-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VaJy0h/AQOZpLhLWhdkGG+TAYEpqH7bHiz9mRYONntISxJofwHkLWTuFEtZEfcku bPk7UgzxXqmZQa52c47BGA== 0001047469-99-012755.txt : 19990402 0001047469-99-012755.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012755 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-D CENTRAL INDEX KEY: 0000868680 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043122696 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20030 FILM NUMBER: 99581066 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-20030 ------------------------ 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 Identification No.) incorporation or organization) 88 BROAD STREET, SIXTH FLOOR, BOSTON, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 Securities registered pursuant to Section 12(b) of the Act NONE ------------------------ NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ---------------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: 829,521.30 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST (Title of class) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders for the year ended December 31, 1998 (Part I and II) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 4 Item 3. Legal Proceedings............................................................................. 5 Item 4. Submission of Matters to a Vote of Security Holders........................................... 5 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 5 Item 6. Selected Financial Data....................................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 7 Item 8. Financial Statements and Supplementary Data................................................... 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 7 PART III Item 10. Directors and Executive Officers of the Partnership........................................... 8 Item 11. Executive Compensation........................................................................ 10 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 10 Item 13. Certain Relationships and Related Transactions................................................ 11 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 13-14
2 PART I ITEM 1. BUSINESS. (a) General Development of Business AMERICAN INCOME FUND I-D, a Massachusetts Limited Partnership, (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on May 30, 1991 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On August 30, 1991 the Partnership issued 829,521.30 units of limited partnership interest (the "Units") to 1,234 investors. Included in the 829,521.30 units are 1,572.30 bonus units. The Partnership has one General Partner, AFG Leasing VI Incorporated, a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG" or the "Manager"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). (b) Financial Information About Industry Segments The Partnership is engaged in only one industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full payout or operating lease basis. Full payout leases are those in which aggregate undiscounted noncancellable rents equal or exceed the acquisition cost of the leased equipment. Operating leases are those in which the aggregate undiscounted noncancellable rental payments are less than the acquisition cost of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives were to acquire and lease equipment that would: 1. Generate quarterly cash distributions; 2. Preserve and protect Partnership capital; and 3. Maintain substantial residual value for ultimate sale. The Partnership has the additional objective of providing certain federal income tax benefits. The Closing Date of the offering of Units of the Partnership was August 30, 1991. Significant operations commenced coincident with the Partnership's initial purchase of equipment and the associated lease commitments on August 30, 1991. The acquisition of the equipment and its associated leases is described in Note 3 to the financial statements included in Item 14, herein. The Restated Agreement, as amended, provides that the Partnership will terminate no later than December 31, 2002. However, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. The Partnership has no employees; however, it is managed pursuant to a Management Agreement with EFG or one of its affiliates. The Manager's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for 3 such services as provided for in the Restated Agreement, as amended, described in Item 13 herein, and in Note 5 to the financial statements included in Item 14, herein. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Partnership must compete with lease programs offered directly by manufacturers and other equipment leasing companies, including limited partnerships and trusts organized and managed similarly to the Partnership, and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. Many competitors have greater financial resources and more experience than the Partnership, the General Partner and the Manager. In addition, default by a lessee under a lease may cause equipment to be returned to the Partnership at a time when the General Partner or the Manager is unable to arrange for the re-lease or sale of such equipment. This could result in the loss of anticipated revenue. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 is incorporated herein by reference to Note 2 to the financial statements in the 1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements in the 1998 Annual Report. 4 ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 8 to the financial statements in the 1998 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. (a) Market Information There is no public market for the resale of the Units and it is not anticipated that a public market for resale of the Units will develop. (b) Approximate Number of Security Holders At December 31, 1998, there were 1,179 record holders in the Partnership. (c) Dividend History and Restrictions Pursuant to Article VI of the Restated Agreement, as amended, the amount of cash distributions to be declared and paid to the Partners is determined on a quarterly basis. Each quarter's distribution may vary in amount and is made 95% to the Limited Partners and 5% to the General Partner. Generally, cash distributions are paid within 30 days after the completion of each calendar quarter. Distributions in 1998 and 1997 were as follows:
GENERAL LIMITED TOTAL PARTNER PARTNERS ------------ --------- ------------ Total 1998 distributions................................................... $ 654,886 $ 32,744 $ 622,142 Total 1997 distributions................................................... 818,606 40,930 777,676 ------------ --------- ------------ Total................................................................ $ 1,473,492 $ 73,674 $ 1,399,818 ------------ --------- ------------ ------------ --------- ------------
Distributions payable were $163,722 at both December 31, 1998 and 1997. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership 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. 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 5 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. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership 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 fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 8 to the accompanying financial statements. Cash distributions consist of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. "Distributable Cash From Operations" means the net cash provided by the Partnership's normal operations after general expenses and current liabilities of the Partnership are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the General Partner, and increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From Operations does not include any Distributable Cash From Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after Payout, any accrued and unpaid Subordinated Remarketing Fees. "Cash From Sales or Refinancings" means cash received by the Partnership from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Partnership required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the General Partner, but not including any Subordinated Remarketing Fees 6 whether or not then due and payable) and (b) general expenses and current liabilities from the Partnership (other than any portion of the Equipment Management Fee which is required to be accrued and the Subordinated Remarketing Fee) and (c) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the General Partner and (ii) increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations. In the event the Partnership accepts a note in connection with any sale or refinancing transaction, all payments subsequently received in cash by the Partnership with respect to such note shall be included in Cash From Sales or Refinancings, regardless of the treatment of such payments by the Partnership for tax or accounting purposes. If the Partnership receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. "Payout" is defined as the first time when the aggregate amount of all distributions to the Limited Partners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Limited Partners' original capital contributions plus a cumulative annual distribution of 11% (compounded quarterly and calculated beginning with the last day of the month of the Partnership's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Limited Partners exceed the amount required to satisfy the cumulative annual distribution of 11% (compounded quarterly) on the Limited Partners' aggregate unreturned capital contributions, such calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each fiscal quarter. ITEM 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1998 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 1998 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. (a-b) Identification of Directors and Executive Officers The Partnership has no Directors or Officers. As indicated in Item 1 of this report, AFG Leasing VI Incorporated is the sole General Partner of the Partnership. Under the Restated Agreement, as amended, the General Partner is solely responsible for the operation of the Partnership's properties. The Limited Partners have no right to participate in the control of the Partnership's general operations, but they do have certain voting rights, as described in Item 12 herein. The names, titles and ages of the Directors and Executive Officers of the General Partner as of March 15, 1999 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM - ------------------------------------ --------------------------------------------- --- --------------------- Geoffrey A. MacDonald Chairman and a member of the Executive Until a successor is Committee of EFG and President and a Director duly elected and of the General Partner 50 qualified Gary D. Engle President and Chief Executive Officer and member of the Executive Committee of EFG 50 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the General Partner 39 James A. Coyne Executive Vice President of EFG 38 Michael J. Butterfield Senior Vice President, Finance and Treasurer of EFG and Treasurer of the General Partner 39 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 48 Gail D. Ofgant Senior Vice President, Lease Operations of EFG 33
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Partners, Directors or Executive Officers. (e) Business Experience Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the General Partner. Mr. MacDonald was also a co-founder, Director, and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Prior to co-founding 8 EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole shareholder and Director of its general partner, Equis Corporation and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is Vice President and a Director of certain of EFG's subsidiaries and affiliates, a limited partner in AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has a MBA from Harvard University and a BS degree from the University of Massachusetts (Amherst). Mr. Romano, age 39, became Executive Vice President and Chief Operating Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in November 1989, became Vice President and Controller in April 1993 and Chief Financial Officer in April 1995. Mr. Romano assumed his current position in April 1996. Mr. Romano is also Vice President and Chief Financial Officer of Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately held real estate development and mortgage origination company that he joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is a Certified Public Accountant and holds a B.S. degree from Boston College. Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and President, Chief Operating Officer and a member of the Board of Directors of Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993 through November 1994, he was employed by the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985, he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates and is Treasurer of the General Partner and Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance and Treasurer of EFG and certain of its affiliates in April 1996 and was promoted to Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (UK) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors Mortgage Insurance Company, which she joined in 1973. 9 Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a BA degree from Wilson College. Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to Manager Lease Operations in April 1994, and became Vice President of Lease Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers or employees of the General Partner or its Affiliates employees of the Partnership. The Partnership has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the General Partner or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Partnership has no employees, as discussed in Item 11(a), pursuant to Section 9.4(c) of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13, herein, and in Note 5 to the financial statements included in Item 14, herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the General Partner or its Affiliates which results or may result from their resignation, retirement or any other termination. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. By virtue of its organization as a limited partnership, the Partnership has outstanding no securities possessing traditional voting rights. However, as provided in Section 10.2(a) of the Restated Agreement, as amended (subject to Sections 10.2(b) and 10.3), a majority interest of the Limited Partners has voting rights with respect to: 1. Amendment of the Restated Agreement; 2. Termination of the Partnership; 10 3. Removal of the General Partner; and 4. Approval or disapproval of the sale of all, or substantially all, of the assets of the Partnership (except in the orderly liquidation of the Partnership upon its termination and dissolution). No person or group is known by the General Partner to own beneficially more than 5% of the Partnership's 829,521.30 outstanding Units as of March 1, 1999. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The General Partner of the Partnership is AFG Leasing VI Incorporated, an affiliate of EFG. (a) Transactions with Management and Others All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 124,824 $ 165,486 $ 154,069 Administrative charges....................................................... 66,480 62,544 39,024 Reimbursable operating expenses due to third parties......................... 410,833 149,048 164,555 ---------- ---------- ---------- Total.................................................................. $ 602,137 $ 377,078 $ 357,648 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenues and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's acquisition cost was determined by the method described in Note 2 to the financial statements included in Item 14, herein. During 1997, the Partnership and certain affiliated investment programs sponsored by EFG exchanged their ownership interests in certain vessels for aggregate consideration of $11,565,375. The Partnership's share of such consideration was $2,351,036 consisting of common stock in Semele valued at $611,955, a note receivable from Semele of $898,405 and cash of $840,676. For further discussion, see Note 4, "Investment Securities--Affiliate / Note Receivable--Affiliate to the financial statements included in Item 14 herein and Item 10. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $63,066 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. 11 Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - ------------------------------------------------------------- ------------- ------------------- Atlantic Acquisition Limited Partnership 35,049 4.23% Old North Capital Limited Partnership 1,511 0.18%
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters See Item 13(a) above. 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements: Report of Independent Auditors................................................. * Statement of Financial Position at December 31, 1998 and 1997.................. * Statement of Operations for the years ended December 31, 1998, 1997 and 1996... * Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............................................................ * Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... * Notes to the Financial Statements.............................................. * (2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable.
EXHIBIT NUMBER - ------------- 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus, which is included in Registration Statement on Form S-1 (No. 33-35148). 13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99(a) Lease agreement with Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 as Exhibit 28 (e) and is incorporated herein by reference. 99(b) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (d) and is incorporated herein by reference. 99(c) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (e) and is incorporated herein by reference.
- ------------------------ * Incorporated herein by reference to the appropriate portion of the 1998 Annual Report to security holders for the year ended December 31, 1998 (see Part II). 13
EXHIBIT NUMBER - ------------- 99(d) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference. 99(e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (g) and is incorporated herein by reference. 99(f) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (h) and is incorporated herein by reference. 99(g) Lease agreement with Finnair OY, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (i) and is incorporated herein by reference. 99(h) Lease agreement with Finnair OY, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (j) and is incorporated herein by reference. 99(i) Lease agreement with Reno Air, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (k) and is incorporated herein by reference. 99(j) Lease agreement with Trans Ocean Container Corporation is filed in the Registrants Annual Report on Form 10-K for the year ended December 31,1998 and is included herein.
(b) Reports on Form 8-K None. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME FUND I-D, a Massachusetts Limited Partnership By: AFG Leasing VI Incorporated ----------------------------------------- a Massachusetts corporation and the General Partner of the Registrant.
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE ---------------------------------------- ---------------------------------------- Geoffrey A. MacDonald Gary D. Engle CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF DIRECTOR OF THE GENERAL PARTNER EFG (PRINCIPAL EXECUTIVE OFFICER) Date: March 30, 1999 Date: March 30, 1999 By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD ---------------------------------------- ---------------------------------------- Gary M. Romano Michael J. Butterfield EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING OFFICER) OFFICER) Date: March 30, 1999 Date: March 30, 1999
15 EX-13 2 EXHIBIT 13 AMERICAN INCOME FUND I AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1998 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT TO THE PARTNERS
PAGE --------- SELECTED FINANCIAL DATA................................................................................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 3-9 FINANCIAL STATEMENTS: Report of Independent Auditors............................................................................ 10 Statement of Financial Position at December 31, 1998 and 1997............................................. 11 Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 12 Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 13 Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 14 Notes to the Financial Statements......................................................................... 15-27 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 28 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 29 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the Amended and Restated Agreement and Certificate of Limited Partnership................................... 30
SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 1998:
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- Lease revenue........................ $ 2,695,965 $ 4,364,091 $ 4,939,781 $ 5,241,427 $ 6,614,391 Net income (loss).................... $ 439,380 $ 1,143,233 $ 820,414 $ (750,100) $ (367,325) Per Unit: Net income (loss).................. $ 0.50 $ 1.31 $ 0.94 $ (0.86) $ (0.42) Cash distributions................. $ 0.75 $ 0.94 $ 1.00 $ 1.25 $ 2.56 FINANCIAL POSITION - ------------------------------------- Total assets......................... $ 13,946,980 $ 14,869,863 $ 17,364,360 $ 14,975,028 $ 17,974,840 Total long-term obligations.......... $ 4,192,148 $ 5,334,349 $ 7,780,603 $ 5,303,736 $ 6,225,806 Partners' capital.................... $ 9,200,096 $ 9,191,217 $ 9,090,975 $ 9,143,742 $ 10,985,318
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Certain statements in this annual report of American Income 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 EFG and has no information systems of its own. EFG has adopted a plan to address the Year 2000 Issue that consists of four phases: assessment, remediation, testing, and implementation and has elected to utilize principally internal resources to perform all phases. EFG completed substantially all of its Year 2000 project by December 31, 1998 at an aggregate cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining items are expected to be minor and be completed by March 31, 1999. All costs incurred in connection with EFG's Year 2000 project have been expensed as incurred. EFG's primary information software was coded by IBM at the point of original design to use a four digit field to identify calendar year. All of the Partnership's lease billings, cash receipts and equipment remarketing processes are performed using this proprietary software. In addition, EFG has gathered information about the Year 2000 readiness of significant vendors and third party servicers and continues to monitor developments in this area. All of EFG's peripheral computer technologies, such as its network operating system and third-party software applications, including payroll, depreciation processing, and electronic banking, have been evaluated for potential programming changes and have required only minor modifications to function properly with respect to dates in the year 2000 and thereafter. EFG understands that each of its and the Partnership's significant vendors and third-party servicers are in the process, or have completed the process, of making their systems Year 2000 compliant. Substantially all parties queried have indicated that their systems would be Year 2000 compliant by the end of 1998. Presently, EFG is not aware of any outside customer with a Year 2000 Issue that would have a material effect on the Partnership's results of operations, liquidity, or financial position. The Partnership's equipment leases were structured as triple net leases, meaning that the lessees are responsible for, among other things, (i) maintaining and servicing all equipment during the lease term, (ii) ensuring that all equipment functions properly and is returned in good condition, normal wear and tear excepted, and (iii) insuring the assets against casualty and other events of loss. Non-compliance with lease terms on the part of a lessee, including failure to address Year 2000 Issues, could result in lost revenues and impairment of residual values of the Partnership's equipment assets under a worst-case scenario. EFG believes that its Year 2000 compliance plan will be effective in resolving all material Year 2000 risks in a timely manner and that the Year 2000 Issue will not pose significant operational problems with respect to its computer systems or result in a system failure or disruption of its or the Partnership's 3 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. OVERVIEW The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course of business. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 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 year ended December 31, 1998, the Partnership recognized lease revenue of $2,695,965 compared to $4,364,091 and $4,939,781 for the years ended December 31, 1997 and 1996, respectively. The decrease in lease revenue from 1996 to 1998 reflects the effects of lease term expirations and the sale or exchange of equipment, including the vessel exchange in 1997 discussed below. In 1997 and 1996, the Partnership had recognized lease revenue from the vessel of $1,045,105 and $1,062,911, respectively. Partially offsetting the decrease from 1996 to 1997 was the effects of an aircraft exchange which concluded in March 1996. As a result of the aircraft exchange, the Partnership replaced its ownership interest in a Boeing 747-SP aircraft (the "United Aircraft"), having aggregate quarterly lease revenues of $257,420, with interests in six other aircraft (three Boeing 737 aircraft leased by Southwest Airlines, Inc., two McDonnell Douglas MD-82 aircraft leased by Finnair OY and one McDonnell Douglas MD-87 aircraft leased by Reno Air, Inc.), having aggregate quarterly lease revenues of $395,394. The Southwest Aircraft were exchanged into the Partnership in 1995 while the Finnair Aircraft and the Reno Aircraft were exchanged into the Partnership on March 25 and March 26, 1996, respectively (see further discussion below). Accordingly, 1997 was the first year the Partnership recognized a full year's revenue related to its interest in all six of these aircraft. The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 1998 was $264,986 compared to $134,242 and $127,420 for the years ended December 31, 1997 and 1996, respectively. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1998 and 1997 included $89,841 and $17,719, respectively, earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele") (see Note 4 to the financial statements herein). In 1996, the Partnership earned interest income of $54,300 on cash held in a special-purpose escrow account in connection with the aircraft exchange transactions. During 1996, the Partnership also earned interest income of $18,511 on a note receivable from EFG resulting from a settlement with ICCU Containers S.p.A. (see Note 5 to the financial statements herein). 4 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 year ended December 31, 1998, the Partnership sold equipment having a net book value of $69,387 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $151,019 compared to a net gain of $512,239 in 1997 on equipment having a net book value of $306,741 and a net gain in 1996 of $459,596 on equipment having a net book value of $278,348. In 1997, the Partnership exchanged its interest in a vessel with an original cost and net book value of $5,091,464 and $2,307,445, respectively. In connection with this exchange, the Partnership realized proceeds of $1,568,119, which resulted in a net loss, for financial statement purposes, of $739,326. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $782,917. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele, a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the vessel exchange transaction and its original 66.15% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $840,676 in cash, became the beneficial owner of 407,970 shares of Semele common stock (valued at $611,955 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in 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 Rancho Malibu. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the 5 partnership. A dividend of $81,594 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. 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 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 was $1,322,360, $2,284,020 and $3,703,293 for the years ended December 31, 1998, 1997 and 1996, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset at the date of primary lease expiration on a straight-line basis over such term. For purposes of this policy, estimated residual values represent 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 $386,021 or 14.3% of lease revenue in 1998, $466,915 or 10.7% of lease revenue in 1997 and $645,442 or 13.1% of lease revenue in 1996. In the future, interest expense is expected to 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%, 3.8% and 3.1% of lease revenue during the years ended December 31, 1998, 1997 and 1996, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Write-down of investment securities-affiliate was $362,072 for the year ended December 31, 1998. The General Partner determined that the decline in market value of the Semele common stock was other-than-temporary at December 31, 1998. As a result, the Partnership wrote down the cost of the Semele common stock from $15 per share to $4.125 per share (the quoted price of Semele stock on NASDAQ at December 31, 1998). Operating expenses were $477,313, $211,592 and $203,579 for the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Partnership incurred or accrued approximately $315,900 for certain legal and administrative expenses related to the Class Action Lawsuit described in Note 8 to the financial statements. Other 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. 6 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 $2,375,827, $3,771,967 and $4,586,028 in 1998, 1997 and 1996, 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 expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. For the year ended December 31, 1998, the Partnership realized net cash proceeds of $220,406, compared to $876,740 in 1997 and $737,944 in 1996. 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. In 1996, the Partnership completed the replacement of the United Aircraft with the acquisitions of a 14.39% ownership interest in the Finnair Aircraft and a 25.82% ownership interest in the Reno Aircraft at a total cost to the Partnership of $4,027,969 and $3,507,561, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,346,709 in cash and obtained financing of $2,681,260 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $599,494 in cash and obtained financing of $2,908,067 from a third-party lender. The Partnership utilized $1,882,960 (classified as Contractual Right for Equipment at December 31, 1995) which had been deposited into a special purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $63,243 was expended from the Partnership's cash reserves. The remaining ownership interests of 85.61% and 74.18% of the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. There were no equipment acquisitions during 1997 or 1998. At December 31, 1998, the Partnership was due aggregate future minimum lease payments of $5,227,938 from contractual lease agreements (see Note 2 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $4,192,148 (see Note 6 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. As a result of the vessel exchange transaction (see Results of Operations) the Partnership became the beneficial owner of 407,970 shares of Semele common stock valued at $611,955 ($1.50 per share) at the date of the transaction. This investment was reduced by a dividend of $81,594 received in November 1997 representing a return of equity to the Partnership. The Partnership also received a beneficial interest in the Semele Note of $898,405 in connection with the exchange. 7 On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 40,797 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $137,687. In 1997, the Partnership recorded an unrealized loss of $224,385 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $362,072 in 1998. The Partnership obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. 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 addition, during 1997 the Partnership utilized a portion of its available cash to repay certain of its debt obligations. 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 the Finnair Aircraft and the Reno Aircraft of $1,367,145 and $823,037, respectively. 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. 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 8 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. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership 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 fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 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 year ended December 31, 1998, the Partnership declared total cash distributions of $654,886. In accordance with the Restated Agreement, as amended, the Limited Partners were allocated 95% of these distributions, or $622,142, and the General Partner was allocated 5%, or $32,744. The fourth quarter 1998 cash distribution was paid on January 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). 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, the difference between distributions (declared vs. paid) for income tax and financial reporting purposes, and the treatment of unrealized gains or losses on investment securities, if any, for book and tax purposes. The principal component of the cumulative difference between financial statement income or loss and tax income or loss results from different depreciation policies for book and tax purposes. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 1998. This is the result of aggregate cash distributions to the General Partner being in excess of its capital contribution of $1,000 and its allocation of financial statement net income or loss. Ultimately, the existence of a capital deficit for the General Partner for financial reporting purposes is not indicative of any further capital obligations to the Partnership by the General Partner. The Amended and Restated Agreement and Certificate of Limited Partnership requires that upon the dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 1998, the General Partner had a positive tax capital account balance. The future liquidity of the Partnership will be influenced by, among other factors, prospective market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, that could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. However, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements will be the principal factor in determining the future of the Partnership's operations. 9 REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Fund I-D, a Massachusetts Limited Partnership: We have audited the accompanying statements of financial position of American Income Fund I-D, a Massachusetts Limited Partnership, as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-D, a Massachusetts Limited Partnership at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 10 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997
1998 1997 ------------- ------------- ASSETS Cash and cash equivalents.......................................................... $ 3,837,781 $ 3,038,635 Rents receivable................................................................... 259,427 147,712 Accounts receivable--affiliate..................................................... 63,066 367,376 Note receivable--affiliate......................................................... 898,405 898,405 Investment securities--affiliate................................................... 168,288 305,975 Equipment at cost, net of accumulated depreciation of $8,780,173 and $8,800,492 at December 31, 1998 and 1997, respectively......................................... 8,720,013 10,111,760 ------------- ------------- Total assets................................................................... $ 13,946,980 $ 14,869,863 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Notes payable...................................................................... $ 4,192,148 $ 5,334,349 Accrued interest................................................................... 32,264 36,923 Accrued liabilities................................................................ 277,500 9,200 Accrued liabilities--affiliate..................................................... 16,565 27,939 Deferred rental income............................................................. 64,685 106,513 Cash distributions payable to partners............................................. 163,722 163,722 ------------- ------------- Total liabilities.............................................................. 4,746,884 5,678,646 ------------- ------------- Partners' capital (deficit): General Partner.................................................................. (457,798) (458,243) Limited Partnership Interests (829,521.30 Units; initial purchase price of $25 each).......................................................................... 9,657,894 9,649,460 ------------- ------------- Total partners' capital........................................................ 9,200,096 9,191,217 ------------- ------------- Total liabilities and partners' capital........................................ $ 13,946,980 $ 14,869,863 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of These financial statements 11 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Income: Lease revenue......................................................... $ 2,695,965 $ 4,364,091 $ 4,939,781 Interest income....................................................... 175,145 116,523 108,909 Interest income--affiliate............................................ 89,841 17,719 18,511 Gain on sale of equipment............................................. 151,019 512,239 459,596 Loss on exchange of equipment......................................... -- (739,326) -- ------------ ------------ ------------ Total income........................................................ 3,111,970 4,271,246 5,526,797 ------------ ------------ ------------ Expenses: Depreciation.......................................................... 1,322,360 2,284,020 3,703,293 Interest expense...................................................... 386,021 466,915 645,442 Equipment management fees--affiliate.................................. 124,824 165,486 154,069 Write-down of investment securities--affiliate........................ 362,072 -- -- Operating expenses--affiliate......................................... 477,313 211,592 203,579 ------------ ------------ ------------ Total expenses...................................................... 2,672,590 3,128,013 4,706,383 ------------ ------------ ------------ Net income.............................................................. $ 439,380 $ 1,143,233 $ 820,414 ------------ ------------ ------------ ------------ ------------ ------------ Net income per limited partnership unit................................. $ 0.50 $ 1.31 $ 0.94 ------------ ------------ ------------ ------------ ------------ ------------ Cash distributions declared per limited partnership unit................ $ 0.75 $ 0.94 $ 1.00 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of These financial statements 12 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
GENERAL LIMITED PARTNERS PARTNER -------------------------- AMOUNT UNITS AMOUNT TOTAL ----------- ------------ ------------ ------------ Balance at December 31, 1995.............................. $ (460,618) 829,521.30 $ 9,604,360 $ 9,143,742 Net income--1996........................................ 41,021 -- 779,393 820,414 ----------- ------------ ------------ ------------ Comprehensive income...................................... 41,021 -- 779,393 820,414 ----------- ------------ ------------ ------------ Cash distributions declared............................... (43,659) -- (829,522) (873,181) ----------- ------------ ------------ ------------ Balance at December 31, 1996.............................. (463,256) 829,521.30 9,554,231 9,090,975 Net income--1997........................................ 57,162 -- 1,086,071 1,143,233 Unrealized loss on investment securities................ (11,219) -- (213,166) (224,385) ----------- ------------ ------------ ------------ Comprehensive income...................................... 45,943 -- 872,905 918,848 ----------- ------------ ------------ ------------ Cash distributions declared............................... (40,930) -- (777,676) (818,606) ----------- ------------ ------------ ------------ Balance at December 31, 1997.............................. (458,243) 829,521.30 9,649,460 9,191,217 Net Income--1998........................................ 21,970 -- 417,410 439,380 Unrealized loss on investment securities................ (6,884) -- (130,803) (137,687) Less: reclassification adjustment for write-down of investment securities................................. 18,103 -- 343,969 362,072 ----------- ------------ ------------ ------------ Comprehensive income...................................... 33,189 -- 630,576 663,765 ----------- ------------ ------------ ------------ Cash distributions declared............................... (32,744) -- (622,142) (654,886) ----------- ------------ ------------ ------------ Balance at December 31, 1998.............................. $ (457,798) 829,521.30 $ 9,657,894 $ 9,200,096 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
The accompanying notes are an integral part of These financial statements 13 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------- ------------- ------------- Cash flows from (used in) operating activities: Net income........................................................... $ 439,380 $ 1,143,233 $ 820,414 Adjustments to reconcile net income to net cash from operating activities: Depreciation..................................................... 1,322,360 2,284,020 3,703,293 Gain on sale of equipment........................................ (151,019) (512,239) (459,596) Write-down of investment securities--affiliate................... 362,072 -- -- Loss on exchange of equipment.................................... -- 739,326 -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable................................................. (111,715) 432,459 211,998 Accounts receivable--affiliate................................... 304,310 (220,921) 80,204 Note receivable--affiliate....................................... -- -- 209,910 Increase (decrease) in: Accrued interest................................................. (4,659) (63,264) 42,249 Accrued liabilities.............................................. 268,300 (13,550) (85,635) Accrued liabilities--affiliate................................... (11,374) (6,205) 12,150 Deferred rental income........................................... (41,828) (10,892) 51,041 ------------- ------------- ------------- Net cash from operating activities............................. 2,375,827 3,771,967 4,586,028 ------------- ------------- ------------- Cash flows from (used in) investing activities: Dividend received.................................................. -- 81,594 -- Purchase of equipment.............................................. -- -- (63,243) Proceeds from equipment sales/exchanges............................ 220,406 876,740 737,944 ------------- ------------- ------------- Net cash from investing activities............................. 220,406 958,334 674,701 ------------- ------------- ------------- Cash flows used in financing activities: Principal payments--notes payable.................................. (1,142,201) (2,446,254) (3,112,460) Distributions paid................................................. (654,886) (873,180) (927,754) ------------- ------------- ------------- Net cash used in financing activities.......................... (1,797,087) (3,319,434) (4,040,214) ------------- ------------- ------------- Net increase in cash and cash equivalents............................ 799,146 1,410,867 1,220,515 Cash and cash equivalents at beginning of year....................... 3,038,635 1,627,768 407,253 ------------- ------------- ------------- Cash and cash equivalents at end of year............................. $ 3,837,781 $ 3,038,635 $ 1,627,768 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental disclosure of cash flow information: Cash paid during the year for interest............................... $ 390,680 $ 530,179 $ 603,193 ------------- ------------- ------------- ------------- ------------- -------------
Supplemental disclosure of non-cash investing and financing activities: See Note 4 to the financial statements regarding the reduction of the Partnership's carrying value of its investment securities--affiliate. Also, see Notes 3 to the financial statements. The accompanying notes are an integral part of These financial statements 14 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS December 31, 1998 NOTE 1-- ORGANIZATION AND PARTNERSHIP MATTERS American Income Fund I-D, a Massachusetts Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on May 30, 1991, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On August 30, 1991 the Partnership issued 829,521.30 units of limited partnership interest (the "Units") to 1,234 investors. Included in the 829,521.30 units were 1,572.30 bonus units. The Partnership's General Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). Significant operations commenced August 30, 1991 when the Partnership made its initial equipment purchase. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Limited Partners and 5% to the General Partner. Under the terms of a Management Agreement between the Partnership and EFG, management services are provided by EFG to the Partnership at fees which the General Partner believes to be competitive for similar services (see Note 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Equipment Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. 15 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 2-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and the display of comprehensive income and its components; however, the adoption of this statement had no impact on the Partnership's net income or partners' capital. Statement 130 requires unrealized gains or losses on the Partnership's available-for-sale securities, which prior to adoption were reported separately in partners' capital to be included in comprehensive income (loss). At December 31, 1997, the cumulative amount of other comprehensive losses was $224,385. STATEMENT OF CASH FLOWS The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in federal agency discount notes and reverse repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 1998 the Partnership had $3,728,350 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. REVENUE RECOGNITION Rents are payable to the Partnership monthly, 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 $5,227,938 are due as follows: For the year ending December 31, 1999 .............................. $2,021,374 2000 .............................. 1,194,680 2001 .............................. 921,969 2002 .............................. 844,977 Thereafter .............................. 244,938 ---------- Total .............................. $5,227,938 ---------- ----------
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. 16 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ---------- ------------ ------------ Finnair OY................................................................ $ 620,019 $ 620,026 $ -- Southwest Airlines........................................................ $ 500,832 $ 500,832 $ 500,832 Reno Air, Inc............................................................. $ 454,489 $ 444,213 $ -- General Motors Corporation................................................ $ 386,198 $ 496,120 $ 565,022 Trans Ocean Container Corporation......................................... $ 279,105 $ -- $ -- Gearbulk Shipowning Ltd................................................... $ -- $ 1,045,105 $ 1,062,911
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. DEPRECIATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Periodically, the General Partner evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. To the extent that such adjustments have been recorded, they are reflected separately on the accompanying Statement of Operations as Write-Down of Equipment 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, 17 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) technological advances, and many other events can converge to enhance or detract from asset values at any given time. INVESTMENT SECURITIES--AFFILIATE The Partnership's investment in Semele Group, Inc. is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of Partner's Capital. Other-than-temporary declines in market value are recorded as write down of investment in the Statement of Operations (see Note 4). ACCRUED LIABILITIES--AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities--Affiliate (see Note 5). ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). See Note 7 for allocation of income or loss for income tax purposes. NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT Net income (loss) and cash distributions per Unit are based on 829,521.30 Units outstanding during each of the three years in the period ended December 31, 1998 and computed after allocation of the General Partner's 5% share of net income (loss) and cash distributions. PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their tax returns. NOTE 3-- EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment 18 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
REMAINING LEASE TERM EQUIPMENT EQUIPMENT TYPE (MONTHS) AT COST LOCATION - -------------------------------------------- ------------- ------------- --------------------------------------- Aircraft.................................... 13-48 $ 10,081,685 NV/TX Materials handling.......................... 0-12 3,131,373 CA/GA/IA/IL/IN/MI/MN/MO/ NC/NV/NY/OH/PA/SC Trailers/intermodal containers.............. 48-54 2,043,102 CA/OK Construction and mining..................... 0-7 1,700,163 IL/MI/NY/PA/WV Retail store fixtures....................... 3 316,563 FL Furniture and fixtures...................... 0 97,082 NY Communications.............................. 0 67,899 AL/CA/FL/NC/OR/WA Tractors and heavy duty trucks.............. 0 62,319 OR ------------- Total equipment cost 17,500,186 Accumulated depreciation (8,780,173) ------------- Equipment, net of accumulated depreciation $ 8,720,013 ------------- -------------
In 1996, the Partnership completed the replacement of the United Aircraft with the acquisitions of a 14.39% ownership interest in the Finnair Aircraft and a 25.82% ownership interest in the Reno Aircraft at a total cost to the Partnership of $4,027,969 and $3,507,561, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,346,709 in cash and obtained financing of $2,681,260 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $599,494 in cash and obtained financing of $2,908,067 from a third-party lender. The Partnership utilized $1,882,960 (classified as Contractual Right for Equipment at December 31, 1995) which had been deposited into a special purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $63,243 was expended from the Partnership's cash reserves. The remaining ownership interests of 85.61% and 74.18% of the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. At December 31, 1998, the Partnership's equipment portfolio included equipment having a proportionate original cost of $12,466,195, representing approximately 71% 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 $7,595,000 at December 31, 1998 (see Note 6). 19 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. The summary above includes fully depreciated equipment held for re-lease or sale with an original cost of approximately $500,700. 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 4-- INVESTMENT SECURITIES--AFFILIATE/NOTE RECEIVABLE--AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 66.15% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $840,676 in cash, became the beneficial owner of 407,970 shares of Semele common stock (valued at $611,955 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in 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 Rancho Malibu. The Partnership recognized interest income of $89,841 and $17,719 related to the Semele Note during 1998 and 1997, respectively. The Partnership's interest in the vessel had an original cost and net book value of $5,091,464 and $2,307,445, respectively. The proceeds realized by the Partnership of $1,568,119 resulted in a net loss, for financial statement purposes, of $739,326. In addition, as this vessel was disposed of prior 20 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $782,917. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $81,594 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and was elected to the Board of Directors. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 40,797 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $137,687. In 1997, the Partnership recorded an unrealized loss of $224,385 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $362,072 in 1998. NOTE 5-- RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years 21 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 124,824 $ 165,486 $ 154,069 Administrative charges....................................................... 66,480 62,544 39,024 Reimbursable operating expenses due to third parties......................... 410,833 149,048 164,555 ---------- ---------- ---------- Total.................................................................... $ 602,137 $ 377,078 $ 357,648 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenues and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. All equipment was acquired from EFG, one of its Affiliates or third-party sellers. The Partnership's Purchase Price is determined by the method described in Note 2, Equipment on Lease. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $63,066 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - --------------------------------------------------------------------------------- ------------- ------------------- Atlantic Acquisition Limited Partnership......................................... 35,049 4.23% Old North Capital Limited Partnership............................................ 1,511 0.18%
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. 22 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 6-- NOTES PAYABLE Notes payable at December 31, 1998 consisted of installment notes of $4,192,148 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 (5.54% at December 31, 1998) plus a margin. 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 the Finnair Aircraft and the Reno Aircraft of $1,367,145 and $823,037, respectively. The carrying amount of notes payable approximates fair value at December 31, 1998. The annual maturities of the installment notes payable are as follows: For the year ending December 31, 1999 .............................. $2,296,020 2000 .............................. 345,214 2001 .............................. 373,331 2002 .............................. 354,546 2003 .............................. 823,037 ---------- Total .............................. $4,192,148 ---------- ----------
NOTE 7-- INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income or loss to each class of partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Restated Agreement, as amended. For income tax purposes, the Partnership allocates net income or net loss in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 1998, the General Partner had a positive tax capital account balance. The following is a reconciliation between net income or loss reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ----------- ------------- ------------ Net income.............................................................. $ 439,380 $ 1,143,233 $ 820,414 Financial statement depreciation in Excess of (less than) tax depreciation........................................................ (824,769) (2,025,107) 187,262 Deferred rental income................................................ (41,828) (10,892) 51,041 Other................................................................. 404,621 (891,689) 88,232 ----------- ------------- ------------ Net income (loss) for federal income tax Reporting purposes............. $ (22,596) $ (1,784,455) $ 1,146,949 ----------- ------------- ------------ ----------- ------------- ------------
23 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The principal component of "Other" consists of the difference between the tax gain or loss on equipment disposals and the financial statement gain or loss on disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998 and 1997:
1998 1997 ------------- ------------- Partners' capital................................................................... $ 9,200,096 $ 9,191,217 Unrealized loss on investment securities.......................................... -- 224,385 Add back selling commissions and organization and offering costs.................. 2,323,619 2,323,619 Financial statement distributions in excess of tax distributions.................. 9,376 8,186 Cumulative difference between federal income tax and financial statement income (loss).......................................................................... (3,519,099) (3,057,123) ------------- ------------- Partners' capital for federal income tax reporting purposes......................... $ 8,013,992 $ 8,690,284 ------------- ------------- ------------- -------------
Unrealized loss on investment securities, financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 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 24 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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, 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 25 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 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 $95,800, 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 $220,100, all of which was accrued and expensed by the Partnership in 1998. While the Court's August 20 Order enjoined certain class members, including all of the partners of the Partnership, from transferring, selling, assigning, giving, pledging, hypothecating, or otherwise disposing of any Units pending the Court's final determination of whether the settlement should be approved, the March 22 Order permits the partners to transfer Units to family members or as a result of the divorce, disability or death of the partner. No other transfers are permitted pending the Court's final determination of whether the settlement should be approved. The provision of the August 20 Order which enjoined the General Partners of the Exchange Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. There can be no assurance that settlement of either sub-class of the Class Action Lawsuit will receive final Court approval and be effected. There also can be no assurance that all or any of the Exchange Partnerships will participate in the Consolidation because if limited partners owning more than one-third of the outstanding Units of a partnership object to the Consolidation, then that partnership will be excluded from the Consolidation. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that final settlements of each sub-class will be achieved. However, in the absence of final settlements approved by the Court, the Defendants intend to defend 26 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) vigorously against the claims asserted in the Class Action Lawsuit. Neither the General Partner nor its affiliates can predict with any degree of certainty the cost of continuing litigation to the Partnership or the ultimate outcome. In addition to the foregoing, the Partnership is a party to other lawsuits that have arisen out of the conduct of its business, principally involving disputes or disagreements with lessees over lease terms and conditions. The following action had not been finally adjudicated at December 31, 1998: ACTION INVOLVING NATIONAL STEEL CORPORATION EFG, on behalf of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth of Massachusetts Superior Court, Department of the Trial Court in and for the County of Suffolk on July 27, 1995, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"). The Complaint seeks reimbursement from National Steel of certain sales and/or use taxes paid to the State of Illinois in connection with equipment leased by National Steel from the Plaintiffs and other remedies provided under the Master Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of Removal, which removed the case to United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to the Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and sought declaratory relief, alleging breach of contract, implied covenant of good faith and fair dealing, and specific performance. The Plaintiffs filed an Answer to National Steel's Counterclaims on September 29, 1995. The parties discussed settlement with respect to this matter for some time; however, the negotiations were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint alleging further default under the MLA and filed a motion for Summary Judgment on all claims and Counterclaims. The Court held a hearing on the Plaintiff's motion in December 1997 and later entered a decision dismissing certain of National Steel's Counterclaims, finding in favor of the Plaintiffs on certain issues and in favor of National Steel on other issues. In March 1999, the Plaintiffs obtained payment for certain of the disputed items and have resumed settlement discussions to resolve remaining issues. The General Partner does not believe that the resolution of the remaining claims will have a material adverse effect on the Partnership's financial position or results of operations. 27 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenue, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------ ------------ ------------ Rents earned prior to disposal of equipment, net of interest charges.... $ 1,546,749 $ 4,706,156 $ 2,589,302 Sale proceeds realized upon disposition of equipment.................... 220,406 876,740 737,944 ------------ ------------ ------------ Total cash generated from rents and equipment sale proceeds............. 1,767,155 5,582,896 3,327,246 Original acquisition cost of equipment disposed......................... 1,412,066 4,942,148 3,176,293 ------------ ------------ ------------ Excess of total cash generated to cost of equipment disposed............ $ 355,089 $ 640,748 $ 150,953 ------------ ------------ ------------ ------------ ------------ ------------
28 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 1998
SALES AND OPERATIONS REFINANCINGS TOTAL ------------- ------------ ------------- Net income............................................................ $ 288,361 $ 151,019 $ 439,380 Add: Depreciation........................................................ 1,322,360 -- 1,322,360 Management fees..................................................... 124,824 -- 124,824 Write-down of investment securities--affiliate...................... 362,072 -- 362,072 Book value of disposed equipment.................................... -- 69,387 69,387 Less: Principal reduction of notes payable................................ (1,142,201) -- (1,142,201) ------------- ------------ ------------- Cash from operations, sales and refinancing......................... 955,416 220,406 1,175,822 Less: Management fees..................................................... (124,824) -- (124,824) ------------- ------------ ------------- Distributable cash from operations, sales and refinancing........... 830,592 220,406 1,050,998 Other sources and uses of cash: Cash at beginning of year........................................... 2,980,875 57,760 3,038,635 Net change in receivables and accruals.............................. 403,034 -- 403,034 Less: Cash distributions paid............................................. (376,720) (278,166) (654,886) ------------- ------------ ------------- Cash at end of year................................................... $ 3,837,781 $ -- $ 3,837,781 ------------- ------------ ------------- ------------- ------------ -------------
29 AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP For the year ended December 31, 1998, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses................................................ $ 215,024
30 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Income Fund I-D, a Massachusetts Limited Partnership, of our report dated March 10, 1999 included in the 1998 Annual Report to the Partners of American Income Fund I-D, a Massachusetts Limited Partnership. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 EX-99.3 4 EXHIBIT 99.3 EXHIBIT 99.3 THIS IS COUNTERPART NO. TWO (DUPLICATE) OF TWO COUNTERPARTS. TO THE EXTENT THIS AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST HEREIN MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. ONE. MARINE SHIPPING CONTAINER VARIABLE LEASE (COMBINED CONTAINER SET IV) THIS MARINE SHIPPING CONTAINER VARIABLE LEASE (the "AGREEMENT") made as of the 17th day of April, 1995 by and between TRANS OCEAN CONTAINER CORPORATION, a Delaware corporation, whose head office is located at 851 Traeger Avenue, San Bruno, CA 94066 (hereinafter called the "Lessee") and Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," having a principal place of business c/o American Finance Group, Exchange Place, Boston, MA 02109 (hereinafter called the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor has agreed to purchase from the Lessee approximately 2500 TEU's (as defined below) of maritime shipping containers, including dry cargo, open top, and collapsible flat rack containers, which containers shall be more fully described in Bills of Sale issued pursuant to that certain Purchase and Sale Agreement of even date herewith (the "Purchase and Sale Agreement") between the parties (said containers are hereafter called the "Containers"); WHEREAS, the Lessee is engaged in the business of leasing and operating containers; and WHEREAS, the Lessor desires to lease the Containers to the Lessee and the Lessee is willing to lease the Containers from the Lessor, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereby agree as follows: 1. Lessor-Lessee Relationship (a) The Lessor hereby leases the Containers to the Lessee, and the Lessee hereby leases the Containers from the Lessor, in accordance with the terms and conditions set forth below. (b) In order to further evidence the relationship of lessor 1 (1) the Lessor has and shall retain exclusive legal and beneficial ownership of the Containers, and the Lessee shall not have any right, title or interest in the Containers, except as provided in this Agreement; (2) in the conduct of its business, the Lessee will not hold itself out as an owner of the Containers or take any action that would be inconsistent with the ownership of the Containers by the Lessor or that would otherwise be inconsistent with, or outside the scope of, the lease created under this Agreement; and (3) Lessor and Lessee agree to treat the transactions provided for in this Agreement as a lease of the Containers by the Lessor to the Lessee for United States federal income tax purposes and to take positions consistent with such treatment in filing the respective United States federal income tax returns, if any, required to be filed thereby. (c) The Lessee and the Lessor expressly recognize and acknowledge that this Agreement does not create a partnership, joint venture or other entity among or between the Lessor, the Lessee, and/or any other person, and is intended only to set forth the terms and conditions of the lessor/lessee relationship between the Lessor and the Lessee with respect to the matters specifically contained herein. (d) The Lessee acknowledges and agrees that: (i) LESSOR IS NOT A MANUFACTURER OF THE CONTAINERS OR A MERCHANT OR DEALER IN PROPERTY OF SUCH KIND; (ii) ON OR BEFORE THE PURCHASE DATE OF EACH CONTAINER, THE LESSEE WILL HAVE ACCEPTED THE CONTAINER INTO ITS FLEET OF MANAGED, OWNED AND LEASED INTERMODAL MARINE CONTAINERS; AND (iii) LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE, ANY REPRESENTATION, WARRANTY, OR COVENANT, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION, QUALITY, DURABILITY, DESIGN, OPERATION, FITNESS FOR USE, OR SUITABILITY OF THE CONTAINERS OR ANY COMPONENT THEREOF IN ANY RESPECT WHATSOEVER OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF THE LESSEE, AND THE LESSOR HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER REPRESENTATIONS, WARRANTIES, OR COVENANTS OF ANY KIND AND CHARACTER, EXPRESS OR IMPLIED WITH RESPECT THERETO, AND SHALL NOT BE LIABLE FOR ANY ACTUAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES OF OR TO ANY PERSON WHATSOEVER, WITH RESPECT THERETO, AND THE LESSEE IS LEASING THE CONTAINERS "AS IS AND WITH ALL FAULTS." (e) Lessee represents, warrants and certifies to the Lessor as of the date of execution and delivery of this Agreement: (i) Lessee is duly organized, validly existing and in 2 good standing under the laws of the state of its incorporation, with full power to enter into and to pay and perform its obligations under this Agreement, and is duly qualified and in good standing in all other jurisdictions in the United States in which the nature of its business or the ownership of its properties, or both, make such qualification necessary and where failure to so qualify would materially adversely affect its financial condition or the conduct of its business or the performance of its obligations under or the enforceability of this Agreement. (ii) This Agreement and all related documents have been duly authorized, executed and delivered by Lessee, are valid, legal and binding obligations of Lessee, are enforceable against Lessee in accordance with their terms and do not and will not contravene any provisions of or constitute a default under Lessee's organizational documents or its by-laws, any agreement to which it is a party or by which it or its property is bound, or any law, regulation or order of any governmental authority; (iii) Lessor's right, title and interest in and to this Agreement and the Containers and the rentals therefrom will vest in Lessor on the Purchase Date for such Containers and will not be affected or impaired by the terms of any agreement or instrument by which Lessee or its property is bound except for Lessee's rights under this Agreement and the rights of the sublessees under the applicable subleases of such Containers; (iv) no approval of, or filing with, any governmental authority or other person is required in connection with Lessee's entering into, or the payment or performance of its obligations under, this Agreement except for the filing of UCC-l financing statements as contemplated by Section 4 of the Purchase and Sale Agreement; (v) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened, before any court or governmental agency against Lessee which, if decided adversely to Lessee, would materially adversely affect Lessee's business or financial condition or its ability to perform any of its obligations under this Agreement; (vi) there has been no material adverse change to the Lessee's financial condition or results from its operations since the date of its most recent audited financial statements delivered to Lessor; and (vii) the address stated in the preamble to this Agreement as Lessee's head office is the principal place of business and chief executive office of Lessee; and Lessee does not conduct business under a trade, assumed or fictitious name except as follows: Trans Ocean, Trans Ocean Leasing, and TOL. 3 2. The Lessee's Duties In consideration of the right to use and operate the Containers as lessee pursuant to this Agreement, the Lessee agrees that it will, during the term hereof, perform the following duties, using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others: (a) accept delivery of the Containers; (b) place such marks upon the Containers, register the Containers in accordance with such tariffs as required for their operation in marine shipping service, paint the Containers any appropriate color, and place on the Containers such markings or legends as the Lessee deems required or appropriate; (c) take all reasonable and customary steps as may be required to provide for the sublease of the Containers under short, medium and long term leases on such terms and conditions as it may deem satisfactory, in its sole discretion (except as otherwise specifically provided for in this Agreement); (d) pay to the Lessor the Fixed Rent or the Variable Rent (as defined in Section 6(c)(6)), as the case may be, on the last day of each calendar quarter immediately following the calendar quarter for which such Fixed Rent or Variable Rent is payable; (e) pay all Operating Expenses (as defined below) and file all applicable tax returns and other reports with respect to ad valorem, gross receipts and property taxes attributable to the Set Containers (as defined below); (f) on behalf of Lessor, sell or otherwise dispose of Containers that become subject to Casualty Occurrences or Ordinary Disposal Occurrences, as described in Section 4(b) below (for this purpose, a Casualty Occurrence shall include a "Casualty Occurrence" (as defined below) that occurs prior to the Purchase Date but that becomes known to Lessee after the Purchase Date); (g) perform all administrative and related functions necessary for the operation and subleasing of the Containers, including but not limited to: (i) maintaining and servicing (or causing the sublessees to maintain and service) the Containers in a condition that meets the then current general interchange standards of the International Institute of Container Lessors, Guide for Container Equipment Inspection, and in such condition as may be required by any applicable law or the rules or regulations of any governmental body having jurisdiction over the Containers and as maybe necessary or appropriate to make the Containers suitable for rental in international commerce; 4 (ii) supervising all maintenance and repair of each Container, whether performed by the Lessee, an employee of a depot operator, or other third party, to ensure such maintenance satisfies the highest of the following standards: (A) any standard required or set forth for the Containers or equipment of a similar class under any applicable industry convention or governmental law or regulation; (B) any standard set by any insurance policy under which the Containers shall from time to time be insured; and (C) good commercial practice; (iii) performing periodic inspections and surveys of the Containers in the possession of depot operators to ensure maintenance of the Containers in a seaworthy and safe operating condition; (iv) maintaining records with respect to the rental of the Containers, locations of the Containers when off-hire, repair and maintenance history and repair and maintenance activity; and (v) monitoring the location of the Containers while off-lease. In performing such administrative and related functions hereunder, the Lessee shall not knowingly discriminate against or in favor of the Containers in seeking subleases; and (h) defend, indemnify and hold the Lessor and any party or parties from whom Lessor obtained financing for the Containers (the "Lenders") harmless from and against any claims asserted against them arising out of the possession or operation of the Containers (including, but not limited to, injury to persons or loss of or damage to lading or other property), provided that the costs of such defense, indemnification and holding harmless shall be an Operating Expense for purposes of Section 6 (excluding, however, those costs or expenses that result from the gross negligence or willful misconduct of the Lessee). 3. Covenant of Quiet Enjoyment The Lessor shall not disturb the Lessee's quiet enjoyment of the Containers provided Lessor is not entitled to terminate this Agreement pursuant to Section 4(c). 4. Duration (a) Initial Term; Extension Options. Except as provided below, the term of this Agreement as to each of the Containers shall 5 commence on the date such Container is included in the Container Set (as defined below) as determined under Section 6(b)(4), and shall remain in full force and effect until June 30, 2003 (the "Stated Term"), provided that the Lessor is hereby granted an option to extend the Stated Term of this Agreement on the same terms and conditions for up to four one-year renewal periods. The Lessor must provide written notice to Lessee of its election to exercise this renewal option not less than ninety (90) days prior to the expiration of the Stated Term of this Agreement or each subsequent renewal period. (b) Termination due to a Casualty Occurrence or an Ordinary Disposal Occurrence. Notwithstanding Section 4(a), this Agreement shall terminate as to any Container upon the total loss or destruction of that Container (a "Casualty Occurrence") or upon an Ordinary Disposal Occurrence (as defined below) (an "Ordinary Disposal Occurrence"), unless within ninety (90) days after the Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence, the Lessee shall, in accordance with Section 9(b) below, replace that Container with one of like size, type, age, and condition and shall notify the Lessor of the replacement. The replacement container shall be deemed to be a "Container" for all purposes of this Agreement from and after the date of the Casualty Occurrence or the Ordinary Disposal Occurrence, as applicable. Unless Lessee replaces a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence in accordance with Section 9(b) below, Lessee will sell, lease or otherwise dispose of such Container, and will distribute the net proceeds from such sale, lease or other disposition, in accordance with said section. For purposes hereof, an "Ordinary Disposal Occurrence" means the determination by Lessee to dispose of a Container in the ordinary course of business for one or both of the following reasons: (i) the Container is no longer marketable, for example, due to technological obsolescence; or (ii) the Container has suffered such damage that it is not economic to repair and re-lease the Container as described in the remainder of this section. When a Container is returned to the Lessee in damaged condition, the Lessee compares the net cash value of repairing that Container to the net proceeds that would be received if that Container were instead sold. If the net cash value is less than the net proceeds, the Lessee will dispose of the Container as an Ordinary Disposal Occurrence. The net cash value is obtained by subtracting the cost of restoring that Container to a leasable condition from the estimated present value of the future cash streams from leasing that Container over its remaining useful life. (c) Termination by the Lessor. Notwithstanding Section 4(a), but subject to Section 4(d), the Lessor may terminate this Agreement as to any Container by written notice effective upon delivery of the notice to Lessee (except that this Agreement shall 6 automatically terminate without notice in the event of the occurrence under Section 4(c)(5) below), which notice may be given only in the event that: (1) the Lessee shall fail to pay to the Lessor the Fixed Rent or the Variable Rent required by Section 2(d) and such failure shall continue for a period of ten (10) days after notice thereof by the Lessor to the Lessee; (2) the Lessee shall assign or transfer any of its rights hereunder without the prior written consent of the Lessor; (3) the Lessee shall default in the performance or observance of any other covenant, condition, agreement, or duty to be performed or observed by the Lessee under this Agreement and such default shall continue unremedied for a period of thirty (30) days after notice thereof by the Lessor to the Lessee; (4) any representation or warranty made by the Lessee in Section 1(e) hereof, Section 5 of the Purchase and Sale Agreement, or in any Bill of Sale (as defined in the Purchase and Sale Agreement) shall prove to have been false in any material respect at the time made; (5) the Lessee shall have (i) ceased doing business as a going concern, (ii) made an assignment for the benefit of creditors, admitted in writing its inability to pay its debts as they mature or generally failed to pay its debts as they become due, (iii) initiated any voluntary bankruptcy or insolvency proceeding, (iv) failed to obtain the discharge of any bankruptcy or insolvency proceeding initiated against it by others within 60 days of the date such proceedings were initiated, or (v) requested or consented to the appointment of a trustee or receiver with respect to itself or for a substantial part of its property; or (6) the Lessee shall make two (2) or more Variable Rent payments in amounts that, together with all other Variable Rent payments theretofore made, fail to aggregate a cumulative annual return to the Lessor of fourteen percent (14%) or more of the aggregate Container Cost of the Containers then under lease hereunder. The events described in Sections 4(c)(l), (2), (3), (4) and (5) above are hereinafter collectively referred to as "Events of Default." (d) Containers Subject to Sublease. Notwithstanding Sections 4(a) or 4(c), if a Container is subject to sublease at a time when this Agreement would otherwise terminate as to the Container, this Agreement shall remain in full force and effect as to the Container until the last day of the calendar quarter in which the Container comes off the sublease unless (x) such termination was as a 7 consequence of the Event of Default specified in Section 4(c) (5), or (y) such termination was as a consequence of any other Event of Default and Lessor gives the notice described in Section 5(c)(A); provided that, unless termination as to the Container was pursuant to Section 4(c), the Lessee shall be entitled to continue this Agreement as to a Container after the last day of the calendar quarter in which the Container comes off the sublease if in its reasonable judgment it is economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user, in which case this Agreement shall continue as to that Container until the last day of the calendar quarter in which the Container comes off a sublease or the last day of the calendar quarter in which the Lessee determines that it is not economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user. Notwithstanding the foregoing, unless Lessor exercises its renewal option pursuant to Section 4(a), the Lessee shall not be entitled pursuant to the foregoing proviso to continue this Agreement as to any Container after the last day of the calendar quarter in which the Container comes off the sublease without the prior written consent of the Lessor. (e) Termination by the Lessee. Notwithstanding Section 4(d), the Lessee may terminate this Agreement as to any Container of a particular size and type at the end of the Stated Term thereof and at any time thereafter, upon the election of the Lessee, at the Lessee's sole and absolute discretion, if Variable Rent specifically allocable to the Set Containers of that size and type, calculated in a manner analogous to Section 6(c), for the most recent calendar quarter that can be reasonably calculated by the Lessee, is less than fourteen percent (14%) of the aggregate Container Cost of Containers of that size and type then under lease hereunder multiplied by a fraction the numerator of which is the number of days in that quarter and the denominator of which is 365. (f) Treatment of Non-Terminated Containers. Notwithstanding the foregoing, the termination of this Agreement with respect to any individual Container shall not relieve the Lessee from performing its obligations hereunder as to any Containers not subject to such termination. 5. Termination. (a) Settlement of the Variable Rent. Upon any termination of this Agreement as to any Container, the Lessee shall make a complete and final settlement of the Fixed Rent and the Variable Rent for the Container as determined in Section 6 no later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. (b) Remarketing of the Containers. Upon termination of this Agreement as to any Container, other than as a consequence of one 8 of the events specified in Section 4(b) or 4(c), the Lessor hereby authorizes the Lessee to remarket the Containers on behalf of the Lessor, and the Lessee shall, pursuant to such authorization: (1) sell, lease or otherwise dispose of the Container, at the sole and absolute discretion of the Lessee; provided that if the Lessee elects to acquire the Container from the Lessor, the price to be paid for the Container will be negotiated in an arm's length transaction and if the parties are unable to agree on a price, Lessee will not be entitled to acquire the Container from the Lessor. Lessee shall use its best efforts to maximize the net proceeds received on account of any sale, lease or other disposition of a Container pursuant to this Section 5(b) using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 5O% to the Lessee as incentive compensation for handling the sale, lease or other disposition; and (2) make payment of any share of the net proceeds to be paid the Lessor pursuant to Section 5(b)(1) coincident with the final Variable Rent payment for the Container, but in any event, not later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. For purposes of this Agreement, "net proceeds" means all proceeds received by the Lessee as a result of the sale, lease or other disposition of a Container (including without limitation damage recoveries and insurance proceeds), less all costs of the sale, lease or other disposition (including without limitation the cost of repairing and/or rehabilitating the Container to prepare it for sale, sales commissions paid to vendors, and repositioning costs). If pursuant to this Section 5(b) the Lessee fails to sell, lease or otherwise dispose of a Container on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to that Container, the Lessee shall, from and after such day, no longer be entitled to sell, lease or otherwise dispose of that Container pursuant to this Section 5(b) and the Lessee shall thereupon return that Container to the Lessor's possession and control "AS IS, WHERE IS." The Lessor shall thereupon retake possession and control of that 9 Container and shall thereafter sell, lease or otherwise dispose of that Container free from any right or interest of the Lessee but subject to the matters set forth in the next succeeding paragraph. On or before the last day of each calendar quarter, commencing with the calendar quarter in which Lessee returns a Container to the Lessor's possession and control pursuant to the preceding paragraph, provided no Event of Default has occurred and is continuing since the commencement of the remarketing period contained in this Section 5(b), the Lessor and the Lessee shall make a complete and final settlement of the net proceeds received with respect to any Container during such quarter. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 50% to the Lessee. (c) Return of the Containers (Event of Default). (A) Upon termination of this Agreement as a consequence of an Event of Default, the Lessor may, upon written notice to Lessee (except that no notice is required with respect to the Event of Default specified in Section 4(c)(5)), pursuant to the security interest granted under Section 10 below, direct any or all sublessees of on-lease Containers to make payment directly to the Lessor and to return the Containers to Lessor at the termination of the subleases and otherwise exercise all rights and remedies of a secured creditor under the Uniform Commercial Code in effect in the applicable jurisdiction. (B) In the alternative, upon termination of this Agreement as a consequence of an Event of Default (other than the Event of Default specified in Section 4(c)(5)), if Lessor does not give the notice described in Section 5(c)(A), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. (C) In addition, upon termination of this Agreement as a consequence of an Event of Default, the Lessee shall effect an orderly transition of any Container that is off-lease at the time of termination, and of any Container that is redelivered to Lessee by a sublessee (if this Agreement continues pursuant to Section 5(c)(B)) to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the 10 event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor in sound operating condition, normal wear and tear excepted, and arrange for the transport of such Container to any of the depot location(s) described on Schedule I attached hereto (or such other depot locations as may be mutually acceptable to Lessor and Lessee) (any location described on said Schedule I or as so agreed by Lessor and Lessee being hereinafter referred to as a "Schedule I Location"), it being understood that the costs, if any, of transport of such Container to a Schedule I Location shall be at the expense of the Lessee. Notwithstanding the foregoing, Lessee may redeliver replacement containers of like size, type, age and condition if the original Containers were re-delivered by Lessee's sublessees to non-Schedule I Locations. The Lessee shall not arrange for the transport of more than 400 TEU's of Containers (or replacement containers) to any of the following Schedule I Locations: Bremen, Milan, Leghorn, Genoa, Marseille, Chicago or New Orleans, except as agreed by the Lessor. (d) Return of the Containers (Performance). Upon termination of this Agreement as a consequence of the event specified in Section 4(c)(6), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. The Lessee shall thereupon effect an orderly transition of such Container, and of any Container that is off-lease at the time of termination of this Agreement, to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor "AS IS, WHERE IS." 6. Fixed Rent; Variable Rent (a) Payment. During the term of this Agreement, the Lessee shall pay to the Lessor at a place designated by the Lessor in United States Dollars (1) the Fixed Rent; and (2) the Variable Rent payment based on the Lessee's use of the Containers. Because of the difficulty and complexity for the Lessee to account for the use of each Container separately, the Lessor agrees that the Variable Rent shall be based on the average use of a set of similar containers (the "Container Set") and shall be calculated in accordance with the provisions of this Section. All rentals and any other amounts to be remitted to the Lessor under this Agreement shall be paid by wire transfer of funds in accordance with payment instructions confirmed by the Lessor. All remittances due the Lessor under this Agreement shall be paid without notice or demand, and without abatement, set-off or deduction of any amounts whatsoever except as specifically set forth in this Agreement. All 11 remittances that become past due will bear interest at a floating rate per annum equal to the lesser of (i) the "prime" rate of NatWest Bank N.A. as announced from time to time at its head office in New York, New York, plus two percent (2%) per annum (with each change in such prime rate to cause an equal and corresponding change in the rate of interest payable hereunder) or (ii) the highest rate allowed by California law, from the due date until paid. (b) General. (1) Container Set. The Container Set shall be denominated "Combined Container Set IV" and shall consist of the Containers and such other containers as are designated by the Lessee as included in the Container Set. The containers in the Container Set (including the Containers) shall be referred to as "Set Containers." (2) Set Container Requirements. Each Set Container must satisfy the following criteria: (A) each Set Container must be a standard dry cargo or special container (other than a refrigerated or tank container) or other container-related equipment of similar classification and type; (B) each Set Container must either be (i) owned by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner; (ii) leased by the Lessee from third parties, such as the Lessor; or (iii) managed by the Lessee for the account of third parties; and (C) each Set Container must either be acquired by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner or committed to the Container Set between January 1, 1992 and December 31, 1994. (3) Notification to Lessor. The Lessee shall, after all the Set Containers to be included in the Container Set have been identified, provide the Lessor with a summary description, in writing, of the Set Containers included in the Container Set. (4) Inclusion in the Container Set. A Container shall be considered to be included in the Container Set on the date that payment for such Container is received in accordance with the Purchase and Sale Agreement (the "Purchase Date"). (5) Container Cost. The Container Cost of each Container shall equal US $2,350 per TEU or as otherwise mutually agreed to by the parties. (6) Exchange Rate. If the Container Cost is not paid in 12 United States dollars, the amount in such dollars shall be calculated based on the exchange rate prevailing on the date of payment. (7) TEUs. Each Set Container shall equal the following number of twenty (20) foot equivalent units ("TEUs"): (i) Each twenty (20)-foot dry cargo container shall equal one (l) TEU; (ii) Each forty (40)-foot dry cargo container shall equal one and one-half (1.50) TEUs; (iii) Each twenty (20)-foot open top container shall equal one and fifty-four hundredths (1.54) TEUs; (iv) Each forty (40)-foot open top container shall equal two and forty-eight hundredths (2.48) TEUs; (v) Each forty (40)-foot collapsible end flat rack container shall equal two and seventy-six hundredths (2.76) TEUs; and (vi) Each forty (40)-foot jumbo high cube container shall equal one and sixty-eight hundredths (l.68) TEUs. (c) Fixed Rent; Determination of Variable Rent. (1) Adjusted Gross Revenues of the Container Set. Adjusted gross revenues of the Container Set ("Adjusted Gross Revenues of the Container Set") for any particular calendar quarter shall equal (x) the Gross Revenues of the Container Set for that quarter less (y) the Operating Expenses of the Container Set for that quarter. (i) Gross revenues of the Container Set ("Gross Revenues") for any particular quarter shall equal all revenues of the Lessee relating to the Container Set accrued during that quarter from leasing or subleasing all Set Containers, including but not limited to ancillary and all other related charges, such as pickup and drop off charges, special handling fees, and late payment fees, less uncollectible accounts receivable with respect to the Set Containers for the same quarter, as recorded on the books of account of the Lessee in accordance with generally accepted accounting principles. (ii) Operating expenses of the Container Set ("Operating Expenses") for any particular quarter shall equal all operating costs and expenses incurred in connection with the operation and leasing of the Set Containers during that quarter, including but not limited to, costs and expenses related to the following: maintaining, repairing, or refurbishing the Set 13 Containers; inspection, handling and storage; transporting the Set Containers other than to the point of origin of the initial leases or subleases; legal fees incurred in enforcing lease obligations; insurance; third-party claims arising out of the possession or operation of the Set Containers (including, but not limited to, injury to persons and loss of or damage to lading or other property), including legal fees incurred in defending against such third-party claims; charges, assessments or levies of any kind against the Set Containers; and ad valorem, gross receipts and property taxes attributable to the Set Containers. Notwithstanding the foregoing, the Operating Expenses shall not include: (w) those costs and expenses that would be considered costs or expenses associated with ownership of containers (as opposed to those associated with operation and maintenance of containers), such as costs and expenses incurred by the Lessee or Lessor in connection with the purchase and sale of the Set Containers; (x) any taxes incurred by the Lessor in respect of the Lessor's acquisition of the Containers or any income, capital or franchise taxes imposed on the Lessor which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessor individually); (y) any income, capital or franchise taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessee individually); or (z) costs and expenses incurred by the Lessee in connection with the leasing, management, and administration of the Set Containers as would generally be considered to be a part of the Lessee's own marketing, general and administrative expenses, including but not limited to, salaries, travel and entertainment expenses of the Lessee's personnel; rent; and bookkeeping and accounting charges. (2) Container Set TEU-Days. For all Set Containers in the Container Set for any particular calendar quarter, the number of Container Set TEU-days ("Container Set TEU-Days") shall equal the sum of the Monthly Container Set TEU-Days for each of the months of that quarter. The Monthly Container Set TEU-Days for any particular month shall equal (x) the number of TEU's of Set Containers on the first day of the month and the number of TEU's of Set Containers on the last day of the month, divided by two; multiplied by (y) the number of days in that month. (3) Container Set Daily Adjusted Gross Revenues. The "Container Set Daily Adjusted Gross Revenues" for any particular calendar quarter shall equal the Adjusted Gross Revenues of the Container Set for that quarter divided by the number of Container Set TEU-Days for the same quarter. (4) Lessor Container TEU-Days. For all Containers in the Container Set for any particular calendar quarter, the number of Lessor Container TEU-days ("Lessor Container TEU-Days") shall equal 14 the sum of the Individual Container TEU-Days for each Container for that quarter. The Individual Container TEU-Days for any particular Container, for any particular quarter shall equal (x) the applicable TEU factor for a Container of that size and type (as set forth in Section 6(b)(7) above) multiplied by (y) the actual number of days during the quarter that the Container was included in the Container Set; provided that, if in any quarter a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (and the Lessee does not replace that Container pursuant to Section 9(b)), that Container shall be deemed to be removed from the Container Set at the midpoint of that quarter. (5) Lessor Adjusted Gross Revenues. The "Lessor Adjusted Gross Revenues" for any particular calendar quarter shall equal the Container Set Daily Adjusted Gross Revenues for that quarter multiplied by the number of Lessor Container TEU-Days for the same quarter. (6) Fixed Rent and Variable Rent. (i) Lessee shall pay Lessor "Fixed Rent" with respect to the Containers included in the Container Set for the period commencing on the Purchase Date therefor and ending on March 31, 1996 (the "Fixed Rent Period"). Fixed Rent for any particular calendar quarter shall equal the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81. (ii) Lessee shall pay Lessor "Variable Rent" with respect to the Containers included in the Container Set for the period commencing on April 1, 1996 and ending on the day this Agreement terminates in accordance with Section 4 above (the "Variable Rent Period"). Subject to subparts (iii) and (iv) below, the Variable Rent for any particular calendar quarter shall equal seventy-five percent (75.0%) of the Lessor Adjusted Gross Revenues for that quarter. (iii) If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the first year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81 (the "first Year Threshold Amount"), the Variable Rent for that quarter shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the First Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the second year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container 15 TEU-Days for that, quarter, divided by the number of days in that quarter, by (y) $91.69 (the "Second Year Threshold Amount"), the Variable Rent payable with respect to such Container shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the Second Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). The amount by which Variable Rent is increased pursuant to this subpart (iii) shall hereinafter be referred to as "Additional Variable Rent." (iv) Commencing with the third year of the Variable Rent Period, the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter shall be decreased by an amount equal to the lesser of: (x) one-twelfth of the aggregate Additional Variable Rent; or (y) the amount by which the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iv) exceeds the product obtained by multiplying (A) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (B) $80. Notwithstanding the foregoing, the aggregate deductions from Variable Rent made pursuant to this subpart (iv) shall in no event exceed the aggregate Additional Variable Rent. (7) Carry-Forward of Operating Deficit. If Variable Rent for any particular calendar quarter is less than zero, the amount by which Variable Rent is less than zero (the "Operating Deficit") shall be carried forward and offset against and to the extent of Lessor's positive Variable Rent in subsequent calendar quarters, without interest, until the Operating Deficit is fully offset; provided that, no offset pursuant to this Section shall be made for any quarter for which Additional Variable Rent is payable. In no event shall the Lessor be obligated to make any direct payment to the Lessee to reimburse the Lessee for any Operating Deficit. 7. Withholding Taxes; Arthur Andersen Review; Reports. (a) Withholding Taxes. (i) If at any time during the term of this Agreement, the Lessee is required by law to make any deduction or withholding on account of any tax, assessment or other governmental charge, which is currently in force or may in the future come into force as a result of the action of any tax authority, with respect to the Containers, the Fixed Rent, the Variable Rent, or any other amount payable by the Lessee to the Lessor hereunder, other than any taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth, the Lessee shall, thereupon be 16 entitled to deduct or withhold, or to offset against the Fixed Rent, the Variable Rent, or any other amount otherwise payable by the Lessee to the Lessor hereunder, the amount of such tax, assessment or other governmental charge (together with interest, additions to tax, penalties or other liabilities related thereto), irrespective of whether such tax, assessment or other governmental charge is imposed with respect to the then current or a previous taxable period, and any amount so deducted, withheld, or offset by the Lessee and paid by the Lessee to the applicable taxing authority pursuant to and in accordance with the deduction or withholding requirement shall be deemed to have been paid by the Lessee to Lessor in satisfaction of the requirements of this Agreement (ii) The Lessee agrees to execute and deliver all such documents and instruments, and to take all such action, as the Lessor shall reasonably request to minimize amounts to be deducted or withheld pursuant to the tax deduction or withholding requirement or to obtain an exemption from the deduction or withholding requirement and to effect any necessary compliance therewith. (iii) If the Lessor is organized under the laws of a jurisdiction outside the United States, then, on or prior to the date it becomes entitled to the receipt of any payment hereunder and from time to time thereafter if requested in writing by the Lessee, the Lessor shall, if and for so long as the Lessor is lawfully able to do so, provide the Lessee with (i) an accurate, complete and duly executed Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that the Lessor is entitled to benefits under an income tax treaty to which the United States is a party that reduces the rate of withholding tax on payments under this Agreement or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States; or (ii) in the event that, by virtue of a change in law or regulations, such forms are no longer valid, such other evidence of the Lessor's exemption from withholding (if and for so long as the Lessor is legally able to provide such evidence) as is reasonably requested by the Lessee. (iv) If the Lessee makes any deduction or pays any withholding tax pursuant to this Section, the Lessee shall promptly give the Lessor written evidence of payment of such tax. (b) Arthur Andersen Review. Arthur Andersen & Company or such other independent public accounting firm as may be satisfactory to the Lessor will review the calculations of the Adjusted Gross Revenues of the Container Set for each calendar quarter during the Variable Rent Period in the course of performing the annual audit of the Lessee's financial statements and will confirm by a written report to the Lessor to accompany the Variable Rent payment to be paid on or about June 30th of each year during the Variable Rent 17 Period that the calculations made by the Lessee during the preceding year were made in accordance with this Agreement. The Lessee will bear the cost of the review. Any adjustments in the Variable Rent resulting from the review shall be reflected in the payment that accompanies the written report. (c) Reports, Inspection. (i) Concurrently with payment of the Variable Rent for each calendar quarter, Lessee shall provide to Lessor a report substantially in the form of Schedule II hereto showing the calculation of the Lessor Adjusted Gross Revenues for that quarter. (ii) During the term of this Agreement and for a period of one year following termination of this Agreement for any reason whatsoever, for the purpose of verifying the amount of Variable Rent due under this Agreement for any one or more calendar quarters, Lessor shall have the right on five business days notice, at Lessor's expense, to examine during the Lessee's. normal business hours the business records relating to the Containers. 8. Utilization and Other Matters. (a) The Lessee agrees to use the Containers in accordance with the standards accepted in the container leasing industry. The Lessor retains the right to have the Containers inspected at any time, so long as any inspection does not interfere with normal utilization of the Containers. (b) The Lessee agrees not to grant or suffer to exist a lien of any kind on the Containers, or to permit any sublessee to grant or suffer to exist a lien of any kind on the Containers, except for the following liens or encumbrances ("Permitted Liens"): (i) liens or encumbrances that result from acts or omissions of the Lessor; (ii) liens or charges for current taxes, assessments or other governmental charges which are either not yet due or are being contested in good faith and by appropriate proceedings so long, as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; (iii) materialmen's, mechanics', workmen's, repairmen's, employees' and other like liens arising in the ordinary course of business which are either inchoate and relate to an obligation which is not yet due or which are being contested in good faith and by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; and (iv) the rights of the sublessees of the Containers under 18 their respective subleases with the Lessee. Lessor may enter into a financing arrangement with one or more Lenders; provided that such Lenders acknowledge in writing that they take subject to this Agreement. (c) The Lessee will not permit any sublessee to sell or otherwise transfer title to any Container to any third party. (d) The Lessee agrees to give the Lessor, within one hundred and eighty (180) days of the end of each calendar year, an inventory of the Containers as of year end. This inventory will specify the name of the lessee of each Container then on lease. 9. Insurance; Total Loss or Destruction. (a) The Lessee agrees during the term of this Agreement to insure the Containers against all risks of physical loss and to maintain comprehensive general liability insurance covering the Containers against bodily injury or property damage, in each case subject to normal terms and conditions of a comprehensive insurance policy, the cost of which insurance shall be an Operating Expense of the Container Set for purposes of Section 6. The Lessee will provide the Lessor with a Certificate of Insurance evidencing the insurance for all Containers covered by this Agreement and naming Lessor and Lenders as an additional insured and loss payee as their interests may appear. If the Lessee, through its own negligence, does not maintain the insurance in effect, any loss or expense due to the failure to maintain the insurance in effect shall be the responsibility of the Lessee and, notwithstanding the provisions of Section 6, shall not be an Operating Expense of the Container Set for purposes of Section 6. (b) (i) In the case of a Casualty Occurrence or an Ordinary Disposal Occurrence as to a Container, the Lessee agrees to replace the Container within ninety (90) days after Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence with one of like size, type, age, and condition and to deliver to the Lessor with respect thereto concurrently with the replacement of such Container a Certificate of Replacement in the form of Exhibit B attached hereto, a Bill of Sale in substantially the form attached to the Purchase and Sale Agreement, and an amendment to the Uniform Commercial Code financing statements originally filed with respect to this transaction. (ii) In the alternative, until the last day of the calendar quarter following the calendar quarter in which there occurs a Casualty Occurrence or an Ordinary Disposal Occurrence, Lessee may, on behalf of the Lessor, and Lessor hereby authorizes Lessee to, sell, lease or otherwise dispose of a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence, at the 19 sole and absolute discretion of the Lessee; provided that, if (x) a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence during the period commencing on the Purchase Date and ending on June 30, 1999; and (y) the total number of Containers included in the Container Set on the Purchase Date and theretofore sold, leased or otherwise disposed of pursuant to this Section (calculated on a TEU basis as of the last day of the most recent calendar quarter during such period) exceeds five percent (5%) of the total number of Containers (calculated on a TEU basis as of the Purchase Date), Lessee shall replace such Container in accordance. with the preceding Section and shall not be entitled to sell, lease or otherwise dispose of such Container pursuant to this Section. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessor and the Lessee as follows: (1) the Lessor shall first receive an amount equal to the lesser of: (A) the amount of the net proceeds; or (B) the value of the Container according to Exhibit A attached hereto; and (2) any net proceeds remaining after the allocation to the Lessor in subpart (1) shall be paid 50% to the Lessor and 50% to the Lessee as incentive compensation for handling the sale, lease or other disposition. (iii) The cost of the replacement or the payment shall not be an Operating Expense of the Container Set for purposes of Section 6. (iv) If the Lessee elects to replace the Container, it shall be entitled to retain the net proceeds of the Casualty Occurrence or Ordinary Disposal Occurrence for its own account, and the Lessor shall transfer all of its right, title and interest in and to the original Container to the Lessee. Lessor agrees to execute or to cause to be executed all necessary documents, including a bill of sale and a Uniform Commercial Code release, to evidence such transfer to Lessee. (v) If the Lessee elects to pay the Lessor the amount described in Section 9(b) (ii) above, the Lessor shall be entitled to Fixed Rent or Variable Rent on account of the Container subject to the Casualty Occurrence or Ordinary Disposal Occurrence in accordance with Section 6 and shall be entitled to receive such amount on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to such Container. 10. Security Interest. To secure the prompt and full payment and performance of any and all of Lessee's obligations hereunder, 20 Lessee hereby assigns, transfers, sets over, and grants to Lessor a security interest in all of Lessee's right, title and interest in and to any and all present or future subleases, leases, chattel paper, agreements for use, or other similar agreements relating to the Containers, all accounts, rents, payments and other rights to receive moneys relating thereto, all other general intangibles thereunder, all books and records and other documents relating thereto, and all proceeds of the foregoing (in each case to the extent the same relates to the Containers) (collectively, the "Collateral"). Upon the occurrence and during the continuance of an Event of Default (provided that the Lessor shall have delivered to the Lessee written notice of termination of this Agreement pursuant to Section 4(c) and the written notice described in Section 5 (c) (A), except that no notices are required with respect to the Event of Default specified in Section 4(c) (5)), Lessee agrees that Lessor shall have the right from and after the effective date of termination to receive and collect all rent and other sums payable to or receivable by Lessee under any such subleases, and the right to make all waivers and agreements, to give all notices, consents and releases and to do any and all other things whatsoever which the Lessee is or may become entitled to do under any sublease (in each case to the extent such sublease relates to the Containers). Anything herein to the contrary notwithstanding, nothing contained in this Section 10 may be interpreted as permitting the Lessor or any Lender, and no right or remedy may be exercised by the Lessor or any Lender, which would result in the derogation of any covenant of quiet enjoyment made to any sublessee under any sublease of a Container. 11. Sale or Transfer by Lessor. The Lessor may at any time sell or transfer any Container or any interest therein subject to this Agreement, provided that: (a) the party to whom the Container is sold or transferred acknowledges in writing that the sale or transfer is subject to this Agreement; (b) the Lessor shall not be entitled to offer or sell any Container or any interest therein or assign or transfer this Agreement or any interest therein to any resident, domiciliary or citizen of the United States unless the offer, sale, assignment or transfer is made in compliance with all applicable United States and state securities laws; and (c) the Lessor shall not be entitled to sell or transfer any Container or any interest therein during the term of this Agreement to any person engaged in the business of operating and leasing ocean-going marine shipping containers to end-users, or any affiliates thereof (other than PLM International, Inc. and its affiliates). 21 With respect to paragraph (b) above, the Lessor agrees that it will not authorize discussions concerning the sale or transfer of any Container or any interest therein, or the assignment or transfer of this Agreement or any interest therein, within the United States. If an agency or court of the United States or any State thereof makes a legitimate request for information to evidence compliance with the matters stated in this Section 11, the Lessor shall, upon notice from the Lessee that such request has been made, disclose such information or the evidence verifying such information so as to comply with such request. 12. Assignment or Transfer by Lessee. No assignment hereof by Lessee or transfer of any of the rights of Lessee hereunder shall be valid or effective as against the Lessor unless in conformity with the prior written consent of the Lessor (which consent shall not be unreasonably withheld). 13. Governing Law. This Agreement is to be interpreted and enforced in accordance with the laws of the State of California. 14. Securities Laws Representation. For the purpose of the United States and state securities laws, Lessor represents and warrants to the Lessee that the following are true and correct on the date the Lessor executes this Agreement: (a) The Lessor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in containers and of protecting its own interests in connection with such investment. (b) The Lessor is entering into this Agreement and acquiring the Containers or an interest therein for its own account and not with a view to or for sale in connection with any distribution of a security. Lessor acknowledges that this transaction has not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities law. Therefore, if this transaction is deemed a security under federal or state securities laws, an interest in this Agreement or in the Containers may not be resold unless it is registered under the Act and all applicable state securities laws or an exemption from such registration is available. 15. Amendment. No modification or amendment of this Agreement shall be valid unless in writing and executed by the parties hereto. 16. Integration. This Agreement represents the entire agreement and understand- 22 ing between the parties hereto and supersedes all prior or contemporaneous agreements, whether written or oral, with respect to the subject matter hereof. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Title and Headings; Sections. Title and headings of the sections and subsections of this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not in any way affect the interpretation thereof. References to sections and subsections without further attribution mean sections and subsections of this Agreement. 19. Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of each party hereto. 20. Further Assurances. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents and take such further action as may be reasonably required effectively to carry out the transactions contemplated herein. 21. Waiver of Jury Trial. LESSEE AND LESSOR EACH IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION OR PROCEEDING UPON, ARISING OUT OF, OR RELATED TO THIS AGREEMENT. 22. Chattel Paper. Only one counterpart of this Agreement shall be marked "Counterpart No. One" ("Counterpart No. One"), and all other counterparts hereof shall be marked as, and shall be duplicates. To the extent this Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code in effect in any applicable jurisdiction), no security interest herein may be created through the transfer or possession of any counterpart other than Counterpart No. One. 23 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: /s/ [ILLEGIBLE] ------------------------------------ Its: TREASURER ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: ------------------------------------ Its: ----------------------------------- 24 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: ------------------------------------ Its: ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: /s/ [ILLEGIBLE] ------------------------------------ Its: Vice-President ----------------------------------- 24 EXHIBIT A VALUE IN THE EVENT OF A CASUALTY OCCURRENCE OR AN ORDINARY DISPOSAL OCCURRENCE (As % of Container Cost) After After Quarter* Value Quarter* Value -------- ----- -------- ----- 0 103.75% 31 64.77% 1 103.00% 32 62.76% 2 102.23% 33 60.68% 3 101.43% 34 58.53% 4 100.61% 35 56.31% 5 99.76% 36 54.02% 6 98.89% 37 51.66% 7 97.98% 38 49.22% 8 97.05% 39 46.70% 9 96.08% 40 44.10% 10 95.08% 41 41.41% 11 94.05% 42 38.64% 12 92.99% 43 35.77% 13 91.90% 44 32.82% 14 90.76% 45 29.77% 15 89.59% 46 26.61% 16 88.39% 47 23.36% 17 87.14% 48 20.00% 18 85.85% 49 18.61% 19 84.52% 50 17.18% 20 83.15% 51 15.70% 21 81.73% 52 14.17% 22 80.27% 53 12.59% 23 78.76% 54 10.96% 24 77.20% 55 9.28% 25 75.59% 56 7.54% 26 73.93% 57 5.74% 27 72.21% 58 3.89% 28 70.44% 59 1.98% 29 68.61% 60 0.00% 30 66.72% - ---------- * Quarters begin to be counted as of the beginning of the first calendar quarter after the calendar quarter in which the Container is included in the Container Set. 26 EXHIBIT B SAMPLE Certificate of Replacement Number ______ A. Description of the Container(s) Trans Ocean Container Corporation (the "Lessee") certifies that the Container(s) listed below in Column 1 (the "Affected Container(s)") that heretofore were subject to the Marine Shipping Container Variable Lease dated as of April _____, 1995 (the "Agreement") with Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust" (the "Lessor") have been subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (as such terms are defined in the Agreement). Therefore, in accordance with Section 9(b) of the Agreement, the Lessee elects to provide replacement container(s) therefor and certifies that: (i) the container(s) listed below in Column 2 (the "Replacement Container (s)") are of like size, type, age and condition as the Affected Container(s), and (ii) effective on the date indicated below, the Replacement Container(s) shall, for purposes of the Agreement, replace the Affected Container(s), and (iii) the Replacement Container(s) are, as of such date, "Containers" for purposes of the Agreement. COLUMN 1 COLUMN 2 -------- -------- 1. Designation of Containers 1. Designation of Containers 2. Type: 2. Type: 3. Quantity: 3. Quantity: 4. Container 4. Container Numbers: Numbers: B. Date Replacement Container(s) Are Effective Under The Agreement: C. Lease of the Replacement Containers(s) The Lessee shall lease the above-designated Replacement Container(s) in accordance with the terms and conditions of the Agreement. D. Restriction on Transfer of the Replacement Container(s) The Lessor may not sell or transfer the above designated Replacement Container(s) or any interest therein except in accordance with the Agreement. TRANS OCEAN CONTAINER CORPORATION By: ------------------------------- Title: ---------------------------- 27 SCHEDULE I Specified Depot Locations for Redelivery of the Containers Pusan New York Hong Kong London Kaohsiung Le Havre Kobe Antwerp Nagoya Rotterdam Yokohama Bremen Seattle Hamburg San Francisco/Oakland Marseille Los Angeles/Long Beach Genoa Houston Leghorn New Orleans Milan Chicago 28 SCHEDULE II TRANS OCEAN LTD CALCULATION OF DAILY ADJUSTED GROSS REVENUE COMBINED CONTAINER SET IV ? QUARTER 199? I. CONTAINER SET RESULTS
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ----- GROSS REVENUE $5 $5 $5 $5 $5 $5 $30 BAD DEBT WRITE-OFFS ($1) ($1) ($1) ($1) ($1) ($1) ($6) --------- --------- --------- -------- -------- ----------- ----- TOTAL GROSS REVENUE $4 $4 $4 $4 $4 $4 $24 REPAIR AND MAINTENANCE EXPENSE $1 $1 $1 $1 $1 $1 $6 OTHER OPERATING EXPENSES $1 $1 $1 $1 $1 $1 $6 --------- --------- --------- -------- -------- ----------- ----- TOTAL EXPENSES $2 $2 $2 $2 $2 $2 $12 --------- --------- --------- -------- -------- ----------- ----- ADJUSTED GROSS REVENUE $2 $2 $2 $2 $2 $2 $12 ========= ========= ========= ======== ======== =========== =====
II. CONTAINER SET TEU DAYS BEGINNING ENDING AVERAGE DAYS IN CONTAINER SET MONTH TEUS TEUS TEUS MONTH TEU DAYS - ---------- --------- ------ ------- ------- ------------- Month 1 6.00 6.00 6.00 31 186.00 Month 2 6.00 6.00 6.00 30 180.00 Month 3 6.00 6.00 6.00 31 186.00 ------------- TOTAL CONTAINER SET TEU DAYS 552.00 ============= III. DAILY ADJUSTED GROSS REVENUE PER TEU
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ------ AVERAGE # OF CONTAINER TEU DAYS 92.00 138.00 154.56 92.00 33.44 42.00 552.00 GROSS REVENUE $0.05 $0.04 $0.03 $0.05 $0.15 $0.12 $0.05 BAD DEBT WRITE-OFFS ($0.01) ($0.01) ($0.01) ($0.01) ($0.03) ($0.02) ($0.01) --------- --------- --------- -------- -------- ----------- ------ TOTAL GROSS REVENUE $0.04 $0.03 $0.03 $0.04 $0.12 $0.10 $0.04 REPAIR AND MAINTENANCE EXPENSE $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 OTHER OPERATING EXPENSES $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 --------- --------- --------- -------- -------- ----------- ------ TOTAL EXPENSES $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 --------- --------- --------- -------- -------- ----------- ------ ADJUSTED GROSS REVENUE $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 ========= ========= ========= ======== ======== =========== ======
TRANS OCEAN LTD CALCULATION OF LESSOR'S VARIABLE RENT COMBINED CONTAINER SET IV ? QUARTER 199? LESSOR: ? I. LESSOR'S CONTAINER TEU DAYS 40' HIGH 40' DRY CUBE CARGO DRY CARGO TOTAL ------- --------- ------ NUMBER OF CONTAINER DAYS IN THE CONTAINER SET: 92 92 TEU FACTOR: 1.50 1.68 ------- --------- LESSOR'S CONTAINER TEU DAYS: 138.00 154.56 292.56 ------- --------- ====== II LESSOR'S ADJUSTED GROSS REVENUE DAILY ADJUSTED GROSS REVENUE PER TEU: $0.02 LESSOR'S CONTAINER TEU DAYS: 292.56 -------- LESSOR'S ADJUSTED GROSS REVENUE $5.85 -------- VARIABLE RENT PERCENTAGE: 75.00% -------- VARIABLE RENT DUE TO LESSOR: $4.39 ======== CONTAINER TEU DAYS CALCULATION ? QUARTER 199? LESSOR TOTAL UNIT TOTAL CONTAINER ACTIVITY NUMBER DAYS IN TEU TEU TYPE DATE OF UNITS QUARTER FACTOR DAYS - ------------ -------- -------- ------- ------ ------- C40 Month 1 1 92 1.50 138.00 -------- ------- ------- 1 92 138.00 J40 Month 1 1 92 1.68 154.56 -------- ------- ------- 1 92 154.56 LLR00D LOAN AMORTIZATION SCHEDULE 9/29/97 10:34:50 PAGE 1 EQUITY OWNER: 8801 AFG TRUST 88-1 PERCENT OWNED: 100.000000% LESSEE: AMOCO RENTAL SCHEDULE: B-O-9 LENDER NAME: KANSALLIS FINANCE LTD LOAN CODE: KFNL052
PRINCIPAL PRINCIPAL PAYMENT PMT BALANCE TOTAL INTEREST PRINCIPAL BALANCE DATE # BEFORE PMT PAYMENT PAYMENT PAYMENT AFTER PMT - ------------------------------------------------------------------------------------------------- 2/01/1989 1 119,033.61 9,808.71 3,228.79 6,579.92 112,453.69 8/01/1989 2 112,453.69 9,808.71 5,903.82 3,904.89 108,548.80 2/01/1990 3 108,548.80 9,808.71 5,698.81 4,109.90 104,438.90 8/01/1990 4 104,438.90 9,808.71 5,483.04 4,325.67 100,113.23 2/01/1991 5 100,113.23 9,808.71 5,255.94 4,552.77 95,560.46 8/01/1991 6 95,560.46 9,808.71 5,016.92 4,791.79 90,768.67 2/01/1992 7 90,768.67 9,808.71 4,765.36 5,043.35 85,725.32 8/01/1992 8 85,725.32 9,808.71 4,500.58 5,308.13 80,417.19 2/01/1993 9 80,417.19 9,808.71 4,221.90 5,586.81 74,830.38 8/01/1993 10 74,830.38 9,808.71 3,928.60 5,880.11 68,950.27 2/01/1994 11 68,950.27 9,808.71 3,619.89 6,188.82 62,761.45 8/01/1994 12 62,761.45 9,808.71 3,294.98 6,513.73 56,247.72 8/01/1994 56,247.72 17,975.55 .00 17,975.55 38,272.17 2/01/1995 13 38,272.17 6,674.24 2,009.29 4,664.95 33,607.22 8/01/1995 14 33,607.22 6,674.24 1,764.38 4,909.86 28,697.36 2/01/1996 15 28,697.36 6,674.24 1,506.61 5,167.63 23,529.73 8/01/1996 16 23,529.73 6,674.24 1,235.31 5,438.93 18,090.80 2/01/1997 17 18,090.80 6,674.24 949.77 5,724.47 12,366.33 8/01/1997 18 12,366.33 6,674.24 649.23 6,025.01 6,341.32 8/02/1997 6,341.32 6,341.32 .00 6,341.32 .00 2/01/1998 19 .00 .00 .00 .00 .00 182,066.83 63,033.22 119,033.61
YEARLY RATE OF RETURN: 10.50000% ** END OF REPORT ** Exhibit A - Value in the Event of a Casualty Occurrence or an Ordinary Disposal Occurrence Exhibit B - Certificate of Replacement Schedule I - Specified Depot Locations Schedule II - Form of Report re: Lessor Adjusted Gross Revenues EX-27 5 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,837,781 168,288 1,220,898 0 0 5,226,967 17,500,186 8,780,173 13,946,980 554,736 4,192,148 0 0 0 9,200,096 13,946,980 0 3,111,970 0 0 2,286,569 0 386,021 439,380 0 439,380 0 0 0 439,380 0 0
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