UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________________ to ______________
________________________
For Quarter Ended March 31, 1998 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 |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes |_| No |_|
AMERICAN INCOME FUND I-C
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1998 and December 31, 1997 3
Statement of Operations
for the three months ended March 31, 1998 and 1997 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 1998 5
Statement of Cash Flows
for the three months ended March 31, 1998 and 1997 6
Notes to the Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
PART II. OTHER INFORMATION:
Items 1 - 6 17
2
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $ 2,810,747 $ 2,519,940
Rents receivable 367,336 246,877
Accounts receivable - affiliate 105,798 296,505
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 182,669 156,573
Equipment at cost, net of accumulated depreciation of
$8,554,304 and $8,365,735 at March 31, 1998
and December 31, 1997, respectively 8,141,030 8,463,244
------------ ------------
Total assets $ 12,067,309 $ 12,142,868
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 4,195,603 $ 4,401,753
Accrued interest 33,350 30,468
Accrued liabilities 10,871 9,200
Accrued liabilities - affiliate 17,482 28,925
Deferred rental income 58,942 25,384
Cash distributions payable to partners 158,577 158,577
------------ ------------
Total liabilities 4,474,825 4,654,307
------------ ------------
Partners' capital (deficit):
General Partner (502,915) (508,111)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 8,095,399 7,996,672
------------ ------------
Total partners' capital 7,592,484 7,488,561
------------ ------------
Total liabilities and partners' capital $ 12,067,309 $ 12,142,868
------------ ------------
------------ ------------
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 months ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---------- ----------
Income:
Lease revenue $ 637,860 $1,039,428
Interest income 35,887 16,479
Interest income - affiliate 11,493 --
Gain on sale of equipment 21,566 36,275
---------- ----------
Total income 706,806 1,092,182
---------- ----------
Expenses:
Depreciation 317,430 667,431
Interest expense 87,403 77,021
Equipment management fees - affiliate 29,054 40,542
Operating expenses - affiliate 36,515 26,178
---------- ----------
Total expenses 470,402 811,172
---------- ----------
Net income $ 236,404 $ 281,010
---------- ----------
---------- ----------
Net income
per limited partnership unit $ 0.28 $ 0.33
---------- ----------
---------- ----------
Cash distribution declared
per limited partnership unit $ 0.19 $ 0.25
---------- ----------
---------- ----------
The accompanying notes are an integral part
of these financial statements.
4
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL for the three
months ended March 31, 1998
(Unaudited)
General Limited Partners
Partner ----------------------
Amount Units Amount Total
----------- ---------- ----------- -----------
Balance at December 31, 1997 $ (508,111) 803,454.56 $ 7,996,672 $ 7,488,561
Net income 11,820 -- 224,584 236,404
Unrealized gain on investment
securities - affiliate 1,305 -- 24,791 26,096
----------- ---------- ----------- -----------
Comprehensive income 13,125 -- 249,375 262,500
----------- ---------- ----------- -----------
Cash distribution declared (7,929) -- (150,648) (158,577)
----------- ---------- ----------- -----------
Balance at March 31, 1998 $ (502,915) 803,454.56 $ 8,095,399 $ 7,592,484
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
The accompanying notes are an integral part
of these financial statements.
5
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from (used in) operating activities:
Net income $ 236,404 $ 281,010
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 317,430 667,431
Gain on sale of equipment (21,566) (36,275)
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable (120,459) 65,721
Accounts receivable - affiliate 190,707 (51,516)
Increase (decrease) in:
Accrued interest 2,882 (28,357)
Accrued liabilities 1,671 (4,250)
Accrued liabilities - affiliate (11,443) 17,336
Deferred rental income 33,558 (78,779)
----------- -----------
Net cash from operating activities 629,184 832,321
----------- -----------
Cash flows from investing activities:
Proceeds from equipment sales 26,350 78,300
----------- -----------
Net cash from investing activities 26,350 78,300
----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (206,150) (879,348)
Distributions paid (158,577) (211,436)
----------- -----------
Net cash used in financing activities (364,727) (1,090,784)
----------- -----------
Net increase (decrease) in cash and cash equivalents 290,807 (180,163)
Cash and cash equivalents at beginning of period 2,519,940 1,187,478
----------- -----------
Cash and cash equivalents at end of period $ 2,810,747 $ 1,007,315
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 84,521 $ 105,378
----------- -----------
----------- -----------
Supplemental disclosure of non-cash activity:
See Note 5 to the financial statements regarding the recognition of an
unrealized gain on the Partnership's investment securities - affiliate during
the three months ended March 31, 1998.
The accompanying notes are an integral part
of these financial statements.
6
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
March 31, 1998
(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 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1998 and December 31, 1997 and results of operations for
the three month periods ended March 31, 1998 and 1997 have been made and are
reflected.
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Partnership's net income or partner's
capital. Statement 130 requires unrealized gains or losses on the Partnership's
available-for-sale securities, which prior to adoption were reported separately
in partners' capital to be included in comprehensive income. During the first
quarter of 1998, total comprehensive income amounted to $262,500.
NOTE 2 - CASH
At March 31, 1998, the Partnership had $2,633,760 invested in federal
agency discount notes and in reverse repurchase agreements secured by U.S.
Treasury Bills or interest 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
$5,275,137 are due as follows:
For the year ending March 31, 1999 $ 1,824,273
2000 1,111,504
2001 761,554
2002 761,554
2003 652,861
Thereafter 163,391
-----------
Total $ 5,275,137
-----------
-----------
7
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March
31, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1997 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of Equis Financial Group Limited Partnership ("EFG"), the
acquisition cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------- ----------- ------------
Aircraft 16-57 $ 8,318,862
Materials handling 0-18 3,756,994
Trailers/intermodal
containers 57-63 1,982,184
Tractors & heavy duty
trucks 0 1,210,962
Retail store fixtures 12 517,488
Construction & mining 0-3 426,263
Motor vehicles 0-3 252,622
Research & test 0 116,406
Communications 0 51,469
Manufacturing 0 35,218
Computers & peripherals 0 26,866
-----------
Total equipment cost 16,695,334
Accumulated depreciation (8,554,304)
-----------
Equipment, net of accumulated depreciation $ 8,141,030
-----------
-----------
At March 31, 1998, the Partnership's equipment portfolio included
equipment having a proportionate original cost of $8,648,184, representing
approximately 52% of total equipment cost.
The summary above includes equipment held for sale or release with a cost
and net book value of approximately $70,000 and $1,000, respectively, at March
31, 1998. The General Partner is actively seeking the sale or re-lease of all
equipment not on lease. The summary above also includes equipment being leased
on a month-to-month basis.
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land
Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375.
Semele is a Delaware corporation organized on April 14, 1987 and has its common
stock listed on NASDAQ. At the date of the exchange transaction, the common
stock of Semele had a net book value of approximately $1.50 per share and
closing market value of
8
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
$1.00 per share. Semele has one principal real estate asset consisting of an
undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 33.85% beneficial
ownership interest in Dove Arrow, one of the three Vessels, the Partnership
received $430,187 in cash and became the beneficial owner of 208,764 shares of
Semele common stock (valued at $313,146 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$459,729. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu. The Partnership recognized interest income of $11,493 related to
the Semele Note during the three months ended March 31, 1998. The Partnership's
interest in the vessel had an original cost and net book value of $2,605,381 and
$1,180,755, respectively. The proceeds realized by the Partnership of $802,431
resulted in a net loss, for financial statement purposes, of $378,324. In
addition, as this vessel was disposed of prior to the expiration of the related
lease term, the Partnership received a prepayment of the remaining contracted
rent due under the vessel's lease agreement of $400,631.
Cash equal to the amount of the Semele Note was held in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele sought
consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in size of the Board to as many as nine members, provided
a majority of the Board shall consist of members independent of Semele, EFG or
any affiliate; and (ii) an amendment extending Semele's life to perpetual and
changing its name from Banyan Strategic Land Fund II. Contemporaneously with the
Consent being obtained, Semele declared a $0.20 per share dividend to be paid on
all shares, including those beneficially owned by the Partnership. A dividend of
$41,752 was paid to the Partnership on November 17, 1997. This dividend
represented a return of equity to the Partnership, which proportionately reduced
the Partnership's investment in Semele. Subsequent to the exchange transaction,
Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the
Board of Directors and appointed Chief Executive Officer of Semele and James A.
Coyne, Executive Vice President of EFG was appointed Semele's President and
Chief Operating Officer, and elected to the Board of Directors.
In accordance with the Financial Accounting Standard Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
marketable equity securities classified as available-for-sale are required to be
carried at fair value. During the three months ended March 31, 1998, the
Partnership increased the carrying value of its investment in Semele common
stock to $0.875 per share (the quoted price of the Semele stock on NASDAQ at
March 31, 1998) resulting in an unrealized gain in 1998 of $26,096. This gain
was reported as a component of comprehensive income, included in partners'
capital.
9
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 6 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the three month periods ended
March 31, 1998 and 1997 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
1998 1997
------- -------
Equipment management fees $29,054 $40,542
Administrative charges 17,013 10,074
Reimbursable operating expenses
due to third parties 19,502 16,104
------- -------
Total $65,569 $66,720
------- -------
------- -------
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At March 31, 1998, the Partnership was owed $105,798 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in April
1998.
NOTE 7 - NOTES PAYABLE
Notes payable at March 31, 1998 consisted of installment notes of $4,195,603
payable to banks and institutional lenders. The installment notes bear interest
rates ranging between 8.65% and 8.89%, except one note which bears a fluctuating
interest rate based on LIBOR plus a margin (5.63% at March 31, 1998). All of the
installment notes are non-recourse and are collateralized by the equipment and
assignment of the related lease payments. Generally, the installment notes will
be fully amortized by noncancellable rents. However, the Partnership has balloon
payment obligations at the expiration of the respective primary lease terms
related to aircraft leased by Finnair OY and Reno Air of $1,127,840 and
$679,276, respectively. The carrying value of notes payable approximates fair
value at March 31, 1998.
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 1999 $ 1,039,070
2000 1,671,633
2001 290,548
2002 314,211
2003 880,141
-----------
Total $ 4,195,603
-----------
-----------
NOTE 8 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed
a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of
10
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative
action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited
Partnership, et al., in the Superior Court of the Commonwealth of Massachusetts
on behalf of the Nominal Defendants against the Defendants. Both actions are
referred to herein collectively as the "Class Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
partners (or beneficiaries, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants.
With respect to the Partnership and 10 affiliated partnerships (hereafter
referred to as the "Exchange Partnerships"), the Memorandum of Understanding
provides for the restructuring of their respective business operations into a
single successor company whose securities would be listed and traded on a
national stock exchange. The partners of the Exchange Partnerships would receive
both common stock in the new company and a cash distribution in exchange for
their existing partnership interests. Such a transaction would, among other
things, allow for the consolidation of the Partnership's operating expenses with
other similarly-organized equipment leasing programs. To the extent that the
parties agree upon a Stipulation of Settlement that is approved by the Court,
the complete terms thereof will be communicated to all of the partners (or
beneficiaries) of the Nominal Defendants to enable them to vote thereon.
There can be no assurance that the parties will agree upon a Stipulation
of Settlement, or that it will be approved by the Court, or that the outcome of
the voting by the partners (or beneficiaries) of the Nominal Defendants,
including the Partnership, will result in a settlement finally being effected or
in the Partnership being included in any such settlement. The General Partner
and its affiliates, in consultation with counsel, concur that there is a
reasonable basis to believe that a Stipulation of Settlement will be agreed upon
by the parties and approved by the Court. In the absence of a Stipulation of
Settlement approved by the Court, the Defendants intend to defend vigorously
against the claims asserted in the Class Action Lawsuit. The General Partner and
its affiliates cannot predict with any degree of certainty the ultimate outcome
of such litigation.
On July 27, 1995, EFG, on behalf of the Partnership and other
EFG-sponsored investment programs, filed an action in the Commonwealth of
Massachusetts Superior Court Department of the Trial Court in and for the County
of Suffolk, for damages and declaratory relief against a lessee of the
Partnership, National Steel Corporation ("National Steel"), under a certain
Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is
seeking the reimbursement by National Steel of certain sales and/or use taxes
paid to the State of Illinois and other remedies provided by the MLA. On August
30, 1995, National Steel filed a Notice of Removal which removed the case to the
United States District Court, District of Massachusetts. On September 7, 1995,
National Steel filed its Answer to EFG's Complaint along with Affirmative
Defenses and Counterclaims, seeking declaratory relief and alleging breach of
contract, implied covenant of good faith and fair dealing and specific
performance. EFG filed its Answer to these counterclaims on September 29, 1995.
Though the parties discussed settlement with respect to this matter for some
time, the negotiations were unsuccessful. Notwithstanding these discussions, EFG
recently filed an Amended and Supplemental Complaint alleging further default
under the MLA and EFG
11
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
recently filed a motion for Summary Judgment on all claims and counterclaims.
The Court held a hearing on EFG's motion in December 1997 and the Court recently
entered a decision dismissing certain of National Steel's counterclaims and
finding in favor of EFG on certain issues and in favor of National Steel on
other issues. The Partnership does not anticipate that it will experience any
material losses as a result of this action.
12
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.
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 important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 8 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") to collect all rents due
under the attendant lease agreements and successfully remarket the Partnership's
equipment upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.
Three months ended March 31, 1998 compared to the three months ended March 31,
1997:
Overview
The Partnership was organized in 1991 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The value of the Partnership's equipment
portfolio decreases over time due to depreciation resulting from age and usage
of the equipment, as well as technological changes and other market factors. In
addition, the Partnership does not replace equipment as it is sold; therefore,
its aggregate investment value in equipment declines from asset disposals
occurring in the normal course. The Partnership's stated investment objectives
and policies contemplated that the Partnership would wind-up its operations
within approximately seven years of its inception. Presently, the Partnership is
a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action
Lawsuit could alter the nature of the Partnership's organization and its future
business operations. See Note 8 to the accompanying financial statements.
Results of Operations
For the three months ended March 31, 1998, the Partnership recognized
lease revenue of $637,860 compared to $1,039,428 for the same period in 1997.
The decrease in lease revenue from 1997 to 1998 reflects the effects of primary
lease term expirations, the sale of equipment and the exchange in the second
quarter of 1997 of the Partnership's interest in a vessel in the second quarter
of 1997 for consideration consisting of newly issued shares of common stock in
Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele"), a note
receivable from Semele and cash (see Note 5 to the financial statements herein).
During the three months ended March 31, 1997, the Partnership recognized lease
revenue of $136,093 related to this vessel. In the future, lease revenue will
continue to decline due to primary and renewal lease term expirations and the
sale of equipment.
13
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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 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.
Interest income for the three months ended March 31, 1998 was $47,380
compared to $16,479 for the same period in 1997. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income in 1998 included $11,493
earned on the note receivable from Semele. The amount of future interest income
is expected to fluctuate in relation to prevailing interest rates, the
collection of lease revenue, and the proceeds from equipment sales.
During the three months ended March 31, 1998, the Partnership sold
equipment having a net book value of $4,784 to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes,
of $21,566 compared to a net gain in 1997 of $36,275 on equipment having a net
book value of $42,025.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of 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 months ended March 31, 1998 was
$317,430 compared to $667,431 for the same period in 1997. 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 $87,403 or 13.7% of lease revenue for the three
months ended March 31, 1998 compared to $77,021 or 7.4% of lease revenue for the
same period in 1997. The increase in interest expense from 1997 to 1998 reflects
an underaccrual during the three months ended March 31, 1997. Interest expense
in future periods will 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.
14
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
Management fees were approximately 4.6% of lease revenue for the three
months ended March 31, 1998, compared to approximately 3.9% of lease revenue
during the same period in 1997. 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. The increase in operating expenses from 1997 to 1998 is attributable
principally to an increase in administrative charges and professional service
costs. 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.
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 $629,184 and $832,321 for the three
months ended March 31, 1998 and 1997, respectively. Future renewal, re-lease and
equipment sale activities will cause a decline in the Partnership's lease
revenue and corresponding sources of operating cash. Overall, expenses
associated with rental activities, such as management fees, and net cash flow
from operating activities will also continue to decline as the Partnership
experiences a higher frequency of remarketing events.
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 realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 1998, the Partnership realized $26,350 in equipment sale
proceeds compared to $78,300 for the same period in 1997. Future inflows of cash
from asset disposals will vary in timing and amount and will be influenced by
many factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
In accordance with the Financial Accounting Standard Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
marketable equity securities classified as available-for-sale are required to be
carried at fair value. During the three months ended March 31, 1998, the
Partnership increased the carrying value of its investment in Semele common
stock to $0.875 per share (the quoted price of the Semele stock on NASDAQ at
March 31, 1998) resulting in an unrealized gain in 1998 of $26,096. This gain
was reported as a component of comprehensive income, included in partners'
capital. The General Partner believes that the underlying tangible assets of
Semele, particularly the Rancho Malibu property, can be sold or developed on a
tax free basis due to Semele's net operating loss carryforwards and can provide
an attractive economic return to the Partnership.
15
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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 the near term, the amount of cash used to repay debt
obligations is expected to be consistent with the quarter ended March 31, 1998.
Subsequently, the amount of such repayments is scheduled to 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 aircraft
leased by Finnair OY and Reno Air, Inc. of $1,127,840 and $679,276,
respectively.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the three months ended March 31, 1998, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $158,577. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership, the Limited Partners
were allocated 95% of these distributions, or $150,648, and the General Partner
was allocated 5%, or $7,929. The first quarter 1998 cash distribution was paid
on April 14, 1998.
Cash distributions paid to the Limited Partners consist of both a return
of and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG 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, as well as the outcome of the Class Action Lawsuit described in Note
8 to the accompanying financial statements. The General Partner anticipates that
cash proceeds resulting from the collection of contractual rents and the outcome
of residual activities 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 are anticipated.
16
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 to the financial statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
17
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: May 15, 1998
------------------------------------------
By: /s/ Gary Romano
------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1998
------------------------------------------