AMERICAN INCOME PARTNERS V
American Income Partners V-B Limited Partnership
Annual Report to the Partners, December 31, 1997
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
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SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1997 and 1996 9
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 10
Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995 11
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 12
Notes to the Financial Statements 13-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 23
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 24
Schedule of Costs Reimbursed to the General
Partner and its Affiliates as Required by
Section 10.4 of the Amended and Restated
Agreement and Certificate of Limited Partnership 25
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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, 1997:
Summary of
Operations 1997 1996 1995 1994 1993
- ----------------------------- -------------- -------------- --------------- -------------- --------------
Lease revenue $ 3,033,098 $ 2,823,191 $ 3,901,359 $ 9,280,336 $ 10,372,781
Net income (loss) $ 717,643 $ 710,319 $ 458,868 $ 2,878,380 $ (5,751,224)
Per Unit:
Net income (loss) $ 0.44 $ 0.44 $ 0.28 $ 1.77 $ (3.53)
Cash distributions $ 0.66 $ 2.42 $ 2.50 $ 2.50 $ 1.56
Financial Position
- -----------------------------
Total assets $ 5,715,354 $ 7,289,920 $ 11,486,422 $ 15,848,219 $ 23,049,892
Total long-term obligations $ 24,608 $ 707,842 $ 1,157,906 $ 1,858,684 $ 7,667,527
Partners' capital $ 5,385,006 $ 5,953,024 $ 9,177,708 $ 12,792,340 $ 13,987,459
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year ended
December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of American Income Partner's V-B
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 important 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 and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), to collect all rents due under the attendant lease
agreements and successfully remarket the Partnership's equipment upon the
expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.
OVERVIEW
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. The value of the Partnership's equipment
portfolio decreases over time due to depreciation resulting from age and usage
of the equipment, as well as technological changes and other market factors. In
addition, the Partnership does not replace equipment as it is sold; therefore,
its aggregate investment value in equipment declines from asset disposals
occurring in the normal course. The Partnership's stated investment objectives
and policies contemplated that the Partnership would wind-up its operations
within approximately seven years of its inception. Presently, the Partnership is
a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action
Lawsuit could alter the nature of the Partnership's organization and its future
business operations. See Note 8 to the accompanying financial statements.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Partnership recognized lease
revenue of $3,033,098 compared to $2,823,191 and $3,901,359 for the years ended
December 31, 1996 and 1995, respectively. The overall decrease in lease revenue
from 1995 to 1997 was primarily attributable to the expiration of lease term
agreements and the sale of equipment. The increase in lease revenue from 1996 to
1997 reflects the receipt in 1997 of prepaid contractual rental obligations of
$1,142,614 associated with the exchange of the Partnership's interest in a
vessel (see discussion below). Lease revenue in 1996 included the receipt of
lease termination rents of $265,796 received in connection with the sale of the
Partnership's interest in two Boeing 727-Advanced aircraft in July 1996 (see
below).
Interest income for the year ended December 31, 1997 was $138,683 compared to
$178,642 and $248,771 for the years ended December 31, 1996 and 1995,
respectively. Interest income is typically generated from
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temporary investment of rental receipts and equipment sale proceeds in
short-term instruments. Interest income in 1997 included $17,530 earned on a
note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II)
("Semele") (see Note 4 to the financial statements herein). The amount of future
interest income is expected to fluctuate in relation to prevailing interest
rates, the collection of lease revenue and the proceeds from equipment sales.
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 an affiliated equipment leasing program
sponsored by EFG. 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 1997, the Partnership sold equipment having a net book value of $21,692 to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $138,167. During 1997, the Partnership also
exchanged its interest in a vessel with an original cost and net book value of
$4,205,030 and $1,597,566, respectively. In connection with this transaction,
the Partnership realized proceeds of $1,183,401 which resulted in a net loss for
financial statement purposes of $414,165. In addition, as this vessel was
disposed of prior to the expiration of the related lease term, the Partnership
received a prepayment of the remaining contracted rent due under the vessel's
lease agreement, as described above.
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele, a purchase money note of $8,219,500 (the "Note") and
cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987
and has its common stock listed on NASDAQ. At the date of the exchange
transaction, the common stock of Semele had a net book value of approximately
$1.50 per share and closing market value of $1.00 per share. Semele has one
principal real estate asset consisting of an undeveloped 274 acre parcel of land
near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 53.54% beneficial
ownership interest in Larkfield, one of the three Vessels, the Partnership
received $847,080 in cash, became the beneficial owner of 393,394 shares of
Semele common stock (valued at $590,091 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$888,844. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu.
Cash equal to the amount of the Semele Note was placed in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Semele,
EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual
and changing its name from Banyan Strategic Land Fund II. Contemporaneously with
the Consent being obtained, Semele declared a $0.20 per share dividend to be
paid on
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all shares, including those beneficially owned by the Partnership. A dividend of
$78,679 was paid to the Partnership on November 17, 1997. This dividend
represented a return of equity to the Partnership, which proportionately reduced
the Partnership's investment in Semele.
In 1996, the Partnership sold equipment having a net book value of $664,268
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $875,782. These equipment sales included the
sale of the Partnership's interest in two Boeing 727-Advanced jet aircraft with
an original cost and net book value of $2,404,163 and $431,852, respectively,
which the Partnership sold to the existing lessee in July 1996. In connection
with these sales, the Partnership realized sale proceeds of $615,218, which
resulted in a net gain, for financial statement purposes, of $183,366. This
equipment was sold prior to the expiration of the related lease term. The
Partnership also realized lease termination rents in connection with the sale of
its interests in these aircraft, as described above. In addition, the
Partnership recognized a gain, for financial statement purposes, of $31,546
which had been deferred at December 31, 1995 (see below).
In 1995, the Partnership sold equipment having a net book value of $1,045,647
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $475,734. During 1995, the Partnership
transferred its ownership interest in certain trailers previously leased to The
Atchison Topeka and Santa Fe Railroad. The Partnership intended to replace all
of the trailers with comparable trailers and structure the transaction as a
like-kind exchange for income tax reporting purposes. A portion of this
transaction was completed in 1995. A gain of $31,546, pertaining to the trailers
which had not been replaced at December 31, 1995, was deferred in anticipation
of completing the exchange in 1996. During 1996, the Partnership elected not to
replace the remaining trailers and, accordingly, the related deferred gain of
$31,546 was recognized as Gain on Sale of Equipment on the Statement of
Operations during 1996. See Note 3 to the financial statements for additional
discussion of this transaction.
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 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.
Depreciation expense was $1,461,252, $2,024,625 and $3,461,042 for the years
ended December 31, 1997, 1996 and 1995, 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 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.
Interest expense was $24,825 or less than 1% of lease revenue in 1997,
$76,800 or 2.7% of lease revenue in 1996 and $151,589 or 3.9% of lease revenue
in 1995. The Partnership's notes payable are scheduled to be fully amortized by
non-cancelable rents during the year ending December 31, 1998.
Management fees were approximately 5%, 5.1% and 4.6% of lease revenue during
the years ended December 31, 1997, 1996 and 1995, respectively. Management fees
for the year ended December 31, 1996 included $7,780, resulting from an
underaccrual in 1995. Management fees are based on 5% of gross lease revenue
generated by operating leases and 2% of gross lease revenue generated by full
payout leases.
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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. Significant operating expenses were incurred during the years ending
December 31, 1997 and 1996 due to heavy maintenance costs incurred in connection
with the Partnership's interests in two Boeing 727 aircraft. In 1996, the
Partnership entered into a new 36 month lease agreement with Sunworld
International Airlines, Inc. to re-lease one of the aircraft at a base rent to
the Partnership of $39,000 per month. The second aircraft was re-leased to
Transmeridian Airlines beginning April 1997 at a base rent to the Partnership of
$48,000 per month for 8 months and $42,000 per month for 10 months. 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 generally 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 $2,430,133, $1,781,983 and $5,231,054
in 1997, 1996 and 1995, respectively. Net cash from operating activities in both
1997 and 1996 included lease termination rents as described above. Future
renewal, re-lease and equipment sale activities will cause a decline in the
Partnership's lease revenue and corresponding sources of operating cash.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will also decline as the Partnership
experiences a higher frequency of remarketing events.
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 expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the year ended December 31, 1997,
the Partnership realized net cash proceeds of $159,858, compared to $1,602,589
and $1,521,381 in 1996 and 1995, 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. During the year ended December 31, 1996, the Partnership expended
$657,000 to replace certain aircraft engines to facilitate the re-lease of an
aircraft, in which the Partnership has an ownership interest, to Transmeridian
Airlines (as discussed above). There were no equipment acquisitions during 1997
and 1995.
As a result of the vessel exchange (see Results of Operations), the
Partnership became the beneficial owner of 393,394 shares of Semele common stock
(valued at $590,091 ($1.50 per share) at the time of the exchange transaction).
This investment was reduced by a dividend of $78,679 received in November 1997
representing a return of equity to the Partnership. The Partnership also
received a beneficial interest in the Semele Note of $888,844 in connection with
the exchange.
In accordance with the Financial Accounting Standard Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
marketable equity securities classified as available-for-sale are required to be
carried at fair value. As such, the Partnership reduced the carrying value of
its investment in Semele common stock to $0.75 per share (the quoted price of
the Semele stock on NASDAQ at December 31, 1997) resulting in an unrealized loss
in 1997 of $216,366 which was reported as a separate component of partner's
capital. However, the General Partner believes that the underlying tangible
assets of Semele, particularly the Rancho Malibu property, can be sold or
developed on a tax free basis due to Semele's net operating loss carryforwards
and can provide an attractive economic return to the Partnership.
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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 $789,005 in 1995 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. 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. In addition, during 1997 the Partnership utilized a
portion of its available cash to repay certain of its debt obligations. The
Partnership's notes payable are scheduled to be fully amortized by
noncancellable rents during the year ending December 31, 1998.
Cash distributions to the General Partner and Recognized Owners are declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is presented as a component of
financing activities. For the year ended December 31, 1997, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $1,069,295. In accordance with
the Amended and Restated Agreement and Certificate of Limited Partnership, the
Recognized Owners were allocated 95% of these distributions, or $1,015,830, and
the General Partner was allocated 5%, or $53,465. The fourth quarter 1997 cash
distribution was paid on January 13, 1998.
Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG 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,
as well as the outcome of the Class Action Lawsuit described in Note 8 to the
accompanying financial statements. The General Partner anticipates that cash
proceeds resulting from the collection of contractual rents, the outcome of
residual activities and the Partnership's available cash 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 future
quarterly cash distributions are anticipated.
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REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Partners V-B Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners V-B Limited Partnership as of December 31, 1997 and
1996, 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,
1997. 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 Partners V-B
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, 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.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1998
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AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
1997 1996
------------------- -------------------
ASSETS
Cash and cash equivalents $ 2,806,479 $ 1,961,623
Rents receivable, net of allowance for doubtful
accounts of $10,000 at December 31, 1996 4,563 233,569
Accounts receivable - affiliate 165,242 459,038
Note receivable - affiliate 888,844 --
Investment securities - affiliate 295,046 --
Equipment at cost, net of accumulated
depreciation of $17,907,433 and $21,000,199
at December 31, 1997 and 1996, respectively 1,555,180 4,635,690
------------------- -------------------
Total assets $ 5,715,354 $ 7,289,920
------------------- -------------------
------------------- -------------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 24,608 $ 707,842
Accrued interest 209 7,428
Accrued liabilities 9,200 64,750
Accrued liabilities - affiliate 26,753 226,297
Deferred rental income 55,718 45,434
Cash distributions payable to partners 213,860 285,145
------------------- -------------------
Total liabilities 330,348 1,336,896
------------------- -------------------
Partners' capital (deficit):
General Partner (1,447,285) (1,418,884)
Limited Partnership Interests
(1,547,930 Units; initial purchase
price of $25 each) 6,832,291 7,371,908
------------------- -------------------
Total partners' capital 5,385,006 5,953,024
------------------- -------------------
Total liabilities and partners' capital $ 5,715,354 $ 7,289,920
------------------- -------------------
------------------- -------------------
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------------ ------------------ ------------------
Income:
Lease revenue $ 3,033,098 $ 2,823,191 $ 3,901,359
Interest income 121,153 178,642 248,771
Interest income - affiliate 17,530 -- --
Gain on sale of equipment 138,167 907,328 475,734
Loss on exchange of equipment (414,165) -- --
------------------- ------------------ ------------------
Total income 2,895,783 3,909,161 4,625,864
------------------ ------------------ ------------------
Expenses:
Depreciation 1,461,252 2,024,625 3,461,042
Interest expense 24,825 76,800 151,589
Equipment management fees - affiliate 150,289 144,159 177,760
Operating expenses - affiliate 541,774 953,258 376,605
------------------ ------------------ ------------------
Total expenses 2,178,140 3,198,842 4,166,996
------------------ ------------------ ------------------
Net income $ 717,643 $ 710,319 $ 458,868
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Net income
per limited partnership unit $ 0.44 $ 0.44 $ 0.28
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Cash distributions declared
per limited partnership unit $ 0.66 $ 2.42 $ 2.50
------------------ ------------------ ------------------
------------------ ------------------ ------------------
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS'
CAPITAL for the years ended December 31,
1997, 1996 and 1995
General Recognized Owners
Partner ----------------------------------
Amount Units Amount Total
-------------- ------------- ---------------- ---------------
Balance at December 31, 1994 $ (1,076,918) 1,547,930 $ 13,869,258 $ 12,792,340
Net income - 1995 22,943 -- 435,925 458,868
Cash distributions declared (203,675) -- (3,869,825) (4,073,500)
-------------- ------------- ---------------- ---------------
Balance at December 31, 1995 (1,257,650) 1,547,930 10,435,358 9,177,708
Net income - 1996 35,516 -- 674,803 710,319
Cash distributions declared (196,750) -- (3,738,253) (3,935,003)
-------------- ------------- ---------------- ---------------
Balance at December 31, 1996 (1,418,884) 1,547,930 7,371,908 5,953,024
Net income - 1997 35,882 -- 681,761 717,643
Unrealized loss on investment securities (10,818) -- (205,548) (216,366)
Cash distributions declared (53,465) -- (1,015,830) (1,069,295)
-------------- ------------- ---------------- ---------------
Balance at December 31, 1997 $ (1,447,285) 1,547,930 $ 6,832,291 $ 5,385,006
-------------- ------------- ---------------- ---------------
-------------- ------------- ---------------- ---------------
The accompanying notes are an integral part
of these financial statements.
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AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------------- ---------------- ---------------
Cash flows from (used in) operating activities:
Net income $ 717,643 $ 710,319 $ 458,868
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 1,461,252 2,024,625 3,461,042
Gain on sale of equipment (138,167) (907,328) (475,734)
Loss on exchange of equipment 414,165 -- --
Decrease in allowance for doubtful accounts (10,000) -- --
Non-cash proceeds on termination rents (295,533) -- --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 239,006 (52,960) 365,351
Accounts receivable - affiliate 293,796 (235,695) 1,499,460
Increase (decrease) in:
Accrued interest (7,219) (275) (18,471)
Accrued liabilities (55,550) 44,750 4,500
Accrued liabilities - affiliate (199,544) 196,410 (45,964)
Deferred rental income 10,284 2,137 (17,998)
---------------- ---------------- ---------------
Net cash from operating activities 2,430,133 1,781,983 5,231,054
---------------- ---------------- ---------------
Cash flows from (used in) investing activities:
Dividend received 78,679 -- --
Purchase of equipment -- (657,000) --
Proceeds from equipment sales 159,858 1,602,589 1,521,381
---------------- ---------------- ---------------
Net cash from (used in) investing activities 238,537 945,589 1,521,381
---------------- ---------------- ---------------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- -- 789,005
Principal payments - notes payable (683,234) (450,064) (1,750,205)
Distributions paid (1,140,580) (4,668,233) (4,073,500)
---------------- ---------------- ---------------
Net cash used in financing activities (1,823,814) (5,118,297) (5,034,700)
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 844,856 (2,390,725) 1,717,735
Cash and cash equivalents at beginning of year 1,961,623 4,352,348 2,634,613
---------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 2,806,479 $ 1,961,623 $ 4,352,348
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 32,044 $ 77,075 $ 170,060
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Supplemental schedule of non-cash investing and financing activities:
See Note 4 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate. Also, see
Note 3 to the financial statements.
The accompanying notes are an integral part
of these financial statements.
-12-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1997
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
American Income Partners V-B Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on September 29, 1989 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 from
the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial
Limited Partner (AFG Assignor Corporation). On December 27, 1989, the
Partnership issued 1,547,930 units, representing assignments of limited
partnership interests (the "Units"), to 2,402 investors. Unitholders and Limited
Partners (other than the Initial Limited Partner) are collectively referred to
as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV
Incorporated, a Massachusetts corporation and an affiliate of Equis Financial
Group Limited Partnership (formerly American Finance Group), a Massachusetts
limited partnership ("EFG"). The common stock of the General Partner is owned by
AF/AIP Programs Limited Partnership, of which EFG and a wholly-owned subsidiary
are the 99% limited partners and AFG Programs, Inc., which is wholly-owned by
EFG, is the 1% general partner. 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(b) of the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended").
Significant operations commenced December 28, 1989 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 95% to the Recognized Owners and 5% to the
General Partner.
Under the terms of a management agreement between the Partnership and
AF/AIP Programs Limited Partnership and the terms of an identical management
agreement between AF/AIP Programs Limited Partnership and EFG (collectively, the
"Management Agreement"), management services are provided by EFG to the
Partnership at fees which the General Partner believes to be competitive for
similar services (see Note 5).
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-13-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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 federal agency
discount notes and in reverse repurchase agreements with overnight securities.
Under the terms of the agreements, title to the underlying securities passes to
the Partnership. The securities underlying the agreements are book entry
securities. At December 31, 1997, the Partnership had $2,702,263 invested in
federal agency discount notes and in reverse repurchase agreements secured by
U.S. Treasury Bills or interests in U.S. Government securities.
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. Future minimum rents of
$1,255,825 are due as follows:
For the year ending December 31, 1998 $ 1,041,341
1999 73,271
2000 47,071
2001 47,071
2002 47,071
------------
Total $ 1,255,825
------------
------------
The Partnership entered into a new 18-month lease agreement with
Transmeridian Airlines for its proportionate interest in a Boeing 727 Aircraft
at a base rent to the Partnership of $48,000 per month for 8 months and $42,000
per month for 10 months, effective April 30. 1997.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
------------------ ------------------ ------------------
Gearbulk Shipowning Ltd. $ 1,279,436 $ 795,855 $ 735,875
Sunworld International Airlines, Inc. $ 468,000 $ 443,300 $ --
Transmeridian Airlines $ 385,400 $ -- $ --
Northwest Airlines, Inc. $ -- $ 481,941 $ 1,192,661
Horizon Air Industries, Inc. $ -- $ 297,792 $ --
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
-14-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, 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 EFG or an affiliate, asset base price was the lower of (i) the
actual price paid for the equipment by EFG or the affiliate plus all actual
costs accrued by EFG or the affiliate while carrying the equipment less the
amount of all rents earned by EFG 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 AND AMORTIZATION
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 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.
INVESTMENT SECURITIES - AFFILIATE
The Partnership's investment in Semele Group, Inc. is considered to be
available-for-sale and as such is carried at fair value with unrealized gains
and losses reported as a separate component of Partner's Capital (see Note 4).
ACCRUED LIABILITIES - AFFILIATE
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 5). At December 31, 1996, Accrued
Liabilities - Affiliate included $201,399, representing aircraft reserves funded
by the lessee and used to pay maintenance costs which were advanced by EFG.
ALLOCATION OF PROFITS AND LOSSES
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 7 concerning
allocation of income or loss for income tax purposes.
NET INCOME AND CASH DISTRIBUTIONS PER UNIT
-15-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Net income and cash distributions per Unit are based on 1,547,930 units
outstanding during the years ended December 31, 1997, 1996 and 1995 and computed
after allocation of the General Partner's 5% 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 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This
statement establishes standards for reporting comprehensive income and its
components and requires this disclosure be added as a new section in a financial
statement. This statement is effective for fiscal years beginning after December
31, 1997. The Partnership will adopt the new disclosures required by SFAS No.
130 in 1998.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1997. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1997 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.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- --------------------------------------- -------------- ----------------- ---------------------------------------
Aircraft 0-13 $ 16,192,484 FL/KY/OR/TX
Manufacturing 14 1,551,460 OH
Materials handling 0-14 978,609 CA/CT/DE/GA/LA/MD/MI/MO/NC OK/TN/TX/UT
Construction and mining 16 354,736 OH
Trailers/intermodal containers 60 299,643 OK
Retail store fixtures 12 30,320 NC/VA
Energy systems 0 29,996 IL
Tractors and heavy duty trucks 0 18,426 IN
Computers & peripherals 0-12 6,939 AL/GA/KY/MS/NC/SC/TN/VA
-----------------
Total equipment cost 19,462,613
Accumulated depreciation (17,907,433)
-----------------
Equipment, net of accumulated depreciation $ 1,555,180
-----------------
-----------------
During September and November of 1995, the Partnership transferred its
ownership interest in certain trailers, previously leased to The Atchison Topeka
and Santa Fe Railroad, to a third party for cash consideration of $143,500. The
trailers had a net book value of $70,221 at the time of the transfer, resulting
in a net gain for financial statement purposes, of $73,279. In December 1995,
the Partnership replaced a portion of the trailers with comparable trailers and
leased such trailers to a new lessee. The transaction was structured as a
like-kind exchange for income tax reporting purposes. The net carrying value of
the new trailers, $299,650, was net of
-16-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
$41,733, representing the amount of gain deferred on the original trailers. The
Partnership funded this transaction with the $80,961 of the cash consideration
and long-term financing of $260,422. The remaining gain of $31,546 was deferred
in anticipation of completing an additional like-kind exchange in 1996. During
1996, the Partnership elected not to replace the remaining trailers and,
accordingly, the remaining deferred gain of $31,546 was recognized as Gain on
Sale of Equipment on the Statement of Operations during 1996. In addition, the
remaining cash consideration of $62,539 from the original transaction, which had
been reported as Contractual Right for Equipment in 1995, was recognized as
proceeds from equipment sales in 1996.
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. 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, 1997, the Partnership's equipment
portfolio included equipment having a proportionate original cost of
$16,499,034, representing approximately 84% 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 $2,980,749
and a net book value of approximately $809,889 at December 31, 1997 (see Note
6).
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, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. The summary above includes equipment held
for sale or release with an original cost and net book value of approximately
$901,000 and $220,000, respectively, at December 31, 1997. This equipment
consists of the Partnership's proportionate interest in a Pratt & Whitney
JT9D-7J jet engine formerly leased to Southern Air Transport, Inc. The General
Partner is actively seeking the sale or re-lease of this equipment. In addition,
the summary above also includes equipment being leased on a month-to-month
basis.
NOTE 4 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land
Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375.
Semele is a Delaware corporation organized on April 14, 1987 and has its common
stock listed on NASDAQ. At the date of the exchange transaction, the common
stock of Semele had a net book value of approximately $1.50 per share and
closing market value of $1.00 per share. Semele has one principal real estate
asset consisting of an undeveloped 274 acre parcel of land near Malibu,
California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
-17-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 53.54% beneficial
ownership interest in Larkfield, one of the three Vessels, the Partnership
received $847,080 in cash, became the beneficial owner of 393,394 shares of
Semele common stock (valued at $590,091 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$888,844. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu. The Partnership's interest in the vessel had an original cost and
net book value of $4,205,030 and $1,597,566, respectively. The proceeds realized
by the Partnership of $1,183,401 resulted in a net loss, for financial statement
purposes, of $414,165. In addition, as this vessel was disposed of prior to the
expiration of the related lease term, the Partnership received a prepayment of
the remaining contracted rent due under the vessel's lease agreement of
$1,142,614.
Cash equal to the amount of the Semele Note was placed in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele agreed to
seek consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in the size of the Board to as many as nine members,
provided a majority of the Board shall consist of members independent of Semele,
EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual
and changing its name from Banyan Strategic Land Fund II. Contemporaneously with
the Consent being obtained, Semele declared a $0.20 per share dividend to be
paid on all shares, including those beneficially owned by the Partnership. A
dividend of $78,679 was paid to the Partnership on November 17, 1997. This
dividend represented a return of equity to the Partnership, which
proportionately reduced the Partnership's investment in Semele. In May 1997,
Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the
Board of Directors of Semele and in October 1997, James A. Coyne, Executive Vice
President of EFG was elected Semele's President and Chief Operating Officer.
In accordance with the Financial Accounting Standard Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
marketable equity securities classified as available-for-sale are required to be
carried at fair value. As such, the Partnership reduced the carrying value of
its investment in Semele common stock to $0.75 per share (the quoted price of
the Semele stock on NASDAQ at December 31, 1997) resulting in an unrealized loss
in 1997 of $216,366 which was reported as a separate component of partner's
capital.
NOTE 5 - 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 years ended December 31,
1997, 1996 and 1995, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
1997 1996 1995
------------ ------------ ------------
Equipment management fees $ 150,289 $ 144,159 $ 177,760
-18-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Administrative charges 56,929 37,037 21,000
Reimbursable operating
expenses due to third parties 484,845 916,221 355,605
------------ ------------ ------------
Total $ 692,063 $ 1,097,417 $ 554,365
------------ ------------ ------------
------------ ------------ ------------
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG is
compensated by an amount equal to 2.23% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
the lesser of (i) 5% of gross operating lease rental revenues and 2% of gross
full payout lease rental revenues received 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 EFG 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
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 EFG, pursuant to Section
10.4 of the Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG.
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1997, the Partnership was owed $165,242 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1998.
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC"), both Massachusetts limited partnerships formed in
1995 owned and controlled by certain principals of EFG, own 94,570 Units or
6.11% and 17,594 Units or 1.14% of the total outstanding units of the
Partnership, respectively. EFG owns a Class D interest in AALP and a 49% limited
partnership interest in ONC, both of which it acquired in December 1996.
NOTE 6 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of two installment notes of
$24,608 payable to an institutional lender. The installment notes are
non-recourse, with interest rates of 10.12%. The installment notes are
collateralized by the equipment and assignment of the related lease payments and
will be fully amortized by noncancellable rents during the year ending December
31, 1998. The carrying value of notes payable approximates fair value at
December 31, 1997.
NOTE 7 - 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.
-19-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). 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 net
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 any negative balance which may exist in the General Partner's tax
capital account balance. At December 31, 1997, the General Partner had a
positive tax capital 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, 1997, 1996 and 1995:
1997 1996 1995
------------------ ------------------ ------------------
Net income $ 717,643 $ 710,319 $ 458,868
Financial statement depreciation in
excess of (less than) tax depreciation 71,967 (112,391) 712,875
Deferred rental income 10,284 2,137 (17,998)
Other (414,936) 260,417 363,424
------------------ ------------------ ------------------
Net income for federal income tax
reporting purposes $ 384,958 $ 860,482 $ 1,517,169
------------------ ------------------ ------------------
------------------ ------------------ ------------------
The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain on disposals.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997 and 1996:
1997 1996
------------------ ------------------
Partners' capital $ 5,385,006 $ 5,953,024
Unrealized loss on investment securities 216,366 --
-20-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Add back selling commissions and organization
and offering costs 4,348,553 4,348,553
Financial statement distributions in excess of
tax distributions 10,693 14,257
Cumulative difference between federal income tax
and financial statement income (loss) 850,808 1,183,493
------------------ ------------------
Partners' capital for federal income tax reporting purposes $ 10,811,426 $ 11,499,327
------------------ ------------------
------------------ ------------------
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 8 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed
a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
partners (or beneficiaries, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants.
With respect to the Partnership and 10 affiliated partnerships (hereafter
referred to as the "Exchange Partnerships"), the Memorandum of Understanding
provides for the restructuring of their respective business operations into a
single successor company whose securities would be listed and traded on a
national stock exchange. The partners of the Exchange Partnerships would receive
both common stock in the new company and a cash distribution in exchange for
their existing partnership interests. Such a transaction would, among other
things, allow for the consolidation of the Partnership's operating expenses with
other similarly-organized equipment leasing programs. To the extent that the
parties agree upon a Stipulation of Settlement that is approved by the Court,
the complete terms thereof will be communicated to all of the partners (or
beneficiaries) of the Nominal Defendants to enable them to vote thereon.
There can be no assurance that the parties will agree upon a Stipulation
of Settlement, or that it will be approved by the Court, or that the outcome of
the voting by the partners (or beneficiaries) of the Nominal
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AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Defendants, including the Partnership, will result in a settlement finally being
effected or in the Partnership being included in any such settlement. The
General Partner and its affiliates, in consultation with counsel, concur that
there is a reasonable basis to believe that a Stipulation of Settlement will be
agreed upon by the parties and approved by the Court. In the absence of a
Stipulation of Settlement approved by the Court, the Defendants intend to defend
vigorously against the claims asserted in the Class Action Lawsuit. The General
Partner and its affiliates cannot predict with any degree of certainty the
ultimate outcome of such litigation.
On July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Partnership, National
Steel Corporation ("National Steel"), under a certain Master Lease Agreement
("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by
National Steel of certain sales and/or use taxes paid to the State of Illinois
and other remedies provided by the MLA. On August 30, 1995, National Steel filed
a Notice of Removal which removed the case to the United States District Court,
District of Massachusetts. On September 7, 1995, National Steel filed its Answer
to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking
declaratory relief and alleging breach of contract, implied covenant of good
faith and fair dealing and specific performance. EFG filed its Answer to these
counterclaims on September 29, 1995. Though the parties have been discussing
settlement with respect to this matter for some time, to date, the negotiations
have been unsuccessful. Notwithstanding these discussions, EFG recently filed an
Amended and Supplemental Complaint alleging further default under the MLA and
EFG recently filed a motion for Summary Judgment on all claims and
counterclaims. The Court held a hearing on EFG's motion in December 1997 and the
matter remains pending before the Court. The Partnership has not experienced any
material losses as a result of this action.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and various other affiliated investment
programs, filed an action in the United States District Court for the District
of Massachusetts against Northwest Airlines, Inc. ("Northwest"), a lessee of the
Partnership. The trustees are seeking damages from Northwest and a declaratory
judgment concerning Northwest's maintenance and return obligations for certain
aircraft owned by the Partnership. In addition to filing its Answer to the
Plaintiffs' Complaint, Northwest also filed a motion to transfer venue of this
proceeding to Minnesota. The Court denied such motion. The parties have
completed the initial phase of discovery, and motions for partial summary
judgment are pending. At present, it is not possible to determine the ultimate
outcome of this matter.
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ADDITIONAL FINANCIAL INFORMATION
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995.
1997 1996 1995
------------------ ------------------ ------------------
Rents earned prior to disposal of
equipment, net of interest charges $ 2,422,146 $ 10,677,177 $ 3,973,037
Sale proceeds realized upon disposition
of equipment 159,858 1,602,589 1,521,381
------------------ ------------------ ------------------
Total cash generated from rents
and equipment sale proceeds 2,582,004 12,279,766 5,494,418
Original acquisition cost of equipment
disposed 1,968,246 11,569,023 4,386,814
------------------ ------------------ ------------------
Excess of total cash generated to cost
of equipment disposed $ 613,758 $ 710,743 $ 1,107,604
------------------ ------------------ ------------------
------------------ ------------------ ------------------
-23-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
Net income $ 579,476 $ 138,167 $ 717,643
Add:
Depreciation 1,461,252 -- 1,461,252
Management fees 150,289 -- 150,289
Book value of disposed equipment -- 21,692 21,692
Decrease in allowance for doubtful
accounts (10,000) -- (10,000)
Loss on exchange 414,165 -- 414,165
Non-cash proceeds on termination rents (295,533) -- (295,533)
Less:
Principal reduction of notes payable (683,234) -- (683,234)
------------------ ------------------ ------------------
Cash from operations, sales and
refinancings 1,616,415 159,859 1,776,274
Less:
Management fees (150,289) -- (150,289)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 1,466,126 159,859 1,625,985
Other sources and uses of cash:
Cash at beginning of year 1,961,623 -- 1,961,623
Net change in receivables and
accruals 280,773 -- 280,773
Dividend received 78,679 -- 78,679
Less:
Cash distributions paid (980,721) (159,859) (1,140,580)
------------------ ------------------- ------------------
Cash at end of year $ 2,806,480 $ -- $ 2,806,480
------------------ ------------------ ------------------
------------------ ------------------ ------------------
-24-
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1997
For the year ended December 31, 1997, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 555,497
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