10-Q 1 0001.txt AMERICAN INCOME FUND I-E 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, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-20029 American Income Fund I-E, a Massachusetts Limited Partnership (Exact name of registrant as specified in its charter) Massachusetts 04-3127244 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 88 Broad Street, Boston, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court 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-E, a Massachusetts Limited Partnership FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Statement of Financial Position at September 30, 2000 and December 31, 1999................................ 3 Statement of Operations for the three and nine months ended September 30, 2000 and 1999............ 4 Statement of Changes in Partners' Capital for the nine months ended September 30, 2000............................... 5 Statement of Cash Flows for the nine months ended September 30, 2000 and 1999...................... 6 Notes to the Financial Statements............................................. 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 12-17 PART II. OTHER INFORMATION: Items 1-6.............................................................................. 18
2 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership STATEMENT OF FINANCIAL POSITION September 30, 2000 and December 31, 1999 (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ ASSETS Cash and cash equivalents................................................... $ 1,973,196 $ 6,089,722 Rents receivable............................................................ 171,384 171,582 Accounts receivable - affiliate............................................. 60,350 555,112 Accounts receivable - other................................................. 32,056 - Investment in real estate venture........................................... 4,681,633 - Note receivable - affiliate................................................. 938,718 938,718 Investment securities - affiliate........................................... 212,870 244,801 Equipment at cost, net of accumulated depreciation of $5,943,136 and $6,929,313 at September 30, 2000 and December 31, 1999, respectively..... 5,574,758 6,289,323 --------------- --------------- Total assets...................................................... $ 13,644,965 $ 14,289,258 =============== =============== LIABILITIES AND PARTNERS' CAPITAL Notes payable............................................................... $ 2,372,327 $ 2,651,371 Accrued interest............................................................ 18,980 25,556 Accrued liabilities......................................................... 399,053 398,951 Accrued liabilities - affiliate............................................. 26,384 17,512 Deferred rental income...................................................... 31,226 47,861 Cash distributions payable to partners...................................... - 235,495 --------------- --------------- Total liabilities................................................. 2,847,970 3,376,746 --------------- --------------- Partners' capital (deficit): General Partner.......................................................... (434,501) (428,725) Limited Partnership Interests (883,829.31 Units; initial purchase price of $25 each)........................................................... 11,231,496 11,341,237 --------------- --------------- Total partners' capital........................................... 10,796,995 10,912,512 --------------- --------------- Total liabilities and partners' capital........................... $ 13,644,965 $ 14,289,258 =============== ===============
The accompanying notes are an integral part of these financial statements. 3 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership STATEMENT OF OPERATIONS For the three and nine months ended September 30, 2000 and 1999 (Unaudited)
For the three months ended For the nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Income: Lease revenue............................... $ 289,953 $ 507,181 $ 908,717 $ 1,626,384 Interest income............................. 33,033 78,521 133,000 216,924 Interest income--affiliate.................. 23,661 23,661 70,211 70,211 Gain on sale of equipment................... 48,994 863 56,494 509,275 ------------- ------------- ------------- ------------- Total income......................... 395,641 610,226 1,168,422 2,422,794 ------------- ------------- ------------- ------------- Expenses: Depreciation................................ 181,147 234,200 524,234 713,755 Interest expense............................ 49,320 55,614 153,198 182,809 Equipment management fees--affiliate........ 13,458 24,144 42,305 75,195 Operating expenses--affiliate............... 297,654 67,993 423,904 279,442 Partnership's share of unconsolidated real estate venture's loss..................... 77,658 - 108,367 - ------------- ------------- ------------- ------------- Total expenses....................... 619,237 381,951 1,252,008 1,251,201 ------------- ------------- ------------- ------------- Net (loss) income.............................. $ (223,596) $ 228,275 $ (83,586) $ 1,171,593 ============= ============= ============= ============= Net (loss) income per limited partnership unit. $ (0.24) $ 0.25 $ (0.09) $ 1.26 ============= ============= ============= ============= Cash distributions declared per limited partnership unit............................ $ - $ 0.25 $ - $ 0.76 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements. 4 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership STATEMENT OF CHANGES IN PARTNERS' CAPITAL For the nine months ended September 30, 2000 (Unaudited)
General Partner Limited Partners Amount Units Amount Total ------ ----- ------ ----- Balance at December 31, 1999....................... $ (428,725) 883,829.31 $ 11,341,237 $ 10,912,512 Net loss........................................ (4,179) - (79,407) (83,586) Unrealized loss on investment securities-- affiliate..................................... (1,597) - (30,334) (31,931) ------------- ------------- ------------- ------------- Comprehensive loss................................. (5,776) - (109,741) (115,517) ------------- ------------- ------------- ------------- Balance at September 30, 2000...................... $ (434,501) 883,829.31 $ 11,231,496 $ 10,796,995 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements. 5 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership STATEMENT OF CASH FLOWS For the nine months ended September 30, 2000 and 1999 (Unaudited)
2000 1999 --------- -------- Cash flows provided by (used in) operating activities: Net (loss) income..................................................... $ (83,586) $ 1,171,593 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation..................................................... 524,234 713,755 Gain on sale of equipment........................................ (56,494) (509,275) Partnership's share of unconsolidated real estate venture's loss. 108,367 - Changes in assets and liabilities Decrease (increase) in: Rents receivable................................................. 198 (59,470) Accounts receivable - affiliate.................................. 494,762 76,641 Accounts receivable - other...................................... (32,056) - Increase (decrease) in: Accrued interest................................................. (6,576) (8,816) Accrued liabilities.............................................. 102 (87,277) Accrued liabilities - affiliate.................................. 8,872 (201) Deferred rental income........................................... (16,635) (383) ------------ ------------ Net cash provided by operating activities................... 941,188 1,296,567 ------------ ------------ Cash flows provided by (used in) investing activities: Proceeds from equipment sales...................................... 246,825 1,732,126 Investment in real estate venture.................................. (4,790,000) - ------------ ------------ Net cash (used in) provided by investing activities......... (4,543,175) 1,732,126 ------------ ------------ Cash flows provided by (used in) financing activities: Proceeds from notes payable........................................ 131,618 - Principal payments--notes payable................................... (410,662) (720,377) Distributions paid................................................. (235,495) (706,496) ------------ ------------ Net cash used in financing activities....................... (514,539) (1,426,873) ------------ ------------ Net (decrease) increase in cash and cash equivalents.................. (4,116,526) 1,601,820 Cash and cash equivalents at beginning of period...................... 6,089,722 4,468,062 ------------ ------------ Cash and cash equivalents at end of period............................ $ 1,973,196 $ 6,069,882 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest........................... $ 159,774 $ 191,625 ============ ============
Supplemental disclosure of non-cash activity: See Note 6 to the financial statements regarding the reduction of the Partnership's carrying value of its investment securities - affiliate during the nine months ended September 30, 2000. The accompanying notes are an integral part of these financial statements. 6 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership NOTES TO THE FINANCIAL STATEMENTS September 30, 2000 (Unaudited) Note 1--Basis of Presentation The financial statements presented herein are prepared in conformity with generally accepted accounting principles for interim financial information and with 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 1999 Annual Report. Except as disclosed herein, there have been no material changes to the information presented in the footnotes to the 1999 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, 2000 and December 31, 1999 and results of operations for the three and nine month periods ended September 30, 2000 and 1999 have been made and are reflected. Note 2--Cash At September 30, 2000, American Income Fund I-E, a Massachusetts Limited Partnership (the "Partnership") had $1,858,394 invested in federal agency discount notes, repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities, or other highly liquid overnight investments. Note 3--Revenue Recognition Rents are payable to the Partnership monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Partnership may enter renewal or re-lease agreements which expire beyond the Partnership's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Partnership's business activities as the General Partner and Equis Financial Group Limited Partnership ("EFG") would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. See also Note 8 to the financial statements presented in the Partnership's 1999 Annual Report regarding the Class Action Lawsuit. Future minimum rents of $3,536,087, which include the aircraft re-leases discussed in Note 4 herein, are due as follows: For the year ending September 30, 2001........................... $ 1,240,590 2002........................... 1,133,275 2003........................... 888,040 2004........................... 274,182 ------------ Total.......................... $ 3,536,087 ============ 7 AMERICAN INCOME FUND I-E, 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, 2000. Remaining Lease Term (Months), as used below, represents the number of months remaining from September 30, 2000 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment, Equipment Type (Months) at Cost -------------- -------- ------- Aircraft.............................. 0-47 $ 6,232,659 Trailers and intermodal containers.... 33 1,756,524 Locomotives........................... 42 1,522,810 Materials handling.................... 0-15 1,497,082 Construction & mining................. 0 500,670 Photocopying.......................... 0 8,149 ------------- Total equipment cost 11,517,894 Accumulated depreciation 5,943,136 ------------- Equipment, net of accumulated depreciation $ 5,574,758 =============
At September 30, 2000, the Partnership's equipment portfolio included equipment having a proportionate original cost of $9,513,043, representing approximately 83% of total equipment cost. Certain of the equipment and related lease payment streams were used to secure term loans with third-party lenders. The preceding summary of equipment includes leveraged equipment having an original cost of approximately $6,609,000 and a net book value of $4,621,206 at September 30, 2000. The Partnership entered into a three year re-lease agreement with Air Slovakia for its prorportionate interest in a Boeing 737-2H4 aircraft, effective September 2000. Under the terms of this agreement, the Partnership will receive rents of $308,175 over the term of the lease. In addition, the Partnership entered into a four year re-lease agreement with Aero-Mexico for its proportionate interest in a McDonnell-Douglas MD-82 aircraft, effective September 2000. Under the terms of this agreement, the Partnership will receive rents of $753,320 over the term of the lease. The summary above includes equipment held for re-lease or sale with an original cost of approximately $573,000 and a net book value of $183,843 at September 30, 2000. This equipment represents the Partnership's interests in a Boeing 737 aircraft. The aircraft was returned by the lessee in December 1999 upon expiration of the lease and was remarketed in October 2000. 8 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership NOTES TO THE FINANCIAL STATEMENTS--(Continued) Note 5--Investment in Real Estate Venture On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange Partnerships") collectively loaned $32 million to Echelon Residential Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate development company. Echelon Residential Holdings is owned by several investors, including James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his individual capacity, is the only equity investor in Echelon Residential Holdings related to EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. The Partnership's participation in the loan is $4,790,000. Echelon Residential Holdings, through a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to acquire various real estate assets from Echelon International Corporation, a Florida-based real estate company. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. In connection with the transaction, Echelon Residential Holdings has pledged a security interest in all of its right, title and interest in and to its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral. 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 investment to determine whether loan, joint venture or real estate accounting is appropriate. Such determination affects the Partnership's balance sheet classification of the investment 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 awards 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 Echelon Residential Holdings under the equity method of accounting. The Partnership's accompanying financial statements as of and for the three and nine months ended September 30, 2000 are presented in accordance with the guidance above. The investment is net of the Partnership's share of losses in this real estate venture. For the three and nine months ended September 30, 2000, the Partnership's share of losses is $77,658 and $108,367, respectively, and is reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss". 9 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership NOTES TO THE FINANCIAL STATEMENTS--(Continued) Note 5--Investment in Real Estate Venture (continued) The summarized financial information for Echelon Residential Holdings as of September 30, 2000 and for the period March 8, 2000 (commencement of operations) through September 30, 2000 is as follows: (Unaudited) ----------- Total assets....... $ 63,457,759 Total liabilities.. $ 64,221,109 Total deficit...... $ (763,350) Total revenues..... $ 1,565,618 Total expenses..... $ 5,109,324 Net loss........... $ (3,543,706) Note 6--Investment Securities--Affiliate and Note Receivable--Affiliate As a result of an exchange transaction in 1997, the Partnership owns 42,574 shares of Semele Group, Inc. ("Semele") common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $938,718. The Semele Note matures in April 2001 and bears an annual interest rate of 10% with mandatory principal reductions prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The Partnership recognized interest income of $23,661 and $70,211, respectively, related to the Semele Note for each of the three and nine months ended September 30, 2000 and 1999. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable equity securities classified as available-for-sale are carried at fair value. During the nine months ended September 30, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $5 per share (the quoted price on the NASDAQ SmallCap market at the date the stock traded closest to September 30, 2000), resulting in an unrealized loss of $31,931. This loss is reported as a component of comprehensive loss included in the Statement of Changes in Partners' Capital. Note 7--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, 2000 and 1999, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
For the nine months ended September 30, 2000 1999 ----- ---- Equipment management fees................................ $ 42,305 $ 75,195 Administrative charges................................... 74,552 92,778 Reimbursable operating expenses due to third parties..... 349,352 186,664 ---------- ---------- Total.......................................... $ 466,209 $ 354,637 ========== ==========
10 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership NOTES TO THE FINANCIAL STATEMENTS--(Continued) Note 7--Related Party Transactions (continued) 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, 2000, the Partnership was owed $60,350 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in October 2000. Note 8--Notes Payable Notes payable at September 30, 2000 consisted of installment notes of $2,372,327 payable to banks and institutional lenders. The installment notes bear an interest rate of 6.76%, 8.22% or a fluctuating interest rate based on LIBOR (approximately 6.62% at September 30, 2000) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of any related lease payments. The Partnership has balloon payment obligations at the expiration of the lease terms related to aircraft leased by Reno Air, Inc. and Finnair OY of $555,597 and $87,154, respectively. The Reno Air, Inc. and Finnair OY indebtedness matures in January 2003 and April 2001, respectively. In addition, the Partnership has a balloon payment obligation of $458,501 which matured in August 2000. The General Partner is currently negotiating with the existing lender to extend the term of this indebtedness and the Partnership is currently paying interest-only on the outstanding debt amount. This obligation is related to its interest in a McDonnell-Douglas MD-82 aircraft which was returned in January 2000 upon its lease term expiration and was re-leased in September 2000. The carrying amount of notes payable approximates fair value at September 30, 2000. The annual maturities of the installment notes payable are as follows: For the year ending September 30, 2001......................... $ 1,039,340 2002......................... 431,908 2003......................... 805,633 2004......................... 95,446 ------------- Total........................ $ 2,372,327 ============= Note 9--Legal Proceedings As described more fully in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1999, 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. 11 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements in this quarterly report of American Income Fund I-E, a Massachusetts Limited Partnership (the "Partnership") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 8 to the financial statements presented in the Partnership's 1999 Annual Report, the remarketing of the Partnership's equipment, and the performance of the Partnership's non-equipment assets. Three and nine months ended September 30, 2000 compared to the three and nine months ended September 30, 1999 The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 8 to the financial statements presented in the Partnership's 1999 Annual Report. Pursuant to the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended,") the Partnership is scheduled to be dissolved by December 31, 2002. Results of Operations For the three and nine months ended September 30, 2000, the Partnership recognized lease revenue of $289,953 and $908,717, respectively, compared to $507,181 and $1,626,384, respectively, for the same periods in 1999. The decrease in lease revenue from 1999 to 2000 resulted in part from the expiration of lease terms related to the Partnerships interests in three Boeing 737-2H4 aircraft (one of which was sold in July 2000) and a McDonnell Douglas MD-82 aircraft. See below for a detailed discussion of variances in lease revenue between the respective periods. The amount of lease revenue in the near term will be increased due to the re-lease of the McDonnell-Douglas MD-82 and a Boeing 737-2H4 aircraft in September 2000. Subsequently, the Partnership's lease revenue is expected to decline due to lease term expirations and equipment sales. The lease terms related to three Boeing 737-2H4 aircraft, in which the Partnership held a proportionate interest, expired on December 31, 1999, and the aircraft were stored pending their remarketing. In July 2000, one of the Boeing 737-2H4 aircraft was sold resulting in $228,930 of proceeds and a net gain, for financial statement purposes, of $35,598 for the Partnership's proportional interest in the aircraft. In September 2000, one of the Boeing 737-2H4 aircraft was re-leased, with a lease term expiring in September 2003. Under the terms of this re-lease agreement, the Partnership will receive rents of $308,175 over the term of the lease. The remaining Boeing 737-2H4 aircraft was remarketed in October 2000. The Partnership recognized lease revenue of $7,338 and $253,584, respectively, related to these three aircraft during the nine months ended September 30, 2000 and 1999. The lease term associated with a McDonnell-Douglas MD-82 aircraft, in which the Partnership holds an ownership interest expired in January 2000 and was re- leased in September 2000, with a lease term expiring in September 2004. Under the terms of this re-lease agreement, the Partnership will receive rents of $753,320 over the term of the lease. The Partnership recognized lease revenue of $31,316 and $155,781, respectively, during the three and nine months ended September 30, 2000 and 1999. 12 The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the three and nine months ended September 30, 2000 was $56,694 and $203,211 compared to $102,182 and $287,135 for the same periods in 1999. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income during the three and nine months ended September 30, 2000 and 1999 included $23,661 and $70,211, respectively, earned on a note receivable from Semele Group, Inc. ("Semele") (See Note 6 to the financial statements herein). On March 8, 2000, the Partnership utilized $4,790,000 of available cash for a loan to Echelon Residential Holdings LLC ("Echelon Residential Holdings"). (See Note 5 to the financial statements herein). 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. During the three and nine months ended September 30, 2000, the Partnership sold equipment with an aggregate net book value of $190,331 to existing lessees and third parties for a net gain, for financial statement purposes, of $48,994 and $56,494 respectively. During the three and nine months ended September 30, 1999, the Partnership sold equipment having a net book value of of $1,636 and $1,222,851, respectively, to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $863 and $509,725, respectively. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements may not be indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense for the three and nine months ended September 30, 2000 was $181,147 and $524,234, respectively, compared to $234,200 and $713,755 for the same periods in 1999. 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 at the date of primary lease expiration 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 equipment is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Interest expense was $49,320 and $153,198 respectively, for the three and nine months ended September 30, 2000, compared to $55,614 and $182,809, respectively, for the same periods in 1999. Interest expense in future 13 periods will decline as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees were $13,458 and $42,305, respectively, for the three and nine month periods ended September 30, 2000, compared to $24,144 and $75,195, respectively, for the same periods in 1999. 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 $297,654 and $423,904, respectively, for the three and nine months ended September 30, 2000 compared to $67,993 and $279,442, respectively, the same periods in 1999. The primary reason for the increase in operating expenses from 1999 to 2000 is storage and remarketing costs associated with the Partnership's off-lease aircraft and approximately $131,000 accrued for the Partnership's proportionate share of the cost of a required D-check on the McDonnell-Douglas MD-82 aircraft leased to Finnair OY. In addition, 2000 operating expenses include approximately $40,000 of costs incurred in connection with Class Action Lawsuit discussed in Note 8 to the financial statements presented in the Partnership's 1999 Annual Report. During the nine months ended September 30, 1999, the Partnership incurred approximately $52,000 in connection with the remarketing of an aircraft in which it held an ownership interest. The Partnership sold its interest in this aircraft during the nine months ended September 30, 1999. In addition, operating expenses in 1999 include an adjustment for 1998 actual administrative charges and third-party costs of approximately $42,000. Operating expenses consist principally of administrative charges, professional service costs, such as audit and legal fees, as well as printing, distribution and other remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with other equipment being remarketed. For the three and nine months ended September 30, 2000, the Partnership's share of losses of Echelon Residential Holdings were $77,658 and $108,367, respectively, and are reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss". See further discussion below. Liquidity and Capital Resources and Discussion of Cash Flows The Partnership by its nature is a limited life entity. 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 net cash inflows of $941,188 and $1,296,567 for the nine months ended September 30, 2000 and 1999, 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. See additional discussion below regarding the loan made by the Partnership to Echelon Residential Holdings in March 2000. Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. During the nine months ended September 30, 2000 and 1999, the Partnership realized equipment sale proceeds of $246,825 and $1,732,126, respectively. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. 14 At September 30, 2000, the Partnership was due aggregate future minimum lease payments of $3,536,087 from contractual lease agreements, a portion of which will be used to amortize the principal balance of notes payable of $2,372,327. See Notes 3 and 8 to the financial statements herein. 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 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 the Class Action Lawsuit described in Note 8 to the financial statements presented in the Partnership's 1999 Annual Report, the Partnership is permitted to invest in new equipment or other business activities, subject to certain limitations. On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange Partnerships") collectively loaned $32 million to Echelon Residential Holdings, a newly-formed real estate development company owned by several investors, including James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his individual capacity, is the only equity investor in Echelon Residential Holdings related to EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. The Partnership's participation in the loan is $4,790,000. Echelon Residential Holdings, through a 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 bears interest at the annual 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. As discussed in Note 5 to the Partnership's financial statements herein, 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. As a result of an exchange transaction in 1997, the Partnership owns 42,574 shares of Semele common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $938,718. The Semele Note matures in April 2001 and bears an annual interest rate of 10% with mandatory principal reductions prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable equity securities classified as available-for-sale are carried at fair value. During the nine months ended September 30, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $5 per share (the quoted price on the NASDAQ SmallCap market at the date the stock traded closest to September 30, 2000), resulting in an unrealized loss of $31,931. This loss was reported as a component of comprehensive loss included in the Statement of Changes in Partners' Capital. The Partnership obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal are reported as components of financing activities. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. The Partnership has balloon payment obligations at the expiration of the lease terms related to aircraft 15 leased by Reno Air, Inc. and Finnair OY of $555,597 and $87,154, respectively. The Reno Air, Inc. and Finnair OY indebtedness matures in January 2003 and April 2001, respectively. In addition, in February 2000, the Partnership and certain affiliated investment programs (collectively, the "Programs") refinanced the indebtedness which matured in January 2000 associated with a McDonnell-Douglas MD-82 aircraft formerly leased to Finnair OY. In addition to refinancing the existing indebtedness of $3,370,000, the Programs received additional debt proceeds of $1,350,000 required to perform a D-Check on the aircraft. The Partnership received $131,618 from such proceeds. The note bears a fluctuating interest rate based on LIBOR plus a margin with interest payments due monthly. The Partnership's aggregate share of the refinanced and new indebtedness was $458,801, which matured in August 2000. The General Partner is currently negotiating with the existing lender to extend the term of this indebtedness and is currently paying interest-only on the outstanding debt amount. The aircraft was returned in January 2000 upon its lease term expiration and was re-leased in September 2000. 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. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. At September 30, 2000, the Partnership had ownership interests in five commercial jet aircraft. Two of the aircraft are Boeing 737 aircraft formerly leased to Southwest Airlines, Inc ("Southwest"). The lease agreements for each of these aircraft expired on December 31, 1999 and Southwest elected to return the aircraft. In September 2000 and October 2000, the aircraft were re-leased and remarketed, respectively, to users outside of the United States. The remaining three aircraft in the Partnership's portfolio have lease terms expiring in April 2001, January 2003 and September 2004, respectively. Cash distributions to the General and Limited Partners had been declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is reported under financing activities on accompanying Statement of Cash Flows. No cash distributions were declared for the nine months ended September 30, 2000. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. 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 7 to the financial statements presented in the Partnership's 1999 Annual Report. For instance, selling commissions and organization and offering costs pertaining to syndication of the Partnership's limited partnership units are not deductible for federal income tax purposes, but are recorded as a reduction of partners' capital for financial reporting purposes. 16 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 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, 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, 1999, the General Partner had a positive tax capital account balance. The Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the financial statements presented in the Partnership's 1999 Annual Report. 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 adjudicated. 17 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings Response: Refer to Note 9 of 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 27 Financial Data Schedule Item 6(b). Reports on Form 8-K Response: None Exhibit Index ------------- Exhibit Description ------- ----------- 27 Financial Data Schedule 18 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-E, a Massachusetts Limited Partnership By: AFG Leasing VI Incorporated, a Massachusetts corporation and the General Partner of the Registrant. /s/ MICHAEL J. BUTTERFIELD By: Michael J. Butterfield Treasurer of AFG Leasing VI Incorporated (Duly Authorized Officer and Principal Accounting Officer) Date: November 14, 2000 19