10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period endedJune 30, 2002 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-20030 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.) 1050 Waltham Street, Suite 310, Lexington, MA 02421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 676-0009 ------------------- 88 Broad Street, Boston, MA 02110 ---------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ ----- AMERICAN INCOME 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 June 30, 2002 and December 31, 2001 3 Statement of Operations for the three and six months ended June 30, 2002 and 2001 4 Statement of Changes in Partners' Capital for the six months ended June 30, 2002 5 Statement of Cash Flows for the six months ended June 30, 2002 and 2001 6 Notes to the Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED)
June 30, December 31, 2002 2001 ----------- -------------- ASSETS Cash and cash equivalents $3,337,584 $ 2,604,913 Rents receivable, net of allowance of $65,213 and $58,257 at June 30, 2002 and December 31, 2001, respectively 23,780 128,745 Accounts receivable - affiliate 19,941 50,494 Interest receivable - affiliate 22,153 22,644 Other assets 21,190 1,468 Interest receivable - loan, net of allowance of $22,026 and $495,015 at June 30, 2002 and December 31, 2001, respectively - - Loan receivable, net of allowance of $266,875 at June 30, 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 67,723 77,514 Equipment at cost, net of accumulated depreciation of $5,573,868 and $6,019,430 at June 30, 2002 and December 31, 2001, respectively 2,810,380 5,327,815 ----------- -------------- Total assets $9,984,281 $ 11,918,672 =========== ============== LIABILITIES AND PARTNERS' CAPITAL Notes payable $1,964,829 $ 2,230,418 Accrued interest 7,106 7,747 Accrued liabilities 327,730 651,469 Accrued liabilities - affiliate 104,012 124,726 Deferred rental income 6,940 3,496 ----------- -------------- Total liabilities 2,410,617 3,017,856 ----------- -------------- Partners' capital (deficit): General Partner (538,631) (472,763) Limited Partnership interests (829,521.30 Units; initial purchase price of $25 each) 8,122,086 9,373,579 Accumulated other comprehensive loss (9,791) - ----------- -------------- Total partners' capital 7,573,664 8,900,816 ----------- -------------- Total liabilities and partners' capital $9,984,281 $ 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 AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
For the three months ended For the six months ended June 30, June 30, 2002 2001 2002 2001 ----------- ----------- ------------ ----------- INCOME Operating lease revenue $ 467,792 $ 548,705 $ 720,837 $ 927,548 Sales-type lease revenue - 4,445 - 8,890 Interest income 12,117 29,448 23,519 51,027 Interest income - loan - - - 121,234 Interest income - affiliate 22,153 22,153 44,551 44,551 Gain (loss) on sale of equipment (92,681) 8,346 (92,681) 10,846 ----------- ----------- ------------ ----------- Total income 409,381 613,097 696,226 1,164,096 ----------- ----------- ------------ ----------- EXPENSES Depreciation 104,364 167,518 271,874 335,036 Write-down of equipment 1,810,484 280,000 1,810,484 280,000 Interest expense 37,736 34,593 77,637 81,170 Equipment management fees - affiliate 27,699 30,018 41,472 51,433 Bad debt expense - - 30,505 - Operating expenses - affiliate 166,077 309,792 254,604 410,909 Recovery of bad debt expense from loan receivable (472,989) - (472,989) - Write-down of impaired loan and interest receivable - 761,890 - 761,890 Write-down of investment securities - affiliate - - - 33,148 ----------- ----------- ------------ ----------- Total expenses 1,673,371 1,583,811 2,013,587 1,953,586 ----------- ----------- ------------ ----------- Net loss $(1,263,990) $ (970,714) $(1,317,361) $ (789,490) ----------- ----------- ------------ ----------- Net loss per limited partnership unit $ (1.45) $ (1.11) $ (1.51) $ (0.90) ----------- ----------- ------------ ----------- 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 SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Accumulated General Other Partner Limited Partners Comprehensive Amount Units Amount Loss Total ---------- ---------- ------------ --------------- ------------ Balance at December 31, 2001 $(472,763) 829,521.30 $ 9,373,579 $ - $ 8,900,816 Net loss (65,868) - (1,251,493) - (1,317,361) Unrealized loss on investment securities - affiliate - - - (9,791) (9,791) ---------- ---------- ------------ --------------- ------------ Comprehensive loss (65,868) - (1,251,493) (9,791) (1,327,152) ---------- ---------- ------------ --------------- ------------ Balance at June 30, 2002 $(538,631) 829,521.30 $ 8,122,086 $ (9,791) $ 7,573,664 ========== ========== ============ =============== ============
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
2002 2001 . ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss $(1,317,361) $(789,490) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 271,874 335,036 Write-down of equipment 1,810,484 280,000 Bad debt expense 30,505 - Sales-type lease revenue - (8,890) Loss (gain) on sale of equipment 92,681 (10,846) Write-down of impaired loan and interest receivable - 761,890 Write-down of investment securities - affiliate - 33,148 Recovery of bad debt expense from loan receivable (472,989) - Changes in assets and liabilities: Rents receivable 98,009 96,546 Accounts receivable - other - (209,273) Accounts receivable - affiliate 30,553 (120,845) Interest receivable - affiliate 491 (22,153) Other assets (19,722) (10,274) Interest receivable - loan 472,989 (121,234) Collections on net investment in sales-type lease - 156,509 Accrued interest (641) (2,847) Accrued liabilities (180,795) 47,684 Accrued liabilities - affiliate (20,714) 207,438 Deferred rental income 3,444 (22,589) -------------- -------------- Net cash provided by operating activities 798,808 599,810 -------------- -------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 199,452 10,846 -------------- -------------- Net cash provided by investing activities 199,452 10,846 -------------- -------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from notes payable - 1,862,028 Principal payments - notes payable (265,589) (1,874,782) -------------- -------------- Net cash used in financing activities (265,589) (12,754) -------------- -------------- Net increase in cash and cash equivalents 732,671 597,902 Cash and cash equivalents at beginning of period 2,604,913 1,887,541 -------------- -------------- Cash and cash equivalents at end of period $3,337,584 $2,485,443 ============== ============== SUPPLEMENTAL INFORMATION Cash paid during the period for interest $78,278 $84,017 ============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: See Note 6 to the financial statements regarding the decrease of the Partnership's carrying value of its investment securities - affiliate during the six months ended June 30, 2002. 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 JUNE 30, 2002 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION ----------------------------------- The financial statements presented herein are prepared in conformity with generally accepted accounting principles and the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and are unaudited. As such, these financial statements do not include all information and footnote disclosures required under generally accepted accounting principles for complete financial statements and, accordingly, the accompanying financial statements should be read in conjunction with the financial statements and related footnotes presented in the 2001 Annual Report (Form 10-K) of American Income Fund I-D, 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 June 30, 2002 and December 31, 2001 and results of operations for the three and six month periods ended June 30, 2002 and 2001 have been made and are reflected. NOTE 2 - REVENUE RECOGNITION -------------------------------- Rents are payable to the Partnership monthly, 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 $1,792,184 are due as follows:
For the year ending June 30, 2003 $ 687,734 2004 687,734 2005 416,716 ---------- . Total $1,792,184 ==========
See Note 10 - "Subsequent Events" for further discussion. NOTE 3 - EQUIPMENT --------------------- The following is a summary of equipment owned by the Partnership at June 30, 2002. Remaining Lease Term (Months), as used below, represents the number of months remaining from June 30, 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 0-36 $ 8,384,248 Accumulated depreciation - (5,573,868) ------------ Equipment, net of accumulated depreciation - $ 2,810,380 ============
At June 30, 2002, all of the equipment in the Partnership's portfolio represented a proportionate ownership interest. During the quarter ended June 30, 2002, the Partnership sold all of its remaining non-aircraft equipment to a third party. 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 $2,045,000 at June 30, 2002. The Partnership entered into a three-year lease agreement with Air Slovakia BWJ Ltd. 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 terminated in August 2002, with the title to the aircraft transferring to Air Slovakia. 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 $648,000. The General Partner is actively seeking the sale or re-lease of this aircraft. The Partnership accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which was issued in August 2001. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the assets may not be recoverable from undiscounted future cash flows. During the three months ended June 30, 2002, the Partnership recorded a write-down of equipment, representing an impairment to the carrying value of the Partnership's interest in a McDonnell Douglas MD-87 aircraft, two McDonnell Douglas MD-82 aircraft and a Boeing 737 aircraft. The resulting charge of $1,810,484 was based on a comparison of estimated fair value and carrying value of the Partnership's interest in the aircraft. The estimate of the fair value was based on (i) a current offer to purchase the McDonnell Douglas MD-87 aircraft and one of the McDonnell Douglas MD-82 aircraft, (ii) indications of interest from potential purchasers of the second McDonnell Douglas MD-82 aircraft, (iii) the sale of the Boeing 737 aircraft subsequent to June 30, 2002, and (iv) EFG's assessment of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. The events of September 11, 2001, along with a recession in the United States have continued to adversely affect the market demand for both new and used commercial 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. During the second quarter of 2002, the Partnership received $472,989 from Echelon Residential Holdings for interest due on the loan. As a result, the Partnership reversed $472,989 of the allowance recorded against the accrued interest receivable balance, which is reflected as "Recovery of bad debt expense from loan receivable" in the Statement of Operations. At June 30, 2002, the General Partner believes that the net carrying value of the loan receivable is appropriate. The summarized unaudited financial information for Echelon Residential Holdings as of and for the six month periods ended June 30, 2002 and 2001 is as follows:
2002 2001 ------------- ------------ Total assets $ 94,423,115 $79,159,776 Total liabilities $107,902,966 $85,455,528 Minority interest $ 1,108,573 $ 1,782,982 Total deficit $(14,588,424) $(8,078,734) Total revenues $ 1,430,874 $ 1,705,679 Total expenses, minority interest and equity in loss of unconsolidated joint venture $ 4,061,173 $ 5,924,774 Net loss $ (2,630,299) $(4,219,095)
NOTE 5 - 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 three and six month periods ended June 30, 2001, the Partnership recognized sales-type lease revenue of $4,445 and $8,890, respectively, 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 June 30, 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 six months ended June 30, 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 $44,551 related to the Semele Note during each of the six month periods ended June 30, 2002 and 2001. The exchange in 1997 involved the sale by five partnerships and certain other affiliates of their beneficial interests in three cargo vessels to Semele in exchange for cash, Semele common stock and the Semele Note. At the time of the transaction, Semele was a public company unaffiliated with the general partners and the partnerships. Subsequently, as part of the exchange transaction, Semele solicited the consent of its shareholders to, among other things, engage EFG to provide administrative services and to elect certain affiliates of EFG and the general partners as members of the board of directors. At that point, Semele became affiliated with EFG and the general partners. Since the Semele Note was received as consideration for the sale of the cargo vessels to an unaffiliated party and the extension of the maturity of the Semele Note is documented in an amendment to the existing Semele Note and not as a new loan, the general partners of the owner partnerships do not consider the Semele Note to be within the prohibition in the Partnership Agreements against loans to or from the general partner and its affiliates. Nonetheless, the extension of the maturity date might be construed to be in violation of the making of a loan to an affiliate of the general partner in violation of the Partnership Agreements. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are carried at fair value. During the six months ended June 30, 2002, the Partnership decreased the carrying value of its investment in Semele common stock to $1.66 per share (the quoted price of Semele stock on the OTC Bulletin Board on the date the stock traded closest to June 30, 2002), resulting in an unrealized loss of $9,791. This loss 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 six months ended June 30, 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 six month periods ended June 30, 2002 and 2001 which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
2002 2001 -------- -------- Equipment management fees $ 41,472 $ 51,433 Administrative charges 128,715 52,434 Reimbursable operating expenses due to third parties 125,889 358,475 -------- -------- Total $296,076 $462,342 ======== ========
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 June 30, 2002, the Partnership was owed $19,941 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in July 2002. The discussion of the loan to Echelon Residential Holdings in Note 4 above is incorporated herein by reference. NOTE 8 - NOTES PAYABLE -------------------------- Notes payable at June 30, 2002 consisted of two installment notes totaling $1,964,829 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 June 30, 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 June 30, 2003 $ 564,112 2004 604,422 2005 796,295 ---------- . Total $1,964,829 ==========
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 Defendant's and Plaintiff's Counsel reached agreement on a Revised Stipulation of Settlement (the "Revised Settlement"). As part of the Revised Settlement, EFG has agreed to buy the loans made by the Partnerships to Echelon Residential Holdings for an aggregate of $32 million plus interest at 7.5% per annum, if they are not repaid prior to or at their scheduled maturity date of September 8, 2002. The Revised Settlement also provides for the liquidation of the Partnerships' assets, a cash distribution and the dissolution of the Partnerships including the liquidation and dissolution of this Partnership. On March 1, 2002, after a hearing on the parties' joint motion for preliminary approval of the Revised Settlement, the Court issued an order preliminarily approving the Revised Settlement and providing for the mailing of notice to the Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement should be finally approved. After the hearing the Court issued its Order and Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18, 2002, approving the settlement on the terms and conditions set forth in the Revised Settlement and finding that the settlement is fair, reasonable and adequate and directing implementation of its terms and provisions with respect to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period expired on July 18, 2002. The Partnership has commenced implementing the terms of the Revised Settlement. See further discussion of the Revised Settlement in Note 10 - Subsequent Events. NOTE 10 - SUBSEQUENT EVENTS ------------------------------- As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment and transferred its proportionate ownership aircraft interests (except for the McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de Mexico, S.A. de C.V, referred to hereinafter as the Retained Aircraft), remaining cash and non-cash assets to the American Income Fund I-D, a Massachusetts Limited Partnership, Liquidating Trust ("Liquidating Trust"), of which Wilmington Trust Company is Trustee. The Partnership will be dissolved. The Partnership is currently negotiating the sale of the Retained Aircraft. The Liquidating Trust is in the process of selling the transferred aircraft, in which the Partnership has a proportionate ownership interest and distributing the Partnership's cash, net of reserves for known and contingent liabilities, in accordance with the terms of the Revised Settlement. See Note 3 "Equipment" for further description of the Partnership's aircraft assets. 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 remarketing of the Partnership's equipment and the performance and liquidation of the Partnership's non-equipment assets. The Defendant's and Plaintiff's Counsel reached agreement on a Revised Stipulation of Settlement (the "Revised Settlement"). As part of the Revised Settlement, Equis Financial Group Limited Partnership ("EFG") has agreed to buy the loans made by the Partnerships to Echelon Residential Holdings LLC ("Echelon Residential Holdings") for an aggregate of $32 million plus interest at 7.5% per annum, if they are not repaid prior to or at their scheduled maturity date of September 8, 2002. The Revised Settlement also provides for the liquidation of the Partnerships' assets, a cash distribution and the dissolution of the Partnerships including the liquidation and dissolution of this Partnership. On March 1, 2002, after a hearing on the parties' joint motion for preliminary approval of the Revised Settlement, the Court issued an order preliminarily approving the Revised Settlement and providing for the mailing of notice to the Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement should be finally approved. After the hearing the Court issued its Order and Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18, 2002, approving the settlement on the terms and conditions set forth in the Revised Settlement and finding that the settlement is fair, reasonable and adequate and directing implementation of its terms and provisions with respect to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period expired on July 18, 2002. The Partnership has commenced implementing the terms of the Revised Settlement. As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment and transferred its proportionate ownership aircraft interests (except for the McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de Mexico, S.A. de C.V, referred to hereinafter as the Retained Aircraft), remaining cash and non-cash assets to the American Income Fund I-D, a Massachusetts Limited Partnership, Liquidating Trust ("Liquidating Trust"), of which Wilmington Trust Company is Trustee. The Partnership will be dissolved. The Partnership is currently negotiating the sale of the Retained Aircraft. The Liquidating Trust is in the process of selling the transferred aircraft, in which the Partnership has a proportionate ownership interest and distributing the Partnership's cash, net of reserves for known and contingent liabilities, in accordance with the terms of the Revised Settlement. The Investment Company Act of 1940 (the "1940 Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing, the loan to Echelon Residential Holdings and its ownership of securities of Semele Group Inc. ("Semele"). The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the 1940 Act. However, it is possible that the Partnership unintentionally may have engaged in an activity or activities that may be construed to fall within the scope of the 1940 Act. The General Partner has been engaged in discussions with the staff of the Securities and Exchange Commission 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. 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 --------- existence of loan impairment indicators, including contemporaneous economic -------- conditions, situations which could affect the borrower's ability to repay its ---- obligation, the estimated value of the underlying collateral, and other relevant -- factors. Real estate values are discounted using a present value methodology over the period between the financial reporting date and the estimated disposition date of each property. A loan is considered to be impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, which includes both principal and interest. A provision for loan losses is charged to earnings based on the judgment of the General Partner of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable losses. Impairment of long-lived assets: On a regular basis, the General Partner ----------------------------------- reviews the net carrying value of equipment to determine whether it can be ------ recovered from undiscounted future cash flows. Adjustments to reduce the net ----- carrying value of equipment are recorded in those instances where estimated net -- realizable value is considered to be less than net carrying value. Inherent in the Partnership's estimate of net realizable values are assumptions regarding estimated future cash flows. If these assumptions or estimates change in the future, the Partnership could be required to record impairment charges for these assets. Contingencies and litigation: The Partnership is subject to legal proceedings ------------------------------- involving ordinary and routine claims related to its business. The ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. Estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, the Partnership may be required to adjust amounts recorded in its financial statements. Results of Operations ----------------------- For the three and six month periods ended June 30, 2002, the Partnership recognized operating lease revenue of $467,792 and $720,837, respectively, compared to $548,705 and $927,548, respectively, for the same periods in 2001. Operating lease revenues in the quarter ended June 30, 2002 include approximately $304,000 of early termination rents received by the Partnership in connection with the sale of certain containers. 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 continuing to negotiate for the return of the aircraft. As of June 30, 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 during the six months ended June 30, 2002 was $23,549. For the three and six months ended June 30, 2001, the Partnership recognized sales-type lease revenue of $4,445 and $8,890, respectively. 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 and six month periods ended June 30, 2002 was $34,270 and $68,070, respectively, compared to $51,601 and $216,812, respectively, for the same periods 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 loans receivable from Echelon Residential Holdings and Semele. Interest income included $22,153 and $44,551 during both the three and six months ended June 30, 2002 and 2001, respectively, earned on a note receivable from Semele. The note receivable from Semele is scheduled to mature in April 2003. Interest income also included $121,234 during the six months ended June 30, 2001, earned on the loan receivable from Echelon Residential Holdings. The Partnership ceased accruing interest on this loan, effective April 1, 2001. See further discussion below. During the three and six months ended June 30, 2002, the Partnership sold equipment having a net book value of $292,133 to existing lessees and third parties. These sales resulted in a net loss, for financial statement purposes, of $92,681. During the three and six months ended June 30, 2001, the Partnership sold fully depreciated equipment resulting in a net gain, for financial statement purposes, of $8,346 and $10,846, respectively. 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 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 and six month periods ended June 30, 2002 was $104,364 and $271,874, respectively, compared to $167,518 and $335,036, respectively, for the same periods in 2001. During the three months ended June 30, 2002, the Partnership recorded a write-down of equipment, representing an impairment to the carrying value of the Partnership's interest in a McDonnell Douglas MD-87 aircraft, two McDonnell Douglas MD-82 aircraft and a Boeing 737 aircraft. The resulting charge of $1,810,484 was based on a comparison of estimated fair value and carrying value of the Partnership's interests in the aircraft. The estimate of the fair value was based on (i) a current offer to purchase the McDonnell Douglas MD-87 aircraft and one of the McDonnell Douglas MD-82 aircraft, (ii) indications of interest from potential purchasers of the second McDonnell Douglas MD-82 aircraft, (iii) the sale of the Boeing 737 aircraft subsequent to June 30, 2002, and (iv) EFG's assessment of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. The events of September 11, 2001, along with a recession in the United States have continued to adversely affect the market demand for both new and used commercial aircraft. During the three months ended June 30, 2001, the Partnership also recorded a write-down of equipment, representing an impairment to the carrying value of the Partnership's interest in a McDonnell Douglas MD-82 aircraft returned in April 2001 and currently off lease. The resulting charge of $280,000 was based on a comparison of estimated fair value and carrying value of the Partnership's interest in the aircraft. The estimate of the fair value was based on (i) information provided by a third-party aircraft broker and (ii) EFG's assessment of prevailing market conditions for similar aircraft. For the three and six month periods ended June 30, 2002, the Partnership incurred interest expense of $37,736 and $77,637, respectively, compared to $34,593 and $81,170, respectively for the same periods in 2001. In the future, interest expense will decline as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees were $27,699 and $41,472, respectively, for the three and six months ended June 30, 2002 compared to $30,018 and $51,433, respectively, for the same periods in 2001. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Bad debt expense was $30,505 during the six months ended June 30, 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. 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. During the second quarter of 2002, the Partnership received $472,989 from Echelon Residential Holdings for interest due on the loan. As a result, the Partnership reversed $472,989 of the allowance recorded against the accrued interest receivable balance, which is reflected as "Recovery of bad debt expense from loan receivable" in the Statement of Operations. Operating expenses were $166,077 and $254,604, respectively, for the three and six month periods ended June 30, 2002, compared to $309,792 and $410,909, respectively, for the same periods in 2001. In 2001, operating expenses included approximately $59,000 related to the Class Action Lawsuit and approximately $172,000 of remarketing and storage costs related to the Partnership's aircraft. 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. At March 31, 2001, the Partnership determined that the decline in the market value of its investment in Semele common stock was other than temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $3.3125 per share (the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the stock traded closest to March 31, 2001), for a realized loss in the six months ended June 30, 2001 of $33,148. Liquidity and Capital Resources and Discussion of Cash Flows -------------------------------------------------------------------- The Partnership by its nature is a limited life entity. See previous discussion regarding the Partnership's dissolution. The Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is generally provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $798,808 and $599,810 for the six months ended June 30, 2002 and 2001, respectively. The increase in cash inflow in 2002 reflects the receipt of approximately $473,000 of interest earned on the loan receivable from Echelon Residential Holdings. Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. During the six months ended June 30, 2002 and 2001, the Partnership realized equipment sale proceeds of $199,452 and $10,846, respectively. During the quarter ended June 30, 2002, the Partnership sold all of its remaining non-aircraft equipment to a third party. At June 30, 2002, the Partnership's equipment portfolio consisted solely of its ownership interests in certain aircraft. The loan made by the Partnership to Echelon Residential Holdings is, and will continue to be, subject to various risks, including the risk of default by Echelon Residential Holdings, which could require the Partnership to foreclose under the pledge agreement on its interests in Echelon Residential LLC. The ability of Echelon Residential Holdings to make loan payments and the amount the Partnership may realize after a default would be dependent upon the risks generally associated with the real estate lending business including, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, rent control laws and other governmental rules. The Partnership periodically evaluates the collectibility of the loan's contractual principal and interest and the existence of loan impairment indicators. During the second quarter of 2001, the General Partner determined that recoverability of the loan receivable had been impaired and at June 30, 2001 recorded an impairment of $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 ceased accruing interest on its loan receivable from Echelon Residential Holdings, effective April 1, 2001. During the quarter ended June 30, 2002, the Partnership received a partial payment of the interest due on this loan as discussed above. The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of the several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager of Echelon Residential Holdings. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a risk that structuring the loan this way may be in violation of the prohibition against loans to affiliates in the Partnership Agreements. As a result of an exchange transaction in 1997, the Partnership is the beneficial owner of 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. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are carried at fair value. During the six months ended June 30, 2002, the Partnership decreased the carrying value of its investment in Semele common stock to $1.66 per share (the quoted price of Semele stock on the OTC Bulletin Board on the date the stock traded closest to June 30, 2002), resulting in an unrealized loss of $9,791. This loss 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 six months ended June 30, 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 six months ended June 30, 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, the Partnership has retained funds in connection with the Class Action Lawsuit. 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 June 30, 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 accordance with a lease amendment executed in January 2002, the lease term was revised and the lease terminated in August 2002, with the title to the aircraft transferring to Air Slovakia. 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, two of the commercial jet aircraft in which the Partnership has a proportionate ownership interest are subject to contracted lease agreements. One of the other aircraft is a 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. The remaining aircraft was leased to Slovakia BWJ, Ltd., as discussed above. 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 primarily dependent upon the proceeds realized from the liquidation of the Partnership's remaining assets offset by the associated costs of such liquidation and dissolution of the Partnership. The Partnership's capital account balances for federal income tax and for financial reporting purposes are different primarily due to differing treatments of income and expense items for income tax purposes in comparison to financial reporting purposes (generally referred to as permanent or timing differences). For instance, selling commissions and organization and offering costs pertaining to syndication of the Partnership's limited partnership units are not deductible for federal income tax purposes, but are recorded as a reduction of partners' capital for financial reporting purposes. Therefore, such differences are permanent differences between capital accounts for financial reporting and federal income tax purposes. Other differences between the bases of capital accounts for federal income tax and financial reporting purposes occur due to timing differences. Such items consist of the cumulative difference between income or loss for tax purposes and financial statement income or loss and the treatment of unrealized gains or losses on investment securities for book and tax purposes. For financial reporting purposes, the General Partner has accumulated a capital deficit at June 30, 2002. This is the result of aggregate cash distributions to the General Partner being in excess of its capital contribution of $1,000 and its allocation of financial statement net income or loss. Ultimately, the existence of a capital deficit for the General Partner for financial reporting purposes is not indicative of any further capital obligations to the Partnership by the General Partner. The Restated Agreement, as amended, requires that upon the dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 2001, the General Partner had a positive tax capital account balance. As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment and transferred its proportionate ownership aircraft interests (except for the McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de Mexico, S.A. de C.V), remaining cash and non-cash assets to the American Income Fund I-D, a Massachusetts Limited Partnership, Liquidating Trust ("Liquidating Trust"), of which Wilmington Trust Company is Trustee. The Partnership will be dissolved. The Partnership is currently negotiating the sale of the Retained Aircraft. The Liquidating Trust is in the process of selling the transferred aircraft, in which the Partnership has a proportionate ownership interest and distributing the Partnership's cash, net of reserves for known and contingent liabilities, in accordance with the terms of the Revised Settlement. Item 3. Quantitative and Qualitative Disclosures about Market Risk -------------------------------------------------------------------------- The Partnership's financial statements include financial instruments that are exposed to interest rate risks. The Partnership's notes payable bear interest rates of 7.03% and 7.65% and amortize monthly through June 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 six months ended June 30, 2002 was not material. The Partnership's loan to Echelon Residential Holdings matures on September 8, 2002 and currently has a stated fixed annual rate of 18% with interest due at maturity (see discussion above). Investments earning a fixed rate of interest may have their fair market value adversely impacted due to a rise in interest rates. The effect of interest rate fluctuations on the Partnership for the six months ended June 30, 2002 was not material. AMERICAN INCOME 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: Exhibit 2.13 Amendment to Subsection 2.2 (f) of the Revised Stipulation of Settlement dated January 29, 2002 Exhibit 2.14 Plan of Liquidation and Dissolution dated July 18, 2002 Exhibit 2.15 Account Agency Agreement between Equis Financial Group Limited Partnership and Wilmington Trust Company, dated April 11, 2002 Exhibit 2.16 Liquidating Trust Agreement between the Partnership and Wilmington Trust Company dated July 18, 2002 Exhibit 99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 6(b). Reports on Form 8-K Response : Form 8-K dated July 18, 2002 to include the Court approved settlement of the Class Action Lawsuit. SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its 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: ls/ Michael J. Butterfield --------------------------------------- Michael J. Butterfield Treasurer of AFG Leasing VI Incorporated (Duly Authorized Officer and Principal Financial and Accounting Officer) Date: August 19, 2002 --------------------------