-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jxg5vjg1Cqj7IIWVMyupMT3JYfRoex3WFstK0z9tNSjSRG8SnWRiTa/ms+stFhjx jX+qE1RrT52/Zl4dE+OAHA== 0001047469-98-013120.txt : 19980401 0001047469-98-013120.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-013120 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-C CENTRAL INDEX KEY: 0000868679 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043077437 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20031 FILM NUMBER: 98583302 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ------------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from___________________ to ___________________________ Commission file number 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, Sixth Floor, Boston, MA 02110 - ------------------------------------------ ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 ------------------------------ Securities registered pursuant to Section 12(b) of the Act NONE ---------------------- Title of each class Name of each exchange on which registered - ------------------------------ ------------------------------------------- - ------------------------------ ------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: 796,161 Units Representing Limited Partnership Interest - -------------------------------------------------------------------------------- (Title of class) - -------------------------------------------------------------------------------- (Title of class) 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 XX No ---- ---- State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. -1- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters 6 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8. Financial Statements and Supplementary Data 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 7 PART III Item 10. Directors and Executive Officers of the Partnership 8 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management 10 Item 13. Certain Relationships and Related Transactions 11 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13-15
-2- PART I ITEM 1. BUSINESS. (a) General Development of Business AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership, (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the Partnership issued 803,454.56 units of limited partnership interest (the "Units") to 909 investors. Included in the 803,454.56 units are 7,293.56 bonus units. The Partnership has one General Partner, AFG Leasing VI Incorporated, a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG" or the "Manager"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). (b) Financial Information About Industry Segments The Partnership is engaged in only one industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full payout or operating lease basis. Full payout leases are those in which aggregate noncancellable rents equal or exceed the Purchase Price of the leased equipment. Operating leases are those in which the aggregate noncancellable rental payments are less than the Purchase Price of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives are to acquire and lease equipment which will: 1. Generate quarterly cash distributions; 2. Preserve and protect Partnership capital; and 3. Maintain substantial residual value for ultimate sale. The Partnership has the additional objective of providing certain federal income tax benefits. The Closing Date of the Offering of Units of the Partnership was May 31, 1991. Significant operations commenced coincident with the Partnership's initial purchase of equipment and the associated lease commitments on May 31, 1991. The acquisition of the equipment and its associated leases is described in detail in Note 3 to the financial statements included in Item 14, herein. The Partnership is expected to terminate no later than December 31, 2002; however, the Partnership is a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action Lawsuit could alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. The Partnership has no employees; however, it is managed pursuant to a Management Agreement with EFG or one of its affiliates. The Manager's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for such services as described in the Restated Agreement, as amended, Item 13 herein, and in Note 5 to the financial statements included in Item 14, herein. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be -3- insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. Consequently, the success of the Partnership is largely dependent upon the ability of the General Partner and its Affiliates to forecast technological advances, the ability of the lessees to fulfill their lease obligations and the quality and marketability of the equipment at the time of sale. In addition, the leasing industry is very competitive. Although all funds available for acquisitions have been invested in equipment, subject to noncancellable lease agreements, the Partnership will encounter considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Partnership will compete with lease programs offered directly by manufacturers and other equipment leasing companies, including limited partnerships and trusts organized and managed similarly to the Partnership, and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. Many competitors have greater financial resources and more experience than the Partnership, the General Partner and the Manager. Generally, the Partnership is prohibited from reinvesting the proceeds generated by refinancing or selling equipment. Accordingly, it is anticipated that the Partnership will begin to liquidate its portfolio of equipment at the expiration of the initial lease terms and to distribute the net liquidation proceeds. As an alternative to sale, the Partnership may enter re-lease agreements when considered advantageous by the General Partner and the Manager. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1997, 1996 and 1995 is incorporated herein by reference to Note 2 to the financial statements in the 1997 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. Default by a lessee under a lease may cause equipment to be returned to the Partnership at a time when the General Partner or the Manager is unable to arrange for the re-lease or sale of such equipment. This could result in the loss of a material portion of anticipated revenues and significantly weaken the Partnership's ability to repay related debt. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President and Chief Executive Officer. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. -4- ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements in the 1997 Annual Report. ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 8 to the financial statements in the 1997 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. -5- PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. (a) Market Information There is no public market for the resale of the Units and it is not anticipated that a public market for resale of the Units will develop. (b) Approximate Number of Security Holders At December 31, 1997, there were 862 record holders in the Partnership. (c) Dividend History and Restrictions Pursuant to Article VI of the Restated Agreement, as amended, the Partnership's Distributable Cash From Operations and Distributable Cash From Sales or Refinancings are determined and distributed to the Partners quarterly. Each quarter's distribution may vary in amount. Distributions may be made to the General Partner prior to the end of the fiscal quarter; however, the amount of such distribution reflects only amounts to which the General Partner is entitled at the time such distribution is made. Currently, there are no restrictions that materially limit the Partnership's ability to distribute Distributable Cash From Operations and Distributable Cash From Sales or Refinancings or that the Partnership believes are likely to materially limit the future distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. The Partnership expects to continue to distribute all Distributable Cash From Operations and Distributable Cash From Sales or Refinancings on a quarterly basis. Distributions in 1997 and 1996 were as follows:
General Limited Total Partner Partners ----------- ----------- ----------- Total 1997 distributions $ 792,883 $ 39,644 $ 753,239 Total 1996 distributions 1,162,895 58,145 1,104,750 ----------- ----------- ----------- Total $ 1,955,778 $ 97,789 $ 1,857,989 ----------- ----------- ----------- ----------- ----------- -----------
Distributions payable were $158,577 and $211,436 at December 31, 1997 and 1996, respectively. "Distributable Cash From Operations" means the net cash provided by the Partnership's normal operations after general expenses and current liabilities of the Partnership are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the General Partner, and increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From Operations does not include any Distributable Cash From Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after Payout, any accrued and unpaid Subordinated Remarketing Fees. -6- "Cash From Sales or Refinancings" means cash received by the Partnership from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Partnership required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the General Partner, but not including any Subordinated Remarketing Fees whether or not then due and payable) and (b) general expenses and current liabilities of the Partnership (other than any portion of the Equipment Management Fee which is required to be accrued and the Subordinated Remarketing Fee) and (c) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the General Partner and (ii) increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations. In the event the Partnership accepts a note in connection with any sale or refinancing transaction, all payments subsequently received in cash by the Partnership with respect to such note shall be included in Cash From Sales or Refinancings, regardless of the treatment of such payments by the Partnership for tax or accounting purposes. If the Partnership receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. Each distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings of the Partnership shall be made 95% to the Limited Partners and 5% to the General Partner. "Payout" is defined as the first time when the aggregate amount of all distributions to the Limited Partners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Limited Partners' original capital contributions plus a cumulative annual distribution of 11% (compounded quarterly and calculated beginning with the last day of the month of the Partnership's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Limited Partners exceed the amount required to satisfy the cumulative annual distribution of 11% (compounded quarterly) on the Limited Partners' aggregate unreturned capital contributions, such calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each fiscal quarter. Distributable Cash From Operations and Distributable Cash From Sales or Refinancings ("Distributions") are distributed within 30 days after the completion of each quarter, beginning with the first full fiscal quarter following the Partnership's Closing. Each Distribution is described in a statement sent to the Limited Partners. ITEM 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1997 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 1997 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -7- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. (a-b) Identification of Directors and Executive Officers The Partnership has no Directors or Officers. As indicated in Item 1 of this report, AFG Leasing VI Incorporated is the sole General Partner of the Partnership. Under the Restated Agreement, as amended, the General Partner is solely responsible for the operation of the Partnership's properties and the Limited Partners have no right to participate in the control of such operations. The names, titles and ages of the Directors and Executive Officers of the General Partner as of March 15, 1998 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13)
Name Title Age Term - -------------------------------- --------------------------------------------- ----- ----------- Geoffrey A. MacDonald Chairman and a member of the Until a Executive Committee of EFG successor and President and a Director is duly of the General Partner 49 elected and qualified Gary D. Engle President and Chief Executive Officer and member of the Executive Committee of EFG 49 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the General Partner 38 James A. Coyne Executive Vice President of EFG 37 Michael J. Butterfield Vice President, Finance and Treasurer of EFG and Treasurer of the General Partner 38 James F. Livesey Vice President, Aircraft and Vessels of EFG 48 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 47 Gail D. Ofgant Vice President, Lease Operations of EFG 32
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Partners, Directors or Executive Officers. (e) Business Experience -8- Mr. MacDonald, age 49, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the General Partner. Mr. MacDonald served as a co-founder, Director and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds an M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 49, is President and Chief Executive Officer and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle is Vice President and a Director of certain of EFG's affiliates. On December 16, 1994, Mr. Engle acquired control of EFG, the General Partner and each of EFG's subsidiaries. Mr. Engle controls the general partner of AALP and is a limited partner in AALP. Mr. Engle is also a limited partner in ONC. In May 1997, Mr. Engle was elected to the Board of Directors of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has an M.B.A. from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Romano, age 38, is Executive Vice President and Chief Operating Officer of EFG and certain of its affiliates and Clerk of the General Partner. In November 1997, Mr. Romano was appointed Chief Financial Officer of Semele. Mr. Romano joined EFG in November 1989 and was appointed Executive Vice President and Chief Operating Officer in April 1996. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately-held real estate company which he joined in 1987. Mr. Romano held audit staff and manager positions at Ernst & Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a C.P.A. and holds a B.S. degree from Boston College. Mr. Coyne, age 37, is Executive Vice President of EFG. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. Mr. Coyne is a limited partner in AALP and ONC. In October 1997, Mr. Coyne was elected President and Chief Operating Officer of Semele. From May 1993 through November 1994, he was with the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985 he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 38, joined EFG in June 1992 and became Vice President, Finance and Treasurer of EFG and certain of its affiliates in April 1996 and is Treasurer of the General Partner. In November 1997, Mr. Butterfield was appointed Treasurer of Semele. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (U.K.) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his C.P.A. requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Mr. Livesey, age 48, is Vice President, Aircraft and Vessels, of EFG. Mr. Livesey joined EFG in October, 1989, and was promoted to Vice President in January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing positions with two privately-held equipment leasing firms. Mr. Livesey holds an M.B.A. from Boston College and B.A. degree from Stonehill College. Ms. Simonsen, age 47, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors Mortgage Insurance Company which she joined in 1973. Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a B.A. degree from Wilson College. -9- Ms. Ofgant, age 32, is Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in June 1989, and was promoted to Manager, Lease Operations in April 1994. In April 1996, Ms. Ofgant was appointed Vice President, Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers or employees of the General Partner or its Affiliates employees of the Partnership. The Partnership has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the General Partner or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Partnership has no employees, as discussed in Item 11(a), pursuant to Section 9.4(c) of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13, herein and in Note 5 to the financial statements included in Item 14, herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the General Partner or its Affiliates which results or may result from their resignation, retirement or any other termination. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. By virtue of its organization as a limited partnership, the Partnership has outstanding no securities possessing traditional voting rights. However, as provided in Section 10.2(a) of the Restated Agreement, as amended (subject to Sections 10.2(b) and 10.3), a majority interest of the Limited Partners have voting rights with respect to: 1. Amendment of the Restated Agreement; 2. Termination of the Partnership; 3. Removal of the General Partner; and -10- 4. Approval or disapproval of the sale of all, or substantially all, of the assets of the Partnership (except in the orderly liquidation of the Partnership upon its termination and dissolution). As of March 1, 1998, the following person or group owns beneficially more than 5% of the Partnership's 803,454.56 outstanding Units:
Name and Amount Percent Title Address of of Beneficial of of Class Beneficial Owner Ownership Class - -------------------------------- ---------------------------------------- -------------------- ----------- Units Representing Old North Capital Limited Partnership Limited Partnership 88 Broad Street 124,851.23 Units 15.54 Interests Boston, MA 02110
Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. In December 1996, EFG purchased a 49% limited partnership interest in ONC. See Items 10 and 13 of this report. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The General Partner of the Partnership is AFG Leasing VI Incorporated, an affiliate of EFG. (a) Transactions with Management and Others 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 years ended December 31, 1997, 1996 and 1995, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1997 1996 1995 ----------- ----------- ---------- Equipment management fees $ 166,417 $ 140,227 $ 140,863 Administrative charges 63,870 40,295 21,000 Reimbursable operating expenses due to third parties 136,800 151,051 117,568 ----------- ----------- ---------- Total $ 367,087 $ 331,573 $ 279,431 ----------- ----------- ---------- ----------- ----------- ----------
In 1991, the Partnership acquired 900 intermodal cargo containers, at a cost of $1,840,140, and leased such containers to ICCU Containers, S.p.A. ("ICCU"), an affiliate of Clou Investments (U.S.A.), Inc. ("CLOU"), which formerly owned a minority interest in AFG Holdings Illinois Limited Partnership, formerly a partner in AFG. The ability of ICCU to fulfill all of its obligations under the lease contract deteriorated, in EFG's view, in 1994. As a result, EFG, on the Partnership's behalf, negotiated with other parties to either assume the lease obligations of ICCU or acquire the containers. As a result of these negotiations, the Partnership transferred 740 containers, having a net book value of $756,502, to a third party on November 30, 1994. The Partnership received, as settlement from ICCU and the third party, consideration as follows: (i) a contractual right to receive comparable containers with an estimated fair market value of $852,207 and (ii) beneficial assignment of an existing EFG note payable to CLOU which had a principal balance of $370,264 at the date of the transaction. The note had an effective interest rate of 8% and a quarterly amortization schedule which matured on December 31, 1996. All amounts due from EFG pursuant to this note had been received at December 31, 1996 in accordance with the original amortization schedule. A portion of the consideration received was used to satisfy the Partnership's accounts receivable balance of $183,128 outstanding from ICCU at November 30, 1994. An additional 158 containers, having a net book value of $161,523, were pending settlement at December 31, 1994. On March 31, 1995, 82 of these containers, having a net book value of $77,841 were transferred to the third party and the Partnership received $92,551 as consideration for these containers. The remaining 76 containers, having a net book value of $33,298, represent less than 1% of the Partnership's equipment portfolio at December 31, 1996. The remaining two containers of the original equipment group were disposed of in 1992 for stipulated payments as a result of casualty events. -11- By April 1995, the Partnership had replaced 822 of the original containers with comparable containers and leased such containers to a new lessee pursuant to the rules for completing a like-kind exchange for income tax reporting purposes. The carrying value of the new containers, $1,958,040, was reduced by $282,842, representing the amount of gain deferred on the original containers, and $14,710, the amount of gain deferred on the 82 containers settled during 1995. The Partnership obtained approximately $925,000 of long-term financing in connection with the replacement containers. As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include all aspects of acquisition, management and sale of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Partnership or (ii) fees which the General Partner reasonably believes to be competitive for similar services for similar equipment. Both of these fees are subject to certain limitations defined in the Management Agreement. Compensation to EFG for services connected to the sale of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under arm's length circumstances. Payment of the remarketing fee is subordinated to Payout and is subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG. All equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's Purchase Price is determined by the method described in Note 2 to the financial statements included in Item 14, herein. During 1997, the Partnership and certain affiliated investment programs sponsored by EFG exchanged their ownership interests in certain vessels for aggregate consideration of $11,565,375. The Partnership's share of such consideration was $1,203,062 consisting of common stock in Semele valued at $313,146, a note receivable from Semele of $459,729 and cash of $430,187. For further discussion, see Note 4, "Investment Securities - Affiliate / Note Receivable - Affiliate to the financial statements included in Item 14 herein and Item 10. 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 December 31, 1997, the Partnership was owed $296,505 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1998. Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"), both Massachusetts Limited Partnerships formed in 1995 and owned and controlled by certain principals of EFG, own 16,536 Units or 2.06% and 124,851.23 Units or 15.54% of the total outstanding units of the Partnership, respectively. EFG owns a Class D interest in AALP and a 49% limited partnership interest in ONC, both of which it acquired in December 1996. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters See Item 13(a) above. -12- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements: Report of Independent Auditors................................* Statement of Financial Position at December 31, 1997 and 1996.................................* Statement of Operations for the years ended December 31, 1997, 1996 and 1995..........* Statement of Changes in Partners' Capital for the years ended December 31, 1997, 1996 and 1995..........* Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995..........* Notes to the Financial Statements.............................* (2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable. Exhibit Number ----------- 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus which is included in Registration Statement on Form S-1 (No. 33-35148). 13 The 1997 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99 (a) Lease agreement with National Steel Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 as Exhibit 28 (a) and is incorporated herein by reference. * Incorporated herein by reference to the appropriate portion of the 1997 Annual Report to security holders for the year ended December 31, 1997 (see Part II). -13- Exhibit Number ----------- 99 (b) Lease agreement with United Air Lines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 as Exhibit 28 (b) and is incorporated herein by reference. 99 (c) Lease agreement with Gearbulk Shipowning Ltd. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 as Exhibit 99 (c) and is incorporated herein by reference. 99 (d) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (d) and is incorporated herein by reference. 99 (e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (e) and is incorporated herein by reference. 99 (f) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference. 99 (g) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (g) and is incorporated herein by reference. 99 (h) Lease agreement with Finnair OY is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and is included herein. 99 (i) Lease agreement with Finnair OY is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and is included herein. 99 (j) Lease agreement with The Helen Mining Company is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and is included herein. (b) Reports on Form 8-K None. -14- SIGNATURES 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/ Geoffrey A. MacDonald By: /s/ Gary D. Engle ----------------------------------- -------------------------------- Geoffrey A. MacDonald Gary D. Engle Chairman and a member of the President and Chief Executive Executive Committee of EFG and Officer and a member of the President and a Director of the Executive Committee of EFG General Partner (Principal Executive Officer) Date: March 31, 1998 Date: March 31, 1998 ---------------------------------- ------------------------------- By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield ----------------------------------- -------------------------------- Gary M. Romano Michael J. Butterfield Executive Vice President and Chief Vice President, Finance and Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer of the General Partner of the General Partner (Principal Financial Officer) (Principal Accounting Officer) Date: March 31, 1998 Date: March 31, 1998 ---------------------------------- ------------------------------- -16- EX-13 2 EXHIBIT 13 AMERICAN INCOME FUND I AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Annual Report to the Partners, December 31, 1997 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership INDEX TO ANNUAL REPORT TO THE PARTNERS Page ---- SELECTED FINANCIAL DATA 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3-8 FINANCIAL STATEMENTS: Report of Independent Auditors 9 Statement of Financial Position at December 31, 1997 and 1996 10 Statement of Operations for the years ended December 31, 1997, 1996 and 1995 11 Statement of Changes in Partners' Capital for the years ended December 31, 1997, 1996 and 1995 12 Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995 13 Notes to the Financial Statements 14-25 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed 26 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings 27 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the Amended and Restated Agreement and Certificate of Limited Partnership 28 -1- SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 1997:
Summary of Operations 1997 1996 1995 1994 1993 - --------------------------- ------------------ ------------------ -------------- --------------- -------------- Lease revenue $ 4,068,381 $ 4,130,156 $ 4,648,578 $ 7,199,896 $ 6,525,598 Net income (loss) $ 1,574,944 $ 552,157 $ (779,251) $ (22,729) $ (186,064) Per Unit: Net income (loss) $ 1.86 $ 0.65 $ (0.92) $ (0.03) $ (0.22) Cash distributions $ 0.94 $ 1.38 $ 2.00 $ 2.88 $ 3.00 Financial Position - --------------------------- Total assets $ 12,142,868 $ 13,848,889 $ 12,687,300 $ 16,390,469 $ 22,927,882 Total long-term obligations $ 4,401,753 $ 6,547,519 $ 4,574,713 $ 5,323,875 $ 9,589,147 Partners' capital $ 7,488,561 $ 6,821,321 $ 7,432,059 $ 9,902,794 $ 12,357,031
-2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31, 1997 compared to the year ended December 31, 1996 and the year ended December 31, 1996 compared to the year ended December 31, 1995 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, and the ability of Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG") to collect all rents due under the attendant lease agreements and successfully remarket the Partnership's equipment upon the expiration of such leases. The Year 2000 Issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The computer programs of EFG were designed and written using four digits to define the applicable year. As a result, EFG does not anticipate system failure or miscalculations causing disruptions of operations. Based on recent assessments, EFG determined that minimal modification of software is required so that its network operating system will function properly with respect to dates in the year 2000 and thereafter. EFG believes that with these modifications to the existing operating system, the Year 2000 Issue will not pose significant operational problems for its computer systems. EFG will utilize internal resources to upgrade software for Year 2000 modifications and anticipates completing the Year 2000 project by December 31, 1998, which is prior to any anticipated impact on its operating system. The total cost of the Year 2000 project is expected to be insignificant and have no effect on the results of operations of the Partnership. OVERVIEW The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course. The Partnership's stated investment objectives and policies contemplated that the Partnership would wind-up its operations within approximately seven years of its inception. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action Lawsuit could alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. RESULTS OF OPERATIONS For the year ended December 31, 1997, the Partnership recognized lease revenue of $4,068,381 compared to $4,130,156 and $4,648,578 for the years ended December 31, 1996 and 1995, respectively. The decrease in lease revenue from 1995 to 1997 reflects the effects of primary lease term expirations and the sale of equipment. Partially offsetting the decrease from 1996 to 1997 was the receipt in 1997 of prepaid contractual rental obligations of $400,631 associated with the exchange of the Partnership's interest in a vessel (see discussion below) and the effects of an aircraft exchange which concluded in March 1996. As a result of the aircraft exchange, the Partnership replaced its ownership interest in a Boeing 747-SP aircraft leased to United Air Lines, Inc. (the "United Aircraft"), having aggregate quarterly lease revenues of $213,302, with interests in six other aircraft (three Boeing 737 aircraft leased by Southwest Airlines, Inc., two McDonnell Douglas MD-82 aircraft leased by Finnair OY and one McDonnell Douglas MD-87 aircraft leased by Reno Air, Inc.), having aggregate quarterly lease revenues of $326,254. The Southwest Aircraft were exchanged into the Partnership in 1995, while the Finnair Aircraft and the Reno Aircraft were exchanged into the Partnership on March 25 and -3- March 26, 1996, respectively. Accordingly, 1997 was the first year the Partnership recognized a full year's revenue related to its interest in all six of these aircraft. The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enables the Partnership to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 1997 was $86,836 compared to $98,806 and $51,136 for the years ended December 31, 1996 and 1995, respectively. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1997 included $9,067 earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele") (see Note 4 to the financial statements herein). In 1996, the Partnership earned interest income of $44,994 on cash held in a special-purpose escrow account in connection with the aircraft exchange transactions. During 1996 and 1995, the Partnership also earned interest income of $18,531 and $25,817, respectively, on a note receivable from EFG resulting from the settlement with ICCU Containers, S.p.A. (see Note 5 to the financial statements herein). All amounts due from EFG pursuant to this note had been received at December 31, 1996. 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 year ended December 31, 1997, the Partnership sold equipment having a net book value of $359,061 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $652,413 compared to a net gain in 1996 of $356,452 on equipment having a net book value of $336,314 and a net gain in 1995 of $48,107 on equipment having a net book value of $517,800. In 1997, the Partnership also exchanged its interest in a vessel with an original cost and net book value of $2,605,381 and $1,180,755, respectively. In connection with this exchange, the Partnership realized proceeds of $802,431, which resulted in a net loss, for financial statement purposes, of $378,324. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received prepayment of the remaining contracted rent due under the vessel's lease agreement, as described above. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele, a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ. At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the vessel exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an -4- annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. In September 1995, the Partnership transferred its 33.07% ownership interest in the United Aircraft, pursuant to the rules of a like-kind exchange for income tax reporting purposes. The Partnership received aggregate cash consideration of $2,723,865 including $213,301 for rent accrued through the transfer date. A portion of the consideration was used to satisfy the balance of outstanding debt and interest of $414,925. The net cash consideration of $2,095,639 was deposited into a special-purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The Partnership's interest in the United Aircraft had a net book value of $3,475,960 at the date of transfer and resulted in a net loss for financial reporting purposes of $965,396. In November 1995, the Partnership partially replaced the United Aircraft with a 14.35% interest in the Southwest Aircraft, at an aggregate cost of $2,101,054. To acquire the interests in the Southwest Aircraft, the Partnership obtained financing of $1,567,878 from a third-party lender and utilized $533,176 of the cash consideration received from the transfer of the United Aircraft. The remaining ownership interest of 85.65% in the Southwest Aircraft is held by affiliated equipment leasing programs sponsored by EFG. Additionally, in March 1996, the Partnership completed the replacement of the United Aircraft with the acquisitions of an 11.87% ownership interest in the Finnair Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total cost to the Partnership of $3,322,913 and $2,894,892, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980 in cash and obtained financing of $2,211,933 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $494,780 in cash and obtained financing of $2,400,112 from a third-party lender. The remaining ownership interests of 88.13% and 78.69% of the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. 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. -5- Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation and amortization expense was $2,099,722, $3,163,960 and $3,930,328 for the years ended December 31, 1997, 1996 and 1995, respectively. 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 $387,553 or 9.5% of lease revenue in 1997, $556,255 or 13.5% of lease revenue in 1996 and $377,734 or 8.1% of lease revenue in 1995. The decrease in interest expense in 1997 compared to 1996 reflects the reduction of the Partnership's indebtedness. The increase in interest expense in 1996 compared to 1995 was due primarily to interest incurred in connection with the leveraging obtained to finance the aircraft exchange transactions, discussed above. Interest expense in future years is expected to decline in amount and as a percentage of lease revenue as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees were approximately 4.1% of lease revenue for the year ended December 31, 1997, compared to 3.4% and 3% of lease revenue during the years ended December 31, 1996 and 1995, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Operating expenses consist principally of administrative charges, professional service costs, such as audit and legal fees, as well as printing, distribution and remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. Operating expenses represented 4.9%, 4.6% and 3% of lease revenue during the years ended December 31, 1997, 1996 and 1995, respectively. The increase in operating expenses from 1996 to 1997 is attributable principally to an increase in administrative charges and professional service costs. The increase in operating expenses from 1995 to 1996 was due principally to costs incurred in connection with the aircraft like-kind exchange transactions, discussed above. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a partnership. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity which was established for specific purposes described in the preceding "Overview". As an equipment leasing program, the Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $3,241,188, $3,646,728, and $4,129,166 for the years ended 1997, 1996 and 1995 respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also continue to decline as the Partnership experiences a higher frequency of remarketing events. Ultimately, the Partnership will dispose of all assets under lease. This will occur principally through sale transactions whereby each asset will be sold to the existing lessee or to a third party. Generally, this will occur upon expiration of each asset's primary or renewal/re-lease term. In certain instances, casualty or early termination events may result in the disposal of an asset. Such circumstances are infrequent and usually result in the collection of stipulated cash settlements pursuant to terms and conditions contained in the underlying lease agreements. -6- Cash expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. During 1997, the Partnership realized net proceeds of $1,041,030, compared to $692,766 and $565,907 in 1996 and 1995, respectively. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. The Partnership expended $43,297 in 1996 in cash in connection with the aircraft like-kind exchange transactions referred to above. There were no equipment acquisitions in 1995 or 1997. As a result of the vessel exchange transaction (see Results of Operations) the Partnership became the beneficial owner of 208,764 shares of Semele common stock valued at $313,146 ($1.50 per share). This investment was reduced by a dividend of $41,752 received in November 1997 representing a return of equity to the Partnership. The Partnership also received a beneficial interest in the Semele Note of $459,729 in connection with the vessel exchange. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. As such, the Partnership reduced the carrying value of its investment in Semele common stock to $0.75 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1997) resulting in an unrealized loss in 1997 of $114,821 which was reported as a separate component of partner's capital. However, the General Partner believes that the underlying tangible assets of Semele, particularly the Ranch 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. During 1995, the Partnership transferred its ownership interest in certain trailers, previously leased to The Atchison Topeka and Santa Fe Railroad to a third party for cash consideration of $89,000. The trailers had an aggregate net book value of $49,693 at the date of transfer resulting in a net gain, for financial statement purposes, of $39,307. A portion of the consideration was used to satisfy outstanding debt of $3,596. The transaction was structured as a like-kind exchange for income tax reporting purposes. In 1995, the Partnership replaced these trailers with comparable trailers and leased such equipment to a new lessee. The net carrying value of the new trailers, $329,323, was net of $39,307, representing the amount of gain deferred on the original trailers. The Partnership funded this transaction with $85,404 of the net cash consideration received and a third-party installment note payable of $283,226. 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 addition, during 1997 the Partnership utilized a portion of its available cash to repay certain of its debt obligations. 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 the Finnair Aircraft and the Reno Aircraft of $1,127,840 and $679,276, respectively. Cash distributions to the General and Limited Partners are declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities. For the year ended December 31, 1997, the Partnership declared total cash distributions of Distributable Cash From Operations and Distributable Cash From Sales and Refinancings of $792,883. In accordance with the Amended and Restated Agreement and Certificate of Limited Partnership, the Limited Partners were allocated 95% of these distributions, or $753,239, and the General Partner was allocated 5%, or $39,644. The fourth quarter 1997 cash distribution was paid on January 13, 1998. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each -7- asset at its disposal date. Future market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. The future liquidity of the Partnership will be influenced by the foregoing, as well as the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements. The General Partner anticipates that cash proceeds resulting from the collection of contractual rents and the outcome of residual activities will satisfy the Partnership's future expense obligations. However, the amount of cash available for distribution in future periods will fluctuate. Equipment lease expirations and asset disposals will cause the Partnership's net cash from operating activities to diminish over time; and equipment sale proceeds will vary in amount and period of realization. In addition, the Partnership may be required to incur asset refurbishment or upgrade costs in connection with future remarketing activities. Accordingly, fluctuations in the level of quarterly cash distributions are anticipated. -8- REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Fund I-C, a Massachusetts Limited Partnership: We have audited the accompanying statements of financial position of American Income Fund I-C, a Massachusetts Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-C, a Massachusetts Limited Partnership at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1998 -9- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF FINANCIAL POSITION December 31, 1997 and 1996
1997 1996 ------------------- ------------------- ASSETS Cash and cash equivalents $ 2,519,940 $ 1,187,478 Rents receivable 246,877 469,090 Accounts receivable - affiliate 296,505 89,539 Note receivable - affiliate 459,729 -- Investment securities - affiliate 156,573 -- Equipment at cost, net of accumulated depreciation of $8,365,735 and $13,677,519 at December 31, 1997 and 1996, respectively 8,463,244 12,102,782 ------------------- ------------------- Total assets $ 12,142,868 $ 13,848,889 ------------------- ------------------- ------------------- ------------------- LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 4,401,753 $ 6,547,519 Accrued interest 30,468 79,752 Accrued liabilities 9,200 22,750 Accrued liabilities - affiliate 28,925 33,067 Deferred rental income 25,384 133,044 Cash distributions payable to partners 158,577 211,436 ------------------- ------------------- Total liabilities 4,654,307 7,027,568 ------------------- ------------------- Partners' capital (deficit): General Partner (508,111) (541,473) Limited Partnership Interests (803,454.56 Units; initial purchase price of $25 each) 7,996,672 7,362,794 ------------------- ------------------- Total partners' capital 7,488,561 6,821,321 ------------------- ------------------- Total liabilities and partners' capital $ 12,142,868 $ 13,848,889 ------------------- ------------------- ------------------- -------------------
The accompanying notes are an integral part of these financial statements. -10- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF OPERATIONS for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ Income: Lease revenue $ 4,068,381 $ 4,130,156 $ 4,648,578 Interest income 77,769 98,806 51,136 Interest income - affiliate 9,067 18,531 25,817 Gain on sale of equipment 652,413 356,452 48,107 Loss on exchange of equipment (378,324) -- (965,396) ------------ ------------ ------------ Total income 4,429,306 4,603,945 3,808,242 ------------ ------------ ------------ Expenses: Depreciation and amortization 2,099,722 3,163,960 3,930,328 Interest expense 387,553 556,255 377,734 Equipment management fees - affiliate 166,417 140,227 140,863 Operating expenses - affiliate 200,670 191,346 138,568 ------------ ------------ ------------ Total expenses 2,854,362 4,051,788 4,587,493 ------------ ------------ ------------ Net income (loss) $ 1,574,944 $ 552,157 $ (779,251) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per limited partnership unit $ 1.86 $ 0.65 $ (0.92) ------------ ------------ ------------ ------------ ------------ ------------ Cash distributions declared per limited partnership unit $ 0.94 $ 1.38 $ 2.00 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. -11- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF CHANGES IN PARTNERS' CAPITAL for the years ended December 31, 1997, 1996 and 1995
General Limited Partners Partner ---------------------------------- Amount Units Amount Total -------------- ------------- -------------- -------------- Balance at December 31, 1994 $ (387,399) 803,454.56 $ 10,290,193 $ 9,902,794 Net loss - 1995 (38,963) -- (740,288) (779,251) Cash distributions declared (84,574) -- (1,606,910) (1,691,484) -------------- ------------- -------------- -------------- Balance at December 31, 1995 (510,936) 803,454.56 7,942,995 7,432,059 Net income - 1996 27,608 -- 524,549 552,157 Cash distributions declared (58,145) -- (1,104,750) (1,162,895) -------------- ------------- -------------- -------------- Balance at December 31, 1996 (541,473) 803,454.56 7,362,794 6,821,321 Net income - 1997 78,747 -- 1,496,197 1,574,944 Unrealized loss on investment securities (5,741) -- (109,080) (114,821) Cash distributions declared (39,644) -- (753,239) (792,883) -------------- ------------- -------------- -------------- Balance at December 31, 1997 $ (508,111) 803,454.56 $ 7,996,672 $ 7,488,561 -------------- ------------- -------------- -------------- -------------- ------------- -------------- --------------
The accompanying notes are an integral part of these financial statements. -12- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---------------- ---------------- ---------------- Cash flows from (used in) operating activities: Net income (loss) $ 1,574,944 $ 552,157 $ (779,251) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 2,099,722 3,163,960 3,930,328 Gain on sale of equipment (652,413) (356,452) (48,107) Loss on exchange of equipment 378,324 -- 965,396 Changes in assets and liabilities: Decrease (increase) in: Rents receivable 222,213 247,567 (83,479) Accounts receivable - affiliate (206,966) (75,887) (26,934) Note receivable - affiliate -- 210,144 160,120 Increase (decrease) in: Accrued interest (49,284) 37,243 (30,951) Accrued liabilities (13,550) (134,252) 44,560 Accrued liabilities - affiliate (4,142) 9,723 16,307 Deferred rental income (107,660) (7,475) (18,823) ---------------- ---------------- ---------------- Net cash from operating activities 3,241,188 3,646,728 4,129,166 ---------------- ---------------- ---------------- Cash flows from (used in) investing activities: Dividend received 41,752 -- -- Purchase of equipment -- (43,297) -- Proceeds from equipment sales 1,041,030 692,766 565,907 ---------------- ---------------- ---------------- Net cash from investing activities 1,082,782 649,469 565,907 ---------------- ---------------- ---------------- Cash flows used in financing activities: Principal payments - notes payable (2,145,766) (2,639,239) (3,106,835) Distributions paid (845,742) (1,268,613) (1,902,919) ---------------- ---------------- ---------------- Net cash used in financing activities (2,991,508) (3,907,852) (5,009,754) ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 1,332,462 388,345 (314,681) Cash and cash equivalents at beginning of year 1,187,478 799,133 1,113,814 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 2,519,940 $ 1,187,478 $ 799,133 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 436,837 $ 519,012 $ 408,685 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Supplemental disclosure of non-cash investing and financing activities: See Note 4 to the financial statements regarding the reduction of the Partnership's carrying value of its investment securities - affiliate. Also, see Notes 3 and 5 to the financial statements. The accompanying notes are an integral part of these financial statements. -13- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements December 31, 1997 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS American Income Fund I-C, a Massachusetts Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the Partnership issued 803,454.56 units of limited partnership interests (the "Units") to 909 investors. Included in the 803,454.56 units were 7,293.56 bonus units. The Partnership's General Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). Significant operations commenced on May 31, 1991 when the Partnership made its initial equipment acquisition. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Limited Partners and 5% to the General Partner. Under the terms of a Management Agreement between the Partnership and EFG, management services are provided by EFG to the Partnership at fees which the General Partner believes to be competitive for similar services (see Note 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President and Chief Executive Officer. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -14- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) STATEMENT OF CASH FLOWS The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in federal agency discount notes and reverse repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 1997, the Partnership had $2,416,897 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. REVENUE RECOGNITION Rents are payable to the Partnership monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $5,779,390 are due as follows: For the year ending December 31, 1998 $ 1,884,325 1999 1,328,721 2000 796,569 2001 762,129 2002 762,129 Thereafter 245,517 ------------ Total $ 5,779,390 ------------ ------------
Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------------ ------------ ------------ Gearbulk Shipowning Ltd. $ 534,796 $ 543,909 $ 542,655 Finnair OY $ 511,496 $ -- $ -- The Helen Mining Company $ 430,000 $ -- $ -- Southwest Airlines, Inc. $ 413,280 $ 413,280 $ -- General Motors Corporation $ -- $ 516,616 $ -- United Air Lines, Inc. $ -- $ -- $ 632,629 National Steel Corporation $ -- $ -- $ 488,580
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment cost represents asset base price plus acquisition fees and was determined in accordance with the Restated -15- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) Agreement, as amended, and certain regulatory guidelines. Asset base price is affected by the relationship of the seller to the Partnership as summarized herein. Where the seller of the equipment was EFG or an affiliate, asset base price was the lower of (i) the actual price paid for the equipment by EFG or the affiliate plus all actual costs accrued by EFG or the affiliate while carrying the equipment less the amount of all rents earned by EFG or the Affiliate prior to selling the equipment or (ii) fair market value as determined by the General Partner in its best judgment, including all liens and encumbrances on the equipment and other actual expenses. Where the seller of the equipment was a third party who did not manufacture the equipment, asset base price was the lower of (i) the price invoiced by the third party or (ii) fair market value as determined by the General Partner. Where the seller of the equipment was a third party who also manufactured the equipment, asset base price was the manufacturer's invoice price, which price was considered to be representative of fair market value. DEPRECIATION AND AMORTIZATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, 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 on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset 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. Periodically, the General Partner evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. 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. Organization costs were amortized using the straight-line method over a period of five years. INVESTMENT SECURITIES - AFFILIATE The Partnership's investment in Semele Group, Inc. is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of Partner's Capital (see Note 4). ACCRUED LIABILITIES - AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities - Affiliate (see Note 5). ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). See Note 7 for allocation of income or loss for income tax purposes. -16- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT Net income (loss) and cash distributions per Unit are based on 803,454.56 Units outstanding during each of the three years in the period ended December 31, 1997 and computed after allocation of the General Partner's 5% share of net income (loss) and cash distributions. PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their tax returns. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This statement establishes standards for reporting comprehensive income and its components and requires this disclosure be added as a new section in a financial statement. This statement is effective for fiscal years beginning after December 31, 1997. The Partnership will adopt the new disclosures required by SFAS No. 130 in 1998. NOTE 3 - EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 1997. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1997 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment Equipment Type (Months) at Cost Location - ------------------------------------ --------------- ------------------- ----------------------------------- Aircraft 19-60 $ 8,318,862 NV/TX/Foreign Materials handling 0-21 3,890,639 CA/CO/FL/GA/IA/IL/MI/MN/MO/NY OH/OR/PA/TX/Foreign
-17- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) Trailers/intermodal containers 60-66 1,982,184 CA/OK Tractors and heavy duty trucks 0-3 1,210,962 CA/IL/IN/MI/OR Retail store fixtures 15 517,488 FL Construction and mining 0-6 426,263 IL Motor vehicles 0-6 252,622 MI/WI Research and test 0 116,406 CO Communications 0 51,469 TX Manufacturing 0 35,218 MI Computers and peripherals 0 26,866 NY ----------------- Total equipment cost 16,828,979 Accumulated depreciation (8,365,735) ----------------- Equipment, net of accumulated depreciation $ 8,463,244 ----------------- -----------------
In September 1995, the Partnership transferred its 33.07% ownership interest in an aircraft leased to United Air Lines, Inc. (the "United Aircraft"), pursuant to the rules of a like-kind exchange for income tax reporting purposes. In November 1995, the Partnership partially replaced the United Aircraft with a 14.35% interest in three aircraft lease to Southwest Airlines, Inc. (the "Southwest Aircraft"), at an aggregate cost of $2,101,054. To acquire the interests in the Southwest Aircraft, the Partnership obtained financing of $1,567,878 from a third-party lender and utilized $533,176 of the cash consideration received from the transfer of the United Aircraft. The remaining ownership interest of 85.65% in the Southwest Aircraft is held by affiliated equipment leasing programs sponsored by EFG. Additionally, in March 1996, the Partnership completed the replacement of the United Aircraft with the acquisitions of an 11.87% ownership interest in two aircraft leased to Finnair OY (the "Finnair Aircraft") and a 21.31% ownership interest in an aircraft leased to Reno Air, Inc. (the "Reno Aircraft") at a total cost of $3,322,913 and $2,894,892, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980 in cash and obtained financing of $2,211,933 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $494,780 in cash and obtained financing of $2,400,112 from a third-party lender. The remaining ownership interests of 88.13% and 78.69% in the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. During 1995, the Partnership transferred its ownership interest in certain trailers, previously leased to The Atchison Topeka and Santa Fe Railroad to a third party for cash consideration of $89,000. The trailers had an aggregate net book value of $49,693 at the date of transfer resulting in a net gain, for financial statement purposes, of $39,307. A portion of the consideration was used to satisfy outstanding debt of $3,596. The transaction was structured as a like-kind exchange for income tax reporting purposes. In 1995, the Partnership replaced these trailers with comparable trailers and leased such equipment to a new lessee. The net carrying value of the new trailers, $329,323, was net of $39,307, representing the amount of gain deferred on the original trailers. The Partnership funded this transaction with $85,404 of the net cash consideration received and a third-party installment note payable of $283,226. In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. 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. Proportionate equipment ownership enables the Partnership to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. At December 31, 1997, the Partnership's equipment portfolio -18- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) included equipment having a proportionate original cost of $10,818,531, representing approximately 64% 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 approximately $8,319,000 and a net book value of approximately $6,975,000 at December 31, 1997 (see Note 6). Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. The summary above includes equipment held for sale or re-lease with a cost and net book value of approximately $78,000 and $2,000, respectively. 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 4 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ. At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. The Partnership's interest in the vessel had an original cost and net book value of $2,605,381 and $1,180,755, respectively. The proceeds -19- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) realized by the Partnership of $802,431 resulted in a net loss, for financial statement purposes, of $378,324. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $400,631. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. In May 1997, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors of Semele and in October 1997, James A. Coyne, Executive Vice President of EFG was elected Semele's President and Chief Operating Officer. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. As such, the Partnership reduced the carrying value of its investment in Semele common stock to $0.75 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1997) resulting in an unrealized loss in 1997 of $114,821 which was reported as a separate component of partner's capital. NOTE 5 - 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 years ended December 31, 1997, 1996 and 1995, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1997 1996 1995 ------------ ------------ ------------ Equipment management fees $ 166,417 $ 140,227 $ 140,863 Administrative charges 63,870 40,295 21,000 Reimbursable operating expenses due to third parties 136,800 151,051 117,568 ------------ ------------ ------------ Total $ 367,087 $ 331,573 $ 279,431 ============ ============ ============
In 1991, the Partnership acquired 900 intermodal cargo containers, at a cost of $1,840,140, and leased such containers to ICCU Containers, S.p.A. ("ICCU"), an affiliate of Clou Investments (U.S.A.), Inc. ("CLOU"), which formerly owned a minority interest in AFG Holdings Illinois Limited Partnership, formerly a partner in AFG. The ability of ICCU to fulfill all of its obligations under the lease contract deteriorated, in EFG's view, in 1994. As a result, EFG, on the Partnership's behalf, negotiated with other parties to either assume the lease obligations of ICCU or acquire the containers. As a result of these negotiations, the Partnership transferred 740 containers, having a net book value of $756,502, to a third party on November 30, 1994. The Partnership received, as -20- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) settlement from ICCU and the third party, consideration as follows: (i) a contractual right to receive comparable containers with an estimated fair market value of $852,207 and (ii) beneficial assignment of an existing EFG note payable to CLOU which had a principal balance of $370,264 at the date of the transaction. The note had an effective interest rate of 8% and a quarterly amortization schedule which matured on December 31, 1996. All amounts due from EFG pursuant to this note had been received at December 31, 1996 in accordance with the original amortization schedule. A portion of the consideration received was used to satisfy the Partnership's accounts receivable balance of $183,128 outstanding from ICCU at November 30, 1994. An additional 158 containers, having a net book value of $161,523, were pending settlement at December 31, 1994. On March 31, 1995, 82 of these containers, having a net book value of $77,841 were transferred to the third party and the Partnership received $92,551 as consideration for these containers. The remaining 76 containers, having a net book value of $33,298, represent less than 1% of the Partnership's equipment portfolio at December 31, 1996. The remaining two containers of the original equipment group were disposed of in 1992 for stipulated payments as a result of casualty events. By April 1995, the Partnership had replaced 822 of the original containers with comparable containers and leased such containers to a new lessee pursuant to the rules for completing a like-kind exchange for income tax reporting purposes. The carrying value of the new containers, $1,958,040, was reduced by $282,842, representing the amount of gain deferred on the original containers, and $14,710, the amount of gain deferred on the 82 containers settled during 1995. The Partnership obtained approximately $925,000 of long-term financing in connection with the replacement containers. As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include all aspects of acquisition, management and sale of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Partnership or (ii) fees which the General Partner reasonably believes to be competitive for similar services for similar equipment. Both of these fees are subject to certain limitations defined in the Management Agreement. Compensation to EFG for services connected to the sale of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under arm's length circumstances. Payment of the remarketing fee is subordinated to Payout and is subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG. All equipment was purchased from EFG, one of its Affiliates or from third-party sellers. The Partnership's Purchase Price is determined by the method described in Note 2. 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 December 31, 1997, the Partnership was owed $296,505 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1998. Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"), both Massachusetts Limited Partnerships formed in 1995 and owned and controlled by certain principals of EFG, own 16,536 Units or 2.06% and 124,851.23 Units or 15.54% of the total outstanding units of the Partnership, -21- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) respectively. EFG owns a Class D interest in AALP and a 49% limited partnership interest in ONC, both of which it acquired in December 1996. NOTE 6 - NOTES PAYABLE Notes payable at December 31, 1997 consisted of installment notes of $4,401,753 payable to banks and institutional lenders. The installment notes bear interest rates ranging between 8.65% and 8.89%, except one note which bears a fluctuating interest rate based on LIBOR (5.72% at December 31, 1997) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Partnership has balloon payment obligations at the expiration of the respective primary lease terms related to the Finnair Aircraft and the Reno Aircraft of $1,127,840 and $679,276, respectively. The carrying value of notes payable approximates fair value at December 31, 1997. The annual maturities of the installment notes payable are as follows: For the year ending December 31, 1998 $ 988,247 1999 1,862,993 2000 284,916 2001 308,121 2002 957,476 ----------- Total $ 4,401,753 ----------- -----------
NOTE 7 - INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income or loss to each class of partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Restated Agreement, as amended. For income tax purposes, the Partnership allocates net income or net loss in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon 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, 1997, the General Partner had a positive tax capital account balance. The following is a reconciliation between net income (loss) reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------------ ------------------ ------------------ Net income (loss) $ 1,574,944 $ 552,157 $ (779,251) Financial statement depreciation in excess of (less than) tax depreciation (244,130) (67,047) 850,430 Deferred rental income (107,660) (7,475) (18,823) Other (445,123) 404,699 1,367,074 ------------------ ------------------ ------------------
-22- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) Net income for federal income tax reporting purposes $ 778,031 $ 882,334 $ 1,419,430 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
The principal component of "Other" consists of the difference between the tax gain on equipment disposals and the financial statement gain (loss) on disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1997 and 1996:
1997 1996 ------------------ ------------------ Partners' capital $ 7,488,561 $ 6,821,321 Unrealized loss on investment securities 114,821 -- Add back selling commissions and organization and offering costs 2,234,203 2,234,203 Financial statement distributions in excess of tax distributions 7,929 10,572 Cumulative difference between federal income tax and financial statement income (loss) (1,354,255) (557,342) ------------------ ------------------ Partners' capital for federal income tax reporting purposes $ 8,491,259 $ 8,508,754 ------------------ ------------------ ------------------ ------------------
Financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. -23- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) NOTE 8 - LEGAL PROCEEDINGS On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit." The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On March 9, 1998, counsel for the Defendants and the Plaintiffs entered into a Memorandum of Understanding setting forth the terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Memorandum of Understanding represents a preliminary step towards a comprehensive Stipulation of Settlement between the parties that must be presented to and approved by the Court as a condition precedent to effecting a settlement. The Memorandum of Understanding (i) prescribes a number of conditions necessary to achieving a settlement, including providing the partners (or beneficiaries, as applicable) of the Nominal Defendants with the opportunity to vote on any settlement and (ii) contemplates various changes that, if effected, would alter the future operations of the Nominal Defendants. With respect to the Partnership and 10 affiliated partnerships (hereafter referred to as the "Exchange Partnerships"), the Memorandum of Understanding provides for the restructuring of their respective business operations into a single successor company whose securities would be listed and traded on a national stock exchange. The partners of the Exchange Partnerships would receive both common stock in the new company and a cash distribution in exchange for their existing partnership interests. Such a transaction would, among other things, allow for the consolidation of the Partnership's operating expenses with other similarly-organized equipment leasing programs. To the extent that the parties agree upon a Stipulation of Settlement that is approved by the Court, the complete terms thereof will be communicated to all of the partners (or beneficiaries) of the Nominal Defendants to enable them to vote thereon. There can be no assurance that the parties will agree upon a Stipulation of Settlement, or that it will be approved by the Court, or that the outcome of the voting by the partners (or beneficiaries) of the Nominal Defendants, including the Partnership, will result in a settlement finally being effected or in the Partnership being included in any such settlement. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that a Stipulation of Settlement will be agreed upon by the parties and approved by the Court. In the absence of a Stipulation of Settlement approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. The General Partner and its affiliates cannot predict with any degree of certainty the ultimate outcome of such litigation. On July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored investment programs, filed an action in the Commonwealth of Massachusetts Superior Court Department of the Trial Court in and for the County of Suffolk, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by National Steel of certain sales and/or use taxes paid to the -24- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) State of Illinois and other remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice of Removal which removed the case to the United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory relief and alleging breach of contract, implied covenant of good faith and fair dealing and specific performance. EFG filed its Answer to these counterclaims on September 29, 1995. Though the parties have been discussing settlement with respect to this matter for some time, to date, the negotiations have been unsuccessful. Notwithstanding these discussions, EFG recently filed an Amended and Supplemental Complaint alleging further default under the MLA and EFG recently filed a motion for Summary Judgment on all claims and counterclaims. The Court held a hearing on EFG's motion in December 1997 and the matter remains pending before the Court. The Partnership has not experienced any material losses as a result of this action. -25- ADDITIONAL FINANCIAL INFORMATION -26- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED for the years ended December 31, 1997, 1996 and 1995 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenue, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995 ------------------ ------------------ ------------------ Rents earned prior to disposal of equipment, net of interest charges $ 6,304,322 $ 2,585,344 $ 1,926,993 Sale proceeds realized upon disposition of equipment 1,041,030 692,766 565,907 ------------------ ------------------ ------------------ Total cash generated from rents and equipment sale proceeds 7,345,352 3,278,110 2,492,900 Original acquisition cost of equipment disposed 6,190,551 3,249,160 2,199,677 ------------------ ------------------ ------------------ Excess of total cash generated to cost of equipment disposed $ 1,154,801 $ 28,950 $ 293,223 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
-27- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS for the year ended December 31, 1997
Sales and Operations Refinancings Total ------------------ ------------------ ------------------ Net income $ 922,531 $ 652,413 $ 1,574,944 Add: Depreciation 2,099,722 -- 2,099,722 Management fees 166,417 -- 166,417 Book value of disposed equipment -- 359,061 359,061 Loss on exchange 378,324 -- 378,324 Proceeds on exchange -- 29,556 29,556 Less: Principal reduction of notes payable (2,145,766) -- (2,145,766) ------------------ ------------------ ------------------ Cash from operations, sales and refinancings 1,421,228 1,041,030 2,462,258 Less: Management fees (166,417) -- (166,417) ------------------ ------------------ ------------------ Distributable cash from operations, sales and refinancings 1,254,811 1,041,030 2,295,841 Other sources and uses of cash: Cash at beginning of year 1,187,478 -- 1,187,478 Net change in receivables and accruals (159,389) -- (159,389) Dividend received 41,752 -- 41,752 Less: Cash distributions paid -- (845,742) (845,742) ------------------ ------------------ ------------------ Cash at end of year $ 2,324,652 $ 195,288 $ 2,519,940 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
-28- AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP December 31, 1997 For the year ended December 31, 1997, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses $ 202,792 -29- EX-23 3 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Income Fund I-C, a Massachusetts Limited Partnership of our report dated March 10, 1998, included in the 1997 Annual Report to the Partners of American Income Fund I-C. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1998 EX-99.(J) 4 EXHIBIT 99(J) EX-99(j) First Amendment to Master Lease Agreement FIRST AMENDMENT TO MASTER LEASE AGREEMENT NO. 9106PAG429 This FIRST AMENDMENT dated as of January 17, 1994, between The Helen Mining Company ("Lessee") and American Finance Group, a Massachusetts general partnership ("Lessor"), amends Master Lease Agreement No. 9106PAG429 (the "Master Lease") dated as of June 25, 1991. WHEREAS, Lessee and Lessor agree that further clarification of certain provisions of the Master Lease is necessary. NOW THEREFORE, in consideration of the premises and for good and valuable consideration, the receipt and adequacy of which is confirmed by each of the parties hereto, the Master Lease is hereby amended as follows. 1. The following new provision is added to the Master Lease as Section 11A. "11A SPECIAL MAINTENANCE AND RETURN CONDITIONS In furtherance, and not in limitation of, the use, maintenance and return conditions for the Equipment set forth in Section 11 of the Master Lease, Lessee hereby agrees to return the Equipment to Lessor in accordance with all of the terms and conditions of the Master Lease and in compliance with the following special return conditions: RETURN OF EQUIPMENT 1. The Equipment will be capable of being immediately assembled and operated by a third party lessee without further inspection, repair, replacement, alterations or improvements needed. 2. The Equipment shall comply in all respects with all applicable laws and rules and provisions of all applicable regulatory agencies having jurisdiction over the use and/or maintenance of the Equipment. 3. All parts in a state of disrepair will have been replaced with new or equivalent Original Equipment Manufacturer or comparable parts and to otherwise comply with the provisions of each Rental Schedule. 4. All modifications and/or alterations made to the Equipment will be subject to prior approval of Lessor and such modifications or alterations must not decrease the value or marketability of the Equipment. The Equipment will be complete and operational with all components equal to or better than those originally supplied. 5. The Equipment, if idled, shall be stored in accordance with the manufacturers' recommendations. If the Equipment is placed on idle status by Sublessee, immediate notification to Lessor is required. 6. All markings not associated with the original manufacturer shall be removed from the Equipment. 7. Upon request of Lessor, Lessee shall provide free storage of the Equipment or for any parts or components thereof for a period not to exceed one hundred and twenty (120) days after the expiration of the Lease Term. During the storage period, Lessee is required to comply with all provisions of the applicable Rental Schedule, except the obligation to make monthly Basic Rent payments. 8. The Equipment shall be thoroughly cleaned consistent with the original condition of delivery. All applicable manufacturer-provided catalogs and required maintenance/operating logs shall be provided to Lessor upon expiration of the Lease Term. INSPECTION PRIOR TO RETURN OF EQUIPMENT Lessor or its agent is authorized to enter upon Lessee's property, for the purpose of Equipment inspection to determine the degree of compliance with aforementioned conditions described herein. All inspection costs shall be at Lessee's expense. If any item of the Equipment is returned in any condition other than as specified herein, Lessee shall immediately advance payment for all repairs and other costs needed to place the Equipment in the required return condition." 2. As hereby amended, the Master Lease is ratified and confirmed and remains in full force and effect. IN WITNESS WHEREOF the parties hereto have caused this First Amendment to Master Lease Agreement No. 9106PAG429 to be executed and delivered by their duly authorized representatives as of the date first above written. AMERICAN FINANCE GROUP THE HELEN MINING COMPANY (Lessor) (Lessee) By: /s/ [Illegible] By: /s/ [Illegible] -------------------------- ---------------------------- Title: Manager Title: Vice Pres. ------------------------ -------------------------- 2931i MASTER LEASE AGREEMENT MASTER LEASE AGREEMENT NO. 9106PAG429 ("Master Lease"), dated as of June 25, 1991 between AMERICAN FINANCE GROUP, a Massachusetts general partnership having a principal place of business and address for purposes of notice hereunder at Exchange Place, Boston, Massachusetts 02109, Attention: Vice President, Lease Financing Group, as Lessor, and THE HELEN MINING COMPANY, a Delaware corporation having a principal place of business and address for purposes of notice hereunder at RD #2, Box 2110, Homer City, Pennsylvania 15748 Attention: President, as Lessee. 1. MASTER LEASE. This Master Lease sets forth the terms and conditions that govern the lease by Lessor to Lessee of items of Equipment specified on rental schedules and acceptance certificates ("Rental Schedules") executed and delivered by the parties from time to time. Each Rental Schedule incorporates by reference this Master Lease and specifies the Lease Term, the amount of Basic Rent, the Payment Dates on which Basic Rent is due (as such terms are defined therein), and such other information and provisions as Lessor and Lessee may agree. Each Rental Schedule constitutes a separate and independent lease. 2. LEASE TERM. LESSEE'S RIGHT TO QUIET ENJOYMENT. Each Rental Schedule is for a non-cancellable Lease Term commencing on the date of acceptance of the Equipment for lease and ending on the Expiration Date specified on such Rental Schedule, unless the lease is extended in accordance with the terms of this Master Lease. Lessee cannot, except as expressly set forth in this Master Lease, terminate the Rental Schedule or suspend payment or performance of any of its obligations thereunder. Provided no Event of Default has occured and is continuing under the Rental Schedule, Lessee will have quiet possession and use of the Equipment throughout the Lease Term, and Lessor shall defend and protect such quiet possession and use against all persons claiming by, through or under Lessor. 3. BASIC RENT. NET LEASE. LESSEE'S INDEMNITY. NO WARRANTIES BY LESSOR. Basic Rent is payable in the amount specified on the Rental Schedule. All payments of Basic Rent shall be made to Lessor in good funds on or before the Payment Dates specified in the Rental Schedule. Lessor will excercise it best efforts to invoice Lessee thirty (30) days prior to each Payment Date, but failure to provide timely invoices will not relieve Lessee of its obligation to pay Basic Rent on the Payment Date. Basic Rent is net of, and Lessee agrees to pay, and will indemnify and hold Lessor and any assignee of Lessor harmless from and against, all costs (including, without limitation, maintenance, repair and insurance costs), claims (including claims of product liability, strict liability in tort, patent infringement and the like), losses or liabilities relating to the Equipment or its use that are incurred by or asserted against Lessee, any permitted sublessee of Lessee, Lessor or any assignee of Lessor and arise out of matters occurring prior to the return of the Equipment. Each Rental Schedule is an irrevocable, absolute, net lease, and Lessee's obligations are not subject to defense, counterclaim, set-off, abatement or recoupment, and Lessee waives all rights to terminate or surrender the Rental Schedule, for any reason except as expressly set forth in this Master Lease, including, without limitation, defect in the Equipment or non-performance by Lessor, provided, however, that Lessee specifically retains the right to seek recourse against Lessor by way of separate action either at law or in equity in the event of breach or non-performance by Lessor under the Rental Schedule. LESSOR HEREBY DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE. Lessor will assign to Lessee for the Lease Term and any renewals thereof any assignable manufacturer or vendor warranties with respect to the Equipment and will cooperate with Lessee, at Lessee's expense, in asserting any claims under such warranties. Lessee acknowledges that each Rental Schedule shall be entered into on the basis that Lessor shall be entitled for federal and state income tax purposes (i) to claim the deductions for depreciation on the total original cost of the Equipment pursuant to the Accelerated Cost Recovery System under Section 168 of the Internal Revenue Code of 1986, as amended ("Code") or for state income tax purposes, any other depreciation deduction method that is permitted by applicable state law; and (ii) to claim under Section 163 of the Code a tax deduction for the full amount of any interest paid by Lessor or accrued under Lessor's method of tax accounting on any indebtedness secured by the Equipment (hereinafter referred to collectively as the "Tax Benefits"). If Lessor shall lose or shall not have the right to claim, or if there shall be disallowed or recaptured, any or all of such Tax Benefits as a result of any act, omission, misrepresentation or failure to act by Lessee, any sublessee, or any other person authorized by the Lessee to use or maintain the Equipment, Lessee shall pay to Lessor as additional rent (a) an amount equal to the actual disallowed Tax Benefits plus (b) all interest, penalties, or additions to tax resulting from such loss, disallowance, unavailability or recapture of any of the foregoing, plus (c) all taxes required to by paid by the Lessor or its assigns under any federal, state and local law upon receipt of any of the foregoing indemnities. 4. USE AND LOCATION OF EQUIPMENT. MAINTENANCE AND REPAIRS. NO LIENS. NO ASSIGNMENT BY LESSEE. LESSEE'S RIGHT TO SUBLEASE. The Equipment is to be used exclusively by Lessee in the conduct of its business, only for the purposes for which it was designed and in substantial compliance with all applicable laws, rules and regulations, manufacturers' or vendors' warranties and applicable policies of insurance. Lessee will obtain and maintain all necessary licenses, permits and approvals. The Equipment may be removed from the location specified on the Rental Schedule to a location within the contiguous United States only upon thirty (30) days' prior written notice to Lessor. In no event may the Equipment be moved to a location outside the United States. Lessee will effect all maintenance and repairs necessary to keep the Equipment in good and efficient operating condition and appearance, reasonable wear and tear excepted. All maintenance and repairs will be made in accordance with the manufacturer's recommendations and by authorized representatives of the manufacturer or by persons of equal skill and knowledge whose work will not adversely affect any applicable manufacturer's or vendor's warranty. Lessee will keep the Equipment and its interest therein free and clear of all liens and encumbrances other than those created by Lessor or arising out of claims against Lessor and not related to the lease of the Equipment to Lessee. THE RENTAL SCHEDULE MAY NOT BE ASSIGNED BY LESSEE. LESSEE MAY SUBLEASE THE EQUIPMENT ONLY UPON PRIOR WRITTEN NOTICE TO LESSOR, in which notice Lessee represents and warrants to Lessor that such sublease is for a term not longer than the Lease Term, is not made to a tax-exempt entity or govermental agency, is specifically made subject to the prior rights of Lessor and its assignees under the Rental Schedule, does not create any obligation on the part of Lessor in favor of such sublessee and does not relieve Lessee of any of its obligations under the Rental Schedule including, without limitation, Lessee's obligations with respect to (a) the payment of Basic Rent and other sums due or to become due, (b) use and maintenance of the Equipment and (c) provisions for the return of the Equipment at the expiration of the Lease Term. 5. LOSS, DAMAGE OR DESTRUCTION OF EQUIPMENT. Lessee will bear all risk of loss with respect to the Equipment during the Lease Term and until the Equipment is returned to Lessor. Lessee will notify Lessor promptly in writing if any item of Equipment is lost, stolen, requisitioned by a governmental authority or damaged beyond repair (each a "Casualty"), describing the Casualty in reasonable detail, and will promptly file a claim under appropriate policies of insurance. Lessee may, with the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed, replace the Equipment suffering a Casualty with similar equipment of at least equal value and utility, assuming the replaced Equipment was in the condition of maintenance and repair required under this Master Lease, and Lessor will convey title to the replaced Equipment to Lessee, as is, where is and with all faults, free of liens and encumbrances created by Lessor. If Lessee does not replace the Equipment, Lessee will pay to Lessor on the next Payment Date following the Casualty, in addition to Basic Rent and other sums due on that date, an amount equal to the Casualty Value thereof specified on the Rental Schedule. The Rental Schedule, solely as it relates to the Equipment suffering the Casualty, will terminate and ownership of the Equipment suffering the Casualty, including all claims for insurance proceeds or condemnation awards, will pass to Lessee upon receipt of such payment by Lessor. 6. TAXES AND FEES. Lessee agrees to prepare and file all required returns or reports and to pay all sales, gross receipts, personal property and other taxes (including highway use and vehicle excise taxes, where applicable), fees, interest, fines or penalties imposed by any governmental authority relating in any way to the Equipment, including any documentary, stamp or recordation taxes assessed in connection with the financing of Lessor's purchase of the Equipment and excepting only taxes imposed upon the net income of Lessor. Notwithstanding the foregoing, Lessor will report and pay all use taxes and Lessee will pay to Lessor, on each Basic Rent Payment Date, as additional rent, an amount equal to the use taxes attributable to that payment of Basic Rent. If any item of Equipment is located in a taxing jurisdiction that does not allow Lessee to report and pay personal property taxes directly, Lessee will prepare an appropriate tax return to be delivered, together with funds equal to the taxes Lessee claims are due on such return, to Lessor not less than ten (10) days prior to the date such taxes are due. If Lessee is eligible for a tax exemption or abatement for sales, use or other taxes that would otherwise apply under this Section, Lessee shall furnish Lessor an appropriate tax exemption or abatement certificate and other reasonable evidence thereof not later than the date of execution of the Commencement Date of the Rental Schedule. 7. INSURANCE. Lessee agrees to maintain policies of insurance on the Equipment in amounts, against risks and on terms and conditions applicable to other equipment owned or leased by Lessee and similar to the Equipment. Such insurance will at a minimum include (i) physical damage and theft insurance in an amount at least equal to the greater of the Casualty Value set forth on the Rental Schedule or the fair market value of the Equipment and (ii) comprehensive liability insurance in the amount of at least $5,000,000 per occurrence, in each case with deductibles not in excess of $500,000. All policies (A) are to be maintained with insurers reasonably acceptable to Lessor; (B) are to name Lessor and its assignees as loss payees with respect to physical damage and theft and as additional insureds with respect to liability, as their interests may appear; and (C) are to provide that the insurance carrier will endeavor to provide thirty days prior written notice to Lessor and each of Lessor's assignees named as additional insured and loss payee in the event of alteration or cancellation. Lessee agrees to deliver to Lessor such certificates of insurance as Lessor may, from time to time, reasonably request. Lessor may hold any insurance proceeds as security for Lessee's performance of its obligations with respect to the Equipment on behalf of which the proceeds were paid and the payment of all Basic Rent and other sums then due and unpaid under the Rental Schedule and will pay such proceeds over to Lessee only upon receipt of satisfactory evidence thereof. 8. FINANCIAL STATEMENTS. INSPECTION. REPORTS. Lessee will provide to Lessor copies of Lessee's annual balance sheet, profit and loss statement and statement of cash flow, and, if generally available to Lessee's Lenders, quarterly unaudited balance sheet and profit and loss statement, all prepared in accordance with generally accepted accounting principles, consistently applied. If Lessee's obligations are guaranteed by any other party, then Lessee will also provide similar financial information with respect to the Guarantor. Lessor may from time to time, upon reasonable notice and during Lessee's normal business hours, inspect the Equipment and Lessee's records with respect thereto and discuss Lessee's financial condition with knowledgeable representatives of Lessee. Lessee will, if requested, provide a report on the condition of the Equipment, a record of its maintenance and repair, a summary of all items suffering a Casualty, a certificate of no default or such other information or evidence of compliance with Lessee's obligations under the Rental Schedule as Lessor may reasonably request. 9. AGREEMENT FOR LEASE ONLY. IDENTIFICATION MARKS. FINANCING STATEMENTS. FURTHER ASSURANCES. Each Rental Schedule is intended to be a true lease and not a lease in the nature of a security agreement; each Rental Schedule is intended to be a "finance lease" as that term is defined in Article 2A of the Uniform Commercial Code. Lessee will affix to the Equipment all notices of Lessor's ownership of the Equipment furnished by Lessor. Lessee will promptly execute and deliver, and Lessor may file, Uniform Commercial Code financing statements or other similar documents notifying the public of Lessor's ownership of the Equipment. Lessee agrees to promptly execute and deliver to Lessor such further documents or other assurances, and to take such further action, including obtaining landlord and mortgagee waivers, as Lessor may from time to time reasonably request in order to establish and protect the rights and remedies created by the Rental Schedule. 10. LATE PAYMENT CHARGES. LESSOR'S RIGHT TO PERFORM FOR LESSEE. A Late Payment Charge equal to (A) the greater of 2% per annum above the debt rate charged to Lessor in connection with the financing of its purchase of the Equipment (or, if there is no such financing outstanding, 2% per annum above the prime lending rate of The First National Bank of Boston, as announced from time to time) or (B) the highest rate not prohibited by law will accrue on any sum not paid when due for each day not paid. If Lessee fails to duly and promptly pay or perform any of its obligations hereunder, Lessor may itself pay or perform such obligations for the account of Lessee without thereby waiving any default and Lessee will pay to Lessor, on demand and in addition to Basic Rent, an amount equal to all sums so paid or expenses so incurred, plus a Late Payment Charge accruing from the date such sums were paid or expenses incurred by Lessor. 11. LESSEE'S OPTIONS UPON LEASE EXPIRATION. Lessee has the option at the expiration of the Lease Term, exerciseable with respect to not less than all items of Equipment leased pursuant to a Rental Schedule, (i) to return the Equipment to Lessor, (ii) to renew the Rental Schedule at fair rental value for a renewal term the length of which shall be determined by agreement of Lessee and Lessor or (iii) to purchase the Equipment for cash at its then fair market value. Lessee agrees to provide Lessor written notice of its decision to return or purchase the Equipment or renew the Rental Schedule not less than 120 days prior to the Expiration Date. If Lessee fails to give Lessor 120 days written notice, the Lease Term may, at Lessor's option, be extended and continue until 120 days from the date Lessor receives written notice of Lessee's decision to purchase or return the Equipment or renew the Rental Schedule. If Lessee elects to purchase the Equipment, Lessor shall convey title to the Equipment (together with manufacturer or vendor warranties, if any) free of liens and encumbrances created by Lessor, as is, where is and with all faults. Fair market value and fair rental value shall mean an amount which would obtain in an arm's-length transaction between an informed and willing buyer-user or lessee (other than a dealer) and an informed and willing seller or lessor under no compulsion to sell or lease (assuming for this purpose that the Equipment shall have been maintained in accordance with this Master Lease and disregarding costs of removal from the location of current use) and will be determined by agreement of Lessor and Lessee, or if the parties cannot agree, by an independent equipment appraiser of nationally recognized standing, experienced in evaluating equipment of the same type as the Equipment, mutually acceptable to both Lessee and Lessor. The cost of an appraisal will be shared equally by Lessor and Lessee. At the expiration of the Lease Term or any extension or renewal thereof, unless Lessee has elected to purchase the Equipment, Lessee will, at its expense, assemble, pack, and crate the Equipment, all in accordance with manufacturer's recommendations, if any, and deliver it by common carrier, freight and insurance prepaid, to a place to be designated by Lessor within one thousand (1,000) miles of its then current location. All packaging will include related maintenance logs, operating manuals, and other related materials and will be clearly marked so as to identify the contents thereof. The Equipment will be returned in good and efficient operating condition and appearance, reasonable wear and tear excepted, and eligible for manufacturer's maintenance, if available, free of all Lessee's markings and free of all liens and encumbrances other than those created by Lessor (hereinafter, together with any specific return conditions set forth in the Rental Schedule, the "Minimum Return Conditions"). Lessor may, but is not required to, inspect the Equipment prior to its return. If, upon inspection, Lessor determines that the Equipment does not conform to the Minimum Return Conditions, Lessor will promptly notify Lessee of such determination, specifying the repairs or refurbishments needed to place the Equipment in the Minimum Return Condition. Lessor may, at its option, either require Lessee to effect such repairs or itself effect such repairs. Lessor may re-inspect the Equipment and require further repairs as often as necessary until the Equipment is placed in the Minimum Return Conditions. In either case, all costs will be paid by Lessee. The Rental Schedule shall continue in full force and effect and Lessee shall continue to pay Basic Rent through and including the date on which the Equipment is accepted for return by Lessor as conforming with the Minimum Return Conditions. 12. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents, warrants and certifies as of the date of execution and delivery of each Rental Schedule as follows: (a) Lessee is duly organized, validly existing and in good standing under the laws of the state of its incorporation, with full power to enter into and to pay and perform its obligations under the Rental Schedule and this Master Lease as incorporated therein by reference, and is duly qualified and in good standing in all other jurisdictions where its failure to so qualify would adversely affect the conduct of its business or the performance of its obligations under or the enforceablility of the Rental Schedule; (b) the Rental Schedule, this Master Lease and all related documents have been duly authorized, executed and delivered by Lessee, are enforceable against Lessee in accordance with their terms and do not and will not contravene any provisions of or constitute a default under Lessee's organizational documents or its By Laws, any agreement to which it is a party or by which it or its property is bound, or any law, regulation or order of any governmental authority; (c) Lessor's right, title and interest in and to the Rental Schedule, this Master Lease and the Equipment and the rentals therefrom will not be affected or impaired by the terms of any agreement or instrument by which Lessee or its property is bound; (d) no approval of, or filing with, any governmental authority or other person is required in connection with Lessee's entering into or the payment or performance of its obligations under the Rental Schedule or this Master Lease as incorporated therein by reference; (e) there are no suits or proceedings pending or threatened before any court or governmental agency against or affecting Lessee which, if decided adversely to Lessee, would materially adversely affect Lessee's business or financial condition or its ability to perform any of its obligations under the Rental Schedule or this Master Lease as incorporated therein by reference; and (f) there has been no material adverse change to Lessee's financial condition since the date of its most recent financial statement. 13. EVENTS OF DEFAULT. LESSOR'S REMEDIES ON DEFAULT. Each of the following events constitutes an Event of Default: (a) default in the payment of any amount when due under the Rental Schedule continuing for a period of ten days; (b) default in the observance or performance of any other covenant, condition or agreement to be observed or performed by Lessee under the Rental Schedule and this Master Lease as incorporated therein by reference, continuing for more than 30 days after written notice thereof, unless Lessee shall be diligently proceeding to cure such default and such default does not subject the Equipment to forfeiture, in which event, Lessee shall have 60 days from the date of notice in which to cure such default; (c) any representation or warranty made by Lessee herein or in the Rental Schedule or this Master Lease as incorporated therein by reference or in any document or certificate furnished in connection herewith shall at any time prove to have been incorrect when made; (d) any attempt by Lessee, without Lessor's prior written consent, to assign the Rental Schedule, to make any unauthorized sublease of the Equipment or to transfer possession of the Equipment; (e) Lessee or, if Lessee's obligations are guaranteed by any other party, any Guarantor (A) ceases doing business as a going concern; (B) makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they mature or generally fails to pay its debts as they become due; (C) initiates any voluntary bankruptcy or insolvency proceeding; (D) fails to obtain the discharge of any bankruptcy or insolvency proceeding initiated against it by others within 60 days of the date such proceedings were initiated; (E) requests or consents to the appointment of a trustee or receiver; or (F) a trustee or receiver is appointed for Lessee or any Guarantor or for a substantial part of Lessee's or any Guarantor's property; or (f) Lessee shall not return the Equipment or shall not return the Equipment in the required condition at the expiration of the Rental Schedule or any extension or renewal thereof. Upon the occurrence of an Event of Default, Lessor may, without notice to Lessee, declare the applicable Rental Schedule in default and may exercise any of the following remedies: I. at Lessor's option, and in its sole discretion, Lessor may declare immediately due and payable, and receive from Lessee and sue to enforce the payment thereof, as liquidated damages for loss of the bargain and not as a penalty, in addition to all accrued and unpaid Basic Rent and other sums then due under the Rental Schedule, either: (a) all Basic Rent and other sums due or to become due under the Rental Schedule, discounted to present value at an annual rate of 6% as of the date of Lessor's receipt thereof; or (b) an amount equal to the greater of (A) the Casualty Value set forth on the Rental Schedule calculated after the last payment of Basic Rent actually received by Lessor or (B) the fair market value of the Equipment as of the date of default determined by an appraiser selected by Lessor; plus, in either case, interest thereon at the Late payment Charge rate from the date of default until the date of payment, and, after receipt in good funds of the sums described above, Lessor will, if it has not already done so, terminate the Rental Schedule and, at its option, either pay over to Lessee, as, when and if received, any net proceeds (after all costs and expenses) from any disposition of the Equipment, or convey to Lessee all of its right, title and interest in and to the Equipment, as is, where is and with all faults, without recourse and without warranty; and II. without regard to whether Lessor has elected either option in subsection I above, Lessor may (a) proceed by appropriate court action either at law or in equity to enforce performance by Lessee of the covenants and terms of the Rental Schedule (including the Lessee's obligation to pay Basic Rent, provided Lessor has not received the full liquidated damages elected under subsection I above) and to recover damages for the breach thereof; and (b) terminate the Rental Schedule by written notice to Lessee, whereupon, unless Lessor has elected to convey title to the Equipment to Lessee in accordance with subsection I above, all right of Lessee to use the Equipment will immediately cease and Lessee will forthwith return the Equipment to Lessor in accordance with the provisions hereof; and (c) unless Lessor has elected to convey title to the Equipment to Lessee in accordance with subsection I above, repossess the Equipment and dispose of it by private or public, cash or credit sale or by lease to a different lessee, in all events free and clear of any rights of Lessee, and for this purpose Lessee hereby grants to Lessor and its agents the right to enter upon the premises where the Equipment is located and to remove the Equipment therefrom and Lessee agrees not to interfere with the peaceful repossesion of the Equipment; and (d) recover from Lessee all costs and expenses arising out of Lessee's default, including, without limitation, expenses of repossession, storage, appraisal, repair, reconditioning and disposition of the Equipment and reasonable attorneys' fees and expenses. Lessor's remedies are, except as indicated herein, cumulative and not exclusive, and are in addition to all remedies at law or in equity. No failure by Lessor to declare a default shall constitute a waiver of such default or restrict Lessor's ability to declare a default at a later date. 14. ASSIGNMENT BY LESSOR. Lessor may at any time and from time to time sell, transfer or grant liens on the Equipment, and assign, as collateral security or otherwise, its rights in the Rental Schedule and this Master Lease as incorporated therein by reference, in each case subject and subordinate to Lessee's rights thereunder, without notice to or consent by Lessee. No such assignment shall relieve Lessor of its obligations hereunder unless Lessee is notified thereof to the contrary. Lessee acknowledges that Lessor may assign the Rental Schedule to a Lender in connection with the financing of Lessor's purchase or the Equipment and Lessee agrees, in the event of such assignment, to execute and deliver an acknowledgment letter confirming that the Lender has (and may exercise either in its own name or in the name of Lessor) all of the rights, privileges and remedies, but none of the obligations, of Lessor under the Rental Schedule; waiving for the benefit of the Lender any defense, counterclaim, set-off, abatement, reduction or recoupment that Lessee may have against Lessor; and agreeing to make all payments of Basic Rent and other sums due under the Rental Schedule to the Lender or as it may direct. Lessee also agrees to deliver opinions of counsel, insurance certificates and such other documents as Lessor may reasonably request for the benefit of the Lender in connection with the collateral assignment of the Rental Schedule. 15. ARBITRATION. In the event that any dispute arises under this Master Lease or the Rental Schedule, including, without limitation, any claim of default or breach of a covenant or representation hereunder, either party in the case of a dispute, or the claiming party in the case of a claim of default or breach, shall submit the matter for arbitration in Pittsburgh, Pennsylvania, by and pursuant to the rules of the American Arbitration Association ("AAA"). The arbitrator who hears the case will be selected by AAA and AAA shall be advised that the parties have agreed in advance that any matter submitted to AAA for resolution shall be heard in a reasonably expeditious manner. The powers of the arbitrator shall expressly include both the right to issue injunctive orders and to order the payment of money damages. The resolution of the matter by arbitration shall be binding upon the parties and judgment upon the award of the arbitrator may be entered in any court of competent jurisdiction. Costs of arbitration and legal fees shall be awarded to a prevailing party; provided, however, that the arbitrator shall have the power to make a different allocation of costs and legal fees whenever it is fair or reasonable to do so as determined by the arbitrator. Notwithstanding anything contained herein to the contrary, this Section shall not be binding upon any lender. 16. MERGERS, CONSOLIDATIONS, LEVERAGED BUY-OUTS INVOLVING LESSEE. Lessee acknowledges and agrees that Lessor has entered into this Master Lease and each Rental Schedule on the basis of Lessee's creditworthiness. In the event that Lessee, without Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed, (i) is a party to a merger or consolidation, (ii) sells or transfers, singly or in a series of related transactions, all or substantially all of its assets other than its rights and obligations under the Rental Schedule, or (iii) purchases, singly or in a series of related transactions, a substantial portion of its stock, and Lessee's creditworthiness suffers a material decline as a result of any of the foregoing transactions, then Lessor may, in its reasonable discretion, demand in writing that Lessee purchase all of the Equipment subject to the Rental Schedule on the next Rent Payment Date for an amount equal to the applicable Casualty Value of the Equipment and, upon receipt by Lessor in good funds of an amount equal to such Casualty Value and all other sums due and payable under the Rental Schedule through the date of such receipt (provided that no Event of Default has occurred and is continuing under the Rental Schedule), Lessor shall deliver to Lessee a bill of sale conveying title to the Equipment free and clear of any liens and encumbrances created by Lessor but otherwise on an as-is, where-is basis, with all faults. For purposes of the foregoing sentence, a "material decline" in Lessee's creditworthiness shall mean a downgrading of the public debt rating assigned to Lessee by Moody's Investors Services, Inc., Standard & Poors Corporation or another reputable rating agency acceptable to Lessor or, if Lessee has no such credit rating, a material decline in Lessee's creditworthiness objectively and reasonably determined by Lessor. 17. MISCELLANEOUS. All notices required hereunder shall be effective upon receipt in writing delivered by hand or by other receipt-acknowledged method of delivery at the address first above written or to the Guarantor at 255 Elm Street, P.O. Box 989, Oil City, Pennsylvania 16301. THIS MASTER LEASE AND THE RENTAL SCHEDULE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. This Master Lease and the Rental Schedule may be executed in multiple counterparts all of which together shall constitute one and the same instrument. Any provision of this Master Lease or the Rental Schedule that is unenforceable in any jurisdiction shall, as to such jurisdiction only, be ineffective to the extent of such unenforceability without invalidating or diminishing Lessor's rights under the remaining provisions hereof. No term or provision of this Master Lease or the Rental Schedule may be amended, altered, modified, rescinded or waived orally, but only by an instrument in writing signed by a duly authorized officer of the party against which enforcement of such amendment, alteration, modification, rescission or waiver is sought. This Master Lease, the Rental Schedule, and each instrument, document, agreement and certificate furnished in connection therewith collectively consititute the complete and exclusive statement of the terms of the agreement between Lessor and Lessee with respect to the acquisition and leasing of the Equipment, and cancel and supercede any and all oral or written prior understandings with respect thereto. IN WITNESS WHEREOF, Lessor and Lessee have caused this Master Lease to be executed and delivered by their duly authorized representatives as of the date first above written. AMERICAN FINANCE GROUP THE HELEN MINING COMPANY By: [Illegible] By: /s/ David E. Lung ------------------------ --------------------------------- David E. Lung Title: Vice President Title: Vice President ------------------------ ------------------------------ EXHIBIT A RENTAL SCHEDULE AND ACCEPTANCE CERTIFICATE NO._______ This RENTAL SCHEDULE AND ACCEPTANCE CERTIFICATE, dated as of_____________________, between American Finance Group, ("Lessor") and The Helen Mining Company ("Lessee") incorporates by reference the terms and conditions of Master Lease Agreement No. 9106PAG429 dated as of June 25, 1991 (the "Master Lease"). Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the following described items of Equipment for the Lease Term and at the Basic Rent payable on the Payment Dates hereinafter set forth, on the terms and conditions set forth in the Master Lease. 1. EQUIPMENT
Description (Manufacturer, Item Type, Model and Equipment Acceptance No. Serial Number) Cost Location Date - --- -------------- --------- -------- ---------- TOTAL EQUIPMENT COST: $_____________
Lessee Billing Location: ___________________ ___________________ ___________________ 2. LEASE TERM The Lease Term is for an Interim Term commencing on the date of acceptance of the Equipment for lease, as set forth above, and continuing through and including ________________________ and for a Primary Term of _____ months, commencing on _________ and continuing through and including the Expiration Date of ______________________. 3. BASIC RENT. PAYMENT DATES. Interim Term Basic Rent in the amount of $________________ is due and payable in full on the first day of the Primary Term. Basic Rent for the first _____ months of the Primary Term is due and payable in ______ payments of $__________________ each commencing on ________________ and continuing ________________________ thereafter, through and including ________________. Basic Rent for the final _____ months of the Primary Term is due and payable in _____ payments of $_____________ each commencing on ________________ and continuing through and including ______________ . Lessee shall also pay to Lessor $_________ as reimbursement for fees owed by Lessor relating to Uniform Commercial Code Financing Statements to be filed in connection with the acquistion of the Equipment. Such fees shall be due and payable on _______________________. Per Diem Lease Rate:________________Periodic Lease Rate:_______________. RENTAL SCHEDULE AND ACCEPTANCE CERTIFICATE NO._______ PAGE TWO 4. SPECIAL MAINTENANCE AND RETURN CONDITIONS. **TO BE INSERTED DEPENDING UPON EQUIPMENT TYPE** 5. ACCEPTANCE CERTIFICATE Lessee hereby represents, warrants and certifies (a) that the Equipment described herein has been delivered to and inspected and found satisfactory by Lessee and is accepted for Lease by Lessee under this Rental Schedule and the Master Lease as incorporated herein by reference, as of the Acceptance Date set forth above; (b) all items of Equipment are new and unused as of the Acceptance Date, except as otherwise specified above, and (c) the representations and warranties of Lessee set forth in the Master Lease are true and correct as of the date hereof. 6. ENTIRE AGREEMENT. MODIFICATION AND WAIVERS. EXECUTION IN COUNTERPARTS. This Rental Schedule and the Master Lease constitute the entire agreement between Lessee and Lessor with respect to the leasing of the Equipment. To the extent any of the terms and conditions set forth in this Rental Schedule conflict with or are inconsistent with the Master Lease, this Rental Schedule shall govern and control. No amendment, modification or waiver of this Rental Schedule or the Master Lease will be effective unless evidenced by a writing signed by the party to be charged. This Rental Schedule may be executed in counterparts, all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties hereto have caused this Rental Schedule and Acceptance Certificate to be executed and delivered by their duly authorized representatives as of the date first above written. AMERICAN FINANCE GROUP THE HELEN MINING COMPANY Lessor Lessee By By ---------------------------- ----------------------------------- David E. Lung Title Title Vice President ------------------------ -------------------------------- COUNTERPART NO. ____ OF 3 SERIALLY NUMBERED MANUALLY EXECUTED COUNTERPARTS. TO THE EXTENT IF ANY THAT THIS DOCUMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO SECURITY INTEREST MAY BE CREATED THROUGH THE TRANSFER AND POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. 1 EX-27 5 EXHIBIT 27
5 12-MOS DEC-31-1996 JAN-01-1997 DEC-31-1997 2,519,940 156,573 1,003,111 0 0 3,679,624 16,828,979 8,365,735 12,142,868 252,554 4,401,753 0 0 0 7,488,561 12,142,868 0 4,429,306 0 0 2,466,809 0 387,553 1,574,944 0 1,574,944 0 0 0 1,574,944 0 0
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