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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2001
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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
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AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3077437
(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
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
803,454.56 Units Representing Limited Partnership Interest
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(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 X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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.
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 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters 9
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Partnership 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49
PART I
Item 1. Business.
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(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 known as American Finance Group), a
Massachusetts limited partnership ("EFG" or the "Manager"). The common stock of
the General Partner is owned by 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", or the "Partnership
Agreement").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one operating industry segment: financial
services. Historically, the Partnership has acquired capital equipment and
leased the equipment to creditworthy lessees on a full payout or operating lease
basis. Full payout leases are those in which aggregate undiscounted
noncancellable rents equal or exceed the acquisition cost of the leased
equipment. Operating leases are those in which the aggregate undiscounted
noncancellable rental payments are less than the acquisition cost of the leased
equipment. Industry segment data is not applicable.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 herein.
(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 were to acquire and lease
equipment that would:
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
Restated Agreement, as amended, provides that the Partnership will terminate no
later than December 31, 2002. However, the Partnership is a Nominal Defendant in
a Class Action Lawsuit, the outcome of which could significantly alter the
nature of the Partnership's organization and its future business operations.
The General Partner does not expect that the Partnership will be dissolved until
such time that the Class Action Lawsuit is settled or adjudicated.
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 provided for in the Restated
Agreement
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, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 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.
The Partnership's investment in equipment is, and will continue to be, subject
to various risks, including physical deterioration, technological obsolescence,
credit quality 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 insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
Another risk is that the credit quality of the lease may deteriorate after a
lease is made. In addition, the leasing industry is very competitive. The
Partnership is subject to considerable competition when re-leasing or selling
equipment at the expiration of its lease terms. The Partnership must compete
with lease programs offered directly by manufacturers and other equipment
leasing companies, many of which have greater resources, 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. The terrorist attacks on September 11, 2001 and the
commencement of hostilities thereafter may adversely affect the Partnership's
ability to re-lease or sell equipment. In addition, 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 anticipated revenue.
Revenue from major individual lessees which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 is incorporated
herein by reference to Note 2 to the financial statements included in Item 8
herein. Refer to Item 14(a)(3) for lease agreements filed with the Securities
and Exchange Commission.
The Partnership holds a note receivable from and common stock in Semele Group
Inc. ("Semele"). The note receivable is subject to a number of risks including,
Semele's ability to make loan payments which is dependent upon the liquidity of
Semele and primarily Semele's ability to sell or refinance its principal real
estate asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California. The market value of the Partnership's investment in Semele common
stock has generally declined since the Partnership's initial investment in 1997.
In 1998 and 2001, the General Partner determined that the decline in market
value of the stock was other-than-temporary and wrote down the Partnership's
investment. Subsequent to December 31, 2001, the market value of the Semele
common stock has remained relatively constant. The market value of the stock
could decline in the future. Gary D. Engle, President and Chief Executive
Officer of the general partner of EFG and a Director of the General Partner is
Chairman and Chief Executive Officer of Semele and James A. Coyne, Executive
Vice President of the general partner of EFG is Semele's President and Chief
Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of
Directors of, and own significant stock in, Semele.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $2,780,000 to a
newly formed real estate company, Echelon Residential Holdings LLC ("Echelon
Residential Holdings") to finance the acquisition of real estate assets by that
company. Echelon Residential Holdings, through a wholly owned subsidiary
("Echelon Residential LLC"), used the loan proceeds, along with the loan
proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company.
Echelon Residential Holding's interest in Echelon Residential LLC is pledged
pursuant to a pledge agreement to the partnerships as collateral for the loans.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $243,250, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $694,444 is recorded as write-down of impaired loan and
interest receivable in the accompanying Statement of Operations for the year
ended December 31, 2001.
The write-down of the loan receivable from Echelon Residential Holdings and the
related accrued interest was precipitated principally by a slowing U.S. economy
and its effects on the real estate development industry. The economic outlook
for the properties that existed when the loan was funded has deteriorated and
inhibited the ability of Echelon Residential Holdings' management to secure
low-cost sources of development capital, including but not limited to
joint-venture or equity partners. In response to these developments and lower
risk tolerances in the credit markets, the management of Echelon Residential
Holdings decided in the second quarter of 2001 to concentrate its prospective
development activities within the southeastern United States and, therefore, to
dispose of development sites located elsewhere. In May 2001, Echelon
Residential Holdings closed its Texas-based development office; and since the
beginning of 2001, the company has sold five of nine properties (two in July
2001, one in October 2001, one in November 2001 and one in February 2002). As a
result of these developments, the General Partner does not believe that Echelon
Residential Holdings will realize the profit levels originally believed to be
achievable from either selling these properties as a group or developing all of
them as multi-family residential communities.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
General Partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of the prohibition against
loans to affiliates in the Partnership Agreement and the court's statement in
its order permitting New Investments that all other provisions of the
Partnership Agreements governing the investment objectives and policies of the
Partnership shall remain in full force and effect. The court may require the
partnerships to restructure or divest the loan.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing, the loan to Echelon Residential Holdings
and its ownership of securities of Semele. The Partnership does not intend to
engage in investment activities in a manner or to an extent that would require
the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership unintentionally may have engaged,
or may in the future, engage in an activity or activities that may be construed
to fall within the scope of the 1940 Act. The General Partner is engaged in
discussions with the staff of the Securities and Exchange Commission ("SEC")
regarding whether or not the Partnership may be an inadvertent investment
company as a consequence of the above-referenced loan. The 1940 Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. If the Partnership were determined to be an unregistered investment
company, its business would be adversely affected. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
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None.
Item 3. Legal Proceedings.
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In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
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Limited Partnership, et al., in the United States District Court for the
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Southern District of Florida (the "Court") on behalf of a proposed class of
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investors in 28 equipment leasing programs sponsored by EFG, including the
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Partnership (collectively, the "Nominal Defendants"), against EFG and a number
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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
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Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
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Defendants. Both actions are referred to herein collectively as the "Class
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Action Lawsuit".
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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 August 20, 1998, the court preliminarily approved a Stipulation of Settlement
setting forth terms pursuant to which a settlement of the Class Action Lawsuit
was intended to be achieved and which, among other things, was at the time
expected to reduce the burdens and expenses attendant to continuing litigation.
Subsequently an Amended Stipulation of Settlement was approved by the court.
The Amended Stipulation, among other things, divided the Class Action Lawsuit
into two separate sub-classes that could be settled individually. On May 26,
1999, the Court issued an Order and Final Judgment approving settlement of one
of the sub-classes. Settlement of the second sub-class, involving the
Partnership and 10 affiliated partnerships remained pending due, in part, to the
complexity of the proposed settlement pertaining to this class. On March 6,
2000, the court preliminarily approved a Second Amended Stipulation that
modified certain of the settlement terms applying to the settlement of the
Partnership sub-class contained in the Amended Stipulation. The settlement of
the Partnership sub-class was premised on the consolidation of the Partnerships'
net assets (the "Consolidation"), subject to certain conditions, into a single
successor company ("Newco"). The potential benefits and risks of the
Consolidation were to be presented in a Solicitation Statement that would be
mailed to all of the partners of the Exchange Partnerships as soon as the
associated regulatory review process was completed and at least 60 days prior to
the fairness hearing. A preliminary Solicitation Statement was filed with the
Securities and Exchange Commission on August 24, 1998.
One of the principal objectives of the Consolidation was to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provided, among other things, that commencing March 22,
1999, the Exchange Partnerships could collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively made a $32 million loan
as permitted by the Second Amended Stipulation approved by the Court. The
Partnership's portion of the aggregate loan is $2,780,000. The loan consists of
a term loan to Echelon Residential Holdings, a newly-formed real estate company
that is owned by several independent investors and, in his individual capacity,
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities. Echelon Residential Holdings, through a wholly owned
subsidiary (Echelon Residential LLC), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company. The
loan has a term of 30 months maturing on September 8, 2002 and bears interest at
the annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. Echelon Residential Holdings has pledged its membership interests in
Echelon Residential LLC to the Exchange Partnerships as collateral for the loan.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
While the Court's August 20, 1998 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothecating, or otherwise disposing of any Units
pending the Court's final determination of whether the settlement should be
approved, the March 22, 1999 Order permitted the partners to transfer Units to
family members or as a result of the divorce, disability or death of the
partner. No other transfers are permitted pending the Court's final
determination of whether the settlement should be approved. The provision of
the August 20, 1998 Order which enjoined the General Partners of the
Partnerships from, among other things, recording any transfers not in accordance
with the Court's order remains effective.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the SEC has completed its review of the solicitation statement
and related materials submitted to the SEC in connection with the proposed
settlement, and (b) whether parties request the Court to schedule a hearing for
final approval of the proposed settlement or are withdrawing the proposed
settlement from judicial consideration and resuming the litigation of the
Plaintiffs' claims. The Court also directed the parties to use their best
efforts to assist the SEC so that its regulatory review may be completed on or
before May 15, 2001.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, AmericanIncome Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase, or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC
staff asserted that the notes evidencing the loans to Echelon Residential
Holdings are investment securities and the ownership of the notes by said
partnerships cause them to be investment companies and that, in the case of
American Income Partners V-A Limited Partnership and V-B Limited Partnership,
they may have become investment companies when they received the securities of
Semele Group Inc. ("Semele") as part of the compensation for the sale of a
vessel to Semele in 1997. The general partners have consulted with counsel who
specializes in the 1940 Act and, based on counsel's advice, do not believe that
the Designated Partnerships are investment companies.
The letter also stated that the Division is considering whether to commence
enforcement action with respect to this matter. Noting that the parties to the
Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the Court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has
yet to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referring the case to mediation and
referring discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel continued to negotiate toward a settlement and have reached agreement on
a Revised Stipulation of Settlement (the "Revised Settlement") that does not
involve a Consolidation. As part of the Revised Settlement, EFG has agreed to
buy the loans made by the Exchange Partnerships to Echelon Residential Holdings
for an aggregate of $32 million plus interest at 7.5% per annum, if they are not
repaid prior to or at their scheduled maturity date. The Revised Settlement also
provides for the liquidation of the Exchange Partnerships' assets, a cash
distribution and the dissolution of the Partnerships including the liquidation
and dissolution of this Partnership. The court held a hearing on March 1, 2002
to consider the Revised Settlement. After the hearing, the court issued an
order preliminarily approving the Revised Settlement and providing for the
mailing of notice to the Operating Partnership Sub-Class of a hearing on June 7,
2002 to determine whether the settlement on the terms and conditions set forth
in the Revised Settlement is fair, reasonable and adequate and should be finally
approved by the court and a final judgment entered in the matter.
There can be no assurance that the Revised Settlement of the sub-class involving
the Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome. Assuming the proposed settlement were effected according
to its terms, the Partnership's share of legal fees and expenses related to the
Class Action Lawsuit and the Consolidation was estimated to be approximately
$478,000, of which approximately $298,000 was expensed by the Partnership in
1998 and additional amounts of approximately $89,000, $41,000 and $50,000 were
expensed in 2001, 2000 and 1999, respectively.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
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Matters.
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(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, 2001, there were 870 record holders in the Partnership.
(c) Dividend History and Restrictions
Historically, the amount of cash distributions to be paid to the Partners had
been determined on a quarterly basis. Each quarter's distribution may have
varied in amount and was made 95% to the Limited Partners and 5% to the General
Partner. Generally, cash distributions were paid within 15 days after the
completion of each calendar quarter.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. Commencing
with the first quarter of 2000, the General Partner suspended the payment of
quarterly cash distributions pending final resolution of the Class Action
Lawsuit. Accordingly, future cash distributions are not expected to be paid
until the Class Action Lawsuit is settled or adjudicated.
In any given year, it is possible that Limited Partners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Limited Partners
adequate to cover any tax obligation.
There were no distributions declared in either 2001 or 2000.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base consists of fewer revenue-producing assets that are available to
cover prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining assets.
In particular, the Partnership must contemplate the potential liquidity risks
associated with its investment in commercial jet aircraft. The management and
remarketing of aircraft can involve, among other things, significant costs and
lengthy remarketing initiatives. Although the Partnership's lessees are
required to maintain the aircraft during the period of lease contract, repair,
maintenance, and/or refurbishment costs at lease expiration can be substantial.
For example, an aircraft that is returned to the Partnership meeting minimum
airworthiness standards, such as flight hours or engine cycles, nonetheless may
require heavy maintenance in order to bring its engines, airframe and other
hardware up to standards that will permit its prospective use in commercial air
transportation.
At December 31, 2001, the Partnership's equipment portfolio included ownership
interests in four commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. In January 2002 this lease was amended, which
includes a revised lease expiration date of August 2002. The remaining three
aircraft in the Partnership's portfolio already are Stage 3 compliant. Two of
these aircraft have lease terms expiring in September 2004 and June 2005,
respectively, and the third aircraft was returned to the General Partner upon
its lease expiration in April 2001.
Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, all of commercial jet
aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements except one McDonnell Douglas MD-82
aircraft, which was returned to the General Partner upon its lease expiration in
April 2001. The General Partner is attempting to remarket this aircraft.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest a Boeing 737-2H4 aircraft. The sale of the aircraft was
recorded by the Partnership as a sales-type lease, with a lease term expiring in
January 2002. In the fourth quarter of 2001, Royal Aviation Inc. declared
bankruptcy and as a result, has defaulted on this conditional sales agreement.
The General Partner is negotiating for the return of the aircraft.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"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.
"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.
"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.
Item 6. Selected Financial Data.
- ------------------------------------
The following data should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included in Item 8 herein.
For each of the five years in the period ended December 31, 2001:
Summary of Operations 2001 2000 1999 1998 1997
- ------------------------------- ------------ ----------- ----------- ----------- -----------
Operating and sales-type lease
revenue . . . . . . . . $ 1,528,904 $ 1,397,964 $ 2,174,523 $ 2,463,373 $ 4,068,381
Interest income . . . . . . . . $ 249,085 $ 510,691 $ 258,113 $ 195,264 $ 86,836
Total income. . . . . . . . . . $ 1,805,945 $ 2,120,488 $ 2,941,228 $ 2,778,361 $ 4,429,306
Net income (loss) . . . . . . . $ (984,363) $ 525,148 $ 1,190,252 $ 623,010 $ 1,574,944
Per Unit:
Net income (loss). . . . . . . $ (1.16) $ 0.62 $ 1.41 $ 0.74 $ 1.86
Cash distributions declared. . $ -- $ -- $ 0.75 $ 0.75 $ 0.94
Financial Position
- -------------------------------
Total assets. . . . . . . . . . $10,209,553 $11,292,179 $11,182,585 $11,565,735 $12,142,868
Total long-term obligations . . $ 1,840,458 $ 2,056,682 $ 2,363,628 $ 3,459,289 $ 4,401,753
Partners' capital . . . . . . . $ 7,688,817 $ 8,666,657 $ 8,181,956 $ 7,592,086 $ 7,488,561
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Year ended December 31, 2001 compared to the year
ended December 31, 2000 and the year ended December 31, 2000
compared to the year ended December 31, 1999
Certain statements in this Form 10-K of the Partnership that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit, the remarketing of the Partnership's
equipment, and the performance of the Partnership's non-equipment assets.
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. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. Pursuant to the Restated Agreement, as amended, the Partnership was
scheduled to be dissolved by December 31, 2001. However, the General Partner
does not expect that the Partnership will be dissolved until such time that the
Class Action Lawsuit is settled or adjudicated.
The 1940 Act places restrictions on the capital structure and business
activities of companies registered thereunder. The Partnership has active
business operations in the financial services industry, including equipment
leasing, the loan to Echelon Residential Holdings and its ownership of
securities of Semele. The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership unintentionally may have engaged, or may in the future,
engage in an activity or activities that may be construed to fall within the
scope of the 1940 Act. The General Partner is engaged in discussions with the
staff of the SEC regarding whether or not the Partnership may be an inadvertent
investment company as a consequence of the above-referenced loan. The 1940
Act, among other things, prohibits an unregistered investment company from
offering securities for sale or engaging in any business in interstate commerce
and, consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. If the Partnership were determined to be an unregistered investment
company, its business would be adversely affected. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
Revenue Recognition: Rents are payable to the Partnership monthly or quarterly
- ---------------------
and no significant amounts are calculated on factors other than the passage of
time. The majority of the Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred. Lease payments for the sales-type lease are due monthly and the
related revenue is recognized by a method which produces a constant periodic
rate of return on the outstanding investment in the lease.
Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. 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 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 the 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.
Allowance for doubtful accounts: The Partnership maintains allowances for
- -----------------------------------
doubtful accounts for estimated losses resulting from the inability of the
- -----
lessees to make the lease payments required under the contracted lease
- -----
agreements. These estimates are primarily based on the amount of time that has
- -----
elapsed since the related payments were due as well as specific knowledge
related to the ability of the lessees to make the required payments. If the
financial condition of the Partnership's lessees were to deteriorate, additional
allowances could be required that would increase expenses. Conversely, if the
financial condition of the lessees were to improve or if legal remedies to
collect past due amounts were successful, the allowance for doubtful accounts
could be reduced, thereby decreasing expenses.
Allowance for loan losses: The Partnership periodically evaluates the
- -----------------------------
collectibility of its loan's contractual principal and interest and the
- ----
existence of loan impairment indicators, including contemporaneous economic
- ----
conditions, situations which could affect the borrower's ability to repay its
- ----
obligation, the estimated value of the underlying collateral, and other relevant
- --
factors. Real estate values are discounted using a present value methodology
over the period between the financial reporting date and the estimated
disposition date of each property. A loan is considered to be impaired when,
based on current information and events, it is probable that the Partnership
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, which includes both principal and interest. A provision for
loan losses is charged to earnings based on the judgment of the General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. 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 and are
reflected separately on the accompanying Statement of Operations as write-down
of equipment. Inherent in the Partnership's estimate of net realizable values
are assumptions regarding estimated future cash flows. If these assumptions or
estimates change in the future, the Partnership could be required to record
impairment charges for these assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. In addition, the
Partnership is also involved in a class action lawsuit. The ultimate legal and
financial liability with respect to such matters cannot be estimated with
certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
- -----------------------
For the year ended December 31, 2001, the Partnership recognized operating lease
revenue of $1,514,232 compared to $1,395,237 and $2,174,523 for the years ended
December 31, 2000 and 1999, respectively. The increase in operating lease
revenue from 2000 to 2001 resulted primarily from the September 2000 re-lease of
two aircraft and receipt of lease termination proceeds, as discussed below. The
decrease in operating lease revenue from 1999 to 2000 resulted primarily from
the expiration of lease terms related to the Partnership's interest in three
Boeing 737-2H4 aircraft and a McDonnell Douglas aircraft. In the future,
operating lease revenue is expected to decline due to lease term expirations and
equipment sales. See discussion below related to the Partnership's sales-type
lease revenue for the year ended December 31, 2001 and 2000.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the equipment.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership held a proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold resulting in $279,825 of proceeds to the Partnerships
and a net gain, for financial statement purposes, of $47,179 for the
Partnership's proportional interest in the aircraft. In September 2000, a
second Boeing 737-2H4 aircraft was re-leased with a lease term expiring in
September 2003. In January 2002 this lease was amended, which includes a
revised lease expiration date of August 2002. The Partnership recognized
operating lease revenues of $123,410, $49,353 and $138,389, related to this
aircraft during the years ended December 31, 2001, 2000 and 1999, respectively.
The Partnership entered into a conditional sales agreement to sell its interest
in the remaining Boeing 737-2H4 aircraft as described below.
The lease term associated with a McDonnell Douglas MD-82 aircraft, in which the
Partnership holds an ownership interest, expired in January 2000. The aircraft
was re-leased in September 2000 to Aerovias De Mexico, S.A. de C.V., with a
lease term expiring in September 2004. The Partnership recognized operating
lease revenues of $235,066, $97,040 and $171,207, related to this aircraft
during the years ended December 31, 2001, 2000 and 1999, respectively.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Partnership's share of the early termination fee was $179,004, which was
recognized as operating lease revenue during the year ended December 31, 2001
and its share of the maintenance payment was $85,240, which is accrued as a
maintenance obligation at December 31, 2001. Coincident with the termination of
the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V.
for a term of four years. The Reno Programs are to receive rents of $6,240,000
over the lease term, of which the Partnership's share is $1,329,744. During the
years ended December 31, 2001, 2000 and 1999, the Partnership recognized
operating lease revenue including the early termination fee discussed above of
$527,243, $384,605 and $370,352, respectively, related to its interest in this
aircraft.
The General Partner is attempting to remarket the second McDonnell Douglas MD-82
aircraft, in which the Partnership holds an ownership interest. The lease term
associated with this aircraft expired in April 2001 and the aircraft is
currently off lease. The Partnership recognized operating lease revenue of
$113,134, $254,061 and $170,080, related to this aircraft during the years ended
December 31, 2001, 2000 and 1999, respectively.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft and recorded a net gain on
sale of equipment, for financial statement purposes, of $100,122. This aircraft
had been off lease from January 2000 through the date of the conditional sale.
The title to the aircraft was to transfer to Royal Aviation Inc., at the
expiration of the lease term. The sale of the aircraft has been recorded by the
Partnership as a sales-type lease, with a lease term expiring in January 2002.
For the years ended December 31, 2001 and 2000, the Partnership recognized
sales-type lease revenue of $14,672 and $2,727, respectively. In the fourth
quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result, has
defaulted on the conditional sales agreement. The General Partner is
negotiating for the return of the aircraft. As of December 31, 2001, no
allowance on the investment in sales-type lease was deemed necessary based on
the comparison of estimated fair value of the Partnership's interest in the
aircraft and the Partnership's net investment in the sales-type lease.
Interest income for the year ended December 31, 2001 was $249,085 compared to
$510,691 and $258,113 for the years ended December 31, 2000 and 1999,
respectively. Interest income is generated principally from temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments and interest earned on the loan receivable from Echelon Residential
Holdings. The amount of future interest income from the short-term instruments
is expected to fluctuate as a result of changing interest rates and the amount
of cash available for investment, among other factors.
Interest income included $110,502 and $340,692 for the years ended December 31,
2001 and 2000, respectively, earned on the loan receivable from Echelon
Residential Holdings. During the second quarter of 2001, the General Partner
determined that recoverability of the loan receivable had been impaired and at
June 30, 2001 recorded an impairment of $243,250, reflecting the General
Partner's current assessment of the amount of loss that is likely to be incurred
by the Partnership. In addition to the write-down recorded at June 30, 2001,
the Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $694,444 is recorded as write-down of impaired loan and
interest receivable in the year ended December 31, 2001.
Interest income included $45,973 in each of the years ended December 31, 2001,
2000, and 1999, earned on a note receivable from Semele. The note receivable
from Semele is scheduled to mature in April 2003.
During the year ended December 31, 2001, the Partnership sold fully depreciated
equipment to existing lessees and third parties which resulted in a net gain,
for financial reporting purposes, of $27,956 compared to a net gain in the year
ended December 31, 2000 excluding the aircraft sale and conditional sale
discussed above, of $64,532 on equipment having a net book value of $3,390.
During the year ended December 31, 1999, the Partnership sold equipment having a
net book value of $1,804 to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $508,592.
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.
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 for each asset is comprised of all primary
lease term revenue generated from that asset, together with its residual value.
The latter consists of cash proceeds realized upon the asset's sale in addition
to all other cash receipts obtained from renting the asset on a re-lease,
renewal or month-to-month basis. The Partnership classifies such residual
rental payments as lease revenue. Consequently, the amount of gain or loss
reported in the financial statements is not necessarily indicative of the total
residual value the Partnership achieved from leasing the equipment.
Depreciation expense was $588,806, $629,430 and $956,631 for the years ended
December 31, 2001, 2000 and 1999, 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 the 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 the 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.
During the year ended December 31, 2001, the Partnership also recorded a
write-down of equipment, representing an impairment to the carrying value of the
Partnership's interest in a McDonnell Douglas MD-82 aircraft returned in April
2001 and currently off lease. The resulting charge of $268,000 was based on a
comparison of estimated fair value and carrying value of the Partnership's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
Interest expense was $129,235, $220,695 and $222,725 for the years ended
December 31, 2001, 2000 and 1999, respectively. Interest expense will decline as
the principal balance of notes payable is reduced through the application of
rent receipts to outstanding debt. See additional discussion below regarding
the refinancing of the debt in 2001.
Management fees were $83,413, $66,733 and $101,040 for the years ended December
31, 2001, 2000 and 1999, 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.
Write-down of investment securities-affiliate was $46,449 for the year ended
December 31, 2001. At both March 31, 2001 and December 31, 2001, the General
Partner determined that the decline in market value of its Semele common stock
was other-than-temporary. As a result, on March 31, 2001, the Partnership wrote
down the carrying value of the Semele common stock to $3.3125 per share (the
quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the
stock traded closest to March 31, 2001). At December 31, 2001, the Partnership
again wrote down the carrying value of the Semele common stock to $1.90 per
share (the quoted price of Semele stock on OTC Bulletin Board on the date the
stock traded closest to December 31, 2001). See further discussion below.
Operating expenses were $979,961, $678,482 and $470,580 for the years ended
December 31, 2001, 2000 and 1999, respectively. The increase in operating
expenses from 2000 to 2001 is primarily due to an increase in administrative and
professional service costs. In addition, operating expenses in 2001 included
approximately $388,000 of remarketing costs related to the re-lease of an
aircraft in June 2001 and storage of another aircraft which was returned to the
General Partner in April 2001, upon its lease expiration. The primary reason
for the increase in operating expenses from 1999 to 2000 was storage,
remarketing and maintenance costs associated with the Partnership's aircraft.
In 2000 and 1999, the Partnership accrued approximately $119,000 and $160,000,
respectively, for the reconfiguration costs and completion of a D-Check incurred
to facilitate the remarketing of the McDonnell Douglas MD-82 aircraft released
in September 2000. In 2000, the Partnership also accrued approximately $160,000
for a required D-check for a second McDonnell Douglas MD-82 aircraft. Operating
expenses in 2001, 2000 and 1999 also included approximately $89,000, $41,000 and
$50,000, respectively, related to the Class Action Lawsuit. Other operating
expenses consist principally of professional service costs, such as audit and
other legal fees, as well as printing, distribution and other remarketing
expenses.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Partnership's assets and the
Partnership's ability to negotiate future lease agreements. Notwithstanding the
foregoing, it currently is not possible for the General Partner to determine the
long-term effects, if any, that these events may have on the economic
performance of the Partnership's equipment portfolio. Approximately 66% of the
Partnership's equipment portfolio consists of commercial jet aircraft. The
events of September 11, 2001 adversely affected market demand for both new and
used commercial aircraft and weakened the financial position of most airlines.
No direct damage occurred to any of the Partnership's assets as a result of
these events and while it is currently not possible for the General Partner to
determine the ultimate long-term economic consequences of these events to the
Partnership, the General Partner expects that the resulting decline in air
travel will suppress market prices for used aircraft in the short term and could
inhibit the viability of the airline industry. In the event of a default by an
aircraft lessee, the Partnership could suffer material losses. At December 31,
2001, the Partnership has collected substantially all rents owed from aircraft
lessees. The General Partner is monitoring the situation and will continue to
evaluate potential implications to the Partnership's financial position and
future liquidity.
The Partnership by its nature is a limited life entity. 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 $893,441, $685,507 and $1,946,817 for the years ended December 31,
2001, 2000 and 1999 respectively. Future renewal, re-lease and equipment sale
activities will cause a decline in the Partnership's lease revenues and
corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will also continue to decline as the Partnership experiences a higher
frequency of remarketing events. The Partnership, however, may continue to incur
significant costs to facilitate the successful remarketing of its aircraft in
the future. The amount of future cash from interest income is expected to
fluctuate as a result of changing interest rates and the level of cash available
for investment, among other factors. The loan to Echelon Residential Holdings
and accrued interest thereon is due in full at maturity on September 8, 2002
(see discussion below).
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During 2001, the
Partnership realized net proceeds of $27,956, compared to $347,747 and $510,396
in 2000 and 1999, 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.
At December 31, 2001, the Partnership was due aggregate future minimum lease
payments of $1,886,221 from contractual operating lease agreements, a portion of
which will be used to amortize the principal balance of notes payable of
$1,840,458. At the expiration of the individual primary and renewal lease terms
underlying the Partnership's future minimum lease payments, the Partnership will
sell the equipment or enter re-lease or renewal agreements when considered
advantageous by the General Partner and EFG. Such future remarketing activities
will result in the realization of additional cash inflows in the form of
equipment sale proceeds or rents from renewals and re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease
contracts, while others may elect to return the equipment. In the latter
instances, the equipment could be re-leased to another lessee or sold to a third
party.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $2,780,000 to a
newly formed real estate company, Echelon Residential Holdings, to finance the
acquisition of real estate assets by that company. Echelon Residential
Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the
loan proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an unrelated Florida-based
real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months maturing on
September 8, 2002 and bears interest at the annual rate of 14% for the first 24
months and 18% for the final six months. Interest accrues and compounds monthly
and is payable at maturity.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
The write-down of the loan receivable from Echelon Residential Holdings
discussed above and the related accrued interest was precipitated principally by
a slowing U.S. economy and its effects on the real estate development industry.
The economic outlook for the properties that existed when the loan was funded
has deteriorated and inhibited the ability of Echelon Residential Holdings'
management to secure low-cost sources of development capital, including but not
limited to joint-venture or equity partners. In response to these developments
and lower risk tolerances in the credit markets, the management of Echelon
Residential Holdings decided in the second quarter of 2001 to concentrate its
prospective development activities within the southeastern United States and,
therefore, to dispose of development sites located elsewhere. In May 2001,
Echelon Residential Holdings closed its Texas-based development office; and
since the beginning of 2001, the company has sold five of nine properties (two
in July 2001, one in October 2001, one in November 2001 and one in February
2002). As a result of these developments, the General Partner does not believe
that Echelon Residential Holdings will realize the profit levels originally
believed to be achievable from either selling these properties as a group or
developing all of them as multi-family residential communities.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of
the Manager serving as the initial equity holder of Echelon Residential Holdings
and as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the
general partner's action in structuring the loan in this way since the officer
may be deemed an affiliate and the loans in violation of theprohibition against
loans to affiliates in the Partnership Agreement and the court's statement in
its order permitting New Investments that all other provisions of the
Partnership Agreements governing the investment objectives and policies of the
Partnership shall remain in full force and effect. The court may require the
partnerships to restructure or divest the loan.
As a result of an exchange in 1997, the Partnership is the owner of 20,876
shares of Semele common stock and holds a beneficial interest in a note from
Semele (the "Semele Note") of $459,729. The Semele Note bears an annual
interest rate of 10% and is scheduled to mature in April 2003. The note also
requires mandatory principal reductions, if and to the extent that net proceeds
are received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele Note has been extended. Since the Semele Note was received as
consideration for the sale of the cargo vessels to an unaffiliated party and the
extension of the maturity of the Semele Note is documented in an amendment to
the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the General Partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate of the General Partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", marketable
equity securities classified as available-for-sale are carried at fair value.
During the year ended December 31, 1999, the Partnership increased the carrying
value of its investment in Semele common stock to $5.75 per share (the quoted
price of the Semele stock on NASDAQ Small Cap market at December 31, 1999),
resulting in an unrealized gain of $33,924. At December 31, 2000, the
Partnership decreased the carrying value of its investment in Semele common
stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small
Cap market nearest December 31, 2000), resulting in an unrealized loss of
$40,447. The gain in 1999 and loss in 2000 were reported as component of
comprehensive income, included in the Statement of Changes in Partners' Capital.
At both March 31, 2001 and December 31, 2001, the General Partner determined
that the decline in market value of the Semele common stock was
other-than-temporary. As a result, the Partnership wrote down the carrying
value of the Semele stock to its quoted price on the NASDAQ SmallCap market and
OTC Bulletin Board, on the date the stock traded closest March 31, 2001 and
December 31, 2001, respectively, for a total realized loss of $46,449 in 2001.
The Semele Note and the Semele common stock are subject to a number of risks
including, Semele's ability to make loan payments which is dependent upon the
liquidity of Semele and primarily Semele's ability to sell or refinance its
principal real estate asset consisting of an undeveloped 274-acre parcel of land
near Malibu, California. The market value of the Partnership's investment in
Semele common stock has generally declined since the Partnership's initial
investment in 1997. In 1998 and 2001, the General Partner determined that the
decline in market value of the stock was other-than-temporary and wrote down the
Partnership's investment. Subsequent to December 31, 2001, the market value of
the Semele common stock has remained relatively constant. The market value of
the stock could decline in the future. Gary D. Engle, President and Chief
Executive Officer of the general partner of EFG, and a Director of the General
Partner, is Chairman and Chief Executive Officer of Semele and James A. Coyne,
Executive Vice President of the general partner of EFG is Semele's President and
Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board
of Directors of, and own significant stock in, Semele.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities on
the accompanying Statement of Cash Flows. 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 the future, the amount of cash used to repay debt obligations
will decline as the principal balance of notes payable is reduced through the
collection and application of rents. In addition, the Partnership has a balloon
payment obligation as discussed below.
In February 2001, the Partnership and certain affiliated investment programs
(collectively the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to financing the Programs' total existing indebtedness and
accrued interest $4,758,845, the Programs received additional debt proceeds of
$3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $968,639 including $564,970 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $403,669 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft then on lease to
Finnair OY of $104,590 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a
fixed interest rate of 7.65%, principal is amortized monthly and Partnership has
a balloon payment obligation at the expiration of the lease term of $323,027 in
September 2004. During the year ended December 31, 2000, the Partnership
refinanced the indebtedness associated with the same aircraft and in addition to
refinancing the existing indebtedness, received additional proceeds of $160,856.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs
executed a debt agreement with a new lender collateralized by the aircraft and
assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno
Programs received debt proceeds of $5,316,482, of which the Partnership's share
was $1,132,936. The Partnership used the new debt proceeds and a portion of
certain other receipts from Reno to repay the outstanding balance of the
existing indebtedness related to the aircraft of $1,186,088 and accrued interest
and fees of $17,670.
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket equipment upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells equipment, because the remaining
equipment base consists of fewer revenue-producing assets that are available to
cover prospective cash disbursements. Insufficient liquidity could inhibit the
Partnership's ability to sustain its operations or maximize the realization of
proceeds from remarketing its remaining assets. In particular, the Partnership
must contemplate the potential liquidity risks associated with its investment in
commercial jet aircraft. The management and remarketing of aircraft can
involve, among other things, significant costs and lengthy remarketing
initiatives. Although the Partnership's lessees are required to maintain the
aircraft during the period of lease contract, repair, maintenance, and/or
refurbishment costs at lease expiration can be substantial. For example, an
aircraft that is returned to the Partnership meeting minimum airworthiness
standards, such as flight hours or engine cycles, nonetheless may require heavy
maintenance in order to bring its engines, airframe and other hardware up to
standards that will permit its prospective use in commercial air transportation.
At December 31, 2001, the Partnership's equipment portfolio included ownership
interests in four commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ,
Ltd., through September 2003. In January 2002 this lease was amended, which
includes a revised lease expiration date of August 2002. The remaining three
aircraft in the Partnership's portfolio already are Stage 3 compliant. Two of
these aircraft have lease terms expiring in September 2004 and June 2005,
respectively, and the third aircraft was returned to the General Partner upon
its lease expiration in April 2001.
Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, all of the commercial
jet aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements except one McDonnell Douglas MD-82
aircraft, which was returned to the General Partner upon its lease expiration in
April 2001. The General Partner is attempting to remarket this aircraft.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as components of financing
activities on the accompanying Statement of Cash Flows. No cash distributions
were declared during the years ended December 31, 2001 and 2000. In any given
year, it is possible that Limited Partners will be allocated taxable income in
excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Limited Partners adequate to cover any tax
obligation.
Cash distributions when 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, the residual value realized for each asset at its
disposal date and the performance of the Partnership's non-equipment assets.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes For instance, selling commissions and organization and
offering costs pertaining to syndication of the Partnership's limited
partnership units are not deductible for federal income tax purposes, but are
recorded as a reduction of partners' capital for financial reporting purposes.
Therefore, such differences are permanent differences between capital accounts
for financial reporting and federal income tax purposes. Other differences
between the bases of capital accounts for federal income tax and financial
reporting purposes occur due to timing differences. Such items consist of the
cumulative difference between income or loss for tax purposes and financial
statement income or loss and the treatment of unrealized gains or losses on
investment securities for book and tax purposes. The principal component of the
cumulative difference between financial statement income or loss and tax income
or loss results from different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at December 31, 2001. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 2001, the General Partner had a positive tax capital account
balance.
The outcome of the Class Action Lawsuit will be the principal factor in
determining the future of the Partnership's operations. Commencing with the
first quarter of 2000, the General Partner suspended the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is settled or adjudicated.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
- -----------------------------------------------------------------------------
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership's notes payable bear interest rates of 7.03% and 7.65%, which
amortize monthly through September 2005. The fair market value of fixed
interest rate on debt may be adversely impacted due to a decrease in interest
rates. The effect of interest rate fluctuations on the Partnership for the year
ended December 31, 2001 was not material.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002, currently earns interest at a fixed annual rate of 14% and will earn a
fixed annual rate of 18% for the last 6 months of the loan, with interest due at
maturity. Investments earning a fixed rate of interest may have their fair
market value adversely impacted due to a rise in interest rates. The effect of
interest rate fluctuations on the Partnership in 2001 was not material.
However, during the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $243,250, reflecting the General Partner's then
assessment of the amount of loss likely to be incurred by the Partnership. In
addition to the write-down recorded at June 30, 2001, the Partnership reserved
all accrued interest of $451,194 recorded on the loan receivable from inception
through March 31, 2001 and ceased accruing interest on its loan receivable from
Echelon Residential Holdings, effective April 1, 2001.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------------
Financial Statements:
Report of Independent Certified Public Accountants . 21
Statement of Financial Position
at December 31, 2001 and 2000. . . . . . . . . . . . 22
Statement of Operations
for the years ended December 31, 2001, 2000 and 1999 23
Statement of Changes in Partners' Capital
for the years ended December 31, 2001, 2000 and 1999 24
Statement of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 25
Notes to the Financial Statements. . . . . . . . . . 26
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess Deficiency of Total Cash
Generated to Cost of Equipment Disposed. . . . . . . . 40
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings. . . . . . . . 41
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 . . . . . . . . . . . . . . . . 42
Report of Independent Certified Public Accountants
To the Partners of American Income Fund I-C,
a Massachusetts Limited Partnership:
We have audited the accompanying balance sheets of American Income Fund I-C, a
Massachusetts Limited Partnership as of December 31, 2001 and 2000, 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, 2001. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
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 at Item 8 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.
/S/ ERNST & YOUNG LLP
Tampa, Florida
March 26, 2002
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
2001 2000
ASSETS
Cash and cash equivalents $ 2,463,781 $ 1,758,608
Rents receivable, net of allowance of $48,073
at December 31, 2001 129,340 162,064
Accounts receivable - other - 39,178
Accounts receivable - affiliate 89,402 93,661
Interest receivable - affiliate 11,588 -
Prepaid expenses 1,076 -
Interest receivable - loan, net of allowance of $451,194
at December 31, 2001 - 340,692
Loan receivable, net of allowance of $243,250
at December 31, 2001 2,536,750 2,780,000
Net investment in sales-type lease 19,432 263,060
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 39,664 79,590
Equipment at cost, net of accumulated depreciation
of $6,043,493 and $5,593,629 at December 31, 2001
and 2000, respectively 4,458,791 5,315,597
------------ ------------
Total assets $10,209,553 $11,292,179
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 1,840,458 $ 2,056,682
Accrued interest 6,391 10,135
Accrued liabilities 561,530 496,938
Accrued liabilities - affiliate 109,469 23,742
Deferred rental income 2,888 38,025
------------ ------------
Total liabilities 2,520,736 2,625,522
------------ ------------
Partners' capital (deficit):
General Partner (498,099) (449,207)
Limited Partnership Interests
(803,454.56 Units; initial purchase price of $25 each) 8,186,916 9,115,864
------------ ------------
Total partners' capital 7,688,817 8,666,657
------------ ------------
Total liabilities and partners' capital $10,209,553 $11,292,179
============ ============
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
INCOME
Operating lease revenue $1,514,232 $1,395,237 $2,174,523
Sales-type lease revenue 14,672 2,727 -
Interest income 92,610 124,026 212,140
Interest income - loan 110,502 340,692 -
Interest income - affiliate 45,973 45,973 45,973
Gain on sale of equipment 27,956 211,833 508,592
----------- ---------- ----------
Total income 1,805,945 2,120,488 2,941,228
----------- ---------- ----------
EXPENSES
Depreciation 588,806 629,430 956,631
Write-down of equipment 268,000 - -
Interest expense 129,235 220,695 222,725
Equipment management fees - affiliate 83,413 66,733 101,040
Operating expenses - affiliate 979,961 678,482 470,580
Write-down of impaired loan and interest receivable 694,444 - -
Write-down of investment securities - affiliate 46,449 - -
----------- ---------- ----------
Total expenses 2,790,308 1,595,340 1,750,976
----------- ---------- ----------
Net income (loss) $ (984,363) $ 525,148 $1,190,252
=========== ========== ==========
Net income (loss) per limited partnership unit $ (1.16) $ 0.62 $ 1.41
=========== ========== ==========
Cash distributions declared
per limited partnership unit $ -- $ -- $ 0.75
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
General
Partner Limited Partners
Amount Units Amount Total
---------- ---------------- ----------- -----------
Balance at December 31, 1998 $(502,935) 803,454.56 $8,095,021 $7,592,086
Net income - 1999 59,513 - 1,130,739 1,190,252
Unrealized gain on investment
securities - affiliate 1,696 - 32,228 33,924
---------- ---------------- ----------- -----------
Comprehensive income 61,209 - 1,162,967 1,224,176
---------- ---------------- ----------- -----------
Cash distributions declared (31,716) - (602,590) (634,306)
---------- ---------------- ----------- -----------
Balance at December 31, 1999 (473,442) 803,454.56 8,655,398 8,181,956
Net income - 2000 26,257 - 498,891 525,148
Unrealized loss on investment
securities - affiliate (2,022) - (38,425) (40,447)
---------- ---------------- ----------- -----------
Comprehensive income 24,235 - 460,466 484,701
---------- ---------------- ----------- -----------
Balance at December 31, 2000 (449,207) 803,454.56 9,115,864 8,666,657
Net loss - 2001 (49,218) - (935,145) (984,363)
Less: Reclassification adjustment
for write-down of investment
securities - affiliate 326 - 6,197 6,523
---------- ---------------- ----------- -----------
Comprehensive loss (48,892) - (928,948) (977,840)
---------- ---------------- ----------- -----------
Balance at December 31, 2001 $(498,099) 803,454.56 $8,186,916 $7,688,817
========== ================ =========== ===========
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (984,363) $ 525,148 $ 1,190,252
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 588,806 629,430 956,631
Bad debt expense 48,073 - -
Write-down of equipment 268,000 - -
Sales-type lease revenue (14,672) (2,727) -
Gain on sale of equipment (27,956) (211,833) (508,592)
Write-down of impaired loan and interest receivable 694,444 - -
Write-down of investment securities - affiliate 46,449 - -
Changes in assets and liabilities:
Rents receivable (15,349) (69,849) 269,068
Accounts receivable - other 39,178 (39,178) -
Accounts receivable - affiliate 4,259 40,289 (83,183)
Interest receivable - affiliate (11,588) - -
Prepaid expenses (1,076) - -
Interest receivable - loan (110,502) (340,692) -
Collections on net investment in sales-type lease 258,300 64,503 -
Accrued interest (3,744) (6,281) (10,204)
Accrued liabilities 64,592 110,020 127,418
Accrued liabilities - affiliate 85,727 5,959 3,032
Deferred rental income (35,137) (19,282) 2,395
------------ ------------ ------------
Net cash provided by operating activities 893,441 685,507 1,946,817
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 27,956 347,747 510,396
Loan receivable - (2,780,000) -
------------ ------------ ------------
Net cash provided by (used in) investing activities 27,956 (2,432,253) 510,396
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 1,536,605 160,856 -
Principal payments - notes payable (1,752,829) (467,802) (1,095,661)
Distributions paid - (158,577) (634,306)
------------ ------------ ------------
Net cash used in financing activities (216,224) (465,523) (1,729,967)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 705,173 (2,212,269) 727,246
Cash and cash equivalents at beginning of year 1,758,608 3,970,877 3,243,631
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,463,781 $ 1,758,608 $ 3,970,877
============ ============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 132,979 $ 226,976 $ 232,929
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment sold on sales-type lease $ - $ 324,836 $ -
============ ============ ============
See Note 6 to the financial statements regarding the Partnership's carrying
value of its investment securities - affiliate.
See Note 8 to the financial statements regarding the refinancing of one of the
Partnership's notes payable in February 2001.
The accompanying notes are an integral part of these financial statements.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 known as American Finance Group), a
Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by 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 based upon
acquisitions of equipment and revenues from leases
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, Chief Executive Officer and sole Director. 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Cash and Cash Equivalents
- ----------------------------
The Partnership classifies as cash and cash equivalent amounts on deposits in
banks and liquid investment instruments purchased with an original maturity of
three months or less.
Revenue Recognition
- --------------------
Effective January 1, 2000, the Partnership adopted the provisions of Securities
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the
recognition, presentation and disclosure of revenue in financial statements.
The adoption of SAB No. 101 had no impact on the Partnership's financial
statements.
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 majority of the leases are accounted for as operating leases and are
noncancellable. Rents received prior to their due dates are deferred. In
certain instances, the Partnership may enter renewal or re-lease agreements
which expire beyond the Partnership's anticipated dissolution date. This
circumstance is not expected to prevent the orderly wind-up of the Partnership's
business activities as the General Partner and EFG would seek to sell the
then-remaining equipment assets either to the lessee or to a third party, taking
into consideration the amount of future noncancellable rental payments
associated with the attendant lease agreements. Future minimum rents from
operating leases of $1,886,221 are due as follows:
For the year ending December 31, 2002 691,057
2003 567,502
2004 489,147
2005 138,515
----------
. Total $1,886,221
==========
Future minimum rents for operating leases does not include the operating leases
for which the lease payments are based on the usage of the equipment leased.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Programs") executed an agreement with the existing lessee,
Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas
MD-87 aircraft that had been scheduled to expire in January 2003. The Programs
received an early termination fee of $840,000 and a payment of $400,000 for
certain maintenance required under the existing lease agreement. The
Partnership's share of the early termination fee was $179,004, which was
recognized as operating lease revenue during the year ended December 31, 2001
and its share of the maintenance payment was $85,240, which was which is accrued
as a maintenance obligation at December 31, 2001. Coincident with the
termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico,
S.A. de C.V. for a term of four years. The Programs are to receive rents of
$6,240,000 over the lease term, of which the Partnership's share is $1,329,744.
In January 2002, the Programs executed a lease amendment with the existing
lessee, Air Slovakia BWJ Ltd. ("Air Slovakia") to restructure the lease of a
Boeing 737 aircraft, which had been scheduled to expire in September 2003. In
accordance with the lease amendment, the lease term was revised and the lease
will terminate in August 2002.
Lease payments for the sales-type lease are due monthly and the related revenue
is recognized by a method which produces a constant periodic rate of return on
the outstanding investment in the lease. Unearned income is recognized as
sales-type lease revenue over the lease term using the interest method.
Revenue from major individual lessees which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
-------- -------- --------
Aerovias De Mexico, S.A. de C.V $409,594 $ -- $ --
Reno Air, Inc.. . . . . . . . . $352,714 $384,605 $370,352
General Motors Corporation. . . $173,992 $210,245 $327,579
Finnair OY. . . . . . . . . . . $ -- $277,316 $507,521
Southwest Airlines, Inc.. . . . $ -- $ -- $416,708
Use of Estimates
- ------------------
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 means the actual cost paid by the Partnership to
acquire the equipment, including acquisition fees. Where equipment was acquired
from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the
equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the
Affiliate while carrying the equipment, including all liens and encumbrances,
less the amount of all primary term rents earned by EFG or the Affiliate prior
to selling the equipment. Where the seller of the equipment was a third party,
Equipment Cost reflects the seller's invoice price.
Depreciation
- ------------
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 the
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.
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.
Remarketing and Maintenance Expenses
- ---------------------------------------
The Partnership expenses storage and remarketing costs associated with aircraft
and other equipment under lease as incurred.
Generally, the costs of scheduled inspections and repairs and routine
maintenance for aircraft and other equipment under lease are the responsibility
of the lessee. For aircraft under lease, scheduled airframe inspections and
repairs, such as "D checks", are generally the responsibility of the lessee. In
certain situations, the Partnership may be responsible for reimbursing the
lessee for a portion of such costs paid by the lessee prior to the redelivery
date (i.e., the expiration of the lease term) or may be entitled to receive
additional payments from the lessee based on the terms and conditions set forth
in the lease arrangement which considers, among other things, the amount of time
remaining until the next scheduled maintenance event. The Partnership records
the amount payable or receivable, with a corresponding charge or credit to
operations.
Investment Securities - Affiliate
- ------------------------------------
The Partnership's investment in Semele Group Inc. ("Semele") is considered to be
available-for-sale and as such is carried at fair value with unrealized gains
and losses reported as components of partners' capital. Other-than-temporary
declines in market value are recorded as write-down of investment in the
Statement of Operations. Unrealized gains or losses on the Partnership's
available-for-sale securities are required to be included in comprehensive
income or loss.
Allowance for Loan Losses
- ----------------------------
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), the
Partnership periodically evaluates the collectibility of its loans' contractual
principal and interest and the existence of loan impairment indicators,
including contemporaneous economic conditions, situations which could affect the
borrower's ability to repay its obligation, the estimated value of the
underlying collateral, and other relevant factors. Real estate values are
discounted using a present value methodology over the period between the
financial reporting date and the estimated disposition date of each property. A
loan is considered to be impaired when, based on current information and events,
it is probable that the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement, which includes both
principal and interest. A provision for loan losses is charged to earnings
based on the judgment of the Partnership's management of the amount necessary to
maintain the allowance for loan losses at a level adequate to absorb probable
losses.
Net Investment in Sales-Type Lease
- --------------------------------------
For leases that qualify as sales-type leases, the Partnership recognizes profit
or loss at lease inception to the extent the fair value of the property leased
differs from the carrying value. For balance sheet purposes, the aggregate
lease payments receivable are recorded on the balance sheet net of unearned
income, representing interest, as net investment in sales-type lease. Unearned
income is recognized as sales-type lease revenue over the lease term using the
interest method.
Impairment of Long-Lived Assets
- ----------------------------------
The carrying values of long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value may not be
recoverable. If this review results in an impairment, as determined based on
the estimated undiscounted cash flow, the carrying value of the related
long-lived asset is adjusted to fair value.
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.
Contingencies
- -------------
It is the Partnership's policy to recognize a liability for goods and services
during the period when the goods or services are received. To the extent that
the Partnership has a contingent liability, meaning generally a liability the
payment of which is subject to the outcome of a future event, the Partnership
recognizes a liability in accordance with Statement of Financial Accounting
Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5
requires the recognition of contingent liabilities when the amount of liability
can be reasonably estimated and the liability is probable.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. The
Defendant's and Plaintiff's Counsel have negotiated a Revised Settlement. As
part of the Revised Settlement, EFG has agreed to buy the loans made by the
Partnership and 10 affiliated partnerships (the ''Exchange Partnerships'') to
Echelon Residential Holdings for an aggregate of $32 million plus interest at
7.5% per annum, if they are not repaid prior to or at their scheduled maturity
date. The Revised Settlement also provides for the liquidation of the Exchange
Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. The
court held a hearing on March 1, 2002 to consider the Revised Settlement. After
the hearing, the court issued an order preliminarily approving the Revised
Settlement and providing for the mailing of notice to the Operating Partnership
Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on
the terms and conditions set forth in the Revised Settlement is fair, reasonable
and adequate and should be finally approved by the court and a final judgment
entered in the matter. The Partnership's estimated exposure for costs
anticipated to be incurred in pursuing the settlement proposal is approximately
$478,000 consisting principally of legal fees and other professional service
costs. These costs are expected to be incurred regardless of whether the
proposed settlement ultimately is effected. The Partnership expensed
approximately $298,000 of these costs in 1998 following the Court's approval of
the initial settlement plan. The cost estimate is subject to change and is
monitored by the General Partner based upon the progress of the litigation and
other pertinent information. As a result, the Partnership expensed additional
amounts of $89,000, $41,000 and $50,000 for such costs during 2001, 2000 and
1999, respectively. See Note 10 for additional discussion.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing, the loan to Echelon Residential Holdings
and its ownership of securities of Semele. The Partnership does not intend to
engage in investment activities in a manner or to an extent that would require
the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership unintentionally may have engaged,
or may in the future, engage in an activity or activities that may be construed
to fall within the scope of the 1940 Act. The General Partner is engaged in
discussions with the staff of the Securities and Exchange Commission ("SEC")
regarding whether or not the Partnership may be an inadvertent investment
company as a consequence of the above-referenced loan. The 1940 Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. If the Partnership were determined to be an unregistered investment
company, its business would be adversely affected. The General Partner has
determined to take action to resolve the Partnership's status under the 1940 Act
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
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 9 for allocation of income or
loss for income tax purposes.
Accumulated Other Comprehensive Income (Loss)
- -------------------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," effective in 1998, requires the disclosure of comprehensive income
(loss) to reflect changes in partners' capital that result from transactions and
economic events from non-owner sources. Accumulated other comprehensive income
(loss) for the years ended December 31, 2001, 2000 and 1999 represents the
Partnership's unrealized gains (losses) on the investment in Semele:
2001 2000 1999
-------- --------- -------
Beginning balance $(6,523) $ 33,924 $ --
Adjustments related to the Partnership's
investment in Semele 6,523 (40,447) 33,924
-------- --------- -------
Ending balance $ -- $ (6,523) $33,924
======== ========= =======
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, 2001
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 separate tax returns.
New Accounting Pronouncements
- -------------------------------
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Partnership believes the adoption of SFAS No.
141 has not had a material impact on its financial statements.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Partnership to complete a
transitional goodwill impairment test six months from the date of adoption. The
Partnership believes the adoption of SFAS No. 142 will not have a material
impact on its financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Partnership believes that the
adoption of SFAS No. 144 will not have a material impact on its financial
statements.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at December 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 2001 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.
. Remaining
. Lease Term Equipment
Equipment Type (Months) at Cost Location
- --------------------------------------------- ----------- ------------ ------------------
Aircraft. . . . . . . . . . . . . . . . . . . 0-42 $ 6,918,159 Foreign
Trailers and intermodal containers. . . . . . 12-18 1,963,408 CA/OK
Materials handling. . . . . . . . . . . . . . 0 1,471,848 CA/IA/IL/MI/MN/MO/
. . OH/OR/TX/Foreign
Motor vehicles. . . . . . . . . . . . . . . . 0 97,400 MI
Communications. . . . . . . . . . . . . . . . 0 51,469 TX
------------
Total equipment cost . . . . . . . . . . . - 10,502,284
Accumulated depreciation . - (6,043,493)
------------
Equipment, net of accumulated depreciation - $ 4,458,791
============
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
enabled the Partnership to further diversify its equipment portfolio at
inception by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could have resulted from a concentration in any
single equipment type, industry or lessee. At December 31, 2001, the
Partnership's equipment portfolio included equipment having a proportionate
original cost of approximately $8,882,000, representing approximately 85% 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 $4,556,000 and a
net book value of approximately $3,170,000 at December 31, 2001.
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 re-lease or
sale with an original cost of approximately $1,716,000 and a net book value of
approximately $748,000 at December 31, 2001, which includes the MD-82 aircraft
returned in April 2001, having an original cost of approximately $1,661,000 and
a net book value of $748,000. The General Partner is actively seeking the sale
or re-lease of all equipment not on lease.
The Partnership accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. During the year ended December 31, 2001, the Partnership
recorded a write-down of equipment, representing an impairment to the carrying
value of the Partnership's interest in the McDonnell Douglas MD-82 aircraft
discussed above. The resulting charge of $268,000 was based on a comparison of
estimated fair value and carrying value of the Partnership's interest in the
aircraft.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Exchange Partnerships collectively loaned $32 million to
Echelon Residential Holdings, a newly formed real estate company. Echelon
Residential Holdings is owned by several investors, including James A. Coyne,
Executive Vice President of the general partner of EFG. In addition, certain
affiliates of the General Partner made loans to Echelon Residential Holdings in
their individual capacities.
In the Class Action Lawsuit, there is a risk that the court may object to the
General Partner's action in structuring the loan in this way since the EFG
officer may be deemed an affiliate and the loans in violation of the prohibition
against loans to affiliates in the Partnership Agreement and the court's
statement in its order permitting New Investments that all other provisions of
the Partnership Agreements governing the investment objectives and policies of
the Partnership shall remain in full force and effect. The court may require
the partnerships to restructure or divest the loan.
The Partnership's original loan was $2,780,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral. Echelon Residential
Holdings has no material business interests other than those connected with the
real estate properties owned by Echelon Residential LLC.
The summarized financial information for Echelon Residential Holdings as of
December 31, 2001 and 2000, and for the year ended December 31, 2001 and the
period March 8, 2000 (commencement of operations) through December 31, 2000 is
as follows:
2001 2000
------------- ------------
Total assets .. . . . . . . . . . . . $ 85,380,902 $68,580,891
Total liabilities . . . . . . . . . . $ 94,352,739 $70,183,162
Minority interest . . . . . . . . . . $ 1,570,223 $ 2,257,367
Total deficit .. . . . . . . . . . . $(10,542,060) $(3,859,638)
Total revenues .. . . . . . . . . . . $ 14,564,771 $ 5,230,212
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture. . . . . . . . . . . . $ 23,137,076 $11,936,238
Net loss .. . . . . . . . . . . . . . $ (8,572,305) $(6,706,026)
During the second quarter of 2001, the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $243,250, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $451,194 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
The total impairment of $694,444 is recorded as write-down of impaired loan and
interest receivable in the year ended December 31, 2001.
The write-down of the loan receivable from Echelon Residential Holdings and the
related accrued interest was precipitated principally by a slowing U.S. economy
and its effects on the real estate development industry. The economic outlook
for the properties that existed when the loan was funded has deteriorated and
inhibited the ability of Echelon Residential Holdings' management to secure
low-cost sources of development capital, including but not limited to
joint-venture or equity partners. In response to these developments and lower
risk tolerances in the credit markets, the management of Echelon Residential
Holdings decided in the second quarter of 2001 to concentrate its prospective
development activities within the southeastern United States and, therefore, to
dispose of development sites located elsewhere. In May 2001, Echelon
Residential Holdings closed its Texas-based development office; and since the
beginning of 2001, the company has sold five of nine properties (two in July
2001, one in October 2001, one in November 2001 and one in February 2002). As a
result of these developments, the General Partner does not believe that Echelon
Residential Holdings will realize the profit levels originally believed to be
achievable from either selling these properties as a group or developing all of
them as multi-family residential communities.
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft was to transfer to
Royal Aviation Inc., at the expiration of the lease term. The sale of the
aircraft has been recorded by the Partnership as a sales-type lease, with a
lease term expiring in January 2002. For the year ended December 31, 2000, the
Partnership recorded a net gain on sale of equipment, for financial statement
purposes, of $100,122 for the Partnership's proportional interest in the
aircraft and recognized sales-type lease revenue of $14,672 and $2,727 for the
years ended December 31, 2001 and 2000, respectively. The net book value of
equipment sold on the sales-type lease totaled $324,836, which was a non-cash
transaction. The components of the net investment in the sales-type lease are
as follows:
Total minimum lease payments to be received $21,263
Less: Unearned income . . . . . . . . . . . . 1,831
-------
Net investment in sales-type lease $19,432
=======
Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.
In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a
result, has defaulted on this conditional sales agreement. The General Partner
is negotiating for the return of the aircraft. As of December 31, 2001, no
allowance on the investment in sales-type lease was deemed necessary based on
the comparison of estimated fair value of the Partnership's interest in the
aircraft and the Partnership's net investment in the sales-type lease.
NOTE 6 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE
- --------------------------------------------------------------------------------
As a result of an exchange transaction in 1997, the Partnership is the
beneficial owner of 20,876 shares of Semele common stock. The Partnership also
received a beneficial interest in a note receivable from Semele ("the Semele
Note") of $459,729 in connection with the exchange.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. See Note 7. At that
point, Semele became affiliated with EFG and the general partners. The maturity
date of the Semele Note has been extended. Since the Semele Note was received
as consideration for the sale of the cargo vessels to an unaffiliated party and
the extension of the maturity of the Semele Note is documented in an amendment
to the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the General Partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate of the General Partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
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. During the year ended December 31, 1999, the Partnership increased
the carrying value of its investment in Semele common stock to $5.75 per share
(the quoted price of the Semele stock on NASDAQ SmallCap market at December 31,
1999), resulting in an unrealized gain of $33,924. At December 31, 2000, the
Partnership decreased the carrying value of its investment in Semele common
stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small
Cap market nearest December 31, 2000), resulting in an unrealized loss of
$40,447. The gain in 1999 and loss in 2000 were each reported as components of
comprehensive income, included in the Statement of Changes in Partners' Capital.
At both March 31, 2001 and December 31, 2001, the General Partner determined
that the decline in market value of its Semele common stock was
other-than-temporary. As a result, on March 31, 2001, the Partnership wrote
down the carrying value of the Semele common stock to $3.3125 per share (the
quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the
stock traded closest to March 31, 2001). At December 31, 2001, the Partnership
again wrote down the carrying value of the Semele common stock to $1.90 per
share (the quoted price of Semele stock on OTC Bulletin Board on the date the
stock traded closest to December 31, 2001), resulting in a total realized loss
of $46,449 for 2001.
The Semele Note bears an annual interest rate of 10% and is scheduled to mature
in April 2003. The note requires mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
its principal real estate asset consisting of an undeveloped 274-acre parcel of
land near Malibu, California. The Partnership recognized interest income
related to the Semele Note of $45,973 in each of the years ended December 31,
2001, 2000 and 1999.
NOTE 7 - 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, 2001, 2000 and
1999, which were paid or accrued by the Partnership to EFG or its Affiliates,
are as follows:
2001 2000 1999
---------- -------- --------
Equipment management fees. . . . . . . . . . . . . . $ 83,413 $ 66,733 $101,040
Administrative charges . . . . . . . . . . . . . . . 94,025 149,638 124,602
Reimbursable operating expenses due to third parties 885,936 528,844 345,978
---------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . $1,063,374 $745,215 $571,620
========== ======== ========
As provided under the terms of the Management Agreement, EFG is compensated for
its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was 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 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are 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 at actual cost.
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, Equipment on Lease.
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, 2001, the Partnership was owed $89,402 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2002.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
Number of Percent of Total
Affiliate Units Owned Outstanding Units
Atlantic Acquisition Limited Partnership 16,535.73 2.06%
- ---------------------------------------- ----------- ------------------
Old North Capital Limited Partnership 124,065.23 15.44%
- ---------------------------------------- ----------- ------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995.
The general partners of AALP and ONC are controlled by Gary D. Engle. EFG owns
limited partnership interests, representing substantially all of the economic
benefit, in AALP and the limited partnership interests of ONC are owned by
Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele and
President, Chief Executive Officer, sole shareholder and Director of EFG's
general partner. James A. Coyne, Executive Vice President of the general partner
of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr.
Coyne are both members of the Board of Directors of, and own significant stock
in, Semele.
NOTE 8 - NOTES PAYABLE
- --------------------------
Notes payable at December 31, 2001 consisted of two installment notes totaling
$1,840,458 payable to banks and institutional lenders, which bear an interest
rate of 7.03% and 7.65%, respectively. Both of the installment notes are
non-recourse and are collateralized by the equipment and assignment of the
related lease payments. The installment notes amortize monthly and in addition,
the Partnership has a balloon payment obligation at the expiration of the lease
term related to one of the two aircraft leased to Aerovias de Mexico, S.A. de
C.V. of $323,027 in September 2004.
In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $968,639 including $564,970 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $403,669 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft then on lease to
Finnair OY of $104,590 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000.
In June 2001, the Partnership and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 2 -
Revenue Recognition). The Reno Programs executed a debt agreement with a new
lender collateralized by the aircraft and assignment of the Aerovias de Mexico,
S.A. de C.V. lease payments. The Reno Programs received debt proceeds of
$5,316,482, of which the Partnership's share was $1,132,936. The Partnership
used the new debt proceeds and a portion of certain other receipts from Reno to
repay the outstanding balance of the existing indebtedness related to the
aircraft of $1,186,088 and accrued interest and fees of $17,670.
Management believes that the carrying amount of notes payable approximates fair
value at December 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 2002 $ 448,554
2003 480,975
2004 769,287
2005 141,642
----------
. Total $1,840,458
==========
NOTE 9 - 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, 2001, 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, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . $(984,363) $ 525,148 $1,190,252
Write-down of loan receivable. . . . . . 243,250 -- --
Bad debt expense .. . . . . . . . 48,073 -- --
Write-down of investment securities -
affiliate. . . . . . . . . . . . 46,449 -- --
Financial statement depreciation
less than tax depreciation. . . . . . (134,271) (163,393) (606,172)
Deferred rental income . . . . . . . . . (35,137) (19,282) 2,395
Other. . . . . . . . . . . . . . . . . . 23,292 (616,472) 5,435
---------- ---------- -----------
Net income (loss) for federal income tax
reporting purposes. . . . . . . . . . . $(792,707) $(273,999) $ 591,910
========== ========== ===========
The principal component of "Other" consists of the difference between the tax
- --------------------------------------------------------------------------------
and financial statement gain or loss on equipment 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, 2001 and 2000:
- --------------------------------------
2001 2000
------------ ------------
Partners' capital. . . . . . . . . . . . . . . . . . . . . . $ 7,688,817 $ 8,666,657
Add back selling commissions and organization
and offering costs. . . . . . . . . . . . . . . . . . . . 2,234,203 2,234,203
Unrealized loss on investment securities - affiliate. . . . -- 6,523
Cumulative difference between federal income tax
and financial statement income (loss) . . . . . . . . . . (3,078,468) (3,270,124)
------------ ------------
Partners' capital for federal income tax reporting purposes. $ 6,844,552 $ 7,637,259
============ ============
Unrealized loss on investment securities and cumulative difference between
- --------------------------------------------------------------------------------
federal income tax and financial statement income (loss) represent timing
- --------------------------------------------------------------------------------
differences.
- ------------
NOTE 10 - LEGAL PROCEEDINGS
- -------------------------------
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
--------------------------------------------------
Limited Partnership, et al., in the United States District Court for the
- -----------------------------
Southern District of Florida (the "Court") on behalf of a proposed class of
- -------
investors in 28 equipment leasing programs sponsored by EFG, including the
- ----
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
- ----
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
- - ----------------------------------
Financial Group Limited Partnership, et al., in the Superior Court of the
- -----------------------------------------------
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
- ------
Defendants. Both actions are referred to herein collectively as the "Class
- --
Action Lawsuit".
- --
The Plaintiffs have asserted, among other things, claims against the Defendants
on behalf of the Nominal Defendants for violations of the Securities Exchange
Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and
violations of the partnership or trust agreements that govern each of the
Nominal Defendants. The Defendants have denied, and continue to deny, that any
of them have committed or threatened to commit any violations of law or breached
any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On August 20, 1998, the court preliminarily approved a Stipulation of Settlement
setting forth terms pursuant to which a settlement of the Class Action Lawsuit
was intended to be achieved and which, among other things, was at the time
expected to reduce the burdens and expenses attendant to continuing litigation.
Subsequently an Amended Stipulation of Settlement was approved by the court.
The Amended Stipulation, among other things, divided the Class Action Lawsuit
into two separate sub-classes that could be settled individually. On May 26,
1999, the Court issued an Order and Final Judgment approving settlement of one
of the sub-classes. Settlement of the second sub-class, involving the
Partnership and 10 affiliated partnerships remained pending due, in part, to the
complexity of the proposed settlement pertaining to this class. The settlement
of the Partnership sub-class was premised on the consolidation of the
Partnerships' net assets (the "Consolidation"), subject to certain conditions,
into a single successor company. The potential benefits and risks of the
Consolidation were to be presented in a Solicitation Statement that would be
mailed to all of the partners of the Exchange Partnerships as soon as the
associated Securities and Exchange Commission review process was completed.
On May 15, 2001, Defendants' Counsel reported to the court that, notwithstanding
the parties' best efforts, the review of the solicitation statement by the staff
of the SEC in connection with the proposed settlement of the Class Action
Lawsuit had not been completed. Nonetheless, the Defendants stated their belief
that the parties should continue to pursue the court's final approval of the
proposed settlement.
Plaintiffs' Counsel also reported that the SEC review has not been concluded and
that they had notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intended to seek court approval to immediately resume active
prosecution of the claims of the Plaintiffs. Subsequently, the court issued an
order setting a trial date of March 4, 2002, referring the case to mediation and
referring discovery to a magistrate judge.
The Defendant's and Plaintiff's Counsel continued to negotiate toward a
settlement and have reached agreement on a Revised Stipulation of Settlement
(the "Revised Settlement") that does not involve a Consolidation. As part of the
Revised Settlement, EFG has agreed to buy the loans made by the Exchange
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date. The Revised Settlement also provides for the
liquidation of the Exchange Partnerships' assets, a cash distribution and the
dissolution of the Partnerships including the liquidation and dissolution of
this Partnership. The court held a hearing on March 1, 2002 to consider the
Revised Settlement. After the hearing, the court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Operating Partnership Sub-Class of a hearing on June 7, 2002 to determine
whether the settlement on the terms and conditions set forth in the Revised
Settlement is fair, reasonable and adequate and should be finally approved by
the court and a final judgment entered in the matter. The Partnership's share
of legal fees and expenses related to the Class Action Lawsuit and the
Consolidation was estimated to be approximately $478,000, of which approximately
$298,000 was expensed by the Partnership in 1998 and additional amounts of
approximately $89,000, $41,000 and $50,000 were expensed in 2001, 2000 and 1999,
respectively.
NOTE 11 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
Three Months Ended
March 31, June 30, September 30, December 31, Total
---------- ---------- --------------- -------------- -----------
2001
----------
Total operating and sales-type lease revenue. $ 418,123 $ 481,871 $ 322,219 $ 306,691 $1,528,904
Net income (loss) . . . . . . . . . . . . . . 241,936 (873,124) (196,860) (156,315) (984,363)
Net income (loss) per
limited partnership unit. . . . . . . . . . 0.29 (1.03) (0.23) (0.18) (1.16)
2000
----------
Total operating and sales-type lease revenue. $ 360,598 $ 393,989 $ 272,050 $ 371,327 $1,397,964
Net income (loss) . . . . . . . . . . . . . . 112,846 254,148 (42,213) 200,367 525,148
Net income (loss) per
limited partnership unit 0.13 0.30 (0.05) 0.24 0.62
The Partnership's net loss in the three months ended June 30, 2001, is primarily
the result of a write-down of the impaired loan and interest receivable from
Echelon Residential Holdings and a write-down of equipment of $694,444 and
$231,000, respectively.
The Partnership's net loss in the three months ended September 30, 2000, is
primarily the result of storage and remarketing costs associated with the
Partnership's off-lease aircraft and approximately $160,000 accrued for the
Partnership's proportionate share of the cost of a required D-check on a
McDonnell-Douglas MD-82 aircraft.
ADDITIONAL FINANCIAL INFORMATION
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, 2001, 2000, AND 1999
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, 2001, 2000 and 1999.
2001 2000 1999
-------- ---------- ----------
Rents earned prior to disposal of
equipment, net of interest charges $729,012 $3,120,021 $2,538,399
Sale proceeds realized upon
disposition of equipment 27,956 347,747 510,396
-------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds 756,968 3,467,768 3,048,795
Original acquisition cost of equipment disposed 406,942 2,282,925 2,081,798
-------- ---------- ----------
Excess of total cash generated to cost
of equipment disposed $350,026 $1,184,843 $ 966,997
======== ========== ==========
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, 2001
. Sales and
Operations Refinancings Total
------------ ------------- ------------
Net income loss $(1,012,319) $ 27,956 $ (984,363)
Add:
Depreciation 588,806 - 588,806
Collections on investment in sales-type lease 258,300 - 258,300
Bad debt expense 48,073 - 48,073
Write-down of equipment 268,000 - 268,000
Management fees 83,413 - 83,413
Write-down of impaired loan and interest receivable 694,444 - 694,444
Write-down of investment securities - affiliate 46,449 - 46,449
Book value of disposed equipment - - -
Less:
Sales-type lease revenue (14,672) - (14,672)
Principal reduction of notes payable (1,752,829) - (1,752,829)
------------ ------------- ------------
Cash from operations, sales and refinancings (792,335) 27,956 (764,379)
Less:
Management fees (83,413) - (83,413)
------------ ------------- ------------
Distributable cash from operations,
sales and refinancings (875,748) 27,956 (847,792)
Other sources and uses of cash:
Cash and cash equivalents at beginning of year 1,758,608 - 1,758,608
Net change in receivables and accruals 16,360 - 16,360
Net proceeds from notes payable refinancing - 1,536,605 1,536,605
------------ ------------- ------------
Cash and cash equivalents at end of year $ 899,220 $ 1,564,561 $ 2,463,781
============ ============= ============
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
FOR THE YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2001, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
Operating expenses $ 829,642
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ----------------------
None.
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. The
Limited Partners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 2002 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13)
- -------------------------------------------------------------------------------
Name Title Age Term
- ---------------------- -------------------------------------------- --- ---------
Geoffrey A. MacDonald Chairman of the general . Until a
. partner of EFG and a Director . successor
. of the General Partner 53 is duly
. . . elected
Gary D. Engle President and Chief Executive . and
. Officer of the general partner of EFG . qualified
. and President and a Director .
. of the General Partner 53
Michael J. Butterfield Executive Vice President and Chief
. Operating Officer of the general partner
. of EFG and Treasurer of the General Partner 42
Gail D. Ofgant Senior Vice President, Lease Operations
. of the general partner of EFG and
. Senior Vice President of the General Partner 36
(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
- ------------------------------
Mr. MacDonald, age 53, has been a Director of the General Partner since 1990 and
- --------------------------------------------------------------------------------
also served as its President from 1990 through August 2001. Mr. MacDonald is
- --------------------------------------------------------------------------------
also Chairman of the Board of the general partner of EFG. Mr. McDonald was a
- --------------------------------------------------------------------------------
co-founder of EFG's predecessor, American Finance Group, which was established
- --------------------------------------------------------------------------------
in 1980. Mr. MacDonald is a member of the Board of Managers of Echelon
- --------------------------------------------------------------------------------
Development Holdings LLC Prior to co-founding American Finance Group, Mr.
- --------------------------------------------------------------------------------
MacDonald held various positions in the equipment leasing industry and the
- --------------------------------------------------------------------------------
ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds
- --------------------------------------------------------------------------------
an M.B.A. from Boston College and a B.A. degree from the University of
- --------------------------------------------------------------------------------
Massachusetts (Amherst).
- -------------------------
Mr. Engle, age 53, is Director and President of the General Partner and sole
- --------------------------------------------------------------------------------
shareholder, Director, President and Chief Executive Officer of Equis
- -----------------------------------------------------------------------------
Corporation, the general partner of EFG. Mr. Engle is also Chairman and Chief
- --------------------------------------------------------------------------------
Executive Officer of Semele Group Inc. ("Semele") and a member of the Board of
- --------------------------------------------------------------------------------
Managers of Echelon Development Holdings LLC. Mr. Engle controls the general
- --------------------------------------------------------------------------------
partners of Atlantic Acquisition Limited Partnership ("AALP") and Old North
- --------------------------------------------------------------------------------
Capital Limited Partnership ("ONC"). Mr. Engle joined EFG in 1990 and acquired
- --------------------------------------------------------------------------------
control of EFG and its subsidiaries in December 1994. Mr. Engle co-founded Cobb
- --------------------------------------------------------------------------------
Partners Development, Inc., a real estate and mortgage banking company, where he
- --------------------------------------------------------------------------------
was a principal from 1987 to 1989. From 1980 to 1987, Mr. Engle was Senior Vice
- --------------------------------------------------------------------------------
President and Chief Financial Officer of Arvida Disney Company, a large-scale
- --------------------------------------------------------------------------------
community development organization 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. degree from Harvard University and a B.S.
- --------------------------------------------------------------------------------
degree from the University of Massachusetts (Amherst).
- ------------------------------------------------------------
Mr. Butterfield, age 42, has served as Treasurer of the General Partner since
- --------------------------------------------------------------------------------
1996. Joining EFG in June 1992, Mr. Butterfield is currently Executive Vice
- --------------------------------------------------------------------------------
President, Chief Operating Officer, Treasurer and Clerk of the general partner
- --------------------------------------------------------------------------------
of EFG. Mr. Butterfield is also Chief Financial Officer and Treasurer of Semele
- --------------------------------------------------------------------------------
and Vice President, Finance and Clerk of Equis/Echelon Management Corporation,
- --------------------------------------------------------------------------------
the manager of Echelon Residential LLC. Prior to joining EFG, Mr. Butterfield
- --------------------------------------------------------------------------------
was an audit manager with Ernst & Young LLP, which he joined in 1987. Mr.
- --------------------------------------------------------------------------------
Butterfield was also employed in public accounting and industry positions in New
- --------------------------------------------------------------------------------
Zealand and London (UK) 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. Mr. Butterfield holds a Bachelor of Commerce degree from the
- --------------------------------------------------------------------------------
University of Otago, Dunedin, New Zealand.
- -----------------------------------------------
Ms. Ofgant, age 36, has served as Senior Vice President of the General Partner
- --------------------------------------------------------------------------------
since 1998. Ms. Ofgant joined EFG in July 1989 and held various positions in
- --------------------------------------------------------------------------------
the organization before becoming Senior Vice President of the general partner of
- --------------------------------------------------------------------------------
EFG in 1998. Ms. Ofgant is Senior Vice President and Assistant Clerk of
- --------------------------------------------------------------------------------
Equis/Echelon Management Corporation, the manager of Echelon Residential LLC.
- --------------------------------------------------------------------------------
From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust
- --------------------------------------------------------------------------------
Company. Ms. Ofgant holds a B.S. degree from Providence College.
- -------------------------------------------------------------------------
(f) Involvement in Certain Legal Proceedings
- ------------------------------------------------------
None.
- -----
(g) Promoters and Control Persons
- ------------------------------------------
Not applicable.
- ----------------
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 7 to the financial statements included in
Item 8, herein.
(d) Stock Options and Stock Appreciation Rights.
Not applicable.
(e) Long-Term Incentive Plan Awards Table.
Not applicable.
(f) Defined Benefit or Actuarial Plan Disclosure.
Not applicable.
(g) Compensation of Directors
None.
(h) 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 has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
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 15, 2002, 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 124,065.23 Units 15.44%
Interests Boston, MA 02110
The general partner of Old North Capital Limited Partnership ("ONC") is a
Massachusetts limited partnership formed in 1995. The general partner of ONC is
controlled by Gary D. Engle and the limited partnership interests in ONC are
owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of
Semele and President, Chief Executive Officer, sole shareholder and Director of
EFG's general partner. James A. Coyne, Executive Vice President of the general
partner of EFG, is Semele's President and Chief Operating Officer. Mr. Engle
and Mr. Coyne are both members of the Board of Directors of, and own significant
stock in, Semele. 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, 2001, 2000 and
1999, which were paid or accrued by the Partnership to EFG or its Affiliates,
are as follows:
2001 2000 1999
---------- -------- --------
Equipment management fees. . . . . . . . . . . . . . . $ 83,413 $ 66,733 $101,040
Administrative charges . . . . . . . . . . . . . . . . 94,025 149,638 124,602
Reimbursable operating expenses
due to third parties. . . . . . . . . . . . . . . . . 885,936 528,844 345,978
---------- -------- --------
Total . $1,063,374 $745,215 $571,620
========== ======== ========
As provided under the terms of the Management Agreement, EFG is compensated for
its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was 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 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are 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 at actual cost.
All equipment was purchased from EFG, one of its affiliates or from third-party
sellers. The Partnership's acquisition cost was determined by the method
described in Note 2 to the financial statements included in Item 8, herein.
As a result of an exchange in 1997, the Partnership is the beneficial owner of
20,876 shares of Semele common stock and holds a beneficial interest in a note
from Semele (the "Semele Note") of $459,729. The Semele Note matures in April
2003 and bears an annual interest rate of 10% with mandatory principal
reductions prior to maturity, if and to the extent that net proceeds are
received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California. For further discussion, see Note 6, "Investment Securities -
Affiliate and Note Receivable - Affiliate to the financial statements included
in Item 8 herein and Item 10. Management believes fair value of the Semele Note
approximates its carrying value.
The exchange in 1997 involved the sale by five partnerships and certain other
affiliates of their beneficial interests in three cargo vessels to Semele in
exchange for cash, Semele common stock and the Semele Note. At the time of the
transaction, Semele was a public company unaffiliated with the general partners
and the partnerships. Subsequently, as part of the exchange transaction, Semele
solicited the consent of its shareholders to, among other things, engage EFG to
provide administrative services and to elect certain affiliates of EFG and the
general partners as members of the board of directors. At that point, Semele
became affiliated with EFG and the general partners. The maturity date of the
Semele Note has been extended. Since the Semele Note was received as
consideration for the sale of the cargo vessels to an unaffiliated party and the
extension of the maturity of the Semele Note is documented in an amendment to
the existing Semele Note and not as a new loan, the general partners of the
owner partnerships do not consider the Semele Note to be within the prohibition
in the Partnership Agreements against loans to or from the General Partner and
its affiliates. Nonetheless, the extension of the maturity date might be
construed to be the making of a loan to an affiliate of the General Partner in
violation of the Partnership Agreements of the owner partnerships and to be a
violation of the court's order with respect to New Investments that all other
provisions of the Partnership Agreements shall remain in full force and effect.
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, 2001, the Partnership was owed $89,402 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2002.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
Number of
Affiliate Units Owned Percent of Total Outstanding Units
Atlantic Acquisition Limited Partnership 16,535.73 2.06%
- ---------------------------------------- ----------- -----------------------------------
Old North Capital Limited Partnership 124,065.23 15.44%
- ---------------------------------------- ----------- -----------------------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995.
The general partners of AALP and ONC are controlled by Gary D. Engle. EFG owns
limited partnership interests, representing substantially all of the economic
benefit, in AALP and the limited partnership interests of ONC are owned by
Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele and
President, Chief Executive Officer, sole shareholder and Director of EFG's
general partner. James A. Coyne, Executive Vice President of the general partner
of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr.
Coyne are both members of the Board of Directors of, and own significant stock
in, Semele.
The discussions of the loan to Echelon Residential Holdings in Items 1(b) and
1(c) above are incorporated herein by reference.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) All Financial Statements:
The financial statements are filed as part of this report under Item 8
"Financial Statements and Supplementary Data".
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Allowance for rents receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 48,073
--------
Balance at December 31, 2001 $ 48,073
========
Allowance for interest receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 451,194
--------
Balance at December 31, 2001 $451,194
========
Allowance for loan receivable
- ---------------------------------
Balance at December 31, 2000 $ -
Additions to allowance 243,250
--------
Balance at December 31, 2001 $243,250
========
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(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.
A list of exhibits filed or incorporated by reference is as follows:
Exhibit
Number
- ------
2.1 Plaintiffs' and Defendants' Joint Motion to Modify Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the Proposed Settlement was filed
in the Registrant's Annual Report on Form 10-K/A for the year ended December 31,
1998 as Exhibit 2.1 and is incorporated herein by reference.
2.2 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint
Motion to Modify Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice of, and Hearing on, the
Proposed Settlement was filed in the Registrant's Annual Report on Form 10-K/A
for the year ended December 31, 1998 as Exhibit 2.2 and is incorporated herein
by reference.
2.3 Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice of, and Hearing on, the
Proposed Settlement (August 20, 1998) was filed in the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.3 and is
incorporated herein by reference.
2.4 Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 22, 1999) was filed in the
Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998
as Exhibit 2.4 and is incorporated herein by reference.
2.5 Plaintiffs' and Defendants' Joint Memorandum in Support
of Joint Motion to Further Modify Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999 as Exhibit 2.5 and is
incorporated herein by reference.
2.6 Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 5, 2000) was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 2.6 and is incorporated herein by reference.
2.7 Proposed Order Granting Joint Motion to Continue Final Approval
Settlement Hearing (March 13, 2001) was filed in the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2000 as Exhibit 2.7 and is
incorporated herein by reference.
2.8 Order Setting Trial Date and Discovery Deadlines, Referring Case to
Mediation and Referring Discovery to United States Magistrate Judge (June 4,
2001) was filed in the Registrant's Annual Report on Form 10-K/A, Amendment No.
2, for the year ended December 31, 2000 as Exhibit 2.8 and is incorporated
herein by reference.
2.9 Plaintiffs' and Defendants' Joint Motion for Preliminary Approval of
Revised Stipulation of Settlement and request for hearing is filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as
Exhibit 2.9 and is included herein.
2.10 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint Motion
for Preliminary Approval of Revised Stipulation of Settlement is filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as
Exhibit 2.10 and is included herein.
2.11 Order Preliminarily Approving Settlement, Conditionally Certifying
Settlement Class and Providing for Notice of, and Hearing on, the Proposed
Settlement (March 1, 2002) is filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001 as Exhibit 2.11 and is included
herein.
4 Amended and Restated Agreement and Certificate of Limited Partnership
included as Exhibit A to the Prospectus, which was included in Registration
Statement on Form S-1 (No. 33-35148) and is incorporated herein by reference.
10.1 Promissory Note in the principal amount of $2,780,000 dated March
8, 2000 between the Registrant, as lender, and Echelon Residential Holdings LLC,
as borrower, was filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999 as Exhibit 10.1 and is incorporated herein by
reference.
10.2 Pledge Agreement dated March 8, 2000 between Echelon
Residential Holdings LLC (Pledgor) and American Income Partners V-A Limited
Partnership, as Agent for itself and the Registrant, was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 10.2 and is incorporated herein by reference.
10.3 Promissory Note from Semele Group Inc. (formerly known as
Banyan Strategic Land Fund II), dated May 31, 1997 was filed as in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as
Exhibit 10.3 and is incorporated herein by reference.
10.4 The First Allonge to Promissory Note from Semele Group
Inc. (formerly known as Banyan Strategic Land Fund II), dated March 21, 2000 was
filed as in the Registrant's Annual Report on Form 10-K for the year ended
December 31,2000 as Exhibit 10.4 and is incorporated herein by reference.
10.5 The Second Allonge to Promissory Note from Semele Group Inc.
(formerly known as Banyan Strategic Land Fund II), dated March 12, 2001 was
filed as in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 as Exhibit 10.5 and is incorporated herein by reference.
99 (a) 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 (b) 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 (c) 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 (d) 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 (e) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as
Exhibit 99 (h) and is incorporated herein by reference.
99 (f) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as
Exhibit 99 (i) and is incorporated herein by reference.
99 (g) Lease agreement with Reno Air, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as
Exhibit 99 (i) and is incorporated herein by reference.
99 (h) Aircraft Conditional Sale agreement with Royal Aviation
Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 as Exhibit 99 (i) and is incorporated herein by reference.
99 (i) Lease agreement with Air Slovakia BWJ, Ltd. was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000
as Exhibit (j) and is incorporated herein by reference.
99 (j) Lease agreement with Aerovias De Mexico, S.A. de C.V. was
filed in the Registrant's Annual Report on Form 10-K for the year ended December
31, 2000 as Exhibit 99 (k) and is incorporated herein by reference.
99 (k) Lease agreement with Aerovias De Mexico, S.A. de C.V. was
filed in the Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2001 as Exhibit 1 and is incorporated herein by reference.
99 (l) Lease agreement with Air Slovakia BWJ, Ltd. is filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as
Exhibit 99 (l) and is included herein.
(b) Reports on Form 8-K
None.
(c) Other Exhibits
None.
(d) Financial Statement Schedules:
Consolidated Financial Statements for Echelon Residential Holdings LLC as
of December 31, 2001 and 2000 and for the year ended December 31, 2001 and for
the period March 8, 2000 (Date of Inception) through December 31, 2000 and
Independent Auditors' Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, by the following persons, on behalf of the registrant and
in the capacities and on the dates 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 of the general partner of EFG President and Chief Executive Officer
and a Director of the General Partner of the general partner of EFG,
. and President and a Director of
. the General Partner
. (Principal Executive Officer)
Date: March 29, 2002 Date: March 29, 2002
- ----------------------------------------------------- --------------------------------------
By: /s/ Michael J. Butterfield
- -----------------------------------------------------
Michael J. Butterfield
Executive Vice President and Chief Operating Officer
of the general partner of EFG and Treasurer
of the General Partner
(Principal Financial and Accounting Officer)
Date: March 29, 2002
- -----------------------------------------------------