AMERICAN INCOME PERTNERS II
American Income 5 Limited Partnership
Annual Report to the Partners, December 31, 1995
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 and 1994 7
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 8
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993 9
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 10
Notes to the Financial Statements 11-18
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 19
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 20
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 21
-1-
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.
For each of the five years in the period ended December 31, 1995:
Summary of
Operations 1995 1994 1993 1992 1991
- -------------------------- -------------- ------------- ------------- ------------- -------------
Lease revenue $ 1,344,928 $ 1,620,482 $ 1,667,341 $ 1,959,679 $ 3,033,909
Net income (loss) $ 236,296 $ 518,222 $ 521,698 $ 228,943 $ (198,802)
Per Unit:
Net income (loss) $ 3.28 $ 7.20 $ 7.24 $ 3.18 $ (2.76)
Cash distributions $ 12.50 $ 20.63 $ 24.37 $ 27.50 $ 33.75
Financial
Position
- --------------------------
Total assets $ 3,194,081 $ 4,136,773 $ 5,952,418 $ 7,255,173 $ 9,613,256
Total long-term
obligations $ 82,037 $ 356,174 $ 1,113,947 $ 1,143,421 $ 1,592,732
Partners' capital $ 2,657,119 $ 3,321,012 $ 4,288,101 $ 5,521,771 $ 7,273,244
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1995 compared to the year
ended December 31, 1994 and the year ended December 31, 1994
compared to the year ended December 31, 1993
Overview
- --------
As an equipment leasing partnership, American Income 5 Limited
Partnership (the "Partnership") was organized to acquire a diversified portfolio
of capital equipment subject to lease agreements with third parties. The
Partnership was designed to progress through three principal phases:
acquisitions, operations, and liquidation. During the operations phase, a period
of approximately six years, all equipment in the Partnership's portfolio
progresses through various stages. Initially, all equipment generates rental
revenues under primary term lease agreements. During the life of the
Partnership, these agreements expire on an intermittent basis and equipment held
pursuant to the related leases are renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by American
Finance Group ("AFG") to obtain the most advantageous economic benefit. Over
time, a greater portion of the Partnership's original equipment portfolio
becomes available for remarketing and cash generated from operations and from
sales or refinancings begins to fluctuate. Ultimately, all equipment will be
sold and the Partnership will be dissolved. In accordance with the Partnership's
stated investment objectives and policies, the General Partner is considering
the winding-up of the Partnership's operations, including the liquidation of its
entire portfolio. The Partnership's operations commenced in 1986.
Results of Operations
- ---------------------
For the year ended December 31, 1995, the Partnership recognized lease
revenue of $1,344,928 compared to $1,620,482 and $1,667,341 for the years ended
December 31, 1994 and 1993, respectively. The decrease in lease revenue between
1993 and 1995 was expected and resulted principally from primary and 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.
In 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 $42,450 compared to a net gain in 1994 of
$75,189 on equipment which had been fully depreciated and a net gain in 1993 of
$139,518 on equipment having a net book value of $47,525.
It cannot be determined whether future sales of equipment will result in
a net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
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.
-3-
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 $1,004,179, $1,004,180 and $1,073,171 for the
years ended December 31, 1995, 1994 and 1993, respectively. 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. 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 (See Note 2 to the financial statements herein.)
Interest expense was $13,598 or 1% of lease revenue in 1995, $54,762 or
3.4% of lease revenue in 1994, and $72,724 or 4.4% of lease revenue in 1993. In
the future, interest expense will be minimal due to the scheduled maturity of
the Partnership's debt obligation in 1996.
Management fees were 5% of lease revenue in each of the years ended
December 31, 1995, 1994 and 1993 and will not change as a percentage of lease
revenue in future years.
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 5.8%,
3.8% and 4.5% of lease revenue in 1995, 1994 and 1993, respectively. 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 $1,157,226, $1,586,061, and $1,445,162
in 1995, 1994 and 1993, respectively. Future renewal, re-lease and equipment
sale activities will cause a gradual 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 decline as the Partnership experiences a higher frequency of
remarketing events.
During 1995, the Partnership and other affiliated partnerships, executed
a renegotiated and extended lease agreement in connection with two DC-10-40
aircraft leased by Northwest Airlines, Inc. ("Northwest"). Pursuant to the
agreement, Northwest will continue to lease these aircraft until September 3,
2000. The Partnership, which has a proportionate ownership interest of
approximately 18% in these aircraft, will receive approximately $540,000 each
year through December 31, 1999 and approximately $405,000 during the year ending
December 31, 2000. Additionally, the lease agreement in connection with a SAAB
SF340A aircraft, in which the Partnership has a 26.9% ownership interest, is
scheduled to expire in June 1996. The Partnership's proportionate interest in
the aircraft had a cost and net book value of $2,254,723 and $492,575,
respectively, at December 31, 1995. The General Partner is actively pursuing the
remarketing of this aircraft.
-4-
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 1995,
the Partnership realized $42,450 in equipment sale proceeds compared to $75,189
and $187,043 in 1994 and 1993, respectively. 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 origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities. Cash
inflows of $341,373 in 1993 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. No leveragings of
equipment occurred in 1994 and 1995.
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. The amount of cash used to repay
debt in 1994 increased in contrast to the prior year as a result of leveraging
obtained in 1993. The Partnership's notes payable will be fully amortized by
noncancellable rents 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 year ended December 31, 1995, the Partnership declared total
cash distributions of Distributable Cash From Operations and Distributable Cash
From Sales and Refinancings of $900,189. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended"), the Limited Partners were allocated 99% of these
distributions, or $891,187, and the General Partner was allocated 1%, or $9,002.
The fourth quarter 1995 cash distribution was paid on January 22, 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 future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future 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.
The future liquidity of the Partnership will be influenced by the
foregoing and will be greatly dependent upon the collection of contractual rents
and the outcome of residual activities. The General Partner anticipates that
cash proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.
-5-
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of American Income 5 Limited Partnership:
We have audited the accompanying statements of financial position of
American Income 5 Limited Partnership as of December 31, 1995 and 1994 and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1995. 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Income 5
Limited Partnership at December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
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.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1996
-6-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
1995 1994
------------ ------------
ASSETS
- ------
Cash and cash equivalents $ 244,878 $ 309,548
Rents receivable, net of allowance for
doubtful accounts of $20,000 19,700 --
Accounts receivable - affiliate 200,698 94,241
Equipment at cost, net of accumulated depreciation of
$10,098,320 and $9,749,836 at December 31, 1995
and 1994, respectively 2,728,805 3,732,984
------------ ------------
Total assets $ 3,194,081 $ 4,136,773
============ ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 82,037 $ 356,174
Accrued interest 953 1,263
Accrued liabilities 20,000 15,500
Accrued liabilities - affiliate 5,954 4,328
Deferred rental income 247,980 168,438
Cash distributions payable to partners 180,038 270,058
------------ ------------
Total liabilities 536,962 815,761
------------ -----------
Partners' capital (deficit):
General Partner (129,850) (123,211)
Limited Partnership Interests
(71,295 Units; initial purchase
price of $250 each) 2,786,969 3,444,223
------------ -----------
Total partners' capital 2,657,119 3,321,012
------------ -----------
Total liabilities and partners' capital $ 3,194,081 $ 4,136,773
============ ============
The accompanying notes are an integral part of
these financial statements.
-7-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------------- -------------- --------------
Income:
Lease revenue $ 1,344,928 $ 1,620,482 $ 1,667,341
Interest income 12,280 24,043 18,745
Gain on sale of equipment 42,450 75,189 139,518
-------------- -------------- --------------
Total income 1,399,658 1,719,714 1,825,604
-------------- -------------- --------------
Expenses:
Depreciation 1,004,179 1,004,180 1,073,171
Interest expense 13,598 54,762 72,724
Equipment management fees - affiliate 67,246 81,024 83,368
Operating expenses - affiliate 78,339 61,526 74,643
-------------- -------------- --------------
Total expenses 1,163,362 1,201,492 1,303,906
-------------- -------------- --------------
Net income $ 236,296 $ 518,222 $ 521,698
============== ============== ==============
Net income
per limited partnership unit $ 3.28 $ 7.20 $ 7.24
============== ============== ==============
Cash distributions declared
per limited partnership unit $ 12.50 $ 20.62 $ 24.37
============== ============== ==============
The accompanying notes are an integral part of
these financial statements.
-8-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
General Limited Partners
Partner -------------------------------
Amount Units Amount Total
------------- --------- ------------ -----------
Balance at December 31, 1992 $ (101,203) 71,295 $ 5,622,974 $ 5,521,771
Net income - 1993 5,217 -- 516,481 521,698
Cash distributions declared (17,554) -- (1,737,814) (1,755,368)
------------- --------- ------------ -----------
Balance at 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 at 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 at December 31, 1995 $ (129,850) 71,295 $ 2,786,969 $ 2,657,119
============= ========= ============ ===========
The accompanying notes are an integral part of
these financial statements.
-9-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ -------------- -------------
Cash flows from (used in) operating activities:
Net income $ 236,296 $ 518,222 $ 521,698
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 1,004,179 1,004,180 1,073,171
Gain on sale of equipment (42,450) (75,189) (139,518)
Decrease in allowance for doubtful accounts -- (20,000) (12,000)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable (19,700) 57,151 37,845
accounts receivable - affiliate (106,457) 57,453 (86,442)
Increase (decrease) in:
accrued interest (310) (36,506) (15,860)
accrued liabilities 4,500 (347) (6,653)
accrued liabilities - affiliate 1,626 (2,201) (9,406)
deferred rental income 79,542 83,298 82,327
------------ -------------- -------------
Net cash from operating activities 1,157,226 1,586,061 1,445,162
Cash flows from investing activities:
Proceeds from equipment sales 42,450 75,189 187,043
------------ -------------- -------------
Net cash from investing activities 42,450 75,189 187,043
------------ -------------- -------------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- -- 341,373
Principal payments - notes payable (274,137) (757,773) (370,847)
Distributions paid (990,209) (1,620,338) (1,845,387)
------------ -------------- -------------
Net cash used in financing activities (1,264,346) (2,378,111) (1,874,861)
------------ -------------- -------------
Net decrease in cash and cash equivalents (64,670) (716,861) (242,656)
Cash and cash equivalents at beginning of year 309,548 1,026,409 1,269,065
------------ -------------- -------------
Cash and cash equivalents at end of year $ 244,878 $ 309,548 $ 1,026,409
============ ============== =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 13,908 $ 91,268 $ 88,584
============ ============== ==============
The accompanying notes are an integral part of
these financial statements.
-10-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1995
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------
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. Partners' capital initially consisted of
contributions of $1,000 each from the General Partner (AFG Leasing Associates
II) and the Initial Limited Partner (Daniel J. Roggemann). The General Partner
of the Partnership is wholly owned by American Finance Group ("AFG"), a
Massachusetts partnership and its Affiliates. On June 27, 1986, the Partnership
issued 71,295 limited partnership units to 1,491 Limited Partners, including
four Units purchased by the Initial Limited Partner. Initially, the General
Partner had the following five general partners: AFG Leasing Incorporated, a
Massachusetts corporation, Kestutis J. Makaitis, Daniel J. Roggemann, Martin F.
Laughlin and Geoffrey A. MacDonald. Messrs. Makaitis, Roggemann and Laughlin
subsequently elected to withdraw as Individual General Partners. The General
Partner is not required to make any other capital contributions except as may be
required under the Uniform Act and Section 6.1(c) of the Amended and Restated
Agreement and Certificate of Limited Partnership ("Restated Agreement, as
amended"). In accordance with the terms of the Restated Agreement, as amended,
AFG purchased 1,783 Units ($445,750) in the Partnership, representing 2.5% of
total capital contributions received by the Partnership. In 1995, AFG tendered
all of its units to Atlantic Acquisition Limited Partnership. (See Note 4
herein).
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various aspects
of the equipment leasing business. In 1990, certain members of AFG's management,
principally Geoffrey A. MacDonald, Chief Executive Officer and co-founder of
AFG, established AFG Holdings (Massachusetts) Limited Partnership ("Holdings
Massachusetts") to acquire ownership and control of AFG. Holdings Massachusetts
effected this event by acquiring all of the equity interests of AFG's two
partners, AFG Holdings Illinois Limited Partnership ("Holdings Illinois") and
AFG Corporation. Holdings Massachusetts incurred significant indebtedness to
finance this acquisition, a significant portion of which was scheduled to mature
in 1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings Illinois
and AFG Corporation and sold all such interests to GDE Acquisitions Limited
Partnership, a Massachusetts limited partnership owned and controlled entirely
by Gary D. Engle, President and member of the Executive Committee of AFG. As a
result of this transaction, GDE Acquisitions Limited Partnership acquired all of
the assets, rights and obligations of AFG from the Senior Lender and assumed
control of AFG. Geoffrey A. MacDonald remains as Chief Executive Officer of AFG
and member of its Executive Committee.
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 will be allocated 99% to the Limited Partners and 1% to the General
Partner until Payout and 85% to the Limited Partners and 15% to the General
Partner after Payout. Payout will occur when the Limited Partners have received
distributions equal to their original investment plus a cumulative annual return
of 10% (compounded daily) on undistributed invested capital.
Under the terms of a Management Agreement between the Partnership and
AFG, management services are provided by AFG to the Partnership at fees which
the General Partner believes to be competitive for similar services. (Also see
Note 4.)
-11-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Statement of Cash Flows
- -----------------------
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities.
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
$3,644,556 are due as follows:
For the year ending December 31, 1996 $ 831,027
1997 765,294
1998 765,294
1999 765,294
2000 517,647
------------
Total $ 3,644,556
============
Future minimum rents include lease revenue to be generated from a
renegotiated and extended renewal agreement with Northwest Airlines, Inc. The
renewal agreement will generate annual rental income to the Partnership of
approximately $540,000 each year through December 31, 1999, and approximately
$405,000 during the year ended December 31, 2000.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during each of the past three years is as follows:
1995 1994 1993
------------- ------------- -------------
Northwest Airlines, Inc. $ 799,020 $ 928,800 $ 883,440
United Technologies Corporation $ 342,995 $ 422,374 $ 425,923
Comair, Inc. $ 143,325 -- --
During 1995, the renewal lease agreement with United Technologies
Corporation ("United Technologies"), scheduled to expire on December 15, 1996,
was renegotiated to extend the renewal period through December 15, 2000. United
Technologies leases two flight simulators which are owned in a trust between the
Partnership and other affiliated partnerships. The Partnership owns
approximately 28% of these assets at an original cost of approximately
$4,609,000. Rents due under the renegotiated lease are $795,500 per year
beginning December 16, 1995. The Partnership's pro-rata share of these rents is
$225,294 per year. At the end of the renewal period, the lessee has the option
to purchase the equipment for $345,900, with the Partnership's share of these
proceeds being $97,962.
-12-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
At December 31, 1993, the General Partner lowered the aggregate amount
reserved against potentially uncollectable rents to $40,000. This resulted in an
increase in lease revenue of $12,000 in 1993. During 1994, this reserve was
further reduced to $20,000 resulting in an increase in lease revenue of $20,000.
This reserve was reviewed and considered adequate as of December 31, 1995. It
cannot be determined whether the Partnership will recover any past due rents in
the future; however, the General Partner will pursue the collection of all such
items.
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, or from third-party sellers.
Equipment cost represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines. Asset base price is 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.
Depreciation
- ------------
The Partnership's depreciation policy is intended to allocate the cost
of equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
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.
-13-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities-Affiliate.(See Note 4.)
Allocation of Profits and Losses
- --------------------------------
For financial statement purposes, net income or loss is allocated to
each Partner according to their respective ownership percentages (99% to the
Limited Partners and 1% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Income and Cash Distributions Per Unit
- ------------------------------------------
Net income and cash distributions per Unit are based on 71,295 Units
outstanding during each of the three years in the period ended December 31, 1995
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.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the impact of adoption to be material to
the financial statements of the Partnership.
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at
December 31, 1995. In the opinion of AFG, the aquisition cost of the equipment
did not exceed its fair market value.
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ----------------------------- ------ ----------- --------------------------------------
Aircraft 36-60 $ 7,958,361 MN/OH
Flight simulators 120 4,608,992 CT
Materials handling 12-60 146,135 CT/GA/NC/TX
Tractors and heavy duty trucks 24-60 52,369 CA
Trailers and intermodal containers 36-60 22,917 IL
Medical 12-60 20,771 WA
Construction and mining 12-60 17,580 MA
-----------
Total equipment cost 12,827,125
Accumulated depreciation (10,098,320)
----------
Equipment, net of accumulated depreciation $ 2,728,805
============
-14-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by AFG or an
affiliated equipment leasing program sponsored by AFG. 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. 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. At December 31, 1995, the Partnership's equipment
portfolio included equipment having a proportionate original cost of
$12,567,353, representing approximately 98% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $2,255,000
and a net book value of approximately $493,000 at December 31, 1995.
(See Note 5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's equipment are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes 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. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. At December 31, 1995, the Partnership was
not holding any equipment not subject to a lease and no equipment was held for
sale or re-lease.
NOTE 4 - 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 three years in
the period ended December 31, 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1995 1994 1993
------------- ------------- -------------
Equipment management fees $ 67,246 $ 81,024 $ 83,368
Administrative charges 16,128 12,000 14,955
Reimbursable operating expenses
due to third parties 62,211 49,526 59,688
------------- ------------- -------------
Total $ 145,585 $ 142,550 $ 158,011
============= ============= =============
As provided under the terms of the Management Agreement, AFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG is compensated by an amount equal to 4.75% of Equipment Base Price
paid by the Partnership. For management services, AFG is 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 believes to be
competitive for similar services for similar equipment. Both of these fees are
subject to certain limitations defined in the Management Agreement. Compensation
to AFG for services connected to the sale of equipment is calculated as the
lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage
fees otherwise payable under
-15-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
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 are 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 are 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.
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 December 31, 1995, the Partnership was owed $200,698 by AFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1996.
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. 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
Plaintiffs have filed an appeal in this matter. The limited partners of the
Partnership tendered approximately 10,391 units or 14.57% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
are not expected to be adversely affected by these proceedings or settlements.
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1995 consisted of one installment note of
$82,037 payable to a bank. The installment note is non-recourse, with an
interest rate of 6.35% and is collateralized by the equipment and assignment of
the related lease payments. The installment note will be fully amortized by
noncancellable rents in the year ending December 31, 1996.
NOTE 6 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates 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).
-16-
This convention differs 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 purposes, the Partnership allocates net
income or loss in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to the lesser of a) any negative balance which may exist in the General
Partner's tax capital account or b) the excess of 1.01% of the total Capital
Contributions contributed by the Limited Partners over the Capital Contributions
previously contributed by the General Partner. At December 31, 1995, the General
Partner had a positive tax capital account balance.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995, 1994 and 1993:
1995 1994 1993
------------- ------------- -------------
Net income $ 236,296 $ 518,222 $ 521,698
Financial statement depreciation
in excess of tax depreciation 1,004,178 1,004,180 1,073,171
Prepaid rental income 80,476 83,298 82,327
Other -- (21,281) 87,760
------------- ------------- -------------
Net income for federal income
tax reporting purposes $ 1,320,950 $ 1,584,419 $ 1,764,956
============= ============= =============
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 and 1994:
1995 1994
------------- -------------
Partners' capital $ 2,657,119 $ 3,321,012
Add back selling commissions and
organization and offering costs 2,082,616 2,082,616
Financial statement distributions
in excess of tax distributions 1,800 2,701
Cumulative difference between federal income
tax and financial statement income (loss) (2,610,158) (3,694,812)
------------- -------------
Partners' capital for federal income
tax reporting purposes $ 2,131,377 $ 1,711,517
============= =============
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
-17-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase, in a multi-step
transaction, certain of AFG's assets and (ii) provide accounting, asset
management and investor services to AFG and certain of AFG's affiliates,
including the Partnership and all other equipment leasing programs managed by
AFG (the "Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995
agreements whereby PLM purchased: (i) AFG's lease origination business and
associated contracts, (ii) the rights to the name "American Finance Group" and
associated logo, and (iii) certain furniture, fixtures and computer software.
PLM hired AFG's marketing force and certain other support personnel effective
January 1, 1996 in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing trustees of the Investment Programs; and AFG, as
Manager, will continue to provide accounting, asset management and investor
services to the Partnership.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain
of its affiliates agreed not to compete with the lease origination business sold
to PLM for a period of five years. AFG reserved the right to satisfy all
equipment needs of the Partnership and all other Investment Programs and
reserved certain other rights not material to the Partnership. AFG also agreed
to change its name, except where it is used in connection with the Investment
Programs. AFG's management considers the amendment to the 1995 agreements to be
in the best interest of AFG and the Partnership.
-18-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1995, 1994 and 1993
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be 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, represent 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 in the years ended December 31, 1995, 1994 and 1993.
1995 1994 1993
------------- ------------- -------------
Rents earned prior to disposal
of equipment, net of interest charges $ 954,082 $ 319,445 $ 1,844,395
Sale proceeds realized upon
disposition of equipment 42,450 75,189 187,043
------------- ------------- -------------
Total cash generated from rents
and equipment sale proceeds 996,532 394,634 2,031,438
Original acquisition cost of
equipment disposed 655,695 314,837 1,540,382
------------- -------------- -------------
Excess of total cash generated
to cost of equipment disposed $ 340,837 $ 79,797 $ 491,056
============= ============== =============
-19-
AMERICAN INCOME 5 LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1995
Sales and
Operations Refinancings Total
---------------- --------------- ---------------
Net income $ 193,846 $ 42,450 $ 236,296
Add back:
Depreciation 1,004,179 -- 1,004,179
Management fees 67,246 -- 67,246
Less:
Principal reduction of notes payable (274,137) -- (274,137)
---------------- --------------- ---------------
Cash from operations, sales
and refinancings 991,134 42,450 1,033,584
Less:
Management fees (67,246) -- (67,246)
---------------- ---------------- ---------------
Distributable cash from operations, sales
and refinancings 923,888 42,450 966,338
Other sources and uses of cash:
Cash at beginning of year 309,548 -- 309,548
Net change in receivables and accruals (40,799) -- (40,799)
Less:
Cash distributions paid (947,759) (42,450) (990,209)
---------------- ---------------- ---------------
Cash at end of year $ 244,878 -- $ 244,878
================ ================ ===============
-20-
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, 1995
For the year ended December 31, 1995, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 65,717
-21-