-----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, LK5o9Afcuyqnvljni8DfWNO7+B3z4PdmlN8P/ekkpJAEbil4A0h49jtigGsz9eWK SPS3JfFVa+GUJPZ4sgNnmQ== 0001047469-98-031421.txt : 19980817 0001047469-98-031421.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031421 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-20031 FILM NUMBER: 98688182 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 -------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ----------------- ----------------- For Quarter Ended June 30, 1998 Commission File No. 0-20031 American Income Fund I-C, a Massachusetts Limited Partnership ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3077437 - -------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 88 Broad Street, Boston, MA 02110 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 ---------------- - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_____ No______ AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Statement of Financial Position at June 30, 1998 and December 31, 1997 3 Statement of Operations for the three and six months ended June 30, 1998 and 1997 4 Statement of Changes in Partners' Capital for the six months ended June 30, 1998 5 Statement of Cash Flows for the six months ended June 30, 1998 and 1997 6 Notes to the Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 PART II. OTHER INFORMATION: Items 1 - 6 18
2 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF FINANCIAL POSITION June 30, 1998 and December 31, 1997 (Unaudited)
June 30, December 31, 1998 1997 ------------ ------------- ASSETS Cash and cash equivalents $ 2,949,152 $ 2,519,940 Rents receivable 296,751 246,877 Accounts receivable - affiliate 150,994 296,505 Note receivable - affiliate 459,729 459,729 Investment securities - affiliate 169,621 156,573 Equipment at cost, net of accumulated depreciation of $8,734,997 and $8,365,735 at June 30, 1998 and December 31, 1997, respectively 7,862,837 8,463,244 ------------ ------------ Total assets $ 11,889,084 $ 12,142,868 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 3,985,317 $ 4,401,753 Accrued interest 35,495 30,468 Accrued liabilities 268,066 9,200 Accrued liabilities - affiliate 3,120 28,925 Deferred rental income 57,544 25,384 Cash distributions payable to partners 158,577 158,577 ------------ ------------ Total liabilities 4,508,119 4,654,307 ------------ ------------ Partners' capital (deficit): General Partner (513,492) (508,111) Limited Partnership Interests (803,454.56 Units; initial purchase price of $25 each) 7,894,457 7,996,672 ------------ ------------ Total partners' capital 7,380,965 7,488,561 ------------ ------------ Total liabilities and partners' capital $ 11,889,084 $ 12,142,868 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 3 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF OPERATIONS for the three and six months ended June 30, 1998 and 1997 (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Income: Lease revenue $ 622,209 $ 1,221,576 $ 1,260,069 $ 2,261,004 Interest income 35,924 9,138 71,811 25,617 Interest income - affiliate 11,678 -- 23,171 -- Gain on sale of equipment 20,709 7,438 42,275 43,713 Loss on exchange of equipment -- (378,324) -- (378,324) ----------- ----------- ----------- ----------- Total income 690,520 859,828 1,397,326 1,952,010 ----------- ----------- ----------- ----------- Expenses: Depreciation 275,298 596,009 592,728 1,263,440 Interest expense 82,377 119,977 169,780 196,998 Equipment management fees - affiliate 28,919 42,816 57,973 83,358 Operating expenses - affiliate 343,820 58,300 380,335 84,478 ----------- ----------- ----------- ----------- Total expenses 730,414 817,102 1,200,816 1,628,274 ----------- ----------- ----------- ----------- Net income (loss) $ (39,894) $ 42,726 $ 196,510 $ 323,736 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) per limited partnership unit $ (0.05) $ 0.05 $ 0.23 $ 0.38 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cash distributions declared per limited partnership unit $ 0.19 $ 0.25 $ 0.38 $ 0.50 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 4 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF CHANGES IN PARTNERS' CAPITAL for the six months ended June 30, 1998 (Unaudited)
General Limited Partners Partner ------------------------ Amount Units Amount Total ------------ ---------- ----------- ----------- Balance at December 31, 1997 $ (508,111) 803,454.56 $ 7,996,672 $ 7,488,561 Net income 9,825 -- 186,685 196,510 Unrealized gain on investment securities - affiliate 652 -- 12,396 13,048 ----------- ---------- ----------- ----------- Comprehensive income 10,477 -- 199,081 209,558 ----------- ---------- ----------- ----------- Cash distributions declared (15,858) -- (301,296) (317,154) ----------- ---------- ----------- ----------- Balance at June 30, 1998 $ (513,492) 803,454.56 $ 7,894,457 $ 7,380,965 ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 5 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership STATEMENT OF CASH FLOWS for the six months ended June 30, 1998 and 1997 (Unaudited)
1998 1997 ---- ---- Cash flows from (used in) operating activities: Net income $ 196,510 $ 323,736 Adjustments to reconcile net income to net cash from operating activities: Depreciation 592,728 1,263,440 Gain on sale of equipment (42,275) (43,713) Loss on exchange of equipment -- 378,324 Changes in assets and liabilities Decrease (increase) in: rents receivable (49,874) 93,087 accounts receivable - affiliate 145,511 (133,171) Increase (decrease) in: accrued interest 5,027 (40,220) accrued liabilities 258,866 (7,750) accrued liabilities - affiliate (25,805) (8,614) deferred rental income 32,160 (77,189) ----------- ----------- Net cash from operating activities 1,112,848 1,747,930 ----------- ----------- Cash flows from investing activities: Proceeds from equipment sales 49,954 122,642 ----------- ----------- Net cash from investing activities 49,954 122,642 ----------- ----------- Cash flows used in financing activities: Principal payments - notes payable (416,436) (1,661,641) Distributions paid (317,154) (422,872) ----------- ----------- Net cash used in financing activities (733,590) (2,084,513) ----------- ----------- Net increase (decrease) in cash and cash equivalents 429,212 (213,941) Cash and cash equivalents at beginning of period 2,519,940 1,187,478 ----------- ----------- Cash and cash equivalents at end of period $ 2,949,152 $ 973,537 ----------- ----------- ----------- ----------- Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 164,753 $ 237,218 ----------- ----------- ----------- -----------
Supplemental disclosure of non-cash investing and financing activities: See Note 5 to the financial statements. The accompanying notes are an integral part of these financial statements. 6 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements June 30, 1998 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The financial statements presented herein are prepared in conformity with generally accepted accounting principles and the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and are unaudited. As such, these financial statements do not include all information and footnote disclosures required under generally accepted accounting principles for complete financial statements and, accordingly, the accompanying financial statements should be read in conjunction with the footnotes presented in the 1997 Annual Report. Except as disclosed herein, there has been no material change to the information presented in the footnotes to the 1997 Annual Report. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary to present fairly the financial position at June 30, 1998 and December 31, 1997 and results of operations for the three and six month periods ended June 30, 1998 and 1997 have been made and are reflected. As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and the display of comprehensive income and its components; however, the adoption of this statement had no impact on the Partnership's net income or partners' capital. Statement 130 requires unrealized gains or losses on the Partnership's available-for-sale securities, which prior to adoption were reported separately in partners' capital to be included in comprehensive income. During the six months ended June 30, 1998, total comprehensive income amounted to $209,558. Certain reclassifications have been made to the financial statements for the six months ended June 30, 1997 to conform to the 1997 Annual Report presentation. NOTE 2 - CASH At June 30, 1998, the Partnership had $2,842,599 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interest in U.S. Government securities. NOTE 3 - REVENUE RECOGNITION Rents are payable to the Partnership monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $4,798,558 are due as follows: For the year ending June 30,1999 $ 1,645,152 2000 1,004,434 2001 761,554 2002 761,554 2003 544,168 Thereafter 81,696 Total $ 4,798,558 ------------- -------------
7 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) NOTE 4 - EQUIPMENT The following is a summary of equipment owned by the Partnership at June 30, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from June 30, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of Equis Financial Group Limited Partnership ("EFG"), the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment Equipment Type (Months) at Cost -------------- ---------- --------- Aircraft 13-54 $8,318,862 Materials handling 0-15 3,659,494 Trailers/intermodal containers 54-60 1,982,184 Tractors & heavy duty trucks 0 1,210,962 Retail store fixtures 9 517,488 Construction & mining 0 426,263 Motor vehicles 0 252,622 Research & test 0 116,406 Communications 0 51,469 Manufacturing 0 35,218 Computers & peripherals 0 26,866 ---------- Total equipment cost 16,597,834 Accumulated depreciation (8,734,997) Equipment, net of accumulated depreciation $ 7,862,837 ----------- -----------
At June 30, 1998, the Partnership's equipment portfolio included equipment having a proportionate original cost of $8,648,184, representing approximately 52% of total equipment cost. The summary above includes equipment held for sale or release which had been fully depreciated with a cost of approximately $70,000 at June 30, 1998. The General Partner is actively seeking the sale or re-lease of all equipment not on lease. The summary above also includes equipment being leased on a month-to-month basis. NOTE 5 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ. At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings 8 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. The Partnership recognized interest income of $23,171 related to the Semele Note during the six months ended June 30, 1998. The Partnership's interest in the vessel had an original cost and net book value of $2,605,381 and $1,180,755, respectively. The proceeds realized by the Partnership of $802,431 resulted in a net loss, for financial statement purposes, of $378,324. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $400,631. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and elected to the Board of Directors. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 20,876 shares. During the six months ended June 30, 1998, the Partnership increased the carrying value of its investment in Semele common stock to $8.125 per share (the quoted price of the Semele stock on NASDAQ at June 30, 1998) resulting in an unrealized gain in 1998 of $13,048. This gain was reported as a component of comprehensive income, included in partners' capital. 9 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) NOTE 6 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the six month periods ended June 30, 1998 and 1997 which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 ---- ---- Equipment management fees $ 57,973 $ 83,358 Administrative charges 34,026 29,844 Reimbursable operating expenses due to third parties 346,309 54,634 -------- -------- Total $438,308 $167,836 -------- -------- -------- --------
All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At June 30, 1998, the Partnership was owed $150,994 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in July 1998. NOTE 7 - NOTES PAYABLE Notes payable at June 30, 1998 consisted of installment notes of $3,985,317 payable to banks and institutional lenders. The installment notes bear interest rates ranging between 8.65% and 8.89%, except one note which bears a fluctuating interest rate based on LIBOR (5.66% at June 30, 1998) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Partnership has balloon payment obligations at the expiration of the respective primary lease terms related to aircraft leased by Finnair OY and Reno Air of $1,127,840 and $679,276, respectively. The carrying value of notes payable approximates fair value at June 30, 1998. The annual maturities of the installment notes payable are as follows: For the year ending June 30, 1999 $ 2,091,971 2000 475,501 2001 296,291 2002 320,423 2003 801,131 ------------- Total $ 3,985,317 ------------- -------------
10 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) NOTE 8 - LEGAL PROCEEDINGS On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit." The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth the terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and supersedes a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and remains pending. Ultimately, the Court must review and approve the Stipulation of Settlement prior to its becoming effective. The Stipulation of Settlement contemplates various changes that, if effected, would alter the future operations of the Nominal Defendants. With respect to the Partnership and 10 affiliated partnerships (hereafter referred to as the "Exchange Partnerships"), the Stipulation of Settlement provides for the restructuring of their respective business operations into a single successor company whose securities would be listed and traded on a national securities exchange. The partners of the Exchange Partnerships would receive both common stock in the new company and a cash distribution in exchange for their existing partnership interests. Such a transaction would, among other things, allow for the consolidation of the Partnership's operating expenses with other similarly organized equipment leasing programs. The Stipulation of Settlement prescribes certain conditions necessary to effecting the settlement, including providing the partners of the Exchange Partnerships with the opportunity to vote on the participation of their partnership in the restructuring. To the extent that the Stipulation of Settlement is approved by the Court, the complete terms thereof will be communicated to all of the partners of the Exchange Partnerships to enable them to vote on the restructuring. There can be no assurance that the Stipulation of Settlement will be approved by the Court, or that the outcome of the voting by the partners of the Exchange Partnerships, including the Partnership, will result in a settlement finally being effected or in the Partnership being included in the restructuring. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that the Stipulation of Settlement will be approved by the Court. In the absence of a Stipulation of Settlement approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. The General Partner and its affiliates cannot predict with any degree of certainty the ultimate outcome of such litigation. 11 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership Notes to the Financial Statements (Continued) On July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored investment programs, filed an action in the Commonwealth of Massachusetts Superior Court Department of the Trial Court in and for the County of Suffolk, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by National Steel of certain sales and/or use taxes paid to the State of Illinois and other remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice of Removal which removed the case to the United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory relief and alleging breach of contract, implied covenant of good faith and fair dealing and specific performance. EFG filed its Answer to these counterclaims on September 29, 1995. Though the parties discussed settlement with respect to this matter for some time, the negotiations were unsuccessful. Notwithstanding these discussions, EFG filed an Amended and Supplemental Complaint alleging further default under the MLA and filed a motion for Summary Judgment on all claims and counterclaims. The Court held a hearing on EFG's motion in December 1997 and the Court recently entered a decision dismissing certain of National Steel's counterclaims and finding in favor of EFG on certain issues and in favor of National Steel on other issues. The parties have since resumed settlement discussions. The Partnership does not anticipate that it will experience any material losses as a result of this action. 12 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements in this quarterly report of American Income Fund I-C, a Massachusetts Limited Partnership (the "Partnership") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements, and the ability of Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG") to collect all rents due under the attendant lease agreements and successfully remarket the Partnership's equipment upon the expiration of such leases. The Year 2000 Issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The computer programs of EFG were designed and written using four digits to define the applicable year. As a result, EFG does not anticipate system failure or miscalculations causing disruptions of operations. Based on recent assessments, EFG determined that minimal modification of software is required so that its network operating system will function properly with respect to dates in the year 2000 and thereafter. EFG believes that with these modifications to the existing operating system, the Year 2000 Issue will not pose significant operational problems for its computer systems. EFG will utilize internal resources to upgrade software for Year 2000 modifications and anticipates completing the Year 2000 project by December 31, 1998, which is prior to any anticipated impact on its operating system. The total cost of the Year 2000 project is expected to be insignificant and have no effect on the results of operations of the Partnership. Three and six months ended June 30, 1998 compared to the three and six months ended June 30, 1997: Overview The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course. The Partnership's stated investment objectives and policies contemplated that the Partnership would wind-up its operations within approximately seven years of its inception. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action Lawsuit could alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. Results of Operations For the three and six months ended June 30, 1998, the Partnership recognized lease revenue of $622,209 and $1,260,069, respectively, compared to $1,221,576 and $2,261,004 for the same period in 1997. The decrease in lease revenue from 1997 to 1998 reflects the effects of primary lease term expirations, the sale of equipment and the exchange in the second quarter of 1997 of the Partnership's interest in a vessel for consideration consisting of newly issued shares of common stock in Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele"), a note receivable from Semele and cash (see Note 5 to the financial statements herein). During the six months ended June 30, 1997, the Partnership recognized lease revenue of $534,796 related to this vessel. In the future, lease revenue will continue to decline due to primary and renewal lease term expirations and the sale of equipment. 13 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enables the Partnership to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. For the three and six months ended June 30, 1998, the Partnership earned interest income of $47,602 and $94,982, respectively, compared to $9,138 and $25,617 for the same periods in 1997. Interest income during the three and six months ended June 30, 1998 included $11,678 and $23,171, respectively earned on the note receivable from Semele. Interest income is typically generated from temporary investment of rental receipts and equipment sales proceeds in short-term instruments. The amount of future interest income is expected to fluctuate in relation to prevailing interest rates, the collection of lease revenue, and the proceeds from equipment sales. During the three and six months ended June 30, 1998, the Partnership sold equipment having a net book value of $2,895 and $7,679, respectively, to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $20,709 and $42,275, respectively, compared to a net gain for the same periods in 1997 of $7,438 and $43,713 on equipment having a net book value of $7,348 and $49,373, respectively. During the three months ended June 30, 1997, the Partnership also exchanged its interest in a vessel with an original cost and net book value of $2,605,381 and $1,180,755, respectively. In connection with this exchange, the Partnership realized proceeds of $802,431, which resulted in a net loss, for financial statement purposes, of $378,324. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received prepayment of the remaining contracted rent due under the vessel's lease agreement in the amount of $400,631. See below for further discussion related to the vessel. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ. At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 14 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and elected to the Board of Directors. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense for the three and six months ended June 30, 1998 was $275,298 and $592,728, respectively, compared to $596,009 and $1,263,440 for the same periods in 1997. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset at the date of primary lease expiration on a straight-line basis over such term. For the purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that equipment is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. 15 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION Interest expense was $82,377 and $169,780, for the three and six months ended June 30, 1998, respectively, compared to $119,977 and $196,998 for the same periods in 1997. Interest expense in future periods will continue to decline in amount as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees were approximately 4.6% of lease revenue for each of the three and six months ended June 30, 1998, respectively, compared to 3.5% and 3.7% of lease revenue for the same periods in 1997. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Operating expenses consist principally of administrative charges, professional service costs, such as audit and legal fees, as well as printing, distribution and remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. Operating expenses were $343,820 and $380,335 for the three and six months ended June 30, 1998, respectively, compared to $58,300 and $84,478 for the same periods in 1997. During the six months ended June 30, 1998, the Partnership incurred or accrued approximately $273,000 for certain legal and administrative expenses related to the Class Action Lawsuit described in Note 8 to the financial statements. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a partnership. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. Liquidity and Capital Resources and Discussion of Cash Flows The Partnership by its nature is a limited life entity which was established for specific purposes described in the preceding "Overview". As an equipment leasing program, the Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $1,112,848 and $1,747,930 for the six months ended June 30, 1998 and 1997, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also decline as the Partnership experiences a higher frequency of remarketing events. Ultimately, the Partnership will dispose of all assets under lease. This will occur principally through sale transactions whereby each asset will be sold to the existing lessee or to a third party. Generally, this will occur upon expiration of each asset's primary or renewal/re-lease term. In certain instances, casualty or early termination events may result in the disposal of an asset. Such circumstances are infrequent and usually result in the collection of stipulated cash settlements pursuant to terms and conditions contained in the underlying lease agreements. Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. For the six months ended June 30, 1998, the Partnership realized net cash proceeds of $49,954 compared to $122,642 for the same period in 1997. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. As a result of the exchange transaction (see Results of Operations) the Partnership holds a beneficial interest in the Semele Note of $459,729 and became the beneficial owner of 208,764 shares of Semele common stock valued at $313,146 ($1.50 per share) at the date of the transaction. 16 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART I. FINANCIAL INFORMATION In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 20,876 shares. During the six months ended June 30, 1998, the Partnership increased the carrying value of its investment in Semele common stock to $8.125 per share (the quoted price of the Semele stock on NASDAQ at June 30, 1998) resulting in an unrealized gain in 1998 of $13,048. This gain was reported as a component of comprehensive income, included in partners' capital. The General Partner believes that the underlying tangible assets of Semele, particularly the Rancho Malibu property, can be sold or developed on a tax free basis due to Semele's net operating loss carryforwards and can provide an attractive economic return to the Partnership. The Partnership obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. In future periods, the amount of cash used to repay debt obligations is scheduled to decline as the principal balance of notes payable is reduced through the collection and application of rents. In addition, the Partnership has balloon payment obligations at the expiration of the respective primary lease terms related to its interests in aircraft leased to Finnair OY and Reno Air, Inc. of $1,127,840 and $679,276, respectively. Cash distributions to the General and Limited Partners are declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities. For the six months ended June 30, 1998, the Partnership declared total cash distributions of Distributable Cash From Operations and Distributable Cash From Sales and Refinancings of $317,154. In accordance with the Amended and Restated Agreement and Certificate of Limited Partnership, the Limited Partners were allocated 95% of these distributions, or $301,296, and the General Partner was allocated 5%, or $15,858. The second quarter 1998 cash distribution was paid on July 14, 1998. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. Future market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. The future liquidity of the Partnership will be influenced by the foregoing, as well as the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements. The General Partner anticipates that cash proceeds resulting from the collection of contractual rents and the outcome of residual activities will satisfy the Partnership's future expense obligations. However, the amount of cash available for distribution in future periods will fluctuate. Equipment lease expirations and asset disposals will cause the Partnership's net cash from operating activities to diminish over time; and equipment sale proceeds will vary in amount and period of realization. In addition, the Partnership may be required to incur asset refurbishment or upgrade costs in connection with future remarketing activities. Accordingly, fluctuations in the level of quarterly cash distributions are anticipated. 17 AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings Response: Refer to Note 8 to the financial statements herein. Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6(a). Exhibits Response: None Item 6(b). Reports on Form 8-K Response: None 18 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership By: AFG Leasing VI Incorporated, a Massachusetts corporation and the General Partner of the Registrant. By: ------------------------------------------------------- Michael J. Butterfield Treasurer of AFG Leasing VI Incorporated (Duly Authorized Officer and Principal Accounting Officer) Date: ------------------------------------------------------- By: ------------------------------------------------------- Gary M. Romano Clerk of AFG Leasing VI Incorporated (Duly Authorized Officer and Principal Financial Officer) Date: ------------------------------------------------------- 19 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership By: AFG Leasing VI Incorporated, a Massachusetts corporation and the General Partner of the Registrant. By: /s/ Michael J. Butterfield ------------------------------------------------- Michael J. Butterfield Treasurer of AFG Leasing VI Incorporated (Duly Authorized Officer and Principal Accounting Officer) Date: August 14, 1998 ------------------------------------------------- By: /s/ Gary M. Romano ------------------------------------------------- Gary M. Romano Clerk of AFG Leasing VI Incorporated Duly Authorized Officer and Principal Financial Officer) Date: August 14, 1998 ------------------------------------------------- 20 EX-27 2 EXHIBIT 27
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 2,949,152 169,621 907,474 0 0 4,026,247 16,597,834 8,734,997 11,889,084 522,802 3,958,317 0 0 0 7,380,965 11,889,084 0 1,397,326 0 0 1,031,036 0 169,780 196,510 0 196,510 0 0 0 196,510 0 0
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