EX-13 3 0003.txt EXHIBIT 13 AMERICAN INCOME FUND I-A, a Massachusetts Limited Partnership Annual Report to the Partners, December 31, 2000 Dear Investor: We are pleased to provide the 2000 Annual Report for American Income Fund I-A, a Massachusetts Limited Partnership, which contains important information concerning the recent operating results and current financial position of your investment program. Please refer to the index on the following page for a listing of information contained in this report. If you have any questions about your investment program or, if you would like a copy of Form 10-K for this program, please contact our Investor Services Representatives at 1-800-247-3863. Very truly yours, /s/ GEOFFREY A. MACDONALD Geoffrey A. MacDonald Chairman and Co-founder AMERICAN INCOME FUND I-A, a Massachusetts Limited Partnership INDEX TO ANNUAL REPORT TO THE PARTNERS PAGE ---- SELECTED FINANCIAL DATA............................................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 3-7 FINANCIAL STATEMENTS: Report of Independent Auditors........................................ 8 Statement of Financial Position at December 31, 2000 and 1999......................................... 9 Statement of Operations for the years ended December 31, 2000, 1999 and 1998.................. 10 Statement of Changes in Partners' Capital for the years ended December 31, 2000, 1999 and 1998.................. 11 Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................. 12 Notes to the Financial Statements..................................... 13-25 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed............................... 26 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings............................... 27 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the Amended and Restated Agreement and Certificate of Limited Partnership...................... 28 SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 2000:
SUMMARY OF OPERATIONS 2000 1999 1998 1997 1996 --------------------- -------------- -------------- -------------- -------------- -------------- Lease revenue........................... $ 57,922 $ 134,514 $ 415,447 $ 515,362 $ 585,768 Interest Income......................... $ 69,939 $ 141,591 $ 94,196 $ 82,978 $ 80,345 Net (loss) income....................... $ (209,738) $ 773,675 $ (52,700) $ 136,727 $ 197,908 Per Unit: Net (loss) income.................. $ (0.70) $ 2.57 $ (0.17) $ 0.45 $ 0.66 Cash distributions declared........ $ -- $ 0.75 $ 0.75 $ 0.94 $ 1.38 FINANCIAL POSITION ------------------ Total assets............................ $ 2,321,032 $ 2,619,983 $ 2,511,172 $ 2,144,122 $ 2,341,360 Total long-term obligations............. $ -- $ -- $ -- $ -- $ -- Partners' capital....................... $ 2,119,210 $ 2,328,948 $ 1,781,279 $ 2,059,985 $ 2,205,765
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Certain statements in this annual report of American Income Fund I-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 factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 7 to the accompanying financial statements, the remarketing of the Partnership's equipment, and the performance of the Partnership's non-equipment assets. OVERVIEW The Partnership was organized in 1990 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 7 to the accompanying financial statements. Pursuant to the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended") the Partnership is scheduled to be dissolved by December 31, 2001. However, the General Partner does not expect that the Partnership will be dissolved until such time that the Class Action Lawsuit is settled or adjudicated. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing and the loan to Echelon Residential Holdings LLC ("Echelon Residential Holdings"). The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the Act. However, it is possible that the Partnership may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. If the Partnership were to be determined to be an investment company, its business would be adversely affected. If necessary, the Partnership intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. RESULTS OF OPERATIONS For the year ended December 31, 2000, the Partnership recognized lessees revenue of $57,922 compared to $134,514 and $415,447 for the years ended December 31, 1999 and 1998, respectively. The decrease in lease revenue from 1999 to 2000 resulted from lease term expirations and equipment sales. The decrease in lease revenue from 1998 to 1999 resulted from lease term expirations and the sale of the Partnership's equipment including its interest in two aircraft which provided a total of $4,775 and $187,649 of lease revenue for the years ended December 31, 1999 and 1998, respectively (see further discussion below). In the future, lease revenue will continue to decline due to lease term expirations and equipment sales. Prior to the quarter ended June 30, 1999, the Partnership's equipment portfolio included certain assets in which the Partnership held a proportionate ownership interest. In such cases, the remaining interests were 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 reported, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 2000 was $69,939 compared to $141,591 and $94,196 for the years ended December 31, 1999 and 1998, respectively. Interest income is generated principally from temporary investment of rental receipts and equipment sale proceeds in short-term investments. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the amount of cash available for investment, among other factors. On March 8, 3 2000, the Partnership utilized $1,650,000 of available cash for a loan to Echelon Residential Holdings. The loan is presented in the accompanying financial statements in accordance with the guidance set forth in the Third Notice to Practitioners by the American Institute of Certified Public Accountants in February 1986 entitled "ADC Arrangements", and therefore the Partnership does not recognize interest income related to this loan. (See further discussion included in Note 4 to the financial statements herein). During the year ended December 31, 2000, the Partnership sold fully depreciated equipment to existing lessees and third parties. The sales resulted in a net gain, for financial reporting purposes, of $8,800. In 1999, the Partnership sold equipment having a net book value of $68,040, to existing lessees and third parties resulting in a net gain, for financial statement purposes, of $789,110. This gain includes $720,760 related to the sale of the Partnership's interests in two aircraft (see further discussion below). In 1998, the Partnership sold fully depreciated equipment to existing lessees and third parties. These sales resulted in a net gain, for financial purposes, of $65,000. The results of future sales of equipment will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized for each asset is comprised of all primary lease term 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 was $23,214 and $159,602 for the years ended December 31, 1999 and 1998, respectively. The Partnership's equipment was fully depreciated during 1999. Management fees were $2,896, $6,544, and $20,772 for the years ended December 31, 2000, 1999 and 1998, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Operating expenses were $218,262, $261,782, and $446,969 for the years ended December 31, 2000, 1999 and 1998, respectively. During the years ended December 31, 2000, 1999 and 1998, operating expenses included approximately $41,000, $50,000 and $269,000, respectively, related to the Class Action Lawsuit described in Note 7 to the financial statements. In addition, the Partnership expensed $43,384 in 1998 related to the refurbishment of an aircraft engine and engine leasing costs. Other operating expenses consist principally of professional service costs, such as audit and legal fees, as well as printing, distribution and other remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. For the year ended December 31, 2000, the Partnership's share of losses in Echelon Residential Holdings was $125,241. This loss is reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss." See further discussion below. 4 LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity. The Partnership's principal operating activities have resulted from asset rental transactions. Historically, the Partnership's principal source of cash from operations was provided by the collection of periodic rents, however, in 2000 and 1999 the principal source of such cash resulted from the receipt of interest income. These cash inflows are used to pay management fees and operating costs. Operating activities generated a net cash outflow of $104,807 and $6,754 in 2000 and 1999, respectively, and a net cash inflow of $337,723 in 1998. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the level of cash available for investment, among other factors. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenues and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also continue to decline as the Partnership remarkets its equipment. Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. During the year ended December 31, 2000, the Partnership realized $8,800 in equipment sale proceeds compared to $857,150 and $65,000 in 1999 and 1998, respectively. Sale proceeds in 1999 included $788,800 related to the Partnership's interests in two Boeing 727-251 ADV aircraft. 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. In January 1999, upon expiration of the lease term, the Partnership and certain affiliated investment programs (collectively, the "Programs") entered into an agreement to sell a Boeing 727-251 ADV jet aircraft to the lessee for $2,450,000. In aggregate, the Partnership received $284,200 for its interest in this aircraft. The Partnership's interest in the aircraft had a cost of $1,080,617 and was fully depreciated, resulting in a net gain, for financial statement purposes, of $284,200. In November 1998, the Programs entered into a separate agreement to sell their ownership interests in a different Boeing 727-251 ADV jet aircraft and three engines (collectively the "Aircraft") to a third party (the "Purchaser") for $4,350,000. In December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding one of three engines which had been damaged while the Aircraft was leased to Transmeridian Airlines ("Transmeridian"). (See Note 7 to the accompanying financial statements regarding legal action undertaken by the Programs related to Transmeridian and the damaged engine). The Purchaser also deposited $1,000,000 into a third-party escrow account (the "Escrow") pending repair of the damaged engine and re-installation of the refurbished engine on the Aircraft. Upon installation, the escrow agent was obligated to transfer the Escrow amount plus interest thereon to the Programs. The engine was refurbished at the expense of the Programs. The associated cost was approximately $374,000, of which the Partnership's share was approximately $43,000. The Partnership expensed $13,000 and $30,000 of these costs during the years ended December 31, 1999 and 1998, respectively. The Programs also were required to reimburse the Purchaser for its cost to lease a substitute engine during the period that the damaged engine was being repaired. This cost was approximately $114,000, of which the Partnership's share was approximately $13,000, all of which was expensed in 1998 in connection with the litigation referenced above. In addition, the purchase and sale agreement permitted the Purchaser to return the Aircraft to the Programs, subject to a number of conditions, for $4,350,000, reduced by an amount equivalent to $450 multiplied by the number of flight hours since the Aircraft's most recent C Check. Among the conditions precedent to the Purchaser's returning the Aircraft, the Purchaser must have completed its intended installation of hush-kitting on the Aircraft to conform to Stage 3 noise regulations. This work was completed in January 1999 and the Purchaser's return option expired on May 15, 1999. 5 Due to the contingent nature of the sale, the Partnership deferred recognition of the sale and a resulting gain until expiration of the Purchaser's return option on May 15, 1999. The Partnership's share of the December proceeds was $388,600, which amount was deposited into EFG's customary escrow account and transferred to the Partnership, together with the Partnership's other December rental receipts, in January 1999. At December 31, 1998, the entire amount was classified as other liabilities, with an equal amount included in accounts receivable - affiliate on the accompanying Statement of Financial Position. Upon the installation of the refurbished engine on the Aircraft, the remainder of the sale consideration, or $1,000,000 and the interest thereon, was released from the escrow account to the Programs. The Partnership's share of this payment was $117,838, including interest of $1,838. In aggregate, the Partnership received sales proceeds of $504,600 for its interest in the Aircraft. The Partnership's interest in the Aircraft had a cost and net book value of $1,207,637 and $68,040, resulting in a net gain, for financial statement purposes, of $436,560. At December 31, 2000, no future minimum lease payments were due from contractual lease agreements however, all of the Partnership's equipment is being leased on a month-to-month basis. The Partnership will sell the equipment or enter re-lease or renewal agreements when considered advantageous by the General Partner and EFG. Such future remarketing activities will result in the realization of additional cash inflows in the form of equipment sale proceeds or rents from renewals and re-leases, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of remarketing events often is dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third-party In connection with a preliminary settlement agreement for a Class Action Lawsuit described in Note 7 to the financial statements, the court permitted the Partnership to invest in any new investment, including but not limited to new equipment or other business activities, subject to certain limitations. On March 8, 2000, the Partnership loaned $1,650,000 to a newly formed real estate company, Echelon Residential Holdings, to finance the acquisition of real estate assets by that company. Echelon Residential Holdings, through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an independent Florida-based real estate company. Echelon Residential Holding's interest in Echelon Residential LLC is pledged pursuant to a pledge agreement to the partnerships as collateral for the loans. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. As discussed in Note 4 to the Partnership's financial statements, the loan is considered to be an investment in a real estate venture for accounting purposes. In accordance with the provisions of Statement of Position No. 78-9, "Accounting for Investments in Real Estate Ventures", the Partnership reports its share of income or loss of Echelon Residential Holdings under the equity method of accounting. The loan made by the Partnership to Echelon Residential Holdings is, and will continue to be, subject to various risks, including the risk of default by Echelon Residential Holdings, which could require the Partnership to foreclose under the pledge agreement on its interests in Echelon Residential LLC. The ability of Echelon Residential Holdings to make loan payments and the amount the Partnership may realize after a default would be dependent upon the risks generally associated with the real estate lending business including, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, rent control laws and other governmental rules. A default by Echelon Residential Holdings could have a material adverse effect on the future cash flow and operating results of the Partnership. The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of the several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a 6 risk that the court may object to the general partner's action in structuring the loan in this way and may require the partnerships to restructure or divest the loan. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. In addition to the need for funds in connection with the Class Action Lawsuit, liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. Cash distributions to the General and Limited Partners had been declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is reported under financing activities on the accompanying Statement of Cash Flows. No cash distributions were declared for the year ended December 31, 2000, however, the fourth quarter 1999 cash distribution of $56,502 was paid in January 2000. In any given year, it is possible that Limited Partners will be allocated taxable income in excess of distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Limited Partners adequate to cover any tax obligation. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, the residual value realized for each asset at its disposal date and the performance of the Partnership's non-equipment assets. The Partnership's capital account balances for federal income tax and for financial reporting purposes are different primarily due to differing treatments of income and expense items for income tax purposes in comparison to financial reporting purposes (generally referred to as permanent or timing differences; see Note 6 to the financial statements). For instance, selling commissions and organization and offering costs pertaining to syndication of the Partnership's limited partnership units are not deductible for federal income tax purposes, but are recorded as a reduction of partners' capital for financial reporting purposes. Therefore, such differences are permanent differences between capital accounts for financial reporting and federal income tax purposes. Other differences between the bases of capital accounts for federal income tax and financial reporting purposes occur due to timing differences. Such items include the cumulative difference between income or loss for tax purposes and financial statement income or loss reflects different treatments for book and tax purposes related to the real estate venture. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 2000. This is the result of aggregate cash distributions to the General Partner being in excess of its capital contribution of $1,000 and its allocation of financial statement net income or loss. Ultimately, the existence of a capital deficit for the General Partner for financial reporting purposes is not indicative of any further capital obligations to the Partnership by the General Partner. The Restated Agreement, as amended, requires that upon the dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 2000, the General Partner had a positive tax capital account balance. The outcome of the Class Action Lawsuit described in Note 7 to the accompanying financial statements will be the principal factor in determining the future of the Partnership's operations. The proposed settlement to that lawsuit, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. In addition, commencing with the first quarter of 2000, the General Partner suspended the payment of quarterly cash distributions pending final resolution of the Class Action Lawsuit. Accordingly, future cash distributions are not expected to be paid until the Class Action Lawsuit is settled or adjudicated. 7 REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Fund I-A, a Massachusetts Limited Partnership: We have audited the accompanying statements of financial position of American Income Fund I-A, a Massachusetts Limited Partnership, as of December 31, 2000 and 1999, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of Echelon Residential Holdings LLC, (a limited liability company to which the Partnership has loaned $2,730,000), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to data included for Echelon Residential Holdings LLC, it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-A, a Massachusetts Limited Partnership at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ ERNST & YOUNG LLP Tampa, Florida March 30, 2001 8 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2000 AND 1999
2000 1999 ------------------- ------------------- ASSETS Cash and cash equivalents..................................... $ 791,204 $ 2,593,713 Rents receivable.............................................. -- 17,000 Accounts receivable - affiliate............................... 5,069 9,270 Investment in real estate venture............................. 1,524,759 -- Equipment at cost, net of accumulated depreciation of $342,411 and $423,985 at December 31, 2000 and 1999, respectively............... -- -- ------------------- ------------------- Total assets.......................................... $ 2,321,032 $ 2,619,983 =================== =================== LIABILITIES AND PARTNERS' CAPITAL Accrued liabilities........................................... $ 188,216 $ 204,068 Accrued liabilities - affiliate............................... 13,606 5,465 Other liabilities............................................. -- 25,000 Cash distributions payable to partners........................ -- 56,502 ------------------- ------------------- Total liabilities..................................... 201,822 291,035 ------------------- ------------------- Partners' capital (deficit): General Partner............................................ (210,924) (200,437) Limited Partnership Interests (286,274 Units; initial purchase price of $25 each)........ 2,330,134 2,529,385 ------------------- ------------------- Total partners' capital............................... 2,119,210 2,328,948 ------------------- ------------------- Total liabilities and partners' capital............... $ 2,321,032 $ 2,619,983 =================== ===================
The accompanying notes are an integral part of these financial statements. 9 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------------ ------------------ ------------------ Income: Lease revenue............................ $ 57,922 $ 134,514 $ 415,447 Interest income.......................... 69,939 141,591 94,196 Gain on sale of equipment................ 8,800 789,110 65,000 ------------------ ------------------ ------------------ Total income......................... 136,661 1,065,215 574,643 ------------------ ------------------ ------------------ Expenses: Depreciation............................. -- 23,214 159,602 Equipment management fees - affiliate............................ 2,896 6,544 20,772 Operating expenses - affiliate........... 218,262 261,782 446,969 Partnership's share of unconsolidated real estate venture's loss........... 125,241 -- -- ------------------ ------------------ ------------------ Total expenses....................... 346,399 291,540 627,343 ------------------ ------------------ ------------------ Net (loss) income............................. $ (209,738) $ 773,675 $ (52,700) ================== ================== ================== Net (loss) income per limited partnership unit............. $ (0.70) $ 2.57 $ (0.17) ================== ================== ================== Cash distributions declared per limited partnership unit............. $ -- $ 0.75 $ 0.75 ================== ================== ==================
The accompanying notes are an integral part of these financial statements. 10 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
GENERAL LIMITED PARTNERS PARTNER ---------------------------------- AMOUNT UNITS AMOUNT TOTAL -------------- -------------- -------------- ------------- Balance at December 31, 1997.......... $ (213,886) 286,274 $ 2,273,871 $ 2,059,985 Net loss - 1998.................. (2,635) -- (50,065) (52,700) Cash distributions declared...... (11,300) -- (214,706) (226,006) -------------- -------------- -------------- ------------- Balance at December 31, 1998.......... (227,821) 286,274 2,009,100 1,781,279 Net income - 1999................ 38,684 -- 734,991 773,675 Cash distributions declared...... (11,300) -- (214,706) (226,006) -------------- -------------- -------------- ------------- Balance at December 31, 1999.......... (200,437) 286,274 2,529,385 2,328,948 Net loss - 2000................... (10,487) -- (199,251) (209,738) -------------- -------------- -------------- ------------- Balance at December 31, 2000.......... $ (210,924) 286,274 $ 2,330,134 $ 2,119,210 ============== ============== ============== =============
The accompanying notes are an integral part of these financial statements. 11 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 --------------- ---------------- ----------------- Cash flows (used in) provided by operating activities: Net (loss) income................................................ $ (209,738) $ 773,675 $ (52,700) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation............................................ -- 23,214 159,602 Gain on sale of equipment............................... (8,800) (789,110) (65,000) Partnership's share of unconsolidated real estate venture's loss.......................... 125,241 -- -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable........................................ 17,000 11,778 4,002 Accounts receivable - affiliate......................... 4,201 412,547 (353,937) Increase (decrease) in: Accrued liabilities..................................... (15,852) (69,816) 264,684 Accrued liabilities - affiliate......................... 8,141 (667) (6,791) Deferred rental income.................................. -- (4,775) (737) Other liabilities....................................... (25,000) (363,600) 388,600 --------------- ---------------- ---------------- Net cash (used in) provided by operating activities..... (104,807) (6,754) 337,723 --------------- ---------------- ---------------- Cash flows (used in) provided by investing activities: Proceeds from equipment sales............................... 8,800 857,150 65,000 Investment in real estate venture......................... (1,650,000) -- -- --------------- ---------------- ---------------- Net cash (used in) provided by investing activities..... (1,641,200) 857,150 65,000 --------------- ---------------- ---------------- Cash flows used in financing activities: Cash distributions paid..................................... (56,502) (226,006) (226,006) --------------- ---------------- ---------------- Net cash used in financing activities................... (56,502) (226,006) (226,006) --------------- ---------------- ---------------- Net (decrease) increase in cash and cash equivalents............. (1,802,509) 624,390 176,717 Cash and cash equivalents at beginning of year................... 2,593,713 1,969,323 1,792,606 --------------- ---------------- ---------------- Cash and cash equivalents at end of year......................... $ 791,204 $ 2,593,713 $ 1,969,323 =============== ================ ================
The accompanying notes are an integral part of these financial statements. 12 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS American Income Fund I-A, a Massachusetts Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on March 6, 1990, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On December 31, 1990, the Partnership issued 286,274 units of limited partnership interest (the "Units") to 359 investors. The Partnership's General Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership ("Restated Agreement, as amended"). Significant operations commenced December 31, 1990 when the Partnership made its initial equipment purchase. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Limited Partners and 5% to the General Partner. Under the terms of a Management Agreement between the Partnership and EFG, management services are provided by EFG to the Partnership at fees which the General Partner believes to be competitive for similar services (see Note 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group", and its acronym, to a third-party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. 13 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 2000, the Partnership had $678,112 invested in federal agency discount notes, repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities, or other highly liquid overnight investments. REVENUE RECOGNITION Effective January 1, 2000, the Partnership adopted the provisions of Securities Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB No. 101 had no impact on the Partnership's financial statements. Rents are payable to the Partnership monthly or quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Partnership may enter renewal or re-lease agreements which expire beyond the Partnership's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Partnership's business activities as the General Partner and EFG would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. See also Note 7 regarding the Class Action Lawsuit. No future minimum rents are due for the year ending December 31, 2000, however, all of the Partnership's equipment is being leased on a month-to-month basis. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------------------ ------------------ ------------------ General Motors Corporation....................... $ 26,935 $ 30,318 $ -- Ford Motor Company............................... $ 18,930 $ 29,070 $ -- Rexam Beverage Can Company (formerly American National Can Company)............... $ 6,049 $ 19,895 $ 71,395 Bergen Brunswig Medical Inc. (formerly Durr Medical)............................... $ -- $ 27,051 $ 64,921 Transmeridian Airlines........................... $ -- $ -- $ 97,169 Sunworld International Airlines, Inc............. $ -- $ -- $ 90,480
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 14 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. DEPRECIATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. 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. IMPAIRMENT OF LONG-LIVED ASSETS The carrying value of long-lived assets, including equipment and the real estate loan, will be reviewed for impairment whenever events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. ACCRUED LIABILITIES - AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities - Affiliate (see Note 5). REAL ESTATE LOAN The Partnership accounts for the loan to a real estate company using the guidance set forth in the Third Notice to Practitioners by the American Institute of Certified Public Accountants ("AICPA") in February 1986 entitled "ADC Arrangements" (the "Third Notice"). The Partnership has evaluated this loan and has determined that real estate accounting is appropriate. This determination affects the Partnership's balance sheet classification of the loan and the recognition of revenues derived therefrom. The Third Notice was issued to address those real estate acquisition, development and construction arrangements where a lender has virtually the same risk and potential rewards as those of owners or joint ventures. Emerging Issues Task Force ("EITF") 86-21, "Application of the AICPA Notice to Practitioners regarding Acquisition, Development and Construction Arrangements to Acquisition of an Operating Property" expanded the applicability of the Third Notice to entities other than financial institutions. Based on the applicability of the Third Notice, EITF 86-21 and consideration of the economic substance of the transaction, the loan is considered to be an investment in a real estate venture for accounting purposes. In accordance with the provisions of Statement of Position No. 78-9, "Accounting for Investments in Real Estate Ventures", the Partnership reports its share of income or loss of the real estate company under the equity method of accounting. 15 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONTINGENCIES It is the Partnership's policy to recognize a liability for goods and services during the period when the goods or services are received. To the extent that the Partnership has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Partnership recognizes a liability in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998, a settlement proposal to resolve that litigation was negotiated and remains pending (See Note 7). The Partnership's estimated exposure for costs anticipated to be incurred in pursuing the settlement proposal is approximately $360,000 consisting principally of legal fees and other professional service costs. These costs are expected to be incurred regardless of whether the proposed settlement ultimately is effected and, therefore, the Partnership expensed approximately $269,000 of these costs in 1998 following the Court's approval of the settlement plan. The cost estimate is subject to change and is monitored by the General Partner based upon the progress of the settlement proposal and other pertinent information. As a result, the Partnership expensed approximately $41,000 and $50,000 for such costs during 2000 and 1999, respectively. ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). See Note 6 for allocation of income or loss for income tax purposes. NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT Net income (loss) and cash distributions per Unit are based on 286,274 Units outstanding during each of the three years in the period ended December 31, 2000 and computed after allocation of the General Partner's 5% share of net income (loss) and cash distributions. PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their separate tax returns. NOTE 3 - EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 2000. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 2000 under contracted lease terms. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value. 16 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
REMAINING LEASE TERM EQUIPMENT EQUIPMENT TYPE (MONTHS) AT COST LOCATION ------------------------------------------------------ --------------- ----------------- ----------------- Materials handling.................................... 0 $ 342,411 CA/DE/IL/KY/MI Accumulated depreciation.............................. 342,411 ----------------- Equipment, net of accumulated depreciation....... $ -- =================
Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. At December 31, 2000, all of the Partnership's equipment was being leased on a month-to-month basis. NOTE 4 - INVESTMENT IN REAL ESTATE VENTURE On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange Partnerships") collectively loaned $32 million to Echelon Residential Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate company. Echelon Residential Holdings is owned by several investors, including James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. The Partnership's loan is $1,650,000. Echelon Residential Holdings, through a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to acquire various real estate assets from Echelon International Corporation, a Florida-based real estate company. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. In connection with the transaction, Echelon Residential Holdings has pledged a security interest in all of its right, title and interest in and to its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral. The loan is presented in accordance with the guidance for ADC Arrangements as described in Note 2, Real Estate Loans, in the Partnership's financial statements as of and for the year December 31, 2000. The loan is accounted for as an investment in real estate venture and is presented net of the Partnership's share of losses in Echelon Residential Holdings. For the period ended December 31, 2000, the Partnership's share of losses in Echelon Residential Holdings was $125,241 and is reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss." The summarized financial information for Echelon Residential Holdings as of December 31, 2000 and for the period March 8, 2000 (commencement of operations) through December 31, 2000 is as follows: 17 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Total assets........................................ $ 68,580,891 Total liabilities................................... $ 70,183,162 Minority interest................................... $ 2,257,367 Total deficit ...................................... $ (3,859,638) Total revenues...................................... $ 5,230,212 Total expenses, minority interest and equity in loss of unconsolidated joint venture.......... $ 11,936,238 Net loss............................................ $ (6,706,026) NOTE 5 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
2000 1999 1998 ------------------ ------------------ ------------------ Equipment management fees...................... $ 2,896 $ 6,544 $ 20,772 Administrative charges......................... 77,806 83,864 57,492 Reimbursable operating expenses due to third parties...................... 140,456 177,918 389,477 ------------------ ------------------ ------------------ Total........... $ 221,158 $ 268,326 $ 467,741 ================== ================== ==================
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG was compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership, which are reimbursed to EFG at actual cost. All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. The Partnership's Purchase Price was determined by the method described in Note 2, Equipment on Lease. All rents and proceeds from the sale of equipment are paid directly to EFG. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 2000, the Partnership was owed $5,069 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 2001. 18 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) An affiliate of the General Partner owns Units in the Partnership as follows:
---------------------------------------------- ----------------------- ------------------------- NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS ---------------------------------------------- ----------------------- ------------------------- Old North Capital Limited Partnership 4,000 1.40% ---------------------------------------------- ----------------------- -------------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited partnership formed in 1995. The general partner of ONC is controlled by Gary D. Engle and the limited partnership interests in ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. NOTE 6 - INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income or loss to each class of partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Restated Agreement, as amended. For income tax purposes, the Partnership allocates net income or net loss in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 2000, the General Partner had a positive tax capital account balance. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ------------------ ------------------ ------------------ Net (loss) income.................................. $ (209,738) $ 773,675 $ (52,700) Financial statement depreciation less than tax depreciation.................. -- (83,853) (54,536) Deferred rental income........................ -- (4,775) (737) Partnership's share of unconsolidated real estate venture's loss................ 125,241 -- -- Interest income - real estate venture......... 201,496 -- -- Other......................................... -- (247,171) 16,384 ------------------ ------------------ ------------------ Net income (loss) for federal income tax Reporting purposes............................ $ 116,999 $ 437,876 $ (91,589) ================== ================== ==================
The principal component of "Other" consists of the difference between the tax and financial statement gain on equipment disposals. 19 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2000 and 1999:
2000 1999 ------------------ ------------------ Partners' capital.................................................... $ 2,119,210 $ 2,328,948 Add back selling commissions and organization And offering costs............................................ 800,146 800,146 Cumulative difference between federal income tax and financial statement (loss) income....................... 326,737 -- ------------------ ------------------ Partners' capital for federal income tax reporting purposes.......... $ 3,246,093 $ 3,129,094 ================== ==================
20 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - LEGAL PROCEEDINGS In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit". The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was preliminarily approved by the Court on August 20, 1998 when the Court issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order"). On March 12, 1999, counsel for the Plaintiffs and the Defendants entered into an amended stipulation of settlement (the "Amended Stipulation") which was filed with the Court on March 12, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other things, divided the Class Action Lawsuit into two separate sub-classes that could be settled individually. On May 26, 1999, the Court issued an Order and Final Judgment approving settlement of one of the sub-classes. Settlement of the second sub-class, involving the Partnership and 10 affiliated partnerships (collectively referred to as the "Exchange Partnerships"), remains pending due, in part, to the complexity of the proposed settlement pertaining to this class. In February 2000, counsel for the Plaintiffs and the Defendants entered into a second amended stipulation of settlement (the "Second Amended Stipulation") which modified certain of the settlement terms contained in the Amended Stipulation. The Second Amended Stipulation was preliminarily approved by the Court by its "Second Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000 Order"). Prior to issuing a final order approving the settlement of the second sub-class involving the Partnership, the Court will hold a fairness hearing that will be open to all interested parties and permit any party to object to the settlement. The investors of the Partnership and all other plaintiff sub-class members will receive a Notice of Settlement and other information pertinent to the settlement of their claims that will be mailed to them in advance of the fairness hearing. The settlement of the second sub-class is premised on the consolidation of the Exchange Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company ("Newco"). Under the proposed Consolidation, the partners of the Exchange Partnerships would receive both common stock in Newco and a cash distribution; and thereupon the Exchange Partnerships would be dissolved. In addition, EFG would contribute certain management contracts, operations personnel, and business opportunities to Newco and cancel its current management contracts with all of the Exchange Partnerships. Newco would operate principally as a 21 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) finance company and would use its best efforts to list its shares on the NASDAQ National Market or another national exchange or market as soon after the Consolidation as Newco deems that market conditions and its business operations are suitable for listing its shares and Newco has satisfied all necessary regulatory and listing requirements. The potential benefits and risks of the Consolidation will be presented in a Solicitation Statement that will be mailed to all of the partners of the Exchange Partnerships as soon as the associated regulatory review process is completed and at least 60 days prior to the fairness hearing. A preliminary Solicitation Statement was filed with the Securities and Exchange Commission on August 24, 1998 and remains pending. Class members will be notified of the actual fairness hearing date when it is confirmed. One of the principal objectives of the Consolidation is to create a company that would have the potential to generate more value for the benefit of existing limited partners than other alternatives, including continuing the Partnership's customary business operations until all of its assets are disposed in the ordinary course of business. To facilitate the realization of this objective, the Amended Stipulation provided, among other things, that commencing March 22, 1999, the Exchange Partnerships could collectively invest up to 40% of the total aggregate net asset values of all of the Exchange Partnerships in any investment, including additional equipment and other business activities that the general partners of the Exchange Partnerships and EFG reasonably believed to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations. The Second Amended Stipulation, among other things, quantified the 40% limitation using a whole dollar amount of $32 million in the aggregate. On March 8, 2000, the Exchange Partnerships collectively made a $32 million loan as permitted by the Second Amended Stipulation approved by the Court. The Partnership's portion of the aggregate loan is $1,650,000. The loan consists of a term loan to Echelon Residential Holdings, a newly-formed real estate company that is owned by several independent investors and, in his individual capacity, James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. Echelon Residential Holdings, through a wholly-owned subsidiary, ("Echelon Residential LLC"), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an independent Florida-based real estate company. The loan has a term of 30 months maturing on September 8, 2002 and bears interest at the annual rate of 14% for the first 24 months and 18% for the final six months of the term. Interest accrues and compounds monthly but is not payable until maturity. Echelon Residential Holdings has pledged its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral for the loan. In the absence of the Court's authorization to enter into new investment activities, the Partnership's Restated Agreement, as amended, would not permit such activities without the approval of limited partners owning a majority of the Partnership's outstanding Units. Consistent with the Amended Stipulation, the Second Amended Stipulation provides terms for unwinding any new investment transactions in the event that the Consolidation is not effected or the Partnership objects to its participation in the Consolidation. The Second Amended Stipulation, as well as the Amended Stipulation and the original Stipulation of Settlement, prescribe certain conditions necessary to effect a final settlement, including providing the partners of the Exchange Partnerships with the opportunity to object to the participation of their partnership in the Consolidation. Assuming the proposed settlement is effected according to present terms, the Partnership's share of legal fees and expenses related to the Class Action Lawsuit and the Consolidation is estimated to be approximately $ 360,000, of which approximately $41,000, $50,000 and $269,000 was expensed by the Partnership in 2000, 1999 and 1998, respectively. While the Court's August 20 Order enjoined certain class members, including all of the partners of the Partnership, from transferring, selling, assigning, giving, pledging, hypothecating, or otherwise disposing of any Units pending the Court's final determination of whether the settlement should be approved, the March 22 Order permitted the partners to transfer Units to family members or as a result of the divorce, disability or death of the partner. No other transfers are permitted pending the Court's final determination of whether the settlement should 22 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) be approved. The provision of the August 20 Order which enjoined the General Partners of the Exchange Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. There can be no assurance that settlement of the sub-class involving the Exchange Partnerships will receive final Court approval and be effected. There also can be no assurance that all or any of the Exchange Partnerships will participate in the Consolidation because if limited partners owning more than one-third of the outstanding Units of a partnership object to the Consolidation, then that partnership will be excluded from the Consolidation. Notwithstanding the extent of delays experienced thus far in achieving a final settlement of the Class Action Lawsuit with respect to the Exchange Partnerships, the General Partner and its affiliates, in consultation with counsel, continue to feel that there is a reasonable basis to believe that a final settlement of the sub-class involving the Exchange Partnerships ultimately will be achieved. However, in the absence of a final settlement approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. Neither the General Partner nor its affiliates can predict with any degree of certainty the cost of continuing litigation to the Partnership or the ultimate outcome. In addition to the foregoing, the Partnership is a party to other lawsuits that have arisen out of the conduct of its business, principally involving disputes or disagreements with lessees over lease terms and conditions as described below: ACTION INVOLVING TRANSMERIDIAN AIRLINES On November 9, 1998, First Security Bank, N.A., as trustee of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs), filed an action in 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 action subsequently was removed to United States District Court for the District of Massachusetts. Transmeridian filed counterclaims for breach of contract, quantum meruit, conversion, breach of the implied covenant of good faith and fair dealing, and violation of M.G.L. c. 93A. The Plaintiffs subsequently filed an Amended Complaint asserting claims for breaches of contract and covenant of good faith and fair dealing against Transmeridian and breach of guaranty against Apple Vacations. The Plaintiffs are seeking damages for, among other things, breach of contract arising out of Transmeridian's refusal to repair or replace burned engine blades found in one engine during a pre-return inspection of an aircraft leased by Transmeridian from the Plaintiffs, a Boeing 727-251 ADV aircraft (the "Aircraft"). The estimated cost to repair the engine and lease a substitute engine during the repair period was approximately $488,000. Repairs were completed in June 1999. The Plaintiffs intend to enforce written guarantees issued by Apple Vacations that absolutely and unconditionally guarantee Transmeridian's performance under the lease agreement and are seeking recovery of all costs, lost revenue and monetary damages in connection with this matter. Notwithstanding the foregoing, the Plaintiffs were required to advance the cost of repairing the engine and leasing a substitute engine and cannot be certain whether the guarantees will be enforced. Therefore, the Partnership accrued and expensed its share of these costs, or approximately $43,000 in 1998 and $13,000 in 1999. On September 22, 2000, Transmeridian filed a petition for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of Georgia in Atlanta (the "Bankruptcy Court"). This filing automatically stayed all pending litigation against Transmeridian, including this action. The Bankruptcy filings indicate Transmeridian has at least $24 million in debt. In January 2001, Transmeridian filed a reorganization plan and disclosure statement indicating that little if any money will be available for distribution to unsecured creditors like the Partnership. The Partnership's counsel has recently initiated discussions with Transmeridian's counsel concerning settlement of the claims against Transmeridian. No assurances can be given that a settlement will be reached. On March 2, 2001, the Partnership's counsel filed a motion in the Bankruptcy Court asking the Court to lift the automatic stay of this Massachusetts proceeding so that it may proceed to final judgment. The Bankruptcy Court 23 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) has scheduled a hearing on this motion for April 10, 2001. Transmeridian's bankruptcy counsel has indicated that he is considering asking the Court to move this Massachusetts action to Georgia and consolidate it with the bankruptcy proceeding. The General Partner cannot predict the outcome of its motion for relief from stay or Transmeridian's efforts to transfer venue of the Massachusetts action. Notwithstanding the Transmeridian bankruptcy, the General Partner plans to vigorously pursue enforcement of the written guarantees issued by Apple Vacations; however, it is too early to predict the Plaintiffs' likelihood of success. This aircraft was sold in June 1999. ACTION INVOLVING NORTHWEST AIRLINES, INC. On September 22, 1995, Investors Asset Holding Corp. and First Security Bank, N.A., trustees of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in United States District Court for the District of Massachusetts against a lessee of the Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that Northwest did not fulfill its maintenance return obligations under its Lease Agreements with the Plaintiffs and seeks declaratory judgment concerning Northwest's obligations and monetary damages. Northwest filed an Answer to the Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United States Magistrate Judge recommended entry of partial summary judgment in favor of the Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United States District Court Judge adopted the Magistrate Judge's recommendation and entered partial summary judgment in favor of the Plaintiffs on their claims for declaratory judgment. The parties then undertook a second phase of discovery, focused on damages. This second phase of damages is scheduled to conclude in April 2001 with the completion of depositions of the parties' experts. In February 2001 the District Court also denied summary judgment on certain of the Plaintiffs' other claims, including their tort claims for conversion. If no settlement is reached, the Plaintiffs will proceed to trial for an assessment of damages. No firm trial date has been established at this time; however, if a trial should become necessary, it is not expected to occur before June 2001. The General Partner believes that the Plaintiff's claims ultimately will prevail and that the Partnership's financial position will not be adversely affected by the outcome of this action. 24 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999:
THREE MONTHS ENDED ------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL --------- -------- ------------- ------------ --------- 2000 Total lease revenue ...... $ 6,779 $ 18,582 $ 9,694 $ 12,867 $ 57,922 Net income (loss) ........ 19,620 (10,524) (90,243) (128,591) (209,738) Net income (loss) per limited partnership unit 0.07 (0.04) (0.30) (0.43) (0.70) 1999 Total lease revenue ...... $43,782 $ 39,905 $16,413 $ 34,414 $134,514 Net (loss) income ........ (3,835) 764,639 36,609 (23,738) 773,675 Net (loss) income per limited partnership unit (0.01) 2.54 0.12 (0.08) 2.57
The Partnership's net income in the three months ended June 30, 1999 is primarily the result of the sale of the Partnership's interest in two aircraft, resulting in a net gain, for financial statement purposes, of $720,760. 25 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenue, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 2000, 1999 and 1998.
2000 1999 1998 ---------------- ---------------- ---------------- Rents earned prior to disposal of equipment, net of interest charges................ $ 302,660 $ 3,053,556 $ 462,256 Sale proceeds realized upon disposition of equipment...................................... 8,800 857,150 65,000 ---------------- ---------------- ---------------- Total cash generated from rents and equipment sale proceeds....................... 311,460 3,910,706 527,256 Original acquisition cost of equipment disposed........ 81,574 3,217,380 329,820 ---------------- ---------------- ---------------- Excess of total cash generated to cost of equipment disposed............................. $ 229,886 $ 693,326 $ 197,436 ================ ================ ================
26 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 2000
SALES AND OPERATIONS REFINANCINGS TOTAL ------------------ ------------------ ------------------ Net (loss) income............................... $ (218,538) $ 8,800 $ (209,738) Add: Management fees............................ 2,896 2,896 Partnership's share of unconsolidated real estate venture's loss............. 125,241 -- 125,241 ------------------ ------------------ ------------------ Cash from operations, sales and refinancings........................... (90,401) 8,800 (81,601) Less: Management fees............................ (2,896) -- (2,896) ------------------ ------------------ ------------------ Distributable cash from operations, sales and refinancings................. (93,297) 8,800 (84,497) Other sources and uses of cash: Cash and cash equivalents 1,962,569 631,144 2,593,713 at beginning of year................... Net change in receivables and accruals..... (11,510) -- (11,510) Investment in real estate venture.......... (1,066,558) (583,442) (1,650,000) Less: Cash distributions paid.................... -- (56,502) (56,502) ------------------ ------------------ ------------------ Cash and cash equivalents at end of year........ $ 791,204 $ -- $ 791,204 ================== ================== ==================
27 AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP FOR THE YEAR ENDED DECEMBER 31, 2000 For the year ended December 31, 2000, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses $ 225,973 28