing activities on
accompanying Statement of Cash Flows. No cash distributions were declared for
either of the quarters ended March 31, 2001 or 2000. In any given year, it is
possible that Limited Partners will be allocated taxable income in excess of
distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions when paid to the Limited Partners generally 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 presented in the Partnership's 2000
Annual Report). 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 components of the cumulative difference
between financial statement income or loss and tax income or loss result from
different depreciation policies for book and tax purposes and different
treatment for book and tax purposes related to the real estate venture.
19
For financial reporting purposes, the General Partner has accumulated a capital
deficit at March 31, 2001. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's exposure to market risk for changes in interest rates at March
31, 2001, related primarily to one note payable for which the interest rates are
based on the London Interbank Offering Rate. An annual increase of a 100 basis
points in the interest rate on this note payable would not have a material
effect on the Partnership's financial statements.
The Partnership's acquisition, development and construction loan to Echelon
Residential Holdings matures on September 8, 2002 and earns interest at a fixed
annual rate of 14% for the first 24 months and a fixed annual rate of 18% for
the last 6 months of the loan. Investments earning a fixed rate of interest may
have their fair market value adversely impacted due to a rise in interest rates.
The effect of interest rate fluctuations on the Partnership in the quarter ended
March 31, 2001 was not material.
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AMERICAN INCOME FUND I-E,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 10 to the financial statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ MICHAEL J. BUTTERFIELD
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Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: MAY 21, 2001
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