Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period endedJune 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-20031
AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3077437
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1050 Waltham Street, Suite 310, Lexington, MA 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 676-0009
-------------------
88 Broad Street, Boston, MA 02110
- ----------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
-----
AMERICAN INCOME FUND I-C
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2002 and December 31, 2001 3
Statement of Operations
for the three and six months ended June 30, 2002 and 2001 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 2002 5
Statement of Cash Flows
for the six months ended June 30, 2002 and 2001 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION:
Item 1 - 6 20
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
June 30, December 31,
2002 2001
----------- --------------
ASSETS
Cash and cash equivalents $3,337,138 $ 2,463,781
Rents receivable, net of allowance of $53,813 and $48,073
at June 30, 2002 and December 31, 2001, respectively 25,819 129,340
Accounts receivable - affiliate 17,327 89,402
Interest receivable - affiliate 11,336 11,588
Other assets 27,070 1,076
Interest receivable - loan, net of allowance of
$20,347 and $451,194 at June 30, 2002 and
December 31, 2001, respectively - -
Loan receivable, net of allowance of $243,250
at June 30, 2002 and December 31, 2001 2,536,750 2,536,750
Net investment in sales-type lease - 19,432
Note receivable - affiliate 459,729 459,729
Investment securities - affiliate 34,654 39,664
Equipment at cost, net of accumulated depreciation
of $4,586,936 and $6,043,493 at June 30, 2002
and December 31, 2001, respectively 2,331,221 4,458,791
----------- --------------
Total assets $8,781,044 $ 10,209,553
=========== ==============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $1,621,298 $ 1,840,458
Accrued interest 5,863 6,391
Accrued liabilities 281,492 561,530
Accrued liabilities - affiliate 88,766 109,469
Deferred rental income 3,441 2,888
----------- --------------
Total liabilities 2,000,860 2,520,736
----------- --------------
Partners' capital (deficit):
General Partner (543,280) (498,099)
Limited Partnership interests
(803,454.56 Units; initial purchase price of $25 each) 7,328,474 8,186,916
Accumulated other comprehensive loss (5,010) -
----------- --------------
Total partners' capital 6,780,184 7,688,817
----------- --------------
Total liabilities and partners' capital $8,781,044 $ 10,209,553
=========== ==============
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 THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
---------- ----------- ----------- -----------
INCOME
Operating lease revenue $ 474,220 $ 478,203 $ 702,832 $ 892,658
Sales-type lease revenue - 3,668 - 7,336
Interest income 11,759 27,282 22,699 47,582
Interest income - loan - - - 110,502
Interest income - affiliate 11,336 11,336 22,797 22,797
Gain on sale of equipment 1,897 11,656 1,897 16,856
---------- ----------- ----------- -----------
Total income 499,212 532,145 750,225 1,097,731
---------- ----------- ----------- -----------
EXPENSES
Depreciation 86,111 147,202 233,302 294,403
Write-down of equipment 1,492,265 231,000 1,492,265 231,000
Interest expense 31,138 28,427 64,062 66,435
Equipment management fees - affiliate 26,157 25,827 38,323 48,356
Bad debt expense - - 25,172 -
Operating expenses - affiliate 143,784 278,369 231,571 377,319
Recovery of bad debt expense from loan receivable (430,847) - (430,847) -
Write-down of impaired loan and interest receivable - 694,444 - 694,444
Write-down of investment securities - affiliate - - - 16,962
---------- ----------- ----------- -----------
Total expenses 1,348,608 1,405,269 1,653,848 1,728,919
---------- ----------- ----------- -----------
Net loss $ (849,396) $ (873,124) $ (903,623) $ (631,188)
---------- ----------- ----------- -----------
Net loss per limited partnership unit $ (1.00) $ (1.03) $ (1.07) $ (0.75)
---------- ----------- ----------- -----------
Cash distributions declared
per limited partnership unit $ - $ - $ - $ -
---------- ----------- ----------- -----------
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 SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
Accumulated
General Other
Partner Limited Partners Comprehensive
Amount Units Amount Loss Total
---------- ---------- ----------- --------------- -----------
Balance at December 31, 2001 $(498,099) 803,454.56 $8,186,916 $ - $7,688,817
Net loss (45,181) - (858,442) - (903,623)
Unrealized loss on investment
securities - affiliate - - - (5,010) (5,010)
---------- ---------- ----------- --------------- -----------
Comprehensive loss (45,181) - (858,442) (5,010) (908,633)
---------- ---------- ----------- --------------- -----------
Balance at June 30, 2002 $(543,280) 803,454.56 $7,328,474 $ (5,010) $6,780,184
========== ========== =========== =============== ===========
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(903,623) $(631,188)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 233,302 294,403
Write-down of equipment 1,492,265 231,000
Bad debt expense 25,172 -
Sales-type lease revenue - (7,336)
Gain on sale of equipment (1,897) (16,856)
Write-down of impaired loan and interest receivable - 694,444
Write-down of investment securities - affiliate - 16,962
Recovery of bad debt expense from loan receivable (430,847) -
Changes in assets and liabilities:
Rents receivable 97,781 68,858
Accounts receivable - other - (165,697)
Accounts receivable - affiliate 72,075 (121,719)
Interest receivable - affiliate 252 (11,336)
Other assets (25,994) (7,521)
Interest receivable - loan 430,847 (110,502)
Collections on net investment in sales-type lease - 129,150
Accrued interest (528) (2,383)
Accrued liabilities (160,976) 36,719
Accrued liabilities - affiliate (20,703) 174,427
Deferred rental income 553 (18,634)
-------------- --------------
Net cash provided by operating activities 807,679 552,791
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 284,838 16,856
-------------- --------------
Net cash provided by investing activities 284,838 16,856
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable - 1,536,605
Principal payments - notes payable (219,160) (1,547,308)
-------------- --------------
Net cash used in financing activities (219,160) (10,703)
-------------- --------------
Net increase in cash and cash equivalents 873,357 558,944
Cash and cash equivalents at beginning of period 2,463,781 1,758,608
-------------- --------------
Cash and cash equivalents at end of period $3,337,138 $2,317,552
============== ==============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $64,590 $68,818
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 6 to the financial statements regarding the decrease of the
Partnership's carrying value of its investment securities - affiliate during the
six months ended June 30, 2002.
In February 2001, the Partnership refinanced certain indebtedness and accrued
interest in the amount of $564,970.
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
JUNE 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of American Income Fund I-C, a Massachusetts Limited
Partnership (the "Partnership"). Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the 2001 Annual
Report included in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 2002 and December 31, 2001 and results of operations for
the three and six month periods ended June 30, 2002 and 2001 have been made and
are reflected.
NOTE 2 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The majority of the Partnership's 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, wholly owned by Equis Financial
Group Limited Partnership ("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 for operating leases
of $1,478,915 are due as follows:
For the year ending June 30, 2003 $ 567,502
2004 567,502
2005 343,911
----------
.. Total $1,478,915
==========
See Note 10 - "Subsequent Events" for further discussion.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at June 30,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 2002 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
- --------------------------------------------- ----------- ------------
Aircraft. . . . . . . . . . . . . . . . . . . 0-36 $ 6,918,157
Accumulated depreciation . - (4,586,936)
------------
Equipment, net of accumulated depreciation - $ 2,331,221
============
At June 30, 2002, all of the equipment in the Partnership's portfolio
represented a proportionate ownership interest. During the quarter ended June
30, 2002, the Partnership sold all of its remaining non-aircraft equipment to a
third party.
Certain of the equipment and related lease payment streams were used to secure
the Partnership's 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 $1,688,000 at June 30, 2002.
The Partnership entered into a three-year lease agreement with Air Slovakia BWJ
Ltd. for its proportionate interest in a Boeing 737-2H4 aircraft, effective
September 2000. In accordance with a lease amendment executed in January 2002,
the lease term was revised and the lease terminated in August 2002, with the
title to the aircraft transferring to Air Slovakia.
The summary above includes a McDonnell Douglas MD-82 aircraft returned in April
2001, being held for re-lease or sale with an original proportionate cost of
approximately $1,661,000 and a net book value of approximately $534,000. The
General Partner is actively seeking the sale or re-lease of this aircraft.
The Partnership accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" which was issued in August
2001. SFAS No. 144 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 three months ended June 30, 2002, the Partnership recorded a write-down of
equipment, representing an impairment to the carrying value of the Partnership's
interest in a McDonnell Douglas MD-87 aircraft, two McDonnell Douglas MD-82
aircraft and a Boeing 737 aircraft. The resulting charge of $1,492,265 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) a current offer to purchase the McDonnell Douglas MD-87 aircraft and one
of the McDonnell Douglas MD-82 aircraft, (ii) indications of interest from
potential purchasers of the second McDonnell Douglas MD-82 aircraft, (iii) the
sale of the Boeing 737 aircraft subsequent to June 30, 2002, and (iv) 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. The events of September 11, 2001, along with a recession in the
United States have continued to adversely affect the market demand for both new
and used commercial aircraft.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''Partnerships'') collectively loaned $32 million to Echelon Residential
Holdings LLC ("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 EFG. In addition, certain
affiliates of the General Partner made loans to Echelon Residential Holdings in
their individual capacities.
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, an unrelated 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 6 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 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.
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.
During the second quarter of 2002, the Partnership received $430,847 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $430,847 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt expense
from loan receivable" in the Statement of Operations. At June 30, 2002, the
General Partner believes that the net carrying value of the loan receivable is
appropriate.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the six month periods ended June 30, 2002 and 2001 is as follows:
2002 2001
------------- ------------
Total assets $ 94,423,115 $79,159,776
Total liabilities $107,902,966 $85,455,528
Minority interest $ 1,108,573 $ 1,782,982
Total deficit $(14,588,424) $(8,078,734)
Total revenues $ 1,430,874 $ 1,705,679
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 4,061,173 $ 5,924,774
Net loss $ (2,630,299) $(4,219,095)
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease was 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 in January 2002. For
the three and six month periods ended June 30, 2001, the Partnership recognized
sales-type lease revenue of $3,668 and $7,336, respectively, from this lease.
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 continuing to negotiate for the return of the aircraft. As of June 30, 2002,
the Partnership has written-down the remaining balance of the Partnership's
investment in the sales-type lease. The write-down was based on the comparison
of the net estimated fair value of the Partnership's interest in the aircraft
and the Partnership's net investment in the sales-type lease. The write-down
recorded in the six months ended June 30, 2002 was $19,432.
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 Group Inc. ("Semele") common stock
and holds a beneficial interest in a note from Semele (the "Semele Note") of
$459,729. The Semele Note matures in April 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. The Partnership recognized interest income of
$22,797 related to the Semele Note during each of the six month periods ended
June 30, 2002 and 2001.
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. 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 in violation of the making of a loan to an
affiliate of the general partner in violation of the Partnership Agreements.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the six months ended June 30, 2002, the Partnership decreased the
carrying value of its investment in Semele common stock to $1.66 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to June 30, 2002), resulting in an unrealized loss of $5,010.
This loss was reported as a component of comprehensive loss included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the General Partner determined that the decline in market
value of its investment in 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) resulting in a loss of $16,962 in the six months ended June 30, 2001. An
additional write-down of the investment in Semele common stock occurred in
December 31, 2001.
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 six month periods ended June 30, 2002
and 2001 which were paid or accrued by the Partnership to EFG or its Affiliates,
are as follows:
2002 2001
-------- --------
Equipment management fees $ 38,323 $ 48,356
Administrative charges 120,805 56,982
Reimbursable operating expenses
due to third parties 110,766 320,337
-------- --------
Total $269,894 $425,675
======== ========
All rents and proceeds from the sale of equipment are paid directly to either
EFG or to a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At June
30, 2002, the Partnership was owed $17,327 by EFG for such funds and the
interest thereon. These funds were remitted to the Partnership in July 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 8 - NOTES PAYABLE
- --------------------------
Notes payable at June 30, 2002 consisted of two installment notes totaling
$1,621,298 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.
Management believes that the carrying amount of notes payable approximates fair
value at June 30, 2002 based on its experience and understanding of the market
for instruments with similar terms.
The annual maturities of the note payable are as follows:
For the year ending June 30, 2003 $ 465,494
2004 498,758
2005 657,046
------------
.. Total $ 1,621,298
============
NOTE 9 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al.
- -------
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the 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 of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement. See further discussion of the Revised Settlement in
Note 10 - Subsequent Events.
NOTE 10 - SUBSEQUENT EVENTS
- -------------------------------
As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment
and transferred its proportionate ownership aircraft interests (except for the
McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de
Mexico, S.A. de C.V, referred to hereinafter as the Retained Aircraft),
remaining cash and non-cash assets to the American Income Fund I-C, a
Massachusetts Limited Partnership, Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Partnership is currently negotiating the sale of the Retained Aircraft. The
Liquidating Trust is in the process of selling the transferred aircraft, in
which the Partnership has a proportionate ownership interest and distributing
the Partnership's cash, net of reserves for known and contingent liabilities, in
accordance with the terms of the Revised Settlement.
See Note 3 "Equipment" for further description of the Partnership's aircraft
assets.
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Certain statements in this quarterly report of American Income Fund I-C, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
remarketing of the Partnership's equipment and the performance and liquidation
of the Partnership's non-equipment assets.
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, Equis Financial Group Limited Partnership ("EFG") has agreed to buy
the loans made by the Partnerships to Echelon Residential Holdings LLC ("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 of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement.
As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment
and transferred its proportionate ownership aircraft interests (except for the
McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de
Mexico, S.A. de C.V, referred to hereinafter as the Retained Aircraft),
remaining cash and non-cash assets to the American Income Fund I-C, a
Massachusetts Limited Partnership, Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Partnership is currently negotiating the sale of the Retained Aircraft. The
Liquidating Trust is in the process of selling the transferred aircraft, in
which the Partnership has a proportionate ownership interest and distributing
the Partnership's cash, net of reserves for known and contingent liabilities, in
accordance with the terms of the Revised Settlement.
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 Group Inc. ("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 in an activity or activities that may be construed to fall within
the scope of the 1940 Act. The General Partner has been engaged in discussions
with the staff of the Securities and Exchange Commission 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.
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. 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. 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 three and six month periods ended June 30, 2002, the Partnership
recognized operating lease revenue of $474,220 and $702,832, respectively,
compared to $478,203 and $892,658, respectively, for the same periods in 2001.
Operating lease revenues in the quarter ended June 30, 2002 include
approximately $304,000 of early termination rents received by the Partnership in
connection with the sale of certain containers. The decrease in operating lease
revenue from 2001 to 2002 resulted from lease term expirations and equipment
sales. In the future, operating lease revenue is expected to decline due to
lease term expirations and equipment sales.
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. This aircraft had been
stored in the warehouse from January 2000 through the date of the conditional
sale in October 2000. The title to the aircraft was to transfer to Royal
Aviation Inc., at the expiration of the lease term in January 2002. 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
continuing to negotiate for the return of the aircraft. As of June 30, 2002,
the Partnership has written-down the remaining balance of the Partnership's
investment in the sales-type lease. The write-down was 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. The write-down recorded
during the six months ended June 30, 2002 was $19,432. For the three and six
months ended June 30, 2001, the Partnership recognized sales-type lease revenue
of $3,668 and $7,336, respectively.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the equipment.
Interest income for the three and six month periods ended June 30, 2002 was
$23,095 and $45,496, respectively, compared to $38,618 and $180,881,
respectively, for the same periods in 2001. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and interest earned on the loans receivable
from Echelon Residential Holdings and Semele.
Interest income included $11,336 and $22,797 during both the three and six
months ended June 30, 2002 and 2001, respectively, earned on a note receivable
from Semele. The note receivable from Semele is scheduled to mature in April
2003.
Interest income also included $110,502 during the six months ended June 30,
2001, earned on the loan receivable from Echelon Residential Holdings. The
Partnership ceased accruing interest on this loan, effective April 1, 2001. See
further discussion below.
During the three and six months ended June 30, 2002, the Partnership sold
equipment having a net book value of $282,941 to existing lessees and third
parties. These sales resulted in a net gain, for financial statement purposes,
of $1,897. During the three and six months ended June 30, 2001, the Partnership
sold fully depreciated equipment resulting in a net gain, for financial
statement purposes, of $11,656 and $16,856, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. Consequently, the amount
of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.
Depreciation expense for the three and six month periods ended June 30, 2002 was
$86,111 and $233,302, respectively, compared to $147,202 and $294,403,
respectively, for the same periods in 2001.
During the three months ended June 30, 2002, the Partnership recorded a
write-down of equipment, representing an impairment to the carrying value of the
Partnership's interest in a McDonnell Douglas MD-87 aircraft, two McDonnell
Douglas MD-82 aircraft and a Boeing 737 aircraft. The resulting charge of
$1,492,265 was based on a comparison of estimated fair value and carrying value
of the Partnership's interests in the aircraft. The estimate of the fair value
was based on (i) a current offer to purchase the McDonnell Douglas MD-87
aircraft and one of the McDonnell Douglas MD-82 aircraft, (ii) indications of
interest from potential purchasers of the second McDonnell Douglas MD-82
aircraft, (iii) the sale of the Boeing 737 aircraft subsequent to June 30, 2002,
and (iv) 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. The events of September 11, 2001, along with a
recession in the United States have continued to adversely affect the market
demand for both new and used commercial aircraft.
During the three months ended June 30, 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 $231,000 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.
For the three and six month periods ended June 30, 2002, the Partnership
incurred interest expense of $31,138 and $64,062, respectively, compared to
$28,427 and $66,435, respectively, for the same periods in 2001. In the
future, interest expense will decline as the principal balance of notes payable
is reduced through the application of rent receipts to outstanding debt.
Management fees were $26,157 and $38,323, respectively, for the three and six
months ended June 30, 2002 compared to $25,827 and $48,356, respectively, for
the same periods in 2001. 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.
Bad debt expense was $25,172 during the six months ended June 30, 2002 including
the write-down of the remaining balance of the Partnership's investment in the
sales-type lease. The write-down was 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.
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.
During the second quarter of 2002, the Partnership received $430,847 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $430,847 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt expense
from loan receivable" in the Statement of Operations.
Operating expenses were $143,784 and $231,571, respectively, for the three and
six month periods ended June 30, 2002, compared to $278,369 and $377,319,
respectively, for the same periods in 2001. In 2001, operating expenses
included approximately $59,000 related to the Class Action Lawsuit and
approximately $142,000 of remarketing and storage costs related to the
Partnership's aircraft. Other operating expenses include professional service
costs, such as audit and legal fees, as well as printing, distribution and
remarketing expenses. In certain cases, equipment storage or repairs and
maintenance costs may be incurred in connection with equipment being remarketed.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in Semele common stock was other than temporary. As a
result, the Partnership wrote down the cost 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), for a realized
loss in the six months ended June 30, 2001 of $16,962.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Partnership by its nature is a limited life entity. See previous discussion
regarding the Partnership's dissolution. The Partnership's principal operating
activities derive from asset rental transactions. Accordingly, the
Partnership's principal source of cash from operations is generally 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
$807,679 and $552,791 for the six months ended June 30, 2002 and 2001,
respectively. The increase in cash inflow in 2002 reflects the receipt of
approximately $431,000 of interest earned on the loan receivable from Echelon
Residential Holdings.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 2002 and 2001, the Partnership realized equipment sale proceeds
of $284,838 and $16,856, respectively. During the quarter ended June 30, 2002,
the Partnership sold all of its remaining non-aircraft equipment to a third
party. At June 30, 2002, the Partnership's equipment portfolio consisted solely
of its ownership interests in certain aircraft.
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. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
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 through March 31, 2001 and ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001. During
the quarter ended June 30, 2002, the Partnership received a partial payment of
the interest due on this loan as discussed above.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the 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 structuring the loan this way may
be in violation of the prohibition against loans to affiliates in the
Partnership Agreements.
As a result of an exchange transaction 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.
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. 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 in violation of the making of a loan to an
affiliate of the general partner in violation of the Partnership Agreements.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are carried at fair value.
During the six months ended June 30, 2002, the Partnership decreased the
carrying value of its investment in Semele common stock to $1.66 per share (the
quoted price of Semele stock on the OTC Bulletin Board on the date the stock
traded closest to June 30, 2002), resulting in an unrealized loss of $5,010.
This loss was reported as a component of comprehensive loss included in the
Statement of Changes in Partners' Capital.
At March 31, 2001, the Partnership determined that the decline in the market
value of its investment in Semele common stock was other-than-temporary. As a
result, the Partnership wrote down the cost 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), for a realized
loss in the six months ended June 30, 2001 of $16,962.
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. Subsequently, the market value of the Semele common
stock has fluctuated. The market value of the stock could decline in the future.
Gary D. Engle, President and Chief Executive Officer 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 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 near term, the amount of cash used for debt payments will
be consistent with the six months ended June 30, 2002. Subsequently, the amount
of cash used will decrease 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 another aircraft 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 the Partnership has a balloon payment
obligation at the expiration of the lease term of $323,027 in September 2004.
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, the Partnership
has retained funds in connection with the Class Action Lawsuit. 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 June 30, 2002, 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 accordance with a lease amendment executed in
January 2002, the lease term was revised and the lease terminated in August
2002, with the title to the aircraft transferring to Air Slovakia. 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, two of the commercial
jet aircraft in which the Partnership has a proportionate ownership interest are
subject to contracted lease agreements. One of the other aircraft is a 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. The remaining aircraft was leased to Slovakia BWJ, Ltd., as discussed
above.
Cash distributions to the General and Limited Partners had been declared and
generally paid within fifteen days following the end of each calendar quarter.
No cash distributions have been declared since 1999. In any given year, it is
possible that the 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 generally 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
primarily dependent upon the proceeds realized from the liquidation of the
Partnership's remaining assets offset by the associated costs of such
liquidation and dissolution of the Partnership.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences).
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.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at June 30, 2002. 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.
As of August 9, 2002, the Partnership has sold all of its non-aircraft equipment
and transferred its proportionate ownership aircraft interests (except for the
McDonnell Douglas MD-82 and MD-87 aircraft currently leased to Aerovias de
Mexico, S.A. de C.V), remaining cash and non-cash assets to the American Income
Fund I-C, a Massachusetts Limited Partnership, Liquidating Trust ("Liquidating
Trust"), of which Wilmington Trust Company is Trustee. The Partnership will be
dissolved. The Partnership is currently negotiating the sale of the Retained
Aircraft. The Liquidating Trust is in the process of selling the transferred
aircraft, in which the Partnership has a proportionate ownership interest and
distributing the Partnership's cash, net of reserves for known and contingent
liabilities, in accordance with the terms of the Revised Settlement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
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% and
amortize monthly through June 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 six months ended
June 30, 2002 was not material.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and currently has a stated fixed annual rate of 18% with interest due at
maturity (see discussion above). 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 for the six
months ended June 30, 2002 was not material.
------
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 9 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response:
Exhibit 2.13 Amendment to Subsection 2.2 (f) of the Revised Stipulation of
Settlement dated January 29, 2002
Exhibit 2.14 Plan of Liquidation and Dissolution dated July 18, 2002
Exhibit 2.15 Account Agency Agreement between Equis Financial Group Limited
Partnership and Wilmington Trust Company, dated April 11, 2002
Exhibit 2.16 Liquidating Trust Agreement between the Partnership and
Wilmington Trust Company dated July 18, 2002
Exhibit 99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Item 6(b). Reports on Form 8-K
Response :
Form 8-K dated July 18, 2002 to include the Court approved settlement of the
Class Action Lawsuit.
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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: ls/ Michael J. Butterfield
-----------------------------
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: August 19, 2002
-----------------