-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTzryTxxpQ8V4PC6x11vbiNr4QUwkAweqeCcv43ObPQlfHYi8dGOMJPT5vZnIthO RNDhVR0i3R6zqWSfoCxKPA== 0001047469-98-020547.txt : 19980518 0001047469-98-020547.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020547 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFG INVESTMENT TRUST C CENTRAL INDEX KEY: 0000879496 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043157232 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21444 FILM NUMBER: 98623125 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________________________ to ______ _______________________ For Quarter Ended March 31, 1998 Commission File No. 0-21444 AFG Investment Trust C ---------------------- (Exact name of registrant as specified in its charter) Delaware 04-3157232 - -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 88 Broad Street, Boston, MA 02110 - --------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617)854-5800 --------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_| APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has not been subject to such filing requirements for the past 90 days. Yes |_| No |_| AFG Investment Trust C FORM 10-Q INDEX Page ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Statement of Financial Position at March 31, 1998 and December 31, 1997 3 Statement of Operations for the three months ended March 31, 1998 and 1997 4 Statement of Cash Flows for the three months ended March 31, 1998 and 1997 5 Notes to the Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-18 PART II. OTHER INFORMATION: Items 1 - 6 19 2 AFG Investment Trust C STATEMENT OF FINANCIAL POSITION March 31, 1998 and December 31, 1997 (Unaudited)
March 31, December 31, 1998 1997 ------------- ------------- ASSETS - ------ Cash and cash equivalents $ 12,330,457 $ 8,843,640 Restricted cash 9,566,189 9,566,189 Rents receivable 441,146 819,736 Accounts receivable - affiliate 771,554 904,426 Equipment at cost, net of accumulated depreciation of $48,775,793 and $50,635,609 at March 31, 1998 and December 31, 1997, respectively 58,920,180 61,902,787 ------------- ------------- Total assets $ 82,029,526 $ 82,036,778 ------------- ------------- ------------- ------------- LIABILITIES AND PARTICIPANTS' CAPITAL - ------------------------------------- Notes payable $ 38,467,220 $ 39,928,173 Accrued interest 365,223 240,434 Accrued liabilities 20,973 11,550 Accrued liabilities - affiliate 64,154 118,703 Deferred rental income 183,377 126,942 Cash distributions payable to participants 451,804 451,804 ------------- ------------- Total liabilities 39,552,751 40,877,606 ------------- ------------- Participants' capital (deficit): Managing Trustee 14,232 (123,674) Special Beneficiary 117,411 (1,000,794) Class A Beneficiary Interests (1,792,353 Interests; initial purchase price of $25 each) 30,895,483 30,858,790 Class B Beneficiary Interests (3,024,740 Interests; initial purchase price of $5 each) 13,741,216 13,716,417 Treasury Interests (218,661 Interests at Cost) (2,291,567) (2,291,567) ------------- ------------- Total participants' capital 42,476,775 41,159,172 ------------- ------------- Total liabilities and participants' capital $ 82,029,526 $ 82,036,778 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 3 AFG Investment Trust C STATEMENT OF OPERATIONS for the three months ended March 31, 1998 and 1997 (Unaudited)
1998 1997 ---------- ---------- Income: Lease revenue $4,101,575 $3,994,410 Interest income 264,078 197,831 Gain on sale of equipment 2,284,311 34,537 ---------- ---------- Total income 6,649,964 4,226,778 ---------- ---------- Expenses: Depreciation and amortization 2,847,877 3,265,846 Interest expense 844,967 310,922 Equipment management fees - affiliate 176,223 169,391 Operating expenses - affiliate 107,894 129,264 ---------- ---------- Total expenses 3,976,961 3,875,423 ---------- ---------- Net income $2,673,003 $ 351,355 ---------- ---------- ---------- ---------- Net income per Class A Beneficiary Interest $ 0.43 $ 0.16 ---------- ---------- ---------- ---------- per Class B Beneficiary Interest $ 0.17 $ -- ---------- ---------- ---------- ---------- Cash distributions declared per Class A Beneficiary Interest $ 0.41 $ 0.41 ---------- ---------- ---------- ---------- per Class B Beneficiary Interest $ 0.16 $ -- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 4 AFG Investment Trust C STATEMENT OF CASH FLOWS for the three months ended March 31, 1998 and 1997 (Unaudited)
1998 1997 ------------ ------------ Cash flows from (used in) operating activities: Net income $ 2,673,003 $ 351,355 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 2,847,877 3,265,846 Gain on sale of equipment (2,284,311) (34,537) Changes in assets and liabilities Decrease in: Rents receivable 378,590 147,973 Accounts receivable - affiliate 132,872 5,881,295 Increase (decrease) in: Accrued interest 124,789 67,028 Accrued liabilities 9,423 (5,235) Accrued liabilities - affiliate (54,549) (132,346) Deferred rental income 56,435 122,353 ------------ ------------ Net cash from operating activities 3,884,129 9,663,732 ------------ ------------ Cash flows from (used in) investing activities: Purchase of equipment -- (1,054,800) Proceeds from equipment sales 2,419,041 162,066 ------------ ------------ Net cash from (used in) investing activities 2,419,041 (892,734) ------------ ------------ Cash flows used in financing activities: Principal payments - notes payable (1,460,953) (2,112,774) Distributions paid (1,355,400) (907,448) Net cash used in financing activities (2,816,353) (3,020,222) ------------ ------------ Net increase in cash and cash equivalents 3,486,817 5,750,776 Cash and cash equivalents at beginning of period 8,843,640 10,634,493 ------------ ------------ Cash and cash equivalents at end of period $ 12,330,457 $ 16,385,269 ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 720,178 $ 243,894 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 5 AFG Investment Trust C Notes to the Financial Statements March 31, 1998 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The financial statements presented herein are prepared in conformity with generally accepted accounting principles and the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and are unaudited. As such, these financial statements do not include all information and footnote disclosures required under generally accepted accounting principles for complete financial statements and, accordingly, the accompanying financial statements should be read in conjunction with the footnotes presented in the 1997 Annual Report. Except as disclosed herein, there has been no material change to the information presented in the footnotes to the 1997 Annual Report. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary to present fairly the financial position at March 31, 1998 and December 31, 1997 and results of operations for the three month periods ended March 31, 1998 and 1997 have been made and are reflected. NOTE 2 - CASH At March 31, 1998, the Trust had $21,091,881 invested in federal agency discount notes and reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. Such cash includes $9,566,189 which represents net proceeds realized from the offering of the Class B Interests less the portion thereof used to pay a special distribution to the Class A Beneficiaries and to redeem Class A Interests (see Note 9). These funds are reserved for future purchases of Class A Interests pursuant to the Trust Agreement and are classified as Restricted Cash on the Trust's Statement of Financial Position at March 31, 1998 and December 31, 1997. NOTE 3 - REVENUE RECOGNITION Rents are payable to the Trust 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 Trust may enter primary-term, renewal or re-lease agreements which expire beyond the Trust's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as the Managing Trustee and the Advisor 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 non-cancelable rental payments associated with the attendant lease agreements. Future minimum rents of $20,753,000 are due as follows: For the year ending March 31, 1999 $ 9,481,965 2000 3,654,803 2001 2,521,061 2002 2,125,899 2003 1,904,141 Thereafter 1,065,131 ----------- Total $20,753,000 ----------- -----------
6 AFG Investment Trust C Notes to the Financial Statements (Continued) NOTE 4 - EQUIPMENT The following is a summary of equipment owned by the Trust at March 31, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from March 31, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of Equis Financial Group Limited Partnership ("EFG"), the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment Equipment Type (Months) at Cost -------------- -------- ------- Aircraft 0-57 $47,400,169 Computers & peripherals 0-21 10,914,878 Retail store fixtures 0-18 10,348,100 Manufacturing 9-65 10,328,381 Locomotives 27-72 9,179,509 Construction & mining 0-33 7,557,664 Materials handling 0-59 7,493,210 Communications 0-2 2,004,394 Research & test 0-7 1,667,223 Furniture & fixtures 5-7 239,785 Trailers/intermodal containers 1 229,352 Tractors and heavy duty trucks 0 148,079 Photocopying 0-3 118,652 Energy systems 0 63,900 Medical 5 2,206 Miscellaneous 6 471 ----------- Total equipment cost 107,695,973 Accumulated depreciation (48,775,793) ----------- Equipment, net of accumulated depreciation $58,920,180 ----------- -----------
At March 31, 1998, the Trust's equipment portfolio included equipment having a proportionate original cost of $59,469,631, representing approximately 55% of total equipment cost. At March 31, 1998, the cost and net book value of equipment held for sale or re-lease was approximately $9,525,000 and $5,475,000, respectively. This equipment includes the Trust's proportionate interest in a McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. with a cost and net book value of $7,333,098 and $5,127,708, respectively. The Managing Trustee is currently holding discussions with a potential lessee regarding the re-lease of this aircraft. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. In addition, the summary above also includes equipment being leased on a month-to-month basis. 7 AFG Investment Trust C Notes to the Financial Statements (Continued) NOTE 5 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during each of the three month periods ended March 31, 1998 and 1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
1998 1997 -------- -------- Equipment acquisition fees $ -- $ 30,722 Equipment management fees 176,223 169,391 Administrative charges 22,686 14,346 Reimbursable operating expenses due to third parties 85,208 114,918 -------- -------- Total $284,117 $329,377 -------- -------- -------- --------
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 Trust. At March 31, 1998, the Trust was owed $771,554 by EFG for such funds, and the interest thereon. These funds were remitted to the Trust in April 1998. Refer to Note 8 regarding the purchase of Class B Interests by an affiliate, Equis II Corporation and the change in ownership of the Managing Trustee. NOTE 6 - NOTES PAYABLE Notes payable at March 31, 1998 consisted of installment notes of $38,467,220 payable to banks and institutional lenders. The notes bear interest rates ranging between 6.1% and 14.46%, except for one note which bears a fluctuating interest rate based on LIBOR (5.63% at March 31, 1998) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Trust has balloon payment obligations of $22,704,268, $2,867,081 and $282,421 at the expiration of the primary lease terms related to an aircraft leased to Scandinavian Airlines System, certain rail equipment and the aircraft leased to Reno Air, Inc., respectively. The carrying amount of notes payable approximates fair value at March 31, 1998. The annual maturities of the notes payable are as follows: For the year ending March 31, 1999 $ 26,679,504 2000 2,162,833 2001 4,859,996 2002 1,776,869 2003 1,956,214 Thereafter 1,031,804 --------- Total $38,467,220 ----------- -----------
8 AFG Investment Trust C Notes to the Financial Statements (Continued) NOTE 7 - LEGAL PROCEEDINGS On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Trust (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the Managing Trustee, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit." The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On March 9, 1998, counsel for the Defendants and the Plaintiffs entered into a Memorandum of Understanding setting forth the terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Memorandum of Understanding represents a preliminary step towards a comprehensive Stipulation of Settlement between the parties that must be presented to and approved by the Court as a condition precedent to effecting a settlement. The Memorandum of Understanding (i) prescribes a number of conditions necessary to achieving a settlement, including providing the beneficiaries (or partners, as applicable) of the Nominal Defendants with the opportunity to vote on any settlement and (ii) contemplates various changes that, if effected, would alter the future operations of the Nominal Defendants (see Note 10). To the extent that the parties agree upon a Stipulation of Settlement that is approved by the Court, the complete terms thereof will be communicated to all of the beneficiaries (or partners) of the Nominal Defendants to enable them to vote thereon. There can be no assurance that the parties will agree on a Stipulation of Settlement, or that it will be approved by the Court, or that the outcome of the voting by the beneficiaries (or partners) of the Nominal Defendants, including the Trust, will result in a settlement finally being effected or in the Trust being included in any such settlement. The Managing Trustee and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that a Stipulation of Settlement will be agreed upon by the parties and approved by the Court. In the absence of a Stipulation of Settlement approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. The Managing Trustee and its affiliates cannot predict with any degree of certainty the ultimate outcome of such litigation. On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored investment programs, filed an action in the Commonwealth of Massachusetts Superior Court Department of the Trial Court in and for the County of Suffolk, for damages and declaratory relief against a lessee of the Trust, National Steel Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by National Steel of certain sales and/or use taxes paid to the State of Illinois and other remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice of Removal which removed the case to the United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory relief and alleging breach of contract, implied covenant of good faith and fair dealing and specific performance. EFG filed its Answer to these counterclaims on September 29, 1995. Though the parties discussed settlement with respect to this matter for some time, the negotiations were unsuccessful. Notwithstanding these discussions, EFG recently filed an Amended and Supplemental Complaint alleging further default under the MLA and EFG recently filed a motion for Summary Judgment on all claims and counterclaims. The Court held a hearing on EFG's motion in December 1997 and the Court recently entered a decision dismissing certain of National Steel's counterclaims and finding in 9 AFG Investment Trust C Notes to the Financial Statements (Continued) favor of EFG on certain issues and in favor of National Steel on other issues. The Trust does not anticipate that it will experience any material losses as a result of this action. NOTE 8 - ISSUANCE OF CLASS B INTERESTS On October 26, 1996, the Trust filed a Solicitation Statement with the United States Securities and Exchange Commission (the "SEC") which subsequently was sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the Securities Exchange Act. The Solicitation Statement sought the consent of the Beneficiaries to a proposed amendment (the "Amendment") to the Amended and Restated Declaration of Trust (the "Trust Agreement") which would (i) amend the provisions of the Trust Agreement governing the redemption of Beneficiary Interests to permit the Trust to offer to redeem outstanding Beneficiary Interests at such times, in such amounts, in such manner and at such prices as the Managing Trustee might determine from time to time, in accordance with applicable law; and (ii) add a provision to the Trust Agreement that would permit the Trust to issue, at the discretion of the Managing Trustee and without further consent or approval of the Beneficiaries, an additional class of security with such designations, preferences and relative, participating, optional or other special rights, powers and duties as the Managing Trustee might affix. The funds obtained through the issuance of such a security would be used by the Trust to (a) expand redemption opportunities for Beneficiaries without using Trust funds which might otherwise be available for cash distributions; and (b) make a special one-time cash distribution to the Beneficiaries. Pursuant to the Trust Agreement, the adoption of the Amendment required the consent of the Beneficiaries holding more than 50% in the aggregate of the Class A Interests held by all Beneficiaries. A majority of the Class A Interests, representing 1,215,771 Interests or 60.5% of all Class A Interests, voted in favor of the Amendment; 174,315 Interests or 8.7% of all Class A Interests voted against the Amendment; and 49,787 Interests or 2.5% of all Class A Interests abstained. Approximately 72% of all Class A Interests participated in the vote. Accordingly, the Trust Agreement was amended. On February 12, 1997, the Trust filed a Registration Statement on Form S-1 with the SEC, which became effective June 10, 1997. The Registration Statement covered the issuance and sale of a new class of beneficiary interests in the Trust (the "Class B Interests"). The characteristics of the Class B Interests, associated risk factors and other matters of importance to the Beneficiaries and purchasers of the Class B Interests were set forth in a Prospectus sent to the Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby generating $15,123,700 in aggregate Class B capital contributions. Class A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of aggregate capital contributions, and the Special Beneficiary, EFG, purchased 3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital contributions. The Trust incurred offering costs in the amount of $151,237 and professional service costs of $153,842 in connection with this offering. Subsequently, EFG transferred its Class B Interests to a special-purpose company, Equis II Corporation, a Delaware corporation. EFG also transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis II Corporation. As a result, Equis II Corporation has voting control of the Trust through its ownership of the majority of all of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. Equis II Corporation is controlled by EFG's President and Chief Executive Officer, Gary D. Engle. Accordingly, control of the Managing Trustee did not change as a result of the foregoing transactions. As described in the Prospectus for the offering of the Class B Interests, the Managing Trustee used a portion of the net cash proceeds realized from the offering of the Class B Interests to pay a one-time special cash distribution of approximately $1.47 per Class A Interest to the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid this special cash distribution, aggregating $2,960,865 to the Class A Beneficiaries on August 15, 1997. 10 AFG Investment Trust C Notes to the Financial Statements (Continued) NOTE 9 - REDEMPTION OF CLASS A INTERESTS On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the outstanding Class A Interests of the Trust by filing a Form 13E-4, Issuer Tender Offer Statement, with the SEC and distributing to the Class A Beneficiaries information (the "Tender Documents") concerning the offer. On October 10, 1997, the Trust used $2,291,567 of the net proceeds realized from the issuance of the Class B Interests to purchase 218,661 of the Class A Interests tendered as a result of the offer. The Tender Documents described, among other things, the terms of the offer and the purchase price per Class A Interest being offered by the Trust. The Trust intends to purchase additional outstanding Class A Interests through future offers to purchase during the Initial Redemption Period (two years following the close of the Class B offering which occurred on July 17,1997). These purchases will be funded by the net proceeds realized from the issuance of the Class B Interests less the portion thereof used to pay a special distribution to the Class A Beneficiaries and to redeem Class A Interests to date. These funds are classified as Restricted Cash on the Trust's Statement of Financial Position at March 31, 1998 and December 31, 1997 (see also Note 10). NOTE 10 - SUBSEQUENT EVENT On May 5, 1998, the Trust filed a definitive Solicitation Statement with the United States Securities and Exchange Commission in connection with the solicitation by the Trust of the consent of the Beneficiaries to a proposed amendment (the "Amendment") to the Second Amended and Restated Declaration of Trust (the "Trust Agreement"). The Solicitation Statement and Consent of Beneficiary were mailed to all of the Beneficiaries of the Trust on May 6, 1998. The Beneficiaries were requested to use the Consent of Beneficiary to vote on several proposals and return their votes on or before June 5, 1998. Subject to attaining a settlement in the Class Action Lawsuit described in Note 7 herein, the Amendment, if approved, would modify the Trust Agreement in the following principal respects: (i) the Trust would pay a Special Cash Distribution to the Class A Beneficiaries of record as of September 1, 1997, or to their successors or assigns, totaling $1,513,639 (or approximately $0.75 per Class A Interest) using a portion of the Class B capital contributions that otherwise would be distributed as a Class B Capital Distribution to Equis II Corporation, (see Note 8) the parent company of the Managing Trustee and an affiliate of EFG; (ii) Equis II Corporation will be required to reduce its prospective Class B Capital Distributions by $3,405,688 and treat such amount as a long-term equity investment in the Trust; (iii) certain voting restrictions will be placed upon the Class B Interests owned by Equis II Corporation; (iv) the Trust's reinvestment period, which originally expired on September 2, 1997, will be reinstated until December 31, 2002; and (v) acquisition fees paid to EFG in connection with reinvestment assets acquired after the Amendment date will be reduced from a maximum of 3% to 1% and management fees earned in connection with such assets will be reduced from a maximum of 5% to 2%. The proposed Amendment also provides for other modifications to the Trust Agreement which are not contingent upon reaching a settlement in the Class Action Lawsuit, principally as follows: (i) the Trust's stated investment policies and objectives will be broadened to permit the Trust to invest in assets other than leased equipment, and (ii) the Trust's financing provisions will be modified to eliminate any cap on the amount of aggregate Trust indebtedness and permit the Trust to use cross-collateralized and other recourse debt structures, thereby enabling the Trust to secure financing at interest rates that, generally, would be lower than under current borrowing arrangements. The Solicitation Statement contains additional information concerning the proposed Amendment and associated risk factors. The Amendment will be adopted or rejected based upon the majority of the Class A Interests actually voted (including 9,210 Class A Interests owned by an affiliate of EFG). Accordingly, the Amendment will be adopted no matter how few Class A Interests are actually voted, provided a majority of those 11 AFG Investment Trust C Notes to the Financial Statements (Continued) Interests are voted in favor of the Amendment. Although Equis II Corporation has voting control of the Trust, it will vote its Class B Interests in the same proportion in which the majority of the Class A Interests are voted. 12 AFG Investment Trust C 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 AFG Investment Trust C (the "Trust") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 7 to the accompanying financial statements, and the ability of Equis Financial Group Limited Partnership (formerly American Finance Group) ("EFG") to collect all rents due under the attendant lease agreements and to successfully remarket the Trust's equipment, upon the expiration of such leases. The Year 2000 Issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. EFG's computer programs were designed and written using four digits to define the applicable year. As a result, EFG does not anticipate system failure or miscalculations causing disruptions of operations. Based on recent assessments, EFG determined that minimal modification of software is required so that its network operating system will function properly with respect to dates in the year 2000 and thereafter. EFG believes that with these modifications to the existing operating system, the Year 2000 Issue will not pose significant operational problems for its computer systems. EFG will utilize internal resources to upgrade software for Year 2000 modifications and anticipates completing the Year 2000 project by December 31, 1998, which is prior to any anticipated impact on its operating system. The total cost of the Year 2000 project is expected to be insignificant and have no effect on the results of operations of the Trust. Three months ended March 31, 1998 compared to the three months ended March 31, 1997: Overview As an equipment leasing trust, the Trust was organized to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The Trust was designed to progress through three principal phases: acquisitions, operations, and liquidation. During the operations phase, a period of approximately six years, all equipment in the Trust's portfolio will progress through various stages. Initially, all equipment will generate rental revenues under primary term lease agreements. During the life of the Trust, these agreements will expire on an intermittent basis and equipment held pursuant to the related leases will be renewed, re-leased or sold, depending on prevailing market conditions and the assessment of such conditions by EFG to obtain the most advantageous economic benefit. Over time, a greater portion of the Trust's original equipment portfolio will become available for remarketing and cash generated from operations and from sales or refinancings will fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action Lawsuit could alter the future business operations of the Trust. See Note 7 to the accompanying financial statements. The Trust's operations commenced in 1992. Results of Operations For the three months ended March 31, 1998, the Trust recognized lease revenue of $4,101,575 compared to $3,994,410 for the same period in 1997. The increase in lease revenue from 1997 to 1998 is attributable to the acquisition of additional equipment in 1997 pursuant to the reinvestment provisions of the Amended and Restated Declaration of Trust (the "Trust Agreement"). The period during which the Trust could reinvest Cash from Sales or Refinancings in additional equipment expired on September 2, 1997. Over time, the level of lease revenue will decline due to the expiration of the Trust's primary lease term agreements. The future level of lease revenue to be recognized by the Trust may be impacted by the proposed amendment to the Trust Agreement as described in Note 10 to the accompanying financial statements. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by EFG or an affiliated equipment leasing program 13 AFG Investment Trust C FORM 10-Q PART I. FINANCIAL INFORMATION sponsored by EFG. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Trust 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 months ended March 31, 1998 was $264,078 compared to $197,831 for the same period in 1997. Generally, interest income is generated from the temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1998 included interest earned on unexpended proceeds resulting from the issuance of Class B Interests. Future interest income will fluctuate in relation to prevailing interest rates, the collection of lease revenue and the proceeds from equipment sales. During the three months ended March 31, 1998, the Trust sold equipment having a net book value of $134,730 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $2,284,311 compared to a net gain of $34,537 on equipment having a net book value of $127,529 for the same period in 1997. It cannot be determined whether future sales of equipment will result in a net gain or net loss to the Trust, 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 Trust and to 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 Trust 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 Trust achieved from leasing the equipment. Depreciation and amortization expense was $2,847,877 and $3,265,846 for the three months ended March 31, 1998 and 1997, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust 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 $844,967 for the three months ended March 31, 1998 compared to $310,922 for the same period in 1997. Interest expense increased from 1997 to 1998 due to additional leveraging obtained to finance the acquisition of reinvestment equipment during 1997. In the future, interest expense will decline as the principal balance of notes payable is reduced through the application of rent receipts to outstanding indebtedness. Management fees were 4.3% and 4.2% of lease revenue for the three months ended March 31, 1998 and 1997, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. 14 AFG Investment Trust C FORM 10-Q PART I. FINANCIAL INFORMATION Operating expenses consist principally of administrative charges, professional service costs, such as audit, insurance and legal fees, as well as printing, distribution and remarketing expenses. Collectively, operating expenses represented approximately 2.6% and 3.2% of lease revenue for the three months ended March 31, 1998 and 1997, respectively. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a trust. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. Liquidity and Capital Resources and Discussion of Cash Flows The Trust by its nature is a limited life entity which was established for specific purposes described in the preceding "Overview". As an equipment leasing program, the Trust's principal operating activities derive from asset rental transactions. Accordingly, the Trust'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. For the three months ended March 31, 1998, operating activities generated net cash inflows of $3,884,129 compared to $3,551,398 for the same period in 1997, after reductions in 1997 for equipment sale proceeds of $2,265,436 received in connection with the sale of a vessel and debt proceeds of $3,846,898 which relate to the leveraging of certain rail equipment in the Trust's portfolio. These sale and debt proceeds were due from EFG at December 31, 1996. In the future, operating activities are expected to decrease due to the renewal, re-lease and equipment sale activities which will cause the Trust's primary-term lease revenue and corresponding sources of operating cash to decline. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will decline as the Trust experiences a higher frequency of remarketing events. The Trust's equipment is leased by a number of creditworthy, investment-grade companies and, to date, the Trust has not experienced any material collection problems and has not considered it necessary to provide an allowance for doubtful accounts. Notwithstanding a positive collection history, there is no assurance that all future contracted rents will be collected or that the credit quality of the Trust's lessees will be maintained. Collection risk could increase in the future, particularly as the Trust remarkets its equipment and enters re-lease agreements with different lessees. The Managing Trustee will continue to evaluate and monitor the Trust's experience in collecting accounts receivable to determine whether a future allowance for doubtful accounts may become appropriate. Ultimately, the Trust will dispose of all assets under lease. This will occur principally through sale transactions whereby each asset will be sold to the existing lessee or to a third party. Generally, this will occur upon expiration of each asset's primary or renewal/re-lease term. In certain instances, casualty or early termination events may result in the disposal of an asset. Such circumstances are infrequent and usually result in the collection of stipulated cash settlements pursuant to terms and conditions contained in the underlying lease agreements. Cash expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. The Trust expended $1,054,800 during the three months ended March 31, 1997 to acquire equipment pursuant to the reinvestment provisions of the Trust Agreement. There were no equipment acquisitions during the corresponding period in 1998. During the three months ended March 31, 1998, the Trust realized net sale proceeds of $2,419,041 compared to $162,066 for the same period in 1997. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. The Trust obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental 15 AFG Investment Trust C FORM 10-Q PART I. FINANCIAL INFORMATION 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 to repay debt obligations is scheduled to increase as a result of leveraging obtained in connection with the acquisition of reinvestment equipment. Thereafter, the amount will decline as the principal balance of notes payable is reduced through the collection and application of rents. However, the Trust has balloon payment obligations of $22,704,268, $2,867,081 and $282,421 at the expiration of the primary lease terms related to an aircraft leased to Scandinavian Airlines System ("SAS"), certain rail equipment and the aircraft leased to Reno Air, Inc., respectively. SAS has the option to renew the attendant lease agreement for two one-year periods at the expiration of the primary lease term on December 29, 1998. The repayment of the associated indebtedness will be partly dependent on whether SAS decides to renew such leases or the outcome of alternative remarketing efforts, in the event SAS chooses not to do so. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance which may exist in the Managing Trustee's tax capital account. At December 31, 1997, the Managing Trustee had a negative tax capital account balance of $4,832. At March 31, 1998, the Trust had aggregate future minimum lease payments of $20,753,000 from contractual lease agreements (see Note 3 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $38,467,220 (see Note 6 to the financial statements and discussion above). Additional cash inflows will be realized from future remarketing activities, such as lease renewals and equipment sales, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of equipment sales is often 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. Accordingly, as the Trust matures and a greater level of its equipment assets become available for remarketing, the cash flows of the Trust will become less predictable. In addition, the Trust will have cash outflows to satisfy interest on indebtedness and to pay management fees and operating expenses. Ultimately, the Trust is expected to meet its future disbursement obligations and to distribute any excess of cash inflows over cash outflows to the Participants in accordance with the Trust Agreement. However, several factors, including month-to-month lease extensions, lessee defaults, equipment casualty events, and early lease terminations could alter the Trust's anticipated cash flows as described herein and in the accompanying financial statements and result in fluctuations to the Trust's periodic cash distribution payments. On July 18, 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby generating $15,123,700 in aggregate Class B capital contributions. Class A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such aggregate capital contributions, and the Special Beneficiary, EFG, purchased 3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital contributions. The Trust incurred offering costs in the amount of $151,237 and professional service costs of $153,842 in connection with this offering. Subsequently, EFG transferred its Class B Interests to a special-purpose company, Equis II Corporation, a Delaware corporation. EFG also transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis II Corporation. As a result, Equis II Corporation has voting control of the Trust through its ownership of the majority of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. Equis II Corporation is controlled by EFG's President and Chief Executive Officer, Gary D. Engle. Accordingly, control of the Managing Trustee did not change as a result of the foregoing transactions (see also Note 8 to the accompanying financial statements). As described in the Prospectus for the offering of the Class B Interests, the Managing Trustee used a portion of the net cash proceeds realized from the offering of the Class B Interests to pay a one-time special cash distribution of approximately $1.47 per Class A Interest to the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid this special cash distribution, aggregating $2,960,865, to Class A Beneficiaries on August 15, 1997. 16 AFG Investment Trust C FORM 10-Q PART I. FINANCIAL INFORMATION On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997, the Trust used $2,291,567 of the net proceeds realized from the issuance of the Class B Interests to purchase 218,661 of the Class A Interests tendered as a result of the offer. The Trust intends to purchase additional Class A Interests through future offers to purchase during the Initial Redemption Period (two years following the close of the Class B offering which occurred on July 17,1997). These purchases will be funded by the remaining net proceeds of $9,566,189 realized from the issuance of the Class B Interests which are classified as Restricted Cash on the Trust's Statement of Financial Position (see also Notes 9 and 10 to the accompanying financial statements). Cash distributions paid to the Participants 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 Trust and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. Future market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, could enhance or detract from individual asset yields and the collective performance of the Trust's equipment portfolio. It is the intention of the Managing Trustee to maintain a cash distribution level that is consistent with the operating cash flows of the Trust and to optimize the long-term value of the Trust. A distribution level that is higher than the Trust's operating cash flows could compromise the Trust's working capital position, as well as its ability to refurbish or upgrade equipment in response to lessee requirements or other market circumstances. Accordingly, in order to better align monthly cash distributions with the Trust's operating cash flows, the Managing Trustee reduced the level of monthly cash distributions from an annualized rate of $2.52 per Class A Interest (the rate established and paid from the Trust's inception through September 1995) to an annualized rate of $1.26 per Class A Interest commencing in October 1995. In October 1996, the Managing Trustee increased the annualized distribution rate to $1.64 per Class A Interest and has sustained this distribution rate through the first quarter of 1998. For the Class B Beneficiaries, the Managing Trustee established and paid, from the Trust, an annualized distribution of $0.66 per Class B Interest commencing July 18, 1997. Future distributions, with respect to Class B Interests, will be subordinate to certain distributions with respect to Class A Interests. Cash distributions to the Managing Trustee, the Special Beneficiary, and the Beneficiaries are declared and generally paid within fifteen days following the end of each month. The payment of such distributions is presented as a component of financing activities. For the three months ended March 31, 1998, the Trust declared total cash distributions of $1,355,400. The Beneficiaries were allocated $1,230,026 ($733,969 for Class A Beneficiaries and $496,057 for Class B Beneficiaries); the Special Beneficiary was allocated $111,820; and the Managing Trustee was allocated $13,554. The nature of the Trust's principal cash flows gradually will shift from rental receipts to equipment sale proceeds as the Trust matures. As this occurs, the Trust's cash flows will become more volatile in that certain of the Trust's equipment leases will be renewed and certain of its assets will be sold. In some cases, the Trust may be required to expend funds to refurbish or otherwise improve the equipment being remarketed in order to make it more desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to monitor and manage these events to maximize the residual value of the Trust's equipment and will consider these factors, in addition to the collection of contractual rents, the retirement of scheduled indebtedness and the Trust's future working capital and equipment requirements, in establishing future cash distribution rates. Ultimately, the Beneficiaries should expect that cash distribution rates will fluctuate over the long term as a result of future remarketing activities. 17 AFG Investment Trust C FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings Response: Refer to Note 7 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: On May 5, 1998, the Trust filed a definitive Solicitation Statement with the United States Securities and Exchange Commission in connection with the solicitation by the Trust of the consent of the Beneficiaries to a proposed amendment to the Second Amended and Restated Declaration of Trust. The Solicitation Statement and accompanying Consent of Beneficiary were mailed to all of the Beneficiaries of the Trust on May 6, 1998. Refer to Note 10 to the financial statements herein. Item 5. Other Information Response: None Item 6(a). Exhibits Response: None Item 6(b). Reports on Form 8-K Response: None 18 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AFG Investment Trust C By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee of the Registrant. By: /s/ Michael J. Butterfield -------------------------- Michael J. Butterfield Treasurer of AFG ASIT Corporation (Duly Authorized Officer and Principal Accounting Officer) Date: May 15, 1998 -------------------------- By: /s/ Gary M. Romano --------------------------- Gary M. Romano Clerk of AFG ASIT Corporation (Duly Authorized Officer and Principal Financial Officer) Date: May 15, 1998 -------------------------- 19 EX-27 2 EXHIBIT 27
5 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 21,896,646 0 1,212,700 0 0 23,109,346 107,695,973 48,775,793 82,029,526 1,085,531 38,467,220 0 0 0 42,476,775 82,029,526 0 6,649,964 0 0 3,131,994 0 844,967 2,673,003 0 2,673,003 0 0 0 2,673,003 0 0
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