UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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----------------------
For Quarter Ended March 31, 1999 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court 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 No
----- -----
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1999 and December 31, 1998 3
Statement of Operations
for the three months ended March 31, 1999 and 1998 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 1999 5
Statement of Cash Flows
for the three months ended March 31, 1999 and 1998 6
Notes to the Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-19
PART II. OTHER INFORMATION:
Items 1 - 6 20
2
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
1999 1998
---------------- ------------------
ASSETS
- --------
Cash and cash equivalents $ 3,863,528 $ 3,837,781
Rents receivable 159,222 259,427
Accounts receivable - affiliates 165,257 63,066
Note receivable - affiliate 898,405 898,405
Investment securities - affiliate 147,889 168,288
Equipment at cost, net of accumulated depreciation
of $8,771,376 and $8,780,173 at March 31, 1999
and December 31, 1998, respectively 8,439,515 8,720,013
--------------- ----------------
Total assets $ 13,673,816 $ 13,946,980
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 3,842,129 $ 4,192,148
Accrued interest 26,132 32,264
Accrued liabilities 243,600 277,500
Accrued liabilities - affiliate 26,333 16,565
Deferred rental income 65,897 64,685
Cash distributions payable to partners 163,722 163,722
--------------- ----------------
Total liabilities 4,367,813 4,746,884
--------------- ----------------
Partners' capital (deficit):
General Partner (452,503) (457,798)
Limited Partnership Interests
(829,521.30 Units; initial purchase price of $25 each) 9,758,506 9,657,894
--------------- ----------------
Total partners' capital 9,306,003 9,200,096
--------------- ----------------
Total liabilities and partners' capital $ 13,673,816 $ 13,946,980
=============== ================
The accompanying notes are an integral part
of these financial statements.
3
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
for the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
--------------- ---------------
Income:
Lease revenue $ 640,295 $ 681,454
Interest income 42,042 43,323
Interest income - affiliate 22,152 22,460
Gain on sale of equipment 20,411 18,742
---------------- ----------------
Total income 724,900 765,979
--------------- ---------------
Expenses:
Depreciation 279,379 374,997
Interest expense 77,913 105,923
Equipment management fees - affiliate 29,515 31,224
Operating expenses - affiliate 48,065 37,601
--------------- ---------------
Total expenses 434,872 549,745
--------------- ---------------
Net income $ 290,028 $ 216,234
=============== ===============
Net income
per limited partnership unit $ 0.33 $ 0.25
=============== ===============
Cash distribution declared
per limited partnership unit $ 0.19 $ 0.19
=============== ===============
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the three months ended March 31, 1999
(Unaudited)
General Limited Partners
Partner ---------------------------------
Amount Units Amount Total
-------------- ------------- -------------- --------------
Balance at December 31, 1998 $ (457,798) 829,521.30 $ 9,657,894 $ 9,200,096
Net income 14,501 -- 275,527 290,028
Unrealized loss on investment
securities - affiliate (1,020) -- (19,379) (20,399)
-------------- ------------- -------------- --------------
Comprehensive income 13,481 -- 256,148 269,629
-------------- ------------- -------------- --------------
Cash distribution declared (8,186) -- (155,536) (163,722)
-------------- ------------- -------------- --------------
Balance at March 31, 1999 $ (452,503) 829,521.30 $ 9,758,506 $ 9,306,003
============== ============= ============== ==============
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
--------------- ---------------
Cash flows from (used in) operating activities:
Net income $ 290,028 $ 216,234
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 279,379 374,997
Gain on sale of equipment (20,411) (18,742)
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable 100,205 (77,155)
Accounts receivable - affiliates (102,191) 271,431
Increase (decrease) in:
Accrued interest (6,132) 3,498
Accrued liabilities (33,900) 1,912
Accrued liabilities - affiliate 9,768 (7,903)
Deferred rental income 1,212 (39,135)
--------------- ---------------
Net cash from operating activities 517,958 725,137
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sales 21,530 37,998
--------------- ---------------
Net cash from investing activities 21,530 37,998
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (350,019) (249,842)
Distributions paid (163,722) (163,722)
--------------- ---------------
Net cash used in financing activities (513,741) (413,564)
--------------- ---------------
Net increase in cash and cash equivalents 25,747 349,571
Cash and cash equivalents at beginning of period 3,837,781 3,038,635
--------------- ---------------
Cash and cash equivalents at end of period $ 3,863,528 $ 3,388,206
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 84,045 $ 102,425
=============== ===============
Supplemental disclosure of non-cash activity:
See Note 5 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 1999.
The accompanying notes are an integral part
of these financial statements.
6
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
March 31, 1999
(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
footnotes presented in the 1998 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1998 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1999 and December 31, 1998 and results of operations for
the three month periods ended March 31, 1999 and 1998 have been made and are
reflected.
NOTE 2 - CASH
- -------------
At March 31, 1999, the Partnership had $3,751,550 invested in federal
agency discount notes and in reverse repurchase agreements secured by U.S.
Treasury Bills or interests in U.S. Government securities.
NOTE 3 - 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. Future minimum rents of
$4,746,366 are due as follows:
For the year ending March 31, 2000 $ 1,861,173
2001 1,162,533
2002 844,582
2003 714,984
2004 163,094
--------------
Total $ 4,746,366
==============
In December 1998, the Partnership and the other affiliated leasing programs
owning interests in two McDonnell Douglas MD-82 aircraft entered into lease
extension agreements with Finnair OY. The lease extensions, effective upon the
expiration of the existing primary lease terms on April 28, 1999, extended the
leases for nine months and two years, respectively. In aggregate, these lease
extensions will provide additional lease revenue of approximately $848,000 to
the Partnership. The lease revenue from these lease extensions is included in
the future minimum rents summary above.
7
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at March
31, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1999 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 Equis Financial Group Limited Partnership ("EFG") the
acquisition cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------------------------- ------------ -----------------
Aircraft 9-45 $ 10,081,685
Materials handling 0-9 2,844,126
Trailers/intermodal containers 45-51 2,041,054
Construction & mining 0-4 1,700,163
Retail store fixtures 0 316,563
Furniture & fixtures 0 97,082
Communications 0 67,899
Tractors & heavy duty trucks 0 62,319
--------------
Total equipment cost 17,210,891
Accumulated depreciation (8,771,376)
--------------
Equipment, net of accumulated depreciation $ 8,439,515
==============
At March 31, 1999, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $12,464,143, representing approximately
72% 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
$10,082,000 and a net book value of approximately $7,381,000 at March 31, 1999
(see Note 7).
The summary above includes fully depreciated equipment held for re-lease or
sale with an original cost of approximately $501,000. The General Partner is
actively seeking the sale or re-lease of all equipment not on lease. In
addition, the summary above also includes equipment being leased on a
month-to-month basis.
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE/NOTE RECEIVABLE - AFFILIATE
- ----------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership owns 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
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 its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California
8
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
("Rancho Malibu"). The Partnership recognized interest income of $22,152 related
to the Semele Note during the three months ended March 31, 1999.
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, 1999, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.625 per share (the
quoted price of the Semele stock on NASDAQ SmallCap Market at March 31, 1999)
resulting in an unrealized loss of $20,399. This loss was reported as a separate
component of comprehensive income, included in partners' capital.
NOTE 6 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the three month periods ended
March 31, 1999 and 1998 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
1999 1998
------------- -------------
Equipment management fees $ 29,515 $ 31,224
Administrative charges 16,620 16,620
Reimbursable operating expenses
due to third parties 31,445 20,981
------------- -------------
Total $ 77,580 $ 68,825
============= =============
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, 1999, the Partnership was owed $143,105 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in April
1999.
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable at March 31, 1999 consisted of installment notes of
$3,842,129 payable to banks and institutional lenders. The installment notes
bear interest rates ranging between 8.65% and 8.89%, except for one note which
bears a fluctuating interest rate based on LIBOR plus a margin (4.94% at March
31, 1999). All of the installment notes are non-recourse and are collateralized
by the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Partnership has balloon payment obligations at the expiration of the respective
primary lease terms related to aircraft leased by Finnair OY and Reno Air, Inc.
of $1,367,145 and $823,037, respectively (see Note 9 regarding the extension of
the maturity date of the Finnair indebtedness). The carrying amount of notes
payable approximates fair value at March 31, 1999.
9
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 2000 $ 2,026,073
2001 352,038
2002 380,710
2003 232,630
2004 850,678
---------------
Total $ 3,842,129
===============
NOTE 8 - 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 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,
10
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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
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
11
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 $96,000, 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 $220,000, all of
which was also 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. Refer to
the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998 for a description of these matters. The following is an update to the
Partnership's prior disclosure on Form 10-K for 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 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
12
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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, on May 11, 1999, the parties executed a comprehensive
settlement agreement to resolve remaining issues. The General Partner does
not expect the outcome of this action to have a material adverse effect on
the Partnership's financial position or results of operations.
NOTE 9 - SUBSEQUENT EVENT
- -------------------------
On April 29, 1999, the Partnership and certain affiliated investment
programs (collectively, the "Programs") entered into agreements with a
third-party lender to extend the maturity date of the Programs' indebtedness
related to the two aircraft leased to Finnair OY (the "Finnair Aircraft"). Under
the existing loan agreements, the Programs had balloon payment obligations
scheduled to mature in April 1999. Consistent with the extension terms of the
lease agreements related to the Finnair Aircraft (see Note 3), the maturity
dates of the indebtedness were extended to January 2000 and April 2001,
respectively. The Partnership will have balloon payment obligations related to
this indebtedness on the respective maturity dates of $484,268 and $129,116.
13
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 important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 8 to the accompanying
financial statements, 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 Equis Financial Group Limited
Partnership (formerly American Finance Group) ("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 has completed substantially all of its Year 2000 project at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. 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.
14
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Three months ended March 31, 1999 compared to the three months ended March 31,
1998:
- ------------------------------------------------------------------------------
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. See Note 8 to the accompanying financial statements. Pursuant to the
Restated Agreement, as amended, the Partnership is scheduled to be dissolved by
December 31, 2002.
Results of Operations
- ---------------------
For the three months ended March 31, 1999, the Partnership recognized lease
revenue of $640,295 compared to $681,454 for the same period in 1998. The
decrease in lease revenue from 1998 to 1999 reflects the effects of primary
lease term expirations and the sale of equipment. In the future, lease revenue
will continue to decline due to lease term expirations and the sale of
equipment.
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 three months ended March 31, 1999 was $64,194
compared to $65,783 for the same period in 1998. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income in 1999 and 1998 included
$22,152 and $22,460, respectively, earned on a note receivable from Semele
Group, Inc. ("Semele") (see Note 5 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.
During the three months ended March 31, 1999, the Partnership sold
equipment having a net book value of $1,119 to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes of
$20,411 compared to a net gain in 1998 of $18,742 on equipment having a net book
value of $19,256.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized
15
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 future gains or losses reported in the financial
statements may not be indicative of the total residual value the Partnership
achieved from leasing the equipment.
Depreciation expense for the three months ended March 31, 1999 was $279,379
compared to $374,997 for the same period in 1998. 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 at the date of primary lease
expiration 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.
Interest expense was $77,913 or 12.2% of lease revenue for the three months
ended March 31, 1999 compared to $105,923 or 15.5% of lease revenue for the same
period in 1998. Interest expense in future periods will decline as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees were approximately 4.6% of lease revenue during each of the
three month periods ended March 31, 1999 and 1998. 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 $48,065 for the three months ended March 31, 1999
compared to $37,601 for the same period in 1998. Operating expenses consist
principally of administrative charges, professional service costs, such as audit
and other 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.
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 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 $517,958 and $725,137 during the three months
ended March 31, 1999 and 1998, respectively. 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 continue to decline as the Partnership
experiences a higher frequency of remarketing events.
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, 1999, the Partnership realized $21,530 in equipment sale
proceeds compared to $37,998 for the same period in 1998. 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.
16
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
At March 31, 1999, the Partnership was due aggregate future minimum lease
payments of $4,746,366 from contractual lease agreements (see Note 3 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $3,842,129 (see Note 7 to the financial statements).
At the expiration of the individual primary and renewal 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 satisfy interest on indebtedness and to
pay management fees and operating expenses.
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. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In future years, the amount of cash used to repay debt
obligations is scheduled to decline as the principal balance of notes payable is
reduced through the collection and application of rents. The Partnership also
has balloon payment obligations at the expiration of the respective primary
lease terms related to aircraft leased by Finnair OY and Reno Air, Inc. of
$1,367,145 and $823,037, respectively (see Note 9 to the financial statements
regarding the extension of the maturity date of the Finnair indebtedness in
April 1999).
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, 1999, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.625 per share (the
quoted price of the Semele stock on NASDAQ SmallCap Market at March 31, 1999)
resulting in an unrealized loss of $20,399 compared to an unrealized gain of
$50,996 for the same period in 1998. The loss and gain were each reported as a
component of comprehensive income, included in partners' capital. The General
Partner believes that the underlying tangible assets of Semele, particularly the
Rancho Malibu property, can be sold or developed on a tax free basis due to
Semele's net operating loss carry forwards and can provide an attractive
economic return to the Partnership.
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 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.
17
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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. Individually,
these repairs can cost in excess of $1 million and, collectively, they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. These aircraft are prohibited from operating in the United
States after December 31, 1999 unless they are retro-fitted with hush-kits to
meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the re-marketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage, particularly in
connection with the Partnership's aircraft interests.
In addition, the Partnership is a Nominal Defendant in a Class Action
Lawsuit described in Note 8 to the accompanying financial statements. A
preliminary court order has allowed the Partnership to invest in new equipment
or other activities, subject to certain limitations, effective March 22, 1999.
To the extent that the Partnership continues to own 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 first quarter of 1999.
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 8 to the accompanying financial
statements.
Cash distributions to the General and Limited Partners 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 three months ended March 31, 1999, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $163,722. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership, the Limited Partners
were allocated 95% of these distributions, or $155,536, and the General Partner
was allocated 5%, or $8,186. The first quarter 1999 cash distribution was paid
on April 15, 1999.
Cash distributions paid to the Limited Partners 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 7 to the financial statements presented in the Partnership's 1998
Annual Report). For instance, selling commissions and organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not
18
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 March 31, 1999. 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 Partnership's 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 8 to the accompanying
financial statements will be the principal factor in determining the future of
the Partnership's operations.
19
AMERICAN INCOME FUND I-D,
a Massachusetts Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 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
20
SIGNATURE PAGE
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 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 Accounting Officer)
Date: May 14, 1999
---------------------------------------------
By: /s/ Gary M. Romano
---------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 14, 1999
---------------------------------------------