UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-20030
AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3122696
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
-----
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2002 and December 31, 2001 3
Statement of Operations
for the three months ended March 31, 2002 and 2001 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 2002 5
Statement of Cash Flows
for the three months ended March 31, 2002 and 2001 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION:
Item 1 - 6 20
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
March 31, December 31,
2002 2001
-------------- --------------
ASSETS
Cash and cash equivalents $ 2,507,450 $ 2,604,913
Rents receivable, net of allowance of $65,213 and $58,257
at March 31, 2002 and December 31, 2001, respectively 92,811 128,745
Accounts receivable - affiliate 38,127 50,494
Interest receivable - affiliate 22,398 22,644
Prepaid expenses 8,462 1,468
Interest receivable - loan, net of allowance of $495,015
at March 31, 2002 and December 31, 2001 - -
Loan receivable, net of allowance of $266,875
at March 31, 2002 and December 31, 2001 2,783,125 2,783,125
Net investment in sales-type lease - 23,549
Note receivable - affiliate 898,405 898,405
Investment securities - affiliate 84,450 77,514
Equipment at cost, net of accumulated depreciation
of $6,186,940 and $6,019,430 at March 31, 2002
and December 31, 2001, respectively 5,160,305 5,327,815
-------------- --------------
Total assets $ 11,595,533 $ 11,918,672
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 2,097,570 $ 2,230,418
Accrued interest 8,562 7,747
Accrued liabilities 514,059 651,469
Accrued liabilities - affiliate 117,465 124,726
Deferred rental income 3,496 3,496
-------------- --------------
Total liabilities 2,741,152 3,017,856
-------------- --------------
Partners' capital (deficit):
General Partner (475,432) (472,763)
Limited Partnership interests
(829,521.30 Units; initial purchase price of $25 each) 9,322,877 9,373,579
Accumulated other comprehensive income 6,936 -
-------------- --------------
Total partners' capital 8,854,381 8,900,816
-------------- --------------
Total liabilities and partners' capital $ 11,595,533 $ 11,918,672
============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
INCOME
Operating lease revenue $ 253,045 $ 378,843
Sales-type lease revenue - 4,445
Interest income 11,402 21,579
Interest income - loan - 121,234
Interest income - affiliate 22,398 22,398
Gain on sale of equipment - 2,500
-------------- -------------
Total income 286,845 550,999
-------------- -------------
EXPENSES
Depreciation 167,510 167,518
Interest expense 39,901 46,577
Equipment management fees - affiliate 13,773 21,415
Bad debt expense 30,505 -
Operating expenses - affiliate 88,527 101,117
Write-down of investment securities - affiliate - 33,148
-------------- -------------
Total expenses 340,216 369,775
-------------- -------------
Net income (loss) $ (53,371) $ 181,224
============== =============
Net income (loss) per limited partnership unit $ (0.06) $ 0.21
============== =============
Cash distributions declared
per limited partnership unit $ - $ -
============== =============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Accumulated
General Other
Partner Limited Partners Comprehensive
Amount Units Amount Income Total
-------------- ------------ -------------- ------------- --------------
Balance at December 31, 2001 $ (472,763) 829,521.30 $ 9,373,579 $ - $ 8,900,816
Net loss (2,669) - (50,702) - (53,371)
Unrealized gain on investment
securities - affiliate - - - 6,936 6,936
-------------- ------------ -------------- ------------- --------------
Comprehensive income (loss) (2,669) - (50,702) 6,936 (46,435)
-------------- ------------ -------------- ------------- --------------
Balance at March 31, 2002 $ (475,432) 829,521.30 $ 9,322,877 $ 6,936 $ 8,854,381
============== ============ ============== ============= ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
SSTATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
... ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(53,371) $181,224
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 167,510 167,518
Bad debt expense 30,505 -
Sales-type lease revenue - (4,445)
Gain on sale of equipment - (2,500)
Write-down of investment securities - affiliate - 33,148
Changes in assets and liabilities:
Rents receivable 28,978 58,692
Accounts receivable - other - 47,490
Accounts receivable - affiliate 12,367 (28,193)
Interest receivable - affiliate 246 (22,398)
Prepaid expenses (6,994) (14,433)
Interest receivable - loan - (121,234)
Collections on net investment in sales-type lease - 78,255
Accrued interest 815 11,149
Accrued liabilities (137,410) (160,949)
Accrued liabilities - affiliate (7,261) 11,126
Deferred rental income - 4,388
-------------- --------------
Net cash provided by operating activities 35,385 238,838
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales - 2,500
-------------- --------------
Net cash provided by investing activities - 2,500
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable - 489,320
Principal payments - notes payable (132,848) (279,608)
-------------- --------------
Net cash provided by (used in) financing activities (132,848) 209,712
-------------- --------------
Net increase (decrease) in cash and cash equivalents (97,463) 451,050
Cash and cash equivalents at beginning of period 2,604,913 1,887,541
-------------- --------------
Cash and cash equivalents at end of period $2,507,450 $2,338,591
============== ==============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $39,086 $35,428
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 6 to the financial statements regarding the increase of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 2002.
In February 2001, the Partnership refinanced certain indebtedness and accrued
interest in the amount of $684,845.
The accompanying notes are an integral part of these financial statements.
------
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of American Income Fund I-A, a Massachusetts Limited
Partnership (the "Partnership"). Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the 2001 Annual
Report included in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2002 and December 31, 2001 and results of operations for
the three month periods ended March 31, 2002 and 2001 have been made and are
reflected.
NOTE 2 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected
to prevent the orderly wind-up of the Partnership's business activities as the
General Partner, wholly owned by Equis Financial Group Limited Partnership
("EFG"), would seek to sell the then-remaining equipment assets either to the
lessee or to a third party, taking into consideration the amount of future
noncancellable rental payments associated with the attendant lease agreements.
Future minimum rents of $2,088,382 are due as follows:
For the year ending March 31, 2003 $ 811,998
2004 687,734
2005 521,518
2006 67,132
----------
... Total $2,088,382
==========
Future minimum rents for operating leases does not include the operating leases
for which the lease payments are based on the usage of the equipment leased.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at March 31,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2002 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.
... Remaining
... Lease Term Equipment
Equipment Type (Months) at Cost
- --------------------------------------------- ----------- ------------
Aircraft 0-39 $ 8,384,248
Trailers/intermodal containers. . . . . . . . 9-15 2,028,929
Materials handling. . . . . . . . . . . . . . 0 836,986
Furniture and fixtures. . . . . . . . . . . . 0 97,082
------------
Total equipment cost . - 11,347,245
Accumulated depreciation - (6,186,940)
------------
Equipment, net of accumulated depreciation - $ 5,160,305
============
At March 31, 2002, the Partnership's equipment portfolio included equipment
having a proportionate original cost of approximately $10,413,000, representing
approximately 92% of total equipment cost.
Certain of the equipment and related lease payment streams were used to secure
term loans with third-party lenders. The preceding summary of equipment includes
leveraged equipment having an original cost of approximately $5,522,000 and a
net book value of approximately $3,775,000 at March 31, 2002.
The Partnership entered into a three-year lease agreement with Air Slovakia for
its proportionate interest in a Boeing 737-2H4 aircraft, effective September
2000. In accordance with a lease amendment executed in January 2002, the lease
term was revised and the lease will terminate in August 2002. The total
payments due under the amended lease approximate the total payments remaining
under the original lease.
The summary above includes a McDonnell Douglas MD-82 aircraft returned in April
2001, being held for re-lease or sale with an original proportionate cost of
approximately $2,014,000 and a net book value of approximately $879,000. The
General Partner is actively seeking the sale or re-lease of this aircraft.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''Partnerships'') collectively loaned $32 million to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate
company. Echelon Residential Holdings is owned by several investors, including
James A. Coyne, Executive Vice President of EFG. In addition, certain
affiliates of the General Partner made loans to Echelon Residential Holdings in
their individual capacities.
The Partnership's original loan was $3,050,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, an unrelated Florida-based real estate company. The loan has a term
of 30 months, maturing on September 8, 2002, and an annual interest rate of 14%
for the first 24 months and 18% for the final 6 months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Partnerships as collateral. Echelon Residential Holdings
has no material business interests other than those connected with the real
estate properties owned by Echelon Residential LLC.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $266,875, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $495,015 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the quarters ended March 31, 2002 and 2001 is as follows:
2002 2001
------------- ------------
Total assets $ 89,635,923 $72,861,183
Total liabilities $100,468,976 $76,780,082
Minority interest $ 1,507,536 $ 1,906,448
Total deficit $(12,340,589) $(5,825,347)
Total revenues $ 3,559,971 $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 5,358,501 $ 3,096,648
Net loss $ (1,798,530) $(2,033,209)
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease was the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft was to transfer to
Royal Aviation Inc., at the expiration of the lease term in January 2002. For
the quarter ended March 31, 2001, the Partnership recognized sales-type lease
revenue of $4,445 from this lease.
In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a
result, has defaulted on this conditional sales agreement. The General Partner
is continuing to negotiate for the return of the aircraft. As of March 31,
2002, the Partnership has written-down the remaining balance of the
Partnership's investment in the sales-type lease. The write-down was based on
the comparison of the net estimated fair value of the Partnership's interest in
the aircraft and the Partnership's net investment in the sales-type lease. The
write-down recorded in the three months ended March 31, 2002 was $23,549.
NOTE 6 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 40,797 shares of Semele Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$898,405. The Semele Note matures in April 2003 and bears an annual interest
rate of 10% with mandatory principal reductions prior to maturity, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
its principal real estate asset consisting of an undeveloped 274-acre parcel of
land near Malibu, California. The Partnership recognized interest income of
$22,398 related to the Semele Note for each of the three month periods ended
March 31, 2002 and 2001.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. Since the Semele Note was
received as consideration for the sale of the cargo vessels to an unaffiliated
party and the extension of the maturity of the Semele Note is documented in an
amendment to the existing Semele Note and not as a new loan, the general
partners of the owner partnerships do not consider the Semele Note to be within
the prohibition in the Partnership Agreements against loans to or from the
general partner and its affiliates. Nonetheless, the extension of the maturity
date might be construed to be in violation of the making of a loan to an
affiliate of the general partner in violation of the Partnership Agreements of
the owner partnerships and to be a violation of the court's order with respect
to New Investments that all other provisions of the Partnership Agreements shall
remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 2002, the Partnership increased the
carrying value of its investment in Semele common stock to $2.07 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to March 31, 2002), resulting in an unrealized gain of $6,936.
This gain was reported as a component of comprehensive loss included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the General Partner determined that the decline in market
value of its investment in Semele common stock was other-than-temporary. As a
result, on March 31, 2001, the Partnership wrote down the carrying value of the
Semele common stock to $3.3125 per share (the quoted price of the Semele stock
on the NASDAQ SmallCap Market on the date the stock traded closest to March 31,
2001) resulting in a loss of $33,148 in the three months ended March 31,2001.
An additional write-down of the investment in Semele common stock occurred in
December 31, 2001.
NOTE 7 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the three month periods ended March 31,
2002 and 2001 which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2002 2001
-------- --------
Equipment management fees $ 13,773 $ 21,415
Administrative charges 58,577 26,217
Reimbursable operating expenses
due to third parties 29,950 74,900
-------- --------
Total $102,300 $122,532
======== ========
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
March 31, 2002, the Partnership was owed $38,127 by EFG for such funds and the
interest thereon. These funds were remitted to the Partnership in April 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 8 - NOTES PAYABLE
- --------------------------
Notes payable at March 31, 2002 consisted of two installment notes totaling
$2,097,570 payable to banks and institutional lenders which bear an interest
rate of either 7.03% or 7.65%. Both of the installment notes are non-recourse
and are collateralized by the equipment and assignment of the related lease
payments. The installment notes amortize monthly and in addition, the
Partnership has a balloon payment obligation at the expiration of the lease term
related to one of the two aircraft leased to Aerovias de Mexico, S.A. de C.V. of
391,567 in September 2004.
Management believes that the carrying amount of notes payable approximates fair
value at March 31, 2002 based on its experience and understanding of the market
for instruments with similar terms.
The annual maturities of the note payable are as follows:
For the year ending March 31, 2003 $ 552,471
2004 593,603
2005 878,100
2006 73,397
----------
... Total $2,097,570
==========
NOTE 9 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al., the outcome of which could significantly alter the nature of the
- -------
Partnership's organization and its future business operations.
- ------
The Defendant's and Plaintiff's Counsel have reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. The
court held a hearing on March 1, 2002 to consider the Revised Settlement. After
the hearing, the court issued an order preliminarily approving the Revised
Settlement and providing for the mailing of notice to the Operating Partnership
Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on
the terms and conditions set forth in the Revised Settlement is fair, reasonable
and adequate and should be finally approved by the court and a final judgment
entered in the matter.
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations.
- ------------------------
Certain statements in this quarterly report of American Income Fund I-D, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit, the remarketing of the Partnership's
equipment, and the performance of the Partnership's non-equipment assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings LLC ("Echelon Residential Holdings") and its ownership of securities of
Semele Group Inc. ("Semele"). The Partnership does not intend to engage in
investment activities in a manner or to an extent that would require the
Partnership to register as an investment company under the 1940 Act. However,
it is possible that the Partnership unintentionally may have engaged, or may in
the future engage, in an activity or activities that may be construed to fall
within the scope of the 1940 Act. The General Partner has been engaged in
discussions with the staff of the Securities and Exchange Commission ("SEC")
regarding whether or not the Partnership may be an inadvertent investment
company as a consequence of the above-referenced loan. The 1940 Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. If the Partnership were determined to be an unregistered investment
company, its business would be adversely affected. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
As part of the Revised Settlement, EFG has agreed to buy the loans made by the
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date of September 8, 2002. The Revised Settlement also
provides for the liquidation of the Partnerships' assets, a cash distribution
and the dissolution of the Partnerships including the liquidation and
dissolution of this Partnership. The court held a hearing on March 1, 2002 to
consider the Revised Settlement. After the hearing, the court issued an order
preliminarily approving the Revised Settlement and providing for the mailing of
notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to
determine whether the settlement on the terms and conditions set forth in the
Revised Settlement is fair, reasonable and adequate and should be finally
approved by the court and a final judgment entered in the matter.
While there can be no assurance that the Revised Settlement will receive final
Court approval and be effected, if it is, the assets of the Partnership will be
liquidated and the Partnership dissolved. In the absence of a final settlement
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit.
Overview
- --------
The Partnership was organized in 1991 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. Pursuant to the Amended and Restated Agreement and Certificate of
Limited Partnership (the "Restated Agreement, as amended,") the Partnership is
scheduled to be dissolved by December 31, 2002. However, the General Partner
does not expect that the Partnership will be dissolved until such time that the
Class Action Lawsuit is settled or adjudicated.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
Revenue Recognition: Rents are payable to the Partnership monthly or quarterly
- ---------------------
and no significant amounts are calculated on factors other than the passage of
time. The majority of the Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred. Lease payments for the sales-type lease are due monthly and the
related revenue is recognized by a method which produces a constant periodic
rate of return on the outstanding investment in the lease.
Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. The Partnership's
depreciation policy is intended to allocate the cost of equipment over the
period during which it produces economic benefit. The principal period of
economic benefit is considered to correspond to each asset's primary lease term,
which generally represents the period of greatest revenue potential for each
asset. Accordingly, to the extent that an asset is held on primary lease term,
the Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of the primary lease expiration. To
the extent that an asset is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.
Allowance for doubtful accounts: The Partnership maintains allowances for
- -----------------------------------
doubtful accounts for estimated losses resulting from the inability of the
- -----
lessees to make the lease payments required under the contracted lease
- -----
agreements. These estimates are primarily based on the amount of time that has
- -----
elapsed since the related payments were due as well as specific knowledge
related to the ability of the lessees to make the required payments. If the
financial condition of the Partnership's lessees were to deteriorate, additional
allowances could be required that would increase expenses. Conversely, if the
financial condition of the lessees were to improve or if legal remedies to
collect past due amounts were successful, the allowance for doubtful accounts
could be reduced, thereby decreasing expenses.
Allowance for loan losses: The Partnership periodically evaluates the
- -----------------------------
collectibility of its loan's contractual principal and interest and the
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existence of loan impairment indicators, including contemporaneous economic
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conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. Adjustments to reduce the net
- -----
carrying value of equipment are recorded in those instances where estimated net
- --
realizable value is considered to be less than net carrying value. Inherent in
the Partnership's estimate of net realizable values are assumptions regarding
estimated future cash flows. If these assumptions or estimates change in the
future, the Partnership could be required to record impairment charges for these
assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
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involving ordinary and routine claims related to its business. In addition, the
Partnership is also involved in a class action lawsuit. The ultimate legal and
financial liability with respect to such matters cannot be estimated with
certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
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For the three months ended March 31, 2002, the Partnership recognized operating
lease revenue of $253,045 compared to $378,843 for the same period in 2001. The
decrease in operating lease revenue from 2001 to 2002 resulted from lease term
expirations and equipment sales. In the future, operating lease revenue is
expected to decline due to lease term expirations and equipment sales.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft. This aircraft had been
stored in the warehouse from January 2000 through the date of the conditional
sale in October 2000. The title to the aircraft was to transfer to Royal
Aviation Inc., at the expiration of the lease term in January 2002. In the
fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result,
has defaulted on the conditional sales agreement. The General Partner is
negotiating for the return of the aircraft. As of March 31, 2002, the
Partnership has written-down the remaining balance of the Partnership's
investment in the sales-type lease. The write-down was based on the comparison
of estimated fair value of the Partnership's interest in the aircraft and the
Partnership's net investment in the sales-type lease. The write-down recorded
in the three months ended March 31, 2002 was $23,549. For the three months
ended March 31, 2001, the Partnership recognized sales-type lease revenue of
$4,445.
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 Equis Financial Group Limited Partnership ("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 three months ended March 31, 2002 was $33,800 compared
to $165,211 for the same period in 2001. Interest income is typically generated
from temporary investment of rental receipts and equipment sale proceeds in
short-term instruments and interest earned on the loan receivable from Echelon
Residential Holdings and Semele. The amount of future interest income is
expected to fluctuate as a result of changing interest rates and the amount of
cash available for investment, among other factors.
Interest income included $22,398 in each of the three month periods ended March
31, 2002 and 2001, earned on a note receivable from Semele. The note receivable
from Semele is scheduled to mature in April 2003.
Interest income also included $121,234 for the three months ended March 31,
2001, earned on the loan receivable from Echelon Residential Holdings. The
Partnership ceased accruing interest on this loan, effective April 1, 2001. See
further discussion below.
During the each of the three month periods ended March 31, 2001, the Partnership
sold fully-depreciated equipment to existing lessees and third parties. These
sales resulted in a net gain, for financial statement purposes, of $2,500.
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 will be
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. 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 for the three months ended March 31, 2002 was $167,510
compared to $167,518 for the same period in 2001. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the
Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of the primary lease expiration. To
the extent that equipment 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.
For the three months ended March 31, 2002 and 2001, the Partnership incurred
interest expense of $39,901 and $46,577, respectively. In the future, interest
expense will continue to decline as the principal balance of notes payable is
reduced through the application of rent receipts to outstanding debt.
Management fees were $13,773 and $21,415, respectively, for the three months
ended March 31, 2002 and 2001. Management fees are based on 5% of gross lease
revenue generated by operating leases and 2% of gross lease revenue generated by
full payout leases.
Operating expenses were $88,527 for the three months ended March 31, 2002
compared to $101,117 for the same period in 2001. During the quarter ended
March 31, 2001, operating expenses included approximately $27,000 related to the
Class Lawsuit. Other operating expenses include professional service costs,
such as audit and legal fees, as well as printing, distribution and remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
Bad debt expense was $30,505 for the quarter ended March 31, 2002 including the
write-down of the remaining balance of the Partnership's investment in the
sales-type lease. The write-down was based on the comparison of estimated fair
value of the Partnership's interest in the aircraft and the Partnership's net
investment in the sales-type lease.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in Semele common stock was other than temporary. As a
result, the Partnership wrote down the cost of the Semele common stock to
$3.3125 per share (the quoted price of the Semele stock on the NASDAQ SmallCap
Market on the date the stock traded closest to March 31, 2001), for a realized
loss in the three months ended March 31, 2001 of $33,148.
Liquidity and Capital Resources and Discussion of Cash Flows
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The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from asset rental transactions.
Accordingly, the Partnership's principal source of cash from operations is
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 $35,385 and $238,838 for the three months ended March 31, 2002 and
2001, respectively. Future renewal, re-lease and equipment sale activities will
cause a decline in the Partnership's lease revenues and corresponding sources of
operating cash. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will also decline
as the Partnership remarkets its assets. The Partnership, however, may continue
to incur significant costs to facilitate the successful remarketing of its
aircraft in the future. In the future, the amount of cash from interest income
is expected to fluctuate as a result of changing interest rates and the level of
cash available for investment, among other factors. The loan to Echelon
Residential Holdings and accrued interest thereon are due in full at maturity on
September 8, 2002.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 2001, the Partnership realized equipment sales proceeds of
$2,500. Future inflows of cash from asset disposals will vary in timing and
amount and will be influenced by many factors including, but not limited to, the
frequency and timing of lease expirations, the type of equipment being sold, its
condition and age, and future market conditions.
At March 31, 2002, the Partnership was due aggregate future minimum lease
payments of $2,088,382 from contractual operating lease agreements, a portion of
which will be used to amortize the principal balance of notes payable of
$2,097,570. 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. In accordance
with the Partnership's investment objectives and the terms of its Partnership
Agreement, the Partnership generally sells its equipment as the related leases
expire. Additionally, the Partnership sells, on a selective basis, equipment
before the expiration of the related lease.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $266,875, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $495,015 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
general partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates and the court's statement in its order permitting New
Investments that all other provisions of the Partnership Agreements governing
the investment objectives and policies of the Partnership shall remain in full
force and effect. The court may require the partnerships to restructure or
divest the loan.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 40,797 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $898,405. The Semele Note
matures in April 2003 and bears an annual interest rate of 10% with mandatory
principal reductions prior to maturity, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. Since the Semele Note was
received as consideration for the sale of the cargo vessels to an unaffiliated
party and the extension of the maturity of the Semele Note is documented in an
amendment to the existing Semele Note and not as a new loan, the general
partners of the owner partnerships do not consider the Semele Note to be within
the prohibition in the Partnership Agreements against loans to or from the
general partner and its affiliates. Nonetheless, the extension of the maturity
date might be construed to be in violation of the making of a loan to an
affiliate of the general partner in violation of the Partnership Agreements of
the owner partnerships and to be a violation of the court's order with respect
to New Investments that all other provisions of the Partnership Agreements shall
remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 2002, the Partnership increased the
carrying value of its investment in Semele common stock to $2.07 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to March 31, 2002), resulting in an unrealized gain of $6,936.
This gain was reported as a component of comprehensive loss included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in Semele common stock was other-than-temporary. As a
result, the Partnership wrote down the cost of the Semele common stock to
$3.3125 per share (the quoted price of the Semele stock on the NASDAQ SmallCap
Market on the date the stock traded closest to March 31, 2001), for a realized
loss in the three months ended March 31, 2001 of $33,148.
The Semele Note and the Semele common stock are subject to a number of risks
including, Semele's ability to make loan payments which is dependent upon the
liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998 and 2001, the General Partner determined that the
decline in the market value of the stock was other than temporary and wrote down
the Partnership's investment. Subsequently, the market value of the Semele
common stock has fluctuated. The market value of the stock could decline in the
future. Gary D. Engle, President and Chief Executive Officer of EFG and a
Director of the General Partner is Chairman and Chief Executive Officer of
Semele and James A. Coyne, Executive Vice President of EFG is Semele's President
and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the
Board of Directors of, and own significant stock in, Semele.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities on
the accompanying Statement of Cash Flows. The Partnership's notes payable are
recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
period generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In the near term, the amount of cash used for debt
payments will be consistent with the quarter ended March 31, 2002.
Subsequently, the amount of cash used will decrease as the principal balance of
notes payable is reduced through the collection and application of rents. In
addition, the Partnership has a balloon payment obligation as discussed below.
In February 2001, the Partnership and certain affiliated investment programs
(collectively, the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico S.A. de
C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $1,174,165 including $684,845 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $489,320 to repay the outstanding balance of
the indebtedness and accrued interest related to another aircraft of $126,782
and certain aircraft reconfiguration costs that the Partnership had accrued at
December 31, 2000. The new indebtedness bears a fixed interest rate of 7.65%,
principal is amortized monthly and the Partnership has a balloon payment
obligation at the expiration of the lease term of $391,567 in September 2004.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base 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
must contemplate the potential liquidity risks associated with its investment in
commercial jet aircraft. The management and remarketing of aircraft can
involve, among other things, significant costs and lengthy remarketing
initiatives. Although the Partnership's lessees are required to maintain the
aircraft during the period of lease contract, repair, maintenance, and/or
refurbishment costs at lease expiration can be substantial. For example, an
aircraft that is returned to the Partnership meeting minimum airworthiness
standards, such as flight hours or engine cycles, nonetheless may require heavy
maintenance in order to bring its engines, airframe and other hardware up to
standards that will permit its prospective use in commercial air transportation.
At March 31, 2002, the Partnership's equipment portfolio included ownership
interests in four commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. In January 2002, this lease was amended, including
revising the lease expiration date to August 2002. The remaining three aircraft
in the Partnership's portfolio already are Stage 3 compliant. Two of these
aircraft have lease terms expiring in September 2004 and June 2005,
respectively, and the third aircraft was returned to the General Partner upon
its lease expiration in April 2001.
Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, all of the commercial
jet aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements except one McDonnell Douglas MD-82
aircraft, which was returned to the General Partner upon its lease expiration in
April 2001. The General Partner is attempting to remarket this aircraft.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
No cash distributions have been declared since 1999. In any given year, it is
possible that the Limited Partners will be allocated taxable income in excess of
distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions when paid to the Limited Partners generally consist of both a
return of and a return on capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences).
For instance, selling commissions and organization and offering costs pertaining
to syndication of the Partnership's limited partnership units are not deductible
for federal income tax purposes, but are recorded as a reduction of partners'
capital for financial reporting purposes. Therefore, such differences are
permanent differences between capital accounts for financial reporting and
federal income tax purposes. Other differences between the bases of capital
accounts for federal income tax and financial reporting purposes occur due to
timing differences. Such items consist of the cumulative difference between
income or loss for tax purposes and financial statement income or loss and the
treatment of unrealized gains or losses on investment securities for book and
tax purposes. 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 March 31, 2002. This is the result of aggregate cash distributions
to the General Partner being in excess of its capital contribution of $1,000 and
its allocation of financial statement net income or loss. Ultimately, the
existence of a capital deficit for the General Partner for financial reporting
purposes is not indicative of any further capital obligations to the Partnership
by the General Partner. The Restated Agreement, as amended, requires that upon
the dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance which may
exist in the General Partner's tax capital account. At December 31, 2001, the
General Partner had a positive tax capital account balance.
The outcome of the Class Action Lawsuit will be the principal factor in
determining the future of the Partnership's operations. Commencing with the
first quarter of 2000, the General Partner suspended the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is settled or adjudicated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's notes payable bear interest rates of 7.03% and 7.65% and
amortize monthly through September 2005. The fair market value of fixed
interest rate on debt may be adversely impacted due to a decrease in interest
rates. The effect of interest rate fluctuations on the Partnership for the
quarter ended March 31, 2002 was not material.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and currently earns interest at a fixed annual rate of 18% with interest
due at maturity (see discussion above). Investments earning a fixed rate of
interest may have their fair market value adversely impacted due to a rise in
interest rates. The effect of interest rate fluctuations on the Partnership in
the quarter ended March 31, 2002 was not material.
AMERICAN INCOME FUND I-D,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 9 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response: None
Item 6(b). Reports on Form 8-K
. Response: None
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INCOME FUND I-D, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ Michael J. Butterfield
-----------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: May 14, 2002
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