<PAGE>
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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 ended June 30, 2000
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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code (617) 854-5800
(Former name, former address and former fiscal year, if changed since last
report.)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [_] No [_]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2000 and December 31, 1999............................... 3
Statement of Operations
for the three and six months ended June 30, 2000 and 1999............ 4
Statement of Changes in Partners' Capital
for the six months ended June 30, 2000............................... 5
Statement of Cash Flows
for the six months ended June 30, 2000 and 1999...................... 6
Notes to the Financial Statements..................................... 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 13-18
PART II. OTHER INFORMATION:
Items 1-6...................................................................... 19
</TABLE>
2
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
June 30, December
2000 31, 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 1,345,784 $ 3,970,877
Rents receivable..................................... 87,912 92,215
Account receivable--affiliate........................ 93,536 133,950
Investment in real estate venture.................... 2,762,177 --
Note receivable--affiliate........................... 459,729 459,729
Investment securities--affiliate..................... 96,551 120,037
Equipment at cost, net of accumulated depreciation of
$7,505,193 and $7,486,725 at June 30, 2000 and
December 31, 1999, respectively..................... 6,078,923 6,405,777
----------- -----------
Total assets..................................... $10,924,612 $11,182,585
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable........................................ $ 2,286,765 $ 2,363,628
Accrued interest..................................... 12,032 16,416
Accrued liabilities.................................. 196,624 386,918
Accrued liabilities--affiliate....................... 10,015 17,783
Deferred rental income............................... 37,957 57,307
Cash distributions payable to partners............... -- 158,577
----------- -----------
Total liabilities................................ 2,543,393 3,000,629
----------- -----------
Partners' capital (deficit):
General Partner..................................... (463,479) (473,442)
Limited Partnership Interests (803,454.56 Units;
initial purchase price of $25 each) ............... 8,844,698 8,655,398
----------- -----------
Total partners' capital.......................... 8,381,219 8,181,956
----------- -----------
Total liabilities and partners' capital.......... $10,924,612 $11,182,585
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF OPERATIONS
For the three and six months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Income:
Lease revenue............ $ 393,989 $ 641,254 $ 754,587 $ 1,168,340
Interest income.......... 20,485 72,670 66,911 107,717
Interest income--
affiliate............... 11,336 11,461 22,797 22,797
Gain on sale of
equipment............... 11,000 362,921 22,000 449,173
------------ ------------- ----------- -------------
Total income.......... 436,810 1,088,306 866,295 1,748,027
------------ ------------- ----------- -------------
Expenses:
Depreciation............. 144,351 238,566 326,854 477,133
Interest expense......... 47,075 57,732 100,364 122,023
Equipment management
fees--affiliate......... 18,293 28,109 34,857 52,546
Operating expenses--
affiliate............... 73,418 113,803 163,648 163,012
Partnership's share of
unconsolidated real
estate venture's loss... 15,103 -- 17,823 --
------------ ------------- ----------- -------------
Total expenses........ 298,240 438,210 643,546 814,714
------------ ------------- ----------- -------------
Net income................ $ 138,570 $ 650,096 $ 222,749 $ 933,313
============ ============= =========== =============
Net income per limited
partnership unit......... $ .16 $ .77 $ .26 $ 1.10
============ ============= =========== =============
Cash distributions
declared per limited
partnership unit......... $ -- $ .19 $ -- $ .38
============ ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the six months ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
General Limited Partners
Partner ---------------------
Amount Units Amount Total
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1999..... $(473,442) 803,454.56 $8,655,398 $8,181,956
Net income...................... 11,137 -- 211,612 222,749
Unrealized loss on investment
securities--affiliate.......... (1,174) -- (22,312) (23,486)
--------- ---------- ---------- ----------
Comprehensive income............. 9,963 -- 189,300 199,263
--------- ---------- ---------- ----------
Balance at June 30, 2000......... $(463,479) 803,454.56 $8,844,698 $8,381,219
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
STATEMENT OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income............................................. $ 222,749 $ 933,313
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 326,854 477,133
Gain on sale of equipment............................ (22,000) (449,173)
Partnership's share of unconsolidated real estate
venture's loss...................................... 17,823 --
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable..................................... 4,303 188,003
Accounts receivable--affiliate....................... 40,414 (63,787)
Increase (decrease) in:
Accrued interest..................................... (4,384) (6,438)
Accrued liabilities.................................. (190,294) (55,923)
Accrued liabilities--affiliate....................... (7,768) 72,067
Deferred rental income............................... (19,350) 1,612
---------- ----------
Net cash provided by operating activities.......... 368,347 1,096,807
---------- ----------
Cash flows provided by (used in) investing activities:
Proceeds from equipment sales......................... 22,000 450,259
Investment in real estate venture..................... (2,780,000) --
---------- ----------
Net cash provided by (used in) investing
activities........................................ (2,758,000) 450,259
---------- ----------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable........................... 160,856 --
Principal payments--notes payable..................... (237,719) (517,902)
Distributions paid.................................... (158,577) (317,154)
---------- ----------
Net cash used in financing activities.............. (235,440) (835,056)
---------- ----------
Net (decrease) increase in cash and cash equivalents... (2,625,093) 712,010
Cash and cash equivalents at beginning of period....... 3,970,877 3,243,631
---------- ----------
Cash and cash equivalents at end of period............. $1,345,784 $3,955,641
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 104,748 $ 128,461
========== ==========
Supplemental disclosure of non-cash activity:
See Note 6 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities--affiliate during
the six months ended June 30, 2000.
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1--Basis of Presentation
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions for preparing Form 10-Q under Rule 10-01 of Regulation
S-X of the Securities and Exchange Commission and are unaudited. As such, these
financial statements do not include all information and footnote disclosures
required under generally accepted accounting principles for complete financial
statements and, accordingly, the accompanying financial statements should be
read in conjunction with the footnotes presented in the 1999 Annual Report.
Except as disclosed herein, there have been no material changes to the
information presented in the footnotes to the 1999 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 2000 and December 31, 1999 and results of operations for
the three and six month periods ended June 30, 2000 and 1999 have been made and
are reflected.
Note 2--Cash
At June 30, 2000, American Income Fund I-C, a Massachusetts Limited
Partnership (the "Partnership") had $1,230,187 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
Note 3--Revenue Recognition
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. 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 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. See also Note 8
to the financial statements presented in the Partnership's 1999 Annual Report
regarding the Class Action Lawsuit. Future minimum rents of $2,354,215 are due
as follows:
<TABLE>
<CAPTION>
For the year ending June 30, 2001.......................... $ 964,473
<S> <C>
2002...................................... 765,637
2003...................................... 542,761
2004...................................... 81,344
----------
Total...................................... $2,354,215
==========
</TABLE>
7
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 4--Equipment
The following is a summary of equipment owned by the Partnership at June 30,
2000. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 2000 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
-------------- ---------- -----------
<S> <C> <C>
Aircraft.................................. 0-30 $ 8,318,862
Materials handling........................ 0-18 2,589,992
Trailers/intermodal containers............ 30-36 1,973,687
Retail store fixtures..................... 1 517,488
Motor vehicles............................ 0 97,400
Communications............................ 0 51,469
Manufacturing............................. 0 35,218
-----------
Total equipment cost 13,584,116
Accumulated depreciation 7,505,193
-----------
Equipment, net of
accumulated depreciation $ 6,078,923
===========
</TABLE>
At June 30, 2000, the Partnership's equipment portfolio included equipment
having a proportionate original cost of $10,810,044, representing approximately
80% 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
$6,218,000 and a net book value of approximately $4,654,000 at June 30, 2000.
The summary above includes equipment held for re-lease or sale with an
original cost of approximately $4,153,000 and a net book value of $1,852,818 at
June 30, 2000. This equipment includes the Partnership's interests in three
Boeing 737 aircraft formerly leased to Southwest Airlines Inc. Each of the
Partnership's interests in these aircraft had an original cost of approximately
$700,000 and a net book value of $232,646 at June 30, 2000. This equipment also
includes the Partnership's interest in a McDonnell-Douglas MD-82 aircraft
formerly leased to Finnair OY. The Partnership's interest in this aircraft had
an original cost of approximately $1,662,000 and a net book value of $1,154,880
at June 30, 2000. The aircraft were returned by the lessees upon their
respective lease term expirations in December 1999 and January 2000. In July
2000, one of the Boeing 737 aircraft was sold, resulting in proceeds to the
Partnership of approximately $280,000 and a net gain, for financial statement
purposes, of approximately $47,000. The General Partner is actively seeking the
sale or re-lease of the remaining equipment not on lease.
Note 5--Investment in Real Estate Venture
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships") collectively loaned $32.0 million to Echelon
Residential Holdings LLC ("Echelon Residential
8
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Holdings"), a newly formed real estate development company. Echelon Residential
Holdings is owned by several investors, including James A. Coyne, Executive
Vice President of EFG. Mr. Coyne, in his individual capacity, is the only
equity investor in Echelon Residential Holdings related to EFG.
The Partnership's participation in the loan is $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.
Using the guidance set forth in the Third Notice to Practitioners by the
American Institute of Certified Public Accountants ("AICPA") in February 1986
entitled "ADC Arrangements" (the "Third Notice"), the Partnership has evaluated
this investment to determine whether loan, joint venture or real estate
accounting is appropriate. Such determination affects the Partnership's balance
sheet classification of the investment and the recognition of revenues derived
therefrom. The Third Notice was issued to address those real estate
acquisition, development and construction arrangements where a lender has
virtually the same risk and potential awards as those of owners or joint
ventures. Emerging Issues Task Force ("EITF") 86-21, "Application of the AICPA
Notice to Practitioners regarding Acquisition, Development and Construction
Arrangements to Acquisition of an Operating Property" expanded the
applicability of the Third Notice to entities other than financial
institutions.
Based on the applicability of the Third Notice, EITF 86-21 and consideration
of the economic substance of the transaction, the loan is considered to be an
investment in a real estate venture for accounting purposes. In accordance with
the provisions of Statement of Position No. 78-9, "Accounting for Investments
in Real Estate Ventures", the Partnership reports its share of income or loss
of Echelon Residential Holdings under the equity method of accounting.
The Partnership's March 31, 2000 Form 10-Q previously reported the
investment in real estate venture as a loan receivable and recorded interest
income and receivable on the Partnership's March 31, 2000 financial statements.
The financial statements below have been adjusted to account for the loan as an
investment in real estate venture as of and for the three months ended March
31, 2000. The adjustments to the financial statements previously filed in the
Partnership's March 31, 2000 Form 10-Q represent less than 1% of the
Partnership's capital and include the reversal of $25,947 of interest income
recorded on this loan and a recognition of $2,720 of the Partnership's share of
losses in Echelon Residential Holdings.
9
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
STATEMENT OF FINANCIAL POSITION
March 31, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents......................................... $ 1,185,395
Rents receivable.................................................. 91,424
Accounts receivable--affiliate.................................... 110,035
Investment in real estate venture................................. 2,777,280
Note receivable--affiliate........................................ 459,729
Investment securities--affiliate.................................. 112,208
Equipment at cost, net of accumulated depreciation of $7,466,370.. 6,223,274
-----------
Total assets.................................................. $10,959,345
===========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable..................................................... $ 2,410,835
Accrued interest.................................................. 12,524
Accrued liabilities............................................... 202,529
Accrued liabilities--affiliate.................................... 38,509
Deferred rental income............................................ 36,642
-----------
Total liabilities............................................. 2,701,039
-----------
Partners' capital (deficit):
General Partner.................................................. (469,624)
Limited Partnership Interests (803,454.56 Units; initial purchase
price of $25 each).............................................. 8,727,930
-----------
Total partners' capital....................................... 8,258,306
-----------
Total liabilities and partners' capital....................... $10,959,345
===========
</TABLE>
10
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
STATEMENT OF OPERATIONS
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<S> <C>
Income:
Lease revenue........................................................... $360,598
Interest income......................................................... 46,426
Interest income--affiliate.............................................. 11,461
Gain on sale of equipment............................................... 11,000
--------
Total income......................................................... 429,485
--------
Expenses:
Depreciation............................................................ 182,503
Interest expense........................................................ 53,289
Equipment management fees--affiliate.................................... 16,564
Operating expenses--affiliate........................................... 90,230
Partnership's share of unconsolidated real estate venture's loss........ 2,720
--------
Total expenses....................................................... 345,306
--------
Net income............................................................... $ 84,179
========
Net income per limited partnership unit.................................. $ .10
========
Cash distribution declared per limited partnership unit.................. $ --
========
</TABLE>
The Partnership's accompanying financial statements as of and for the six
months ended June 30, 2000 are presented in accordance with the guidance above.
The investment is net of the Partnership's share of losses in this real estate
venture. For the six months ended June 30, 2000, the Partnership's share of
losses is $17,823 and is reflected on the Statement of Operations as
"Partnership's share of unconsolidated real estate venture's loss".
The summarized financial information for Echelon Residential Holdings as of
and for the six months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Total assets $54,704,360
Total liabilities $50,914,020
Total equity $ 3,790,340
Total revenues $ 905,751
Total expenses $ 2,593,700
Net loss $(1,687,949)
</TABLE>
Note 6--Investment Securities--Affiliate and Note Receivable--Affiliate
As a result of an exchange transaction in 1997, the Partnership owns 20,876
shares of Semele Group, Inc. ("Semele") common stock and holds a beneficial
interest in a note from Semele (the "Semele Note") of $459,729. The Semele Note
matures in April 2001 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 for each of the six months ended June 30, 2000 and 1999.
11
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", marketable
equity securities classified as available-for-sale are carried at fair value.
During the six months ended June 30, 2000, the Partnership decreased the
carrying value of its investment in Semele common stock to $4.625 per share
(the quoted price on the NASDAQ SmallCap market at the date the stock traded
closest to June 30, 2000), resulting in an unrealized loss of $23,486. This
loss is reported as a component of comprehensive income included in the
Statement of Changes in Partners' Capital.
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, 2000 and 1999 which were paid or accrued by the Partnership to EFG or
its Affiliates, are as follows:
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Equipment management fees........................... $ 34,857 $ 52,546
Administrative charges.............................. 72,832 73,758
Reimbursable operating expenses due to third
parties............................................ 90,816 89,254
------------ ------------
Total............................................. $ 198,505 $ 215,558
============ ============
</TABLE>
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, 2000, the Partnership was owed $93,536 by EFG for such
funds and the interest thereon. These funds were remitted to the Partnership in
July 2000.
Note 8--Notes Payable
Notes payable at June 30, 2000 consisted of installment notes of $2,286,765
payable to banks and institutional lenders. The installment notes bear an
interest rate of either 8.225% or a fluctuating interest rate based on LIBOR
(approximately 6.52% at June 30, 2000) plus a margin. All of the installment
notes are non-recourse and are collateralized by the equipment and assignment
of any related lease payments. The Partnership has balloon payment obligations
at the expiration of the lease terms related to aircraft leased by Reno Air,
Inc. and Finnair OY of $823,037 and $129,116 respectively. The Reno Air, Inc.
and Finnair OY indebtedness matures in January 2003 and April 2001,
respectively. In addition, the Partnership has a balloon payment obligation of
$560,358 which matures in August 2000. The General Partner is currently
negotiating with the existing lender to extend the terms of this indebtedness.
This obligation is related to its interest in a McDonnell-Douglas MD-82
aircraft which was returned in January 2000 upon its lease term expiration.
This aircraft is being stored in a warehouse pending its remarketing. The
carrying amount of notes payable approximates fair value at June 30, 2000.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending June 30, 2001...................... $1,145,320
2002.................................. 322,482
2003.................................. 818,963
----------
Total.................................. $2,286,765
==========
</TABLE>
Note 9--Legal Proceedings
As described more fully in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1999, 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.
12
<PAGE>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this quarterly report of American Income Fund I-C, a
Massachusetts Limited Partnership (the "Partnership") that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 8 to the financial
statements presented in the 1999 Annual Report, the remarketing of the
Partnership's equipment, and the performance of the Partnership's non-equipment
assets.
Three and six months ended June 30, 2000 compared to the three and six months
ended June 30, 1999
The Partnership was organized in 1991 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 8 to the financial statements presented in the
Partnership's 1999 Annual Report. Pursuant to the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended"), the Partnership is scheduled to be dissolved by December 31, 2002.
Results of Operations
For the three and six months ended June 30, 2000, the Partnership recognized
lease revenue of $393,989 and $754,587, respectively, compared to $641,254 and
$1,168,340, respectively, for the same periods in 1999. The decrease in lease
revenue from 1999 to 2000 is the result of lease term expirations and the sale
of equipment. In the future, lease revenue will continue to decline due to
primary and renewal lease term expirations and the sale of equipment.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership holds a proportionate interest, expired on December 31, 1999. In
July 2000, one of the Boeing 737-2H4 aircraft was sold resulting in
approximately $280,000 of proceeds and a net gain, for financial statement
purposes, of approximately $47,000 for the Partnership's proportional interest
in the aircraft. The remaining two aircraft are currently being stored in a
warehouse, while the General Partner pursues remarketing alternatives. The
Partnership recognized lease revenue of $206,640 related to these three
aircraft during the six months ended June 30, 1999.
The lease term associated with a McDonnell-Douglas MD-82 aircraft, in which
the Partnership holds an ownership interest, expired in January 2000. That
aircraft, which is being stored in a warehouse pending its remarketing,
generated lease revenue to the Partnership of $23,255 and $126,452,
respectively, during the six months ended June 30, 2000 and 1999.
13
<PAGE>
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 Equis Financial Group Limited Partnership ("EFG"). Proportionate
equipment ownership enabled the Partnership to further diversify its equipment
portfolio at inception by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could have resulted from a
concentration in any single equipment type, industry or lessee. The Partnership
and each affiliate individually report, in proportion to their respective
ownership interests, their respective shares of assets, liabilities, revenues,
and expenses associated with the equipment.
Interest income for the three and six months ended June 30, 2000 was $31,821
and $89,708 compared to $84,131 and $130,514 for the same periods in 1999.
Interest income is typically generated from temporary investment of rental
receipts and equipment sale proceeds in short-term instruments. Interest income
during the three and six months ended June 30, 2000 and 1999 included $11,336
and $22,797, respectively, and $11,461 and $22,797, respectively, earned on a
note receivable from Semele Group Inc. ("Semele") (see Note 6 to the financial
statements herein). On March 8, 2000, the Partnership utilized $2,780,000 of
available cash for a loan to Echelon Residential Holdings LLC ("Echelon
Residential Holdings"). See Note 5 to the financial statements herein. The
amount of future interest income is expected to fluctuate as a result of
changing interest rates and the amount of cash available for investment, among
other factors.
During the three and six months ended June 30, 2000, the Partnership sold
fully-depreciated equipment to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $11,000 and
$22,000, respectively. During the six months ended June 30, 1999, the
Partnership sold equipment having a net book value of $1,086, resulting in a
net gain, for financial statement purposes of $449,173. During the three months
ended June 30, 1999, the Partnership sold fully-depreciated equipment to
existing lessees and third-parties, resulting in a net gain, for financial
statement purposes, of $362,921.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership
classifies such residual rental payments as lease revenue. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing
the equipment.
Depreciation expense for the three and six months ended June 30, 2000 was
$144,351 and $326,854, respectively, compared to $238,566 and $477,133 for the
same periods in 1999. For financial reporting purposes, to the extent that an
asset is held on primary lease term, the Partnership depreciates the difference
between (i) the cost of the asset and (ii) the estimated residual value of the
asset at the date of primary lease expiration on a straight-line basis over
such term. For
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the purposes of this policy, estimated residual values represent estimates of
equipment values at the date of primary lease expiration. To the extent that
equipment is held beyond its primary lease term, the Partnership continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Interest expense was $47,075 and $100,364, respectively, for the three and
six months ended June 30, 2000 compared to $57,732 and $122,023, respectively,
for the same periods in 1999. Interest expense will continue to decrease in
future periods as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt.
Management fees were $18,293 and $34,857, respectively, for each of the
three and six month periods ended June 30, 2000 and $28,109 and $52,546,
respectively, for the same periods in 1999. Management fees are based on 5% of
gross lease revenue generated by operating leases and 2% of gross lease revenue
generated by full payout leases.
Operating expenses were $73,418 and $163,648, respectively, for the three
and six month periods ended June 30, 2000 compared to $113,803 and $163,012,
respectively, for the same periods in 1999. 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.
For the three and six months ended June 30, 2000, the Partnership's share of
losses in Echelon Residential Holdings is $15,103 and $17,823, respectively,
and is reflected on the Statement of Operations as "Partnership's share of
unconsolidated real estate venture's loss". See further discussion below.
Liquidity and Capital Resources and Discussion of Cash Flows
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These
cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $368,347 and $1,096,807 for the six
months ended June 30, 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. See additional discussion
below regarding the loan made by the Partnership to Echelon Residential Holding
in March 2000.
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, 2000 and 1999, the Partnership realized equipment sales proceeds
of $22,000 and $450,259, 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 June 30, 2000, the Partnership was due aggregate future minimum lease
payments of $2,354,215 from contractual lease agreements, a portion of which
will be used to amortize the principal balance of notes payable of $2,286,765.
See Notes 3 and 8 to the financial statements herein. 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
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<PAGE>
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 the Class Action
Lawsuit described in Note 8 to the financial statements presented in the
Partnership's 1999 Annual Report, the Partnership is permitted to invest in new
equipment or other business activities, subject to certain limitations. On
March 8, 2000, the Partnership and 10 different partnerships (the "Exchange
Partnerships") collectively loaned $32.0 million to Echelon Residential
Holdings, a newly-formed real estate development company owned by several
investors, including James A. Coyne, Executive Vice President of EFG. Mr.
Coyne, in his individual capacity, is the only equity investor in Echelon
Residential Holdings who is related to EFG.
The Partnership's participation in the loan is $2,780,000. Echelon
Residential Holdings, through a 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 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. 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.
As discussed in Note 5 in the Partnership's financial statements, the loan
is considered to be an investment in a real estate venture for accounting
purposes. In accordance with the provisions of Statement of Position No. 78-9,
"Accounting for Investments in Real Estate Ventures", the Partnership reports
its share of income or loss of Echelon Residential Holdings under the equity
method of accounting.
As a result of an exchange transaction in 1997, the Partnership owns 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 2001
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.
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, 2000, the Partnership decreased the
carrying value of its investment in Semele common stock to $4.625 per share
(the quoted price on the NASDAQ SmallCap market at the date the stock traded
closest to June 30, 2000), resulting in an unrealized loss of $23,486. This
loss was reported as a component of comprehensive income included in the
Statement of Changes in Partners' Capital.
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.
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. The Partnership has balloon
payment obligations at the expiration of the lease terms related to aircraft
leased by Reno Air, Inc. and Finnair OY of $679,276 and $106,516, respectively.
The Reno Air, Inc. and Finnair OY indebtedness matures in January 2003 and
April 2001, respectively.
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<PAGE>
In addition, in February 2000, the Partnership and certain affiliated
investment programs (collectively, the "Programs") refinanced the indebtedness
which matured in January 2000 associated with a McDonnell-Douglas MD-82
aircraft formerly leased to Finnair OY, which matures in April 2001. In
addition to refinancing the existing indebtedness of $3,370,000, the Programs
received additional debt proceeds of $1,350,000 required to perform a D-Check
on the aircraft. The Partnership received $160,856 from such proceeds. The note
bears a fluctuating interest rate based on LIBOR plus a margin with interest
payments due monthly. The Partnership's aggregate share of the refinanced and
new indebtedness was $560,358, which matures in August 2000. The General
Partner is currently negotiating with the existing lender to extend the terms
of this indebtedness. The aircraft was returned in January 2000 upon its lease
term expiration and is currently being stored in a warehouse.
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. 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 June 30, 2000, the Partnership had ownership interests in
six commercial jet aircraft. Three of the aircraft are Boeing 737 aircraft
formerly leased to Southwest Airlines, Inc. The lease agreements for each of
these aircraft expired on December 31, 1999 and Southwest elected to return the
aircraft. The aircraft are Stage 2 aircraft, meaning that they are prohibited
from operating in the United States after December 31, 1999 unless they are
retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by
the Federal Aviation Administration. The cost to hush-kit an aircraft, such as
the Partnership's Boeing 737s, can approach $2.0 million. In July 2000, one of
the Boeing 737 aircraft was sold. At this time, the General Partner is
attempting to remarket the remaining Boeing 737 aircraft without further
capital investment by either re-leasing the aircraft to a user outside of the
United States or selling the aircraft as they are without retro-fitting the
aircraft to conform to Stage 3 standards. The remaining three aircraft in the
Partnership's portfolio already are Stage 3 compliant. One of these aircraft
had a lease term that expired in January 2000 and is being held in storage
pending the outcome of ongoing remarketing efforts. The final two aircraft in
the Partnership's portfolio have lease terms expiring in April 2001 and January
2003.
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 reported under financing activities on the
accompanying Statement of Cash Flows. No cash distributions were declared for
the six months ended June 30, 2000.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset
at its disposal date.
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The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing
treatments of income and expense items for income tax purposes in comparison to
financial reporting purposes, generally referred to as permanent or timing
differences. See Note 7 to the financial statements presented in the 1999
Annual Report. 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, the difference between distributions (declared vs. paid) for
income tax and financial reporting purposes, and the treatment of unrealized
gains or losses on investment securities for book and tax purposes. The
principal component of the cumulative difference between financial statement
income or loss and tax income or loss results from different depreciation
policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at June 30, 2000. 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, 1999, the General Partner had a positive tax capital
account balance.
The outcome of the Class Action Lawsuit described in Note 8 to the financial
statements presented in the Partnership's 1999 Annual Report will be the
principal factor in determining the future of the Partnership's operations. The
proposed settlement to that lawsuit, if effected, will materially change the
future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. In addition, 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 adjudicated.
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AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
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
27 Financial Data Schedule
Item 6(b). Reports on Form 8-K
Response: None
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
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<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity
and on the date indicated.
AMERICAN INCOME FUND I-C, a Massachusetts Limited
Partnership
By: AFG Leasing VI Incorporated, a
Massachusetts corporation and the
General Partner of the Registrant.
/s/ Michael J. Butterfield
By: ______________________________________________
Michael J. Butterfield
Treasurer of AFG Leasing VI Incorporated
(Duly Authorized Officer and
Principal Accounting Officer)
Date: August 14, 2000
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