UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2001
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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
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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
-----------------------------
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(Former name, former address and former fiscal year, 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.
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 March 31, 2001 and December 31, 2000 3
Statement of Operations
for the three months ended March 31, 2001 and 2000 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 2001 5
Statement of Cash Flows
for the three months ended March 31, 2001 and 2000 6
Notes to the Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION:
Items 1 - 6 20
2
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $ 478,270 $ 1,003,350
Rents receivable 2,586 2,797
Accounts receivable - affiliate 17,350 7,990
Interest receivable - affiliate 19,233 --
Prepaid expenses 20,407 --
Investment in real estate venture 1,951,719 1,996,048
Note receivable - affiliate 771,450 771,450
Investment securities - affiliate - at fair market value 113,102 130,174
Equipment at cost, net of accumulated depreciation of
$422,550 and $522,900 at March 31, 2001
and December 31, 2000, respectively -- --
----------- -----------
Total assets $ 3,374,117 $ 3,911,809
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 196,856 $ 644,677
Accrued liabilities - affiliate 25,203 15,541
----------- -----------
Total liabilities 222,059 660,218
----------- -----------
Partners' capital (deficit):
General Partner (1,373,370) (1,368,393)
Limited Partnership Interests
(1,380,661 Units; initial purchase price of $25 each) 4,525,428 4,619,984
----------- -----------
Total partners' capital 3,152,058 3,251,591
----------- -----------
Total liabilities and partners' capital $ 3,374,117 $ 3,911,809
=========== ===========
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 MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
--------- ---------
INCOME
Lease revenue $ 16,821 $ 20,692
Interest income 6,358 38,105
Interest income - affiliate 19,233 19,233
Gain on sale of equipment 16,080 5,000
--------- ---------
Total income 58,492 83,030
--------- ---------
EXPENSES
Equipment management fees - affiliate 841 1,035
Operating expenses - affiliate 95,783 50,367
Write-down of investment securities - affiliate 27,742 --
Partnership's share of unconsolidated
real estate venture's loss 44,329 2,114
--------- ---------
Total expenses 168,695 53,516
--------- ---------
Net income (loss) $(110,203) $ 29,514
========= =========
Net income (loss) per limited partnership unit $ (0.08) $ 0.02
========= =========
Cash distributions declared
per limited partnership unit $ -- $ --
========= =========
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 THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
GENERAL LIMITED PARTNERS
PARTNER -----------------------
AMOUNT UNITS AMOUNT TOTAL
----------- --------- ----------- -----------
Balance at December 31, 2000 $(1,368,393) 1,380,661 $ 4,619,984 $ 3,251,591
Net loss (5,510) -- (104,693) (110,203)
Less: Reclassification adjustment
for write-down of investment
securities - affiliate 533 -- 10,137 10,670
----------- ----------- ----------- -----------
Comprehensive loss (4,977) -- (94,556) (99,533)
----------- ----------- ----------- -----------
Balance at March 31, 2001 $(1,373,370) 1,380,661 $ 4,525,428 $ 3,152,058
=========== =========== =========== ===========
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 THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (110,203) $ 29,514
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sale of equipment (16,080) (5,000)
Partnership's share of unconsolidated
real estate venture's loss 44,329 2,114
Write-down of investment securities - affiliate 27,742 --
Changes in assets and liabilities:
Rents receivable 211 (515)
Accounts receivable - affiliate (9,360) (158)
Interest receivable - affiliate (19,233) --
Prepaid expenses (20,407) --
Accrued liabilities (447,821) (37,987)
Accrued liabilities - affiliate 9,662 (133)
----------- -----------
Net cash used in operating activities (541,160) (12,165)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 16,080 5,000
Investment in real estate venture -- (2,160,000)
----------- -----------
Net cash used in investing activities 16,080 (2,155,000)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Distributions paid -- (136,250)
----------- -----------
Net cash provided by (used in) financing activities -- (136,250)
----------- -----------
Net decrease in cash and cash equivalents (525,080) (2,303,415)
Cash and cash equivalents at beginning of period 1,003,350 3,397,803
----------- -----------
Cash and cash equivalents at end of period $ 478,270 $ 1,094,388
=========== ===========
SUPPLEMENTAL INFORMATION
See Note 6 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 2001 and 2000.
The accompanying notes are an integral part of these financial statements.
6
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2001
(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 2000 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
2000 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2001 and December 31, 2000 and results of operations for
the three month periods ended March 31, 2001 and 2000 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 2001, American Income Partners V-A Limited Partnership (the
"Partnership") had $202,503 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 see Note 8 to the
financial statements regarding the Class Action Lawsuit. Future minimum rents of
$4,035 are due during the year ending December 31, 2001.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2001 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-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.
7
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
- ---------------------------------------------- ---------- ---------
Materials handling 0-9 $381,558
Communications 0 40,992
--------
Total equipment cost 422,550
Accumulated depreciation (422,550)
--------
Equipment, net of accumulated depreciation $ --
========
At March 31, 2001, all of the Partnership's equipment was subject to contracted
leases or being leased on a month-to-month basis.
NOTE 5 - INVESTMENT IN REAL ESTATE VENTURE
On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange
Partnerships") collectively loaned $32 million to Echelon Residential Holdings
LLC ("Echelon Residential Holdings"), a newly formed real estate company.
Echelon Residential Holdings is owned by several investors, including James A.
Coyne, Executive Vice President of EFG. In addition, certain affiliates of the
General Partner made loans to Echelon Residential Holdings in their individual
capacities.
The Partnership's original loan was $2,160,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral.
The loan is presented, in accordance with the guidance set forth in the Third
Notice to Practitioners by the American Institute of Certified Public
Accountants in February 1986 entitled "ADC Arrangements", as an investment in
real estate venture and is presented net of the Partnership's share of the
losses in Echelon Residential Holdings. The Partnership is allocated its
proportionate share of the unconsolidated real estate venture's net income or
loss, adjusted for interest on the ADC arrangements, based on the balance of its
ADC arrangement in relation to the real estate venture's total equity and notes
payable, including the ADC arrangements. For the periods ended March 31, 2001
and 2000, the Partnership's share of losses in Echelon Residential Holdings was
$44,329 and $2,114, respectively, and are reflected on the Statement of
Operations as "Partnership's share of unconsolidated real estate venture's
loss."
The Partnership took into consideration the following characteristics of the
loan in determining that the loan should be accounted for as an investment in a
real estate venture: (i) the Exchange Partnerships who made the loans
collectively have provided substantially all of the necessary funds to acquire
the underlying properties without taking title to such properties, (ii) by
virtue of a pledged security interest in the wholly owned subsidiary of Echelon
Residential Holdings that holds title to the properties, the Partnership's loan
is secured only by the underlying properties, (iii) Echelon Residential Holdings
will only repay the Partnership at maturity, including all interest accrued on
the loan through maturity, (iv) it is expected that Echelon Residential Holdings
can only repay
8
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
the loan through sales of undeveloped and developed property; and (v) the
structure of the loan (i.e. no payments due until maturity) makes it unlikely
that the properties will be taken in foreclosure as a result of delinquency.
The summarized financial information for Echelon Residential Holdings as of
March 31, 2001 and for the quarter ended March 31, 2001 is as follows:
(Unaudited)
Total assets $ 72,861,183
Total liabilities $ 76,780,082
Minority interest $ 1,906,448
Total deficit $ (5,825,347)
Total revenues $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 3,096,648
Net loss $ (2,033,209)
NOTE 6 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 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 2003 and bears an annual interest
rate of 10% with mandatory principal reductions prior to maturity, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
its principal real estate asset consisting of an undeveloped 274-acre parcel of
land near Malibu, California. The Partnership recognized interest income of
$19,233 related to the Semele Note for both the three months ended March 31,
2001 and 2000.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
note has been extended. Since the Semele Note was received as consideration for
the sale of the cargo vessels to an unaffiliated party and the extension of the
maturity of the Semele Note is documented in an amendment to the existing Semele
Note and not as a new loan, the general partners of the owner partnerships do
not consider the Semele Note to be within the prohibition in the Partnership
Agreements against loans to or from the general partner and its affiliates.
Nonetheless, the extension of the maturity date might be construed to be in
violation of the making of a loan to an affiliate of the general partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31,
9
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
2000, the Partnership decreased the carrying value of its investment in Semele
common stock to $5.375 per share (the quoted price on the NASDAQ SmallCap Market
at March 31,
2000), resulting in an unrealized loss of $12,804. This loss was reported as a
component of comprehensive income included in the Statement of Changes in
Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the market
value of its Semele common stock was other than temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $27,742.
NOTE 7 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the three month periods ended March 31,
2001 and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
------- -------
Equipment management fees $ 841 1,035
Administrative charges 17,817 14,918
Reimbursable operating expenses
due to third parties 77,966 35,449
------- -------
Total $96,624 51,402
======= =======
All rents and proceeds from the sale of equipment are paid directly to EFG. EFG
temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At March 31, 2001, the
Partnership was owed $17,350 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in April 2001.
NOTE 8 - LEGAL PROCEEDINGS
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, 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.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") has completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether parties request the
Court to schedule a hearing for final approval of the proposed settlement or are
withdrawing the proposed settlement from judicial consideration and resuming the
litigation of the Plaintiffs' claims. The Court also directed the parties to use
their best efforts to assist the SEC so that its regulatory review may be
completed on or before May 15, 2001. The Court continued the Final Approval
Settlement Hearing until a date to be scheduled in July 2001 after receipt from
the parties of a request to schedule a hearing. There are a number of issues to
be resolved with the staff of the SEC before the staff's review of the
solicitation materials is completed.
10
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase any security or engage in any business in interstate
commerce. Accordingly, Section 7 would prohibit any partnership that is an
unregistered investment company from engaging in any business in interstate
commerce, except transactions that are merely incidental to its dissolution. The
SEC staff asked that the general partners advise them within the next 30 days as
to what steps the Designated Partnerships will take to address their status
under the 1940 Act. The SEC staff asserts that the notes evidencing the loans to
Echelon Residential Holdings are investment securities and the ownership of the
notes by said partnerships cause them to be investment companies and that, in
the case of American Income Partners V-A Limited Partnership and American Income
Partners V-B Limited Partnership, they may have become investment companies when
they received the Semele securities as part of the compensation for the sale of
a vessel to Semele in 1997. The general partners have consulted with counsel who
specializes in the 1940 Act and, based on counsel's advise, do not believe that
the Designated Partnerships are investment companies.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a proposed
settlement, and that the SEC staff's views, as expressed in the letter, are
relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating
11
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
Partnership Sub-class. However, since the SEC has yet to complete its review of
the proxy, the Plaintiffs do not believe that the litigation should continue to
be stayed so that the SEC may continue its regulatory review for an indefinite
period of time." Plaintiffs requested a pre-trial conference to schedule filing
of Plaintiffs' motion for class certification on or before May 29, 2001 and
resumption of merits discovery and discovery related to the class certification
motion.
Apart from the language of the order, the Court has not stated what action it
might order if the SEC's review were not completed by May 15, 2001. If the Court
were to decline to continue the date for the Final Approval Settlement Hearing
and there is no settlement alternative offered by the parties that meets the
Court's approval, the Court may direct that the parties resume the litigation
and abandon the proposed settlement and consolidation.
12
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 8 to the accompanying financial statements, the
remarketing of the Partnership's equipment and the performance of the
Partnership's non-equipment assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing, the loan to Echelon Residential Holdings
LLC ("Echelon Residential Holdings") and its ownership of securities of Semele
Group Inc. ("Semele"). The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the 1940 Act. The General
Partner is engaged in discussions with the staff of the Securities and Exchange
Commission ("SEC") regarding whether or not the Partnership may be an
inadvertent investment company as a consequence of the above-referenced loan.
The General Partner has consulted counsel and believes that the Partnership is
not an investment company. If the Partnership were determined to be an
unregistered investment company, its business would be adversely affected. The
1940 Act, among other things, prohibits an unregistered investment company from
offering securities for sale or engaging in any business in interstate commerce
and, consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. If necessary, the Partnership
intends to avoid being deemed an investment company by disposing or acquiring
certain assets that it might not otherwise dispose or acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company to offer or sell or purchase any security or engage in any
business in interstate commerce. Accordingly, Section 7 would prohibit any
partnership that is an unregistered investment company from engaging in any
business in interstate commerce, except transactions that are merely incidental
to its dissolution. The SEC staff asked that the general partners advise them
within the next 30 days as to what steps the Designated Partnerships will take
to address their status under the 1940 Act. The SEC staff asserts that the notes
evidencing the loans to Echelon Residential Holdings are investment securities
and the ownership of the notes by said partnerships cause them to be investment
companies and that, in the case of American Income Partners V-A Limited
Partnership and American V-B Limited Partnership, they may have become
investment companies when they received the Semele securities as part of the
compensation for the sale of a vessel to Semele in 1997. The general partners
have consulted with counsel who specializes in the 1940 Act and, based on
counsel's advice, do not believe that the Designated Partnerships are investment
companies.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a
13
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the SEC staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has yet
to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. See Note 8 to the financial
statements for additional discussion.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
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 8 to the financial statements.)
Pursuant to the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended,"), the Partnership was
scheduled to be dissolved by December 31, 2000. However, the General Partner
does not expect that the Partnership will be dissolved until such time that the
Class Action Lawsuit is settled or adjudicated. The final settlement has not
been effected and therefore dissolution of the Partnership has been deferred
until a later date.
RESULTS OF OPERATIONS
For the three months ended March 31, 2001, the Partnership recognized lease
revenue of $16,821 compared to $20,692 for the same period in 2000. The decrease
in lease revenue between 2000 and 2001 resulted primarily from renewal lease
term expirations and the sale of equipment. In the future, lease revenue will
continue to decline due to lease term expirations and the sale of equipment.
Interest income for the three months ended March 31, 2001 was $25,591 compared
to $57,338 for the same period in 2000. Interest income is typically generated
from temporary investment of rental receipts and equipment sale proceeds in
short-term instruments. The amount of future interest income is expected to
fluctuate as a result
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of changing interest rates and the amount of cash available for investment,
among other factors. Interest income during both the three months ended March
31, 2001 and 2000 included $19,233 earned on a note receivable from Semele (see
Note 6 to the financial statements herein).
During both the three month periods ended March 31, 2001 and 2000, the
Partnership sold fully depreciated equipment to existing lessees and third
parties, resulting in net gains, for financial statement purposes, of $16,080
and $5,000, respectively. The results of future sales of equipment will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of gain
or loss reported in the financial statements is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Management fees were $841 and $1,035, respectively, for the three months ended
March 31, 2001 and 2000. Management fees are based on 5% of gross lease revenue
generated by operating leases.
Operating expenses were $95,783 for the three months ended March 31, 2001,
compared to $50,367 for the same period in 2000. In 2001, operating expenses
included approximately $27,000 related to the Class Action Lawsuit discussed in
Note 8 to the financial statements herein. Other operating expenses consist
principally of administrative charges, professional service costs, such as audit
and legal fees, as well as printing, distribution and other remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
At March 31, 2001, the Partnership determined that the decline in the market
value of its Semele common stock was other than temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $27,742.
For the three months ended March 31, 2001 and 2000, the Partnership's share of
losses in Echelon Residential Holdings were $44,329 and $2,114 respectively. The
losses are reflected on the Statement of Operations as "Partnership's share of
unconsolidated real estate venture's loss. " See further discussion below.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities have resulted from asset rental transactions.
Historically, the Partnership's principal source of cash from operations was
provided by the collection of periodic rents, however, beginning in 1999 the
principal source of such cash has 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 $541,160 and $12,165 for the three
months ended March 31, 2001 and 2000, respectively. The significant increase in
the net cash outflow in 2001 primarily reflects the payment of a litigation
settlement and related legal fees, which had been accrued in 2000. 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.
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
remarkets its equipment.
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Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 2001 and 2000, the Partnership realized equipment sale proceeds
of $16,080 and $5,000, 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.
At March 31, 2001, the Partnership was due aggregate future minimum lease
payments of $4,035 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.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 8 to the accompanying financial statements, the court
permitted the Partnership to invest in any new investment, including but not
limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $2,160,000 to a newly
formed real estate company, Echelon Residential Holdings, to finance the
acquisition of real estate assets by that company. Echelon Residential Holdings,
through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan
proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships, representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an independent
Florida-based real estate company. Echelon Residential Holding's interest in
Echelon Residential LLC is pledged pursuant to a pledge agreement to the
partnerships as collateral for the loans. The loan has a term of 30 months,
maturing on September 8, 2002, and an annual interest rate of 14% for the first
24 months and 18% for the final six months. Interest accrues and compounds
monthly and is payable at maturity.
As discussed in Note 5 to the Partnership's financial statements, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of Echelon Residential Holdings under the equity method of
accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon Residential
Holdings could have a material adverse effect on the future cash flow and
operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of the
Manager serving as the initial equity holder of Echelon Residential Holdings and
as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the general
partner's action in structuring the loan in this way since the officer may be
deemed an affiliate and the loans in violation of the prohibition against loans
to affiliates and the court's statement in its order permitting New Investments
that all other provisions of the Partnership Agreements governing the investment
objectives and policies of the
16
Partnership shall remain in full force and effect. The court may require the
partnerships to restructure or divest the loan.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 34,144 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $771,450. The Semele Note
matures in April 2003 and bears an annual interest rate of 10% with mandatory
principal reductions prior to maturity, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
note has been extended. Since the Semele Note was received as consideration for
the sale of the cargo vessels to an unaffiliated party and the extension of the
maturity of the Semele Note is documented in an amendment to the existing Semele
Note and not as a new loan, the general partners of the owner partnerships do
not consider the Semele Note to be within the prohibition in the Partnership
Agreements against loans to or from the general partner and its affiliates.
Nonetheless, the extension of the maturity date might be construed to be in
violation of the making of a loan to an affiliate of the general partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 2000, the Partnership decreased the
carrying value of its investment in Semele common stock to $5.375 per share (the
quoted price on the NASDAQ SmallCap Market at March 31, 2000), resulting in an
unrealized loss of $12,804. This loss was reported as a component of
comprehensive income included in the Statement of Changes in Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the market
value of its Semele common stock was other than temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
three months ended March 31, 2001 of $27,742.
The Semele Note and the Semele common stock are subject to a number of risks
including, Semele's ability to make loan payments which is dependent upon the
liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998, the General Partner determined that the decline in
market value of the stock was other-than-temporary and wrote down the
Partnership's investment. Again in the quarter ended March 31, 2001, the General
Partner determined that the decline in the market value of the stock was other
than temporary and wrote down the Partnership's investment. Subsequently, the
market value of the Semele common stock has fluctuated. The market value of the
stock could decline in the future. Gary D. Engle, President and Chief Executive
Officer of EFG and a Director of the General Partner is Chairman and Chief
Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG
is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are
both members of the Board of Directors of, and own significant stock in, Semele.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base
17
consists of fewer revenue-producing assets that are available to cover
prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining assets.
Cash distributions to the General Partner and Recognized Owners had been
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is reported under financing
activities on the accompanying Statement of Cash Flows. No cash distributions
were declared for either of the quarters ended March 31, 2001 or 2000. In any
given year, it is possible that Recognized Owners will be allocated taxable
income in excess of distributed cash. This discrepancy between tax obligations
and cash distributions may or may not continue in the future, and cash may or
may not be available for distribution to the Recognized Owners adequate to cover
any tax obligation.
Cash distributions when paid to the Recognized Owners generally consist of both
a return of and a return on capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 7 to the financial statements presented in the Partnership's 2000
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
and the treatment of unrealized gains or losses on investment securities for
book and tax purposes. The principal components of the cumulative difference
between financial statement income or loss and tax income or loss result from
different depreciation policies for book and tax purposes and different
treatments for book and tax purposes related to the real estate venture.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at March 31, 2001. This is the result of aggregate cash distributions to
the General Partner being in excess of its capital contribution of $1,000 and
its allocation of financial statement net income or loss. Ultimately, the
existence of a capital deficit for the General Partner for financial reporting
purposes is not indicative of any further capital obligations to the Partnership
by the General Partner. The Restated Agreement, as amended, requires that upon
the dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance which may
exist in the General Partner's tax capital account. At December 31, 2000, the
General Partner had a positive tax capital account balance.
The outcome of the Class Action Lawsuit described in Note 8 to the accompanying
financial statements, will be the principal factor in determining the future of
the Partnership's operations. The proposed settlement to that lawsuit, if
effected, will materially change the future organizational structure and
business interests of the Partnership, as well as its cash distribution
policies. In addition, commencing with the first quarter of 2000, the General
Partner suspended the payment of quarterly cash distributions pending final
resolution of the Class Action Lawsuit. Accordingly, future cash distributions
are not expected to be paid until the Class Action Lawsuit is settled or
adjudicated.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's acquisition, development and construction loan to Echelon
Residential Holdings matures on September 8, 2002 and earns interest at a fixed
annual rate of 14% for the first 24 months and a fixed annual rate of 18% for
the last 6 months of the loan. Investments earning a fixed rate of interest may
have their fair market value adversely impacted due to a rise in interest rates.
The effect of interest rate fluctuations on the Partnership in the quarter ended
March 31, 2001 was not material.
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AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 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
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated, a Massachusetts
corporation and the General Partner of the
Registrant.
By: /s/ MICHAEL J. BUTTERFIELD
------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing IV Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: MAY 21, 2001
------------------------------------------------
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