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 June 30, 1996
------------------------------------------------
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 June 30, 1996 Commission File No. 0-15621
American Income 5 Limited Partnership
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2917026
- ---------------------------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- ---------------------------------------------------- ---------------------
(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 5 LIMITED PARTNERSHIP
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1996 and December 31, 1995 3
Statement of Operations
for the three and six months ended June 30, 1996 and 1995 4
Statement of Cash Flows
for the six months ended June 30, 1996 and 1995 5
Notes to the Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II. OTHER INFORMATION:
Items 1 - 6 11
2
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
- ------
Cash and cash equivalents $ 267,136 $ 244,878
Accounts receivable, net of allowance
for doubtful accounts of $20,000 at
December 31, 1995 449 19,700
Accounts receivable - affiliate 161,808 200,698
Equipment at cost, net of accumulated
depreciation of $10,536,611 and
$10,098,320 at June 30, 1996
and December 31, 1995, respectively 2,253,134 2,728,805
---------- ----------
Total assets $2,682,527 $3,194,081
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ -- $ 82,037
Accrued interest -- 953
Accrued liabilities 11,750 20,000
Accrued liabilities - affiliate 5,739 5,954
Deferred rental income 107,760 247,980
Cash distributions payable to partners 45,009 180,038
---------- ----------
Total liabilities 170,258 536,962
---------- ----------
Partners' capital (deficit):
General Partner (131,298) (129,850)
Limited Partnership Interests
(71,295 Units, initial purchase
price of $250 each) 2,643,567 2,786,969
---------- ----------
Total partners' capital 2,512,269 2,657,119
---------- ----------
Total liabilities and partners'
capital $2,682,527 $3,194,081
========== ==========
The accompanying notes are an integral part
of these financial statements.
3
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
--------------- -------------- ---------- ---------
Income:
Lease revenue $226,126 $368,962 $470,294 $750,623
Interest income 2,611 2,958 6,923 6,728
Gain on sale of equipment -- 15,500 7,500 18,300
-------- -------- -------- --------
Total income 228,737 387,420 484,717 775,651
-------- -------- -------- --------
Expenses:
Depreciation 237,836 251,046 475,671 502,090
Interest expense 105 4,705 731 10,753
Equipment management fees
- affiliate 11,307 18,448 23,515 37,531
Operating expenses - affiliate 22,169 19,868 39,632 43,825
-------- -------- -------- --------
Total expenses 271,417 294,067 539,549 594,199
-------- -------- -------- --------
Net income (loss) $(42,680) $ 93,353 $(54,832) $181,452
======== ======== ======== ========
Net income (loss)
per limited partnership unit $ (0.59) $ 1.30 $ (0.76) $ 2.52
======== ======== ======== ========
Cash distributions declared
per limited partnership unit $ 0.62 $ 3.75 $ 1.25 $ 7.50
======== ======== ======== ========
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
---------- ----------
Cash flows from (used in) operating
activities:
Net income (loss) $ (54,832) $ 181,452
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Depreciation 475,671 502,090
Gain on sale of equipment (7,500) (18,300)
Decrease in allowance for doubtful
accounts (20,000) --
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 39,251 (129)
accounts receivable - affiliate 38,890 (5,804)
Increase (decrease) in:
accrued interest (953) (1,060)
accrued liabilities (8,250) (500)
accrued liabilities - affiliate (215) (1,207)
deferred rental income (140,220) 17,066
--------- ---------
Net cash from operating activities 321,842 673,608
--------- ---------
Cash flows from investing activities:
Proceeds from equipment sales 7,500 18,300
--------- ---------
Net cash from investing activities 7,500 18,300
--------- ---------
Cash flows used in financing activities:
Principal payments - notes payable (82,037) (228,657)
Distributions paid (225,047) (540,116)
--------- ---------
Net cash used in financing activities (307,084) (768,773)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 22,258 (76,865)
Cash and cash equivalents at beginning
of period 244,878 309,548
--------- ---------
Cash and cash equivalents at end of
period $ 267,136 $ 232,683
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 1,684 $ 11,813
========= =========
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
June 30, 1996
(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 1995 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995 and results of operations for
the three and six month periods ended June 30, 1996 and 1995 have been made and
are reflected.
NOTE 2 - CASH
- -------------
The Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. The reverse repurchase
agreements are secured by U.S. Treasury Bills or interests in U.S. Government
securities.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$3,153,876 are due as follows:
For the year ending June 30, 1997 $ 767,994
1998 765,294
1999 765,294
2000 765,294
2001 90,000
----------
Total $3,153,876
==========
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at June 30,
1996. In the opinion of American Finance Group ("AFG"), the acquisition cost of
the equipment did not exceed its fair market value.
6
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Lease Term Equipment
Equipment Type (Months) at Cost
-------------------------------- ---------- -----------
Aircraft 36-60 $7,958,361
Flight simulators 108 4,608,992
Materials handling 12-60 108,755
Tractors & heavy duty trucks 24-60 52,369
Trailers & intermodal containers 36-60 22,917
Medical 12-60 20,771
Construction & mining 12-60 17,580
----------
Total equipment cost 12,789,745
Accumulated depreciation (10,536,611)
-----------
Equipment, net of accumulated depreciation $ 2,253,134
===========
At June 30, 1996, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $12,567,353 representing approximately
98% of total equipment cost.
At June 30, 1996, the Partnership was not holding any equipment not subject to
a lease.
NOTE 5 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by AFG on behalf
of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the six month
periods ended June 30, 1996 and 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1996 1995
-------- --------
Equipment management fees $23,515 $37,531
Administrative charges 8,064 8,064
Reimbursable operating expenses
due to third parties 31,568 35,761
------- -------
Total $63,147 $81,356
======= =======
All rents and proceeds from the sale of equipment are paid directly to either
AFG or to a lender. AFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At June
30, 1996, the Partnership was owed $161,808 by AFG for such funds and the
interest thereon. These funds were remitted to the Partnership in July 1996.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations.
----------------------
Three and six months ended June 30, 1996 compared to the three and six months
- -----------------------------------------------------------------------------
ended June, 1995:
- -----------------
Overview
- --------
The Partnership was organized in 1986 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The Partnership's stated investment
objectives and policies contemplated that the Partnership would wind-up its
operations within approximately seven years of its inception. Accordingly, the
General Partner is pursuing the remarketing of all of the Partnership's
remaining equipment and has engaged an investment adviser to solicit interested
third-party buyers. This effort is being undertaken in conjunction with certain
other affiliated partnerships and, if successful, would result in the sale of
each affected partnership's assets to a selected buyer. The General Partner
believes this approach will (i) maximize the disposition prices of each
partnership's assets and (ii) prevent the incidence of future expenses to
operate a publicly-registered limited partnership with a declining asset base.
The General Partner is evaluating expressions of interest submitted by the
investment adviser from a number of potential buyers, but is under no obligation
to accept any proposal. If successful, the General Partner anticipates that it
would wind-up the operations of the Partnership and make a liquidating
distribution to the Partners, net of any cash reserves which the General Partner
may consider appropriate, on or before December 31, 1996.
Results of Operations
- ---------------------
For the three and six months ended June 30, 1996, the Partnership recognized
lease revenue of $226,126 and $470,294, respectively, compared to $368,962 and
$750,623 for the same periods in 1995. The decrease in lease revenue from 1995
to 1996 was expected and resulted principally from renewal lease term
expirations and the sale of equipment. The Partnership also earns interest
income from temporary investments of rental receipts and equipment sales
proceeds in short-term instruments.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by AFG or an affiliated equipment leasing program
sponsored by AFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
from a concentration in any single equipment type, industry or lessee. The
Partnership and each affiliate individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the equipment.
For the three months ended June 30, 1995, 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 $15,500. There
were no equipment sales during the three months ended June 30, 1996.
For the six months ended June 30, 1996, 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 $7,500 compared to
a net gain of $18,300 on equipment which had been fully depreciated for the same
period in 1995.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale. In addition, the amount of gain or loss reported for financial
statement
8
AMERICAN INCOME 5 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
purposes is partly a function of the amount of accumulated depreciation assoc-
iated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG'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. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership
classifies such residual rental payments as lease revenue. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value achieved from leasing the equipment.
Depreciation expense was $237,836 and $475,671 for the three and six months
ended June 30, 1996, respectively, compared to $251,046 and $502,090 for the
same periods in 1995. For financial reporting purposes, to the extent that an
asset is held on primary lease term, the Partnership depreciates the difference
between (i) the cost of the asset and (ii) the estimated residual value of the
asset at the date of primary lease expiration on a straight-line basis over such
term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of primary lease expiration. To the
extent that equipment is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a straight-
line basis over the asset's remaining economic life.
Interest expense was $105 and $731, or less than 1% of lease revenue for both
the three and six months ended June 30, 1996, compared to $4,705 and $10,753,
or 1.3% and 1.4% of lease revenue for the same periods in 1995. Interest
expense is not expected to be incurred in future periods.
Management fees were 5% of lease revenue during each of the periods ended June
30, 1996 and 1995 and will not change as a percentage of lease revenue in future
periods.
Operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as printing, distribution
and remarketing expenses. In certain cases, equipment storage or repairs and
maintenance costs may be incurred in connection with equipment being remarketed.
Collectively, operating expenses represented approximately 9.8% and 8.4% of
lease revenue for the three and six months ended June 30, 1996, respectively,
compared to 5.4% and 5.8% of lease revenue for the same periods in 1995. The
amount of future operating expenses cannot be predicted with certainty; however,
such expenses are usually higher during the acquisition and liquidation phases
of a partnership. Other fluctuations typically occur in relation to the volume
and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These
cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $321,842 and $673,608 for the six
months ended June 30, 1996 and 1995, respectively. Future renewal, re-lease and
equipment sale activities will cause a gradual decline in the
9
AMERICAN INCOME 5 LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL IONFORMATION
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 decline as the Partnership
experiences a higher frequency of remarketing events.
The Partnership's lease agreement in connection with its 26.9% ownership
interest in a SAAB SF340A aircraft expired in June 1996. The Partnership's
proportionate interest in the aircraft had a cost and net book value of
$2,254,723 and $405,877, respectively, at June 30, 1996. The lessee has agreed
to release the aircraft on a month to month basis at a base rent to the
Partnership of $10,086. This agreement may be terminated by either party with
sixty days notice. The General Partner is actively pursuing the remarketing of
this aircraft.
Ultimately, the Partnership will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 1996, the Partnership realized $7,500 in equipment sale proceeds
compared to $18,300 for the same period in 1995. 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.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. All of the Partnership's outstanding debt obligations
were retired in 1996.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the six months ended June 30, 1996, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $90,018. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership, the Limited Partners
were allocated 99% of these distributions, or $89,118, and the General Partner
was allocated 1%, or $900. The second quarter 1996 cash distribution was paid on
July 15, 1996.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of 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 contracted rents, the generation of renewal
and/or re-lease rents, and the residual value realized for each asset at its
disposal date. Market conditions, technological changes, the ability of AFG to
manage and remarket the assets, and many other events and circumstances, could
enhance or detract from individual asset yields and the collective performance
of the Partnership's equipment portfolio.
10
AMERICAN INCOME 5 LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
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
11
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 5 LIMITED PARTNERSHIP
By: AFG Leasing Associates II, a Massachusetts
general partnership and the General Partner of
the Registrant.
By: AFG Leasing Incorporated, a Massachusetts
corporation and general partner in such general
partnership.
By: /s/ Michael J. Butterfield
-----------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: August 13, 1996
-----------------------------------------------
By: /s/ Gary M. Romano
-----------------------------------------------
Gary M. Romano
Clerk of AFG Leasing Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 13, 1996
-----------------------------------------------
12