<PAGE>
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 MARCH 31, 1999
---------------------------------------------
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 March 31, 1999 Commission File No. 33-35148
AMERICAN INCOME FUND I-A, A MASSACHUSETTS LIMITED PARTNERSHIP
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3097216
- ------------------------------------ ------------------
(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
-- --
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1999 and December 31, 1998 3
Statement of Operations
for the three months ended March 31, 1999 and 1998 4
Statement of Cash Flows
for the three months ended March 31, 1999 and 1998 5
Notes to the Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
PART II. OTHER INFORMATION:
Items 1 - 6 19
</TABLE>
2
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,472,246 $ 1,969,323
Rents receivable 27,645 28,778
Accounts receivable - affiliate 20,326 421,817
Equipment at cost, net of accumulated depreciation
of $3,467,069 and $3,550,111 at March 31, 1999
and December 31, 1998, respectively 68,040 91,254
--------------- ---------------
Total assets $ 2,588,257 $ 2,511,172
--------------- ---------------
--------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 239,684 $ 273,884
Accrued liabilities - affiliate 13,592 6,132
Deferred rental income 850 4,775
Other liabilities 556,687 388,600
Cash distributions payable to partners 56,502 56,502
--------------- ---------------
Total liabilities 867,315 729,893
--------------- ---------------
Partners' capital (deficit):
General Partner (230,838) (227,821)
Limited Partnership Interests
(286,274 Units; initial purchase price of $25 each) 1,951,780 2,009,100
--------------- ---------------
Total partners' capital 1,720,942 1,781,279
--------------- ---------------
Total liabilities and partners' capital $ 2,588,257 $ 2,511,172
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
for the three months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Income:
Lease revenue $ 43,782 $ 103,517
Interest income 23,880 23,593
Gain on sale of equipment 7,547 1,000
--------------- ---------------
Total income 79,209 128,110
--------------- ---------------
Expenses:
Depreciation 23,214 40,047
Equipment management fees - affiliate 2,189 5,176
Operating expenses - affiliate 57,641 28,241
--------------- ---------------
Total expenses 83,044 73,464
--------------- ---------------
Net income (loss) $ (3,835) $ 54,646
--------------- ---------------
--------------- ---------------
Net income (loss)
per limited partnership unit $ (0.01) $ 0.18
--------------- ---------------
--------------- ---------------
Cash distribution declared
per limited partnership unit $ 0.19 $ 0.19
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (3,835) $ 54,646
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation 23,214 40,047
Gain on sale of equipment (7,547) (1,000)
Changes in assets and liabilities Decrease in:
Rents receivable 1,133 9,190
Accounts receivable - affiliate 401,491 4,192
Increase (decrease) in:
Accrued liabilities (34,200) (5)
Accrued liabilities - affiliate 7,460 (4,629)
Deferred rental income (3,925) --
Other liabilities 168,087 --
--------------- ---------------
Net cash from operating activities 551,878 102,441
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sales 7,547 1,000
--------------- ---------------
Net cash from investing activities 7,547 1,000
--------------- ---------------
Cash flows used in financing activities:
Distributions paid (56,502) (56,502)
--------------- ---------------
Net cash used in financing activities (56,502) (56,502)
--------------- ---------------
Net increase in cash and cash equivalents 502,923 46,939
Cash and cash equivalents at beginning of period 1,969,323 1,792,606
--------------- ---------------
Cash and cash equivalents at end of period $ 2,472,246 $ 1,839,545
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
March 31, 1999
(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 1998 Annual Report. Except as
disclosed herein, there has been no material change to the information
presented in the footnotes to the 1998 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1999 and December 31, 1998 and results of operations
for the three month periods ended March 31, 1999 and 1998 have been made and
are reflected.
NOTE 2 - CASH
At March 31, 1999, the Partnership had $2,360,716 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
$5,100 are due for the year ending March 31, 2000.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March
31, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1999 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.
6
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
EQUIPMENT TYPE (MONTHS) AT COST
-------------- ---------- -----------
<S> <C> <C>
Aircraft 0 $ 2,288,254
Materials handling 0-6 675,035
Communications 0 383,676
Computers & peripherals 0 127,008
Tractors & heavy duty trucks 0 61,036
----------------
Total equipment cost 3,535,109
Accumulated depreciation (3,467,069)
----------------
Equipment, net of accumulated depreciation $ 68,040
----------------
----------------
</TABLE>
At March 31, 1999, the Partnership's equipment portfolio included
equipment having a proportionate original cost of $2,415,273 representing
approximately 68% of total equipment cost.
At March 31, 1999, the Partnership had equipment held for sale with a
cost and net book value of approximately $2,288,000 and $68,000,
respectively. This equipment represents the Partnership's proportionate
interests in two Boeing 727-251 ADV aircraft. See below for discussion
related to the Partnership's interests in these aircraft. The summary above
also includes equipment being leased on a month to month basis.
DEFERRED SALE
The Partnership and certain affiliated investment programs
(collectively, the "Programs") own a Boeing 727-251 ADV jet aircraft that was
leased to Sunworld International Airlines, Inc. ("Sunworld"). In January
1999, upon expiration of the lease term, the Programs entered into an
agreement to sell the aircraft to Sunworld for $2,450,000. The sale agreement
permits Sunworld to return the aircraft to the Programs, subject to certain
conditions, on or before April 10, 1999.
At March 31, 1999, the Partnership had received $168,087, representing a
portion of the Partnership's total sale proceeds which is classified as a
component of other liabilities on the accompanying Statement of Financial
Position at March 31, 1999. The Partnership received the remainder of the
sale proceeds in April 1999; see Note 7 - Subsequent Event. Due to the
contingent nature of the sale, the Partnership has deferred recognition of
the sale until expiration of the return option on April 10, 1999. The
Partnership's interest in the aircraft had a cost of $1,080,617 and was fully
depreciated at March 31, 1999.
In November 1998, the Programs entered into an agreement to sell their
ownership interests in a Boeing 727-251 ADV aircraft and three engines
(collectively the "Aircraft") to a third party (the "Purchaser"). The
Programs will receive gross sale proceeds of $4,350,000. Previously, the
Aircraft had been leased to Transmeridian Airlines ("Transmeridian"). In
December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding
one of three engines which had been damaged while the Aircraft was leased to
Transmeridian. (See Note 6 to the financial statements presented in the
Partnership's 1998 Annual Report regarding legal action undertaken by the
Programs related to Transmeridian and the damaged engine). The Purchaser also
deposited $1,000,000 into a third-party escrow account (the "Escrow") pending
repair of the damaged engine and re-installation of the refurbished engine
7
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
on the Aircraft. Upon installation, the escrow agent will transfer the Escrow
amount plus interest thereon to the Programs. Currently, the engine is being
refurbished at the expense of the Programs. The associated cost is estimated
to be approximately $336,000, of which the Partnership's share is
approximately $39,000. The Partnership accrued $30,000 of these costs in 1998
and the balance was incurred in the three months ended March 31, 1999.
The Programs also are required to reimburse the Purchaser for its cost
to lease a substitute engine during the period that the damaged engine is
being repaired. This cost is expected to be approximately $114,000, of which
the Partnership's share is approximately $13,000, all of which was accrued in
1998 in connection with the litigation referenced above. Upon completion of
the engine repair and re-installation, the Escrow plus all interest thereon
will be transferred to the Programs.
In addition, the purchase and sale agreement permits the Purchaser to
return the Aircraft to the Programs, subject to a number of conditions, for
$4,350,000, reduced by an amount equivalent to $450 multiplied by the number
of flight hours since the Aircraft's most recent C Check. Among the
conditions precedent to the Purchaser's returning the Aircraft, the Purchaser
must have completed its intended installation of hush-kitting on the Aircraft
to conform to Stage 3 noise regulations. This work was completed in January
1999. The Purchaser's return option expires on May 15, 1999.
Due to the contingent nature of the sale, the Partnership has deferred
recognition of the sale and a resulting gain at March 31, 1999 until
expiration of the Purchaser's return option on May 15, 1999. The
Partnership's share of the December proceeds was $388,600, which amount was
deposited into EFG's customary escrow account and transferred to the
Partnership, together with the Partnership's other December rental receipts,
in January 1999. At March 31, 1999, such amount was reflected as a component
of other liabilities on the accompanying Statement of Financial Position. The
remainder of the sale consideration, or $1,000,000, will be paid to the
Programs upon release of the Escrow discussed above. The Partnership's share
of this payment will be $116,000. The Partnership's interest in the Aircraft
had a cost and net book value of $1,207,637 and $68,040 at March 31, 1999,
respectively.
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 each of the three month
periods ended March 31, 1999 and 1998, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Equipment management fees $ 2,189 $ 5,176
Administrative charges 14,373 14,373
Reimbursable operating expenses
due to third parties 43,268 13,868
--------------- ---------------
Total $ 59,830 $ 33,417
--------------- ---------------
--------------- ---------------
</TABLE>
8
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(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 March 31, 1999, the Partnership was owed $20,326 by EFG for
such funds and the interest thereon. These funds were remitted to the
Partnership in April 1999.
NOTE 6 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL
GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for
the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a
number of its affiliates, including the General Partner, as defendants
(collectively, the "Defendants"). Certain of the Plaintiffs, on or about June
24, 1997, had filed an earlier derivative action, captioned LEONARD
ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in
the Superior Court of the Commonwealth of Massachusetts on behalf of the
Nominal Defendants against the Defendants. Both actions are referred to
herein collectively as the "Class Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the
Securities Exchange Act of 1934, common law fraud, breach of contract, breach
of fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants. The Defendants have denied, and
continue to deny, that any of them have committed or threatened to commit any
violations of law or breached any fiduciary duties to the Plaintiffs or the
Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed
a Stipulation of Settlement setting forth terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant
to continuing litigation. The Stipulation of Settlement was based upon and
superseded 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 and was preliminarily
approved by the Court on August 20, 1998 when the Court issued its "Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the Proposed Settlement" (the
"August 20 Order"). Prior to issuing a final order, the Court will hold a
fairness hearing that will be open to all interested parties and permit any
party to object to the settlement. The investors of the Partnership and all
other plaintiff class members in the Class Action Lawsuit will receive a
Notice of Settlement and other information pertinent to the settlement of
their claims that will be mailed to them in advance of the fairness hearing.
Since first executing the Stipulation of Settlement, the Court has scheduled
two fairness hearings, the first on December 11, 1998 and the second on March
19, 1999, each of which was postponed because of delays in finalizing certain
information materials that are subject to regulatory review prior to being
distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which
was filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides
the Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership
9
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
and 10 affiliated partnerships (collectively referred to as the "Exchange
Partnerships"), is expected to remain pending for a longer period due, in
part, to the complexity of the proposed settlement pertaining to this class.
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco").
Under the proposed Consolidation, the partners of the Exchange Partnerships
would receive both common stock in Newco and a cash distribution; and
thereupon the Exchange Partnerships would be dissolved. In addition, EFG
would contribute certain management contracts, operations personnel, and
business opportunities to Newco and cancel its current management contracts
with all of the Exchange Partnerships. Newco would operate as a finance
company specializing in the acquisition, financing and servicing of equipment
leases for its own account and for the account of others on a contract basis.
Newco also would use its best efforts to list its shares on the Nasdaq
National Market or another national exchange or market as soon after the
Consolidation as Newco deems that market conditions and its business
operations are suitable for listing its shares and Newco has satisfied all
necessary regulatory and listing requirements. The potential benefits and
risks of the Consolidation will be presented in a Solicitation Statement that
will be mailed to all of the partners of the Exchange Partnerships as soon as
the associated regulatory review process is completed and at least 60 days
prior to the fairness hearing. A preliminary Solicitation Statement was filed
with the Securities and Exchange Commission on August 24, 1998 and remains
pending. Class members will be notified of the actual fairness hearing date
when it is confirmed.
One of the principal objectives of the Consolidation is to create a
company that would have the potential to generate more value for the benefit
of existing limited partners than other alternatives, including continuing
the Partnership's customary business operations until all of its assets are
disposed in the ordinary course of business. To facilitate the realization of
this objective, the Amended Stipulation provides, among other things, that
commencing March 22, 1999, the Exchange Partnerships may collectively invest
up to 40% of the total aggregate net asset values of all of the Exchange
Partnerships in any investment, including additional equipment and other
business activities that the general partners of the Exchange Partnerships
and EFG reasonably believe to be consistent with the anticipated business
interests and objectives of Newco, subject to certain limitations, including
that the Exchange Partnerships retain sufficient cash balances to pay their
respective shares of the cash distribution referenced above in connection
with the proposed Consolidation.
In the absence of the Court's authorization to enter into such
activities, the Partnership's Restated Agreement, as amended, would not
permit new investment activities without the approval of limited partners
owning a majority of the Partnership's outstanding Units. Accordingly, to the
extent that the Partnership invests in new equipment, the Manager (being EFG)
will (i) defer, until the earlier of the effective date of the Consolidation
or December 31, 1999, any acquisition fees resulting therefrom and (ii) limit
its management fees on all such assets to 2% of rental income. In the event
that the Consolidation is consummated, all such acquisition and management
fees will be paid to Newco. To the extent that the Partnership invests in
other business activities not consisting of equipment acquisitions, the
Manager will forego any acquisition fees and management fees related to such
investments. In the event that the Partnership has acquired new investments,
but the Partnership does not participate in the Consolidation, Newco will
acquire such new investments for an amount equal to the Partnership's net
equity investment plus an annualized return thereon of 7.5%. Finally, in the
event that the Partnership has acquired new investments and the Consolidation
is not effected, the General Partner will use its best efforts to divest all
such new investments in an orderly and timely fashion and the Manager will
cancel or return to the Partnership any acquisition or management fees
resulting from such new investments.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to
10
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
object to the participation of their partnership in the Consolidation.
Assuming the proposed settlement is effected according to present terms, the
Partnership's share of legal fees and expenses related to the Class Action
Lawsuit is estimated to be approximately $59,000, all of which was accrued
and expensed by the Partnership in 1998. In addition, the Partnership's share
of fees and expenses related to the proposed Consolidation is estimated to be
approximately $209,600, all of which was also accrued and expensed by the
Partnership in 1998.
While the Court's August 20 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothecating, or otherwise disposing of any
Units pending the Court's final determination of whether the settlement
should be approved, the March 22 Order permits the partners to transfer Units
to family members or as a result of the divorce, disability or death of the
partner. No other transfers are permitted pending the Court's final
determination of whether the settlement should be approved. The provision of
the August 20 Order which enjoined the General Partners of the Exchange
Partnerships from, among other things, recording any transfers not in
accordance with the Court's order remains effective.
There can be no assurance that settlement of either sub-class of the
Class Action Lawsuit will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the
Consolidation, then that partnership will be excluded from the Consolidation.
The General Partner and its affiliates, in consultation with counsel, concur
that there is a reasonable basis to believe that final settlements of each
sub-class will be achieved. However, in the absence of final settlements
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit. Neither the General Partner nor
its affiliates can predict with any degree of certainty the cost of
continuing litigation to the Partnership or the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other
lawsuits that have arisen out of the conduct of its business, principally
involving disputes or disagreements with lessees over lease terms and
conditions. Refer to the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998 for a description of these matters. The
following is an update to the Partnership's prior disclosure on Form 10-K for
1998:
ACTION INVOLVING NORTHWEST AIRLINES, INC.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges
that Northwest did not fulfill its maintenance obligations under its Lease
Agreements with the Plaintiffs and seeks declaratory judgment concerning
Northwest's obligations and monetary damages. Northwest filed an Answer to
the Plaintiffs' Complaint and a motion to transfer the venue of this
proceeding to Minnesota. The Court denied Northwest's motion. On June 29,
1998, a United States Magistrate Judge recommended entry of partial summary
judgment in favor of the Plaintiffs. Northwest appealed this decision. On
April 15, 1999, the United States District Court Judge adopted the Magistrate
Judge's recommendation and entered partial summary judgment in favor of the
Plaintiffs. The General Partner believes that the Plaintiff's claims
ultimately will prevail and that the Partnership's financial position will
not be adversely affected by the outcome of this action.
11
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 7 - SUBSEQUENT EVENT
On April 10, 1999, Sunworld's option to return a Boeing 727-251 ADV
aircraft that it had purchased from the Partnership and certain affiliated
investment programs in January 1999 expired. Subsequently, the Partnership
received the balance of its share of the sale proceeds for this asset. In
aggregate, the Partnership received total sale proceeds of $284,200. The
aircraft was fully depreciated at the date of its disposal. See also Note 4.
12
<PAGE>
AMERICAN INCOME FUND I-A,
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-A
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, the collection of all rents due under the Partnership's
lease agreements and the remarketing of the Partnership's equipment.
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 Equis Financial Group Limited
Partnership (formerly American Finance Group) ("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.
EFG has completed substantially all of its Year 2000 project at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. All costs
incurred in connection with EFG's Year 2000 project 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 have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. 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 would 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. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues could result
in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
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 servicers will conform ultimately to
Year 2000 standards. The effect of this risk to the Partnership is not
determinable.
13
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998:
The Partnership was organized in 1990 as a direct-participation
equipment leasing program to acquire a diversified portfolio of capital
equipment subject to lease agreements with third parties. Presently, the
Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization
and its future business operations. See Note 6 to the accompanying financial
statements. Pursuant to the Restated Agreement, as amended, the Partnership
is scheduled to be dissolved by December 31, 2001.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Partnership recognized
lease revenue of $43,782 compared to $103,517 for the same period in 1998.
The decrease in lease revenue between 1998 and 1999 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 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.
For the three months ended March 31, 1999, the Partnership sold
equipment that had been fully depreciated to existing lessees and third
parties. These sales resulted in a net gain, for financial statement
purposes, of $7,547 compared to a net gain of $1,000 on fully-depreciated
equipment for the same period in 1998.
The results of future sales of equipment will be dependent upon the
condition and type of equipment being sold and its marketability at the time
of sale. 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 is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Depreciation expense for the three months ended March 31, 1999 was $23,214
compared to $40,047 for the same period in 1998. 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
14
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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.
Management fees were approximately 5% of lease revenue for both the
three months ended March 31, 1999 and 1998. 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 $57,641 for the three months ended March 31,
1999 compared to $28,241 for the same period in 1998. In 1999, operating
expenses included approximately $9,000 related to the refurbishment of an
aircraft engine (see Note 4 to the financial statements). Other 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 equipment being
remarketed.
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 pay management fees and operating costs. Operating
activities generated a net cash outflow of $4,809 (excluding the receipt of
proceeds of $556,687 related to the deferred aircraft sales, discussed below)
and a net cash inflow of $102,441 during the three months ended March 31,
1999 and 1998, respectively. Future renewal, re-lease and equipment sale
activities will cause a decline in the Partnership's lease revenue and
corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will also continue to decline as the Partnership experiences a
higher frequency of remarketing events.
Cash realized from asset disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. During the
three months ended March 31, 1999, the Partnership realized $7,547 in
equipment sale proceeds compared to $1,000 for the same period in 1998.
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 and certain affiliated investment programs
(collectively, the "Programs") own a Boeing 727-251 ADV jet aircraft that was
leased to Sunworld International Airlines, Inc. ("Sunworld"). In January
1999, upon expiration of the lease term, the Programs entered into an
agreement to sell the aircraft to Sunworld for $2,450,000. The sale agreement
permits Sunworld to return the aircraft to the Programs, subject to certain
conditions, on or before April 10, 1999.
At March 31, 1999, the Partnership had received $168,087, representing a
portion of the Partnership's total sale proceeds which is classified as a
component of other liabilities on the accompanying Statement of Financial
Position at March 31, 1999. The Partnership received the remainder of the
sale proceeds in April 1999; see Note 7 - Subsequent Event to the financial
statements. Due to the contingent nature of the sale, the Partnership has
deferred recognition of the sale until expiration of the return option on
April 10, 1999. The Partnership's interest in the aircraft had a cost of
$1,080,617 and was fully depreciated at March 31, 1999.
15
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
In November 1998, the Programs entered into an agreement to sell their
ownership interests in a Boeing 727-251 ADV aircraft and three engines
(collectively the "Aircraft") to a third party (the "Purchaser"). The
Programs will receive gross sale proceeds of $4,350,000. Previously, the
Aircraft had been leased to Transmeridian Airlines ("Transmeridian"). In
December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding
one of three engines which had been damaged while the Aircraft was leased to
Transmeridian. (See Note 6 to the financial statements presented in the
Partnership's 1998 Annual Report regarding legal action undertaken by the
Programs related to Transmeridian and the damaged engine). The Purchaser also
deposited $1,000,000 into a third-party escrow account (the "Escrow") pending
repair of the damaged engine and re-installation of the refurbished engine on
the Aircraft. Upon installation, the escrow agent will transfer the Escrow
amount plus interest thereon to the Programs. Currently, the engine is being
refurbished at the expense of the Programs. The associated cost is estimated
to be approximately $336,000, of which the Partnership's share is
approximately $39,000. The Partnership accrued $30,000 of these costs in 1998
and the balance was incurred in the three months ended March 31, 1999.
The Programs also are required to reimburse the Purchaser for its cost
to lease a substitute engine during the period that the damaged engine is
being repaired. This cost is expected to be approximately $114,000, of which
the Partnership's share is approximately $13,000, all of which was accrued in
1998 in connection with the litigation referenced above. Upon completion of
the engine repair and re-installation, the Escrow plus all interest thereon
will be transferred to the Programs.
In addition, the purchase and sale agreement permits the Purchaser to
return the Aircraft to the Programs, subject to a number of conditions, for
$4,350,000, reduced by an amount equivalent to $450 multiplied by the number
of flight hours since the Aircraft's most recent C Check. Among the
conditions precedent to the Purchaser's returning the Aircraft, the Purchaser
must have completed its intended installation of hush-kitting on the Aircraft
to conform to Stage 3 noise regulations. This work was completed in January
1999. The Purchaser's return option expires on May 15, 1999.
Due to the contingent nature of the sale, the Partnership has deferred
recognition of the sale and a resulting gain at March 31, 1999 until
expiration of the Purchaser's return option on May 15, 1999. The
Partnership's share of the December proceeds was $388,600, which amount was
deposited into EFG's customary escrow account and transferred to the
Partnership, together with the Partnership's other December rental receipts,
in January 1999. At March 31, 1999, such amount was reflected as a component
of other liabilities on the accompanying Statement of Financial Position. The
remainder of the sale consideration, or $1,000,000, will be paid to the
Programs upon release of the Escrow discussed above. The Partnership's share
of this payment will be $116,000. The Partnership's interest in the Aircraft
had a cost and net book value of $1,207,637 and $68,040 at March 31, 1999,
respectively.
At March 31, 1999, the Partnership was due aggregate future minimum
lease payments of $12,050 from contractual lease agreements (see Note 3 to
the financial statements). At the expiration of the individual 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. 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
need cash outflows to pay management fees and operating expenses.
16
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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's ownership
interests in commercial aircraft involve unique risks resulting from the
specialized nature of these assets and the potential for the Partnership to
incur significant remarketing costs at lease expiration. Accordingly, the
General Partner has maintained significant cash reserves within the
Partnership in order to minimize the risk of a liquidity shortage primarily
in connection with the Partnership's aircraft. At March 31, 1999, the
Partnership owned interests in two Boeing 727 aircraft, both of which were
under contract to be sold to third party buyers subject to the buyers' right
to return the aircraft on or before April 10, 1999 and May 15, 1999,
respectively (see discussion above).
In addition, the Partnership is a Nominal Defendant in a Class Action
Lawsuit described in Note 6 to the accompanying financial statements. A
preliminary court order has allowed the Partnership to invest in new
equipment or other activities, subject to certain limitations, effective
March 22, 1999. To the extent that the Partnership has exposure to aircraft
investments that could require capital reserves, the General Partner does not
anticipate that the Partnership will invest in new assets, regardless of its
authority to do so. Until the Class Action Lawsuit is adjudicated, the
General Partner does not expect that the level of future quarterly cash
distributions paid by the Partnership will be increased above amounts paid in
the first quarter of 1999. In addition, the proposed settlement, if effected,
will materially change the future organizational structure and business
interests of the Partnership, as well as its cash distribution policies. See
Note 6 to the accompanying financial statements.
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 three months ended March 31, 1999, the
Partnership declared total cash distributions of Distributable Cash from
Operations and Distributable Cash From Sales and Refinancings of $56,502. In
accordance with the Amended and Restated Agreement and Certificate of Limited
Partnership, the Limited Partners were allocated 95% of these distributions,
or $53,677, and the General Partner was allocated 5%, or $2,825. The first
quarter 1999 cash distribution was paid on April 15, 1999.
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 5 to the financial statements presented in the
Partnership's 1998 Annual Report). For instance, selling commissions and
organization and offering costs pertaining to syndication of the
Partnership's limited partnership units are not
17
<PAGE>
AMERICAN INCOME FUND I-A,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 and the difference between distributions (declared
vs. paid) for income tax and financial reporting 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 March 31, 1999. 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 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,
1998, the General Partner had a positive tax capital account balance.
The future liquidity of the Partnership will be influenced by, among
other factors, prospective market conditions, technological changes, the
ability of EFG to manage and remarket the Partnership's assets, and many
other events and circumstances, that could enhance or detract from individual
asset yields and the collective performance of the Partnership's equipment
portfolio. However, the outcome of the Class Action Lawsuit described in Note
6 to the accompanying financial statements will be the principal factor in
determining the future of the Partnership's operations.
18
<PAGE>
AMERICAN INCOME FUND I-A,
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
19
<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 FUND I-A, 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: MAY 14, 1999
-----------------------------------------------
By: /S/ GARY ROMANO
----------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: MAY 14, 1999
-----------------------------------------------
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,472,246
<SECURITIES> 0
<RECEIVABLES> 47,971
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,520,217
<PP&E> 3,535,109
<DEPRECIATION> (3,467,069)
<TOTAL-ASSETS> 2,588,257
<CURRENT-LIABILITIES> 867,315
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,720,942
<TOTAL-LIABILITY-AND-EQUITY> 2,588,257
<SALES> 0
<TOTAL-REVENUES> 79,209
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 83,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,835)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,835)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
