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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-B
a Massachusetts Limited Partnership
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3106525
(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-B,
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-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
SEPTEMBER DECEMBER
30, 31,
1998 1997
----------- -----------
ASSETS
Cash and cash equivalents............................. $1,402,891 $1,442,855
Rents receivable...................................... 25,997 30,351
Accounts receivable -- affiliate...................... 697,202 76,072
Equipment at cost, net of accumulated depreciation of
$1,486,616 and $3,333,813 at September 30, 1998 and
December 31, 1997, respectively...................... 373,346 1,232,893
----------- -----------
Total assets...................................... $2,499,436 $2,782,171
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable......................................... $ -- $ 22,990
Accrued interest...................................... -- 195
Accrued liabilities................................... 267,500 9,200
Accrued liabilities -- affiliate...................... 13,616 15,272
Deferred rental income................................ -- 20,866
Cash distributions payable to partners................ 56,588 56,588
----------- -----------
Total liabilities................................. 337,704 125,111
----------- -----------
Partners' capital (deficit):
General Partner..................................... (209,283) (184,517)
Limited Partnership Interests
(286,711 Units; initial purchase price of $25
each)............................................. 2,371,015 2,841,577
----------- -----------
Total partners' capital........................... 2,161,732 2,657,060
----------- -----------
Total liabilities and partners' capital........... $2,499,436 $2,782,171
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
3
AMERICAN INCOME FUND I-B,
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..................... $ 72,418 $ 158,166 $ 265,312 $ 454,451
Interest income................... 20,669 19,952 57,762 61,319
Gain (loss) on sale of
equipment....................... (1,130) 80,000 6,520 115,379
--------- --------- ---------- ---------
Total income.................... 91,957 258,118 329,594 631,149
--------- --------- ---------- ---------
Expenses:
Depreciation...................... 48,391 105,526 187,862 326,416
Interest expense.................. -- 8,306 -- 37,516
Equipment management fees --
affiliate....................... 2,555 6,843 10,069 19,608
Operating expenses -- affiliate... 82,022 48,953 457,227 105,292
--------- --------- ---------- ---------
Total expenses.................. 132,968 169,628 655,158 488,832
--------- --------- ---------- ---------
Net income (loss)................... $ (41,011) $ 88,490 $ (325,564) $ 142,317
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net income (loss) per limited
partnership unit................... $ (0,14) $ 0.29 $ (1.08) $ 0.47
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Cash distributions declared per
limited partnership unit........... $ 0.19 $ 0.25 $ 0.56 $ 0.75
--------- --------- ---------- ---------
--------- --------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
4
AMERICAN INCOME FUND I-B,
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)..................................... $ (325,564) $ 142,317
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities:
Depreciation...................................... 187,862 326,416
Gain on sale of equipment......................... (6,520) (115,379)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable.................................. 4,354 (3,623)
accounts receivable -- affiliate.................. (621,130) (6,488)
Increase (decrease) in:
accrued interest.................................. (195) (2,930)
accrued liabilities............................... 258,300 (250)
accrued liabilities -- affiliate.................. (1,656) (12,914)
deferred rental income............................ (20,866) (20,865)
----------- -----------
Net cash from (used in) operating activities.... (525,415) 306,284
----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment............................... -- (75,957)
Proceeds from equipment sales....................... 678,205 123,943
----------- -----------
Net cash from investing activities.............. 678,205 47,986
----------- -----------
Cash flows used in financing activities:
Principal payments -- notes payable................. (22,990) (613,052)
Distributions paid.................................. (169,764) (226,353)
----------- -----------
Net cash used in financing activities........... (192,754) (839,405)
----------- -----------
Net decrease in cash and cash equivalents............. (39,964) (485,135)
Cash and cash equivalents at beginning of period...... 1,442,855 1,938,967
----------- -----------
Cash and cash equivalents at end of period............ $ 1,402,891 $ 1,453,832
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ 195 $ 40,446
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
5
AMERICAN INCOME FUND I-B,
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 $1,294,830 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 $444,143 are due as
follows:
For the year ending September 30, 1999 $185,182
2000 135,005
2001 97,351
2002 21,284
2003 5,321
--------
Total $444,143
--------
--------
6
AMERICAN INCOME FUND I-B,
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
------------------------------------------------------ ---------- ------------
Materials handling.................................... 0-20 $ 672,619
Trailers/intermodal containers........................ 0-51 620,252
Research & test....................................... 15-16 458,822
Communications........................................ 0 68,603
Construction & mining................................. 0 39,666
------------
Total equipment cost 1,859,962
Accumulated depreciation (1,486,616)
------------
Equipment, net of accumulated depreciation $ 373,346
------------
------------
At September 30, 1998, the Partnership's equipment portfolio included
equipment having a proportionate original cost of $151,529, representing
approximately 8% of total equipment cost.
At September 30, 1998, the Partnership was not holding any equipment not
subject to lease and no equipment was held for sale or re-lease. The summary
above 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 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................................... $ 10,069 $ 19,608
Administrative charges...................................... 42,786 39,342
Reimbursable operating expenses due to third parties........ 414,441 65,950
-------- --------
Total................................................... $467,296 $124,900
-------- --------
-------- --------
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 September 30, 1998, the Partnership was owed $697,202 by EFG for such funds
and the interest thereon. This balance included proceeds of $670,404 related to
the sale of the Partnership's proportionate interests in two Fairchild Metro III
aircraft in September 1998. These funds were remitted to the Partnership in
October 1998.
7
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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.
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
8
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Partnership, National
Steel Corporation ("National Steel"), under a certain Master Lease Agreement
("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by
National Steel of certain sales and/or use taxes paid to the State of Illinois
and other remedies provided by the MLA. On August 30, 1995, National Steel filed
a Notice of Removal which removed the case to the United States District Court,
District of Massachusetts. On September 7, 1995, National Steel filed its Answer
to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking
declaratory relief and alleging breach of contract, implied covenant of good
faith and fair dealing and specific performance. EFG filed its Answer to these
counterclaims on September 29, 1995. Though the parties discussed settlement
with respect to this matter for some time, the negotiations were unsuccessful.
Notwithstanding these discussions, EFG filed an Amended and Supplemental
Complaint alleging further default under the MLA and filed a motion for Summary
Judgment on all claims and counterclaims. The Court held a hearing on EFG's
motion in December 1997 and the Court recently entered a decision dismissing
certain of National Steel's counterclaims and finding in favor of EFG on certain
issues and in favor of National Steel on other issues. The parties have since
resumed settlement discussions. The Partnership does not anticipate that it will
experience any material losses as a result of this action.
9
AMERICAN INCOME FUND I-B,
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-B, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of 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-B,
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 $72,418 and $265,312, respectively, compared to
$158,166 and $454,451 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 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 and nine months ended September 30, 1998, the
Partnership sold equipment having a net book value of $671,535 and $671,685,
respectively, to existing lessees and third parties. These sales resulted in a
net loss of $1,130 and a net gain of $6,520, respectively, for financial
statement purposes.
For the three months ended September 30, 1997, the Partnership sold fully
depreciated equipment to existing lessees and third parties resulting in a net
gain of $80,000, for financial statement purposes. For the nine months ended
September 30, 1997, the Partnership sold equipment having a net book value of
$8,564 to existing lessees and third parties. These sales resulted in a net gain
of $115,379, for financial statement purposes.
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-B,
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 revenues generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of gain
or loss reported in the financial statements is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Depreciation expense for the three and nine months ended September 30, 1998
was $48,391 and $187,862, respectively, compared to $105,526 and $326,416 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.
Interest expense was $8,306 and $37,516 or 5.3% and 8.3% of lease revenue
for the three and nine months ended September 30, 1997, respectively. The
Partnership's notes payable were fully amortized on January 1, 1998.
Management fees were approximately 3.5% and 3.8% of lease revenue for the
three and nine months ended September 30, 1998, respectively, compared to 4.3%
of lease revenue for each of 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 $82,022 and $457,227 for the three and nine
months ended September 30, 1998, respectively, compared to $48,953 and $105,292
for the same periods in 1997. During the nine months ended September 30, 1998,
the Partnership incurred or accrued approximately $265,000 for certain legal and
administrative expenses related to the Class Action Lawsuit described in Note 6
to the financial statements. In addition, during the three months ended
September 30, 1998, operating expenses included costs related to the sale of the
Partnership's interests in two Fairchild Metro III aircraft (for additional
discussion see Note 5 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 a
partnership. Other fluctuations typically occur in relation to the volume and
timing of remarketing activities.
12
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These cash
inflows are used to satisfy debt service obligations associated with leveraged
leases, and to pay management fees and operating costs. Operating activities
generated a net cash outflow of $525,415 and a net cash inflow of $306,284 for
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 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 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 expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the nine months ended September 30,
1997, the Partnership expended $75,957 to upgrade certain research and test
equipment. There were no equipment acquisitions during the same period in 1998.
For the nine months ended September 30, 1998, the Partnership realized $678,205
in equipment sale proceeds compared to $123,943 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.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements 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
13
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 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 $444,143 from contractual lease agreements (see Note 3 to the
financial statements). At the expiration of the individual primary and renewal
lease terms underlying the Partnership's future minimum lease payments, the
Partnership will sell the equipment or enter re-lease or renewal agreements when
considered advantageous by the General Partner and EFG. Such future remarketing
activities will result in the realization of additional cash inflows in the form
of equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events 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.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. The Partnership's notes payable
were fully amortized on January 1, 1998.
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 $169,764. In accordance with
the Amended and Restated Agreement and Certificate of Limited Partnership, the
Limited Partners were allocated 95% of these distributions, or $161,276 and the
General Partner was allocated 5%, or $8,488. 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
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AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 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
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.
15
AMERICAN INCOME FUND I-B,
A MASSACHUSETTS LIMITED PARTNERSHIP
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-B, 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 13, 1998
------------------------------------------
By: /s/ GARY M. ROMANO
------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 13, 1998
------------------------------------------
17