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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 SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
FOR QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 33-35148
------------------------
AMERICAN INCOME FUND I-A
a Massachusetts Limited Partnership
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3097216
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
88 BROAD STREET, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)
(617) 854-5800
Registrant's telephone number, including area code
(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 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 / / No / /
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AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PAGE
---------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1998 and December 31, 1997 3
Statement of Operations
for the three and nine months ended September 30, 1998 and 1997 4
Statement of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Notes to the Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION:
Items 1 - 6 16
2
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
ASSETS
Cash and cash equivalents............................. $ 1,898,892 $ 1,792,606
Rents receivable...................................... 264 32,780
Accounts receivable -- affiliate...................... 77,841 67,880
Equipment at cost, net of accumulated depreciation of
$3,687,426 and $3,720,329 at September 30, 1998 and
December 31, 1997, respectively...................... 131,106 250,856
--------------- ---------------
Total assets...................................... $ 2,108,103 $ 2,144,122
--------------- ---------------
--------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities................................... $ 266,500 $ 9,200
Accrued liabilities -- affiliate...................... 7,857 12,923
Deferred rental income................................ 4,775 5,512
Cash distributions payable to partners................ 56,502 56,502
--------------- ---------------
Total liabilities................................. 335,634 84,137
--------------- ---------------
Partners' capital (deficit):
General Partner..................................... (228,262) (213,886)
Limited Partnership Interests
(286,274 Units; initial purchase price of $25
each)............................................. 2,000,731 2,273,871
--------------- ---------------
Total partners' capital........................... 1,772,469 2,059,985
--------------- ---------------
Total liabilities and partners' capital........... $ 2,108,103 $ 2,144,122
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
3
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- ---------- ---------
Income:
Lease revenue..................... $ 103,024 $ 142,835 $ 326,561 $ 394,812
Interest income................... 24,591 20,539 71,288 60,802
Gain on sale of equipment......... 24,000 -- 25,000 10,578
--------- --------- ---------- ---------
Total income.................... 151,615 163,374 422,849 466,192
--------- --------- ---------- ---------
Expenses:
Depreciation...................... 39,852 68,134 119,751 210,467
Equipment management fees --
affiliate....................... 5,151 6,969 16,328 19,449
Operating expenses -- affiliate... 39,909 53,607 404,783 196,292
--------- --------- ---------- ---------
Total expenses.................. 84,912 128,710 540,862 426,208
--------- --------- ---------- ---------
Net income (loss)................... $ 66,703 $ 34,664 $ (118,013) $ 39,984
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net income (loss) per limited
partnership unit................... $ 0.22 $ 0.12 $ (0.39) $ 0.13
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Cash distributions declared per
limited partnership unit........... $ 0.18 $ 0.25 $ 0.56 $ 0.75
--------- --------- ---------- ---------
--------- --------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
4
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Cash flows from (used in) operating activities:
Net income (loss)..................................... $ (118,013) $ 39,984
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation...................................... 119,751 210,467
Gain on sale of equipment......................... (25,000) (10,578)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable.................................. 32,516 9,720
accounts receivable -- affiliate.................. (9,961) (12,054)
Increase (decrease) in:
accrued liabilities............................... 257,300 (8,370)
accrued liabilities -- affiliate.................. (5,066) (15,217)
deferred rental income............................ (737) --
----------- -----------
Net cash from operating activities.............. 250,790 213,952
----------- -----------
Cash flows from investing activities:
Proceeds from equipment sales....................... 25,000 21,376
----------- -----------
Net cash from investing activities.............. 25,000 21,376
----------- -----------
Cash flows used in financing activities:
Distributions paid.................................. (169,504) (226,005)
----------- -----------
Net cash used in financing activities........... (169,504) (226,005)
----------- -----------
Net increase in cash and cash equivalents............. 106,286 9,323
Cash and cash equivalents at beginning of period...... 1,792,606 1,721,388
----------- -----------
Cash and cash equivalents at end of period............ $ 1,898,892 $ 1,730,711
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
5
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 1998 and December 31, 1997 and results of operations
for the three and nine month periods ended September 30, 1998 and 1997 have been
made and are reflected.
NOTE 2 -- CASH
At September 30, 1998, the Partnership had $1,790,773 invested in federal
agency discount notes and reverse repurchase agreements secured by U.S. Treasury
Bills or interests in U.S. Government securities.
NOTE 3 -- REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred. Future minimum rents of $50,129 are due as
follows:
For the year ending September 30, 1999 $49,279
2000 850
-------
Total $50,129
-------
-------
6
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 -- EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1998. Remaining Lease Term (Months), as used below, represents the
number of months remaining from September 30, 1998 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.............................................. 1-4 $ 2,288,254
Materials handling.................................... 0-12 951,587
Communications........................................ 0 383,676
Computers & peripherals............................... 0-3 133,976
Tractors & heavy duty trucks.......................... 0 61,039
------------
Total equipment cost 3,818,532
Accumulated depreciation (3,687,426)
------------
Equipment, net of accumulated depreciation $ 131,106
------------
------------
At September 30, 1998, the Partnership's equipment portfolio included
equipment having a proportionate original cost of $2,415,273, representing
approximately 63% of total equipment cost.
At September 30, 1998, the cost and net book value of equipment held for
sale or re-lease was approximately $2,288,000 and $131,000, respectively. This
equipment represents the Partnership's proportionate interests in two Boeing
727-251 ADV aircraft. The Partnership has received an irrevocable notice of the
lessees' intention to purchase the Partnership's interest in one of these
aircraft for approximately $284,200 in January 1999, at the expiration of the
existing lease term. The Partnership's interest in this aircraft had a cost and
net book value of $1,080,617 and $19,478, respectively, at September 30, 1998.
The General Partner is currently holding discussions with a potential
third-party purchaser regarding the second aircraft. The Partnership's interest
in this aircraft had a cost and net book value of $1,207,637 and $111,630,
respectively, at September 30, 1998. The summary above also includes equipment
being leased on a month-to-month basis.
NOTE 5 -- RELATED PARTY TRANSACTIONS
]All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of
7
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
the nine month periods ended September 30, 1998 and 1997, which were paid or
accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997
-------- --------
Equipment management fees................................... $ 16,328 $ 19,449
Administrative charges...................................... 43,119 39,633
Reimbursable operating expenses due to third parties........ 361,664 156,659
-------- --------
Total................................................... $421,111 $215,741
-------- --------
-------- --------
All rents and proceeds from the sale of equipment are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At September 30, 1998, the
Partnership was owed $77,841 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in October 1998.
NOTE 6 -- LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth the 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 based upon and supersedes a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998. On August 20, 1998, 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"). The Court's August 20 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothesizing, or otherwise disposing of any Units
pending the Court's final determination of whether the settlement should be
approved. Similarly, the August 20 Order enjoined the General Partner of the
Partnership (and the general partners of certain affiliated partnerships) from,
among other things, recording any such transfers.
8
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
The Stipulation of Settlement, as preliminarily approved by the Court,
contemplates various changes that, if effected, would alter the future
operations of the Nominal Defendants. With respect to the Partnership and 10
affiliated partnerships (hereafter referred to as the "Exchange Partnerships"),
the Stipulation of Settlement provides for the restructuring of their respective
business operations into a single successor company whose securities would be
listed and traded on a national securities exchange. The partners of the
Exchange Partnerships would receive both common stock in the new company and a
cash distribution in exchange for their existing partnership interests. Such a
transaction would, among other things, allow for the consolidation of the
Partnership's operating expenses with other similarly organized equipment
leasing programs. The Stipulation of Settlement prescribes certain conditions
necessary to effecting the settlement, including providing the partners of the
Exchange Partnerships with the opportunity to object to the participation of
their partnership in the restructuring.
A preliminary Solicitation Statement, describing, among other things, the
various terms of settlement, was filed with the Securities and Exchange
Commission on August 25, 1998. Upon completion of the review process, a
definitive Solicitation Statement will be distributed to all of the partners of
the Exchange Partnerships to enable them to vote on the restructuring. Prior to
the settlement becoming final, the Court will hold a hearing on the settlement
that will be open to all interested parties. The Court has scheduled a hearing
date for December 11, 1998. Currently, it is anticipated that a request for
extension will be filed with the Court to permit sufficient time to complete the
regulatory review process and print and mail the definitive Solicitation
Statement. Class members will be notified of the final hearing date in advance.
There can be no assurance that the outcome of the voting by the partners of
the Exchange Partnerships, including the Partnership, will result in all or any
of the Exchange Partnerships, including the Partnership, being included in the
proposed restructuring. There also can be no assurance that a settlement,
including the restructuring, will be approved by the Court and effected. The
General Partner and its affiliates, in consultation with counsel, concur that
there is a reasonable basis to believe that a final settlement 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. The General Partner and its affiliates cannot predict with any
degree of certainty the ultimate outcome of such litigation.
On November 9, 1998, First Security Bank, N.A. (the "Trustee"), as trustee
of the Partnership and various other affiliated investment programs (the
"Affiliated Programs"), filed an action in the Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc. and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract.
The Trustee is seeking a declaration that Transmeridian has breached the
lease agreement that the Partnership and the Affiliated Programs entered into
with Transmeridian to lease a Boeing 727-251 ADV aircraft (the "Aircraft") by,
among other things, (i) refusing to pay for inspections of the Aircraft; (ii)
refusing to repair or replace burned engine blades found in one engine; and
(iii) failing to pay $70,000 of rents due for the month subsequent to the lease
agreement expiration date on October 29, 1998 but prior to the return of the
Aircraft. A maintenance contractor has refused to continue to perform
maintenance work on the Aircraft, including a C Check required under the lease,
due to Transmeridian's failure to make full payment for such maintenance.
Transmeridian's breaches are impeding the ability of the Partnership and the
Affiliated Programs to sell the Aircraft to a third party. In addition, the
Partnership seeks to enforce written guaranties issued by Apple Vacations that
absolutely and unconditionally guarantee Transmeridian's performance under the
lease agreement. Thus, Apple Vacations is liable to the Partnership and the
Affiliated Programs for any harm they may suffer as a result of Transmeridian's
breaches. At present, it is not possible to determine the outcome of this
matter.
9
AMERICAN INCOME FUND I-A,
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-A, 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 important 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 6 to the accompanying
financial statements and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), to collect all rents due under the attendant lease
agreements and successfully remarket the Partnership's equipment upon the
expiration of such leases.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. Presently, EFG
anticipates completing its Year 2000 project by December 31, 1998 at a di
minimus cost to the Partnership. Aggregate costs for the entire project are
anticipated to be less than $50,000, all of which will have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of original
design to use a four-digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and are expected to require only minor modifications to function properly with
respect to dates in the year 2000 and thereafter. Moreover, EFG understands that
each of its and the Partnership's significant vendors and third-party servicers
are in the process, or have completed the process, of making their systems Year
2000 compliant. Substantially all parties queried have indicated that their
systems will be Year 2000 compliant by the end of 1998. Presently, EFG is not
aware of any outside customer with a Year 2000 Issue that would have a material
effect on the Partnership's results of operations, liquidity, or financial
position. However, non-compliance on the part of a lessee could, under a worse
case scenario, result in lost revenues to the Partnership.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party
10
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
servicers will conform ultimately to Year 2000 standards. The effect of this
risk to the Partnership is not determinable.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997:
OVERVIEW
The Partnership was organized in 1990 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The value of the Partnership's equipment
portfolio decreases over time due to depreciation resulting from age and usage
of the equipment, as well as technological changes and other market factors. In
addition, the Partnership does not replace equipment as it is sold; therefore,
its aggregate investment value in equipment declines from asset disposals
occurring in the normal course. The Partnership's stated investment objectives
and policies contemplated that the Partnership would wind-up its operations
within approximately seven years of its inception. Presently, the Partnership is
a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action
Lawsuit could alter the nature of the Partnership's organization and its future
business operations. See Note 6 to the accompanying financial statements.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1998, the Partnership
recognized lease revenue of $103,024 and $326,561, respectively, compared to
$142,835 and $394,812 for the same periods in 1997. The decrease in lease
revenue from 1997 to 1998 was expected and resulted principally from lease term
expirations and the sale of equipment. The Partnership also earns interest
income from temporary investments of rental receipts and equipment sales
proceeds in short-term instruments.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by EFG or an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
For the three months ended September 30, 1998, the Partnership sold
equipment that had been fully depreciated to existing lessees and third parties.
These sales resulted in a net gain, for financial statement purposes, of
$24,000. There were no equipment sales during the three months ended September
30, 1997.
For the nine months ended September 30, 1998, the Partnership sold equipment
that had been fully depreciated to existing lessees and third parties. These
sales resulted in a net gain, for financial statement purposes of $25,000
compared to a net gain of $10,578 on equipment having a net book value of
$10,798 for the same period in 1997.
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
11
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of gain
or loss reported in the financial statements is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Depreciation expense for the three and nine months ended September 30, 1998
was $39,852 and $119,751, respectively, compared to $68,134 and $210,467 for the
same periods in 1997. For financial reporting purposes, to the extent that an
asset is held on primary lease term, the Partnership depreciates the difference
between (i) the cost of the asset and (ii) the estimated residual value of the
asset on a straight-line basis over such term. For purposes of this policy,
estimated residual values represent estimates of equipment values at the date of
primary lease expiration. To the extent that an asset is held beyond its primary
lease term, the Partnership continues to depreciate the remaining net book value
of the asset on a straight-line basis over the asset's remaining economic life.
Management fees were approximately 5% of lease revenue for each of the three
and nine months ended September 30, 1998 compared to 4.9% for the same periods
in 1997. 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 consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed. Operating expenses were $39,909 and $404,783 for the three and nine
months ended September 30, 1998, respectively, compared to $53,607 and $196,292
for the same period in 1997. During the nine months ended September 30, 1998,
the Partnership incurred or accrued approximately $264,000 for certain legal and
administrative expenses related to the Class Action Lawsuit described in Note 6
to the financial statements. The amount of future operating expenses cannot be
predicted with certainty; however, such expenses are usually higher during the
acquisition and liquidation phases of partnership. Other fluctuations typically
occur in relation to the volume and timing of remarketing activities.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These cash
inflows are used to pay management fees and operating costs. Operating
activities generated net cash inflows of $250,790
12
AMERICAN INCOME FUND I-A,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
compared to $213,952 during the nine months ended September 30, 1998 and 1997,
respectively. Future renewal, re-lease and equipment sale activities will cause
a decline in the Partnership's lease revenue and corresponding sources of
operating cash. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will also decline
as the Partnership experiences a higher frequency of remarketing events.
Ultimately, the Partnership will dispose of all assets under lease. This
will occur principally through sale transactions whereby each asset will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the nine months
ended September 30, 1998, the Partnership realized $25,000 in equipment sale
proceeds compared to $21,376 for the same period in 1997. 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.
Pursuant to a purchase option contained in the lease agreement, the lessee,
Sunworld International Airlines, Inc., has given the Partnership irrevocable
notice of the its intention to purchase the Partnership's interest in a Boeing
727-251 ADV aircraft for approximately $284,200 in January 1999, at the
expiration of the existing lease term. The Partnership's interest in the
aircraft had a net book value of $19,478 at September 30, 1998. The
Partnership's ability to remarket its interest in a second Boeing 727-251 ADV
aircraft is being impeded due to the lessee's, Transmeridian Airlines, failure
to perform its obligations under the lease agreement. See Note 6 to the
accompanying financial statements for details regarding legal action undertaken
by the Partnership related to this situation.
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 5 to the financial statements presented in the Partnership's 1997
Annual Report). For instance, selling commissions, 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,
the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, and the treatment of unrealized gains or losses on
investment securities, if any, 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.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at September 30, 1998. 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
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PART I. FINANCIAL INFORMATION
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 Amended and Restated Agreement and Certificate of
Limited Partnership 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, 1997, the General Partner had a positive tax
capital account balance.
At September 30, 1998, the Partnership had aggregate future minimum lease
payments of $50,129 from contractual lease agreements (see Note 3 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 is often 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.
Accordingly, as the terms of the currently existing contractual lease agreements
expire, the cash flows of the Partnership will become less predictable. In
addition, the Partnership will have cash outflows to pay management fees and
operating expenses. The Partnership may also be required to expend funds to
refurbish or otherwise improve the equipment being remarketed in order to make
it more desirable to a potential lessee or purchaser. Ultimately, the
Partnership is expected to meet its future disbursement obligations and to
distribute any excess of cash inflows over cash outflows to the Partners in
accordance with the Amended and Restated Agreement and Certificate of Limited
Partnership. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the timing and amount of the Partnership's anticipated
cash flows as described herein and in the accompanying financial statements and
result in fluctuations to the Partnership's periodic cash distribution payments.
Further, the outcome of the Class Action Lawsuit described above could effect
the ability of the Partnership to collect all of its contracted future minimum
lease payments and remarketing proceeds, as well as the amount and timing of
future cash distributions to the Partners.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the nine months ended September 30, 1998, the Partnership
declared total cash distributions of Distributable Cash from Operations and
Distributable Cash From Sales and Refinancings of $169,504. In accordance with
the Amended and Restated Agreement and Certificate of Limited Partnership, the
Limited Partners were allocated 95% of these distributions, or $161,029, and the
General Partner was allocated 5%, or $8,475. The third quarter 1998 cash
distribution was paid on October 15, 1998.
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, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
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PART I. FINANCIAL INFORMATION
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the foregoing,
as well as the outcome of the Class Action Lawsuit described in Note 6 to the
accompanying financial statements. The General Partner anticipates that cash
reserves, cash proceeds resulting from the collection of contractual rents and
the outcome of residual activities will satisfy the Partnership's future expense
obligations. However, the amount of cash available for distribution in future
periods will fluctuate. Equipment lease expirations and asset disposals will
cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of future quarterly cash distributions are
anticipated.
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FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 6 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
16
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP
By: AFG Leasing VI Incorporated, a
Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ MICHAEL J. BUTTERFIELD
------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 16, 1998
------------------------------------------
By: /s/ GARY M. ROMANO
------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 16, 1998
------------------------------------------
17