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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 June 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-18365
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061971
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1050 Waltham Street, Suite 310, Lexington, MA 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 676-0009
-------------------
88 Broad Street, Boston, MA 02110
- ----------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
-----
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2002 and December 31, 2001 3
Statement of Operations
for the three and six months ended June 30, 2002 and 2001 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 2002 5
Statement of Cash Flows
for the six months ended June 30, 2002 and 2001 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION:
Item 1 - 6 17
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
June 30, December 31,
2002 2001
------------ --------------
ASSETS
Cash and cash equivalents $ 3,600,000 $ 2,481,908
Accounts receivable - affiliate 12 6,410
Interest receivable - affiliate 21,917 22,403
Other assets 19,079 2,759
Interest receivable - loan, net of allowance of
$41,793 and $925,111 at June 30, 2002 and
December 31, 2001, respectively - -
Loan receivable, net of allowance of $498,750
at June 30, 2002 and December 31, 2001 5,201,250 5,201,250
Note receivable - affiliate 888,844 888,844
Investment securities - affiliate 65,303 74,744
Equipment at cost, net of accumulated depreciation
of $249,541 at December 31, 2001 - 41,021
------------ --------------
Total assets $ 9,796,405 $ 8,719,339
============ ==============
LIABILITIES AND PARTNERS' CAPITAL
Accrued liabilities $ 177,274 $ 256,155
Accrued liabilities - affiliate 16,025 -
------------ --------------
Total liabilities 193,299 256,155
------------ --------------
Partners' capital (deficit):
General Partner (1,235,907) (1,293,375)
Limited Partnership interests
(1,547,930 Units; initial purchase price of $25 each) 10,848,454 9,756,559
Accumulated other comprehensive loss (9,441) -
------------ --------------
Total partners' capital 9,603,106 8,463,184
------------ --------------
Total liabilities and partners' capital $ 9,796,405 $ 8,719,339
============ ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
---------- ----------- ----------- ------------
INCOME
Lease revenue $ 1,470 $ 11,972 $ 12,870 $ 29,513
Interest income 12,026 24,566 23,283 47,277
Interest income - loan - - - 226,569
Interest income - affiliate 21,917 21,917 44,077 44,077
Gain on sale of equipment 16,784 - 16,784 -
Other income - - 322,336 -
---------- ----------- ----------- ------------
Total income 52,197 58,455 419,350 347,436
EXPENSES
Depreciation - 10,255 10,255 20,510
Equipment management fees - affiliate 76 257 304 792
Operating expenses - affiliate 81,562 202,773 142,746 306,865
Recovery of bad debt expense (883,318) - (883,318) -
Write-down of impaired loan and interest receivable - 1,423,861 - 1,423,861
Write-down of investment securities - affiliate - - - 31,963
---------- ----------- ----------- ------------
Total expenses (801,680) 1,637,146 (730,013) 1,783,991
Net income (loss) $ 853,877 $(1,578,691) $1,149,363 $(1,436,555)
========== ============ ========== ============
Net income (loss) per limited partnership unit $ 0.52 $ (0.97) $ 0.71 $ (0.88)
========== ============ ========== ============
Cash distributions declared
per limited partnership unit $ - $ - $ - $ -
========== ============ ========== ============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Accumulated
General Other
Partner Limited Partners Comprehensive
Amount Units Amount Loss Total
------------ --------- ----------- --------------- -----------
Balance at December 31, 2001 $(1,293,375) 1,547,930 $ 9,756,559 $ - $8,463,184
Net income 57,468 - 1,091,895 - 1,149,363
Unrealized loss on investment
securities - affiliate - - - (9,441) (9,441)
------------ --------- ----------- --------------- -----------
Comprehensive income (loss) 57,468 - 1,091,895 (9,441) 1,139,922
------------ --------- ----------- --------------- -----------
Balance at June 30, 2002 $(1,235,907) 1,547,930 $10,848,454 $ (9,441) $9,603,106
============ ========= =========== =============== ===========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
.. ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ 1,149,363 $ (1,436,555)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 10,255 20,510
Gain on sale of equipment (16,784) -
Write-down of impaired loan and interest receivable - 1,423,861
Write-down of investment securities - affiliate - 31,963
Recovery of bad debt expense (883,318) -
Changes in assets and liabilities:
Accounts receivable - affiliate 6,398 2,347
Interest receivable - affiliate 486 (21,917)
Other assets (16,320) (19,305)
Interest receivable - loan 883,318 (226,569)
Accrued liabilities (78,881) 11,338
Accrued liabilities - affiliate 16,025 15,865
Other liabilities - (999)
-------------- --------------
Net cash provided by (used in) operating activities 1,070,542 (199,461)
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 47,550 -
-------------- --------------
Net cash provided by investing activities 47,550 -
-------------- --------------
Net increase (decrease) in cash and cash equivalents 1,118,092 (199,461)
Cash and cash equivalents at beginning of period 2,481,908 2,400,126
-------------- --------------
Cash and cash equivalents at end of period $ 3,600,000 $ 2,200,665
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 5 to the financial statements regarding the decrease of the
Partnership's carrying value of its investment securities - affiliate during the
six months ended June 30, 2002.
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2002
(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 financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of American Income Partners V-B Limited Partnership (the
"Partnership"). Except as disclosed herein, there has been no material change
to the information presented in the footnotes to the 2001 Annual Report included
in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 2002 and December 31, 2001 and results of operations for
the three and six months ended June 30, 2002 and 2001 have been made and are
reflected.
NOTE 2 - 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. At June 30, 2002, no future minimum
lease payments were due to the Partnership.
NOTE 3 - EQUIPMENT
- ---------------------
During the quarter ended June 30, 2002, the Partnership sold all of its
remaining equipment resulting in a net gain of $16,784.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''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 $5,700,000. 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, an unrelated 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 6 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 Partnerships as collateral. Echelon Residential Holdings
has no material business interests other than those connected with the real
estate properties owned by Echelon Residential LLC.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $498,750, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $925,111 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
During the second quarter of 2002, the Partnership received $883,318 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $883,318 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt
expense" in the Statement of Operations. At June 30, 2002, the General Partner
believes that the net carrying value of the loan receivable is appropriate.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the six month periods ended June 30, 2002 and 2001 is as follows:
2002 2001
------------- ------------
Total assets $ 94,423,115 $79,159,776
Total liabilities $107,902,966 $85,455,528
Minority interest $ 1,108,573 $ 1,782,982
Total deficit $(14,588,424) $(8,078,734)
Total revenues $ 1,430,874 $ 1,705,679
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 4,061,173 $ 5,924,774
Net loss $ (2,630,299) $(4,219,095)
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 39,339 shares of Semele Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$888,844. 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
$44,077 related to the Semele Note during each of the six month periods ended
June 30, 2002 and 2001.
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. 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.
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 six months ended June 30, 2002, the Partnership decreased the
carrying value of its investment in Semele common stock to $1.66 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to June 30, 2002), resulting in an unrealized loss of $9,441.
This loss was reported as a component of comprehensive income included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the General Partner determined that the decline in market
value of its investment in Semele common stock was other-than-temporary. As a
result, on March 31, 2001, the Partnership wrote down the carrying value 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) resulting in a loss of $31,963 in the six months ended June 30, 2001. An
additional write-down of the investment in Semele common stock occurred in
December 31, 2001.
NOTE 6 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the six month periods ended June 30, 2002
and 2001, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2002 2001
-------- --------
Equipment management fees $ 304 $ 792
Administrative charges 55,149 32,130
Reimbursable operating expenses
due to third parties 87,597 274,735
-------- --------
Total $143,050 $307,657
======== ========
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 June 30, 2002, the
Partnership was owed $12 by EFG for interest earned on such funds. These funds
were remitted to the Partnership in July 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 7 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al.
- -------
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement. See further discussion of the Revised Settlement in
Note 8 - Subsequent Events.
Action involving Transmeridian Airlines
------------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, First Security Bank, N.A., as trustee of the
Partnership and certain affiliated investment programs (collectively, the
"Plaintiffs), filed a lawsuit against Prime Air, Inc. d/b/a Transmeridian
Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and Apple Vacations,
West, Inc., both d/b/a Apple Vacations ("Apple"), asserting various causes of
action for declaratory judgment and breach of contract.
As of March 13, 2002, the parties settled all claims involved in this lawsuit
and in a related lawsuit involving affiliated entities but not the Partnership.
The material terms of settlement provide: (i) in exchange for payment of
$2,100,000 from Apple to the Plaintiffs all claims arising from or related to
the lawsuits are dismissed with prejudice; (ii) the Plaintiffs shall have
Allowed Claims against the bankruptcy estate of Transmeridian in the aggregate
amount of $2,700,000; (iii) the Plaintiffs will be paid $400,000 from the
insurance proceeds relating to the aircraft loss; and (iv) each of the parties
will receive mutual releases of all claims and counterclaims.
The Partnership has received and recorded approximately $322,000 in the first
quarter of 2002, as its share of the $2,100,000 payment. The Partnership has
not yet received or recorded its share of the $400,000 from the insurance
proceeds. In addition, the Partnership recognized $494,000 as income in the
fourth quarter of 2001 that had been held in escrow pending the resolution of
the litigation.
NOTE 8 - SUBSEQUENT EVENTS
- ------------------------------
As of August 9, 2002, the Partnership has sold all of its equipment and
transferred its remaining cash and non-cash assets to the American Income
Partners V-B Limited Partnership Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Liquidating Trust is in the process of distributing the Partnership's cash,
net of reserves for known and contingent liabilities, in accordance with the
terms of the Revised Settlement.
- ------
AMERICAN INCOME PARTNERS V-B 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-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 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 performance and
liquidation of the Partnership's remaining non-equipment assets.
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, Equis Financial Group Limited Partnership ("EFG") has agreed to buy
the loans made by the Partnerships to Echelon Residential Holdings LLC ("Echelon
Residential Holdings") for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement.
As of August 9, 2002, the Partnership has sold all of its equipment and
transferred its remaining cash and non-cash assets to the American Income
Partners V-B Limited Partnership Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Liquidating Trust is in the process of distributing the Partnership's cash,
net of reserves for known and contingent liabilities, in accordance with the
terms of the Revised Settlement.
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
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
unintentionally may have engaged in an activity or activities that may be
construed to fall within the scope of the 1940 Act. The General Partner has
been 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.
In a letter dated May 10, 2001, the staff of the SEC informed the general
partner that the staff believes that the Partnership and seven of its affiliated
partnerships are unregistered investment companies as defined in Section
3(a)(1)(C) of the 1940 Act. 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. The General Partner has consulted counsel and believes that the
Partnership is not an investment company.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
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 Partnership's leases are accounted for as operating leases and are
noncancellable. Rents received prior to their due dates are deferred.
Asset lives and depreciation method: The Partnership's primary business involved
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. 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 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 the 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.
Allowance for loan losses: The Partnership periodically evaluates the
- ----------------------------
collectibility of its loan's contractual principal and interest and the
- ----
existence of loan impairment indicators, including contemporaneous economic
- ----
conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. 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. Inherent in
the Partnership's estimate of net realizable values are assumptions regarding
estimated future cash flows. If these assumptions or estimates change in the
future, the Partnership could be required to record impairment charges for these
assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. The ultimate
legal and financial liability with respect to such matters cannot be estimated
with certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
- -----------------------
For the three and six month periods ended June 30, 2002, the Partnership
recognized lease revenue of $1,470 and $12,870, respectively, compared to
$11,972 and $29,513, respectively, for the same periods in 2001. The decrease
in lease revenue from 2001 to 2002 resulted primarily from lease term
expirations and the sale of equipment. During the second quarter of 2002, the
Partnership sold all of its remaining equipment.
Interest income for the three and six month periods ended June 30, 2002 was
$33,943 and $67,360, respectively, compared to $46,483 and $317,923,
respectively, for the same periods in 2001. Interest income is generated
principally from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and interest earned on the loans receivable
from Echelon Residential Holdings and Semele.
Interest income included $21,917 and $44,077 during both the three and six
months ended June 30, 2002 and 2001, respectively, earned on a note receivable
from Semele. The note receivable from Semele is scheduled to mature in April
2003.
Interest income also included $226,569 during the six months ended June 30,
2001, earned on the loan receivable from Echelon Residential Holdings. The
Partnership ceased accruing interest on this loan, effective April 1, 2001. See
further discussion below.
In the fourth quarter of 2001, a court judgment was entered in favor of the
Partnership and certain affiliates related to the litigation with Transmeridian
Airlines. The Partnership received settlement proceeds of approximately
$322,000 from the defendants in March 2002, which was recognized as other income
in the first quarter of 2002.
During the three and six months ended June 30, 2002, the Partnership sold fully
depreciated equipment to existing lessees and third parties, resulting in net
gains, for financial statement purposes, of $16,784. There were no equipment
sales during the six months ended June 30, 2001. As of June 30, 2002, the
Partnership owned no equipment.
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 any gain or loss reported in the financial statements may not
necessarily be indicative of the total residual value the Partnership achieved
from leasing the equipment.
Depreciation expense for the six month period ended June 30, 2002 was $10,255,
compared to $10,255 and $20,510, respectively, for the three and six month
periods ended June 30, 2001. 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.
Management fees were $76 and $304, respectively, for the three and six months
ended June 30, 2002 compared to $257 and $792, respectively, for the same
periods in 2001. 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.
Operating expenses were $81,562 and $142,746, respectively, for the three and
six month periods ended June 30, 2002, compared to $202,773 and $306,865,
respectively, for the same periods in 2001. In 2001, operating expenses
included approximately $115,000 related to ongoing litigation and approximately
$59,000 related to the Class Action Lawsuit. 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 have been incurred in connection with equipment being remarketed.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $498,750, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $925,111 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
During the second quarter of 2002, the Partnership received $883,318 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $883,318 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt
expense" in the Statement of Operations.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in 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 realized
loss in the six months ended June 30, 2001 of $31,963.
Liquidity and Capital Resources and Discussion of Cash Flows
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The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from asset rental transactions.
Historically, the Partnership's principal source of cash from operations was
provided by the collection of periodic rents, however, beginning in 1999 the
principal source of such cash has generally resulted from the receipt of
interest income. These cash inflows are used to pay management fees and
operating costs. Operating activities generated a net cash inflow of $1,070,542
for the six months ended June 30, 2002 and net cash outflow of $199,461 for the
six months ended June 30, 2001. The cash inflow in 2002 is primarily the result
of the receipt of approximately $883,000 of interest earned on the loan
receivable from Echelon Residential Holdings and approximately $322,000 of
litigation settlement proceeds.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 2002, the Partnership realized equipment sale proceeds of
$47,550. At June 30, 2002, no future minimum lease payments were due and all
remaining equipment was sold.
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. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $498,750, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $925,111 recorded on the loan
receivable through March 31, 2001 and ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001. During
the quarter ended June 30, 2002, the Partnership received a partial payment of
the interest due on this loan as discussed above.
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 structuring the loan this way may
be in violation of the prohibition against loans to affiliates in the
Partnership Agreements.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 39,339 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $888,844. 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. 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.
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 six months ended June 30, 2002, the Partnership decreased the
carrying value of its investment in Semele common stock to $1.66 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to June 30, 2002), resulting in an unrealized loss of $9,441.
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 investment in 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 realized
loss in the six months ended June 30, 2001 of $31,963.
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 and 2001, the General Partner determined that the
decline in 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, the Partnership
has retained funds in connection with the Class Action Lawsuit.
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. No cash distributions have been declared since 1999. 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
primarily dependent upon the proceeds realized from the liquidation of the
Partnership's remaining assets offset by the associated costs of such
liquidation and dissolution of the Partnership.
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).
For instance, selling commissions and 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.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at June 30, 2002. 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, 2001, the
General Partner had a positive tax capital account balance.
As of August 9, 2002, the Partnership has sold all of its equipment and
transferred its remaining cash and non-cash assets to the American Income
Partners V-B Limited Partnership Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Liquidating Trust is in the process of distributing the Partnership's cash,
net of reserves for known and contingent liabilities, in accordance with the
terms of the Revised Settlement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and currently has a stated fixed annual rate of 18% with interest due at
maturity (see discussion above). 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 for the six
months ended June 30, 2002 was not material.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 7 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
Response:
Exhibit 2.13
Amendment to Subsection 2.2 (f) of the Revised Stipulation
of Settlement dated January 29, 2002
Exhibit 2.14
Plan of Liquidation and Dissolution dated July 18, 2002
Exhibit 2.15
Account Agency Agreement between Equis Financial Group
Limited Partnership and Wilmington Trust Company, dated Apr
Exhibit 2.16
Liquidating Trust Agreement between the Partnership and
Wilmington Trust Company dated July 18, 2002
Exhibit 99.1
Certification Pursuant to 18 U.S. C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
Exhibit 99.2
Certification Pursuant to 18 U.S. C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
Item 6(b). Reports on Form 8-K
. Form 8-K dated July 18, 2002 to include the Court approved settlement of the Class Action Lawsuit.
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-B 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: August 14, 2002
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