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 JUNE 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------
Commission File No. 0-18365
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061971
(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.
Yes No
1
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2001 and December 31, 2000 3
Statement of Operations
for the three and six months ended June 30, 2001 and 2000 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 2001 and 2000 5
Statement of Cash Flows
for the six months ended June 30, 2001 and 2000 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION:
Item 1 - 6 19
2
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
June 30, December 31,
2001 2000
ASSETS
Cash and cash equivalents $ 2,200,665 $ 2,400,126
Accounts receivable - affiliate 3,646 5,993
Interest receivable - affiliate 21,917 -
Prepaid expenses 19,305 -
Investment in real estate venture 5,019,135 5,267,349
Note receivable - affiliate 888,844 888,844
Investment securities - affiliate - at fair market value 118,017 149,980
Equipment at cost, net of accumulated depreciation
of $267,740 and $247,230 at June 30, 2001
and December 31, 2000, respectively 61,531 82,041
------------ --------------
Total assets $ 8,333,060 $ 8,794,333
============ ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 250,407 $ 239,069
Accrued liabilities - affiliate 29,566 13,701
Other liabilities - 999
------------ --------------
Total liabilities 279,973 253,769
------------ --------------
Partners' capital (deficit):
General Partner (1,313,881) (1,289,507)
Limited Partnership Interests
(1,547,930 Units; initial purchase price of $25 each) 9,366,968 9,830,071
------------ --------------
Total partners' capital 8,053,087 8,540,564
------------ --------------
Total liabilities and partners' capital $ 8,333,060 $ 8,794,333
============ ==============
The accompanying notes are an integral part of these financial statements.
3
- ------
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
INCOME
Lease revenue $ 11,972 $ 18,861 $ 29,513 $ 37,409
Interest income 24,566 38,628 47,277 128,092
Interest income - affiliate 21,917 21,917 44,077 44,077
Gain on sale of marketable securities - - - 143,465
Gain on sale of equipment - 6,825 - 6,825
---------- --------- ---------- --------
Total income 58,455 86,231 120,867 359,868
---------- --------- ---------- --------
EXPENSES
Depreciation 10,255 10,576 20,510 21,152
Equipment management fees - affiliate 257 590 792 1,164
Operating expenses - affiliate 202,773 54,751 306,865 88,304
Write-down of investment securities - affiliate - - 31,963 -
Partnership's share of unconsolidated
real estate venture's loss 131,234 30,966 248,214 36,543
---------- --------- ---------- --------
Total expenses 344,519 96,883 608,344 147,163
---------- --------- ---------- --------
Net income (loss) $(286,064) $(10,652) $(487,477) $212,705
========== ========= ========== ========
Net income (loss) per limited partnership unit $ (0.18) $ (0.01) $ (0.30) $ 0.13
========== ========= ========== ========
Cash distributions declared
per limited partnership unit $ -- $ -- $ -- $ --
========== ========= ========== ========
The accompanying notes are an integral part of these financial statements.
4
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
General Limited Partners
Partner
Amount Units Amount Total
Balance at December 31, 2000 $(1,289,507) 1,547,930 $9,830,071 $8,540,564
Net loss (24,374) - (463,103) (487,477)
Unrealized loss on investment
securities-affiliate (615) - (11,678) (12,293)
Less: Reclassification adjustment
for write-down of investment
securities - affiliate 615 - 11,678 12,293
------------ ---------------- ----------- -----------
Comprehensive loss (24,374) - (463,103) (487,477)
------------ ---------------- ----------- -----------
Balance at June 30, 2001 $(1,313,881) 1,547,930 $9,366,968 $8,053,087
============ ================ =========== ===========
The accompanying notes are an integral part of these financial statements.
5
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (487,477) $ 212,705
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 20,510 21,152
Gain on sale of marketable securities - (143,465)
Gain on sale of equipment - (6,825)
Partnership's share of unconsolidated
real estate venture's loss 248,214 36,543
Write-down of investment securities - affiliate 31,963 -
Changes in assets and liabilities:
Rents receivable - 4,251
Accounts receivable - affiliate 2,347 5,358
Interest receivable (21,917) -
Prepaid expenses (19,305) -
Accrued liabilities 11,338 (68,137)
Accrued liabilities - affiliate 15,865 (272)
Other liabilities (999) (5,977)
----------- ------------
Net cash provided by (used in) operating activities (199,461) 55,333
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales - 6,825
Proceeds from marketable securities - 357,680
Investment in real estate venture - (5,700,000)
----------- ------------
Net cash used in investing activities - (5,335,495)
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Distributions paid - (213,860)
----------- ------------
Net cash used in financing activities - (213,860)
----------- ------------
Net decrease in cash and cash equivalents (199,461) (5,494,022)
Cash and cash equivalents at beginning of period 2,400,126 8,007,462
----------- ------------
Cash and cash equivalents at end of period $2,200,665 $ 2,513,440
=========== ============
SUPPLEMENTAL INFORMATION
See Note 6 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
six months ended June 30, 2001.
The accompanying notes are an integral part of these financial statements.
6
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
accounting principles generally accepted in the United States for interim
financial reporting 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 accounting principles generally accepted
in the United States for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein,
there has been no material change to the information presented in the footnotes
to the 2000 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 2001 and December 31, 2000 and results of operations for
the three and six month periods ended June 30, 2001 and 2000 have been made and
are reflected. Operating results for the six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the entire year.
NOTE 2 - CASH
- ----------------
At June 30, 2001, American Income Partners V-B Limited Partnership (the
"Partnership") had $2,101,600 invested in federal agency discount notes,
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities, or other highly liquid overnight investments.
NOTE 3 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly 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. In certain instances, the Partnership
may enter renewal or re-lease agreements which expire beyond the Partnership's
anticipated dissolution date. This circumstance is not expected to prevent the
orderly wind-up of the Partnership's business activities as the General Partner
and Equis Financial Group Limited Partnership ("EFG") would seek to sell the
then-remaining equipment assets either to the lessee or to a third party, taking
into consideration the amount of future noncancellable rental payments
associated with the attendant lease agreements. See also Note 9 regarding the
Class Action Lawsuit. Future minimum rents of $68,400 are due as follows:
For the year ending June 30, 2002 $45,600
2003 22,800
-------
. Total $68,400
=======
7
- ------
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS- (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at June 30,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 2001 under contracted lease terms. A Remaining
Lease Term equal to zero reflects equipment either held for sale or re-lease or
being leased on a month-to-month basis. In the opinion of EFG, the acquisition
cost of the equipment did not exceed its fair market value.
Remaining
Lease
Term Equipment
Equipment Type (Months) at Cost
- -------------------- ---------- -----------
Trailers/intermodal containers 18 $ 290,555
Materials handling 0 38,716
-----------
Total equipment cost . 329,271
Accumulated depreciation . (267,740)
-----------
Equipment, net of accumulated depreciation . $ 61,531
===========
At June 30, 2001, the Partnership's equipment portfolio included equipment
having a proportionate original cost of approximately $291,000, representing
approximately 88% of total equipment cost.
At June 30, 2001, all of the Partnership's equipment was subject to contracted
leases or being leased on a month-to-month basis.
NOTE 5 - INVESTMENT IN REAL ESTATE VENTURE
- -------------------------------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the ''Exchange
Partnerships'') collectively loaned $32 million to Echelon Residential Holdings
LLC (''Echelon Residential Holdings''), a newly formed real estate company.
Echelon Residential Holdings is owned by several investors, including James A.
Coyne, Executive Vice President of EFG. In addition, certain affiliates of the
General Partner made loans to Echelon Residential Holdings in their individual
capacities.
The Partnership's original loan was $5,700,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral.
The loan is presented, in accordance with the guidance set forth in the Third
Notice to Practitioners by the American Institute of Certified Public
Accountants in February 1986 entitled "ADC Arrangements", as an investment in
real estate venture and is presented net of the Partnership's share of losses in
Echelon Residential Holdings. The Partnership is allocated its proportionate
share of the unconsolidated real estate venture's net income or loss, adjusted
for interest on the ADC arrangements, based on the balance of its ADC
arrangement in relation to the real estate venture's total equity and notes
payable, including the ADC arrangements. For the six
8
month periods ended June 30, 2001 and 2000, the Partnership's share of losses in
Echelon Residential Holdings were $248,214 and $36,543, respectively, and are
reflected on the Statement of Operations as ''Partnership's share of
unconsolidated real estate venture's loss."
The Partnership took into consideration the following characteristics of the
loan in determining that the loan should be accounted for as an investment in a
real estate venture: (i) the Exchange Partnerships who made the loans
collectively have provided substantially all of the necessary funds to acquire
the underlying properties without taking title to such properties, (ii) by
virtue of a pledged security interest in the wholly owned subsidiary of Echelon
Residential Holdings that holds title to the properties, the Partnership's loan
is secured only by the underlying properties, (iii) Echelon Residential Holdings
will only repay the Partnership at maturity, including all interest accrued on
the loan through maturity, (iv) it is expected that Echelon Residential Holdings
can only repay the loan through sales of undeveloped and developed property; and
(v) the structure of the loan (i.e. no payments due until maturity) makes it
unlikely that the properties will be taken in foreclosure as a result of
delinquency.
The summarized financial information for Echelon Residential Holdings as of and
for the periods ended June 30, 2001 and 2000, respectively, is as follows:
(Unaudited)
As of and for the periods ended
June 30,
2001 2000
------------ ------------
Total assets $79,159,776 $54,704,360
Total liabilities $85,455,528 $48,386,270
Minority interest $ 1,782,982 $ 2,527,750
Total equity (deficit) $(8,078,734) $ 3,790,340
Total revenues $ 1,705,679 $ 905,751
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 5,924,774 $ 2,593,700
Net loss $(4,219,095) $(1,687,949)
NOTE 6 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 39,339 shares of Semele Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$888,844. The Semele Note matures in April 2003 and bears an annual interest
rate of 10% with mandatory principal reductions prior to maturity, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
its principal real estate asset consisting of an undeveloped 274-acre parcel of
land near Malibu, California. The Partnership recognized interest income of
$44,077 related to the Semele Note during each of the six month periods ended
June 30, 2001 and 2000.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele Note has been extended. Since the Semele Note was received as
9
consideration for the sale of the cargo vessels to an unaffiliated party and
the extension of the maturity of the Semele Note is documented in an amendment
to the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the general partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate in violation of the
Partnership Agreements and to be a violation of the court's order, in connection
with the settlement of the class action lawsuit discussed in Note 9, that
authorized New Investments while providing that all other provisions of the
Partnership Agreements shall remain in full force and effect.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", marketable equity securities classified as
available-for-sale are carried at fair value. At March 31, 2001, the
Partnership determined that the decline in the market value of its Semele common
stock was other than temporary. As a result, the Partnership wrote down the
cost of the Semele common stock to $3.3125 per share (the quoted price of the
Semele stock on the NASDAQ SmallCap Market on the date the stock traded closest
to March 31, 2001), for a total realized loss in the six months ended June
30, 2001 of $31,963.
During the three months ended June 30, 2001, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.00 per share (the
quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the
stock traded closest to June 30, 2001), resulting in an unrealized loss of
$12,293. This loss was reported as a component of comprehensive loss included
in the Statement of Changes in Partners' Capital.
NOTE 7 - MARKETABLE SECURITIES
- ----------------------------------
In April 1999, the Partnership purchased marketable securities in the amount of
$214,215. The securities were sold in March 2000 for proceeds of $357,680,
resulting in a realized gain, for financial statement purposes, of $143,465.
NOTE 8 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the six month periods ended June 30, 2001
and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- -------
Equipment management fees $ 792 $ 1,164
Administrative charges 32,130 19,967
Reimbursable operating expenses
due to third parties 274,735 68,337
-------- -------
Total $307,657 $89,468
======== =======
All rents and proceeds from the sale of equipment are paid directly to EFG. EFG
temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At June 30, 2001, the
10
Partnership was owed $3,646 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in July 2001.
The discussion of the loan to Echelon Residential Holdings in Note 5 above is
incorporated herein by reference.
NOTE 9 - LEGAL PROCEEDINGS
- ------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, 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.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") had completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether the parties
requested the Court to schedule a hearing for final approval of the proposed
settlement or were withdrawing the proposed settlement from judicial
consideration and resuming the litigation of the Plaintiffs' claims.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase any security or engage in any business in interstate
commerce. Accordingly, Section 7 would prohibit any partnership that is an
unregistered investment company from engaging in any business in interstate
commerce, except transactions that are merely incidental to its dissolution.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
The general partners have consulted with counsel who specializes in the 1940 Act
and, based on counsel's advice, do not believe that the Partnership or the other
Designated Partnerships are investment companies within the meaning of the 1940
Act. Counsel has corresponded and met with the SEC staff to address the issues
concerning the Designated Partnerships' status under the 1940 Act. However,
their status is unresolved and there is a risk that the Division of Investment
Management may commence enforcement action against the Partnership and the other
Designated Partnerships with respect to this matter.
Plaintiffs' Counsel and Defendants' Counsel each filed status reports in
response to the Court's order on May 15, 2001. The Court held a hearing on May
28, 2001 at which Plaintiffs' Counsel requested that the case be put back on a
litigation track anticipating his filing a motion for class certification and
discovery leading to the setting of a trial date. Defendants' Counsel requested
that the Court address the issue of whether or not the 1940 Act applies to the
Designated Partnerships and the consolidation under the proposed settlement. The
Court permitted Plaintiffs' Counsel to submit a timetable for discovery and
trial and at the same time encouraged the parties to continue to work together
with the SEC in an effort to consummate the proposed settlement. Subsequently,
the Court scheduled a status conference for February 22, 2002 and a trial date
of March 4, 2002.
11
- ------
AMERICAN INCOME PARTNERS V-B 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 Partners V-B
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of factors that could cause actual results to
differ materially from those expressed in any forward-looking statements made
herein. These factors include, but are not limited to, the outcome of the Class
Action Lawsuit described in Note 9 to the accompanying financial statements, the
remarketing of the Partnership's equipment, and the performance of the
Partnership's non-equipment assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing, the loan to Echelon Residential Holdings
LLC ("Echelon Residential Holdings") and its ownership of securities of Semele
Group Inc. ("Semele"). The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the 1940 Act. If the
Partnership were determined to be an unregistered investment company, its
business would be adversely affected. The 1940 Act, among other things,
prohibits an unregistered investment company from offering securities for sale
or engaging in any business in interstate commerce and, consequently, leases and
contracts entered into by partnerships that are unregistered investment
companies may be voidable. If necessary, the Partnership intends to avoid being
deemed an investment company by disposing or acquiring certain assets that it
might not otherwise dispose or acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The
letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
The general partners have consulted with counsel who specializes in the 1940 Act
and, based on counsel's advice, do not believe that the Partnership or the other
Designated Partnerships are investment companies within the meaning of the 1940
Act. Counsel has corresponded and met with the SEC staff to address the issues
concerning the Designated Partnerships' status under the 1940 Act. However,
their status is unresolved and there is a risk that the Division of Investment
Management may commence enforcement action against the Partnership and the other
Designated Partnerships with respect to this matter.
Plaintiffs' Counsel and Defendants' Counsel each filed status reports in
response to the Court's order on May 15, 2001. The Court held a hearing on May
28, 2001 at which Plaintiffs' Counsel requested that the case be put back on a
litigation track anticipating his filing a motion for class certification and
discovery leading to the setting of a trial date. Defendants' Counsel requested
that the Court address the issue of whether or not the 1940 Act applies
12
to the Designated Partnerships and the consolidation under the proposed
settlement. The Court permitted Plaintiffs' Counsel to submit a timetable for
discovery and trial and at the same time encouraged the parties to continue to
work together with the SEC in an effort to consummate the proposed settlement.
See Note 9 to the financial statements for additional discussion.
Three and six months ended June 30, 2001 compared to the three and six months
- --------------------------------------------------------------------------------
ended June 30, 2000
- ----------------------
The Partnership was organized in 1989 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 9 to the financial statements.) Pursuant to the Amended
and Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended,") the Partnership was scheduled to be dissolved by
December 31, 2000. However, the General Partner does not expect that the
Partnership will be dissolved until such time that the Class Action Lawsuit is
adjudicated and settled. The final settlement has not been effected and
therefore dissolution of the Partnership has been deferred until a later date.
Results of Operations
- -----------------------
For the three and six month periods ended June 30, 2001, the Partnership
recognized lease revenue of $11,972 and $29,513, respectively, compared to
$18,861 and $37,409, respectively, for the same periods in 2000. The decrease
in lease revenue from 2000 to 2001 resulted primarily from lease term
expirations and the sale of equipment. In the future, lease revenue will
continue to decline due to lease term expirations and the sale of equipment.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate
equipment ownership enabled the Partnership to further diversify its equipment
portfolio at inception by participating in the ownership of selected assets,
thereby reducing the general levels of risk, which could have resulted from a
concentration in any single equipment type, industry or lessee. The Partnership
and each affiliate individually report, in proportion to their respective
ownership interests, their respective shares of assets, liabilities, revenues,
and expenses associated with the equipment.
Interest income for the three and six month periods ended June 30, 2001 was
$46,483 and $91,354, respectively, compared to $60,545 and $172,169,
respectively, for the same periods in 2000. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. The amount of future interest income is
expected to fluctuate as a result of changing interest rates and the amount of
cash available for investment, among other factors. Interest income during both
the three and six months ended June 30, 2001 and 2000 included $21,917 and
$44,077, respectively, earned on a note receivable from Semele (see Note 6 to
the financial statements herein).
During the six month period ended June 30, 2000, the Partnership sold marketable
securities for proceeds of $357,680, which resulted in a net gain, for financial
statement purposes, of $143,465.
During the three months ended June 30, 2000, the Partnership sold fully
depreciated equipment to existing lessees and third parties, resulting in a net
gain, for financial purposes, of $6,825. There were no equipment sales during
the three months ended March 31, 2000 and the six months ended June 30, 2001.
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.
13
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 and six month periods ended June 30, 2001 was
$10,255 and $20,510, respectively, compared to $10,576 and $21,152,
respectively, for the same periods in 2000. For financial reporting purposes,
to the extent that an asset is held on primary lease term, the Partnership
depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of primary lease expiration. To the extent that an
asset is held beyond its primary lease term, the Partnership continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Management fees were $257 and $792, respectively, during the three and six month
periods ended June 30, 2001 and $590 and $1,164, respectively, for the same
periods in 2000. 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 $202,773 and $306,865, respectively, for the three and
six month periods ended June 30, 2001 compared to $54,751 and $88,304,
respectively, for the same periods in 2000. In 2001, operating expenses included
fees of approximately $115,000 related to ongoing legal matters and
approximately $59,000 related to the Class Action Lawsuit discussed in Note 9 to
the financial statements herein. 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.
At March 31, 2001, the Partnership determined that the decline in the market
value of its Semele common stock was other than temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
six months ended June 30, 2001 of $31,963.
For the three and six month periods ended June 30, 2001, the Partnership's share
of losses in Echelon Residential Holdings were $131,234 and $248,214,
respectively, compared to $30,966 and $36,543, respectively, for the same
periods in 2000. The losses are reflected on the Statement of Operations as
"Partnership's share of unconsolidated real estate venture's loss." See further
discussion below.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from asset rental transactions.
Historically, the Partnership's principal source of cash from operations was
provided by the collection of periodic rents, however, beginning in 2000 the
principal source of such cash has resulted from the receipt of interest income.
These cash inflows are used to pay management fees and operating costs.
Operating activities generated a net cash outflow of $199,461 and a net cash
inflow of $55,333 for the six months ended June 30, 2001 and 2000, respectively.
The amount of future interest income is expected to fluctuate as a result of
changing interest rates and the level of cash available for investment, among
other factors. 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
14
management fees, and net cash flow from operating activities will also decline
as the Partnership remarkets its equipment.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 2000, the Partnership realized $357,680, in proceeds from the
sale of marketable securities and $6,825 in proceeds from the sale of equipment.
There were no asset sales during the six months ended June 30, 2001. Future
inflows of cash from equipment 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.
At June 30, 2001, the Partnership was due aggregate future minimum lease
payments of $68,400 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.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 9 to the accompanying financial statements, the Court
permitted the Partnership to invest in any new investment, including but not
limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $5,700,000 to a newly
formed real estate company Echelon Residential Holdings, to finance the
acquisition of real estate assets by that company. Echelon Residential Holdings,
through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan
proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships, representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an independent
Florida-based real estate company. Echelon Residential Holding's interest in
Echelon Residential LLC is pledged pursuant to a pledge agreement to the
partnerships as collateral for the loans. The loan has a term of 30 months,
maturing on September 8, 2002, and an annual interest rate of 14% for the first
24 months and 18% for the final six months. Interest accrues and compounds
monthly and is payable at maturity.
As discussed in Note 5 to the Partnership's financial statements, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of Echelon Residential Holdings under the equity method of
accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the
15
partnerships realize on their loans. There is a risk that the court may object
to the general partner's action in structuring the loan in this way since the
officer may be deemed an affiliate and the loans in violation of the prohibition
against loans to affiliates and the court's statement in its order permitting
New Investments that all other provisions of the Partnership Agreements
governing the investment objectives and policies of the Partnership shall remain
in full force and effect. The court may require the partnerships to restructure
or divest the loan.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 39,339 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $888,844. The Semele Note
matures in April 2003 and bears an annual interest rate of 10% with mandatory
principal reductions prior to maturity, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele note has been extended. Since the Semele Note was received as
consideration for the sale of the cargo vessels to an unaffiliated party and the
extension of the maturity of the Semele Note is documented in an amendment to
the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the general partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate in violation of the
Partnership Agreements and to be a violation of the court's order, in connection
with the settlement of the class action lawsuit discussed in Note 9, that
authorized New Investments while providing that all other provisions of the
Partnership Agreements shall remain in full force and effect.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", marketable equity securities classified as
available-for-sale are carried at fair value. At March 31, 2001, the Partnership
determined that the decline in the market value of its Semele common stock was
other than temporary. As a result, the Partnership wrote down the cost of the
Semele common stock resulting in a total realized loss in the six months ended
June 30, 2001 of $31,963.
During the three months ended June 30, 2001, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.00 per share (the
quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the
stock traded closest to June 30, 2001), resulting in an unrealized loss of
$12,293. This loss was reported as a component of comprehensive loss included
in the Statement of Changes in Partners' Capital.
The Semele Note and the Semele common stock are subject to a number of risks
including, Semele's ability to make loan payments which is dependent upon the
liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998, the General Partner determined that the decline in
the market value of the stock was other than temporary and wrote down the
Partnership's investment. Again in the three months ended March 31, 2001, the
General Partner made the same determination and wrote down the Partnership's
investment. Subsequently, the market value of the Semele common stock has
fluctuated. The market value of the stock could decline in the future. Gary D.
Engle, President and Chief Executive Officer of EFG and a Director of the
General Partner is Chairman and Chief Executive Officer of Semele and James A.
Coyne, Executive Vice President of EFG is Semele's President and Chief Operating
Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of,
and own significant stock in, Semele.
16
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. In addition to the need for
funds in connection with the Class Action Lawsuit, 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.
Cash distributions to the General Partner and Recognized Owners had been
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is reported under financing
activities on the accompanying Statement of Cash Flows. No cash distributions
were declared for either of the six month periods ended June 30, 2001 or 2000.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
Cash distributions when paid to the Recognized Owners generally 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, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
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 8 to the financial statements presented in the Partnership's 2000
Annual Report. For instance, selling commissions and organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes, but are recorded as a
reduction of partners' capital for financial reporting purposes. 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 treatment of unrealized gains or losses on investment
securities for book and tax purposes. The principal components of the
cumulative difference between financial statement income or loss and tax income
or loss result from different depreciation policies for book and tax purposes
and different treatment for book and tax purposes related to the real estate
venture.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at June 30, 2001. This is the result of aggregate cash distributions to
the General Partner being in excess of its capital contribution of $1,000 and
its allocation of financial statement net income or loss. Ultimately, the
existence of a capital deficit for the General Partner for financial reporting
purposes is not indicative of any further capital obligations to the Partnership
by the General Partner. The Restated Agreement, as amended, requires that upon
the dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance, which may
exist in the General Partner's tax capital account. At December 31, 2000, the
General Partner had a positive tax capital account balance.
The outcome of the Class Action Lawsuit described in Note 9 to the accompanying
financial statements, will be the principal factor in determining the future of
the Partnership's operations. The settlement or adjudication of that lawsuit
may materially change the future organizational structure and business interests
of the Partnership, as well as its cash distribution policies. In addition,
commencing with the first quarter of 2000, the General Partner suspended the
payment of quarterly cash distributions pending final resolution of the Class
Action Lawsuit. Accordingly, future cash distributions are not expected to be
paid until the Class Action Lawsuit is settled or adjudicated.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's acquisition, development and construction loan to Echelon
Residential Holdings matures on September 8, 2002 and earns interest at a fixed
annual rate of 14% for the first 24 months and a fixed annual rate of 18% for
the last 6 months of the loan. Investments earning a fixed rate of interest may
have their fair market value adversely impacted due to a rise in interest rates.
The effect of interest rate fluctuations on the Partnership for the six months
ended June 30, 2001 was not material.
18
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 9 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
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ Michael J. Butterfield
-----------------------------
Michael J. Butterfield
Treasurer of AFG Leasing IV Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: August 14, 2001
-----------------
20
- ------