UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
-------------------
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. 0-18364
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3057303
(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
-----
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2002 and December 31, 2001 3
Statement of Operations
for the three months ended March 31, 2002 and 2001 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 2002 5
Statement of Cash Flows
for the three months ended March 31, 2002 and 2001 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION:
Item 1 - 6 18
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
March 31, December 31,
2002 2001
-------------- --------------
ASSETS
Cash and cash equivalents $ 476,460 $ 448,696
Rents receivable 4,820 2,220
Accounts receivable - affiliate 4,466 10,527
Interest receivable - affiliate 19,233 19,445
Prepaid expenses 14,642 2,041
Interest receivable - loan, net of allowance of $350,569
at March 31, 2002 and December 31, 2001 - -
Loan receivable, net of allowance of $189,000
at March 31, 2002 and December 31, 2001 1,971,000 1,971,000
Note receivable - affiliate 771,450 771,450
Investment securities - affiliate 70,228 64,424
Equipment at cost, net of accumulated depreciation
of $348,957 at March 31, 2002 and December 31, 2001 - -
-------------- --------------
Total assets $ 3,332,299 $ 3,289,803
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 160,914 $ 211,878
Accrued liabilities - affiliate 20,820 25,435
-------------- --------------
Total liabilities 181,734 237,313
-------------- --------------
Partners' capital (deficit):
General Partner (1,373,735) (1,378,349)
Limited Partnership interests
(1,380,661 Units; initial purchase price of $25 each) 4,518,496 4,430,839
Accumulated other comprehensive income 5,804 -
-------------- --------------
Total partners' capital 3,150,565 3,052,490
-------------- --------------
Total liabilities and partners' capital $ 3,332,299 $ 3,289,803
============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
INCOME
Lease revenue $ 6,651 $ 16,821
Interest income 1,894 6,358
Interest income - loan - 85,858
Interest income - affiliate 19,233 19,233
Other income 120,339 -
Gain on sale of equipment - 16,080
------------- -------------
Total income 148,117 144,350
------------- -------------
EXPENSES
Equipment management fees - affiliate 333 841
Operating expenses - affiliate 55,513 95,783
Write-down of investment securities - affiliate - 27,742
------------- -------------
Total expenses 55,846 124,366
------------- -------------
Net income $ 92,271 $ 19,984
============= =============
Net income per limited partnership unit $ 0.06 $ 0.01
============= =============
Cash distributions declared
per limited partnership unit $ -- $ --
============= =============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Accumulated
General Other
Partner Limited Partners Comprehensive
Amount Units Amount Income Total
-------------- ------------ ------------- ------------- -------------
Balance at December 31, 2001 $ (1,378,349) 1,380,661 $ 4,430,839 $ - $ 3,052,490
Net income 4,614 - 87,657 - 92,271
Unrealized gain on investment
securities - affiliate - - - 5,804 5,804
-------------- ------------ ------------- ------------- -------------
Comprehensive income 4,614 - 87,657 5,804 98,075
-------------- ------------ ------------- ------------- -------------
Balance at March 31, 2002 $ (1,373,735) 1,380,661 $ 4,518,496 $ 5,804 $ 3,150,565
============== ============ ============= ============= =============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 92,271 $ 19,984
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on sale of equipment - (16,080)
Write-down of investment securities - affiliate - 27,742
Changes in assets and liabilities:
Rents receivable (2,600) 211
Accounts receivable - affiliate 6,061 (9,360)
Interest receivable - affiliate 212 (19,233)
Prepaid expenses (12,601) (20,407)
Interest receivable - loan - (85,858)
Accrued liabilities (50,964) (447,821)
Accrued liabilities - affiliate (4,615) 9,662
-------------- --------------
Net cash provided by (used in) operating activities 27,764 (541,160)
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales - 16,080
-------------- --------------
Net cash provided by investing activities - 16,080
-------------- --------------
Net increase (decrease) in cash and cash equivalents 27,764 (525,080)
Cash and cash equivalents at beginning of period 448,696 1,003,350
-------------- --------------
Cash and cash equivalents at end of period $ 476,460 $ 478,270
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 5 to the financial statements regarding the increase of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 2002.
The accompanying notes are an integral part of these financial statements.
------
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
(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 financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of American Income Partners V-A Limited Partnership (the
"Partnership"). Except as disclosed herein, there has been no material change
to the information presented in the footnotes to the 2001 Annual Report included
in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2002 and December 31, 2001 and results of operations for
the three month periods ended March 31, 2002 and 2001 have been made and are
reflected.
NOTE 2 - 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,
wholly owned by 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. As of March 31, 2002,
the Partnership has no future rents due under noncancellable lease agreements.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at March 31,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2002 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.
... Remaining
... Lease Term Equipment
Equipment Type (Months) at Cost
- --------------------------------------------- ----------- -----------
Materials handling equipment 0 $ 307,965
Communications 0 40,992
-----------
Total equipment cost - 348,957
Accumulated depreciation - (348,957)
-----------
Equipment, net of accumulated depreciation - $ -
===========
At March 31, 2002, all of the Partnership's equipment was being leased on a
month-to-month basis.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''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 $2,160,000. 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, an unrelated 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 6 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 Partnerships as collateral. Echelon Residential Holdings
has no material business interests other than those connected with the real
estate properties owned by Echelon Residential LLC.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $189,000, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $350,569 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the quarters ended March 31, 2002 and 2001, respectively, is as
follows:
2002 2001
------------- ------------
Total assets $ 89,635,923 $72,861,183
Total liabilities $100,468,976 $76,780,082
Minority interest $ 1,507,536 $ 1,906,448
Total deficit $(12,340,589) $(5,825,347)
Total revenues $ 3,559,971 $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 5,358,501 $ 3,096,648
Net loss $ (1,798,530) $(2,033,209)
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange in 1997, the Partnership became the beneficial owner
of 34,144 shares of Semele common stock and holds a beneficial interest in a
note from Semele (the "Semele Note") of $771,450. 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 $19,233 related to
the Semele Note during each of the three month periods ended March 31, 2002 and
2001.
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. 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 of the
General Partner in violation of the Partnership Agreements of the owner
partnerships and to be a violation of the court's order with respect to New
Investments that all other provisions of the Partnership Agreements shall remain
in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 2002, the Partnership increased the
carrying value of its investment in Semele common stock to $2.07 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to March 31, 2002), resulting in an unrealized gain of $5,804.
This gain was reported as a component of comprehensive income included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the General Partner determined that the decline in market
value of its investment in Semele common stock was other-than-temporary. As a
result, on March 31, 2001, the Partnership wrote down the carrying value 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) resulting in a loss of $27,742 in the three months ended March 31,2001.
An additional write-down of the investment in Semele common stock occurred in
December 31, 2001.
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 the three month periods ended March 31,
2002 and 2001, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2002 2001
------- -------
Equipment management fees $ 333 $ 841
Administrative charges 35,702 17,817
Reimbursable operating expenses
due to third parties 19,811 77,966
------- -------
Total $55,846 $96,624
======= =======
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 March 31, 2002, the
Partnership was owed $4,466 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in April 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 7 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al., the outcome of which could significantly alter the nature of the
- -------
Partnership's organization and its future business operations.
- ------
The Defendant's and Plaintiff's Counsel have reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. The
court held a hearing on March 1, 2002 to consider the Revised Settlement. After
the hearing, the court issued an order preliminarily approving the Revised
Settlement and providing for the mailing of notice to the Operating Partnership
Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on
the terms and conditions set forth in the Revised Settlement is fair, reasonable
and adequate and should be finally approved by the court and a final judgment
entered in the matter.
Action involving Transmeridian Airlines
- ------------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, First Security Bank, N.A., as trustee of the
Partnership and certain affiliated investment programs (collectively, the
"Plaintiffs), filed a lawsuit against Prime Air, Inc. d/b/a Transmeridian
Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and Apple Vacations,
West, Inc., both d/b/a Apple Vacations ("Apple"), asserting various causes of
action for declaratory judgment and breach of contract.
As of March 13, 2002, the parties settled all claims involved in this lawsuit
and in a related lawsuit involving affiliated entities but not the Partnership.
The material terms of settlement provide: (i) in exchange for payment of
$2,100,000 from Apple to the Plaintiffs all claims arising from or related to
the lawsuits are dismissed with prejudice; (ii) the Plaintiffs shall have
Allowed Claims against the bankruptcy estate of Transmeridian in the aggregate
amount of $2,700,000; (iii) the Plaintiffs will be paid $400,000 from the
insurance proceeds relating to the aircraft loss; and (iv) each of the parties
will receive mutual releases of all claims and counterclaims.
The Partnership has received and recorded approximately $120,000 in the first
quarter of 2002, as its share of the $2,100,000 payment. The Partnership has
not yet received or recorded its share of the $400,000 from the insurance
proceeds. In addition, the Partnership recognized as income $184,576 in the
fourth quarter of 2001 that had been held in escrow pending the resolution of
the litigation.
AMERICAN INCOME PARTNERS V-A 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-A
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of 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, 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 unintentionally may have engaged, or may in the future
engage, in an activity or activities that may be construed to fall within the
scope of the 1940 Act. The General Partner has been engaged in discussions with
the staff of the Securities and Exchange Commission ("SEC") regarding whether or
not the Partnership may be an inadvertent investment company as a consequence of
the above-referenced loan. In a letter dated May 10, 2001, the staff of the SEC
informed the general partner that the staff believes that the Partnership and
seven of its affiliated partnerships are unregistered investment companies as
defined in Section 3(a)(1)(C) of the 1940 Act. 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. The General Partner has consulted counsel
and believes that the Partnership is not an investment company. If the
Partnership were determined to be an unregistered investment company, its
business would be adversely affected. The General Partner has determined to
take action to resolve the Partnership's status under the 1940 Act by means that
may include disposing or acquiring certain assets that it might not otherwise
dispose or acquire.
As part of the Revised Settlement, EFG has agreed to buy the loans made by the
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date of September 8, 2002. The Revised Settlement also
provides for the liquidation of the Partnerships' assets, a cash distribution
and the dissolution of the Partnerships including the liquidation and
dissolution of this Partnership. The court held a hearing on March 1, 2002 to
consider the Revised Settlement. After the hearing, the court issued an order
preliminarily approving the Revised Settlement and providing for the mailing of
notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to
determine whether the settlement on the terms and conditions set forth in the
Revised Settlement is fair, reasonable and adequate and should be finally
approved by the court and a final judgment entered in the matter.
While there can be no assurance that the Revised Settlement will receive final
Court approval and be effected, if it is, the assets of the Partnership will be
liquidated and the Partnership dissolved. The dissolution of the Partnership
may resolve its status under the 1940 Act. In the absence of a final settlement
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit.
Overview
- --------
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. Pursuant to the Amended and Restated Agreement
and Certificate of Limited Partnership (the "Restated Agreement, as amended,"),
the Partnership dissolution was scheduled for 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 settled or adjudicated. The final
settlement has not been effected and therefore dissolution of the Partnership
has been deferred until a later date.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
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 majority of the Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred.
Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. The Partnership's
depreciation policy is intended to allocate the cost of equipment over the
period during which it produces economic benefit. The principal period of
economic benefit is considered to correspond to each asset's primary lease term,
which generally represents the period of greatest revenue potential for each
asset. Accordingly, 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 the 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.
Allowance for loan losses: The Partnership periodically evaluates the
- ----------------------------
collectibility of its loan's contractual principal and interest and the
- ----
existence of loan impairment indicators, including contemporaneous economic
- ----
conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. Adjustments to reduce the net
- -----
carrying value of equipment are recorded in those instances where estimated net
- --
realizable value is considered to be less than net carrying value. Inherent in
the Partnership's estimate of net realizable values are assumptions regarding
estimated future cash flows. If these assumptions or estimates change in the
future, the Partnership could be required to record impairment charges for these
assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. In addition, the
Partnership is also involved in a class action lawsuit. The ultimate legal and
financial liability with respect to such matters cannot be estimated with
certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
- -----------------------
For the three months ended March 31, 2002, the Partnership recognized lease
revenue of $6,651 compared to $16,821 for the same period in 2001. The decrease
in lease revenue between 2001 and 2002 resulted primarily from renewal lease
term expirations and the sale of equipment. In the future, lease revenue will
continue to decline due to lease term expirations and equipment sales.
Interest income for the three months ended March 31, 2002 was $21,127 compared
to $111,449 for the same period in 2001. Interest income is generated
principally from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and interest earned on the loan receivable
from Echelon Residential Holdings and Semele. In the future, the amount of cash
from interest income from the short-term instruments is expected to fluctuate as
a result of changing interest rates and the amount of cash available for
investment, among other factors.
Interest income included $19,233 in each of the three month periods ended March
31, 2002 and 2001, earned on a note receivable from Semele. The note receivable
from Semele is scheduled to mature in April 2003.
Interest income also included $85,858 for the three months ended March 31, 2001,
earned on the loan receivable from Echelon Residential Holdings. The
Partnership cease accruing interest on this loan, effective April 1, 2001. See
further discussion below.
In the fourth quarter of 2001, a court judgment was entered in favor of the
Partnership and certain affiliates related to the litigation with Transmeridian
Airlines. The Partnership received settlement proceeds of approximately
$120,000 from the defendants in March 2002, which was recognized as other income
in the first quarter of 2002.
During the three month period ended March 31, 2001, the Partnership sold fully
depreciated equipment to existing lessees and third parties, resulting in net
gains, for financial statement purposes, of $16,080. The results of future sales
of equipment will be dependent upon the condition and type of equipment being
sold and its marketability at the time of sale.
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 any future gain or loss reported in the financial statements may not
necessarily be indicative of the total residual value the Partnership achieved
from leasing the equipment.
Management fees were $333 and $841, respectively, for the three months ended
March 31, 2002 and 2001. Management fees are based on 5% of gross lease revenue
generated by operating leases.
Operating expenses were $55,513 for the three months ended March 31, 2002,
compared to $95,783 for the same period in 2001. During the quarter ended March
31, 2001, operating expenses included approximately $27,000 related to the Class
Action Lawsuit. 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 investment in 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 realized
loss in the three months ended March 31, 2001 of $27,742.
Liquidity and Capital Resources and Discussion of Cash Flows
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The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities have resulted 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 1999 the
principal source of such cash has generally resulted from the receipt of
interest income. Cash inflows are used to pay management fees and operating
costs. Operating activities generated a net cash inflow of $27,764 during the
three months ended March 31, 2002 and a net cash outflow of $541,160 for the
three months ended March 31, 2001. The cash inflow in 2002 is primarily the
result of the receipt of approximately $120,000 of litigation settlement
proceeds. The net cash outflow in 2001 primarily reflected the payment of a
litigation settlement and related legal fees, which had been accrued in 2000.
The amount of future cash from interest income is expected to fluctuate as a
result of changing interest rates and the level of cash available for
investment, among other factors. The loan to Echelon Residential Holdings and
accrued interest thereon are due in full at maturity on September 8, 2002. The
Partnership's lease revenues and corresponding sources of operating cash are
currently derived from equipment being leased on a month-to-month basis.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will 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 three months
ended March 31, 2001, the Partnership realized equipment sale proceeds of
$16,080. 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
type of equipment being sold, its condition and age, and future market
conditions.
At March 31, 2002, no future minimum lease payments were due from contractual
lease agreements, however, all of the Partnership's equipment is being leased on
a month-to-month basis. 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 accordance with the
Partnership's investment objectives and the terms of its Partnership Agreement,
the Partnership generally sells its equipment as the related leases expire.
Additionally, the Partnership sells, on a selective basis, equipment before the
expiration of the related lease.
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 Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $189,000, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $350,569 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
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 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 34,144 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $771,450. 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. 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 in violation of the making of a loan to an
affiliate of the general partner in violation of the Partnership Agreements of
the owner partnerships and to be a violation of the court's order with respect
to New Investments that all other provisions of the Partnership Agreements shall
remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 2002, the Partnership increased the
carrying value of its investment in Semele common stock to $2.07 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to March 31, 2002), resulting in an unrealized gain of $5,804.
This gain was reported as a component of comprehensive income included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in 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 realized
loss in the three months ended March 31, 2001 of $27,742.
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 and 2001, the General Partner determined that the
decline in market value of the stock was other-than-temporary 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.
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. No cash distributions have been declared since 1999. 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 rents from the Partnership's month-to-month
leases, 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).
For instance, selling commissions, 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 component of the cumulative difference between
financial statement income or loss and tax income or loss results from different
depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at March 31, 2002. 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, 2001, the
General Partner had a positive tax capital account balance.
The outcome of the Class Action Lawsuit will be the principal factor in
determining the future of the Partnership's operations. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and currently earns interest at a fixed annual rate of 18% with interest
due at maturity (see discussion above). 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 in
the quarter ended March 31, 2002 was not material.
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 7 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
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-A 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: May 14, 2002
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