-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQadi840y+OawQdf2L0pPEPIJuWaMdWAbDYGXUn0jSH1QQx0ZT++xjDZFVkYsZ4A 6DofZPn4VEd9kY83d03VdA== 0001047469-99-012740.txt : 19990402 0001047469-99-012740.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012740 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME PARTNERS V B LTD PARTNERSHIP CENTRAL INDEX KEY: 0000847558 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043061971 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18364 FILM NUMBER: 99580982 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6175421200 MAIL ADDRESS: STREET 2: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 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 Identification No.) incorporation or organization) 88 BROAD ST., SIXTH FLOOR, BOSTON, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 Securities registered pursuant to Section 12(b) of the Act NONE ------------------------ NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ---------------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: 1,547,930 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST (Title of class) (Title of class) 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 / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders for the year ended December 31, 1998 (Part I and II) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 5 Item 3. Legal Proceedings............................................................................. 5 Item 4. Submission of Matters to a Vote of Security Holders........................................... 5 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 6 Item 6. Selected Financial Data....................................................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8 Item 8. Financial Statements and Supplementary Data................................................... 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8 PART III Item 10. Directors and Executive Officers of the Partnership........................................... 9 Item 11. Executive Compensation........................................................................ 11 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 11 Item 13. Certain Relationships and Related Transactions................................................ 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14-15
2 PART I ITEM 1. BUSINESS. (a) General Development of Business American Income Partners V-B Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on September 29, 1989 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On December 27, 1989, the Partnership issued 1,547,930 units, representing assignments of limited partnership interests (the "Units"), to 2,402 investors. Unitholders and Limited Partners (other than the Initial Limited Partner) are collectively referred to as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV Incorporated, a Massachusetts corporation and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG"). The common stock of the General Partner is owned by AF/AIP Programs Limited Partnership, of which EFG and a wholly-owned subsidiary are the 99% limited partners and AFG Programs, Inc., which is wholly-owned by EFG, is the 1% general partner. The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). (b) Financial Information about Industry Segments The Partnership is engaged in only one industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full payout or operating lease basis. Full payout leases are those in which aggregate undiscounted noncancellable rents equal or exceed the acquisition cost of the leased equipment. Operating leases are those in which the aggregate undiscounted noncancellable rental payments are less than the acquisition cost of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives were to acquire and lease equipment that would: 1. Generate quarterly cash distributions; 2. Preserve and protect Partnership capital; and 3. Maintain substantial residual value for ultimate sale. The Partnership has the additional objective of providing certain federal income tax benefits. The Closing Date of the Offering of Units of the Partnership was December 27, 1989. The initial purchase of equipment and the associated lease commitments occurred on December 28, 1989. The acquisition of the equipment and its associated leases is described in Note 3 to the financial statements included in Item 14, herein. The Restated Agreement, as amended, provides that the Partnership will terminate no later than December 31, 2000. However, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 7 to the accompanying financial statements. 3 The Partnership has no employees; however, it is managed pursuant to a Management Agreement with EFG or one of its affiliates (the "Manager"). The Manager's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for such services as provided for in the Restated Agreement, as amended, described in Item 13 herein, and in Note 5 to the financial statements, included in Item 14, herein. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Partnership must compete with lease programs offered directly by manufacturers and other equipment leasing companies, including limited partnerships and trusts organized and managed similarly to the Partnership, and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. Many competitors have greater financial resources and more experience than the Partnership, the General Partner and the Manager. In addition, default by a lessee under a lease may cause equipment to be returned to the Partnership at a time when the General Partner or the Manager is unable to arrange for the re-lease or sale of such equipment. This could result in the loss of anticipated revenue. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 is incorporated herein by reference to Note 2 to the financial statements in the 1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. (d) Financial Information about Foreign and Domestic Operations and Export Sales Not applicable. 4 ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements in the 1998 Annual Report. ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 7 to the financial statements in the 1998 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 5 PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. (a) Market Information There is no public market for the resale of the Units and it is not anticipated that a public market for resale of the Units will develop. (b) Approximate Number of Security Holders At December 31, 1998, there were 2,203 record holders of Units in the Partnership. (c) Dividend History and Restrictions Pursuant to Article VI of the Restated Agreement, as amended, the amount of cash distributions to be declared and paid to the Partners is determined on a quarterly basis. Each quarter's distribution may vary in amount and is made 95% to the Limited Partners and 5% to the General Partner. Generally, cash distributions are paid within 30 days after the completion of each calendar quarter. Distributions in 1998 and 1997 were as follows:
GENERAL RECOGNIZED TOTAL PARTNER OWNERS ------------ --------- ------------ Total 1998 distributions................................................... $ 855,440 $ 42,772 $ 812,668 Total 1997 distributions................................................... 1,069,295 53,465 1,015,830 ------------ --------- ------------ Total................................................................ $ 1,924,735 $ 96,237 $ 1,828,498 ------------ --------- ------------ ------------ --------- ------------
Distributions payable were $213,860 at both December 31, 1998 and 1997. 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. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership's ownership interests in commercial aircraft involve unique risks resulting from the specialized nature of these assets and the potential for the Partnership to incur significant remarketing costs at lease expiration. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage primarily in connection with the Partnership's aircraft. At December 31, 1998, the Partnership owned interests in two Boeing 727 aircraft, one of which was under contract to be sold to a third party buyer subject to the buyer's right to return the aircraft on or before May 15, 1999. See Notes 3 and 8 of the accompanying financial statements concerning this aircraft. See also Note 3 of the accompanying financial statements concerning the sale of the second aircraft in January 1999. In addition, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 7 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership has exposure to aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level 6 of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 7 to the accompanying financial statements. Cash distributions consist of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. "Distributable Cash From Operations" means the net cash provided by the Partnership's normal operations after general expenses and current liabilities of the Partnership are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the General Partner, and increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash from Operations does not include any Distributable Cash from Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after Payout, any accrued and unpaid Subordinated Remarketing Fees. "Cash From Sales or Refinancings" means cash received by the Partnership from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Partnership required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the General Partner, but not including any Subordinated Remarketing Fees whether or not then due and payable) and (b) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the General Partner and (ii) increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations. In the event the Partnership accepts a note in connection with any sale or refinancing transaction, all payments subsequently received in cash by the Partnership with respect to such note shall be included in Cash From Sales or Refinancings, regardless of the treatment of such payments by the Partnership for tax or accounting purposes. If the Partnership receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. "Payout" is defined as the first time when the aggregate amount of all distributions to the Recognized Owners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Recognized Owners' original capital contributions plus a cumulative annual return of 11% (compounded quarterly and calculated beginning with the last day of the month of the Partnership's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Recognized Owners exceed the amount required to satisfy the cumulative annual return of 11% (compounded quarterly) on the Recognized Owners' aggregate unreturned capital contributions, such 7 calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each fiscal quarter. ITEM 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1998 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 1998 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. (a-b) Identification of Directors and Executive Officers The Partnership has no Directors or Officers. As indicated in Item 1 of this report, AFG Leasing lV Incorporated is the sole General Partner of the Partnership. Under the Restated Agreement, as amended, the General Partner is solely responsible for the operation of the Partnership's properties. The Limited Partners have no right to participate in the control of the Partnership's general operations, but they do have certain voting rights, as described in Item 12 herein. The names, titles and ages of the Directors and Executive Officers of the General Partner as of March 15, 1999 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM - ------------------------------------ --------------------------------------------- --- --------------------- Geoffrey A. MacDonald Chairman and a member of the Executive 50 Until a successor is Committee of EFG and President and a Director duly elected and of the General Partner qualified Gary D. Engle President and Chief Executive Officer and 50 member of the Executive Committee of EFG and a Director of the General Partner Gary M. Romano Executive Vice President and Chief Operating 39 Officer of EFG and Clerk of the General Partner James A. Coyne Executive Vice President of EFG 38 Michael J. Butterfield Senior Vice President, Finance and Treasurer 39 of EFG and Treasurer of the General Partner Sandra L. Simonsen Senior Vice President, Information Systems of 48 EFG Gail D. Ofgant Senior Vice President, Lease Operations of 33 EFG
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Partners, Directors or Executive Officers. (e) Business Experience Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the General Partner. Mr. MacDonald was also a co-founder, Director, and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition 9 Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole shareholder and Director of its general partner, Equis Corporation and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is Vice President and a Director of certain of EFG's subsidiaries and affiliates, a limited partner in AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has a MBA from Harvard University and a BS degree from the University of Massachusetts (Amherst). Mr. Romano, age 39, became Executive Vice President and Chief Operating Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in November 1989, became Vice President and Controller in April 1993 and Chief Financial Officer in April 1995. Mr. Romano assumed his current position in April 1996. Mr. Romano is also Vice President and Chief Financial Officer of Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately held real estate development and mortgage origination company that he joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is a Certified Public Accountant and holds a B.S. degree from Boston College. Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and President, Chief Operating Officer and a member of the Board of Directors of Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993 through November 1994, he was employed by the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985, he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates and is Treasurer of the General Partner and Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance and Treasurer of EFG and certain of its affiliates in April 1996 and was promoted to Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (UK) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors Mortgage Insurance Company, which she joined in 1973. 10 Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a BA degree from Wilson College. Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to Manager Lease Operations in April 1994, and became Vice President of Lease Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers or employees of the General Partner or its Affiliates employees of the Partnership. The Partnership has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the General Partner or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Partnership has no employees, as discussed in Item 11(a), pursuant to section 10.4 of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13, herein and Note 5 to the financial statements included in Item 14, herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the General Partner or its Affiliates which results or may result from their resignation, retirement or any other termination. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. By virtue of its organization as a limited partnership, the Partnership has no outstanding securities possessing traditional voting rights. However, as provided in Section 11.2(a) of the Restated Agreement, as amended (subject to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners has voting rights with respect to: 1. Amendment of the Restated Agreement; 2. Termination of the Partnership; 11 3. Removal of the General Partner; and 4. Approval or disapproval of the sale of all, or substantially all, of the assets of the Partnership (except in the orderly liquidation of the Partnership upon its termination and dissolution). As of March 1, 1999, the following person or group owns beneficially more than 5% of the Partnership's 1,547,930 outstanding Units:
NAME AND AMOUNT PERCENT TITLE ADDRESS OF OF BENEFICIAL OF OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS - ------------------------------------------- ------------------------------------------- -------------- ----------- Units Representing Limited Partnership Atlantic Acquisition Limited Partnership 94,570 Units 6.11% Interests 88 Broad Street Boston, MA 02110
Messrs. Engle, MacDonald and Coyne have ownership interests in AALP. The general partner of AALP is controlled by Gary D. Engle. See Item 10 and Item 13 of this report. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The General Partner of the Partnership is AFG Leasing IV Incorporated, an affiliate of EFG. (a) Transactions with Management and Others All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ------------ Equipment management fees.................................................. $ 64,755 $ 150,289 $ 144,159 Administrative charges..................................................... 59,736 56,929 37,037 Reimbursable operating expenses due to third parties....................... 799,508 484,845 916,221 ---------- ---------- ------------ Total................................................................ $ 923,999 $ 692,063 $ 1,097,417 ---------- ---------- ------------ ---------- ---------- ------------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenues and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's acquisition cost was determined by the method described in Note 2 to the financial statements included in Item 14, herein. All rents and proceeds from the sale of equipment are paid directly to either EFG or a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to 12 the Partnership. At December 31, 1998, the Partnership was owed $2,103,987 by EFG for such funds and the interest thereon. Included in this balance is the sale proceeds from the sale of a Boeing 727-251 aircraft (see Note 3 to the financial statements included in Item 14 herein). These funds were remitted to the Partnership in January 1999. During 1997, the Partnership and certain affiliated investment programs sponsored by EFG exchanged their ownership interests in certain vessels for aggregate consideration of $11,565,375. The Partnership's share of such consideration was $2,326,015 consisting of common stock in Semele valued at $590,091, a note receivable from Semele of $888,844 and cash of $847,080. For further discussion, see Note 4, "Investment Securities--Affiliate / Note Receivable--Affiliate to the financial statements included in Item 14 herein and Item 10. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - ------------------------------------------------------------- ------------- ------------------- Atlantic Acquisition Limited Partnership 94,570 6.11% Old North Capital Limited Partnership 17,594 1.14%
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters See Item 13(a) above. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements: Report of Independent Auditors................................................. * Statement of Financial Position at December 31, 1998 and 1997.................. * Statement of Operations for the years ended December 31, 1998, 1997 and 1996... * Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............................................................ * Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... * Notes to the Financial Statements.............................................. * (2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable.
EXHIBIT NUMBER - ------------- 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus, which is included in Registration Statement on Form S-1 (No. 33-27828). 13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99(a) Lease agreement with Northwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 as Exhibit 28 (b) and is incorporated herein by reference. 99(b) Lease agreement with Gearbulk Shipowning Ltd. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 as Exhibit 99 (c) and is incorporated herein by reference.
- ------------------------ * Incorporated herein by reference to the appropriate portion of the 1998 Annual Report to security holders for the year ended December 31, 1998 (see Part II). 14
EXHIBIT NUMBER - ------------- 99(c) Lease agreement with Horizon Air Industries, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99(d) and is incorporated herein by reference. 99(d) Lease agreement with Sunworld International Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99(e) and is incorporated herein by reference. 99(e) Lease agreement with Transmeridian Airlines was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99(e) and is incorporated herein by reference.
(b) Reports on Form 8-K None. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP By: AFG Leasing IV Incorporated, ----------------------------------------- a Massachusetts corporation and the General Partner of the Registrant.
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE ---------------------------------------- ---------------------------------------- Geoffrey A. MacDonald Gary D. Engle CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF DIRECTOR OF THE GENERAL PARTNER EFG AND A DIRECTOR OF THE GENERAL PARTNER (PRINCIPAL EXECUTIVE OFFICER) Date: March 31, 1999 Date: March 31, 1999 By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD ---------------------------------------- ---------------------------------------- Gary M. Romano Michael J. Butterfield EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING OFFICER) OFFICER) Date: March 31, 1999 Date: March 31, 1999
16 EX-13 2 EXHIBIT 13 AMERICAN INCOME PARTNERS V American Income Partners V-B Limited Partnership Annual Report to the Partners, December 31, 1998 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT TO THE PARTNERS
Page ---- SELECTED FINANCIAL DATA 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3-9 FINANCIAL STATEMENTS: Report of Independent Auditors 10 Statement of Financial Position at December 31, 1998 and 1997 11 Statement of Operations for the years ended December 31, 1998, 1997 and 1996 12 Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996 13 Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 14 Notes to the Financial Statements 15-27 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed 28 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings 29 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 10.4 of the Amended and Restated Agreement and Certificate of Limited Partnership 30
SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 1998:
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994 - ----------------------------- -------------- -------------- -------------- --------------- --------- Lease revenue $ 1,323,344 $ 3,033,098 $ 2,823,191 $ 3,901,359 $ 9,280,336 Net income $ 580,743 $ 717,643 $ 710,319 $ 458,868 $ 2,878,380 Per Unit: Net income $ 0.36 $ 0.44 $ 0.44 $ 0.28 $ 1.77 Cash distributions $ 0.53 $ 0.66 $ 2.42 $ 2.50 $ 2.50 FINANCIAL POSITION - ----------------------------- Total assets $ 8,089,683 $ 5,715,354 $ 7,289,920 $ 11,486,422 $ 15,848,219 Total long-term obligations $ -- $ 24,608 $ 707,842 $ 1,157,906 $ 1,858,684 Partners' capital $ 5,326,675 $ 5,385,006 $ 5,953,024 $ 9,177,708 $ 12,792,340
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31, 1998 compared to the year ended December 31, 1997 and the year ended December 31, 1997 compared to the year ended December 31, 1996 Certain statements in this annual report of American Income Partner's V-B Limited Partnership (the "Partnership") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 7 to the accompanying financial statements, the collection of all rents due under the Partnership's lease agreements and the remarketing of the Partnership's equipment. YEAR 2000 ISSUE The Year 2000 Issue generally refers to the capacity of computer programming logic to correctly identify the calendar year. Many companies utilize computer programs or hardware with date sensitive software or embedded chips that could interpret dates ending in "00" as the year 1900 rather than the year 2000. In certain cases, such errors could result in system failures or miscalculations that disrupt the operations of the affected businesses. The Partnership uses information systems provided by EFG and has no information systems of its own. EFG has adopted a plan to address the Year 2000 Issue that consists of four phases: assessment, remediation, testing, and implementation and has elected to utilize principally internal resources to perform all phases. EFG completed substantially all of its Year 2000 project by December 31, 1998 at an aggregate cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining items are expected to be minor and be completed by March 31, 1999. All costs incurred in connection with EFG's Year 2000 project have been expensed as incurred. EFG's primary information software was coded by IBM at the point of original design to use a four digit field to identify calendar year. All of the Partnership's lease billings, cash receipts and equipment remarketing processes are performed using this proprietary software. In addition, EFG has gathered information about the Year 2000 readiness of significant vendors and third party servicers and continues to monitor developments in this area. All of EFG's peripheral computer technologies, such as its network operating system and third-party software applications, including payroll, depreciation processing, and electronic banking, have been evaluated for potential programming changes and have required only minor modifications to function properly with respect to dates in the year 2000 and thereafter. EFG understands that each of its and the Partnership's significant vendors and third-party servicers are in the process, or have completed the process, of making their systems Year 2000 compliant. Substantially all parties queried have indicated that their systems would be Year 2000 compliant by the end of 1998. Presently, EFG is not aware of any outside customer with a Year 2000 Issue that would have a material effect on the Partnership's results of operations, liquidity, or financial position. The Partnership's equipment leases were structured as triple net leases, meaning that the lessees are responsible for, among other things, (i) maintaining and servicing all equipment during the lease term, (ii) ensuring that all equipment functions properly and is returned in good condition, normal wear and tear excepted, and (iii) insuring the assets against casualty and other events of loss. Non-compliance with lease terms on the part of a lessee, including failure to address Year 2000 Issues, could result in lost revenues and impairment of residual values of the Partnership's equipment assets under a worst-case scenario. EFG believes that its Year 2000 compliance plan will be effective in resolving all material Year 2000 risks in a timely manner and that the Year 2000 Issue will not pose significant operational problems with respect to its computer systems or result in a system failure or disruption of its or the Partnership's business operations. However, EFG has no means of ensuring that all customers, vendors and third-party servicers will conform ultimately to Year 2000 standards. The effect of this risk to the Partnership is not determinable. 3 OVERVIEW The Partnership was organized in 1989 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course of business. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 7 to the accompanying financial statements. Pursuant to the Restated Agreement, as amended, the Partnership is scheduled to be dissolved by December 31, 2000. RESULTS OF OPERATIONS For the year ended December 31, 1998, the Partnership recognized lease revenue of $1,323,344 compared to $3,033,098 and $2,823,191 for the years ended December 31, 1997 and 1996, respectively. The decrease in lease revenue from 1997 to 1998 was expected and resulted principally from lease term expirations and the sale of equipment. The increase in lease revenue from 1996 to 1997 reflects the receipt in 1997 of prepaid contractual rental obligations of $1,142,614 associated with the exchange of the Partnership's interest in a vessel (see discussion below). Lease revenue in 1996 included the receipt of lease termination rents of $265,796 received in connection with the sale of the Partnership's interest in two Boeing 727-Advanced aircraft in July 1996 (see below). The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 1998 was $267,765 compared to $138,683 and $178,642 for the years ended December 31, 1997 and 1996, respectively. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1998 and 1997 included $88,884 and 17,530, respectively, earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele") (see below and Note 4 to the financial statements herein). The amount of future interest income is expected to fluctuate in relation to prevailing interest rates, the collection of lease revenue and the proceeds from equipment sales. In 1998, the Partnership sold equipment having a net book value of $873,626 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $775,111 compared to a net gain in 1997 of $138,167 on equipment having a net book value of $21,692. During 1997, the Partnership also exchanged its interest in a vessel with an original cost and net book value of $4,205,030 and $1,597,566, respectively. In connection with this transaction, the Partnership realized proceeds of $1,183,401, which resulted in a net loss for financial statement purposes of $414,165. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement, as described above. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele, a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market 4 effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 53.54% beneficial ownership interest in Larkfield, one of the three Vessels, the Partnership received $847,080 in cash, became the beneficial owner of 393,394 shares of Semele common stock (valued at $590,091 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $888,844. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $78,679 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. In 1996, the Partnership sold equipment having a net book value of $664,268 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $875,782. These equipment sales included the sale of the Partnership's interest in two Boeing 727-Advanced jet aircraft with an original cost and net book value of $2,404,163 and $431,852, respectively, which the Partnership sold to the existing lessee in July 1996. In connection with these sales, the Partnership realized sale proceeds of $615,218, which resulted in a net gain, for financial statement purposes, of $183,366. This equipment was sold prior to the expiration of the related lease term. The Partnership also realized lease termination rents in connection with the sale of its interests in these aircraft, as described above. In addition, cash consideration of $62,539 (classified as Contractual Right for Equipment at December 31, 1995) was recognized as proceeds from equipment sales in 1996 and the Partnership recognized the related gain, for financial statement purposes, of $31,546, which had been deferred at December 31, 1995. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG 5 attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense was $512,339, $1,461,252, and $2,024,625 for the years ended December 31, 1998, 1997 and 1996, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Interest expense was $24,825 or less than 1% of lease revenue in 1997 and $76,800, or 2.7% of lease revenue in 1996. The Partnership's notes payable were fully amortized by non-cancelable rents at January 1, 1998. Management fees were approximately 4.9%, 5.0% and 5.1% of lease revenue during the years ended December 31, 1998, 1997 and 1996, respectively. Management fees for the year ended December 31, 1996 included $7,780, resulting from an under accrual in 1995. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Write-down of investment securities-affiliate was $349,139 for the year ended December 31, 1998. The General Partner determined that the decline in market value of the Semele common stock was other-than-temporary at December 31, 1998. As a result, the Partnership wrote down the cost of the Semele common stock from $15 per share to $4.125 per share (the quoted price of Semele stock on NASDAQ at December 31, 1998). Operating expenses were $859,244, $541,774 and $953,258 for the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Partnership incurred or accrued approximately $319,400 for certain legal and administrative expenses related to the Class Action Lawsuit described in Note 7 to the financial statements. In addition, the Partnership expensed $224,400 in 1998 related to the refurbishment of an aircraft engine and engine leasing costs (see Notes 3 and 7 to the financial statements). Significant operating expenses were incurred during the years ending December 31, 1997 and 1996 due to heavy maintenance costs incurred in connection with the Partnership's interests in two Boeing 727 aircraft. In 1996, the Partnership entered into a new 36 month lease agreement with Sunworld International Airlines, Inc. to re-lease one of the aircraft at a base rent to the Partnership of $39,000 per month. The second aircraft was re-leased to Transmeridian Airlines beginning April 1997 at a base rent to the Partnership of $48,000 per month for 8 months and $42,000 per month for 10 months. Other operating expenses consist principally of administrative charges, professional service costs, such as audit and other legal fees, as well as printing, distribution and other remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity. As an equipment leasing program, the Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is generally provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $1,187,218, $2,430,133 and $1,781,983 in 1998, 1997 and 1996, respectively. Net cash from operating activities in both 1997 and 1996 included lease termination rents as described above. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also decline as the Partnership experiences a higher frequency of remarketing events. 6 Cash expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. During the year ended December 31, 1998, the Partnership realized net cash proceeds of $1,648,737 compared to $159,858 and $1,602,589 in 1997 and 1996, respectively. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. During the year ended December 31, 1996, the Partnership expended $657,000 to replace certain aircraft engines to facilitate the re-lease of an aircraft, in which the Partnership had an ownership interest, to Transmeridian Airlines (as discussed above). There were no equipment acquisitions during 1998 or 1997. In November 1998, the Partnership and certain affiliated investment programs (collectively, the "Programs") entered into an agreement to sell their ownership interests in a Boeing 727-251 ADV aircraft and three engines (collectively the "Aircraft") to a third party (the "Purchaser"). The Programs will receive gross sale proceeds of $4,350,000. Previously, the Aircraft had been leased to Transmeridian Airlines ("Transmeridian"). In December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding one of three engines which had been damaged while the Aircraft was leased to Transmeridian. (See Note 7 regarding legal action undertaken by the Programs related to Transmeridian and the damaged engine). The Purchaser also deposited $1,000,000 into a third-party escrow account (the "Escrow") pending repair of the damaged engine and re-installation of the refurbished engine on the Aircraft. Upon installation, the escrow agent will transfer the Escrow amount plus interest thereon to the Programs. Currently, the engine is being refurbished at the expense of the Programs. The associated cost is estimated to be approximately $260,000, of which the Partnership's share is approximately $156,000. All of the Partnership's costs were accrued at December 31, 1998 in connection with the Partnership's legal action against Transmeridian discussed in Note 7. The Programs also are required to reimburse the Purchaser for its cost to lease a substitute engine during the period that the damaged engine is being repaired. This cost is expected to be approximately $114,000, of which the Partnership's share is $68,400, all of which has been accrued in 1998 in connection with the litigation referenced above. If the engine repair and re-installation do not occur on or before May 11, 1999, the Escrow plus all interest thereon will be returned to the Purchaser and the Programs' obligation to pay for the cost of a substitute engine will be terminated. In addition, the purchase and sale agreement permits the Purchaser to return the Aircraft to the Programs, subject to a number of conditions, for $4,350,000, reduced by an amount equivalent to $450 multiplied by the number of flight hours since the Aircraft's most recent C Check. Among the conditions precedent to the Purchaser's returning the Aircraft, the Purchaser must have completed its intended installation of hush-kitting on the Aircraft to conform to Stage 3 noise regulations. This work was completed in January 1999. In addition, the Escrow funds must have been released to the Programs, assuming the repaired engine is reinstalled on the Aircraft by May 11, 1999. The Purchaser's return option expires on May 15, 1999. Due to the contingent nature of the sale, the Partnership has deferred recognition of the sale and a resulting gain at December 31, 1998 until expiration of the Purchaser's return option on May 15, 1999. The Partnership's share of the December proceeds was $2,010,000, which amount was deposited into EFG's customary escrow account and transferred to the Partnership, together with the Partnership's other December rental receipts, in January 1999. At December 31, 1998, the entire amount was classified as accounts receivable affiliate, with an equal amount reflected in other liabilities on the accompanying Statement of Financial Position. The remainder of the sale consideration, or $1,000,000, will be paid to the Programs upon release of the Escrow discussed above. The Partnership's share of this payment will be $600,000. Based upon current information, the Partnership expects to recognize a gain for financial reporting purposes of approximately $2,610,000 in connection with this transaction. The Partnership's interest in the Aircraft had a cost of $6,484,110 and was fully depreciated at December 31, 1998. Pursuant to a purchase option contained in the lease agreement, the lessee, Sunworld International Airlines, Inc., purchased the Partnership's interest in a Boeing 727-251 ADV aircraft for approximately $1,470,000 in January 1999, at the expiration of the existing lease term (see Note 8 Subsequent Event for additional discussion). 7 At December 31, 1998, the Partnership was due aggregate future minimum lease payments of $200,684 from contractual lease agreements (see Note 2 to the financial statements). At the expiration of the individual lease terms underlying the Partnership's future minimum lease payments, the Partnership will sell the equipment or enter re-lease or renewal agreements when considered advantageous by the General Partner and EFG. Such future remarketing activities will result in the realization of additional cash inflows in the form of equipment sale proceeds or rents from renewals and re-leases, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of remarketing events often is dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as the terms of the currently existing contractual lease agreements expire, the cash flows of the Partnership will become less predictable. In addition, the Partnership will need cash outflows to pay management fees and operating expenses. As a result of the vessel exchange (see Results of Operations), the Partnership became the beneficial owner of 393,394 shares of Semele common stock (valued at $590,091 ($1.50 per share) at the time of the exchange transaction). This investment was reduced by a dividend of $78,679 received in November 1997 representing a return of equity to the Partnership. The Partnership also received a beneficial interest in the Semele Note of $888,844 in connection with the exchange. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 39,339 Shares.In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $132,773. In 1997, the Partnership recorded an unrealized loss of $216,366 relate to its investment in the Semele common stock. Each of these losses was reported as a component of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $349,139 in 1998. The Partnership obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. The Partnership's notes payable were fully amortized at January 1, 1998. 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. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership's ownership interests in commercial aircraft involve unique risks resulting from the specialized nature of these assets and the potential for the Partnership to incur significant remarketing costs at lease expiration. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage primarily in connection with the Partnership's aircraft. At December 31, 1998, the Partnership owned interests in two Boeing 727 aircraft, one of which was under contract to be sold to a third party buyer subject to the buyer's right to return the aircraft on or before May 15, 1999. See Notes 3 and 7 of the accompanying financial statements concerning this aircraft. See also Note 8 of the accompanying financial statements concerning the sale of the second aircraft in January 1999. In addition, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 7 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new 8 equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership has exposure to aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 7 to the accompanying financial statements. Cash distributions to the General Partner and Recognized Owners are declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities. For the year ended December 31, 1998, the Partnership declared total cash distributions of $855,440. In accordance with the Restated Agreement, as amended, the Recognized Owners were allocated 95% of these distributions, or $812,668, and the General Partner was allocated 5%, or $42,772. The fourth quarter 1998 cash distribution was paid on January 15, 1999. Cash distributions paid to the Recognized Owners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. The Partnership's capital account balances for federal income tax and for financial reporting purposes are different primarily due to differing treatments of income and expense items for income tax purposes in comparison to financial reporting purposes (generally referred to as permanent or timing differences; see Note 6 to the accompanying financial statements). 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, the difference between distributions (declared vs. paid) for income tax and financial reporting purposes, and the treatment of unrealized gains or losses on investment securities, if any, for book and tax purposes. The principal component of the cumulative difference between financial statement income or loss and tax income or loss results from different depreciation policies for book and tax purposes. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 1998. 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 Amended and Restated Agreement and Certificate of Limited Partnership 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, 1998, the General Partner had a positive tax capital account balance. The future liquidity of the Partnership will be influenced by, among other factors, prospective market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, that could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. However, the outcome of the Class Action Lawsuit described in Note 7 to the accompanying financial statements will be the principal factor in determining the future of the Partnership's operations. 9 REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Partners V-B Limited Partnership: We have audited the accompanying statements of financial position of American Income Partners V-B Limited Partnership, as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Partners V-B Limited Partnership at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 10 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION December 31, 1998 and 1997
1998 1997 ------------------- ------------------- ASSETS Cash and cash equivalents $ 4,762,386 $ 2,806,479 Rents receivable 2,978 4,563 Accounts receivable - affiliate 2,103,987 165,242 Note receivable - affiliate 888,844 888,844 Investment securities - affiliate 162,273 295,046 Equipment at cost, net of accumulated depreciation of $13,395,899 and $17,907,433 at December 31, 1998 and 1997, respectively 169,215 1,555,180 ------------------- ------------------- Total assets $ 8,089,683 $ 5,715,354 ------------------- ------------------- ------------------- ------------------- LIABILITIES AND PARTNERS' CAPITAL Notes payable $ -- $ 24,608 Accrued interest -- 209 Accrued liabilities 504,900 9,200 Accrued liabilities - affiliate 9,548 26,753 Deferred rental income 24,700 55,718 Other liabilities 2,010,000 -- Cash distributions payable to partners 213,860 213,860 ------------------- ------------------- Total liabilities 2,763,008 330,348 ------------------- ------------------- Partners' capital (deficit): General Partner (1,450,202) (1,447,285) Limited Partnership Interests (1,547,930 Units; initial purchase price of $25 each) 6,776,877 6,832,291 ------------------- ------------------- Total partners' capital 5,326,675 5,385,006 ------------------- ------------------- Total liabilities and partners' capital $ 8,089,683 $ 5,715,354 ------------------- ------------------- ------------------- -------------------
The accompanying notes are an integral part of these financial statements. 11 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP STATEMENT OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------------ ------------------ ------------------ Income: Lease revenue $ 1,323,344 $ 3,033,098 $ 2,823,191 Interest income 178,881 121,153 178,642 Interest income - affiliate 88,884 17,530 -- Gain on sale of equipment 775,111 138,167 907,328 Loss on exchange of equipment -- (414,165) -- ------------------ ------------------ ------------------ Total income 2,366,220 2,895,783 3,909,161 ------------------ ------------------ ------------------ Expenses: Depreciation 512,339 1,461,252 2,024,625 Interest expense -- 24,825 76,800 Equipment management fees - affiliate 64,755 150,289 144,159 Writedown of investment securities - affiliate 349,139 -- -- Operating expenses - affiliate 859,244 541,774 953,258 ------------------ ------------------ ------------------ Total expenses 1,785,477 2,178,140 3,198,842 ------------------ ------------------ ------------------ Net income $ 580,743 $ 717,643 $ 710,319 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Net income per limited partnership unit $ 0.36 $ 0.44 $ 0.44 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Cash distributions declared per limited partnership unit $ 0.53 $ 0.66 $ 2.42 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
The accompanying notes are an integral part of these financial statements. 12 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL for the years ended December 31, 1998, 1997 and 1996
General Recognized Owners Partner ----------------- Amount Units Amount Total -------------- -------------- ---------------- --------------- Balance at December 31, 1995 $ (1,257,650) 1,547,930 $ 10,435,358 $ 9,177,708 Net income - 1996 35,516 -- 674,803 710,319 -------------- -------------- ---------------- --------------- Comprehensive income 35,516 -- 674,803 710,319 -------------- -------------- ---------------- --------------- Cash distributions declared (196,750) -- (3,738,253) (3,935,003) -------------- -------------- ---------------- --------------- Balance at December 31, 1996 (1,418,884) 1,547,930 7,371,908 5,953,024 Net income - 1997 35,882 -- 681,761 717,643 Unrealized loss on investment securities (10,818) -- (205,548) (216,366) -------------- -------------- ---------------- --------------- Comprehensive income 25,064 -- 476,213 501,277 -------------- -------------- ---------------- --------------- Cash distributions declared (53,465) -- (1,015,830) (1,069,295) -------------- -------------- ---------------- --------------- Balance at December 31, 1997 (1,447,285) 1,547,930 6,832,291 5,385,006 Net income - 1998 29,037 -- 551,706 580,743 Unrealized loss on investment securities (6,639) -- (126,134) (132,773) Less: reclassification adjustment for write-down of investment securities 17,457 -- 331,682 349,139 -------------- -------------- ---------------- --------------- Comprehensive income 39,855 -- 757,254 797,109 -------------- -------------- ---------------- --------------- Cash distributions declared (42,772) -- (812,668) (855,440) -------------- -------------- ---------------- --------------- Balance at December 31, 1998 $(1,450,202) 1,547,930 $ 6,776,877 $ 5,326,675 -------------- -------------- ---------------- --------------- -------------- -------------- ---------------- ---------------
The accompanying notes are an integral part of these financial statements. 13 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------------- ---------------- ----------- Cash flows from (used in) operating activities: Net income $ 580,743 $ 717,643 $ 710,319 Adjustments to reconcile net income to net cash from operating activities: Depreciation 512,339 1,461,252 2,024,625 Gain on sale of equipment (775,111) (138,167) (907,328) Write-down of investment securities - affiliate 349,139 -- -- Loss on exchange of equipment -- 414,165 -- Decrease in allowance for doubtful accounts -- (10,000) -- Non-cash proceeds on termination rents -- (295,533) -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable 1,585 239,006 (52,960) Accounts receivable - affiliate (1,938,745) 293,796 (235,695) Increase (decrease) in: Accrued interest (209) (7,219) (275) Accrued liabilities 495,700 (55,550) 44,750 Accrued liabilities - affiliate (17,205) (199,544) 196,410 Deferred rental income (31,018) 10,284 2,137 Other liabilities 2,010,000 -- -- ---------------- ---------------- ---------------- Net cash from operating activities 1,187,218 2,430,133 1,781,983 ------------------ ---------------- ---------------- Cash flows from (used in) investing activities: Dividend received -- 78,679 -- Purchase of equipment -- -- (657,000) Proceeds from equipment sales 1,648,737 159,858 1,602,589 ---------------- ---------------- ---------------- Net cash from investing activities 1,648,737 238,537 945,589 ---------------- ---------------- ---------------- Cash flows used in financing activities: Principal payments - notes payable (24,608) (683,234) (450,064) Distributions paid (855,440) (1,140,580) (4,668,233) ---------------- ---------------- ---------------- Net cash used in financing activities (880,048) (1,823,814) (5,118,297) ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 1,955,907 844,856 (2,390,725) Cash and cash equivalents at beginning of year 2,806,479 1,961,623 4,352,348 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 4,762,386 $ 2,806,479 $ 1,961,623 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 209 $ 32,044 $ 77,075 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Supplemental schedule of non-cash investing and financing activities: See Note 4 to the financial statements. The accompanying notes are an integral part of these financial statements. 14 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements December 31, 1998 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS American Income Partners V-B Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on September 29, 1989 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On December 27, 1989, the Partnership issued 1,547,930 units, representing assignments of limited partnership interests (the "Units"), to 2,402 investors. Unitholders and Limited Partners (other than the Initial Limited Partner) are collectively referred to as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV Incorporated, a Massachusetts corporation and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG"). The common stock of the General Partner is owned by AF/AIP Programs Limited Partnership, of which EFG and a wholly-owned subsidiary are the 99% limited partners and AFG Programs, Inc., which is wholly-owned by EFG, is the 1% general partner. The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). Significant operations commenced December 28, 1989 when the Partnership made its initial equipment purchase. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Recognized Owners and 5% to the General Partner. Under the terms of a management agreement between the Partnership and AF/AIP Programs Limited Partnership and the terms of an identical management agreement between AF/AIP Programs Limited Partnership and EFG (collectively, the "Management Agreement"), management services are provided by EFG to the Partnership at fees which the General Partner believes to be competitive for similar services (see Note 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. 15 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and the display of comprehensive income and its components; however, the adoption of this statement had no impact on the Partnership's net income or partners' capital. Statement 130 requires unrealized gains or losses on the Partnership's available-for-sale securities, which prior to adoption were reported separately in partners' capital to be included in comprehensive income (loss). At December 31, 1997, the cumulative amount of other comprehensive losses was $216,366. STATEMENT OF CASH FLOWS The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in federal agency discount notes and in reverse repurchase agreements with overnight securities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 1998, the Partnership had $4,650,950 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. REVENUE RECOGNITION Rents are payable to the Partnership monthly or quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $200,684 are due as follows:
For the year ending December 31, 1999 $ 59,471 2000 47,071 2001 47,071 2002 47,071 ------------- Total $ 200,684 ------------- -------------
Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ------------------ ------------------ ------------------ Transmeridian Airlines $ 502,600 $ 385,400 $ -- Sunworld International Airlines, Inc. $ 468,000 $ 468,000 $ 443,300 Gearbulk Shipowning Ltd. $ -- $ 1,279,436 $ 795,855 Northwest Airlines, Inc. $ -- $ -- $ 481,941 Horizon Air Industries, Inc. $ -- $ -- $ 297,792
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 16 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. DEPRECIATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Periodically, the General Partner evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. INVESTMENT SECURITIES - AFFILIATE The Partnership's investment in Semele Group, Inc. is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of Partner's Capital. Other-than- temporary declines in market value are recorded as write down of investment in the Statement of Operations (see Note 4). ACCRUED LIABILITIES - AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities - Affiliate (see Note 5). ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Recognized Owners and 5% to the General Partner). See Note 6 concerning allocation of income or loss for income tax purposes. NET INCOME AND CASH DISTRIBUTIONS PER UNIT Net income and cash distributions per Unit are based on 1,547,930 units outstanding during the years ended December 31, 1998, 1997 and 1996 and computed after allocation of the General Partner's 5% share of net income and cash distributions. 17 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their tax returns. NOTE 3 - EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment Equipment Type (Months) At Cost Location - -------------------------------- ---------- ----------------- ---------------------------- Aircraft 1 $ 12,311,220 KY/TX Materials handling equipment 0 435,341 CA/DE/GA/LA/MO/MI/NC/OK/TX Construction and mining 4 433,283 OH Trailers/intermodal containers 48 299,643 OK Retail store fixtures 0 30,320 NC/SC Energy systems 0 29,996 IL Tractors and heavy duty trucks 0 18,426 IN Computers & peripherals 0 6,885 AL/GA/KY/MS/NC/SC/TN/VA ----------------- Total equipment cost 13,565,114 Accumulated depreciation (13,395,899) ----------------- Equipment, net of accumulated depreciation $ 169,215 ----------------- -----------------
In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. At December 31, 1998, the Partnership's equipment portfolio included equipment having a proportionate original cost of $12,617,748, representing approximately 93% of total equipment cost. Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds 18 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. At December 31, 1998, the Partnership had fully depreciated equipment held for sale with a cost of approximately $12,311,000. This equipment represents the Partnership's proportionate interests in two Boeing 727-251 ADV aircraft. In January 1999, at the expiration of the existing lease term, the Partnership sold its interest in one of these aircraft having a cost of $5,827,110 (see Note 8 - Subsequent Event). See below for discussion related to the Partnership's interest in the second aircraft. The summary above also includes equipment being leased on a month to month basis. DEFERRED SALE In November 1998, the Partnership and certain affiliated investment programs (collectively, the "Programs") entered into an agreement to sell their ownership interests in a Boeing 727-251 ADV aircraft and three engines (collectively the "Aircraft") to a third party (the "Purchaser"). The Programs will receive gross sale proceeds of $4,350,000. Previously, the Aircraft had been leased to Transmeridian Airlines ("Transmeridian"). In December 1998, the Purchaser remitted $3,350,000 for the Aircraft, excluding one of three engines which had been damaged while the Aircraft was leased to Transmeridian. (See Note 7 regarding legal action undertaken by the Programs related to Transmeridian and the damaged engine). The Purchaser also deposited $1,000,000 into a third-party escrow account (the "Escrow") pending repair of the damaged engine and re-installation of the refurbished engine on the Aircraft. Upon installation, the escrow agent will transfer the Escrow amount plus interest thereon to the Programs. Currently, the engine is being refurbished at the expense of the Programs. The associated cost is estimated to be approximately $260,000, of which the Partnership's share is approximately $156,000. All of the Partnership's costs were accrued at December 31, 1998 in connection with the Partnership's legal action against Transmeridian discussed in Note 7. The Programs also are required to reimburse the Purchaser for its cost to lease a substitute engine during the period that the damaged engine is being repaired. This cost is expected to be approximately $114,000, of which the Partnership's share is $68,400, all of which has been accrued in 1998 in connection with the litigation referenced above. If the engine repair and re-installation do not occur on or before May 11, 1999, the Escrow plus all interest thereon will be returned to the Purchaser and the Programs' obligation to pay for the cost of a substitute engine will be terminated. In addition, the purchase and sale agreement permits the Purchaser to return the Aircraft to the Programs, subject to a number of conditions, for $4,350,000, reduced by an amount equivalent to $450 multiplied by the number of flight hours since the Aircraft's most recent C Check. Among the conditions precedent to the Purchaser's returning the Aircraft, the Purchaser must have completed its intended installation of hush-kitting on the Aircraft to conform to Stage 3 noise regulations. This work was completed in January 1999. In addition, the Escrow funds must have been released to the Programs, assuming the repaired engine is reinstalled on the Aircraft by May 11, 1999. The Purchaser's return option expires on May 15, 1999. Due to the contingent nature of the sale, the Partnership has deferred recognition of the sale and a resulting gain at December 31, 1998 until expiration of the Purchaser's return option on May 15, 1999. The Partnership's share of the December proceeds was $2,010,000, which amount was deposited into EFG's customary escrow account and transferred to the Partnership, together with the Partnership's other December rental receipts, in January 1999. At December 31, 1998, the entire amount was classified as accounts receivable affiliate, with an equal amount reflected in other liabilities on the accompanying Statement of Financial Position. The remainder of the sale consideration, or $1,000,000, will be paid to the Programs upon release of the Escrow discussed above. 19 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) The Partnership's share of this payment will be $600,000. The Partnership's interest in the Aircraft had a cost of $6,484,110 and was fully depreciated at December 31, 1998. NOTE 4 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 53.54% beneficial ownership interest in Larkfield, one of the three Vessels, the Partnership received $847,080 in cash, became the beneficial owner of 393,394 shares of Semele common stock (valued at $590,091 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $888,844. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. The Partnership recognized interest income of $88,884 and $17,530 related to the Semele Note during 1998 and 1997, respectively. The Partnership's interest in the vessel had an original cost and net book value of $4,205,030 and $1,597,566, respectively. The proceeds realized by the Partnership of $1,183,401 resulted in a net loss, for financial statement purposes, of $414,165. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $1,142,614. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially 20 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) owned by the Partnership. A dividend of $78,679 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and was elected to the Board of Directors. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 39,339 Shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $132,773. In 1997, the Partnership recorded an unrealized loss of $216,366 relate to its investment in the Semele common stock. Each of these losses was reported as a component of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $349,139 in 1998. NOTE 5 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ------------------ ------------------ ------------------- Equipment management fees $ 64,755 $ 150,289 $ 144,159 Administrative charges 59,736 56,929 37,037 Reimbursable operating Expenses due to third parties 799,508 484,845 916,221 ------------------ ------------------ ------------------ Total $ 923,999 $ 692,063 $ 1,097,417 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenues and 2% of gross full payout lease rental revenues received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 10.4 of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was acquired from EFG, one of its affiliates, including other equipment leasing programs sponsored by EFG, or from third-party sellers. The Partnership's Purchase Price was determined by the method described in Note 3, Equipment on Lease. 21 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $2,103,987 by EFG for such funds and the interest thereon. Included in this balance is the sale proceeds from the sale of the Boeing 727-251 aircraft (see Note 3 for additional discussion). These funds were remitted to the Partnership in January 1999. Certain affiliates of the General Partner own Units in the Partnership as follows:
------------------------------------------------ ---------------------- ----------------------- Number of Percent of Total Affiliate Units Owned Outstanding Units ------------------------------------------------ ---------------------- ----------------------- Atlantic Acquisition Limited Partnership 94,570 6.11% ------------------------------------------------ ---------------------- ----------------------- Old North Capital Limited Partnership 17,594 1.14% ------------------------------------------------ ---------------------- -----------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. NOTE 6 - INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income or loss to each class of partner according to their respective ownership percentages (95% to the Recognized Owners and 5% to the General Partner). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Restated Agreement, as amended. For income tax purposes, the Partnership allocates net income or net loss in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account balance. At December 31, 1998, the General Partner had a positive tax capital balance. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------------------ ------------------ -------------------- Net income $ 580,743 $ 717,643 $ 710,319 Financial statement depreciation in excess of (less than) tax depreciation (678,927) 71,967 (112,391) Deferred rental income (31,018) 10,284 2,137 Other 1,418,759 (414,936) 260,417 ------------------ ------------------ ------------------ Net income for federal income tax reporting purposes $ 1,289,557 $ 384,958 $ 860,482 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
22 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) The principal component of "Other" consists of the difference between the tax gain or loss on equipment disposals and the financial statement gain or loss on disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998 and 1997:
1998 1997 ------------------ ------------------ Partners' capital $ 5,326,675 $ 5,385,006 Unrealized loss on investment securities -- 216,366 Add back selling commissions and organization and offering costs 4,348,553 4,348,553 Financial statement distributions in excess of tax distributions 10,693 10,693 Cumulative difference between federal income tax and financial statement income (loss) 1,559,622 850,808 ------------------ ------------------ Partners' capital for federal income tax reporting purposes $ 11,245,543 $ 10,811,426 ------------------ ------------------ ------------------ ------------------
Unrealized loss on investment securities, financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 7 - LEGAL PROCEEDINGS In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit". The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and superseded a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and was preliminarily approved by the Court on August 20, 1998 when the Court 23 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order"). Prior to issuing a final order, the Court will hold a fairness hearing that will be open to all interested parties and permit any party to object to the settlement. The investors of the Partnership and all other plaintiff class members in the Class Action Lawsuit will receive a Notice of Settlement and other information pertinent to the settlement of their claims that will be mailed to them in advance of the fairness hearing. Since first executing the Stipulation of Settlement, the Court has scheduled two fairness hearings, the first on December 11, 1998 and the second on March 19, 1999, each of which was postponed because of delays in finalizing certain information materials that are subject to regulatory review prior to being distributed to investors. On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an amended stipulation of settlement (the "Amended Stipulation") which was filed with the Court on March 15, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other things, divides the Class Action Lawsuit into two separate sub-classes that can be settled individually. This revision is expected to expedite the settlement of one sub-class by the middle of 1999. However, the second sub-class, involving the Partnership and 10 affiliated partnerships (collectively referred to as the "Exchange Partnerships"), is expected to remain pending for a longer period due, in part, to the complexity of the proposed settlement pertaining to this class. Specifically, the settlement of the second sub-class is premised on the consolidation of the Exchange Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company ("Newco"). Under the proposed Consolidation, the partners of the Exchange Partnerships would receive both common stock in Newco and a cash distribution; and thereupon the Exchange Partnerships would be dissolved. In addition, EFG would contribute certain management contracts, operations personnel, and business opportunities to Newco and cancel its current management contracts with all of the Exchange Partnerships. Newco would operate as a finance company specializing in the acquisition, financing and servicing of equipment leases for its own account and for the account of others on a contract basis. Newco also would use its best efforts to list its shares on the Nasdaq National Market or another national exchange or market as soon after the Consolidation as Newco deems that market conditions and its business operations are suitable for listing its shares and Newco has satisfied all necessary regulatory and listing requirements. The potential benefits and risks of the Consolidation will be presented in a Solicitation Statement that will be mailed to all of the partners of the Exchange Partnerships as soon as the associated regulatory review process is completed and at least 60 days prior to the fairness hearing. A preliminary Solicitation Statement was filed with the Securities and Exchange Commission on August 24, 1998 and remains pending. Class members will be notified of the actual fairness hearing date when it is confirmed. One of the principal objectives of the Consolidation is to create a company that would have the potential to generate more value for the benefit of existing limited partners than other alternatives, including continuing the Partnership's customary business operations until all of its assets are disposed in the ordinary course of business. To facilitate the realization of this objective, the Amended Stipulation provides, among other things, that commencing March 22, 1999, the Exchange Partnerships may collectively invest up to 40% of the total aggregate net asset values of all of the Exchange Partnerships in any investment, including additional equipment and other business activities that the general partners of the Exchange Partnerships and EFG reasonably believe to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations, including that the Exchange Partnerships retain sufficient cash balances to pay their respective shares of the cash distribution referenced above in connection with the proposed Consolidation. In the absence of the Court's authorization to enter into such activities, the Partnership's Restated Agreement, as amended, would not permit new investment activities without the approval of limited partners owning a majority 24 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) of the Partnership's outstanding Units. Accordingly, to the extent that the Partnership invests in new equipment, the Manager (being EFG) will (i) defer, until the earlier of the effective date of the Consolidation or December 31, 1999, any acquisition fees resulting therefrom and (ii) limit its management fees on all such assets to 2% of rental income. In the event that the Consolidation is consummated, all such acquisition and management fees will be paid to Newco. To the extent that the Partnership invests in other business activities not consisting of equipment acquisitions, the Manager will forego any acquisition fees and management fees related to such investments. In the event that the Partnership has acquired new investments, but the Partnership does not participate in the Consolidation, Newco will acquire such new investments for an amount equal to the Partnership's net equity investment plus an annualized return thereon of 7.5%. Finally, in the event that the Partnership has acquired new investments and the Consolidation is not effected, the General Partner will use its best efforts to divest all such new investments in an orderly and timely fashion and the Manager will cancel or return to the Partnership any acquisition or management fees resulting from such new investments. The Amended Stipulation and previous Stipulation of Settlement prescribe certain conditions necessary to effecting final settlements, including providing the partners of the Exchange Partnerships with the opportunity to object to the participation of their partnership in the Consolidation. Assuming the proposed settlement is effected according to present terms, the Partnership's share of legal fees and expenses related to the Class Action Lawsuit is estimated to be approximately $85,300 all of which was accrued and expensed by the Partnership in 1998. In addition, the Partnership's share of fees and expenses related to the proposed Consolidation is estimated to be approximately $234,100, all of which was accrued and expensed by the Partnership in 1998. While the Court's August 20 Order enjoined certain class members, including all of the partners of the Partnership, from transferring, selling, assigning, giving, pledging, hypothecating, or otherwise disposing of any Units pending the Court's final determination of whether the settlement should be approved, the March 22 Order permits the partners to transfer Units to family members or as a result of the divorce, disability or death of the partner. No other transfers are permitted pending the Court's final determination of whether the settlement should be approved. The provision of the August 20 Order which enjoined the General Partners of the Exchange Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. There can be no assurance that settlement of either sub-class of the Class Action Lawsuit will receive final Court approval and be effected. There also can be no assurance that all or any of the Exchange Partnerships will participate in the Consolidation because if limited partners owning more than one-third of the outstanding Units of a partnership object to the Consolidation, then that partnership will be excluded from the Consolidation. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that final settlements of each sub-class will be achieved. However, in the absence of final settlements approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. Neither the General Partner nor its affiliates can predict with any degree of certainty the cost of continuing litigation to the Partnership or the ultimate outcome. In addition to the foregoing, the Partnership is a party to other lawsuits that have arisen out of the conduct of its business, principally involving disputes or disagreements with lessees over lease terms and conditions. The following actions had not been finally adjudicated at December 31, 1998: ACTION INVOLVING NATIONAL STEEL CORPORATION EFG, on behalf of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth of Massachusetts Superior Court, Department of the Trial Court in and for the County of Suffolk on July 27, 1995, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"). The Complaint seeks reimbursement from National Steel of certain 25 sales and/or use taxes paid to the State of Illinois in connection with equipment leased by National Steel from the Plaintiffs and other remedies provided under the Master Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of Removal, which removed the case to United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to the Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and sought declaratory relief, alleging breach of contract, implied covenant of good faith and fair dealing, and specific performance. The Plaintiffs filed an Answer to National Steel's Counterclaims on September 29, 1995. The parties discussed settlement with respect to this matter for some time; however, the negotiations were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint alleging further default under the MLA and filed a motion for Summary Judgment on all claims and Counterclaims. The Court held a hearing on the Plaintiff's motion in December 1997 and later entered a decision dismissing certain of National Steel's Counterclaims, finding in favor of the Plaintiffs on certain issues and in favor of National Steel on other issues. In March 1999, the Plaintiffs obtained payment for certain of the disputed items and have resumed settlement discussions to resolve remaining issues. The General Partner does not believe that the resolution of the remaining claims will have a material adverse effect on the Partnership's financial position or results of operations. ACTION INVOLVING NORTHWEST AIRLINES, INC. On September 22, 1995, Investors Asset Holding Corp. and First Security Bank, N.A., trustees of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in United States District Court for the District of Massachusetts against a lessee of the Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that Northwest did not fulfill its maintenance obligations under its Lease Agreements with the Plaintiffs and seeks declaratory judgment concerning Northwest's obligations and monetary damages. Northwest filed an Answer to the Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United States Magistrate Judge recommended entry of partial summary judgment in favor of the Plaintiffs. Northwest appealed this decision and a hearing was scheduled for January 1999 by the District Judge to consider arguments and review the Magistrate's recommendation. A ruling by the District Judge remains pending. The General Partner believes that the Plaintiff's claims ultimately will prevail and that the Partnership's financial position will not be adversely affected by the outcome of this action. ACTION INVOLVING TRANSMERIDIAN AIRLINES On November 9, 1998, First Security Bank, N.A., as trustee of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs), filed an action in Superior Court of the Commonwealth of Massachusetts in Suffolk County 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, asserting various causes of action for declaratory judgment and breach of contract. The action subsequently was removed to United States District Court for the District of Massachusetts. Transmeridian filed counterclaims for breach of contract, quantum meruit, conversion, breach of the implied covenant of good faith and fair dealing, and violation of M.G.L. c. 93A. The Plaintiffs subsequently filed an Amended Complaint asserting claims for breaches of contract and covenant of faith and fair dealing against Transmeridian and breach of guaranty against Apple Vacations. The Plaintiffs are seeking damages for, among other things, breach of contract arising out of Transmeridian's refusal to repair or replace burned engine blades found in one engine during a pre-return inspection of an aircraft leased by Transmeridian from the Plaintiffs, a Boeing 727-251 ADV aircraft (the "Aircraft"). The estimated cost to repair the engine and lease a substitute engine during the repair period is approximately $374,000. The Plaintiffs intend to enforce written guarantees issued by Apple Vacations that absolutely and unconditionally guarantee Transmeridian's performance under the lease agreement and are seeking recovery of all costs, lost revenue and monetary damages in connection with this matter. Notwithstanding the foregoing, the Plaintiffs will be required to 26 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP Notes to the Financial Statements (Continued) advance the cost of repairing the engine and leasing a substitute engine and cannot be certain whether the guarantees will be enforced. Therefore, the Partnership has accrued and expensed its share of these costs, or $224,400, in 1998. Discovery has not yet commenced, and although the General Partner plans to vigorously pursue this action, it is too early to predict the Plaintiffs' likelihood of success. This Aircraft was fully depreciated at December 31, 1998 for financial reporting purposes (See Note 3 concerning the remarketing of this Aircraft). NOTE 8 - SUBSEQUENT EVENT On January 19, 1999, at the expiration of the aircraft's lease term, the Partnership sold its proportional interest in a Boeing 727-251 aircraft to the lessee, Sunworld International Airlines, Inc. The Partnership received net sale proceeds of approximately $1,470,000 for its interest in this aircraft which had a cost of $5,827,110 and was fully depreciated at December 31, 1998. 27 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED for the years ended December 31, 1998, 1997 and 1996 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenues, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition, may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------------ ------------------ ------------------ Rents earned prior to disposal of equipment, net of interest charges $ 6,558,696 $ 2,422,146 $ 10,677,177 Sale proceeds realized upon disposition of equipment 1,648,737 159,858 1,602,589 ------------------ ------------------ ------------------ Total cash generated from rents and equipment sale proceeds 8,207,433 2,582,004 12,279,766 Original acquisition cost of equipment disposed 5,897,499 1,968,246 11,569,023 ------------------ ------------------ ------------------ Excess of total cash generated to cost of equipment disposed $ 2,309,934 $ 613,758 $ 710,743 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
28 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS for the year ended December 31, 1998
Sales and Operations Refinancings Total ------------------ ------------------ ------------------ Net income $ (194,368) $ 775,111 $ 580,743 Add: Depreciation 512,339 -- 512,339 Management fees 64,755 -- 64,755 Write-down as investment securities - affiliate 349,139 -- 349,139 Book value of disposed equipment -- 873,626 873,626 Less: Principal reduction of notes payable (24,608) -- (24,608) ------------------ ------------------ ------------------ Cash from operations, sales and refinancings 707,257 1,648,737 2,355,994 Less: Management fees (64,755) -- (64,755) ------------------ ------------------ ------------------ Distributable cash from operations, sales and refinancings 642,502 1,648,737 2,291,239 Other sources and uses of cash: Cash at beginning of year 2,806,479 -- 2,806,479 Net change in receivables and accruals 520,108 -- 520,108 Less: Cash distributions paid -- (855,440) (855,440) ------------------ ------------------ ------------------ Cash at end of year $ 3,969,089 $ 793,297 $ 4,762,386 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
29 AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 10.4 OF THE AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP December 31, 1998 For the year ended December 31, 1998, the Partnership reimbursed the General Partner and its Affiliates for the following costs:
Operating expenses $ 376,189
30 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Income Partners V-B Limited Partnership, of our report dated March 10, 1999, included in the 1998 Annual Report to the Partners of American Income Partners V-B Limited Partnership. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 EX-27 4 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,762,386 162,273 2,995,809 0 0 7,920,468 13,565,114 13,395,899 8,089,683 2,763,008 0 0 0 0 5,326,675 8,089,683 0 2,366,220 0 0 1,785,477 0 0 580,743 0 580,743 0 0 0 580,743 0 0
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