10-Q 1 doc1.txt 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. 0-18364 AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP ------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-3057303 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 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-A 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-A 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 $ 747,253 $ 448,696 Rents receivable 2,220 2,220 Accounts receivable - affiliate 2,239 10,527 Interest receivable - affiliate 19,022 19,445 Prepaid expenses 12,273 2,041 Interest receivable - loan, net of allowance of $15,651 and $350,569 at June 30, 2002 and December 31, 2001, respectively - - Loan receivable, net of allowance of $189,000 at June 30, 2002 and December 31, 2001 1,971,000 1,971,000 Note receivable - affiliate 771,450 771,450 Investment securities - affiliate 56,679 64,424 Equipment at cost, net of accumulated depreciation of $348,957 at December 31, 2001 - - ------------ -------------- Total assets $ 3,582,136 $ 3,289,803 ============ ============== LIABILITIES AND PARTNERS' CAPITAL Accrued liabilities $ 148,363 $ 211,878 Accrued liabilities - affiliate 22 25,435 ------------ -------------- Total liabilities 148,385 237,313 ------------ -------------- Partners' capital (deficit): General Partner (1,358,899) (1,378,349) Limited Partnership interests (1,380,661 Units; initial purchase price of $25 each) 4,800,395 4,430,839 Accumulated other comprehensive loss (7,745) - ------------ -------------- Total partners' capital 3,433,751 3,052,490 ------------ -------------- Total liabilities and partners' capital $ 3,582,136 $ 3,289,803 ============ ==============
The accompanying notes are an integral part of these financial statements. AMERICAN INCOME PARTNERS V-A 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 $ 420 $ 8,505 $ 7,071 $ 25,326 Interest income 2,137 4,897 4,031 11,255 Interest income - loan - - - 85,858 Interest income - affiliate 19,022 19,022 38,255 38,255 Other income 7,764 - 128,103 - Gain on sale of equipment 22,834 - 22,834 16,080 --------- ---------- ---------- ---------- Total income 52,177 32,424 200,294 176,774 EXPENSES Equipment management fees - affiliate 140 425 473 1,266 Operating expenses - affiliate 90,220 95,227 145,733 191,010 Recovery of bad debt expense (334,918) - (334,918) - Write-down of impaired loan and interest receivable - 539,569 - 539,569 Write-down of investment securities - affiliate - - - 27,742 --------- ---------- ---------- ---------- Total expenses (244,558) 635,221 (188,712) 759,587 --------- ---------- ---------- ---------- Net income (loss) $ 296,735 $(602,797) $ 389,006 $(582,813) ========= ========== ========== ========== Net income (loss) per limited partnership unit $ 0.20 $ (0.41) $ 0.27 $ (0.40) ========= ========== ========== ========== Cash distributions declared per limited partnership unit $ - $ - $ - $ - ========= ========== ========== ==========
The accompanying notes are an integral part of these financial statements. AMERICAN INCOME PARTNERS V-A 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 $(1,378,349) 1,380,661 $4,430,839 $ - $3,052,490 Net income 19,450 - 369,556 - 389,006 Unrealized loss on investment securities - affiliate - - - (7,745) (7,745) ------------ --------- ---------- --------------- ----------- Comprehensive income (loss) 19,450 - 369,556 (7,745) 381,261 ------------ --------- ---------- --------------- ----------- Balance at June 30, 2002 $(1,358,899) 1,380,661 $4,800,395 $ (7,745) $3,433,751 ============ ========= ========== =============== ===========
The accompanying notes are an integral part of these financial statements. AMERICAN INCOME PARTNERS V-A 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) $ 389,006 $ (582,813) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of equipment (22,834) (16,080) Write-down of impaired loan and interest receivable - 539,569 Write-down of investment securities - affiliate - 27,742 Recovery of bad debt expense (334,918) - Changes in assets and liabilities: Accounts receivable - affiliate 8,288 4,199 Interest receivable - affiliate 423 (19,022) Prepaid expenses (10,232) (14,285) Interest receivable - loan 334,918 (85,858) Accrued liabilities (63,515) (475,265) Accrued liabilities - affiliate (25,413) 14,385 ---------- ----------- Net cash provided by (used in) operating activities 275,723 (607,428) ---------- ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 22,834 16,080 ---------- ----------- Net cash provided by investing activities 22,834 16,080 ---------- ----------- Net increase (decrease) in cash and cash equivalents 298,557 (591,348) Cash and cash equivalents at beginning of period 448,696 1,003,350 ---------- ----------- Cash and cash equivalents at end of period $ 747,253 $ 412,002 ========== ===========
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-A 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-A 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 month periods 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. As of June 30, 2002, the Partnership has no future rents due under noncancellable lease agreements. NOTE 3 - EQUIPMENT --------------------- During the quarter ended June 30, 2002, the Partnership sold all of its remaining equipment resulting in a net gain of $22,834. 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 $2,160,000. Echelon Residential Holdings, through a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to acquire various real estate assets from Echelon International Corporation, 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 $189,000, 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 $350,569 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 $334,918 from Echelon Residential Holdings for interest due on the loan. As a result, the Partnership reversed $334,918 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, respectively, 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 in 1997, the Partnership became the beneficial owner of 34,144 shares of Semele common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $771,450. The Semele Note matures in April 2003 and bears an annual interest rate of 10% with mandatory principal reductions prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The Partnership recognized interest income of $38,255 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 $7,745. 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 $27,742 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 $ 473 $ 1,266 Administrative charges 72,241 35,634 Reimbursable operating expenses due to third parties 73,492 155,376 -------- -------- Total $146,206 $192,276 ======== ========
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 $2,239 by EFG for such funds and the interest thereon. 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 $120,000 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 $184,576 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-A 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-A LIMITED PARTNERSHIP FORM 10-Q PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations. --------------- Certain statements in this quarterly report of American Income Partners V-A Limited Partnership (the "Partnership") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the 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-A 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 $420 and $7,071, respectively, compared to $8,505 and $25,326, respectively, for the same periods in 2001. The decrease in lease revenue between 2001 and 2002 resulted primarily from renewal 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 $21,159 and $42,286, respectively, compared to $23,919 and $135,368, 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 Group. Interest income included $19,022 and $38,255 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 $85,858 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 $120,000 from the defendants in March 2002, which was recognized as other income in the first quarter of 2002. During the six months ended June 30, 2002 and 2001, the Partnership sold fully depreciated equipment to existing lessees and third parties, resulting in net gains, for financial statement purposes, of $22,834 and $16,080, respectively. 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. Management fees were $140 and $473, respectively, for the three and six months ended June 30, 2002 compared to $425 and $1,266, respectively, for the same periods in 2001. Management fees are based on 5% of gross lease revenue generated by operating leases. Operating expenses were $90,220 and $145,733, respectively, for the three and six month periods ended June 30, 2002, compared to $95,227 and $191,010, respectively, for the same periods in 2001. In 2001, operating expenses included approximately $59,000 related to the Class Action Lawsuit and approximately $27,000 related to other ongoing litigation. 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 $189,000, 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 $350,569 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 $334,918 from Echelon Residential Holdings for interest due on the loan. As a result, the Partnership reversed $334,918 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 $27,742. Liquidity and Capital Resources and Discussion of Cash Flows -------------------------------------------------------------------- The Partnership by its nature is a limited life entity. The Partnership's principal operating activities have resulted from asset rental transactions. Historically, the Partnership's principal source of cash from operations was provided by the collection of periodic rents, however, beginning in 1999 the principal source of such cash has generally resulted from the receipt of interest income. Cash inflows are used to pay management fees and operating costs. Operating activities generated a net cash inflow of $275,723 for the six months ended June 30, 2002 and a net cash outflow of $607,428 for the six months ended June 30, 2001. The cash inflow in 2002 is primarily the result of the receipt of approximately $335,000 of interest earned on the loan receivable from Echelon Residential Holdings and approximately $120,000 of litigation settlement proceeds. The net cash outflow in 2001 primarily reflected the payment of a litigation settlement and related legal fees, which had been accrued in 2000. 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 and 2001, the Partnership realized equipment sale proceeds of $22,834 and $16,080, respectively. 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 $189,000, 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 $350,569 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 34,144 shares of Semele common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $771,450. The Semele Note matures in April 2003 and bears an annual interest rate of 10% with mandatory principal reductions prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The exchange in 1997 involved the sale by five partnerships and certain other affiliates of their beneficial interests in three cargo vessels to Semele in exchange for cash, Semele common stock and the Semele Note. At the time of the transaction, Semele was a public company unaffiliated with the general partners and the partnerships. Subsequently, as part of the exchange transaction, Semele solicited the consent of its shareholders to, among other things, engage EFG to provide administrative services and to elect certain affiliates of EFG and the general partners as members of the board of directors. At that point, Semele became affiliated with EFG and the general partners. 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 $7,745. 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 $27,742. The Semele Note and the Semele common stock are subject to a number of risks including, Semele's ability to make loan payments which is dependent upon the liquidity of Semele and primarily Semele's ability to sell or refinance its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The market value of the Partnership's investment in Semele common stock has generally declined since the Partnership's initial investment in 1997. In 1998 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, 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-A 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 -------------------------------------------------------------------------- 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-A 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-A LIMITED PARTNERSHIP By: AFG Leasing IV Incorporated, a Massachusetts corporation and the General Partner of the Registrant. By: /s/ Michael J. Butterfield ----------------------------- Michael J. Butterfield Treasurer of AFG Leasing IV Incorporated (Duly Authorized Officer and Principal Financial and Accounting Officer) Date: August 14, 2002 -----------------