UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
For Quarter Ended September 30, 1999 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______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes_____ No______
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1999 and December 31, 1998 3
Statement of Operations
for the three and nine months ended September 30, 1999 and 1998 4
Statement of Changes in Partners' Capital
for the nine months ended September 30, 1999 5
Statement of Cash Flows
for the nine months ended September 30, 1999 and 1998 6
Notes to the Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-19
PART II. OTHER INFORMATION:
Items 1 - 6 20
2
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 3,577,481 $ 2,448,960
Rents receivable 1,256 6,643
Accounts receivable - affiliate 9,017 787,967
Note receivable - affiliate 771,450 771,450
Investment securities - affiliate 185,658 140,844
Equipment at cost, net of accumulated depreciation
of $681,290 and $5,498,839 at September 30, 1999
and December 31, 1998, respectively -- --
----------- -----------
Total assets $ 4,544,862 $ 4,155,864
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 262,801 $ 350,276
Accrued liabilities - affiliate 10,725 6,864
Deferred rental income -- 9,219
Other liabilities -- 750,400
Cash distributions payable to partners 136,250 136,250
----------- -----------
Total liabilities 409,776 1,253,009
----------- -----------
Partners' capital (deficit):
General Partner (1,324,218) (1,385,829)
Limited Partnership Interests
(1,380,661 Units; initial purchase price of $25 each) 5,459,304 4,288,684
----------- -----------
Total partners' capital 4,135,086 2,902,855
----------- -----------
Total liabilities and partners' capital $ 4,544,862 $ 4,155,864
=========== ===========
The accompanying notes are an integral
part of these financial statements.
3
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1999 and 1998
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
------- -------- ---------- ---------
Income:
Lease revenue $18,818 $112,443 $ 73,354 $ 355,760
Interest income 46,606 32,366 141,829 97,965
Interest income - affiliate 19,445 18,913 57,700 57,700
Gain on sale of equipment 2,000 3,425 1,568,063 5,725
------- -------- ---------- ---------
Total income 86,869 167,147 1,840,946 517,150
------- -------- ---------- ---------
Expenses:
Depreciation -- -- -- 80,952
Equipment management fees - affiliate 941 5,623 3,668 17,697
Operating expenses - affiliate 55,752 48,198 241,110 504,348
------- -------- ---------- ---------
Total expenses 56,693 53,821 244,778 602,997
------- -------- ---------- ---------
Net income (loss) $30,176 $113,326 $1,596,168 $ (85,847)
======= ======== ========== =========
Net income (loss)
per limited partnership unit $ 0.02 $ 0.08 $ 1.10 $ (0.06)
======= ======== ========== =========
Cash distributions declared
per limited partnership unit $ 0.09 $ 0.09 $ 0.28 $ 0.28
======= ======== ========== =========
The accompanying notes are an integral
part of these financial statements.
4
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the nine months ended September 30, 1999
(Unaudited)
General Recognized Owners
Partner --------------------------
Amount Units Amount Total
----------- --------- ----------- -----------
Balance at December 31, 1998 $(1,385,829) 1,380,661 $ 4,288,684 $ 2,902,855
Net income 79,808 -- 1,516,360 1,596,168
Unrealized gain on investment
securities - affiliate 2,241 -- 42,573 44,814
----------- --------- ----------- -----------
Comprehensive income 82,049 -- 1,558,933 1,640,982
----------- --------- ----------- -----------
Cash distributions declared (20,438) -- (388,313) (408,751)
----------- --------- ----------- -----------
Balance at September 30, 1999 $(1,324,218) 1,380,661 $ 5,459,304 $ 4,135,086
=========== ========= =========== ===========
The accompanying notes are an integral
part of these financial statements.
5
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998
(Unaudited)
1999 1998
----------- -----------
Cash flows from (used in) operating activities:
Net income (loss) $ 1,596,168 $ (85,847)
Adjustments to reconcile net income (loss) to net
cash from (used in) operating activities:
Depreciation -- 80,952
Gain on sale of equipment (1,568,063) (5,725)
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable 5,387 (3,013)
Accounts receivable - affiliate 778,950 11,035
Increase (decrease) in:
Accrued liabilities (87,475) 283,300
Accrued liabilities - affiliate 3,861 (7,581)
Deferred rental income (9,219) (353)
Other liabilities (750,400) --
----------- -----------
Net cash from (used in) operating activities (30,791) 272,768
----------- -----------
Cash flows from investing activities:
Proceeds from equipment sales 1,568,063 5,725
----------- -----------
Net cash from investing activities 1,568,063 5,725
----------- -----------
Cash flows used in financing activities:
Distributions paid (408,751) (408,751)
----------- -----------
Net cash used in financing activities (408,751) (408,751)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,128,521 (130,258)
Cash and cash equivalents at beginning of period 2,448,960 2,614,272
----------- -----------
Cash and cash equivalents at end of period $ 3,577,481 $ 2,484,014
=========== ===========
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 nine months ended September 30, 1999.
The accompanying notes are an integral
part of these financial statements.
6
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not include
all information and footnote disclosures required under generally accepted
accounting principles for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 1998 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1998 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 1999 and December 31, 1998 and results of operations
for the three and nine month periods ended September 30, 1999 and 1998 have been
made and are reflected.
NOTE 2 - CASH
At September 30, 1999, American Income Partners V-A Limited Partnership
(the "Partnership") had $3,462,881 invested in federal agency discount notes,
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities, or other highly liquid overnight investments.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and Equis Financial Group Limited Partnership ("EFG") would seek
to sell the then-remaining equipment assets either to the lessee or to a third
party, taking into consideration the amount of future noncancellable rental
payments associated with the attendant lease agreements. See also Note 7
regarding the Class Action Lawsuit. Future minimum rents of $16,146 are due as
follows:
For the year ending September 30, 2000 $10,866
2001 5,280
-------
Total $16,146
=======
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1999. Remaining Lease Term (Months), as used below, represents the
number of months remaining from September 30, 1999 under contracted lease terms
and is presented as a range when more than one lease agreement is contained in
the stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-
7
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
lease or being leased on a month-to-month basis. In the opinion of EFG, the
acquisition cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) At Cost
-------------- -------- -------
Materials handling 0-8 $ 640,298
Communications 0 40,992
-----------
Total equipment cost 681,290
Accumulated depreciation (681,290)
-----------
Equipment, net of accumulated depreciation $ --
===========
At September 30, 1999, the Partnership was not holding any equipment not
subject to a lease and no equipment was held for sale or re-lease. The summary
above also includes equipment being leased on a month to month basis.
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
As a result of an exchange transaction in 1997, the Partnership owns 34,144
shares of Semele Group, Inc. ("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 2000 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 ("Rancho Malibu"). The Partnership recognized interest income of
$57,700 related to the Semele Note during each of the nine months ended
September 30, 1999 and 1998.
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 nine months ended September 30, 1999, the Partnership increased the
carrying value of its investment in Semele common stock to $5.4375 per share
(the quoted price on the NASDAQ SmallCap market at September 30, 1999),
resulting in an unrealized gain of $44,814. This gain was reported as a
component of comprehensive income included in partners' capital.
NOTE 6 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the nine month
periods ended September 30, 1999 and 1998, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
8
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
1999 1998
--------- ---------
Equipment management fees $ 3,668 $ 17,697
Administrative charges 74,903 44,127
Reimbursable operating expenses
due to third parties 166,207 460,221
--------- ---------
Total $ 244,778 $ 522,045
========= =========
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At September 30, 1999, the Partnership was owed $9,017 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in October
1999.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended"), for persons employed by EFG
who are engaged in providing administrative services to the Partnership.
Administrative charges and reimbursable operating expenses for the nine months
ended September 30, 1999 include adjustments for 1998 actual costs of
approximately $19,000 and $13,000, respectively.
NOTE 7 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 12, 1999. The Amended
9
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Stipulation was preliminarily approved by the Court by its "Modified Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing For Notice of, and Hearing On, the Proposed Settlement" dated
March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other
things, divided the Class Action Lawsuit into two separate sub-classes that
could be settled individually. On May 26, 1999, the Court issued an Order and
Final Judgment approving settlement of one of the sub-classes. Settlement of the
second sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
Prior to issuing a final order approving the settlement of the second sub-class
involving the Partnership, the Court will hold a fairness hearing that will be
open to all interested parties and permit any party to object to the settlement.
The investors of the Partnership and all other plaintiff sub-class members will
receive a Notice of Settlement and other information pertinent to the settlement
of their claims that will be mailed to them in advance of the fairness hearing.
The settlement of the second sub-class is premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate as a finance company specializing in the
acquisition, financing and servicing of equipment leases for its own account and
for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the NASDAQ National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provides, among other things, that commencing March 22,
1999, the Exchange Partnerships may collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believe to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations, including that the Exchange Partnerships retain
sufficient cash balances to pay their respective shares of the cash distribution
that is part of the proposed settlement and Consolidation.
In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity
10
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
investment plus an annualized return thereon of 7.5%. Finally, in the event that
the Partnership has acquired new investments and the Consolidation is not
effected, the General Partner will use its best efforts to divest all such new
investments in an orderly and timely fashion and the Manager will cancel or
return to the Partnership any acquisition or management fees resulting from such
new investments. To date, the General Partner has not authorized new investment
activities involving the Partnership.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting a final settlement, including
providing the partners of the Exchange Partnerships with the opportunity to
object to the participation of their partnership in the Consolidation. Assuming
the proposed settlement is effected according to present terms, the
Partnership's share of legal fees and expenses related to the Class Action
Lawsuit is estimated to be approximately $78,000 all of which was accrued and
expensed by the Partnership in 1998. In addition, the Partnership's share of
fees and expenses related to the proposed Consolidation is estimated to be
approximately $227,000, all of which also was accrued and expensed by the
Partnership in 1998.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the Consolidation,
then that partnership will be excluded from the Consolidation. The General
Partner and its affiliates, in consultation with counsel, concur that there is a
reasonable basis to believe that a final settlement of the sub-class involving
the Exchange Partnerships will be achieved. However, 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. Neither the General
Partner nor its affiliates can predict with any degree of certainty the cost of
continuing litigation to the Partnership or the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions. Refer to
the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998 for a description of these matters. The following are updates to the
Partnership's prior disclosures on Form 10-K for 1998:
ACTION INVOLVING TRANSMERIDIAN AIRLINES
On November 9, 1998, First Security Bank, N.A., as trustee of the
Partnership and certain affiliated investment programs (collectively, the
"Plaintiffs), filed an action in Superior Court of the Commonwealth of
Massachusetts in Suffolk County 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, asserting various causes of action for
declaratory judgment and breach of contract. The action subsequently was removed
to United States District Court for the District of Massachusetts. Transmeridian
filed counterclaims for breach of contract, quantum meruit, conversion, breach
of the implied covenant of good faith and fair dealing, and violation of M.G.L.
c. 93A. The Plaintiffs subsequently filed an Amended Complaint asserting claims
for breaches of contract and covenant of good faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
11
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
The Plaintiffs are seeking damages for, among other things, breach of
contract arising out of Transmeridian's refusal to repair or replace burned
engine blades found in one engine during a pre-return inspection of an aircraft
leased by Transmeridian from the Plaintiffs, a Boeing 727-251 ADV aircraft (the
"Aircraft"). The estimated cost to repair the engine and lease a substitute
engine during the repair period was approximately $488,000. Repairs were
completed in June 1999. The Plaintiffs intend to enforce written guarantees
issued by Apple Vacations that absolutely and unconditionally guarantee
Transmeridian's performance under the lease agreement and are seeking recovery
of all costs, lost revenue and monetary damages in connection with this matter.
Notwithstanding the foregoing, the Plaintiffs were required to advance the cost
of repairing the engine and leasing a substitute engine and cannot be certain
whether the guarantees will be enforced. Therefore, the Partnership accrued and
expensed its share of these costs, or approximately $84,000 in 1998 and $26,000
in 1999. Discovery is ongoing and a trial date has been tentatively scheduled
for April 17, 2000. The General Partner plans to vigorously pursue this action;
however, it is too early to predict the Plaintiffs' likelihood of success. This
aircraft was sold in June 1999.
ACTION INVOLVING NATIONAL STEEL CORPORATION
EFG, on behalf of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth
of Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Partnership, National Steel Corporation ("National Steel"). The
Complaint sought reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. On May 11, 1999, the
parties executed a comprehensive settlement agreement to resolve all outstanding
issues, including reimbursement to the Partnership for the disputed sales tax
items referenced above. This matter did not have a material effect on the
Partnership's financial position or results of operations.
ACTION INVOLVING NORTHWEST AIRLINES, INC.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in favor of the
Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United
States District Court Judge adopted the Magistrate Judge's recommendation and
entered partial summary judgment in favor of the Plaintiffs on their claims for
declaratory judgment. The Plaintiffs intend to make a demand upon Northwest for
settlement. If no settlement is reached, the Plaintiffs will proceed to trial
for an assessment of damages. No date has been set by the Court. The General
12
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Partner believes that the Plaintiff's claims ultimately will prevail and that
the Partnership's financial position will not be adversely affected by the
outcome of this action.
13
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 described in Note 7 to the accompanying financial statements, and
the remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Partnership uses information systems provided by Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") and has no information
systems of its own. EFG has adopted a plan to address the Year 2000 Issue that
consists of four phases: assessment, remediation, testing, and implementation
and has elected to utilize principally internal resources to perform all phases.
EFG has completed its Year 2000 project at an aggregate cost of less than
$50,000 and at a di minimus cost to the Partnership. All costs incurred in
connection with EFG's Year 2000 project have been expensed as incurred.
EFG's primary information software was coded by a third party at the point
of original design to use a four-digit field to identify calendar year. All of
the Partnership's lease billings, cash receipts and equipment remarketing
processes are performed using this proprietary software. In addition, EFG has
gathered information about the Year 2000 readiness of significant vendors and
third party servicers and continues to monitor developments in this area. All of
EFG's peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried indicated that their systems would be Year
2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues, could
result in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Partnership is not determinable.
14
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Form 10-Q
PART I. FINANCIAL INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998:
The Partnership was organized in 1989 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 7 to the accompanying financial statements. Pursuant to the
Restated Agreement, as amended, the Partnership is scheduled to be dissolved by
December 31, 2000.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1999, the Partnership
recognized lease revenue of $18,818 and $73,354, respectively, compared to
$112,443 and $355,760 for the same periods in 1998. The decrease in lease
revenue between 1998 and 1999 resulted principally from 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.
For the three and nine months ended September 30, 1999, the Partnership
earned interest income of $66,051 and $199,529, respectively, compared to
$51,279 and $155,665 for the same periods in 1998. Interest income is generated
principally from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income during the three and nine
months ended September 30, 1999 included $19,445 and $57,700, respectively,
earned on a note receivable from Semele Group, Inc. ("Semele") (see Note 5 to
the financial statements herein). The amount of future interest income is
expected to fluctuate as a result of changing interest rates and the level of
cash available for investment, among other factors. In addition, the note
receivable from Semele is scheduled to mature in April 2000.
The Partnership's equipment portfolio (until the second quarter of 1999)
included certain assets in which the Partnership held a proportionate ownership
interest. In such cases, the remaining interests were owned by an affiliated
equipment leasing program sponsored by EFG. Proportionate equipment ownership
enabled the Partnership to further diversify its equipment portfolio at
inception by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could have resulted from a concentration in any
single equipment type, industry or lessee. The Partnership and each affiliate
individually reported, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
During the three and nine months ended September 30, 1999, the Partnership
sold equipment which had been fully depreciated to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes,
of $2,000 and $1,568,063, respectively, compared to $3,425 and $5,725,
respectively, on fully depreciated equipment for the same periods in 1998. The
net gain in 1999 includes $1,523,200 related to the sale of the Partnership's
interests in two aircraft (see further discussion below). 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.
15
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Form 10-Q
PART I. FINANCIAL INFORMATION
The total economic value realized for each asset is comprised of all
primary lease term revenue generated from that asset, together with its residual
value. The latter consists of cash proceeds realized upon the asset's sale in
addition to all other cash receipts obtained from renting the asset on a
re-lease, renewal or month-to-month basis. The Partnership classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Partnership achieved from leasing the equipment.
Depreciation expense for the nine months ended September 30, 1998 was
$80,952. The Partnership's equipment was fully depreciated during 1998.
Management fees were 5% of lease revenue for each of the three and nine month
periods ended September 30, 1999 and 1998.
Operating expenses were $55,752 and $241,110 for the three and nine months
ended September 30, 1999, respectively, compared to $48,198 and $504,348 for the
same periods in 1998. Operating expenses in 1999 include approximately $26,000
related to the refurbishment of an aircraft engine (see discussion below) and an
adjustment for 1998 actual administrative charges and third party costs of
approximately $32,000. During the nine months ended September 30, 1998, the
Partnership incurred or accrued $290,000 for certain legal and Consolidation
expenses related to the Class Action Lawsuit described in Note 7 to the
financial statements. Other operating expenses consist principally of
professional service costs, such as audit and legal fees, as well as printing,
distribution and other remarketing expenses. In certain cases, equipment storage
or repairs and maintenance costs may be incurred in connection with equipment
being remarketed.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Historically, the Partnership's principal source of
cash from operations was provided by the collection of periodic rents, however,
in 1999 the principal source of such cash resulted from the receipt of interest
income. Cash inflows are used to pay management fees and operating costs.
Operating activities generated a net cash outflow of $30,791 and a net cash
inflow of $272,768 for the nine months ended September 30, 1999 and 1998,
respectively. Future renewal, re-lease and equipment sale activities will cause
a decline in the Partnership's lease revenues and corresponding sources of
operating cash. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will also decline
as the Partnership experiences a higher frequency of remarketing events.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the nine months
ended September 30, 1999, the Partnership realized $1,568,063 in equipment sale
proceeds, compared to $5,725 for the same period in 1998. Future inflows of cash
from asset disposals will vary in timing and amount and will be influenced by
many factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
In January 1999, upon expiration of the lease term, the Partnership and
certain affiliated investment programs (collectively, the "Programs") entered
into an agreement to sell a Boeing 727-251 ADV jet aircraft to the lessee for
$2,450,000. The sale agreement permitted the lessee to return the aircraft to
the Programs, subject to certain conditions, on or before April 10, 1999.
During the first quarter of 1999, the Partnership received $324,581,
representing a portion of the Partnership's total sale proceeds with the
remainder of the sale proceeds being received in the second quarter of 1999,
subsequent to the expiration of the lessee's option to return the aircraft. In
aggregate, the Partnership received $548,800 for its interest in this aircraft.
Due to the contingent nature of the sale, the Partnership deferred
16
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Form 10-Q
PART I. FINANCIAL INFORMATION
recognition of the sale until expiration of the return option on April 10, 1999.
The Partnership's interest in the aircraft had a cost of $2,175,454 and was
fully depreciated, resulting in a net gain, for financial statement purposes, of
$548,800.
In November 1998, the Programs entered into a separate agreement to sell
their ownership interests in a different Boeing 727-251 ADV jet aircraft and
three engines (collectively the "Aircraft") to a third party (the "Purchaser")
for $4,350,000. In December 1998, the Purchaser remitted $3,350,000 for the
Aircraft, excluding one of three engines which had been damaged while the
Aircraft was leased to Transmeridian Airlines ("Transmeridian"). (See Note 7 to
the accompanying financial statements regarding legal action undertaken by the
Programs related to Transmeridian and the damaged engine). The Purchaser also
deposited $1,000,000 into a third-party escrow account (the "Escrow") pending
repair of the damaged engine and re-installation of the refurbished engine on
the Aircraft. Upon installation, the escrow agent was obligated to transfer the
Escrow amount plus interest thereon to the Programs. The engine was refurbished
at the expense of the Programs. The associated cost was approximately $374,000,
of which the Partnership's share was approximately $84,000. The Partnership
accrued $58,000 of these costs in 1998 and the balance was accrued or incurred
in the nine months ended September 30, 1999.
The Programs also were required to reimburse the Purchaser for its cost to
lease a substitute engine during the period that the damaged engine was being
repaired. This cost was approximately $114,000, of which the Partnership's share
was approximately $26,000, all of which was accrued in 1998 in connection with
the litigation referenced above.
In addition, the purchase and sale agreement permitted the Purchaser to
return the Aircraft to the Programs, subject to a number of conditions, for
$4,350,000, reduced by an amount equivalent to $450 multiplied by the number of
flight hours since the Aircraft's most recent C Check. Among the conditions
precedent to the Purchaser's returning the Aircraft, the Purchaser must have
completed its intended installation of hush-kitting on the Aircraft to conform
to Stage 3 noise regulations. This work was completed in January 1999. The
Purchaser's return option was to expire on May 15, 1999.
Due to the contingent nature of the sale, the Partnership deferred
recognition of the sale and a resulting gain until expiration of the Purchaser's
return option on May 15, 1999. The Partnership's share of the December proceeds
was $750,400, which amount was deposited into EFG's customary escrow account and
transferred to the Partnership, together with the Partnership's other December
rental receipts, in January 1999. Upon the installation of the refurbished
engine on the Aircraft, the remainder of the sale consideration, or $1,000,000
and the interest thereon, was released from the escrow account to the Programs.
The Partnership's share of this payment was $227,548, including interest of
$3,548. In aggregate, the Partnership received sales proceeds of $974,400 for
its interest in the Aircraft. The Partnership's interest in the Aircraft had a
cost of $2,420,734 and was fully depreciated, resulting in a net gain, for
financial statement purposes, of $974,400.
At September 30, 1999, the Partnership was due aggregate future minimum
lease payments of $16,146 from contractual lease agreements (see Note 3 to the
financial statements). At the expiration of the individual renewal lease terms
underlying the Partnership's future minimum lease payments, the Partnership will
sell the equipment or enter re-lease or renewal agreements when considered
advantageous by the General Partner and EFG. Such future remarketing activities
will result in the realization of additional cash inflows in the form of
equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease contracts,
while others may elect to return the equipment. In the latter instances, the
equipment could be re-leased to another lessee or sold to a third-party.
17
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Form 10-Q
PART I. FINANCIAL INFORMATION
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 required to be carried at
fair value. During the nine months ended September 30, 1999, the Partnership
recorded an unrealized gain on available-for-sale securities of $44,814. This
gain was reported as a component of comprehensive income included in partners'
capital.
Cash distributions to the General Partner and Recognized Owners are
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is reported under financing
activities on the accompanying Statement of Cash Flows. For the nine months
ended September 30, 1999, the Partnership declared total cash distributions of
Distributable Cash From Operations and Distributable Cash From Sales and
Refinancing of $408,751. In accordance with the Restated Agreement, as amended,
the Recognized Owners were allocated 95% of these distributions, or $388,313,
and the General Partner was allocated 5%, or $ 20,438. The third quarter 1999
cash distribution was paid on October 15, 1999.
Cash distributions paid to the Recognized Owners consist of both a return
of and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date.
The Partnership's future cash distributions will be adversely affected by
the bankruptcy of a former lessee of the Partnership, Midway Airlines, Inc.
("Midway"). In 1993, the Partnership's interests in two DC-9-30 aircraft leased
by Midway were transferred to a designee of the lender in lieu of foreclosure.
Although this bankruptcy had no immediate adverse effect on the Partnership's
cash flow, as the Partnership had almost fully leveraged its ownership interest
in the underlying aircraft, this event resulted in the Partnership's loss of any
future interest in the residual value of the aircraft. Notwithstanding such
adverse impact, the overall investment results to be achieved by the Partnership
will be dependent upon the collective performance results of all of the
Partnership's equipment leases.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements presented in the Partnership's 1998
Annual Report). 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,
the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, and the treatment of unrealized gains or losses on
investment securities, if any, 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 September 30, 1999. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of
18
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
Form 10-Q
PART I. FINANCIAL INFORMATION
the Partnership, the General Partner will be required to contribute to the
Partnership an amount equal to any negative balance which may exist in the
General Partner's tax capital account. At December 31, 1998, the General Partner
had a positive tax capital account balance.
The outcome of the Class Action Lawsuit described in Note 7 to the
accompanying financial statements will be the principal factor in determining
the future of the Partnership's operations. A preliminary court order has
allowed the Partnership to invest in new equipment or other activities, subject
to certain limitations, effective March 22, 1999. Until the Class Action Lawsuit
is adjudicated, the General Partner does not expect that the level of future
quarterly cash distributions paid by the Partnership will be increased above
amounts paid in the third quarter of 1999. The proposed settlement, if effected,
will materially change the future organizational structure and business
interests of the Partnership, as well as its cash distribution policies.
19
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
20
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME 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 Accounting Officer)
Date: November 12, 1999
-------------------------------------------
By: /s/ Gary Romano
-------------------------------------------
Gary M. Romano
Clerk of AFG Leasing IV Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 12, 1999
-------------------------------------------
21