-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F54YLqWcvJl8+A5pWaB1i1YA0IXps+IsBroo2Vpi4ldApZrzkW4Z6TiiU9iEJTo2 laZhRq5Pew+87EGzlbCzMA== 0001047469-98-041384.txt : 19981123 0001047469-98-041384.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041384 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-B CENTRAL INDEX KEY: 0000868678 STANDARD INDUSTRIAL CLASSIFICATION: 7359 IRS NUMBER: 043106525 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-35148 FILM NUMBER: 98753414 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-Q 1 10-Q - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 / / - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 14 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 EX-27 2 EXHIBIT 27
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,402,891 0 723,199 0 0 2,126,090 1,859,962 1,486,616 2,499,436 337,704 0 0 0 0 2,161,732 2,499,436 0 329,594 0 0 655,158 0 0 (325,564) 0 (325,564) 0 0 0 (325,564) 0 0
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