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, 1998
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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, 1998 Commission File No. 0-20031
American Income Fund I-C, a Massachusetts Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3077437
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(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
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1998 and December 31, 1997 3
Statement of Operations
for the three and six months ended June 30, 1998 and 1997 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 1998 5
Statement of Cash Flows
for the six months ended June 30, 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 13-17
PART II. OTHER INFORMATION:
Items 1 - 6 18
2
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1998 and December 31, 1997
(Unaudited)
June 30, December 31,
1998 1997
------------ -------------
ASSETS
Cash and cash equivalents $ 2,949,152 $ 2,519,940
Rents receivable 296,751 246,877
Accounts receivable - affiliate 150,994 296,505
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 169,621 156,573
Equipment at cost, net of accumulated depreciation
of $8,734,997 and $8,365,735 at June 30, 1998
and December 31, 1997, respectively 7,862,837 8,463,244
------------ ------------
Total assets $ 11,889,084 $ 12,142,868
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,985,317 $ 4,401,753
Accrued interest 35,495 30,468
Accrued liabilities 268,066 9,200
Accrued liabilities - affiliate 3,120 28,925
Deferred rental income 57,544 25,384
Cash distributions payable to partners 158,577 158,577
------------ ------------
Total liabilities 4,508,119 4,654,307
------------ ------------
Partners' capital (deficit):
General Partner (513,492) (508,111)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 7,894,457 7,996,672
------------ ------------
Total partners' capital 7,380,965 7,488,561
------------ ------------
Total liabilities and partners' capital $ 11,889,084 $ 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 and six months ended June 30, 1998 and 1997
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Income:
Lease revenue $ 622,209 $ 1,221,576 $ 1,260,069 $ 2,261,004
Interest income 35,924 9,138 71,811 25,617
Interest income - affiliate 11,678 -- 23,171 --
Gain on sale of equipment 20,709 7,438 42,275 43,713
Loss on exchange of equipment -- (378,324) -- (378,324)
----------- ----------- ----------- -----------
Total income 690,520 859,828 1,397,326 1,952,010
----------- ----------- ----------- -----------
Expenses:
Depreciation 275,298 596,009 592,728 1,263,440
Interest expense 82,377 119,977 169,780 196,998
Equipment management fees
- affiliate 28,919 42,816 57,973 83,358
Operating expenses - affiliate 343,820 58,300 380,335 84,478
----------- ----------- ----------- -----------
Total expenses 730,414 817,102 1,200,816 1,628,274
----------- ----------- ----------- -----------
Net income (loss) $ (39,894) $ 42,726 $ 196,510 $ 323,736
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss)
per limited partnership unit $ (0.05) $ 0.05 $ 0.23 $ 0.38
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash distributions declared
per limited partnership unit $ 0.19 $ 0.25 $ 0.38 $ 0.50
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 six months ended June 30, 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 9,825 -- 186,685 196,510
Unrealized gain on investment
securities - affiliate 652 -- 12,396 13,048
----------- ---------- ----------- -----------
Comprehensive income 10,477 -- 199,081 209,558
----------- ---------- ----------- -----------
Cash distributions declared (15,858) -- (301,296) (317,154)
----------- ---------- ----------- -----------
Balance at June 30, 1998 $ (513,492) 803,454.56 $ 7,894,457 $ 7,380,965
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
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 six months ended June 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
Cash flows from (used in) operating activities:
Net income $ 196,510 $ 323,736
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 592,728 1,263,440
Gain on sale of equipment (42,275) (43,713)
Loss on exchange of equipment -- 378,324
Changes in assets and liabilities Decrease (increase) in:
rents receivable (49,874) 93,087
accounts receivable - affiliate 145,511 (133,171)
Increase (decrease) in:
accrued interest 5,027 (40,220)
accrued liabilities 258,866 (7,750)
accrued liabilities - affiliate (25,805) (8,614)
deferred rental income 32,160 (77,189)
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Net cash from operating activities 1,112,848 1,747,930
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Cash flows from investing activities:
Proceeds from equipment sales 49,954 122,642
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Net cash from investing activities 49,954 122,642
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Cash flows used in financing activities:
Principal payments - notes payable (416,436) (1,661,641)
Distributions paid (317,154) (422,872)
----------- -----------
Net cash used in financing activities (733,590) (2,084,513)
----------- -----------
Net increase (decrease) in cash and cash equivalents 429,212 (213,941)
Cash and cash equivalents at beginning of period 2,519,940 1,187,478
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Cash and cash equivalents at end of period $ 2,949,152 $ 973,537
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 164,753 $ 237,218
----------- -----------
----------- -----------
Supplemental disclosure of non-cash investing and financing activities:
See Note 5 to the financial statements.
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
June 30, 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 June 30, 1998 and December 31, 1997 and results of operations for
the three and six month periods ended June 30, 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 the display of comprehensive income and its components; however, the
adoption of this statement had no impact on the Partnership's net income or
partners' capital. Statement 130 requires unrealized gains or losses on the
Partnership's available-for-sale securities, which prior to adoption were
reported separately in partners' capital to be included in comprehensive
income. During the six months ended June 30, 1998, total comprehensive
income amounted to $209,558.
Certain reclassifications have been made to the financial statements for
the six months ended June 30, 1997 to conform to the 1997 Annual Report
presentation.
NOTE 2 - CASH
At June 30, 1998, the Partnership had $2,842,599 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
$4,798,558 are due as follows:
For the year ending June 30,1999 $ 1,645,152
2000 1,004,434
2001 761,554
2002 761,554
2003 544,168
Thereafter 81,696
Total $ 4,798,558
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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 June
30, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 1998 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment 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 13-54 $8,318,862
Materials handling 0-15 3,659,494
Trailers/intermodal containers 54-60 1,982,184
Tractors & heavy duty trucks 0 1,210,962
Retail store fixtures 9 517,488
Construction & mining 0 426,263
Motor vehicles 0 252,622
Research & test 0 116,406
Communications 0 51,469
Manufacturing 0 35,218
Computers & peripherals 0 26,866
----------
Total equipment cost 16,597,834
Accumulated depreciation (8,734,997)
Equipment, net of accumulated depreciation $ 7,862,837
-----------
-----------
At June 30, 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 which had
been fully depreciated with a cost of approximately $70,000 at June 30, 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 $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
8
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 $23,171 related to
the Semele Note during the six months ended June 30, 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. On June 30, 1998, Semele effected a 1-for-300 reverse
stock split followed by a 30-for-1 forward stock split resulting in a reduction
of the number of shares of Semele common stock owned by the Partnership to
20,876 shares. During the six months ended June 30, 1998, the Partnership
increased the carrying value of its investment in Semele common stock to $8.125
per share (the quoted price of the Semele stock on NASDAQ at June 30, 1998)
resulting in an unrealized gain in 1998 of $13,048. 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 six month periods ended
June 30, 1998 and 1997 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
1998 1997
---- ----
Equipment management fees $ 57,973 $ 83,358
Administrative charges 34,026 29,844
Reimbursable operating expenses
due to third parties 346,309 54,634
-------- --------
Total $438,308 $167,836
-------- --------
-------- --------
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At June 30, 1998, the Partnership was owed $150,994 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in July 1998.
NOTE 7 - NOTES PAYABLE
Notes payable at June 30, 1998 consisted of installment notes of $3,985,317
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 (5.66% at June 30, 1998) plus a margin. All of the
installment notes are non-recourse and are collateralized by the equipment and
assignment of the related lease payments. Generally, the installment notes will
be fully amortized by noncancellable rents. However, the Partnership has balloon
payment obligations at the expiration of the respective primary lease terms
related to 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 June 30, 1998.
The annual maturities of the installment notes payable are as follows:
For the year ending June 30, 1999 $ 2,091,971
2000 475,501
2001 296,291
2002 320,423
2003 801,131
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Total $ 3,985,317
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10
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth 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 Stipulation of Settlement was based upon and supersedes a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement.
The Stipulation of Settlement was filed with the Court on July 23, 1998 and
remains pending. Ultimately, the Court must review and approve the Stipulation
of Settlement prior to its becoming effective. The Stipulation of Settlement
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 Stipulation of Settlement provides for the restructuring of their respective
business operations into a single successor company whose securities would be
listed and traded on a national securities 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. The Stipulation of Settlement prescribes certain conditions
necessary to effecting the settlement, including providing the partners of the
Exchange Partnerships with the opportunity to vote on the participation of their
partnership in the restructuring. To the extent that the Stipulation of
Settlement is approved by the Court, the complete terms thereof will be
communicated to all of the partners of the Exchange Partnerships to enable them
to vote on the restructuring.
There can be no assurance that the Stipulation of Settlement will be
approved by the Court, or that the outcome of the voting by the partners of the
Exchange Partnerships, including the Partnership, will result in a settlement
finally being effected or in the Partnership being included in the
restructuring. The General Partner and its affiliates, in consultation with
counsel, concur that there is a reasonable basis to believe that the Stipulation
of Settlement will be 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.
11
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 filed an Amended and Supplemental
Complaint alleging further default under the MLA and filed a motion for Summary
Judgment on all claims and counterclaims. The Court held a hearing on 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 parties have since
resumed settlement discussions. 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), a Massachusetts limited
partnership ("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 and six months ended June 30, 1998 compared to the three and six months
ended June 30, 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 and six months ended June 30, 1998, the Partnership
recognized lease revenue of $622,209 and $1,260,069, respectively, compared to
$1,221,576 and $2,261,004 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 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 six months ended June 30,
1997, the Partnership recognized lease revenue of $534,796 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.
For the three and six months ended June 30, 1998, the Partnership earned
interest income of $47,602 and $94,982, respectively, compared to $9,138 and
$25,617 for the same periods in 1997. Interest income during the three and six
months ended June 30, 1998 included $11,678 and $23,171, respectively earned on
the note receivable from Semele. Interest income is typically generated from
temporary investment of rental receipts and equipment sales proceeds in
short-term instruments. 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 and six months ended June 30, 1998, the Partnership sold
equipment having a net book value of $2,895 and $7,679, respectively, to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $20,709 and $42,275, respectively, compared to
a net gain for the same periods in 1997 of $7,438 and $43,713 on equipment
having a net book value of $7,348 and $49,373, respectively. During the three
months ended June 30, 1997, the Partnership also exchanged its interest in a
vessel with an original cost and net book value of $2,605,381 and $1,180,755,
respectively. In connection with this exchange, the Partnership realized
proceeds of $802,431, which 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 prepayment of the
remaining contracted rent due under the vessel's lease agreement in the amount
of $400,631. See below for further discussion related to the vessel.
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 $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
14
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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.
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.
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 and six months ended June 30, 1998 was
$275,298 and $592,728, respectively, compared to $596,009 and $1,263,440 for the
same periods 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.
15
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Interest expense was $82,377 and $169,780, for the three and six months
ended June 30, 1998, respectively, compared to $119,977 and $196,998 for the
same periods in 1997. Interest expense in future periods will continue to
decline in amount as the principal balance of notes payable is reduced through
the application of rent receipts to outstanding debt.
Management fees were approximately 4.6% of lease revenue for each of the
three and six months ended June 30, 1998, respectively, compared to 3.5% and
3.7% of lease revenue for the same periods 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. Operating expenses were $343,820 and $380,335 for the three and six
months ended June 30, 1998, respectively, compared to $58,300 and $84,478 for
the same periods in 1997. During the six months ended June 30, 1998, the
Partnership incurred or accrued approximately $273,000 for certain legal and
administrative expenses related to the Class Action Lawsuit described in Note 8
to the financial statements. 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 $1,112,848 and $1,747,930 for the six
months ended June 30, 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 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. For the six months ended
June 30, 1998, the Partnership realized net cash proceeds of $49,954 compared to
$122,642 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.
As a result of the exchange transaction (see Results of Operations) the
Partnership holds a beneficial interest in the Semele Note of $459,729 and
became the beneficial owner of 208,764 shares of Semele common stock valued at
$313,146 ($1.50 per share) at the date of the transaction.
16
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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. On June 30, 1998, Semele effected a 1-for-300 reverse
stock split followed by a 30-for-1 forward stock split resulting in a reduction
of the number of shares of Semele common stock owned by the Partnership to
20,876 shares. During the six months ended June 30, 1998, the Partnership
increased the carrying value of its investment in Semele common stock to $8.125
per share (the quoted price of the Semele stock on NASDAQ at June 30, 1998)
resulting in an unrealized gain in 1998 of $13,048. 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.
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 is scheduled to decline as the principal balance of notes
payable is reduced through the collection and application of rents. In addition,
the Partnership has balloon payment obligations at the expiration of the
respective primary lease terms related to its interests in aircraft leased to
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 six months ended June 30, 1998, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $317,154. In accordance with the Amended and
Restated Agreement and Certificate of Limited Partnership, the Limited Partners
were allocated 95% of these distributions, or $301,296, and the General Partner
was allocated 5%, or $15,858. The second quarter 1998 cash distribution was paid
on July 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.
17
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
18
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:
-------------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date:
-------------------------------------------------------
By:
-------------------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date:
-------------------------------------------------------
19
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, 1998
-------------------------------------------------
By: /s/ Gary M. Romano
-------------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1998
-------------------------------------------------
20