<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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, 1997 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
--- ---
<PAGE>
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, 1997 and December 31, 1996 3
Statement of Operations
for the three and nine months ended September 30, 1997 and 1996 4
Statement of Cash Flows
for the nine months ended September 30, 1997 and 1996 5
Notes to the Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II. OTHER INFORMATION:
Items 1 - 6 17
2
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
September 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,234,069 $ 1,838,896
Rents receivable 347,395 864,959
Accounts receivable - affiliate 292,614 239,386
Note receivable - Banyan 938,718 --
Investment in Banyan 638,615 --
Equipment at cost, net of accumulated depreciation of
$10,392,826 and $14,050,647 at September 30, 1997
and December 31, 1996, respectively 10,603,003 15,131,587
----------- -----------
Total assets $16,054,414 $18,074,828
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 5,045,326 $ 6,586,970
Accrued interest 42,685 96,123
Accrued liabilities 22,500 23,250
Accrued liabilities - affiliate 17,598 34,223
Deferred rental income 59,217 155,008
Cash distributions payable to partners 313,993 313,993
----------- -----------
Total liabilities 5,501,319 7,209,567
----------- -----------
Partners' capital (deficit):
General Partner (446,696) (431,088)
Limited Partnership Interests
(883,829.31 Units; initial purchase price of $25 each) 10,999,791 11,296,349
----------- -----------
Total partners' capital 10,553,095 10,865,261
----------- -----------
Total liabilities and partners' capital $16,054,414 $18,074,828
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
----- ----- ---- -----
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 744,764 $ 1,330,028 $ 3,837,800 $3,991,023
Interest income 38,117 23,075 83,725 117,548
Interest income - affiliate -- 4,662 -- 13,892
Gain (loss) on sale/exchange of equipment (158,488) (1,818) (613,623) 25,199
--------- ---------- ---------- ----------
Total income 624,393 1,355,947 3,307,902 4,147,662
--------- ---------- ---------- ----------
Expenses:
Depreciation and amortization 595,197 943,200 2,101,570 2,818,363
Interest expense 91,716 145,898 284,409 438,518
Equipment management fees - affiliate 31,078 37,967 124,725 113,799
Operating expenses - affiliate 92,250 47,376 167,388 120,081
--------- ---------- ---------- ----------
Total expenses 810,241 1,174,441 2,678,092 3,490,761
--------- ---------- ---------- ----------
Net income (loss) $(185,848) $ 181,506 $ 629,810 $ 656,901
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income (loss)
per limited partnership unit $ (0.20) $ 0.20 $ 0.68 $ 0.71
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Cash distributions declared
per limited partnership unit $ 0.34 $ 0.69 $ 1.01 $ 2.06
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income (loss)
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Cash flows from (used in) operating activities:
Net income $ 629,810 $ 656,901
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 2,101,570 2,818,363
(Gain) loss on sale/exchange of equipment 613,623 (25,199)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 517,564 330,994
accounts receivable - affiliate (53,228) (69,683)
Increase (decrease) in:
accrued interest (53,438) (6,531)
accrued liabilities (750) (3,020)
accrued liabilities - affiliate (16,625) 2,417
deferred rental income (95,791) 49,355
--------- ---------
Net cash from operating activities 3,642,735 3,753,597
--------- ---------
--------- ---------
Cash flows from (used in) investing activities:
Investment in Banyan stock (638,615) --
Note receivable - Banyan (938,718) --
Purchase of equipment -- (37,677)
Proceeds from equipment sales 2,441,437 121,965
--------- ---------
Net cash from investing activities 864,104 84,288
--------- ---------
--------- ---------
Cash flows used in financing activities:
Principal payments - notes payable (2,169,690) (2,352,332)
Distributions paid (941,976) (1,918,840)
---------- ----------
Net cash used in financing activities (3,111,666) (4,271,172)
---------- ----------
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,395,173 (433,287)
Cash and cash equivalents at beginning of period 1,838,896 2,189,633
---------- ----------
Cash and cash equivalents at end of period $3,234,069 $1,756,346
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 337,847 $ 445,049
---------- ----------
---------- ----------
Supplemental disclosure of non-cash investing and financing activities:
See Note 4 to the financial statements.
At December 31, 1995, the Partnership held $1,276,051 in a special-purpose
escrow account pending the completion of an aircraft exchange (see Results of
Operations). The Partnership completed the exchange in March 1996 obtaining
interests in aircraft at an aggregate cost of $5,086,706, utilizing cash of
$1,313,728 (including the escrowed funds) and third-party financing of
$3,772,978.
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
Notes to Financial Statements
September 30, 1997
(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 1996 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1996 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, 1997 and December 31, 1996 and results of operations
for the three and nine months ended September 30, 1997 and 1996 have been made
and are reflected.
NOTE 2 - CASH
At September 30, 1997, the Partnership had invested $3,130,000 in 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, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. Rents from Reno Air, Inc. ("Reno Air"), as provided for in the lease
agreement, are adjusted monthly for changes in the London Inter-Bank Offered
Rate ("LIBOR"). Future rents from Reno Air, included below, reflect the most
recent LIBOR effected rental payment. The leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred. Future minimum rents of $6,883,664 are due as follows:
For the year ending September 30, 1998 $ 2,105,102
1999 1,453,188
2000 950,417
2001 837,463
2002 837,463
Thereafter 700,031
-----------
Total $ 6,883,664
-----------
-----------
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1997. In the opinion of Equis Financial Group Limited Partnership
("EFG"), the acquisition cost of the equipment did not exceed its fair market
value.
6
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
Notes to Financial Statements
(Continued)
<TABLE>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
-------------- ---------- ---------
<S> <C> <C>
Aircraft 3-63 $ 8,697,671
Materials handling 0-18 3,785,590
Construction & mining 0-3 1,770,212
Trailers and intermodal containers 69 1,766,036
Locomotives 78 1,524,831
General purpose plant/warehouse 3 1,193,417
Tractors & heavy duty trucks 0-9 807,848
Retail store fixtures 0 687,947
Communications 0-12 659,442
Photocopying 0-1 64,895
Computers & peripherals 0 37,940
----------
Total equipment cost 20,995,829
Accumulated depreciation (10,392,826)
------------
Equipment, net of accumulated depreciation $ 10,603,003
------------
------------
</TABLE>
During August 1997, the Partnership and another EFG-sponsored investment
program exchanged certain locomotives for a proportionate interest in certain
other locomotives. The Partnership's original locomotives had a cost and net
book value of $1,572,197 and $1,047,043, respectively, and had associated
indebtedness of $411,997 at the time of the exchange. The replacement
locomotives were recorded at their fair value of $1,524,829 and the Partnership
assumed associated debt of $1,040,043. The exchange resulted in the recognition
of a net loss, for financial statement purposes, of $150,260.
At September 30, 1997, the Partnership's equipment portfolio included
equipment having a proportionate original cost of $11,205,958, representing
approximately 53% of total equipment cost.
The summary above includes equipment held for sale or re-lease with a cost
and net book value of approximately $1,163,000 and $130,000, respectively, at
September 30, 1997. The General Partner is actively seeking the sale or
re-lease or all equipment not on lease. In addition, the summary above also
includes equipment being leased on a month-to-month basis.
NOTE 5 - INVESTMENT IN BANYAN
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by KGJS/Gearbulk Holdings Limited
(the "Lessee"), exchanged their ownership interests in the Vessels for aggregate
consideration of $11,565,375, including 1,987,000 shares (at $1.50 per share) of
common stock in Banyan Strategic Land Fund II ("Banyan") and a purchase money
note of $8,219,500 (the "Note"). Banyan is a Delaware corporation organized on
April 14, 1987 and has its common stock listed on NASDAQ. Banyan, at the time
of the exchange transaction, held certain real
7
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
Notes to Financial Statements
(Continued)
estate investments, the only one of which remained unsold at September 30,
1997 being a 274 acre site near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Banyan and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Banyan or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Banyan (the "Banyan Note").
As a result of the exchange transaction and its original 67% beneficial
ownership interest in Hato Arrow, one of the three Vessels, the Partnership
received $879,195 in cash, is the beneficial owner of 425,743 shares of Banyan
common stock valued at $638,615 ($1.50 per share) and holds a beneficial
interest in the Banyan Note of $938,718. The Banyan Note will be amortized over
three years and bear an annual interest rate of 10%.
Cash equal to the amount of the Banyan Note was placed in escrow for the
benefit of Banyan in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Banyan agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Banyan's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Banyan,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Banyan's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Banyan,
EFG or any affiliate; and (ii) an amendment extending Banyan's life to perpetual
and changing its name. Contemporaneously with the Consent being obtained,
Banyan declared a $0.20 per share dividend to be paid on all shares, including
those beneficially owned by the Partnership. A dividend of $85,149 is scheduled
to be paid to the Partnership on or before November 15, 1997.
In connection with the Banyan transaction, Gary D. Engle, President and
Chief Executive Officer of EFG, joined the Board of Directors of Banyan and
James A. Coyne, Senior Vice President of EFG became Banyan's Chief Operating
Officer. The General Partner believes that the underlying tangible assets of
Banyan, particularly the Rancho Malibu property, can be sold or developed on a
tax free basis due to Banyan's net operating loss carryforwards and can provide
an attractive economic return to the Partnership.
NOTE 6 - 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 nine month
periods ended September 30, 1997 and 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
8
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
Notes to Financial Statements
(Continued)
1997 1996
------------ ------------
Equipment management fees $ 124,725 $ 113,799
Administrative charges 46,395 15,750
Reimbursable operating expenses
due to third parties 120,993 104,331
------------ ------------
Total $ 292,113 $ 233,880
------------ ------------
------------ ------------
During the nine months ended September 30, 1996, the Partnership earned
interest income of $13,892, on a note receivable from EFG resulting from a
settlement with ICCU Containers, S.p.A., a former lessee of the Partnership
whose affiliate was a former partner in American Finance Group.
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, 1997, the Partnership was owed $292,614 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
October 1997.
NOTE 7 - NOTES PAYABLE
Notes payable at September 30, 1997 consisted of installment notes of
$5,045,326 payable to banks and institutional lenders. The installment notes
bear interest rates ranging between 7.35% and 8.95%, except for one note which
bears a fluctuating interest rate based on LIBOR plus a margin (5.66% at
September 30, 1997). All of the installment notes are non-recourse and are
collateralized by the equipment and assignment of the related lease payments.
Generally, the installment notes will be fully amortized by noncancellable
rents. However, the Partnership has balloon payment obligations at the
expiration of the primary lease terms related to the Finnair Aircraft and the
Reno Aircraft of $922,830 and $555,597, respectively. The carrying amount of
notes payable approximates fair value at September 30, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending September 30, 1998 $ 1,129,195
1999 1,730,687
2000 487,707
2001 405,913
2002 437,049
Thereafter 854,775
-----------
Total $ 5,045,326
-----------
-----------
NOTE 8 - LEGAL PROCEEDINGS
On July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Partnership, National
Steel Corporation
9
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
Notes to Financial Statements
(Continued)
("National Steel"), under a certain Master Lease Agreement ("MLA") for the
lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and
other remedies provided by the MLA. On August 30, 1995, National Steel filed
a Notice of Removal which removed the case to the United States District
Court, District of Massachusetts. On September 7, 1995, National Steel filed
its Answer to EFG's Complaint along with Affirmative Defenses and
Counterclaims, seeking declaratory relief and specific performance and
alleging, among other things, breach of contract and breach of the implied
covenant of good faith and fair dealing. EFG filed its Answer to these
counterclaims on September 29, 1995. Though the parties have been discussing
settlement with respect to this matter for some time, to date, the
negotiations have been unsuccessful. Notwithstanding these discussions, EFG
recently filed an Amended and Supplemental Complaint alleging a further
default by National Steel under the MLA and EFG recently filed a motion for
Summary Judgment on all claims and counterclaims. The matter remains pending
before the Court and is scheduled for a hearing on EFG's motion in December
1997. The Partnership has not experienced any material losses as a result of
this action.
On June 24, 1997, four plaintiffs (the "Plaintiffs") owning limited partner
units or beneficiary interests in eight investment programs sponsored by EFG
filed a lawsuit, as a derivative action, on behalf of the Partnership and 27
other investment programs (collectively, the "Nominal Defendants") in the
Superior Court of the Commonwealth of Massachusetts for the County of Suffolk
against EFG and certain of EFG's affiliates, including the General Partner
of the Partnership and four other wholly-owned subsidiaries of EFG which are the
general partner or managing trustee of one or more of the investment programs,
(collectively, the "Managing Defendants"), and certain other entities and
individuals that have control of the Managing Defendants and the Nominal
Defendants (the "Controlling Defendants"). The Plaintiffs assert claims of
breach of fiduciary duty, breach of contract, unjust enrichment, and equitable
relief and seek various remedies, including compensatory and punitive damages to
be determined at trial.
The General Partner and EFG are in the early stages of evaluating the
nature and extent of the claims asserted in this lawsuit and cannot predict its
outcome with any degree of certainty. However, based upon all of the facts
presently being considered by management, the General Partner and EFG do not
believe that any likely outcome will have a material adverse effect on the
Partnership. The General Partner, EFG and their affiliates intend to vigorously
defend against the lawsuit.
10
<PAGE>
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 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
ability of EFG to collect all rents due under the attendant lease agreements and
successfully remarket the Partnership's equipment upon the expiration of such
leases.
Three and nine months ended September 30, 1997 compared to the three and nine
months ended September 30, 1996:
Overview
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. The Partnership's stated investment
objectives and policies contemplated that the Partnership would wind-up its
operations within approximately seven years of its inception. The value of the
Partnership's equipment portfolio decreases over time due to depreciation
resulting from age and usage of the equipment, as well as technological changes
and other market factors. In addition, the Partnership does not replace
equipment as it is sold; therefore, its aggregate investment value in equipment
declines from asset disposals occurring in the normal course. As a result of
the Partnership's age and a declining equipment portfolio, the General Partner
is evaluating a variety of transactions that will reduce the Partnership's
prospective costs to operate as a publicly registered limited partnership and,
therefore, enhance overall cash distributions to the limited partners. Such a
transaction may involve the sale of the Partnership's remaining equipment or a
transaction that would allow for the consolidation of the Partnership's expenses
with other similarly-organized equipment leasing programs. In order to increase
the marketability of the Partnership's remaining equipment, the General Partner
expects to use the Partnership's available cash and future cash flow to retire
indebtedness. This will negatively effect short-term cash distributions.
Results of Operations
For the three and nine months ended September 30, 1997, the Partnership
recognized lease revenue of $744,764 and $3,837,800, respectively, compared to
$1,330,028 and $3,991,023 for the same periods in 1996. The decrease in lease
revenue from 1996 to 1997 resulted from lease term expirations and equipment
sales offset by the receipt in 1997 of prepaid contractual rental obligations of
$878,320 associated with the exchange of its interest in a vessel (see
discussion below) and the impact of an aircraft exchange concluded in March
1996. As a result of the exchange, the Partnership replaced its ownership
interest in a Boeing 747-SP aircraft, with interests in six other aircraft
(three Boeing 737 aircraft leased by Southwest Airlines, Inc., two McDonnell
Douglas MD-82 aircraft leased by Finnair OY and one McDonnell Douglas MD-87
aircraft leased by Reno Air, Inc.). The Southwest Aircraft were exchanged into
the Partnership in 1995, while the Finnair Aircraft and the Reno Aircraft were
exchanged into the Partnership on March 25 and March 26, 1996, respectively.
Accordingly, revenue for the nine months ended September 30, 1996 reflected only
a portion of the rents ultimately earned from the like-kind exchange. In
aggregate, the replacement aircraft generated approximately $791,000 of lease
revenue during the nine months ended September 30, 1997 compared to
approximately $452,000 for the same period in 1996. In the future, lease
revenue will decline due to primary and renewal lease term expirations and the
sale of equipment.
11
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 EFG or an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
For the three and nine months ended September 30, 1997, the Partnership
earned interest income of $38,117 and $83,725, respectively, compared to $23,075
and $117,548 for the corresponding periods in 1996. Interest income is
typically generated from temporary investment of rental receipts and equipment
sales proceeds in short-term instruments. Interest income in 1996 included
interest of $36,763 earned on cash held in a special-purpose escrow account in
connection with the like-kind exchange transaction, discussed above. During the
three and nine months ended September 30, 1996, the Partnership earned interest
income of $4,662 and $13,892, respectively, on a note receivable from EFG
resulting from a settlement with ICCU Containers S.p.A., a former lessee of the
Partnership whose affiliate was a former partner in American Finance Group. All
amounts due from EFG pursuant to this note were received at December 31, 1996.
The amount of future interest income is expected to fluctuate in relation to
prevailing interest rates, the collection of lease revenue, and the proceeds
from equipment sales.
During the three and nine months ended September 30, 1997, the Partnership
sold or exchanged equipment having a net book value of $242,786 and $3,055,060,
respectively, to existing lessees and third parties. These transactions resulted
in a net loss, for financial statement purposes, of $158,488 and $613,623,
respectively. The equipment transactions included the Partnership's interest in
a vessel with an original cost and net book value of $5,160,573 and $2,386,249,
respectively. In connection with this transaction, the Partnership realized
proceeds of $1,578,208, which resulted in a net loss, for financial statement
purposes, of $808,041. In addition, as this vessel was disposed of prior to the
expiration of the related lease term, the Partnership received a prepayment of
the remaining contracted rent due under the vessel's lease agreement, as
described above. See below for further discussion related to the vessel. The
equipment transactions also include the exchange of certain locomotives as
described below.
During August 1997, the Partnership and another EFG-sponsored investment
program exchanged certain locomotives for a proportionate interest in certain
other locomotives. The Partnership's original locomotives had a cost and net
book value of $1,572,197 and $1,047,043, respectively, and had associated
indebtedness of $411,997 at the time of the exchange. The replacement
locomotives were recorded at their fair value of $1,524,829 and the Partnership
assumed associated debt of $1,040,043. The exchange resulted in the recognition
of a net loss, for financial statement purposes, of $150,260.
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by KGJS/Gearbulk Holdings Limited
(the "Lessee"), exchanged their ownership interests in the Vessels for aggregate
consideration of $11,565,375, including 1,987,000 shares (at $1.50 per share) of
common stock in Banyan Strategic Land Fund II ("Banyan") and a purchase money
note of $8,219,500 (the "Note"). Banyan is a Delaware corporation organized on
April 14, 1987 and has its common stock listed on NASDAQ. Banyan, at the time
of the exchange transaction, held certain real estate investments, the only one
of which remained unsold at September 30, 1997 being a 274 acre site near
Malibu, California ("Rancho Malibu").
12
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Banyan and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Banyan or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Banyan (the "Banyan Note").
As a result of the exchange transaction and its original 67% beneficial
ownership interest in Hato Arrow, one of the three Vessels, the Partnership
received $879,195 in cash and is the beneficial owner of 425,743 shares of
Banyan common stock valued at $638,615 ($1.50 per share) and holds a beneficial
interest in the Banyan Note of $938,718. The Banyan Note will be amortized over
three years and bear an annual interest rate of 10%.
Cash equal to the amount of the Banyan Note was placed in escrow for the
benefit of Banyan in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Banyan agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Banyan's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Banyan,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Banyan's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Banyan,
EFG or any affiliate; and (ii) an amendment extending Banyan's life to perpetual
and changing its name. Contemporaneously with the Consent being obtained,
Banyan declared a $0.20 per share dividend to be paid on all shares, including
those beneficially owned by the Partnership. A dividend of $85,149 is scheduled
to be paid to the Partnership on or before November 15, 1997.
The General Partner believes that the underlying tangible assets of Banyan,
particularly the Rancho Malibu property, can be sold or developed on a tax free
basis due to Banyan's net operating loss carryforwards and can provide an
attractive economic return to the Partnership.
During the three and nine months ended September 30, 1996, the Partnership
sold equipment having a net book value of $40,008 and $96,766 to existing
lessees and third parties. These sales resulted in a net loss and a net gain,
for financial statement purposes, of $1,818 and $25,199, 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
13
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AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 and amortization expense for the three and nine months ended
September 30, 1997 was $595,187 and $2,101,570, respectively, compared to
$943,200 and $2,818,363 for the same periods in 1996. 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 $91,716 and $284,409, or 12.3% and 7.4% of lease
revenue for the three and nine months ended September 30, 1997, respectively,
compared to $145,898 and $438,518, or 11% of lease revenue for each of the same
periods in 1996. Interest expense in future periods will continue to decline in
amount as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt. In addition, the General
Partner expects to use a portion of the Partnership's available cash and future
cash flow to retire indebtedness (see Overview).
Management fees were approximately 4.2% and 3.2% of lease revenue for the
three and nine months ended September 30, 1997, compared to 2.9% of lease
revenue for each of the same periods in 1996. Management fees are based on 5%
of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed. Collectively, operating expenses represented 12.4% and 4.4% of
lease revenue for the three and nine months ended September 30, 1997,
respectively, compared to 3.6% and 3% of lease revenue for the same periods in
1996. The increase in operating expenses from 1996 to 1997 resulted primarily
due to increases in administrative charges and professional service costs. The
amount of future operating expenses cannot be predicted with certainty; however,
such expenses are usually higher during the acquisition and liquidation phases
of a partnership. Other fluctuations typically occur in relation to the volume
and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
derive from asset rental transactions. Accordingly, the Partnership's principal
source of cash from operations is provided by the collection of periodic rents.
These cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $3,642,735 and $3,753,597 for the nine
months ended September 30, 1997 and 1996, respectively. Future renewal,
re-lease and equipment sale activities will continue to cause a gradual 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 decline as the Partnership
experiences a higher frequency of remarketing events.
14
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Ultimately, the Partnership will dispose of all assets under lease. This
will occur principally through sale transactions whereby each asset will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the nine months ended
September 30, 1997, the Partnership realized net cash proceeds of $2,441,437,
including proceeds from the vessel exchange transaction, compared to $121,965
for the same period in 1996. 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.
During the nine months ended September 30, 1996, the Partnership expended
$37,677 in cash in connection with the aircraft like-kind exchange transactions
referred to above. There were no equipment acquisitions during the
corresponding period in 1997.
As a result of the vessel exchange transaction (see Results of Operations)
the Partnership became the beneficial owner of 425,743 shares of Banyan common
stock valued at $638,615 ($1.50 per share) and holds a beneficial interest in
the Banyan Note of $938,718.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal are reported as a component 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. In future periods,
the amount of cash used to repay debt obligations is scheduled to decline as the
principal balance of notes payable is reduced through the collection and
application of rents. However, the amount of cash to repay debt obligations may
fluctuate due to the use of the Partnership's available cash and future cash
flow to retire indebtedness (see Overview). In addition, the Partnership has
balloon payment obligations at the expiration of the respective primary lease
terms related to the Finnair Aircraft and the Reno Aircraft of $922,830 and
$555,597, respectively.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the nine months ended September 30, 1997, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $941,976. In accordance with
the Amended and Restated Agreement and Certificate of Limited Partnership, the
Limited Partners were allocated 95% of these distributions, or $894,877 and the
General Partner was allocated 5%, or $47,099. The third quarter 1997 cash
distribution was paid on October 14, 1997.
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. Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
15
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.
16
<PAGE>
AMERICAN INCOME FUND I-E,
a Massachusetts Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 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
17
<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-E, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ Michael J. Butterfield
--------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 14, 1997
---------------------------------------------
By: /s/ Gary M. Romano
---------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 1997
----------------------------------------------
18
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,234,069
<SECURITIES> 638,615
<RECEIVABLES> 1,578,727
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,451,411
<PP&E> 20,995,829
<DEPRECIATION> 10,392,826
<TOTAL-ASSETS> 16,054,414
<CURRENT-LIABILITIES> 455,993
<BONDS> 5,045,326
0
0
<COMMON> 0
<OTHER-SE> 10,553,095
<TOTAL-LIABILITY-AND-EQUITY> 16,054,414
<SALES> 0
<TOTAL-REVENUES> 3,307,902
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,393,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,409
<INCOME-PRETAX> 629,810
<INCOME-TAX> 0
<INCOME-CONTINUING> 629,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629,810
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
