UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------
Commission File No. 0-20031
AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3077437
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
- ------
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at September 30, 2001 and December 31, 2000 3
Statement of Operations
for the three and nine months ended September 30, 2001 and 2000 4
Statement of Changes in Partners' Capital
for the nine months ended September 30, 2001 5
Statement of Cash Flows
for the nine months ended September 30, 2001 and 2000 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION:
Item 1 - 6 24
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
September 30, December 31,
. 2001 2000
ASSETS . (Restated)
--------------- --------------
Cash and cash equivalents $ 2,437,170 $ 1,758,608
Rents receivable 101,588 162,064
Accounts receivable - other 24,545 39,178
Accounts receivable - affiliate 116,502 93,661
Interest receivable - affiliate 11,588 -
Prepaid expenses 4,298 -
Interest receivable - loan, net of allowance of $451,194
at September 30, 2001 - 340,692
Loan receivable, net of allowance of $243,250
at September 30, 2001 2,536,750 2,780,000
Net investment in sales-type lease 80,339 263,060
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 56,626 79,590
Equipment at cost, net of accumulated depreciation
of $5,880,639 and $5,593,629 at September 30, 2001
and December 31, 2000, respectively 4,642,993 5,315,597
--------------- --------------
Total assets $ 10,472,128 $ 11,292,179
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 1,942,811 $ 2,056,682
Accrued interest 6,177 10,135
Accrued liabilities 571,211 496,938
Accrued liabilities - affiliate 99,931 23,742
Deferred rental income 19,391 38,025
--------------- --------------
Total liabilities 2,639,521 2,625,522
--------------- --------------
Partners' capital (deficit):
General Partner (490,909) (449,207)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 8,323,516 9,115,864
--------------- --------------
Total partners' capital 7,832,607 8,666,657
--------------- --------------
Total liabilities and partners' capital $ 10,472,128 $ 11,292,179
=============== ==============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
. For the three months ended For the nine months ended
. September 30, September 30,
2001 2000 2001 2000
. (Restated) . (Restated)
INCOME
Operating lease revenue $ 318,551 $272,050 $1,211,209 $1,026,637
Sales-type lease revenue 3,668 - 11,004 -
Interest income 23,189 28,072 70,771 94,983
Interest income - loan - 105,230 110,502 231,652
Interest income - affiliate 11,588 11,588 34,385 34,385
Gain on sale of equipment 10,000 71,209 26,856 93,209
----------- --------- ----------- ----------
Total income 366,996 488,149 1,464,727 1,480,866
----------- --------- ----------- ----------
EXPENSES
Depreciation 147,201 155,374 441,604 482,228
Write-down of equipment - - 231,000 -
Interest expense 37,132 47,778 103,567 148,142
Equipment management fees - affiliate 5,971 12,549 54,327 47,406
Operating expenses - affiliate 373,552 314,661 750,871 478,309
Write-down of impaired loan and interest
receivable - - 694,444 -
Write-down of investment securities - affiliate - - 16,962 -
----------- --------- ----------- ----------
Total expenses 563,856 530,362 2,292,775 1,156,085
----------- --------- ----------- ----------
Net income (loss) $ (196,860) $(42,213) $ (828,048) $ 324,781
=========== ========= =========== ==========
Net income (loss) per limited partnership unit $ (0.23) $ (0.05) $ (0.98) $ 0.38
=========== ========= =========== ==========
Cash distributions declared
per limited partnership unit $ -- $ -- $ -- $ --
=========== ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
General Limited Partners
Partner
----------
Amount Units Amount Total
Balance at December 31, 2000 (Restated) $(449,207) 803,454.56 $9,115,864 $8,666,657
Net loss (41,402) - (786,646) (828,048)
Unrealized loss on investment
securities - affiliate (626) - (11,900) (12,526)
Less: Reclassification adjustment
for write-down of investment
securities - affiliate 326 - 6,198 6,524
---------- ---------------- ----------- -----------
Comprehensive loss (41,702) - (792,348) (834,050)
---------- ---------------- ----------- -----------
Balance at September 30, 2001 $(490,909) 803,454.56 $8,323,516 $7,832,607
========== ================ =========== ===========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
. (Restated)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (828,048) $ 324,781
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 441,604 482,228
Write-down of equipment 231,000 -
Sales-type lease revenue (11,004) -
Gain on sale of equipment (26,856) (93,209)
Write-down of impaired loan and interest receivable 694,444 -
Write-down of investment securities - affiliate 16,962 -
Changes in assets and liabilities:
Rents receivable 60,476 (3,941)
Accounts receivable - other 14,633 (39,177)
Accounts receivable - affiliate (22,841) 62,379
Interest receivable - affiliate (11,588) -
Prepaid expenses (4,298) -
Interest receivable - loan (110,502) (231,652)
Collections on net investment in sales-type lease 193,725 -
Accrued interest (3,958) (5,723)
Accrued liabilities 74,273 5,562
Accrued liabilities - affiliate 76,189 9,741
Deferred rental income (18,634) (19,141)
------------ ------------
Net cash provided by operating activities 765,577 491,848
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 26,856 329,245
Loan receivable - (2,780,000)
------------ ------------
Net cash provided by (used in) investing activities 26,856 (2,450,755)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 1,536,605 160,856
Principal payments - notes payable (1,650,476) (364,730)
Distributions paid - (158,577)
------------ ------------
Net cash used in financing activities (113,871) (362,451)
------------ ------------
Net increase (decrease) in cash and cash equivalents 678,562 (2,321,358)
Cash and cash equivalents at beginning of period 1,758,608 3,970,877
------------ ------------
Cash and cash equivalents at end of period $ 2,437,170 $ 1,649,519
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 107,525 $ 104,748
============ ============
See Note 7 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
nine months ended September 30, 2001.
See Note 9 to the financial statements regarding the refinancing of one of the
Partnership's notes payable in February 2001.
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
accounting principles generally accepted in the United States for interim
financial reporting and the instructions for preparing Form 10-Q under Rule
10-01 of Regulation S-X of the Securities and Exchange Commission and are
unaudited. As such, these financial statements do not include all information
and footnote disclosures required under accounting principles generally accepted
in the United States for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein,
there has been no material change to the information presented in the footnotes
to the 2000 Annual Report.
Subsequent to the issuance of the Partnership's financial statements for the
year ended December 31, 2000, the Partnership determined that the loan
receivable from Echelon Residential Holdings LLC
("Echelon Residential Holdings") should be accounted for consistent with its
legal form and the Partnership should recognize the interest income, as
calculated per the contractual terms of the loan agreement to the extent such
interest income was evaluated as likely to be collected. Accordingly, the
Partnership reversed the proportionate share of losses in Echelon Residential
Holdings for the nine months ended September 30, 2000 of $62,894 previously
recorded and recognized interest income of $231,652, resulting in an increase in
the net income for the nine months ended September 30, 2000 of $294,546, or
$0.35 per limited partnership unit. As a result, the accompanying financial
statements for the three and nine months ended September 30, 2000 and as of
December 31, 2000 have been restated from the amounts previously reported.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 2001 and December 31, 2000 and results of operations
for the three and nine month periods ended September 30, 2001 and 2000 have been
made and are reflected. Operating results for the nine months ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the entire year.
NOTE 2 - CASH
- ----------------
At September 30, 2001, American Income Fund I-C, a Massachusetts Limited
Partnership (the "Partnership") had $2,363,330 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
NOTE 3 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The majority of the Partnership's leases is accounted for as operating leases
and is noncancellable. Rents received prior to their due dates are deferred.
In certain instances, the Partnership may enter renewal or re-lease agreements
which expire beyond the Partnership's anticipated dissolution date. This
circumstance is not expected to prevent the orderly wind-up of the Partnership's
business activities as the General Partner and Equis Financial Group Limited
Partnership ("EFG") would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 10 regarding the Class Action Lawsuit. Future
minimum rents for operating leases of $2,219,140 are due as follows:
For the year ending September 30, 2002 $ 751,315
2003 698,288
2004 547,913
2005 221,624
----------
. Total $2,219,140
==========
Future minimum rents for operating leases does not include the operating leases
for which the lease payments are based on the usage of the equipment leased.
In June 2001, Partnership and certain affiliated investment programs
(collectively, the "Programs") executed an agreement with the existing lessee,
Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas
MD-87 aircraft that had been scheduled to expire in January 2003. The Programs
received an early termination fee of $840,000 and a payment of $400,000 for
certain maintenance required under the existing lease agreement. The
Partnership's share of the early termination fee was $179,004, which was
recognized as operating lease revenue during the nine months ended September 30,
2001 and its share of the maintenance payment was $85,240, which was accrued as
a maintenance obligation at September 30, 2001. Coincident with the termination
of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de
C.V. for a term of four years. The Programs will receive rents of $6,240,000
over the lease term, of which the Partnership's share is $1,329,744.
Lease payments for the sales-type lease are due monthly and the related revenue
is recognized by a method, which produces a constant periodic rate of return on
the outstanding investment in the lease. Future minimum lease payments for the
sales-type lease of $85,838 are due through the date of the lease expiration in
January 2002.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at September
30, 2001. Remaining Lease Term (Months), as used below, represents the number
of months remaining from September 30, 2001 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------------------------------------------- ----------- ------------
Aircraft 0-45 $ 6,918,159
Trailers and intermodal containers 15-21 1,963,408
Materials handling 0-3 1,493,196
Motor vehicles 0 97,400
Communications 0 51,469
------------
Total equipment cost . 10,523,632
Accumulated depreciation . (5,880,639)
------------
Equipment, net of accumulated depreciation . $ 4,642,993
============
At September 30, 2001, the Partnership's equipment portfolio included equipment
having a proportionate original cost of approximately $8,882,000, representing
approximately 84% of total equipment cost.
Certain of the equipment and related lease payment streams were used to secure
the Partnership's loans with third-party lenders. The preceding summary of
equipment includes leveraged equipment having an original cost of approximately
$4,556,000 and a net book value of approximately $3,225,000 at September 30,
2001 (see Note 9).
The summary above includes the Partnership's interest in a McDonnell Douglas
MD-82 aircraft, which had been leased to Finnair OY through April 2001. Upon
expiration of the lease, the aircraft was returned to the General Partner. The
Partnership's interest in this aircraft had an original cost of approximately
$1,661,000 and a net book value of approximately $808,000 at September 30, 2001.
The General Partner is attempting to remarket this aircraft.
The Partnership accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. During the three months ended June 30, 2001, the Partnership
recorded a write-down of equipment, representing an impairment to the carrying
value of the Partnership's interest in the McDonnell Douglas MD-82 aircraft
discussed above. The resulting charge of $231,000 was based on a comparison of
estimated fair value and carrying value of the Partnership's interest in the
aircraft.
NOTE 5 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the ''Exchange
Partnerships'') collectively loaned $32 million to Echelon Residential Holdings,
a newly formed real estate company. Echelon Residential Holdings is owned by
several investors, including James A. Coyne, Executive Vice President of EFG.
In addition, certain affiliates of the General Partner made loans to Echelon
Residential Holdings in their individual capacities.
The Partnership's original loan was $2,780,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral. Echelon Residential
Holdings has no material business interests other than those connected with the
real estate properties owned by Echelon Residential LLC.
The summarized financial information for Echelon Residential Holdings as of and
for the periods ended September 30, 2001 and 2000, respectively, is as follows:
(Unaudited)
As of and for the periods ended
September 30,
2001 2000
------------- ------------
Total assets $ 81,508,282 $63,457,759
Total liabilities $ 89,882,493 $61,693,359
Minority interest $ 1,688,330 $ 2,527,750
Total deficit $(10,062,541) $ (763,350)
Total revenues $ 9,371,321 $ 1,565,618
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 15,574,223 $ 5,109,324
Net loss $ (6,202,902) $(3,543,706)
During the second quarter of 2001 the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $243,250, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $694,444 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
The write-down was precipitated principally by a slowing U.S. economy and its
effects on the real estate development industry. The economic outlook for the
properties that existed when the loan was funded has deteriorated and inhibited
the ability of Echelon Residential Holdings' management to secure low-cost
sources of development capital, including but not limited to joint-venture or
equity partners. In response to these developments and lower risk tolerances in
the credit markets, the management of Echelon Residential Holdings decided in
the second quarter of 2001 to concentrate its prospective development activities
within the southeastern United States and, therefore, to dispose of development
sites located elsewhere. In May 2001, Echelon Residential Holdings closed its
Texas-based development office; and since the beginning of 2001, the company has
sold three of nine properties (two in July 2001 and one in October 2001). As of
November 2001, one additional property is under contract to be sold, subject to
due diligence that remains pending. As a result of these developments, the
General Partner does not believe that Echelon Residential Holdings will realize
the profit levels originally believed to be achievable from either selling these
properties as a group or developing all of them as multi-family residential
communities.
NOTE 6 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft transfers to Royal
Aviation Inc., at the expiration of the lease term. The sale of the aircraft
was recorded by the Partnership as a sales-type lease, with a lease term
expiring in January 2002. For the three and nine month periods ended September
30, 2001, the Partnership recognized sales-type lease revenue of $3,668 and
$11,004, respectively, from this lease. At September 30, 2001, the components
of the net investment in the sales-type lease are as follows:
Total minimum lease payments to be received $85,838
Less: Unearned income 5,499
-------
Total $80,339
=======
Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.
NOTE 7 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 20,876 shares of Semele Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$459,729. The Semele Note matures in April 2003 and bears an annual interest
rate of 10% with mandatory principal reductions prior to maturity, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
its principal real estate asset consisting of an undeveloped 274-acre parcel of
land near Malibu, California. The Partnership recognized interest income of
$34,385 related to the Semele Note during each of the nine month periods ended
September 30, 2001 and 2000.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele Note has been extended. Since the Semele Note was received as
consideration for the sale of the cargo vessels to an unaffiliated party and the
extension of the maturity of the Semele Note is documented in an amendment to
the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the general partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate in violation of the
Partnership Agreements and to be a violation of the court's order, in connection
with the settlement of the class action lawsuit discussed in Note 10, that
authorized New Investments while providing that all other provisions of the
Partnership Agreements shall remain in full force and effect.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", marketable equity securities classified as
available-for-sale are carried at fair value. At March 31, 2001, the
Partnership determined that the decline in the market value of its Semele common
stock was other than temporary. As a result, the Partnership wrote down the
cost of the Semele common stock to $3.3125 per share (the quoted price of the
Semele stock on the NASDAQ SmallCap Market on the date the stock traded closest
to March 31, 2001), for a total realized loss in the nine months ended September
30, 2001 of $16,962.
During the six months ended September 30, 2001, the Partnership decreased the
carrying value of its investment in Semele common stock based on the quoted
price of the Semele stock on the OTC Bulletin Board on the date the stock traded
closest to September 30, 2001, resulting in an unrealized loss of $12,526. This
loss was reported as a component of comprehensive loss included in the Statement
of Changes in Partners' Capital.
NOTE 8 - 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 nine month periods ended September 30,
2001 and 2000 which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- --------
Equipment management fees $ 54,327 $ 47,406
Administrative charges 85,473 101,323
Reimbursable operating expenses
due to third parties 665,398 376,986
-------- --------
Total $805,198 $525,715
======== ========
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
September 30, 2001, the Partnership was owed $116,502 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in October
2001.
The discussion of the loan to Echelon Residential Holdings in Note 5 above is
incorporated herein by reference.
NOTE 9 - NOTES PAYABLE
- --------------------------
Notes payable at September 30, 2001 consisted of two installment notes totaling
$1,942,811 payable to banks and institutional lenders, which bear an interest
rate of either 7.03% or 7.65%. Both of the installment notes are non-recourse
and are collateralized by the equipment and assignment of the related lease
payments. The installment notes amortize monthly and in addition, the
Partnership has a balloon payment obligation at the expiration of the lease term
related to one of the two aircraft leased to Aerovias de Mexico, S.A. de C.V. of
$323,027 in September 2004.
In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $968,639 including $564,970 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $403,669 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft then on lease to
Finnair OY of $104,590 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 3 -
Revenue Recognition). The Reno Programs executed a debt agreement with a new
lender collateralized by the aircraft and assignment of the Aerovias de Mexico,
S.A. de C.V. lease payments. The Reno Programs received debt proceeds of
$5,316,482, of which the Partnership's share was $1,132,936. The Partnership
used the new debt proceeds and a portion of certain other receipts from Reno to
repay the outstanding balance of the existing indebtedness related to the
aircraft of $1,186,088 and accrued interest and fees of $17,670.
Management believes that the carrying amount of notes payable approximates fair
value at September 30, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the note payable are as follows:
For the year ending September 30, 2002 $ 438,736
2003 472,004
2004 492,748
2005 539,323
----------
. Total $1,942,811
==========
NOTE 10 - LEGAL PROCEEDINGS
- -------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, 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.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") had completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether the parties
requested the Court to schedule a hearing for final approval of the proposed
settlement or were withdrawing the proposed settlement from judicial
consideration and resuming the litigation of the Plaintiffs' claims.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase any security or engage in any business in interstate
commerce. Accordingly, Section 7 would prohibit any partnership that is an
unregistered investment company from engaging in any business in interstate
commerce, except transactions that are merely incidental to its dissolution.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and to special 1940
Act counsel's submissions to the SEC staff setting forth the reasons why the
1940 Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, if asked, counsel would be willing to issue an
opinion of the firm that none of the partnerships is an investment company under
the 1940 Act. The Defendants stated their belief that the proposed settlement
is still viable and in the best interests of the parties and that final approval
should be pursued. The Defendants advised the court that they believe that if
the court were to address the issue of whether or not the 1940 Act applies to
the partnerships and the proposed consolidation, it could remove the major
obstacle to the settlement being finally consummated. The Defendants also
requested that the court schedule a hearing to address on a preliminary basis
the objection to the proposed settlement raised in the staff's May 10, 2001
letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referred the case to mediation and
referred discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel have continued to negotiate toward a settlement and have reached
agreement as to its principal business terms. As part of the settlement, EFG
has agreed to buy the loans made by the Exchange Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date.
Upon completion of a stipulation of settlement, the parties will submit the
settlement to the court for approval.
There can be no assurance that a settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. 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.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
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Certain statements in this quarterly report of American Income Fund I-C, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 10 to the accompanying
financial statements, the remarketing of the Partnership's equipment, and the
performance of the Partnership's non-equipment assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing, the loan to Echelon Residential Holdings
LLC ("Echelon Residential Holdings") and its ownership of securities of Semele
Group Inc. ("Semele"). The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the 1940 Act. The General
Partner is engaged in discussions with the staff of the Securities and Exchange
Commission ("SEC") regarding whether or not the Partnership may be an
inadvertent investment company as a consequence of the above-referenced loan. If
the Partnership were determined to be an unregistered investment company, its
business would be adversely affected. The 1940 Act, among other things,
prohibits an unregistered investment company from offering securities for sale
or engaging in any business in interstate commerce and, consequently, leases and
contracts entered into by partnerships that are unregistered investment
companies may be voidable. The General Partner has consulted counsel and
believes that it is not an investment company. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The
letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit
were scheduled to appear before the court in the near future to consider a
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and to special 1940
Act counsel's submissions to the SEC staff setting forth the reasons why the
1940 Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, if asked, counsel would be willing to issue an
opinion of the firm that none of the partnerships is an investment company under
the 1940 Act. The Defendants stated their belief that the proposed settlement
is still viable and in the best interests of the parties and that final approval
should be pursued. The Defendants advised the court that they believe that if
the court were to address the issue of whether or not the 1940 Act applies to
the partnerships and the proposed consolidation, it could remove the major
obstacle to the settlement being finally consummated. The Defendants also
requested that the court schedule a hearing to address on a preliminary basis
the objection to the proposed settlement raised in the staff's May 10, 2001
letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referred the case to mediation and
referred discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel have continued to negotiate toward a settlement and have reached
agreement as to its principal business terms. As part of the settlement, EFG
has agreed to buy the loans made by the Exchange Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date.
Upon completion of a stipulation of settlement, the parties will submit the
settlement to the court for approval.
There can be no assurance that a settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. 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. See Note 10 to the financial statements for additional
discussion.
Three and nine months ended September 30, 2001 compared to the three and nine
- --------------------------------------------------------------------------------
months ended September 30, 2000:
- ------------------------------------
The Partnership was organized in 1991 as a direct-participation
equipment-leasing program to acquire a diversified portfolio of capital
equipment subject to lease agreements with third parties. Presently, the
Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations. (See Note 10 to the financial statements.)
Pursuant to the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended"), the Partnership is scheduled
to be dissolved by December 31, 2002. However, the General Partner does not
expect that the Partnership will be dissolved until such time that the Class
Action Lawsuit is settled or adjudicated.
The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Partnership's assets and the
Partnership's ability to negotiate future lease agreements. Notwithstanding the
foregoing, it currently is not possible for the General Partner to determine the
long-term effects, if any, that these events may have on the economic
performance of the Partnership's equipment portfolio. Approximately 66% of the
Partnership's equipment portfolio consists of commercial jet aircraft. The
events of September 11, 2001 adversely affected market demand for both new and
used commercial aircraft and weakened the financial position of most airlines.
No direct damage occurred to any of the Partnership's assets as a result of
these events and while it is currently not possible for the General Partner to
determine the ultimate long-term economic consequences of these events to the
Partnership, the General Partner expects that the resulting decline in air
travel will suppress market prices for used aircraft in the short term and could
inhibit the viability of the airline industry. In the event of a default by an
aircraft lessee, the Partnership could suffer material losses. At September 30,
2001, the Partnership has collected substantially all rents owed from aircraft
lessees. The General Partner is monitoring the situation and will continue to
evaluate potential implications to the Partnership's financial position and
future liquidity.
Results of Operations
- -----------------------
For the three and nine month periods ended September 30, 2001, the Partnership
recognized operating lease revenue of $318,551 and $1,211,209, respectively,
compared to $272,050 and $1,026,637, respectively, for the same periods in 2000.
The increase in operating lease revenue from 2000 to 2001 resulted from the
September 2000 re-lease of a McDonnell Douglas MD-82 aircraft and a Boeing
737-2H4 aircraft in which the Partnership holds ownership interests and lease
termination proceeds, as discussed below. These increases were partially offset
by the affects on operating lease revenue of the lease term expiration in April
2001 of a second McDonnell Douglas MD-82 aircraft and sales of equipment. In
the future, operating lease revenue is expected to decline due to lease term
expirations and equipment sales.
The lease term associated with the Boeing 737-2H4, in which the Partnership
holds an ownership interest, expired in December 1999. The aircraft was
re-leased in September 2000 to Air Slovakia BWJ Ltd., with a lease term expiring
in September 2003. The Partnership recognized operating lease revenue of
$91,400 for the nine month period ended September 30, 2001 related to its
interest in this aircraft.
The lease term associated with a McDonnell Douglas MD-82 aircraft, in which the
Partnership holds an ownership interest, expired in January 2000. The aircraft
was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V., with a lease
term expiring in September 2004. The Partnership recognized operating lease
revenue of $176,300 and $38,273 related to this aircraft during the nine month
periods ended September 30, 2001 and 2000, respectively.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Partnership's share of the early termination fee was $179,004, which was
recognized as operating lease revenue during the nine months ended September 30,
2001 and its share of the maintenance payment was $85,240, which is accrued as a
maintenance obligation at September 30, 2001. Coincident with the termination
of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de
C.V. for a term of four years. The Reno Programs will receive rents of
$6,240,000 over the lease term, of which the Partnership's share is $1,329,744.
The General Partner is attempting to remarket the second McDonnell Douglas MD-82
aircraft, in which the Partnership holds an ownership interest. The lease term
associated with this aircraft expired in April 2001 and the aircraft is
currently off lease. The Partnership recognized operating lease revenue of
$83,981 and $190,388 related to this aircraft during the nine month periods
ended September 30, 2001 and 2000, respectively.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a second Boeing 737-2H4 aircraft. This aircraft had
been off lease from January 2000 through the date of the conditional sale in
October 2000. The title to the aircraft transfers to Royal Aviation Inc., at the
expiration of the lease term. The sale of the aircraft has been recorded by the
Partnership as a sales-type lease, with a lease term expiring in January 2002.
For the three and nine month periods ended September 30, 2001, the Partnership
recognized sales-type lease revenue of $3,668 and $11,004 respectively.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the equipment.
Interest income for the three and nine month periods ended September 30, 2001
was $34,777 and $215,658, respectively, compared to $144,890 and $361,020,
respectively, for the same periods in 2000. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and interest earned on the loans receivable
from Echelon Residential Holdings and Semele. The amount of future interest
income from short-term investments is expected to fluctuate as a result of
changing interest rates and the amount of cash available for investment, among
other factors.
Interest income during the nine months ended September 30, 2001 included
$110,502 earned on the loan receivable from Echelon Residential Holdings,
compared to $105,230 and $231,652, respectively, for the three and nine months
ended September 30, 2000. During the second quarter of 2001, the General
Partner determined that recoverability of the loan receivable had been impaired
and at June 30, 2001 recorded an impairment of $243,250, reflecting the General
Partner's current assessment of the amount of loss that is likely to be incurred
by the Partnership. In addition to the write-down recorded at June 30, 2001,
the Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $694,444 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
Interest income during the three and nine months ended September 30, 2001 and
2000 also included $11,588 and $34,385, respectively, earned on a note
receivable from Semele (see Note 7 to the financial statements herein).
During the three and nine month periods ended September 30, 2001, the
Partnership sold fully-depreciated equipment to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes
of $10,000 and $26,856, respectively. During the three and nine months ended
September 30, 2000, the Partnership sold equipment with an aggregate net book
value of $236,036 to existing lessees and third parties. These sales resulted
in a net gain, for financial statement purposes, of $71,209 and $93,209,
respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment will be
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. Consequently, the amount
of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.
Depreciation expense for the three and nine month periods ended September 30,
2001 was $147,201 and $441,604, respectively, compared to $155,374 and $482,228,
respectively, for the same periods in 2000. For financial reporting purposes,
to the extent that an asset is held on primary lease term, the Partnership
depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For the purposes of this policy, estimated residual values represent estimates
of equipment values at the date of 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.
During the nine months ended September 30, 2001, the Partnership also recorded a
write-down of equipment, representing an impairment to the carrying value of the
Partnership's interest in a McDonnell Douglas MD-82 aircraft returned in April
2001 and currently off lease. The resulting charge of $231,000 was based on a
comparison of estimated fair value and carrying value of the Partnership's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
For the three and nine month periods ended September 30, 2001, the Partnership
incurred interest expense of $37,132 and $103,567, respectively, compared to
$47,778 and $148,142, respectively, for the same periods in 2000. In the
future, interest expense will decline as the principal balance of notes payable
is reduced through the application of rent receipts to outstanding debt.
Management fees were $5,971 and $54,327, respectively, for the three and nine
month periods ended September 30, 2001 compared to $12,549 and $47,406,
respectively, for the same periods in 2000.
Operating expenses were $373,552 and $750,871 for the three and nine month
periods ended September 30, 2001 compared to $314,661 and $478,309,
respectively, for the same periods in 2000. During the nine months ended
September 30, 2001 operating expenses included approximately $84,000 related to
the Class Action Lawsuit discussed in Note 10 to the financial statements herein
and approximately $380,000 of remarketing and storage costs related to the
re-lease of an aircraft in June 2001 and storage of another aircraft which was
returned to the General Partner in April 2001, upon its lease term expiration.
Operating expenses during the nine months ended September 30, 2000 included
approximately $160,000 accrued for the Partnership's proportionate share of the
cost of a required D-check on a McDonnell Douglas aircraft currently off lease.
Other operating expenses include professional service costs, such as audit and
legal fees, as well as printing, distribution and remarketing expenses. In
certain cases, equipment storage or repairs and maintenance costs may be
incurred in connection with equipment being remarketed.
At March 31, 2001, the Partnership determined that the decline in the market
value of its Semele common stock was other than temporary. As a result, the
Partnership wrote down the cost of the Semele common stock to $3.3125 per share
(the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date
the stock traded closest to March 31, 2001), for a total realized loss in the
nine months ended September 30, 2001 of $16,962.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from asset rental transactions.
Accordingly, the Partnership's principal source of cash from operations is
provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $765,577 and $491,848 for the nine months ended September 30, 2001
and 2000, respectively. Future renewal, re-lease and equipment sale activities
will cause a decline in the Partnership's lease revenues and corresponding
sources of operating cash. Overall, expenses associated with rental activities,
such as management fees, and net cash flow from operating activities will
decline as the Partnership remarkets its assets. The Partnership, however, may
continue to incur significant costs to facilitate the successful remarketing of
its aircraft in the future. The loan to Echelon Residential Holdings and
accrued interest thereon is due in full at maturity on September 8, 2002.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the nine months
ended September 30, 2001 and 2000, the Partnership realized equipment sales
proceeds of $26,856 and $329,245, respectively. Future inflows of cash from
asset disposals will vary in timing and amount and will be influenced by many
factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
At September 30, 2001, the Partnership was due aggregate future minimum lease
payments of $2,304,978 from contractual operating and sales-type lease
agreements (see Note 3 to the financial statements), a portion of which will be
used to amortize the principal balance of notes payable of $1,942,811 (see Note
9 to the financial statements). At the expiration of the individual lease terms
underlying the Partnership's future minimum lease payments, the Partnership will
sell the equipment or enter re-lease or renewal agreements when considered
advantageous by the General Partner and EFG. Such future remarketing activities
will result in the realization of additional cash inflows in the form of
equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease
contracts, while others may elect to return the equipment. In the latter
instances, the equipment could be re-leased to another lessee or sold to a third
party.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 10 to the accompanying financial statements, the court
permitted the Partnership to invest in any new investment, including but not
limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $2,780,000 to a newly
formed real estate company, Echelon Residential Holdings, to finance the
acquisition of real estate assets by that company. Echelon Residential Holdings,
through a wholly owned subsidiary (Echelon Residential LLC), used the loan
proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships, representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an unrelated Florida-based
real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.
During the second quarter of 2001 the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $243,250, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and has ceased accruing
interest on its loan receivable from Echelon Residential Holdings, effective
April 1, 2001. The total impairment of $694,444 is recorded as write-down of
impaired loan and interest receivable in the accompanying Statement of
Operations for the nine months ended September 30, 2001.
The write-down was precipitated principally by a slowing U.S. economy and its
effects on the real estate development industry. The economic outlook for the
properties that existed when the loan was funded has deteriorated and inhibited
the ability of Echelon Residential Holdings' management to secure low-cost
sources of development capital, including but not limited to joint-venture or
equity partners. In response to these developments and lower risk tolerances in
the credit markets, the management of Echelon Residential Holdings decided in
the second quarter of 2001 to concentrate its prospective development activities
within the southeastern United States and, therefore, to dispose of development
sites located elsewhere. In May 2001, Echelon Residential Holdings closed its
Texas-based development office; and since the beginning of 2001, the company has
sold three of nine properties (two in July 2001 and one in October 2001). As of
November 2001, one additional property is under contract to be sold, subject to
due diligence that remains pending. As a result of these developments, the
General Partner does not believe that Echelon Residential Holdings will realize
the profit levels originally believed to be achievable from either selling these
properties as a group or developing all of them as multi-family residential
communities.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
general partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates and the court's statement in its order permitting New
Investments that all other provisions of the Partnership Agreements governing
the investment objectives and policies of the Partnership shall remain in full
force and effect. The court may require the partnerships to restructure or
divest the loan.
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 20,876 shares of Semele common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $459,729. The Semele Note
matures in April 2003 and bears an annual interest rate of 10% with mandatory
principal reductions prior to maturity, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele Note has been extended. Since the Semele Note was received as
consideration for the sale of the cargo vessels to an unaffiliated party and the
extension of the maturity of the Semele Note is documented in an amendment to
the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the general partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate in violation of the
Partnership Agreements and to be a violation of the court's order, in connection
with the settlement of the class action lawsuit discussed in Note 10 to the
financial statements, that authorized New Investments while providing that all
other provisions of the Partnership Agreements shall remain in full force and
effect.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", marketable equity securities classified as
available-for-sale are carried at fair value. At March 31, 2001, the
Partnership determined that the decline in the market value of its Semele common
stock was other-than-temporary. As a result, the Partnership wrote down the
cost of the Semele common stock resulting in a total realized loss in the nine
months ended September 30, 2001 of $16,962.
During the six months ended September 30, 2001, the Partnership decreased the
carrying value of its investment in Semele common stock based on the quoted
price of the Semele stock on the OTC Bulletin Board on the date the stock traded
closest to September 30, 2001, resulting in an unrealized loss of $12,526. This
loss was reported as a component of comprehensive loss included in the Statement
of Changes in Partners' Capital.
The Semele Note and the Semele common stock are subject to a number of risks
including, Semele's ability to make loan payments which is dependent upon the
liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998, the General Partner determined that the decline in
the market value of the stock was other than temporary and wrote down the
Partnership's investment. Again in the three months ended March 31, 2001, the
General Partner made the same determination and wrote down the Partnership's
investment. Subsequently, the market value of the Semele common stock has
fluctuated. The market value of the stock could decline in the future. Gary D.
Engle, President and Chief Executive Officer of EFG and a Director of the
General Partner is Chairman and Chief Executive Officer of Semele and James A.
Coyne, Executive Vice President of EFG is Semele's President and Chief Operating
Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of,
and own significant stock in, Semele.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities on
the accompanying Statement of Cash Flows. 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 the future, the amount of cash used will decline as the
principal balance of notes payable is reduced through the collection and
application of rents. In addition, the Partnership has a balloon payment
obligation as discussed below.
In February 2001, the Partnership and certain affiliated investment programs
(collectively the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to financing the Programs' total existing indebtedness and
accrued interest $4,758,845, the Programs received additional debt proceeds of
$3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $968,639 including $564,970 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $403,669 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft then on lease to
Finnair OY of $104,590 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a
fixed interest rate of 7.65%, principal is amortized monthly and Partnership has
a balloon payment obligation at the expiration of the lease term of $323,027 in
September 2004. In the nine months ended September 30, 2000, the Partnership
refinanced the indebtedness associated with the same aircraft and in addition to
refinancing the existing indebtedness, received additional proceeds of $160,856.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years (see Results of
Operations). The Reno Programs executed a debt agreement with a new lender
collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de
C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of
which the Partnership's share was $1,132,936. The Partnership used the new debt
proceeds and a portion of certain other receipts from Reno to repay the
outstanding balance of the existing indebtedness related to the aircraft of
$1,186,088 and accrued interest and fees of $17,670.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base consists of fewer revenue-producing assets that are available to
cover prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining assets. In particular, the Partnership
must contemplate the potential liquidity risks associated with its investment in
commercial jet aircraft. The management and remarketing of aircraft can
involve, among other things, significant costs and lengthy remarketing
initiatives. Although the Partnership's lessees are required to maintain the
aircraft during the period of lease contract, repair, maintenance, and/or
refurbishment costs at lease expiration can be substantial. For example, an
aircraft that is returned to the Partnership meeting minimum airworthiness
standards, such as flight hours or engine cycles, nonetheless may require heavy
maintenance in order to bring its engines, airframe and other hardware up to
standards that will permit its prospective use in commercial air transportation.
At September 30, 2001, the Partnership's equipment portfolio included ownership
interests in four commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. The remaining three aircraft in the Partnership's
portfolio already are Stage 3 compliant. Two of these aircraft have lease terms
expiring in September 2004 and June 2005, respectively, and the third aircraft
was returned to the General Partner upon its lease expiration in April 2001.
The General Partner is attempting to remarket this aircraft.
Recent changes in economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of the commercial jet aircraft. Currently, all of commercial jet
aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements except one McDonnell Douglas MD-82, which
was returned to the General Partner upon its lease expiration in April 2001.
The General Partner is attempting to remarket this aircraft.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is reported under financing activities on the
accompanying Statement of Cash Flows. No cash distributions were declared for
either of the nine month periods ended September 30, 2001 or 2000. In any given
year, it is possible that Limited Partners will be allocated taxable income in
excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions when paid to the Limited Partners generally consist of both a
return of and a return on capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 9 to the financial statements presented in the Partnership's 2000
Annual Report). For instance, selling commissions and organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes, but are recorded as a
reduction of partners' capital for financial reporting purposes. Therefore,
such differences are permanent differences between capital accounts for
financial reporting and federal income tax purposes. Other differences between
the bases of capital accounts for federal income tax and financial reporting
purposes occur due to timing differences. Such items consist of the cumulative
difference between income or loss for tax purposes and financial statement
income or loss and the treatment of unrealized gains or losses on investment
securities for book and tax purposes. The principal component of the cumulative
difference between financial statement income or loss and tax income or loss
results from different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at September 30, 2001. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance, which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
The outcome of the Class Action Lawsuit described in Note 10 to the accompanying
financial statements, will be the principal factor in determining the future of
the Partnership's operations. Commencing with the first quarter of 2000, the
General Partner suspended the payment of quarterly cash distributions pending
final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
settled or adjudicated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's notes payable bear interest rates of 7.03% and 7.65%, which
amortize monthly through September 2005. The fair market value of fixed
interest rate on debt may be adversely impacted due to a decrease in interest
rates. The effect of interest rate fluctuations on the Partnership for the nine
months ended September 30, 2001 was not material.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and earns interest at a fixed annual rate of 14% for the first 24 months
and a fixed annual rate of 18% for the last 6 months of the loan, with interest
due at maturity. The effect of interest rate fluctuations on the Partnership
for the nine months ended September 30, 2001 was not material.
------
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 10 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response: None
.
Item 6(b). Reports on Form 8-K
. Response: None
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: ls/ Michael J. Butterfield
-----------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: November 14, 2001
-------------------