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, 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 June 30, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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- --------------------------------------------------------------------------------
(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, 1999 and December 31, 1998 3
Statement of Operations
for the three and six months ended June 30, 1999 and 1998 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 1999 5
Statement of Cash Flows
for the six months ended June 30, 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
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December 31,
1999 1998
---------------- ----------------
ASSETS
- ------
Cash and cash equivalents $ 3,955,641 $ 3,243,631
Rents receivable 173,280 361,283
Accounts receivable - affiliate 114,554 50,767
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 86,113 86,113
Equipment at cost, net of accumulated depreciation
of $7,359,820 and $8,610,088 at June 30, 1999
and December 31, 1998, respectively 6,885,993 7,364,212
---------------- ----------------
Total assets $ 11,675,310 $ 11,565,735
---------------- ----------------
---------------- ----------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 2,941,387 $ 3,459,289
Accrued interest 20,182 26,620
Accrued liabilities 203,577 259,500
Accrued liabilities - affiliate 86,818 14,751
Deferred rental income 56,524 54,912
Cash distributions payable to partners 158,577 158,577
---------------- ----------------
Total liabilities 3,467,065 3,973,649
---------------- ----------------
Partners' capital (deficit):
General Partner (472,127) (502,935)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 8,680,372 8,095,021
---------------- ----------------
Total partners' capital 8,208,245 7,592,086
---------------- ----------------
Total liabilities and partners' capital $ 11,675,310 $ 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 and six months ended June 30, 1999 and 1998
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
--------------- --------------- --------------- ----------
Income:
Lease revenue $ 641,254 $ 622,209 $ 1,168,340 $ 1,260,069
Interest income 72,670 35,924 107,717 71,811
Interest income - affiliate 11,461 11,678 22,797 23,171
Gain on sale of equipment 362,921 20,709 449,173 42,275
--------------- --------------- --------------- ---------------
Total income 1,088,306 690,520 1,748,027 1,397,326
--------------- --------------- --------------- ---------------
Expenses:
Depreciation 238,566 275,298 477,133 592,728
Interest expense 57,732 82,377 122,023 169,780
Equipment management fees - affiliate 28,109 28,919 52,546 57,973
Operating expenses - affiliate 113,803 343,820 163,012 380,335
--------------- --------------- --------------- ---------------
Total expenses 438,210 730,414 814,714 1,200,816
--------------- --------------- --------------- ---------------
Net income (loss) $ 650,096 $ (39,894) $ 933,313 $ 196,510
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income (loss)
per limited partnership unit $ 0.77 $ (0.05) $ 1.10 $ 0.23
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Cash distributions declared
per limited partnership unit $ 0.19 $ 0.19 $ 0.38 $ 0.38
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
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, 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 46,666 -- 886,647 933,313
-------------- ------------- -------------- --------------
Comprehensive income 46,666 -- 886,647 933,313
-------------- ------------- -------------- --------------
Cash distributions declared (15,858) -- (301,296) (317,154)
-------------- ------------- -------------- --------------
Balance at June 30, 1999 $ (472,127) 803,454.56 $ 8,680,372 $ 8,208,245
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
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, 1999 and 1998
(Unaudited)
1999 1998
--------------- ---------------
Cash flows from (used in) operating activities:
Net income $ 933,313 $ 196,510
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 477,133 592,728
Gain on sale of equipment (449,173) (42,275)
Changes in assets and liabilities Decrease (increase) in:
Rents receivable 188,003 (49,874)
Accounts receivable - affiliate (63,787) 145,511
Increase (decrease) in:
Accrued interest (6,438) 5,027
Accrued liabilities (55,923) 258,866
Accrued liabilities - affiliate 72,067 (25,805)
Deferred rental income 1,612 32,160
--------------- ---------------
Net cash from operating activities 1,096,807 1,112,848
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sales 450,259 49,954
--------------- ---------------
Net cash from investing activities 450,259 49,954
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (517,902) (416,436)
Distributions paid (317,154) (317,154)
--------------- ---------------
Net cash used in financing activities (835,056) (733,590)
--------------- ---------------
Net increase in cash and cash equivalents 712,010 429,212
Cash and cash equivalents at beginning of period 3,243,631 2,519,940
--------------- ---------------
Cash and cash equivalents at end of period $ 3,955,641 $ 2,949,152
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 128,461 $ 164,753
--------------- ---------------
--------------- ---------------
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, 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 June 30, 1999 and December 31, 1998 and results of operations for
the three and six month periods ended June 30, 1999 and 1998 have been made and
are reflected.
NOTE 2 - CASH AND CASH EQUIVALENTS
At June 30, 1999, the Partnership had $3,842,503 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. Future minimum rents of
$3,825,916 are due as follows:
For the year ending June 30, 2000 $ 1,466,244
2001 968,596
2002 766,230
2003 543,354
2004 81,492
---------------
Total $ 3,825,916
---------------
---------------
In December 1998, the Partnership and certain 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 over the terms of the leases.
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, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 1999 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 6-42 $ 8,318,862
Materials handling 0-14 3,124,148
Trailers/intermodal containers 42-48 1,975,014
Retail store fixtures 13 517,488
Tractors & heavy duty trucks 0 126,214
Motor vehicles 0 97,400
Communications 0 51,469
Manufacturing 0 35,218
----------------
Total equipment cost 14,245,813
Accumulated depreciation (7,359,820)
----------------
Equipment, net of accumulated depreciation $ 6,885,993
----------------
----------------
At June 30, 1999, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $10,811,360, representing approximately
76% 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 $5,913,024 at June 30, 1999 (see Note 7).
At June 30, 1999, the Partnership was not holding any equipment not subject
to a lease and no equipment was held for sale or re-lease. The summary above
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
matures in April 2000 and bears an annual interest rate of 10% 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 $22,797 and
$23,171 related to the Semele Note during the six months ended June 30, 1999 and
1998, respectively.
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 June 30, 1999, the Partnership increased the
carrying value of its investment in Semele common stock to $4.125 per share (the
quoted price on the NASDAQ SmallCap market at June 30, 1999), resulting in an
unrealized gain of $10,438. This gain offsets an unrealized loss of the same
amount recorded during the three months ended March 31, 1999.
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, 1999 and 1998 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
1999 1998
------------- -------------
Equipment management fees $ 52,546 $ 57,973
Administrative charges 73,758 34,026
Reimbursable operating expenses
due to third parties 89,254 346,309
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Total $ 215,558 $ 438,308
------------- -------------
------------- -------------
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, 1999, the Partnership was owed $114,554 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in July 1999.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(c) of the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended"), for persons employed by EFG
who are engaged in providing administrative services to the Partnership.
Administrative charges and reimbursable operating expenses for the six months
ended June 30, 1999 include adjustments for 1998 actual costs of approximately
$27,000 and $19,000, respectively.
NOTE 7 - NOTES PAYABLE
Notes payable at June 30, 1999 consisted of installment notes of $2,941,387
payable to banks and institutional lenders. The installment notes bear interest
rates ranging between 8.09% and 8.65%, except one note which bears a fluctuating
interest rate based on LIBOR plus a margin (4.99% at June 30, 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 lease terms related to aircraft
leased by Reno Air, Inc. ($679,276) and Finnair OY ($399,502 and $106,516). The
Finnair OY indebtedness matures in January 2000 and April 2001, respectively.
The Reno indebtedness matures in January 2003. The carrying amount of notes
payable approximates fair value at June 30, 1999.
9
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
The annual maturities of the installment notes payable are as follows:
For the year ending June 30, 2000 $ 1,228,062
2001 577,449
2002 320,423
2003 815,453
--------------
Total $ 2,941,387
--------------
--------------
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 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").
On March 12, 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 12, 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. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of 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. Prior to issuing a final order approving
the settlement of the second sub-class involving the Partnership, 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 sub-class members 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.
10
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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. 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. To date, the General
Partner has not authorized new investment activities involving the Partnership.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting a final settlement, 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 also was accrued and expensed by the
Partnership in 1998.
11
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Notes to the Financial Statements
(Continued)
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 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 the sub-class involving the
Exchange Partnerships 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 a final settlement of the sub-class involving
the Exchange Partnerships will be achieved. However, in the absence of a final
settlement approved by the Court, the Defendants intend to defend vigorously
against the claims asserted in the Class Action Lawsuit. Neither the General
Partner nor its affiliates can predict with any degree of certainty the cost of
continuing litigation to the Partnership or the ultimate outcome.
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. On May 11, 1999, the
parties executed a comprehensive settlement agreement to resolve all outstanding
issues, including reimbursement to the Partnership for the disputed sales tax
items referenced above. This matter did not have a material effect on the
Partnership's financial position or results of operations.
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 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 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 a third party 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 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.
13
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 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 and six months ended June 30, 1999, the Partnership
recognized lease revenue of $641,254 and $1,168,340, respectively, compared to
$622,209 and $1,260,069 for the same periods in 1998. The overall 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 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 and six months ended June 30, 1999 was
$84,131 and $130,514, respectively, compared to $47,602 and $94,982 for the same
periods in 1998. Interest income is generated principally from temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income in 1999 and 1998 included $22,797 and $23,171,
respectively, earned on a note receivable from Semele Group, Inc. ("Semele")(see
Note 5 to the financial statements herein). Interest income in 1999 also
includes $32,745 related to the National Steel Corporation settlement (see Note
8 to the accompanying financial statements). The amount of future interest
income is expected to fluctuate as a result of changing interest rates, the
collection of lease revenue, and the proceeds from equipment sales, among other
factors.
During the three and six months ended June 30, 1999, the Partnership sold
fully depreciated equipment and equipment having a net book value of $1,086,
respectively, to existing lessees and third parties. These sales resulted in a
net gain, for financial statement purposes, of $362,921 and $449,173,
respectively, compared to a net gain for the same periods in 1998 of $20,709 and
$42,275 on equipment having a net book value of $2,895 and $7,679, respectively.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment 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.
14
AMERICAN INCOME FUND I-C
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
The total economic value realized for 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, 1999 was
$238,566 and $477,133, respectively, compared to $275,298 and $592,728 for the
same periods 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 $57,732 and $122,023 or 9% and 10.4% of lease revenue,
for the three and six months ended June 30, 1999, respectively, compared to
$82,377 and $169,780 or 13.2% and 13.5% of lease revenue for the same periods 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 4.4% and 4.5% of lease revenue for the
three and six months ended June 30, 1999, respectively, compared to 4.6% of
lease revenue for each of the same periods in 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 $113,803 and $163,012 for the three and six months
ended June 30, 1999, respectively, compared to $343,820 and $380,335 for the
same periods in 1998. Operating expenses in 1999 include an adjustment for 1998
actual administrative charges and third party costs of approximately $46,000.
During 1998, the Partnership accrued $273,000 for certain legal and
Consolidation expenses related to the Class Action Lawsuit described in Note 8
to the financial statements. Other operating expenses consist principally of
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 $1,096,807 and $1,112,848 for the six months ended
June 30, 1999 and 1998, respectively. Future renewal, re-lease and equipment
sale activities will cause a decline in the Partnership's lease revenues and
corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities also will 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 six months
ended June 30, 1999, the Partnership realized $450,259 in equipment sale
proceeds compared to $49,954 for the same period in 1998. Future inflows of cash
from asset
15
AMERICAN INCOME FUND I-C
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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 June 30, 1999, the Partnership was due aggregate future minimum lease
payments of $3,825,916 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 $2,941,387 (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 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.
In December 1998, the Partnership and certain affiliated investment
programs owning interests in two McDonnell Douglas MD-82 aircraft (collectively,
the "Programs") 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 over the terms of the
leases.
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. However, the
Partnership has balloon payment obligations at the expiration of the lease terms
related to aircraft leased by Reno Air, Inc. ($679,276) and Finnair OY ($399,502
and $106,516). On April 29, 1999, the Programs entered into agreements with a
third-party lender to extend the maturity dates of the Programs' indebtedness
related to the two aircraft leased to Finnair OY. Consistent with the extension
terms of the lease agreements for these aircraft, the maturity dates of the
indebtedness were extended to January 2000 ($399,502) and April 2001 ($106,516),
respectively.
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 six months ended June 30, 1999, the Partnership's carrying value of
the Semele common stock remained the same. An unrealized gain of $13,048 was
recognized for the same period in 1998 and 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
16
AMERICAN INCOME FUND I-C
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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, 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 second 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 six months ended June 30, 1999, 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 Restated
Agreement, as amended, 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 1999 cash distribution was paid on July 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
17
AMERICAN INCOME FUND I-C
a Massachusetts Limited Partnership
Form 10-Q
PART I. FINANCIAL INFORMATION
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 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 June 30, 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 Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 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.
18
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
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 13, 1999
-------------------------------------------
By: /s/ Gary Romano
-------------------------------------------
Gary M. Romano
Clerk of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 13, 1999
-------------------------------------------
20