<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------------------------------
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, 1996 Commission File No. 0-15623
American Income 7 Limited Partnership
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2932747
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- ---------------------------------------- ----------
(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
---- -----
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement of Financial Position at September 30, 1996 and December 31,
1995 3
Statement of Operations for the Three and Nine Months Ended
September 30, 1996 and 1995 4
Statement of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 5
Notes to the Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-14
PART II. OTHER INFORMATION
ITEMS 1-6 15
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
1996 1995
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 593,902 $ 316,150
Rents receivable, net of allowance for doubtful accounts
of $10,000 at December 31, 1995 - 20,124
Due from Buyer 3,094,185 -
Accounts receivable--affiliate 56,492 194,735
Equipment at cost, net of accumulated depreciation of $9,931,106
at December 31, 1995 - 3,679,301
---------- ----------
Total assets $3,744,579 $4,210,310
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable $ - $ 65,165
Accrued interest - 835
Accrued liabilities 69,751 20,000
Accrued liabilities--affiliate 11,634 1,715
Deferred rental income - 252,724
Cash distributions payable to partners 3,285,397 180,319
---------- ----------
Total liabilities 3,366,782 520,758
PARTNERS' CAPITAL (DEFICIT):
General Partner (152,905) (119,787)
Limited Partnership Interests (71,406 Units;
initial purchase price of $250 each) 530,702 3,809,339
---------- ----------
Total partners' capital 377,797 3,689,552
---------- ----------
Total liabilities and partners' capital $3,744,579 $4,210,310
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME:
Lease revenue $292,815 $395,689 $798,196 $1,195,772
Interest income 6,835 7,010 15,931 29,025
Gain on sale of equipment 129,449 54,535 130,330 65,555
-------- -------- -------- ----------
Total income 429,099 457,234 944,457 1,290,352
-------- -------- -------- ----------
EXPENSES:
Depreciation 153,080 232,228 607,603 696,684
Write-down of equipment - - 100,000 -
Interest expense - 9,991 581 45,719
Equipment management fees--affiliate 14,641 19,784 39,910 59,789
Operating expenses--affiliate 95,277 10,624 132,561 53,604
-------- -------- -------- ----------
Total expenses 262,998 272,627 880,655 855,796
-------- -------- -------- ----------
NET INCOME $166,101 $184,607 $ 63,802 $ 434,556
-------- -------- -------- ----------
-------- -------- -------- ----------
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 2.30 $ 2.56 $ .88 $ 6.02
------- ------- ------- -------
------- ------- ------- -------
CASH DISTRIBUTIONS DECLARED PER
LIMITED PARTNERSHIP UNIT $ 45.55 $ 1.88 $ 46.80 $ 11.88
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,802 $ 434,556
Adjustments to reconcile net income to cash from operating activities-
Depreciation 607,603 696,684
Write-down of equipment 100,000 -
Gain on sale of equipment (130,330) (65,555)
Decrease in allowance for doubtful accounts (10,000) -
Changes in assets and liabilities-
Decrease (increase) in-
Rents receivable 30,124 6,419
Accounts receivable--affiliate 138,243 (587)
Increase (decrease) in-
Accrued interest (835) (1,815)
Accrued liabilities 49,751 (1,750)
Accrued liabilities--affiliate 9,919 (3,247)
Deferred rental income (252,724) (80,459)
--------- -----------
Cash from operating activities 605,553 984,246
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from equipment sales 7,843 65,555
--------- -----------
Cash from investing activities 7,843 65,555
--------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments--notes payable (65,165) (775,971)
Distributions paid (270,479) (1,081,911)
--------- -----------
Cash used in financing activities (335,644) (1,857,882)
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 277,752 (808,081)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 316,150 992,497
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 593,902 $ 184,416
--------- -----------
--------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,416 $ 47,534
--------- -----------
--------- -----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
As discussed in Note 1, the Partnership entered into a sale transaction to
dispose of its equipment portfolio. This transaction was closed on
September 30, 1996. The Partnership received net sales proceeds of
$3,094,185 that were deposited into an escrow account and transferred to
the Partnership on October 3, 1996. This amount has been reflected as Due
from Buyer on the Statement of Financial Position at September 30, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(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 1995 Annual Report. Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the
1995 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, 1996 and December 31, 1995 and
results of operations for the three and nine month periods ended
September 30, 1996 and 1995 have been made and are reflected.
On September 30, 1996, the Partnership sold all of its remaining
equipment assets for $3,094,185 (see Notes 4 and 5). In October 1996,
the Partnership filed Form 8-K, which provided a description of the
remarketing process and the terms of sale. The entire remarketing
effort was undertaken jointly by 15 individual equipment leasing
programs, consisting of the Partnership and 14 affiliated partnerships,
each of which individually executed separate purchase and sale
agreements with RSL Finance Limited Partnership II (the Buyer) for all
or a portion of their equipment assets (the Sale Assets).
The General Partner anticipates that the Partnership will be dissolved
on or before December 31, 1996 in accordance with the Partnership's
Amended and Restated Agreement and Certificate of Limited Partnership
(the "Partnership Agreement"). Prior to December 31, 1996, the General
Partner will wind up the operations of the Partnership and make a
liquidating distribution of $3,285,397 to the Partners. The
distribution approximates all of the Partnership's available cash net of
estimated wind-up costs and a contingency reserve. In November 1996,
the contingency reserve of $375,000 was deposited in a separate account
to cover any unforeseen liabilities that may arise in future periods.
At such time as the General Partner considers appropriate, any balance
in the reserve account will be distributed to the Partners according to
their respective ownership interests in the Partnership at the date of
its dissolution (see Note 6).
6
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
(1) BASIS OF PRESENTATION (CONTINUED)
The financial statements presented have been prepared on a going-concern
basis through September 30, 1996. Due to the imminent dissolution of
the Partnership requiring liquidation and distribution of its net
assets, a statement of net assets in liquidation as of September 30,
1996 is presented below. This statement is prepared based on
anticipated liquidating values of assets and liabilities. Management
has determined the liquidating values of amounts receivable based on
collectibility of balances prior to any final distribution and
termination of the Partnership. Accrued liabilities have been estimated
based on the existing obligations and anticipated fees and costs
associated with the sales transaction and the wind-up effort. Cash
distributions to partners, including contingency reserves, may vary
depending upon the realization of the amounts estimated by management.
Values estimated by management may be different from actual amounts.
Assets:
Cash and cash equivalents $ 593,902
Due from Buyer3,094,185
Accounts receivable--affiliate 56,492
----------
Total assets $3,744,579
----------
----------
Liabilities:
Accrued liabilities $ 69,751
Accrued liabilities--affiliate 11,634
Cash distributions payable to partners,
including contingency reserve 3,663,194
----------
Total liabilities $3,744,579
----------
----------
Net assets $ -
----------
----------
(2) CASH
The Partnership invests excess cash with large institutional banks in
reverse repurchase agreements with overnight maturities. The reverse
repurchase agreements are secured by U.S. Treasury Bills or interests in
U.S. Government securities. At September 30, 1996, the Partnership had
$590,000 invested in reverse repurchase agreements.
(3) REVENUE RECOGNITION
Rents were payable to the Partnership monthly, quarterly or
semiannually, and no significant amounts were calculated on factors
other than the passage of time. The leases were accounted for as
operating leases and were noncancelable. Rents received prior to their
due dates were deferred.
7
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
(4) EQUIPMENT
The following is a summary of equipment owned by the Partnership
immediately prior to the sales transaction described in Note 1.
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
Aircraft 36-60 $ 8,179,070
Flight simulators 60 4,290,414
Manufacturing 24-60 598,850
Motor vehicles 12-72 291,550
Computers and peripherals 12-60 54,612
Materials handling 2-60 27,443
Tractors and heavy duty trucks 2-60 6,377
------------
Total equipment cost 13,448,316
Accumulated depreciation (10,476,618)
------------
Equipment, net of accumulated depreciation $ 2,971,698
------------
------------
As discussed in Note 1, on September 30, 1996, the Partnership sold all
of the foregoing equipment for $3,094,185.
(5) RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by American
Finance Group (AFG) on behalf of the Partnership, and AFG is reimbursed
at its actual cost for such expenditures. Fees and other costs incurred
during each of the nine month periods ended September 30, 1996 and 1995,
which were paid or accrued by the Partnership to AFG or its Affiliates,
are as follows:
1996 1995
Equipment management fees $ 39,910 $ 59,789
Administrative charges 15,756 11,817
Reimbursable operating expenses due to third parties 116,805 41,787
-------- --------
Total $172,471 $113,393
-------- --------
-------- --------
Administrative charges and reimbursable operating expenses due to third
parties in 1996 include all costs anticipated in connection with the
Partnership's wind-up and dissolution.
8
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
All rents and proceeds from the sale of equipment are paid directly to
either AFG or to a lender. AFG temporarily deposits collected funds in
a separate interest-bearing escrow account prior to remittance to the
Partnership. At September 30, 1996, the Partnership was owed $56,492 by
AFG for such funds and the interest thereon. These funds were remitted
to the Partnership in November 1996. The sales proceeds due from the
Buyer were deposited into the escrow account subsequent to September 30,
1996.
The remarketing effort described in Note 1 was undertaken jointly by 15
individual equipment leasing programs, consisting of the Partnership and
14 affiliated partnerships (Other Affected Partnerships). Collectively,
the Partnership and the Other Affected Partnerships offered for sale all
or a portion of their Sale Assets. Thirteen of the programs, including
the Partnership, sold all of their equipment assets and are expected to
wind up business operations by December 31, 1996; the remaining two
programs, which will continue their business operations beyond December
31, 1996, sold only their interest in assets owned jointly with one or
more of the 13 programs anticipating wind-up by December 31, 1996.
Substantially all of the Partnership's equipment assets of material
value represented partial ownership interests whereby the Partnership
owned less than a 100% interest in the equipment it sold. The remaining
interests in such assets were owned by one or more of the Other Affected
Partnerships. Ultimately, the Sale Assets were sold for an aggregate
adjusted sale price of approximately $32,997,000, of which the
Partnership's proportionate share, net of associated costs, was
determined to be $3,094,185. The Partnership's proportionate share in
this transaction is net of certain third-party advisory fees incurred in
connection with the equipment sales.
The Buyer is a limited partnership established to acquire the Sale
Assets and has no direct affiliation with the Partnership, the Other
Affected Partnerships, the General Partner or AFG. The sole general
partner of the Buyer is RSL Holdings, Inc. (RSL). An affiliate of RSL
purchased a significant limited partnership interest in a
direct-participation equipment leasing program co-sponsored by AFG in
1992. AFG acquired this interest in 1993 for cash and assumption of
indebtedness. There have been no other business dealings between the
Buyer and AFG and their affiliates.
9
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
(6) SUBSEQUENT EVENTS
On October 10, 1996, the General Partner entered into a Cross
Partnership Agreement with general partners of certain other affiliated
partnerships. Under this agreement, each of the general partners has
agreed to set aside a contingency reserve amount for future liabilities
and deposit that amount into an account that may be accessed by any of
the general partners to fund any and all obligations contemplated under
the Cross Partnership Agreement. Any obligation of the Partnership that
is not associated with the sales transaction (see Note 1) will directly
reduce the Partnership's reserve amount. All costs arising as a result
of the sales transaction will be allocated against the reserve amount of
the Partnership and other affiliated partnerships. If the reserve
amount contributed by the Partnership is reduced below zero, the reserve
amounts contributed by the general partners of the other affiliated
partnerships shall be debited on a pro rata basis to cover the deficit.
If the reserve amount contributed by one of the affiliated partnerships
is reduced below zero, the reserve amounts of the Partnership and the
other affiliated partnerships shall be debited on a pro rata basis to
cover the deficit. Upon termination of the contingency reserve account,
any monies remaining will be distributed to those partnerships with
positive balances. The Partnership's reserve amount under this
agreement was determined to be $375,000 and was deposited in the reserve
account in November 1996.
In connection with the wind-up effort, certain general partner interests
in AFG Leasing Associates II, the General Partner of the Partnership,
[including the general partner interest owned by Geoffrey A. MacDonald]
were transferred to AFG Leasing IV Incorporated, resulting in AFG
Leasing IV Incorporated and AFG Leasing Incorporated being the two
general partners of AFG Leasing Associates II. AFG Leasing Incorporated
then merged with and into AFG Leasing IV Incorporated effective October
17, 1996. Accordingly, AFG Leasing IV Incorporated became the sole
General Partner of the Partnership commencing October 17, 1996. AFG
Leasing IV Incorporated was established in 1987 and is also the general
partner or managing general partner of certain other affiliated
partnerships sponsored by AFG.
10
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Three and Nine Months Ended September 30, 1996 Compared To the Three and
Nine Months Ended September 30, 1995:
OVERVIEW
The Partnership was organized in 1986 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment
subject to lease agreements with third parties. The Partnership's stated
investment objectives and policies contemplated that the Partnership would
wind up its operations within approximately seven years of its inception.
On September 30, 1996, the Partnership sold all of its remaining equipment
assets for $3,094,185. The remarketing effort described in Note 1 was
undertaken jointly by 15 individual equipment leasing programs, consisting of
the Partnership and 14 affiliated partnerships (Other Affected Partnerships).
Collectively, the Partnership and the Other Affected Partnerships offered
for sale all or a portion of their equipment assets (Sale Assets). Thirteen
of the programs, including the Partnership, sold all of their equipment
assets and are expected to wind up business operations by December 31 1996;
the remaining two programs, which will continue their business operations
beyond December 31, 1996, sold only their interest in assets owned jointly
with one or more of the 13 programs anticipating wind-up by December 31,
1996. Substantially all of the Partnership's equipment assets of material
value represented partial ownership interests whereby the Partnership owned
less than a 100% interest in the equipment it sold. The remaining interests
in such assets were owned by one or more of the Other Affected Partnerships.
Ultimately, the Sale Assets were sold for an aggregate adjusted sale price of
approximately $32,997,000, of which the Partnership's proportionate share,
net of associated costs, was determined to be $3,094,185. The Partnership's
proportionate share in this transaction is net of certain third-party
advisory fees incurred in connection with the equipment sales.
The General Partner anticipates that the Partnership will be dissolved on or
before December 31, 1996 in accordance with the Partnership's Amended and
Restated Agreement and Certificate of Limited Partnership (the "Partnership
Agreement"). Prior to December 31, 1996, the General Partner will wind up
the operations of the Partnership and make a liquidating cash distribution of
$3,285,397 to the Partners. The distribution approximates all of the
Partnership's available cash, net of estimated wind-up costs and a
contingency reserve. In November 1996, the contingency reserve of $375,000
was deposited in a separate account to cover any unforeseen liabilities that
may arise in future periods. At such time as the General Partner considers
appropriate, any balance in the reserve account will be distributed to the
Partners according to their respective ownership interests in the Partnership
at the date of its dissolution (see Note 6 to the financial statements).
11
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
(Continued)
OVERVIEW (Continued)
The financial statements presented have been prepared on a going-concern
basis through September 30, 1996. Due to the imminent dissolution of the
Partnership requiring liquidation and distribution of its net assets,
management has determined the liquidating values of amounts receivable based
on collectibility of balances prior to any final distribution and termination
of the Partnership. Accrued liabilities have been estimated based on the
existing obligations and anticipated fees and costs associated with the sales
transaction and the wind-up effort. Cash distributions to partners,
including contingency reserves, may vary depending upon the realization of
the amounts estimated by management. Values estimated by management may be
different from actual amounts.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1996, the Partnership
recognized lease revenue of $292,815 and $798,196, respectively, compared to
$395,689 and $1,195,772 for the same periods in 1995. The decrease in lease
revenue from 1995 to 1996 was expected and resulted principally from renewal
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.
Prior to the sale of the Partnership's assets, the Partnership's equipment
portfolio included certain assets in which the Partnership held a
proportionate ownership interest. In such cases, the remaining interests
were owned by AFG or an affiliated equipment leasing program sponsored by
AFG. Proportionate equipment ownership enabled the Partnership to further
diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk that could
result from a concentration in any single equipment type, industry or lessee.
The Partnership and each affiliate individually reported, in proportion to
their respective ownership interests, their respective shares of assets,
liabilities, revenues and expenses associated with the equipment.
For the three and nine months ended September 30, 1996, the Partnership sold
fully depreciated equipment in the normal course of business, which resulted
in net gains, for financial statement purposes, of $6,962 and $7,843,
respectively. For the three and nine months ended September 30, 1995, the
Partnership sold fully depreciated equipment which resulted in net gains, for
financial statement purposes, of $54,535 and $65,555, respectively. In
connection with the September 30, 1996 sales transaction discussed above, the
Partnership sold equipment having a net book value of $2,971,698 which
resulted in a net gain of $122,487.
12
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
(Continued)
RESULTS OF OPERATIONS (Continued)
Depreciation expense was $153,080 and $607,603 for the three and nine months
ended September 30, 1996, respectively, compared to $232,228 and $696,684 for
the same periods in 1995. For financial reporting purposes, to the extent
that an asset was held on primary lease term, the Partnership depreciated 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. To the extent
that equipment was held beyond its primary lease term, the Partnership
continued to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.
During the nine months ended September 30, 1996, the Partnership recorded a
write-down, representing an impairment in value, pertaining to its interest
in a Lockheed L-1011 aircraft. This adjustment was precipitated by
continuing deterioration in the secondary market for wide-body aircraft of
this type. Several air carriers have reduced their commitment to the L-1011
and a major domestic air carrier is expected to retire eleven L-1011 aircraft
from its fleet. Further, it appeared that future demand for this type of
aircraft would be weak, consisting principally of air cargo or operators of
passenger charters. In consideration of such circumstances and in accordance
with Financial Accounting Standards Board Statement No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, the Partnership reduced the carrying value of its L-1011 aircraft
interest to its estimated current fair market value. This resulted in a
write-down of $100,000, representing $1.39 per limited partnership unit.
There was no interest expense for the three months ended September 30, 1996.
Interest expense was $9,991 or 2.5% of lease revenue for the same period in
1995. Interest expense was $581 and $45,719 or less than 1% and 3.8% of
lease revenue for the nine months ended September 30 1996 and 1995,
respectively.
Management fees were 5% of lease revenue during each of the periods ended
September 30, 1996 and 1995.
Operating expenses consisted 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 were incurred in connection with
equipment being remarketed. Collectively, operating expenses represented
approximately 32.5% and 16.6% of lease revenue for the three and nine months
ended September 30, 1996, respectively, compared to 2.7% and 4.5% of lease
revenue for the same periods in 1995. Operating expenses for the three and
nine month periods ended September 30, 1996 included all costs anticipated in
connection with the Partnership's wind-up and dissolution.
13
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership, by its nature, is a limited-life entity that was established
for specific purposes described in the preceding "Overview." As an equipment
leasing program, the Partnership's principal operating activities have been
derived from asset rental transactions. Accordingly, the Partnership's
principal source of cash from operations has been provided from the
collection of periodic rents. These cash inflows were 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
$605,553 and $984,246 for the nine months ended September 30, 1996 and 1995,
respectively.
Cash realized from asset disposal transactions, excluding the sales
transaction on September 30, 1996, has been reported under investing
activities in the accompanying Statement of Cash Flows. During the nine
months ended September 30, 1996 and 1995, the Partnership realized $7,843 and
$65,555, respectively, in equipment sale proceeds during the normal course of
business.
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. All of the
Partnership's outstanding debt obligations have been retired.
On September 30, 1996, the Partnership recorded a receivable of $3,094,185 in
connection with the sale of all of its remaining equipment assets. These
proceeds were deposited into an escrow account and transferred to the
Partnership on October 3, 1996. In conjunction with this transaction, the
General Partner has commenced the dissolution and liquidation of the
Partnership. The aggregate funds from the sale transaction and liquidation
will be used to fund existing obligations, including estimated costs of the
wind-up effort and sale transactions and to establish a contingency reserve
to cover any unforeseen liabilities. The remaining funds, including any
unutilized contingency reserves, will be distributed to the Partners in
accordance with the terms of the Partnership Agreement and related agreements.
14
<PAGE>
AMERICAN INCOME 7 LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None.
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.
15
<PAGE>
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 7 LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated, a Massachusetts
corporation and the General Partner of the Registrant.
By: /S/ Michael J. Butterfield
--------------------------
Michael J. Butterfield
Treasurer of AFG Leasing IV Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 19, 1996
-----------------
By: /S/ Gary M. Romano
------------------
Gary M. Romano
Clerk of AFG Leasing IV Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 19, 1996
-----------------
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 593,902
<SECURITIES> 0
<RECEIVABLES> 3,150,677
<ALLOWANCES> 0
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<CURRENT-ASSETS> 3,744,579
<PP&E> 0
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<TOTAL-ASSETS> 3,744,579
<CURRENT-LIABILITIES> 3,366,782
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 377,797
<TOTAL-LIABILITY-AND-EQUITY> 3,744,579
<SALES> 798,196
<TOTAL-REVENUES> 944,457
<CGS> 0
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<OTHER-EXPENSES> 780,074
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 581
<INCOME-PRETAX> 63,802
<INCOME-TAX> 0
<INCOME-CONTINUING> 63,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,802
<EPS-PRIMARY> 0
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