UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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-------------------------
For Quarter Ended June 30, 1996 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.)
98 North Washington Street, Boston, MA 02114
- ---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No
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AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
Page
-----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1996 and December 31, 1995 3
Statement of Operations for the three and six
months ended June 30, 1996 and 1995 4
Statement of Cash Flows for the six months ended
June 30, 1996 and 1995 5
Notes to the Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II. OTHER INFORMATION:
Items 1 - 6 16
2
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
------------- ------------
ASSETS
- -------
Cash and cash equivalents $ 538,434 $ 799,133
Contractual right for equipment -- 1,562,463
Rents receivable 847,697 716,657
Accounts receivable - affiliate 116,452 13,652
Note receivable - affiliate 210,144 210,144
Equipment at cost, net of accumulated
depreciation of $13,851,679 and
$13,427,155 at June 30, 1996 and
December 31, 1995, respectively 13,641,070 9,384,501
Organization costs, net of accumulated
amortization of $4,750 and $4,250 at
June 30, 1996 and December 31, 1995,
respectively 250 750
----------- -----------
Total assets $15,354,047 $12,687,300
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 7,805,894 $ 4,574,713
Accrued interest 88,277 42,509
Accrued liabilities 152,072 157,002
Accrued liabilities - affiliate 15,538 23,344
Deferred rental income 129,536 140,519
Cash distributions payable to partners 317,154 317,154
----------- -----------
Total liabilities 8,508,471 5,255,241
----------- -----------
Partners' capital (deficit):
General Partner (540,260) (510,936)
Limited Partnership Interests
(803,454.56 Units; initial purchase
price of $25 each) 7,385,836 7,942,995
----------- -----------
Total partners' capital 6,845,576 7,432,059
----------- -----------
Total liabilities and
partners' capital $15,354,047 $12,687,300
=========== ===========
The accompanying notes are an integral part
of these financial statements.
3
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
-------------- --------------- ----------- ------------
Income:
Lease revenue $1,029,011 $1,185,656 $2,017,538 $2,425,386
Interest income 11,008 14,532 66,061 27,855
Interest income - affiliate 4,610 7,168 9,220 17,042
Gain (loss) on sale of equipment 89,228 (18,710) 150,874 (26,059)
---------- ---------- ---------- ----------
Total income 1,133,857 1,188,646 2,243,693 2,444,224
---------- ---------- ---------- ----------
Expenses:
Depreciation and amortization 862,406 979,230 1,779,060 2,042,039
Interest expense 168,273 84,183 263,288 183,510
Equipment management fees
- affiliate 32,684 36,231 62,819 75,314
Operating expenses - affiliate 61,742 33,813 90,701 74,670
---------- ---------- ---------- ----------
Total expenses 1,125,105 1,133,457 2,195,868 2,375,533
---------- ---------- ---------- ----------
Net income $ 8,752 $ 55,189 $ 47,825 $ 68,691
========== ========== ========== ==========
Net income
per limited partnership unit $ 0.01 $ 0.07 $ 0.06 $ 0.08
========== ========== ========== ==========
Cash distributions declared
per limited partnership unit $ 0.37 $ 0.63 $ 0.75 $ 1.25
========== ========== ========== ==========
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Cash flows from (used in) operating
activities: $ 47,825 $ 68,691
Net income
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,779,060 2,042,039
(Gain) loss on sale of equipment (150,874) 26,059
Changes in assets and liabilities
Decrease (increase) in:
rents receivable (131,040) 174,200
accounts receivable - affiliate (102,800) (60,181)
note receivable - affiliate -- 118,919
Increase (decrease) in:
accrued interest 45,768 (37,880)
accrued liabilities (4,930) 14,960
accrued liabilities - affiliate (7,806) (6,432)
deferred rental income (10,983) (31,132)
----------- -----------
Net cash from operating
activities 1,464,220 2,309,243
----------- -----------
Cash flows from (used in) investing
activities:
Purchase of equipment (43,297) --
Proceeds from equipment sales 333,550 258,892
----------- -----------
Net cash from investing
activities 290,253 258,892
----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (1,380,864) (1,668,951)
Distributions paid (634,308) (1,057,178)
----------- -----------
Net cash used in financing
activities (2,015,172) (2,726,129)
----------- -----------
Net decrease in cash and cash
equivalents (260,699) (157,994)
----------- -----------
Cash and cash equivalents at beginning
of period 799,133 1,113,814
----------- -----------
Cash and cash equivalents at end of
period $ 538,434 $ 955,820
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 217,520 $ 221,390
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
See Notes 4 and 5 to the financial statements.
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
June 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the 1995 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995 and results of operations for
the three and six month periods ended June 30, 1996 and 1995 have been made and
are reflected.
NOTE 2 - CASH
- -------------
The Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. The reverse repurchase
agreements are secured by U.S. Treasury Bills or interests in U.S. Government
securities.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$10,215,664 are due as follows:
For the year ending June 30, 1997 $ 3,152,504
1998 2,336,152
1999 1,572,570
2000 1,002,878
2001 761,798
Thereafter 1,389,762
------------
Total $10,215,664
============
In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the existing
lessee, United Air Lines, Inc., pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes (See Note 4 herein). In November
1995, the Partnership partially replaced the United Aircraft with a 14.35%
interest in three Boeing 737-2H4 aircraft leased to Southwest Airlines, Inc.
(the "Southwest Aircraft"). The Partnership will receive approximately
6
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
$413,000 of rental revenue in each of the years in the period ending June 30,
1999, and approximately $241,000 in the year ending June 30, 2000, pursuant to
the Southwest Aircraft lease agreement.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with the acquisitions of an 11.87% interest in two McDonnell-
Douglas MD-82 Aircraft leased by Finnair OY (the "Finnair Aircraft") and a
21.31% ownership interest in a McDonnell-Douglas MD-87 aircraft leased by Reno
Air, Inc. (the "Reno Aircraft"). The Partnership will receive approximately
$511,000 of rental revenue in each of the years in the period ending June 30,
1998, and approximately $378,000 in the year ending June 30, 1999, pursuant to
the Finnair Aircraft lease agreement. With respect to the Reno Aircraft lease
agreement, the Partnership will receive approximately $381,000 of rental revenue
in each of the years in the period ending June 30, 2002 and approximately
$191,000 in the year ending June 30, 2003. Pursuant to the Reno Aircraft lease
agreement, rents are adjusted monthly for changes of the London Inter-Bank
Offered Rate ("LIBOR"). Future rents reported above reflect the most recent
LIBOR effected rental payment.
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at June 30,
1996. In the opinion of American Finance Group ("AFG"), the acquisition cost of
the equipment did not exceed its fair market value.
Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------- ------------- ------------
Aircraft 39-81 $ 8,318,862
Materials handling 4-60 6,482,602
Trailers/intermodal containers 66-99 3,588,755
Vessels 72 2,605,381
Tractors & heavy duty trucks 3-78 1,945,458
Furniture & fixtures 90 1,914,145
Construction & mining 36-60 762,152
Retail store fixtures 48 517,488
Motor vehicles 48-60 471,845
Computers & peripherals 6-37 377,025
Communications 12-60 295,245
Research & test 24 116,406
Graphic printing & display 36 62,167
Manufacturing 72 35,218
-------------
Total equipment cost 27,492,749
Accumulated depreciation (13,851,679)
-------------
Equipment, net of accumulated depreciation $ 13,641,070
=============
In September 1995, the Partnership transferred its 33.07% ownership interest
in the United Aircraft, pursuant to the rules of a like-kind exchange for income
tax reporting purposes (See Note 3 herein). In November 1995, the Partnership
partially replaced the United Aircraft with a 14.35% interest in the Southwest
7
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
Aircraft, at an aggregate cost of $2,101,054. To acquire the interests in the
Southwest Aircraft, the Partnership obtained financing of $1,567,878 from a
third-party lender and utilized $533,176 of the cash consideration received from
the transfer of the United Aircraft. The remaining ownership interest of 85.65%
in the Southwest Aircraft is held by affiliated equipment leasing programs
sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with the acquisitions of an 11.87% ownership interest in the
Finnair Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total
cost of $3,322,913 and $2,894,892, respectively. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $1,110,980 in cash and
obtained financing of $2,211,933 from a third-party lender. To acquire the
ownership interest in the Reno Aircraft, the Partnership paid $494,780 in cash
and obtained financing of $2,400,112 from a third-party lender. The remaining
ownership interests of 88.13% and 78.69% in the Finnair Aircraft and Reno
Aircraft, respectively, are held by affiliated equipment leasing programs
sponsored by AFG.
During the three months ended March 31, 1996, the Partnership transferred its
ownership interest in certain trailers, previously leased to The Atchison Topeka
and Santa Fe Railroad to a third party for cash consideration of $26,250. The
trailers had an aggregate net book value of $21,694 at the date of transfer
resulting in a net gain, for financial statement purposes, of $4,556. The gain
was deferred in anticipation of completing a like-kind exchange during the three
months ended June 30, 1996. The Partnership intended to replace these trailers
with comparable trailers and lease such equipment to a new lessee. The
Partnership had accounted for this transaction as a like-kind exchange for
income tax reporting purposes. Accordingly, the net cash consideration of
$26,250 was deposited in a special-purpose escrow account through a third-party
Exchange Agent pending completion of the equipment exchange. During the three
months ended June 30, 1996, the Partnership elected not to replace the trailers
and, accordingly, the deferred gain of $4,556 was recognized as Gain on Sale of
Equipment on the Statement of Operations for the three months ended June 30,
1996. In addition, the cash consideration of $26,250, which was reported as
Contractual Right for Equipment on the Statement of Financial Position at March
31, 1996, was recognized as proceeds from equipment sales.
At June 30, 1996, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $13,431,527, representing approximately
49% of total equipment cost.
The summary above includes equipment held for sale or release with a cost and
net book value of approximately $2,216,000 and $220,000, respectively, at June
30, 1996. The General Partner is actively seeking the sale or re-lease of all
equipment not on lease.
NOTE 5 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by AFG on behalf
of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the six month periods ended
June 30, 1996 and 1995 which were paid or accrued by the Partnership to AFG or
its Affiliates, are as follows:
8
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
1996 1995
--------- ---------
Equipment management fees $ 62,819 $ 75,314
Administrative charges 10,500 10,500
Reimbursable operating expenses
due to third parties 80,201 64,170
-------- --------
Total $153,520 $149,984
======== ========
In 1991, the Partnership acquired 900 intermodal cargo containers, at a cost
of $1,840,140, and leased such containers to ICCU Containers, S.p.A. ("ICCU"),
an affiliate of Clou Investments (U.S.A.), Inc. ("CLOU"), which formerly owned a
minority interest in AFG Holdings Illinois Limited Partnership. The ability of
ICCU to fulfill all of its obligations under the lease contract deteriorated, in
AFG's view, in 1994. As a result, AFG, on the Partnership's behalf, began
negotiations with other parties to either assume the lease obligations of ICCU
or acquire the containers. As a result of these negotiations, the Partnership
transferred 740 containers, having a net book value of $756,501, to a third
party on November 30, 1994. The Partnership received, as settlement from ICCU
and the third party, consideration as follows: (i) a contractual right to
receive comparable containers with an estimated fair market value of $852,207
and (ii) beneficial assignment of an existing AFG note payable to CLOU which had
a principal balance of $370,264 at the date of the transaction. The note has an
effective interest rate of 8% and matures on December 31, 1996. AFG will pay
all of the note balance plus interest directly to the Partnership according to
the original amortization schedule. A portion of the consideration received was
used to satisfy the Partnership's accounts receivable balance of $183,128
outstanding from ICCU at November 30, 1994.
An additional 158 containers, having a net book value of $161,523, were
pending settlement at December 31, 1994. On March 31, 1995, 82 of these
containers, having a net book value of $77,841 were transferred to the third
party and the Partnership received $92,551 as consideration for these
containers. The remaining 76 containers, having a net book value of $44,397,
represent less than 1% of the Partnership's equipment portfolio at June 30,
1996. The remaining two containers of the original equipment group were disposed
of in 1992 for stipulated payments as a result of casualty events.
By April 1995, the Partnership had replaced 822 of the original containers
with comparable containers and leased such containers to a new lessee pursuant
to the rules for completing a like-kind exchange for income tax reporting
purposes. The carrying value of the new containers, $1,958,040, was reduced by
$282,842, representing the amount of gain deferred on the original containers
and $14,710, the amount of gain deferred on the 82 containers settled during
1995. The Partnership obtained approximately $925,000 of long-term financing in
connection with the replacement containers.
All rents and proceeds from the sale of equipment are paid directly to either
AFG or to a lender. AFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At June
30, 1996, the Partnership was owed $116,452 by AFG for such funds and the
interest thereon. These funds were remitted to the Partnership in July 1996.
9
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 6 - NOTES PAYABLE
- ----------------------
Notes payable at June 30, 1996 consisted of installment notes of $7,805,894
payable to banks and institutional lenders. The installment notes bear interest
rates ranging between 7.04% and 10.65%, except one note which bears a
fluctuating interest rate based on LIBOR plus a margin (5.5% at June 30, 1996).
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. The
carrying value of notes payable approximates fair value at June 30, 1996.
The annual maturities of the installment notes payable are as follows:
For the year ending June 30, 1997 $1,905,197
1998 1,125,411
1999 2,163,321
2000 618,568
2001 454,293
Thereafter 1,539,104
-----------
Total $7,805,894
===========
10
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.
- --------------
Three and six months ended June 30, 1996 compared to the three and six months
- -----------------------------------------------------------------------------
ended June 30, 1995:
- --------------------
Overview
- --------
As an equipment leasing partnership, the Partnership was organized to acquire
a diversified portfolio of capital equipment subject to lease agreements with
third parties. The Partnership was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations
phase, a period of approximately six years, all equipment in the Partnership's
portfolio will progress through various stages. Initially, all equipment will
generate rental revenue under primary term lease agreements. During the life of
the Partnership, these agreements will expire on an intermittent basis and
equipment held pursuant to the related leases will be renewed, re-leased or
sold, depending on prevailing market conditions and the assessment of such
conditions by AFG to obtain the most advantageous economic benefit. Over time,
a greater portion of the Partnership's original equipment portfolio will become
available for remarketing and cash generated from operations and from sales or
refinancings will begin to fluctuate. Ultimately, all equipment will be sold
and the Partnership will be dissolved. The Partnership's operations commenced
in 1991.
Results of Operations
- ---------------------
For the three and six months ended June 30, 1996, the Partnership recognized
lease revenue of $1,029,011 and $2,017,538, respectively, compared to $1,185,656
and $2,425,386 for the same periods in 1995. The decrease in lease revenue from
1995 to 1996 reflects the effects of primary lease term expirations and a
temporary decline in aircraft lease revenues associated with the Partnership's
aircraft exchange (discussed below) which was concluded late in the first
quarter of 1996. As a result of this exchange, the Partnership replaced its
ownership interest in a Boeing 747-SP, having aggregate quarterly lease revenues
of $213,302, 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 $326,498. The Finnair
Aircraft and the Reno Aircraft were exchanged into the Partnership on March 25
and March 26, 1996, respectively. Accordingly, revenue for the six month period
ended June 30, 1996 reflects only a portion of the rents ultimately anticipated
from the like-kind exchange.
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 AFG or an affiliated equipment leasing program
sponsored by AFG. Proportionate equipment ownership enables the Partnership to
further diversify its equipment portfolio by participating in the ownership of
selected assets, thereby reducing the general levels of risk which could result
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.
For the three and six months ended June 30, 1996, the Partnership earned
interest income of $11,008 and $66,061, respectively, compared to $14,532 and
$27,855 for the same periods in 1995. Interest income is typically generated
from temporary investment of rental receipts and equipment sales proceeds in
short-term instruments. The overall increase in interest income in 1996 compared
to the same period in 1995 is a
11
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
result of interest of $44,994 earned on cash held in a special-purpose escrow
account in connection with the like-kind exchange transactions, discussed below.
During the three and six months ended June 30, 1996, the Partnership also earned
interest income of $4,610 and $9,220, respectively, on a note receivable from
AFG resulting from the settlement with ICCU Containers S.p.A. (See Note 5 to the
financial statements), compared to $7,168 and $17,042 for the same periods in
1995. 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.
For the three months ended June 30, 1996, the Partnership sold equipment
having a net book value of $87,628 to existing lessees and third parties. These
sales resulted in a net gain for financial statement purposes, of $84,672
compared to a net loss of $18,710 on equipment having a net book value of
$69,710 for the same period in 1995.
For the six months ended June 30, 1996, the Partnership sold equipment having
a net book value of $160,982 to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $146,318 compared
to a net loss of $26,059 on equipment having a net book value of $284,951 for
the same period in 1995.
In September 1995, the Partnership transferred its 33.07% ownership interest
in the United Aircraft, pursuant to the rules of a like-kind exchange for income
tax reporting purposes (See Note 3 to the financial statements). In November
1995, the Partnership partially replaced the United Aircraft with a 14.35%
interest in the Southwest Aircraft, at an aggregate cost of $2,101,054. To
acquire the interests in the Southwest Aircraft, the Partnership obtained
financing of $1,567,878 from a third-party lender and utilized $533,176 of the
cash consideration received from the transfer of the United Aircraft. The
remaining ownership interest of 85.65% in the Southwest Aircraft is held by
affiliated equipment leasing programs sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with the acquisitions of an 11.87% ownership interest in the
Finnair Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total
cost to the Partnership of $3,322,913 and $2,894,892, respectively. To acquire
the ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980
in cash and obtained financing of $2,211,933 from a third-party lender. To
acquire the ownership interest in the Reno Aircraft, the Partnership paid
$494,780 in cash and obtained financing of $2,400,112 from a third-party lender.
The remaining ownership interests of 88.13% and 78.69% of the Finnair Aircraft
and Reno Aircraft, respectively, are held by affiliated equipment leasing
programs sponsored by AFG.
During the three months ended March 31, 1996, the Partnership transferred its
ownership interest in trailers previously leased to The Atchison Topeka and
Santa Fe Railroad. The Partnership intended to replace the trailers with
comparable trailers and account for the transaction as a like-kind exchange for
income tax reporting purposes. A gain of $4,556 was deferred in anticipation of
completing the exchange during the three months ended June 30, 1996. During the
three months ended June 30, 1996, the Partnership elected not to replace the
trailers and, accordingly, the deferred gain of $4,556 was recognized as Gain on
Sale of Equipment on the Statement of Operations for the three months ended June
30, 1996. In addition, the cash consideration of $26,250, which was reported as
Contractual Right for Equipment on the Statement of Financial Position at March
31, 1996, was recognized as proceeds from equipment sales. See Note 4 to the
financial statements for additional discussion of this transaction.
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
12
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 AFG'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. AFG 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 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 and amortization expense for the three and six months ended June
30, 1996 was $862,406 and $1,779,060, respectively, compared to $979,230 and
$2,042,039 for the same periods in 1995. 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 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.
Interest expense was $168,273 and $263,288, or 16.4% and 13.1% of lease
revenue for the three and six months ended June 30, 1996, respectively, compared
to $84,183 and $183,510 or 7.1% and 7.6% of lease revenue for the same periods
in 1995. The increase in interest expense in 1996 compared to 1995 was due
primarily to interest incurred in connection with the leveraging obtained to
finance the like-kind exchange transactions, discussed above. Interest expense
in future periods is expected to decline in amount and as a percentage of lease
revenue as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt.
Management fees were approximately 3.2% and 3.1% of lease revenue for the
three and six months ended June 30, 1996, respectively, compared to 3.1% of
lease revenue for each of the same periods in 1995. Management fees are based
on 5% of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges, 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.
Collectively, operating expenses represented 6% and 4.5% of lease revenue for
the three and six months ended June 30, 1996, respectively, compared to 2.9% and
3.1% of lease revenue for the same periods in 1995. The increase in operating
expenses from 1995 to 1996 is due principally to costs incurred in connection
with the like-kind exchange transactions, discussed above. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a
partnership. Other fluctuations typically occur in relation to the volume and
timing of remarketing activities.
13
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". 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 $1,464,220 and $ 2,309,243 for the six
months ended June 30, 1996 and 1995, respectively. Future renewal, re-lease and
equipment sale activities will cause a gradual 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 continue to decline as the Partnership
experiences a higher frequency of remarketing events.
Ultimately, the Partnership will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash expended for equipment acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During the six months ended June 30, 1996, the
Partnership expended $43,297 in cash in connection with the like-kind exchange
transactions referred to above. For the six months ended June 30, 1996, the
Partnership realized $333,550 in equipment sale proceeds compared to $258,892
for the same period in 1995. 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.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In future periods, the amount of cash used to repay
debt obligations will decline as the principal balance of notes payable is
reduced through the collection and application of rents. However, the
Partnership has balloon payment obligations at the expiration of the respective
primary lease terms related to the Finnair Aircraft and Reno Aircraft.
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 six months ended June 30, 1996, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $634,308. In accordance with the Amended
and Restated Agreement and Certificate of Limited Partnership, the Limited
Partners were allocated 95% of these distributions, or $602,593, and the General
Partner was allocated 5%, or $31,715. The second quarter 1996 cash distribution
was paid on July 15, 1996.
14
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of 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. Future market conditions, technological changes, the ability
of AFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.
15
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
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
16
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated, a Massachusetts
corporation and the General Partner of
the Registrant.
By: /s/ Michael J. Butterfield
----------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: August 14, 1996
--------------------------------------------
By: /s/ Gary M. Romano
----------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1996
--------------------------------------------
17