AMERICAN INCOME PARTNERS II
American Income 5 Limited Partnership
Annual Report to the Partners, December 31, 1996
AMERICAN INCOME 5 LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
PAGE
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-5
FINANCIAL STATEMENTS:
Report of Independent Auditors 6
Statement of Financial Position at December 31, 1995 7
Statement of Changes in Net Assets in Liquidation for the
Period October 1, 1996 to December 31, 1996 8
Statement of Operations for the Period January 1, 1996 to
September 30, 1996 and for the Years Ended December 31, 1995
and 1994 9
Statement of Changes in Partners' Capital for the Period
January 1, 1996 to September 30, 1996 and for the Years Ended
December 31, 1995 and 1994 10
Statement of Cash Flows for the Period January 1, 1996 to
September 30, 1996 and for the Years Ended December 31, 1995
and 1994 11
Notes to the Financial Statements 12-21
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to
Cost of Equipment Disposed 23
Statement of Cash and Distributable Cash from Operations,
Sales and Refinancings 24
Schedule of Costs Reimbursed to the General Partner and its
Affiliates as Required by Section 9.4 of the Amended and
Restated Agreement and Certificate of Limited Partnership 25
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements. The discussion of the 1996 results, presented below, incorporates
the nine month operating period ended September 30, 1996 and the three month
liquidation period ended December 31, 1996.
For each of the five years in the period ended December 31, 1996:
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
Lease revenue $ 752,199 $1,344,928 $1,620,482 $1,667,341 $1,959,679
Net income $ 752,052 $ 236,296 $ 518,222 $ 521,698 $ 228,943
Per Unit:
Net income $ 10.44 $ 3.28 $ 7.20 $ 7.24 $ 3.18
Cash distributions $ 43.08 $ 12.50 $ 20.62 $ 24.37 $ 27.50
FINANCIAL POSITION
Total assets -- $3,194,081 $4,136,773 $5,952,418 $7,255,173
Total long-term obligations -- $ 82,037 $ 356,174 $1,113,947 $1,143,421
Partners' capital -- $2,657,119 $3,321,012 $4,288,101 $5,521,771
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31, 1995
COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Results of Operations and Liquidity and Capital Resources
American Income 5 Limited Partnership (the Partnership) was established in 1986
as a direct-participation equipment leasing program. The Partnership's principal
purpose was (i) to acquire and lease a diversified portfolio of capital
equipment to third-party lessees and (ii) to distribute the net cash flow
realized from the Partnership's business operations to its Partners. The
Partnership was capitalized with equity contributions of $17,823,750 from its
Limited Partners and $1,000 from its General Partner. Following its inception,
the Partnership acquired a diversified pool of capital equipment at an aggregate
cost of $29,651,604, a significant portion of which was financed by third-party
banks or other institutional lenders. On September 30, 1996, the Partnership
sold substantially all of its assets and thereafter wound up its operations. The
Partnership was dissolved on December 31, 1996.
Organized as a limited-life entity, the Partnership was anticipated to be
dissolved within approximately seven years of its formation. A significant
portion of the Partnership's equipment assets, representing 57% of its original
equipment portfolio, was sold in the ordinary course of business prior to
September 30, 1996. On September 30, 1996, the remainder of the Partnership's
equipment portfolio was sold to RSL Finance Limited Partnership II (the Buyer).
Accordingly, the financial statements accompanying this discussion were prepared
using the liquidation basis of accounting for the period October 1, 1996 through
December 31, 1996. The Statement of Changes in Net Assets in Liquidation
reflects the liquidation of assets during that period.
A comparison of current and prior years' financial results is not presented
because it is not considered meaningful due the dissolution of the Partnership
and the liquidation of its assets.
Prior to its dissolution, the Partnership's principal sources of revenue
consisted of rental income from equipment leases and sales proceeds generated
from the disposition of its equipment assets. Rental income was used first to
extinguish indebtedness and second to pay the Partnership's management fees and
operating expenses. Net cash flow from all sources, after satisfaction of debt
service, management fees and operating expenses, was used to pay cash
distributions to the Partners. Over its lifetime, the Partnership paid aggregate
cash distributions of $20,696,754. In accordance with the Partnership's Amended
and Restated Agreement and Certificate of Limited Partnership, the Partnership's
Limited Partners were paid 99% of such cash distributions, or $20,489,786
($287.39 per limited partnership unit) and the General Partner was paid 1% of
such distributions, or $206,968. At December 31, 1996, the Partnership had a
contingency reserve balance of $307,119. These funds will be used to satisfy any
expenses of the Partnership which may arise after its dissolution date. To the
extent that these funds are not utilized for such purposes, they will be paid to
the Partners according to their respective allocation percentages, 99%, or
$304,048, representing $4.26 per limited partnership unit, to the Limited
Partners and 1%, or $3,071, to the General Partner.
3
During the second quarter of 1996, the Partnership engaged an investment adviser
to solicit potential buyers for the Partnership's remaining equipment assets and
associated lease contracts. The remarketing effort was undertaken jointly by 15
individual equipment leasing programs, consisting of the Partnership and 14
affiliated partnerships (the Other Affected Partnerships). Thirteen of the
programs, including the Partnership, sold all of their equipment assets (the
Liquidated Programs); and two programs sold only their proportionate ownership
interests in certain assets owned jointly with one or more of the Liquidated
Programs (collectively, the Sale Assets). Substantially all of the Partnership's
equipment assets of material value represented partial ownership interests
whereby the Partnership owned less than a 100% interest in the equipment it
sold. The remaining interests in such assets were owned by one or more of the
Other Affected Partnerships.
On September 30, 1996, the Partnership and each of the Other Affected
Partnerships executed individual purchase and sale agreements with the Buyer for
all of the Sale Assets, except for one McDonnell Douglas MD-82 aircraft leased
to Northwest Airlines, Inc. (the NWA Aircraft), hereafter the Sales Assets, as
Revised. The Partnership, which had no interest in the NWA Aircraft, sold all of
its remaining equipment, having a net book value of $2,091,432, to the Buyer for
$2,931,004. In aggregate, the Partnership and the Other Affected Partnerships
realized $32,997,000, prior to transaction costs, for all of the Sale Assets, as
Revised. The amounts allocated to the Partnership and to each of the Other
Affected Partnerships were determined based upon an apportionment of the sales
price among all equipment comprising the Sale Assets, as Revised according to
each asset's estimated re-sale value, as determined by an independent appraiser.
For financial reporting purposes, the Partnership recognized a net gain of
$839,572 in connection with this sale. In addition, the Partnership recognized a
net gain of $7,500 during the nine months ended September 30, 1996 from the sale
of other equipment, all of which had been fully depreciated for financial
reporting purposes at the date of sale.
For the year ended December 31, 1996, the Partnership recognized lease revenue
of $752,199. In addition, the Partnership earned interest income from temporary
cash investments. Operating expenses consisted principally of administrative
charges, professional service costs, such as legal and accounting fees, as well
as printing, distribution, and remarketing expenses, including equipment storage
and repairs and maintenance costs. Operating costs for 1996 include all
identified costs anticipated to be incurred in connection with the Partnership's
wind-up and dissolution.
On October 10, 1996, the General Partner entered into a Cross Partnership
Agreement (the Agreement) with the general partners of certain of the Other
Affected Partnerships participating in the sale transaction described above.
Pursuant to the Agreement, the Partnership and each of the other partnerships
agreed to set aside a contingency reserve for future liabilities. The Agreement
provides that obligations of any individual partnership which are not associated
with the sale transaction will directly reduce that partnership's reserve
balance, whereas costs pertaining to the sale transaction will be allocated
against the reserve balances of the Partnership and each of the other
partnerships on a proportionate basis. If the reserve balance of the Partnership
is depleted to zero, the reserve balances contributed by the other partnerships
will be debited on a proportionate basis to cover the deficit. If the reserve
balances of any one of the other partnerships is depleted to zero, the reserve
balance of the Partnership and any other partnerships having a positive reserve
balance shall be debited on a proportionate basis to cover the deficit. Upon
termination of the Agreement, any remaining monies will be distributed to the
partners of those partnerships with positive reserve balances. At December 31,
1996, the Partnership had a contingency reserve balance of $307,119. To the
extent that this contingency reserve is not necessary to satisfy any unforeseen
liabilities of the Partnership, it will be remitted to the Partners.
4
In connection with the wind-up effort, certain general partner interests in AFG
Leasing Associates II, a Massachusetts general partnership, and the original
General Partner of the Partnership, including the individual general partner
interest owned by Geoffrey A. MacDonald, were transferred to AFG Leasing IV
Incorporated, resulting in AFG Leasing IV Incorporated and AFG Leasing
Incorporated becoming the two general partners of AFG Leasing Associates II. AFG
Leasing Incorporated thereupon was merged with and into AFG Leasing IV
Incorporated. Accordingly, effective October 17, 1996, AFG Leasing IV
Incorporated became the sole General Partner of the Partnership. AFG Leasing IV
Incorporated was established in 1987 and is also the general partner or the
managing general partner of certain affiliated partnerships sponsored by AFG.
The dissolution of the Partnership was recorded at the Office of the Secretary
of State of the Commonwealth of Massachusetts on December 31, 1996. The
Partnership's business operations were concluded on that date. Immediately
following the filing of the Partnership's 1996 Form 10-K, the General Partner of
the Partnership will file Form 15, Certification and Notice of Termination of
Registration under Section 12(g) of the Securities Exchange Act of 1934 or
Suspension of Duty to File Reports Under Sections 13 and 15(d) of the Securities
Exchange Act of 1934, with the United States Securities and Exchange Commission.
5
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income 5 Limited Partnership:
We have audited the accompanying statement of financial position of American
Income 5 Limited Partnership as of December 31, 1995, and the related statements
of operations, changes in partners' capital and cash flows for each of the two
years ended December 31, 1995 and for the period from January 1, 1996 to
September 30, 1996. In addition, we have audited the statement of changes in net
assets in liquidation for the period from October 1, 1996 to December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the General Partner of
American Income 5 Limited Partnership approved a plan of liquidation on
September 30, 1996, and the Partnership commenced liquidation shortly
thereafter. As a result, the Partnership has changed its basis of accounting for
periods subsequent to September 30, 1996 from the going-concern basis to a
liquidation basis. The liquidation was completed and the Partnership was
dissolved on December 31, 1996.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Income 5 Limited
Partnership as of December 31, 1995, the results of its operations and its cash
flows for each of the two years ended December 31, 1995, and for the period from
January 1, 1996 to September 30, 1996, and the changes in its net assets in
liquidation for the period from October 1, 1996 to December 31, 1996, in
conformity with generally accepted accounting principles applied on the bases
described in the preceding paragraph.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 7, 1997
6
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1995
ASSETS
ASSETS:
Cash and cash equivalents $ 244,878
Rents receivable, net of allowance for doubtful accounts
of $20,000 19,700
Accounts receivable--affiliate 200,698
Equipment at cost, net of accumulated depreciation of
$10,098,320 2,728,805
-----------
Total assets $ 3,194,081
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable $ 82,037
Accrued interest 953
Accrued liabilities 20,000
Accrued liabilities--affiliate 5,954
Deferred rental income 247,980
Cash distributions payable to partners 180,038
-----------
Total liabilities 536,962
-----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (129,850)
Limited Partnership Interests (71,295 Units, initial
purchase price of $250 each) 2,786,969
-----------
Total partners' capital 2,657,119
-----------
Total liabilities and partners' capital $ 3,194,081
===========
The accompanying notes are an integral part of these financial statements.
7
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE PERIOD OCTOBER 1, 1996 TO DECEMBER 31, 1996
INTEREST INCOME $ 6,899
OPERATING EXPENSES--AFFILIATE (50,911)
LIQUIDATING DISTRIBUTION (307,119)
---------
NET DECREASE IN NET ASSETS IN LIQUIDATION DURING THE PERIOD (351,131)
NET ASSETS IN LIQUIDATION, BEGINNING OF PERIOD 351,131
---------
NET ASSETS IN LIQUIDATION, END OF PERIOD $ --
=========
The accompanying notes are an integral part of these financial statements.
8
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
FOR THE
PERIOD
JANUARY 1,
1996 TO FOR THE YEARS
SEPTEMBER 30, ENDED DECEMBER 31,
1996 1995 1994
INCOME:
Lease revenue $ 752,199 $1,344,928 $1,620,482
Interest income 12,297 12,280 24,043
Gain on sale of equipment 847,072 42,450 75,189
---------- ---------- ----------
Total income 1,611,568 1,399,658 1,719,714
---------- ---------- ----------
EXPENSES:
Depreciation 637,373 1,004,179 1,004,180
Interest expense 731 13,598 54,762
Equipment management fees--affiliate 37,610 67,246 81,024
Operating expenses--affiliate 139,790 78,339 61,526
---------- ---------- ----------
Total expenses 815,504 1,163,362 1,201,492
---------- ---------- ----------
NET INCOME $ 796,064 $ 236,296 $ 518,222
========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 11.05 $ 3.28 $ 7.20
========== ========== ==========
CASH DISTRIBUTIONS DECLARED PER
LIMITED PARTNERSHIP UNIT $ 43.08 $ 12.50 $ 20.62
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
9
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
PARTNER LIMITED PARTNERS
AMOUNT UNITS AMOUNT TOTAL
BALANCE, DECEMBER 31, 1993 $ (113,540) 71,295 $ 4,401,641 $ 4,288,101
Net income--1994 5,182 -- 513,040 518,222
Cash distributions declared (14,853) -- (1,470,458) (1,485,311)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 (123,211) 71,295 3,444,223 3,321,012
Net income--1995 2,363 -- 233,933 236,296
Cash distributions declared (9,002) -- (891,187) (900,189)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 (129,850) 71,295 2,786,969 2,657,119
Net income for the period
January 1, 1996 to
September 30, 1996 7,961 -- 788,103 796,064
Cash distributions declared (31,021) -- (3,071,031) (3,102,052)
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 $ (152,910) 71,295 $ 504,041 $ 351,131
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
10
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO SEPTEMBER 30, 1996
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
FOR THE
PERIOD
JANUARY 1,
1996 TO FOR THE YEARS
SEPTEMBER 30, ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 796,064 $ 236,296 $ 518,222
Adjustments to reconcile net income to cash
from operating activities-
Depreciation 637,373 1,004,179 1,004,180
Gain on sale of equipment (847,072) (42,450) (75,189)
Decrease in allowance for doubtful accounts (20,000) _ (20,000)
Changes in assets and liabilities-
Decrease (increase) in-
Rents receivable 39,700 (19,700) 57,151
Accounts receivable--affiliate 152,724 (106,457) 57,453
Increase (decrease) in-
Accrued interest (953) (310) (36,506)
Accrued liabilities 52,115 4,500 (347)
Accrued liabilities--affiliate 5,615 1,626 (2,201)
Deferred rental income (247,980) 79,542 83,298
----------- ----------- -----------
Net cash from operating activities 567,586 1,157,226 1,586,061
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from equipment sales 7,500 42,450 75,189
----------- ----------- -----------
Net cash from investing activities 7,500 42,450 75,189
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments--notes payable (82,037) (274,137) (757,773)
Distributions paid (270,056) (990,209) (1,620,338)
----------- ----------- -----------
Net cash used in financing activities (352,093) (1,264,346) (2,378,111)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 222,993 (64,670) (716,861)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 244,878 309,548 1,026,409
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 467,871 $ 244,878 $ 309,548
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,684 $ 13,908 $ 91,268
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
As discussed in Notes 1 and 4, the Partnership
entered into a sale transaction to dispose of
its equipment portfolio. This transaction was
closed on September 30, 1996. The Partnership
received net sales proceeds of $2,931,004 that
were deposited into an escrow account and
transferred to the Partnership on October 3,
1996.
The accompanying notes are an integral part of these financial statements.
11
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND PARTNERSHIP MATTERS
Organization
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the Uniform Act) on April
15, 1986, for the purpose of acquiring and leasing to third parties a
diversified portfolio of capital equipment. On June 27, 1986, the
Partnership issued 71,295 limited partnership units (the Units) to 1,491
Limited Partners, including four Units purchased by its Initial Limited
Partner, Daniel J. Roggemann. In accordance with the Amended and Restated
Agreement and Certificate of Limited Partnership (the Restated Agreement,
as amended), American Finance Group (AFG), a Massachusetts general
partnership, which subsequently became Equis Financial Group Limited
Partnership (collectively referred to herein as AFG), purchased 1,783
Units, representing 2.5% ($445,750) of total capital contributions
received by the Partnership at its inception. In 1995, AFG tendered all
of its Units to Atlantic Acquisition Limited Partnership (see Note 4
herein). On December 31, 1996, the General Partner of the Partnership
caused the Restated Agreement, as amended to be canceled by filing a
Certificate of Cancellation with the Massachusetts Secretary under the
Uniform Act. Accordingly, the Partnership was dissolved on December 31,
1996.
Partners' capital initially consisted of contributions of $1,000 from the
General Partner (AFG Leasing Associates II, a Massachusetts general
partnership) and $1,000 from the Initial Limited Partner. The General
Partner originally had the following five general partners: AFG Leasing
Incorporated, a Massachusetts corporation and wholly-owned subsidiary of
AFG, Kestutis J. Makaitis, Daniel J. Roggemann, Martin F. Laughlin, and
Geoffrey A. MacDonald. Messrs. Makaitis, Roggemann, and Laughlin each
subsequently elected to withdraw as Individual General Partners. In
connection with the Partnership's wind-up and dissolution, the General
Partner interests of AFG Leasing Associates II, including the Individual
General Partner interest owned by Geoffrey A. MacDonald, were transferred
to AFG Leasing IV Incorporated, resulting in AFG Leasing IV Incorporated
and AFG Leasing Incorporated becoming the two general partners of AFG
Leasing Associates II. AFG Leasing Incorporated thereupon was merged with
and into AFG Leasing IV Incorporated. Accordingly, effective October 17,
1996, AFG Leasing IV Incorporated became the sole General Partner of the
Partnership. AFG Leasing IV Incorporated is a Massachusetts corporation
established in 1987 and a wholly owned subsidiary of AFG and is also the
general partner or the managing general partner of certain affiliated
partnerships sponsored by AFG.
Significant operations commenced June 30, 1986 when the Partnership made
its initial equipment purchase. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings were allocated 99% to the Limited Partners and 1%
to the General Partner.
12
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) ORGANIZATION AND PARTNERSHIP MATTERS (Continued)
Organization (Continued)
Under the terms of a Management Agreement between the Partnership and
AFG, management services were provided by AFG to the Partnership at fees
which the General Partner believed to be competitive for similar
services. (Also see Note 4.)
Equis Financial Group Limited Partnership (Equis) is a Massachusetts
partnership formerly known as American Finance Group (AFG). AFG was
established in 1988 as a Massachusetts general partnership and succeeded
American Finance Group, Inc., a Massachusetts corporation organized in
1980. Equis and its subsidiaries (collectively, the Company) are engaged
in various aspects of the equipment leasing business, including Equis'
role as Equipment Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored
by AFG (the Other Investment Programs). The Company arranges to broker or
originate equipment leases, acts as remarketing agent and asset manager,
and provides leasing support services, such as billing, collecting and
asset tracking.
The general partner of Equis, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by
Gary D. Engle, its President and Chief Executive Officer. Equis
Corporation also owns a controlling 1% general partner interest in Equis'
99% limited partner, GDE Acquisition Limited Partnership (GDE LP). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for
the sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating
primarily to the business of originating new leases, and the name
"American Finance Group," and its acronym to a third party (the Buyer).
AFG changed its name to Equis Financial Group Limited Partnership after
the sale was concluded. Pursuant to terms of the sale agreements, Equis
agreed not to compete with the Buyer's lease origination business for a
period of five years; however, Equis is permitted to originate certain
equipment leases, principally those involving noninvestment grade lessees
and ocean-going vessels, which are not in competition with the Buyer. In
addition, the sale agreements specifically reserved to Equis the rights
to continue using the name American Finance Group and its acronym in
connection with the Partnership and the Other Investment Programs and to
continue managing all assets owned by the Partnership and the Other
Investment Programs, including the right to satisfy all required
equipment acquisitions utilizing either brokers or the Buyer. Geoffrey A.
MacDonald, Chairman of Equis Corporation and Gary D. Engle agreed not to
compete with the sold business on terms and conditions similar to those
for the Company.
13
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) ORGANIZATION AND PARTNERSHIP MATTERS (Continued)
Basis of Presentation
On September 30, 1996, the Partnership sold all of its equipment assets
for $2,931,004. The entire remarketing effort was undertaken jointly by
15 individual equipment leasing programs, consisting of the Partnership
and 14 affiliated partnerships, each of which individually executed
separate purchase and sale agreements with RSL Finance Limited
Partnership II (the Buyer) for all or a portion of their equipment
assets. (See Note 4.)
On October 15, 1996, the Partnership paid a cash distribution of
$3,012,034 of which $2,981,914 was paid to the Limited Partners and
$30,120 was paid to the General Partner. As discussed in Note 4, the
Partnership had a contingency reserve of $307,119 at December 31, 1996.
The General Partner approved a plan of liquidation on September 30, 1996
and commenced liquidation on October 1, 1996. On December 31, 1996, the
General Partner dissolved the Partnership in accordance with the Restated
Agreement, as amended.
The financial statements presented have been prepared on a going-concern
basis through September 30, 1996. Due to the dissolution of the
Partnership requiring liquidation and distribution of its net assets, the
Partnership changed its basis of accounting from going-concern to
liquidation basis effective October 1, 1996. Liquidation basis requires
that statements be prepared based on anticipated liquidating values of
assets and liabilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considered liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. The Partnership
invested excess cash with large institutional banks in reverse repurchase
agreements with overnight maturities. Under the terms of the agreements,
title to the underlying securities passed to the Partnership. The
securities underlying the agreements were book entry securities.
Revenue Recognition
Rents were payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts were calculated on factors other than the
passage of time. The leases were accounted for as operating leases and
were noncancellable. Rents received prior to their due dates were
deferred. The Partnership's entire equipment portfolio was sold on
September 30, 1996. No future rents are due.
14
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during each of the past three years is as follows:
1996 1995 1994
Northwest Airlines, Inc. $412,920 $799,020 $928,800
United Technologies Corporation $215,906 $342,995 $422,374
Comair, Inc. $ 96,459 $143,325 -
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Equipment on Lease
All equipment was acquired from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, and from third-party
sellers. Equipment cost represented asset base price plus acquisition
fees and was determined in accordance with the Restated Agreement, as
amended, and certain regulatory guidelines. Asset base price was affected
by the relationship of the seller to the Partnership as summarized
herein. Where the seller of the equipment was AFG or an affiliate, asset
base price was the lower of (i) the actual price paid for the equipment
by AFG or the affiliate plus all actual costs accrued by AFG or the
affiliate while carrying the equipment less the amount of all rents
earned by AFG or the affiliate prior to selling the equipment or (ii)
fair market value as determined by the General Partner in its best
judgment, including all liens and encumbrances on the equipment and other
actual expenses. Where the seller of the equipment was a third party who
did not manufacture the equipment, asset base price was the lower of (i)
the price invoiced by the third party or (ii) fair market value as
determined by the General Partner. Where the seller of the equipment was
a third party who also manufactured the equipment, asset base price was
the manufacturer's invoice price, which price was considered to be
representative of fair market value.
15
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation
The Partnership's depreciation policy was intended to allocate the cost
of equipment over the period during which it produced economic benefit.
The principal period of economic benefit was considered to correspond to
each asset's primary lease term, which term generally represented the
period of greatest revenue potential for each asset. Accordingly, to the
extent that an asset was held on primary lease term, the Partnership
depreciated the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such
term. For purposes of this policy, estimated residual values represented
estimates of equipment values at the date of primary lease expiration. To
the extent that an asset was held beyond its primary lease term, the
Partnership continued to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
Accrued Liabilities--Affiliate
Unpaid operating expenses paid by AFG on behalf of the Partnership were
reported as Accrued Liabilities--Affiliate. (see Note 4.)
Allocation of Profits and Losses
For financial statement purposes, net income or loss was allocated to
each Partner according to their respective ownership percentages (99% to
the Limited Partners and 1% to the General Partner). See Note 5
concerning allocation of income or loss for income tax purposes.
Net Income and Cash Distributions Per Unit
Net income and cash distributions per Unit were based on 71,295 Units
outstanding during each of the three years in the period ended December
31, 1996 and computed after allocation of the General Partner's 1% share
of net income and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and
other tax attributes on their tax returns.
16
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) EQUIPMENT
At September 30, 1996, the Partnership disposed of its entire equipment
portfolio.
As equipment was sold to third parties, or otherwise disposed of, the
Partnership recognized a gain or loss equal to the difference between the
net book value of the equipment at the time of sale or disposition and
the proceeds realized upon sale or disposition.
(4) RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership were paid by AFG on
behalf of the Partnership, and AFG was reimbursed at its actual cost for
such expenditures. Fees and other costs incurred during each of the three
years in the period ended December 31, 1996, which were paid or accrued
by the Partnership to AFG or its Affiliates, are as follows:
1996 1995 1994
Equipment management fees $ 37,610 $ 67,246 $ 81,024
Administrative charges 28,972 16,128 12,000
Reimbursable operating expenses
due to third parties 161,729 62,211 49,526
-------- -------- --------
Total $228,311 $145,585 $142,550
======== ======== ========
As provided under the terms of the Management Agreement, AFG was
compensated for its services to the Partnership. Such services included
all aspects of acquisition, management and sale of equipment. For
acquisition services, AFG was compensated by an amount equal to 4.75% of
Equipment Base Price paid by the Partnership. For management services,
AFG was compensated by an amount equal to the lesser of (i) 5% of gross
lease rental revenues earned by the Partnership or (ii) fees which the
General Partner reasonably believed to be competitive for similar
services for similar equipment. Both of these fees were subject to
certain limitations defined in the Management Agreement. As Payout was
not achieved, AFG received no compensation for services connected to the
sale of equipment under its subordinated remarketing agreement.
Administrative charges represent amounts owed to AFG, pursuant to Section
9.4 of the Restated Agreement, as amended, for persons employed by AFG
who were engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid
by AFG on behalf of the Partnership which were reimbursed to AFG.
All equipment was purchased from AFG, one of its affiliates, including
other equipment leasing programs sponsored by AFG, or from third-party
sellers. The Partnership's Purchase Price was determined by the method
described in Note 2.
17
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
All rents and proceeds from the sale of equipment were paid directly to
either AFG or to a lender. AFG temporarily deposited collected funds in a
separate interest-bearing escrow account prior to remittance to the
Partnership.
On August 18, 1995, Atlantic Acquisition Limited Partnership (AALP), a
newly formed Massachusetts limited partnership owned and controlled by
certain principals of AFG, commenced a voluntary cash Tender Offer (the
Offer) for up to approximately 45% of the outstanding units of limited
partner interest in this Partnership and 20 affiliated partnerships
sponsored and managed by AFG. The Offer was subsequently amended and
supplemented in order to provide additional disclosure to unitholders;
increase the offer price; reduce the number of units sought to
approximately 35% of the outstanding units; and extend the expiration
date of the Offer to October 20, 1995. Following commencement of the
Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected
programs, and various other affiliates and related parties. One action, a
class action brought in the United States District Court for the District
of Massachusetts (the Court) on behalf of the unitholders (limited
partners), sought to enjoin the Offer and obtain unspecified monetary
damages. A settlement of this litigation was approved by the Court on
November 15, 1995. The Plaintiffs filed an appeal in this matter. On
November 26, 1996, the United States Court of Appeals for the First
Circuit handed down a decision affirming the Court's approval of the
settlement. A second class action, brought in the Superior Court of the
Commonwealth of Massachusetts (the Superior Court) seeking to enjoin the
Offer, obtain unspecified monetary damages, and intervene in the first
class action, was dismissed by the Superior Court. The limited partners
of the Partnership tendered 10,407 units or 14.6% of the total
outstanding units of the Partnership to AALP. In September 1996, AALP
sold these units to Equis for $496,170.
The remarketing effort described in Note 1 was undertaken jointly by 15
individual equipment leasing programs, consisting of the Partnership and
14 affiliated partnerships (Other Affected Partnerships). Thirteen of the
programs, including the Partnership, sold all of their equipment assets
(the Liquidated Programs); and two programs sold only their proportionate
ownership interests in certain assets owned jointly with one or more of
the Liquidated programs. Substantially all of the Partnership's equipment
assets of material value represented partial ownership interests whereby
the Partnership owned less than a 100% interest in the equipment it sold.
The remaining interests in such assets were owned by one or more of the
Other Affected Partnerships. Ultimately, the Sale Assets were sold for an
aggregate adjusted sale price of approximately $32,997,000, of which the
Partnership's proportionate share, net of associated costs, was
determined to be $2,931,004. The Partnership's proportionate share in
this transaction was net of certain third-party advisory fees incurred in
connection with the equipment sale.
18
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) RELATED PARTY TRANSACTIONS (Continued)
The Buyer is a limited partnership established to acquire the Sale Assets
and has no direct affiliation with the Partnership, the Other Affected
Partnerships, the General Partner or AFG. The sole general partner of the
Buyer of the Partnership's equipment is RSL Holdings, Inc. (RSL). An
affiliate of RSL purchased a significant limited partnership interest in
a direct-participation equipment leasing program co-sponsored by AFG in
1992. AFG acquired this interest in 1993 for cash and assumption of
indebtedness. There have been no other business dealings between the
Buyer and AFG and their affiliates.
On October 10, 1996, the General Partner entered into a Cross Partnership
Agreement (the Agreement) with the general partners of certain of the
Other Affected Partnerships participating in the sale transaction
described above. Pursuant to the Agreement, the Partnership and each of
the other partnerships agreed to set aside a contingency reserve for
future liabilities. The Agreement provides that obligations of any
individual partnership which are not associated with the sale transaction
will directly reduce that partnership's reserve balance, whereas costs
pertaining to the sale transaction will be allocated against the reserve
balances of the Partnership and each of the other partnerships on a
proportionate basis. If the reserve balance of the Partnership is
depleted to zero, the reserve balances contributed by the other
partnerships will be debited on a proportionate basis to cover the
deficit. If the reserve balances of any one of the other partnerships is
depleted to zero, the reserve balance of the Partnership and any
remaining partnerships having a positive reserve balance shall be debited
on a proportionate basis to cover the deficit. Upon termination of the
Agreement, any remaining monies will be distributed to the partners of
those partnerships with positive reserve balances. At December 31, 1996,
the Partnership had a contingency reserve balance of $307,119. To the
extent that this contingency reserve is not necessary to satisfy any
unforeseen liabilities of the Partnership, it will be remitted to the
Partners.
In connection with the wind-up effort, certain general partner interests
in AFG Leasing Associates II, a Massachusetts general partnership, and
the original General Partner of the Partnership, including the individual
general partner interest owned by Geoffrey A. MacDonald, were transferred
to AFG Leasing IV Incorporated, resulting in AFG Leasing IV Incorporated
and AFG Leasing Incorporated becoming the two general partners of AFG
Leasing Associates II. AFG Leasing Incorporated thereupon was merged with
and into AFG Leasing IV Incorporated. Accordingly, effective October 17,
1996, AFG Leasing IV Incorporated became the sole General Partner of the
Partnership. AFG Leasing IV Incorporated was established in 1987 and is
also the general partner or the managing general partner of certain
affiliated partnerships sponsored by AFG.
19
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) INCOME TAXES
The Partnership was not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes was recorded in the accounts
of the Partnership.
For financial statement purposes, the Partnership allocated net income or
loss to each class of partner according to their respective ownership
percentages (99% to the Limited Partners and 1% to the General Partner).
This convention differed from the income or loss allocation requirements
for income tax and Dissolution Event purposes as delineated in the
Restated Agreement, as amended. For income tax reporting purposes, the
Partnership allocated net income or net loss in accordance with such
agreement.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the
years ended December 31, 1996, 1995 and 1994.
1996 1995 1994
Net income $ 752,052 $ 236,296 $ 518,222
Financial statement depreciation
in excess of tax depreciation 637,373 1,004,178 1,004,180
Prepaid rental income (247,980) 80,476 83,298
Other 1,786,573 -- (21,281)
----------- ----------- -----------
Net income for federal income
tax reporting purposes $ 2,928,018 $ 1,320,950 $ 1,584,419
=========== =========== ===========
The principal component of Other consists of the difference between tax
gain on equipment disposals and the financial statement gain on equipment
disposals.
20
AMERICAN INCOME 5 LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) INCOME TAXES (Continued)
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the
year ended December 31, 1995. A reconciliation for the year ended
December 31, 1996 has not been presented, as partners' capital for
financial statement and federal income tax reporting purposes is zero.
Partners' capital $ 2,657,119
Add back selling commissions and organization
and offering costs 2,082,616
Financial statement distributions in excess
of tax distributions 1,800
Cumulative difference between federal income
tax and financial statement income (loss)
(2,610,158)
-----------
Partners' capital for federal income tax
reporting purposes $ 2,131,377
===========
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement
income (loss) represent timing differences.
21
ADDITIONAL FINANCIAL INFORMATION
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH
GENERATED TO COST OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Partnership classified all rents from leasing equipment as lease revenue.
Upon expiration of the primary lease terms, equipment was sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenues, represented the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment dispositions
occurring during the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994
Rents earned prior to disposal of
equipment, net of interest charges $14,947,314 $ 954,082 $ 319,445
Sale proceeds realized upon disposition 2,938,504 42,450 75,189
of equipment ----------- ----------- -----------
Total cash generated from rents and 17,885,818 996,532 394,634
equipment saleproceeds
Original acquisition cost of equipment
disposed 12,827,125 655,695 314,837
----------- ----------- -----------
Excess of total cash generated to cost
of equipment disposed $ 5,058,693 $ 340,837 $ 79,797
=========== =========== ===========
23
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH
FROM OPERATIONS, SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
SALES AND
OPERATIONS REFINANCINGS TOTAL
NET INCOME (LOSS) $ (95,020) $ 847,072 $ 752,052
ADD BACK:
Depreciation 637,373 -- 637,373
Decrease in allowance for doubtful accounts (20,000) -- (20,000)
Management fees 37,610 -- 37,610
Book value of disposed equipment -- 2,091,432 2,091,432
LESS:
Principal reduction of notes payable (82,037) -- (82,037)
----------- ----------- -----------
Cash from operations, sales and refinancings 477,926 2,938,504 3,416,430
LESS:
Management fees (37,610) -- (37,610)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings 440,316 2,938,504 3,378,820
OTHER SOURCES AND USES OF CASH:
Cash, beginning of year 244,878 -- 244,878
Net change in receivables and accruals (34,489) -- (34,489)
LESS:
Cash distributions paid (343,586) (2,938,504) (3,282,090)
Liquidating distribution (307,119) -- (307,119)
----------- ----------- -----------
CASH, END OF YEAR $ -- $ -- $ --
=========== =========== ===========
24
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER
AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED
AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
DECEMBER 31, 1996
For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
Operating expenses $ 177,578
25