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, 1999
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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 March 31, 1999 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
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AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
Page
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1999 and December 31, 1998 3
Statement of Operations
for the three months ended March 31, 1999 and 1998 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 1999 5
Statement of Cash Flows
for the three months ended March 31, 1999 and 1998 6
Notes to the Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
PART II. OTHER INFORMATION:
Items 1 - 6 19
2
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
1999 1998
---------------- ---------------
ASSETS
- ------
Cash and cash equivalents $ 3,219,165 $ 3,243,631
Rents receivable 265,284 361,283
Accounts receivable - affiliates 218,250 50,767
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 75,675 86,113
Equipment at cost, net of accumulated depreciation of
$8,544,231 and $8,610,088 at March 31, 1999
and December 31, 1998, respectively 7,124,559 7,364,212
---------------- ---------------
Total assets $ 11,362,662 $ 11,565,735
---------------- ---------------
---------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 3,170,475 $ 3,459,289
Accrued interest 21,560 26,620
Accrued liabilities 226,000 259,500
Accrued liabilities - affiliate 23,851 14,751
Deferred rental income 55,911 54,912
Cash distributions payable to partners 158,577 158,577
---------------- ---------------
Total liabilities 3,656,374 3,973,649
---------------- ---------------
Partners' capital (deficit):
General Partner (497,225) (502,935)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 8,203,513 8,095,021
---------------- ---------------
Total partners' capital 7,706,288 7,592,086
---------------- ---------------
Total liabilities and partners' capital $ 11,362,662 $ 11,565,735
---------------- ---------------
---------------- ---------------
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, 1999 and 1998
(Unaudited)
1999 1998
--------------- ---------------
Income:
Lease revenue $ 527,086 $ 637,860
Interest income 35,047 35,887
Interest income - affiliate 11,336 11,493
Gain on sale of equipment 86,252 21,566
--------------- ---------------
Total income 659,721 706,806
--------------- ---------------
Expenses:
Depreciation 238,567 317,430
Interest expense 64,291 87,403
Equipment management fees - affiliate 24,437 29,054
Operating expenses - affiliate 49,209 36,515
--------------- ---------------
Total expenses 376,504 470,402
--------------- ---------------
Net income $ 283,217 $ 236,404
--------------- ---------------
--------------- ---------------
Net income
per limited partnership unit $ 0.33 $ 0.28
--------------- ---------------
--------------- ---------------
Cash distribution declared
per limited partnership unit $ 0.19 $ 0.19
--------------- ---------------
--------------- ---------------
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, 1999
(Unaudited)
General Limited Partners
Partner ----------------------------------
Amount Units Amount Total
--------------- ------------- -------------- --------------
Balance at December 31, 1998 $ (502,935) 803,454.56 $ 8,095,021 $ 7,592,086
Net income 14,161 -- 269,056 283,217
Unrealized loss on investment
securities - affiliate (522) -- (9,916) (10,438)
--------------- ------------- -------------- --------------
Comprehensive income 13,639 -- 259,140 272,779
-------------- ------------- -------------- --------------
Cash distribution declared (7,929) -- (150,648) (158,577)
-------------- ------------- -------------- --------------
Balance at March 31, 1999 $ (497,225) 803,454.56 $ 8,203,513 $ 7,706,288
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
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, 1999 and 1998
(Unaudited)
1999 1998
--------------- ---------------
Cash flows from (used in) operating activities:
Net income $ 283,217 $ 236,404
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 238,567 317,430
Gain on sale of equipment (86,252) (21,566)
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable 95,999 (120,459)
Accounts receivable - affiliates (167,483) 190,707
Increase (decrease) in:
Accrued interest (5,060) 2,882
Accrued liabilities (33,500) 1,671
Accrued liabilities - affiliate 9,100 (11,443)
Deferred rental income 999 33,558
--------------- ---------------
Net cash from operating activities 335,587 629,184
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sales 87,338 26,350
--------------- ---------------
Net cash from investing activities 87,338 26,350
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (288,814) (206,150)
Distributions paid (158,577) (158,577)
--------------- ---------------
Net cash used in financing activities (447,391) (364,727)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (24,466) 290,807
Cash and cash equivalents at beginning of period 3,243,631 2,519,940
--------------- ---------------
Cash and cash equivalents at end of period $ 3,219,165 $ 2,810,747
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 69,351 $ 84,521
--------------- ---------------
--------------- ---------------
Supplemental disclosure of non-cash activity:
See Note 5 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities - affiliate during the
three months ended March 31, 1999.
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, 1999
(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 1998 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1998 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, 1999 and December 31, 1998 and results of operations for
the three month periods ended March 31, 1999 and 1998 have been made and are
reflected.
NOTE 2 - CASH
- -------------
At March 31, 1999, the Partnership had $3,107,629 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
$4,243,257 are due as follows:
For the year ending March 31, 2000 $ 1,629,966
2001 1,036,967
2002 760,961
2003 652,268
2004 163,095
------------
Total $ 4,243,257
------------
------------
In December 1998, the Partnership and the other affiliated leasing programs
owning interests in two McDonnell Douglas MD-82 aircraft entered into lease
extension agreements with Finnair OY. The lease extensions, effective upon the
expiration of the existing primary lease terms on April 28, 1999, extended the
leases for nine months and two years, respectively. In aggregate, these lease
extensions will provide additional lease revenue of approximately $700,000 to
the Partnership. The lease revenue from these lease extensions is included in
the future minimum rents summary above.
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at March
31, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1999 under
7
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 9-45 $ 8,318,862
Materials handling 0-17 3,124,148
Trailers/intermodal containers 45-51 1,975,014
Tractors & heavy duty trucks 0 1,210,962
Retail store fixtures 0 517,488
Construction & mining 0 220,026
Motor vehicles 0 215,603
Communications 0 51,469
Manufacturing 0 35,218
---------------
Total equipment cost 15,668,790
Accumulated depreciation (8,544,231)
---------------
Equipment, net of accumulated depreciation $ 7,124,559
---------------
---------------
At March 31, 1999, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $10,811,360, representing approximately
69% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of $8,318,862 and a net
book value of $6,090,098 at March 31, 1999 (see Note 7).
The summary above includes equipment held for sale or re-lease with a cost
of approximately $70,000, which had been fully depreciated at March 31, 1999.
The General Partner is actively seeking the sale or re-lease of all such
equipment. In addition, the summary above also includes equipment being leased
on a month-to-month basis.
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE/NOTE RECEIVABLE - AFFILIATE
- -----------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership owns 20,876
shares of Semele Group, Inc. ("Semele") common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $459,729. The Semele Note
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 its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California ("Rancho Malibu"). The Partnership recognized interest income of
$11,336 related to the Semele Note during the three months ended March 31, 1999.
8
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 1999, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.625 per share (the
quoted price of the Semele stock on NASDAQ SmallCap Market at March 31, 1999)
resulting in an unrealized loss of $10,438. This loss was reported as a
component of comprehensive income, included in partners' capital.
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, 1999 and 1998 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
1999 1998
----------- -----------
Equipment management fees $ 24,437 $ 29,054
Administrative charges 17,013 17,013
Reimbursable operating expenses
due to third parties 32,196 19,502
----------- -----------
Total $ 73,646 $ 65,569
----------- -----------
----------- -----------
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, 1999, the Partnership was owed $206,914 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in April
1999.
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable at March 31, 1999 consisted of installment notes of
$3,170,475 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 (4.94% at March 31,
1999). 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, Inc.
of $1,127,840 and $679,276, respectively (see Note 9 regarding the extension of
the maturity date of the Finnair indebtedness). The carrying value of notes
payable approximates fair value at March 31, 1999.
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 2000 $ 1,671,631
2001 290,548
2002 314,211
2003 191,996
2004 702,089
-------------
Total $ 3,170,475
-------------
-------------
9
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 8 - LEGAL PROCEEDINGS
- --------------------------
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved.
10
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
In addition, EFG would contribute certain management contracts, operations
personnel, and business opportunities to Newco and cancel its current management
contracts with all of the Exchange Partnerships. Newco would operate as a
finance company specializing in the acquisition, financing and servicing of
equipment leases for its own account and for the account of others on a contract
basis. Newco also would use its best efforts to list its shares on the NASDAQ
National Market or another national exchange or market as soon after the
Consolidation as Newco deems that market conditions and its business operations
are suitable for listing its shares and Newco has satisfied all necessary
regulatory and listing requirements. The potential benefits and risks of the
Consolidation will be presented in a Solicitation Statement that will be mailed
to all of the partners of the Exchange Partnerships as soon as the associated
regulatory review process is completed and at least 60 days prior to the
fairness hearing. A preliminary Solicitation Statement was filed with the
Securities and Exchange Commission on August 24, 1998 and remains pending. Class
members will be notified of the actual fairness hearing date when it is
confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provides, among other things, that commencing March 22,
1999, the Exchange Partnerships may collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believe to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations, including that the Exchange Partnerships retain
sufficient cash balances to pay their respective shares of the cash distribution
referenced above in connection with the proposed Consolidation.
In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity investment plus an annualized
return thereon of 7.5%. Finally, in the event that the Partnership has acquired
new investments and the Consolidation is not effected, the General Partner will
use its best efforts to divest all such new investments in an orderly and timely
fashion and the Manager will cancel or return to the Partnership any acquisition
or management fees resulting from such new investments.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to object to the
participation of their partnership in the Consolidation. Assuming the proposed
settlement is effected according to present terms, the Partnership's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $82,000, all of which was accrued and expensed by the Partnership
in 1998. In addition, the Partnership's share of fees and expenses related to
the proposed Consolidation is estimated to be approximately $216,000, all of
which was also accrued and expensed by the Partnership in 1998.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order
11
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
permits the partners to transfer Units to family members or as a result of the
divorce, disability or death of the partner. No other transfers are permitted
pending the Court's final determination of whether the settlement should be
approved. The provision of the August 20 Order which enjoined the General
Partners of the Exchange Partnerships from, among other things, recording any
transfers not in accordance with the Court's order remains effective.
There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that final settlements of each sub-class will be achieved.
However, in the absence of final settlements approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions. Refer to
the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998 for a description of these matters. The following is an update to the
Partnership's prior disclosure on Form 10-K for 1998:
ACTION INVOLVING NATIONAL STEEL CORPORATION
- -------------------------------------------
EFG, on behalf of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth
of Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Partnership, National Steel Corporation ("National Steel"). The
Complaint seeks reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. In March 1999, the
Plaintiffs obtained payment for certain of the disputed items and, on May 11,
1999, the parties executed a comprehensive settlement agreement to resolve
remaining issues. The General Partner does not expect the outcome of this action
to have a material adverse effect on the Partnership's financial position or
results of operations.
NOTE 9 - SUBSEQUENT EVENT
- -------------------------
On April 29, 1999, the Partnership and certain affiliated investment
programs (collectively, the "Programs") entered into agreements with a
third-party lender to extend the maturity date of the Programs' indebtedness
related to the two aircraft leased to Finnair OY (the "Finnair Aircraft"). Under
the existing loan agreements, the Programs had balloon payment obligations
scheduled to mature in April 1999. Consistent with the extension
12
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
terms of the lease agreements related to the Finnair Aircraft (see Note 3), the
maturity dates of the indebtedness were extended to January 2000 and April 2001,
respectively. The Partnership will have balloon payment obligations related to
this indebtedness on the respective maturity dates of $399,502 and $106,516.
13
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 annual 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, the collection of all rents due under the Partnership's
lease agreements and the remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
- ---------------
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Partnership uses information systems provided by Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") and has no information
systems of its own. EFG has adopted a plan to address the Year 2000 Issue that
consists of four phases: assessment, remediation, testing, and implementation
and has elected to utilize principally internal resources to perform all phases.
EFG has completed substantially all of its Year 2000 project at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of
original design to use a four digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues could result
in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Partnership is not determinable.
14
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998:
- --------------------------------------------------------------------------------
The Partnership was organized in 1991 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 8 to the accompanying financial statements. Pursuant to the
Restated Agreement, as amended, the Partnership is scheduled to be dissolved by
December 31, 2002.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 1999, the Partnership recognized lease
revenue of $527,086 compared to $637,860 for the same period in 1998. The
decrease in lease revenue from 1998 to 1999 primarily reflects the effects of
lease term expirations and the sale of equipment. In the future, lease revenue
will continue to decline due to primary and renewal lease term expirations and
the sale of equipment.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in proportion
to their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
Interest income for the three months ended March 31, 1999 was $46,383
compared to $47,380 for the same period in 1998. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income in 1999 and 1998 included
$11,336 and $11,493, respectively, earned on a note receivable from Semele
Group, Inc. ("Semele")(see Note 5 to the financial statements herein). 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, 1999, the Partnership sold
equipment having a net book value of $1,086 to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes,
of $86,252 compared to a net gain in 1998 of $21,566 on equipment having a net
book value of $4,784.
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.
15
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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, 1999 was $238,567
compared to $317,430 for the same period in 1998. 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 $64,291 or 12.2% of lease revenue for the three months
ended March 31, 1999 compared to $87,403 or 13.7% of lease revenue for the same
period in 1998. Interest expense in future periods will decline as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees were approximately 4.6% of lease revenue for each of the
three months ended March 31, 1999 and 1998. 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 were $49,209 for the three months ended March 31, 1999
compared to $36,515 for the same period in 1998. Operating expenses consist
principally of administrative charges, professional service costs, such as audit
and other legal fees, as well as printing, distribution and remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These cash
inflows are used to satisfy debt service obligations associated with leveraged
leases, and to pay management fees and operating costs. Operating activities
generated net cash inflows of $335,587 and $629,184 for the three months ended
March 31, 1999 and 1998, respectively. Future renewal, re-lease and equipment
sale activities will cause a decline in the Partnership's lease revenue and
corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will also continue to decline as the Partnership experiences a higher
frequency of remarketing events.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 1999, the Partnership realized $87,338 in equipment sale
proceeds compared to $26,350 for the same period in 1998. Future inflows of cash
from asset disposals will vary in timing and amount and will be influenced by
many factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
At March 31, 1999, the Partnership was due aggregate future minimum lease
payments of $4,243,257 from contractual lease agreements (see Note 3 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $3,170,475 (see Note 7 to the financial statements).
At the expiration of the individual primary and renewal lease terms underlying
the Partnership's future minimum lease payments, the
16
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
Partnership will sell the equipment or enter re-lease or renewal agreements when
considered advantageous by the General Partner and EFG. Such future remarketing
activities will result in the realization of additional cash inflows in the form
of equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease contracts,
while others may elect to return the equipment. In the latter instances, the
equipment could be re-leased to another lessee or sold to a third party.
Accordingly, as the terms of the currently existing contractual lease agreements
expire, the cash flows of the Partnership will become less predictable. In
addition, the Partnership will have cash needs to satisfy interest on
indebtedness and to pay management fees and operating expenses.
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 years, the amount of cash used to repay debt
obligations is scheduled to decline as the principal balance of notes payable is
reduced through the collection and application of rents. In addition, the
Partnership has balloon payment obligations at the expiration of the respective
primary lease terms related to aircraft leased to Finnair OY and the Reno Air,
Inc. of $1,127,840 and $679,276, respectively (see Note 9 to the financial
statements regarding the extension of the maturity date of the Finnair
indebtedness in April 1999).
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the three months ended March 31, 1999, the Partnership decreased the
carrying value of its investment in Semele common stock to $3.625 per share (the
quoted price of the Semele stock on NASDAQ SmallCap Market at March 31, 1999)
resulting in an unrealized loss of $10,438 compared to an unrealized gain of
$26,096 for the same period in 1998. The loss and gain were each 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.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets. In particular,
the Partnership must contemplate the potential liquidity risks associated with
its investment in commercial jet aircraft. The management and remarketing of
aircraft can involve, among other things, significant costs and lengthy
remarketing initiatives.
Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or refurbishment
costs at lease expiration can be substantial. For example, an aircraft that is
returned to the Partnership meeting minimum airworthiness standards, such as
flight hours or engine cycles, nonetheless may require heavy maintenance in
order to bring its engines, airframe and other hardware up to standards that
will permit its prospective use in commercial air transportation. Individually,
these repairs can cost in excess of $1 million and, collectively, they could
require the disbursement of several million dollars,
17
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
depending upon the extent of refurbishment. In addition, the Partnership's
equipment portfolio includes an interest in three Stage 2 aircraft having
scheduled lease expiration dates of December 31, 1999. These aircraft are
prohibited from operating in the United States after December 31, 1999 unless
they are retro-fitted with hush-kits to meet Stage 3 noise regulations
promulgated by the Federal Aviation Administration. The cost to hush-kit an
aircraft, such as the Partnership's Boeing 737s, can approach $2 million.
Although the Partnership is not required to retro-fit its aircraft with
hush-kits, insufficient liquidity could jeopardize the re-marketing of these
aircraft and risk their disposal at a depressed value at a time when a better
economic return would be realized from refurbishing the aircraft and re-leasing
them to another user. Collectively, the aggregation of the Partnership's
potential liquidity needs related to aircraft and other working capital
requirements could be significant. Accordingly, the General Partner has
maintained significant cash reserves within the Partnership in order to minimize
the risk of a liquidity shortage, particularly in connection with the
Partnership's aircraft interests.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 8 to the accompanying financial statements. A preliminary
court order has allowed the Partnership to invest in new equipment or other
activities, subject to certain limitations, effective March 22, 1999. To the
extent that the Partnership continues to own aircraft investments that could
require capital reserves, the General Partner does not anticipate that the
Partnership will invest in new assets, regardless of its authority to do so.
Until the Class Action Lawsuit is adjudicated, the General Partner does not
expect that the level of future quarterly cash distributions paid by the
Partnership will be increased above amounts paid in the first quarter of 1999.
In addition, the proposed settlement, if effected, will materially change the
future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. See Note 8 to the accompanying financial
statements.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the three months ended March 31, 1999, 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 1999 cash distribution was paid
on April 15, 1999.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 7 to the financial statements presented in the Partnership's 1998
Annual Report). For instance, selling commissions, organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes, but are recorded as a
reduction of partners' capital for financial reporting purposes. Therefore, such
differences are permanent differences between capital accounts for financial
reporting and federal income tax purposes. Other differences between the bases
of capital accounts for federal income tax and financial reporting purposes
occur due to timing differences. Such items consist of the cumulative difference
between income or loss for tax purposes and financial statement income or loss,
the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, and the treatment of unrealized gains or losses on
investment securities, if any, for book and tax purposes. The principal
component
18
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
of the cumulative difference between financial statement income or loss and tax
income or loss results from different depreciation policies for book and tax
purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at March 31, 1999. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Amended and Restated
Agreement and Certificate of Limited Partnership requires that upon the
dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance which may
exist in the General Partner's tax capital account. At December 31, 1998, the
General Partner had a positive tax capital account balance.
The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, technological changes, the ability of
EFG to manage and remarket the Partnership's assets, and many other events and
circumstances, that could enhance or detract from individual asset yields and
the collective performance of the Partnership's equipment portfolio. However,
the outcome of the Class Action Lawsuit described in Note 8 to the accompanying
financial statements will be the principal factor in determining the future of
the Partnership's operations.
19
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
20
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 14, 1999
--------------------------------------------
By: /s/ Gary M. Romano
--------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 14, 1999
--------------------------------------------
21