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, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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.
Yes No
1
AFG INVESTMENT TRUST C
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2001 and December 31, 2000 3
Statement of Operations
for the three and six months ended June 30, 2001 and 2000 4
Statement of Changes in Participants' Capital
for the six months ended June 30, 2001 and 2000 5
Statement of Cash Flows
for the six months ended June 30, 2001 and 2000 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
PART II. OTHER INFORMATION:
Item 1 - 6 26
2
AFG INVESTMENT TRUST C
STATEMENT OF FINANCIAL POSITION
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
June 30, December 31,
2001 2000
ASSETS
Cash and cash equivalents $ 1,458,193 $ 8,848,816
Rents receivable 104,616 257,399
Accounts receivable - affiliate 135,070 424,853
Guarantee fee receivable 180,536 126,000
Interest receivable 21,794 8,930
Loan receivable - Kettle Valley 77,059 77,059
Interest in Kettle Valley 3,773,820 4,315,263
Interest in EFG Kirkwood 4,628,726 3,803,949
Interest in MILPI 7,827,353 408,000
Investments - other 237,882 238,382
Other assets 584,047 478,793
Equipment at cost, net of accumulated depreciation
of $20,393,771 and $20,018,229 at June 30, 2001
and December 31, 2000, respectively 31,388,195 33,364,106
------------ --------------
Total assets $50,417,291 $ 52,351,550
============ ==============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $24,128,362 $ 26,220,794
Accrued interest 344,439 344,871
Accrued liabilities 84,845 284,691
Accrued liabilities - affiliates 404,193 47,835
Deferred rental income 25,164 29,882
Other liabilities 1,596,071 1,524,803
------------ --------------
Total liabilities 26,583,074 28,452,876
------------ --------------
Participants' capital:
Managing Trustee - 23,386
Special Beneficiary - 192,938
Class A Beneficiary Interests (1,787,153 Interests;
initial purchase price of $25 each) 26,172,584 25,570,027
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) - 450,690
Treasury Interests (223,861 Class A Interests at Cost) (2,338,367) (2,338,367)
------------ --------------
Total participants' capital 23,834,217 23,898,674
------------ --------------
Total liabilities and participants' capital $50,417,291 $ 52,351,550
============ ==============
The accompanying notes are an integral part of these financial statements.
3
AFG INVESTMENT TRUST C
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
INCOME
Lease revenue $ 1,642,867 $2,035,590 $3,250,361 $4,180,687
Interest income 35,069 152,309 103,986 338,232
Gain on sale of equipment 22,159 124,130 113,999 351,990
Gain on sale of investment securities - - - 86,079
Other income 55,089 - 85,136 206,329
------------ ---------- ----------- ----------
Total income 1,755,184 2,312,029 3,553,482 5,163,317
------------ ---------- ----------- ----------
EXPENSES
Depreciation and amortization 981,586 1,124,249 1,964,149 2,257,027
Interest expense 551,999 641,209 1,115,177 1,311,046
Management fees - affiliate 123,910 112,660 216,721 229,504
Operating expenses - affiliate 313,985 92,046 748,184 197,586
------------ ---------- ----------- ----------
Total expenses 1,971,480 1,970,164 4,044,231 3,995,163
------------ ---------- ----------- ----------
EQUITY INTERESTS
Equity loss from Kettle Valley (449,031) - (508,543) -
Equity income (loss) from EFG Kirkwood (538,507) - 824,777 -
Equity income from MILPI 71,679 - 110,058 -
------------ ---------- ----------- ----------
Total income (loss) from equity interests (915,859) - 426,292 -
------------ ---------- ----------- ----------
Net income (loss) $(1,132,155) $ 341,865 $ (64,457) $1,168,154
============ ========== =========== ==========
Net income (loss)
per Class A Beneficiary Interest $ (0.09) $ 0.14 $ 0.34 $ 0.31
============ ========== =========== ==========
per Class B Beneficiary Interest $ (0.22) $ 0.02 $ (0.15) $ 0.12
============ ========== =========== ==========
Cash distributions declared
per Class A Beneficiary Interest $ -- $ -- $ -- $ --
============ ========== =========== ==========
per Class B Beneficiary Interest $ -- $ -- $ -- $ --
============ ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
4
AFG INVESTMENT TRUST C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Managing Special Class A Beneficiaries Class B Beneficiaries
Trustee Beneficiary
Amount Amount Interests Amount Interests Amount
Balance at December 31, 2000 $ 23,386 $ 192,938 1,787,153 $ 25,570,027 3,024,740 $ 450,690
Net income (loss) (23,386) (192,938) - 602,557 - (450,690)
---------- ------------- --------------------- ---------------------- --------- ----------
Balance at June 30, 2001 $ - $ - 1,787,153 $ 26,172,584 3,024,740 $ -
========== ============= ===================== ====================== ========= ==========
Treasury
Interests Total
Balance at December 31, 2000 $(2,338,367) $23,898,674
Net income (loss) - (64,457)
------------ ------------
Balance at June 30, 2001 $(2,338,367) $23,834,217
============ ============
The accompanying notes are an integral part of these financial statements.
5
AFG INVESTMENT TRUST C
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (64,457) $ 1,168,154
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,964,149 2,257,027
Accretion of bond discount - (4,470)
Gain on sale of equipment (113,999) (351,990)
Gain on sale of investment securities - (86,079)
Income from equity interests (426,292) -
Changes in assets and liabilities:
Rents receivable 152,783 (66,420)
Accounts receivable - affiliate 289,783 731,609
Accounts receivable - other - (30,929)
Guarantee fee receivable (54,536) -
Interest receivable (12,864) -
Other assets (105,254) -
Accrued interest (432) 136,823
Accrued liabilities (199,846) 7,000
Accrued liabilities - affiliates 101,358 (5,394)
Deferred rental income (4,718) (284,120)
Other liabilities 71,268 -
------------ -------------
Net cash provided by operating activities 1,596,943 3,471,211
------------ -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 174,150 401,400
Investments - other 500 (72,000)
Interest in EFG Kirkwood - (620,750)
Interest in MILPI (7,069,784) -
Proceeds from sale of investment securities - 214,608
------------ -------------
Net cash used in investing activities (6,895,134) (76,742)
------------ -------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 471,032 -
Principal payments - notes payable (2,563,464) (1,815,472)
Distributions paid - (15,200,000)
------------ -------------
Net cash used in financing activities (2,092,432) (17,015,472)
------------ -------------
Net decrease in cash and cash equivalents (7,390,623) (13,621,003)
Cash and cash equivalents at beginning of period 8,848,816 22,923,967
------------ -------------
Cash and cash equivalents at end of period $ 1,458,193 $ 9,302,964
============ =============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 1,115,609 $ 1,174,223
============ =============
See Note 7 to the financial statements regarding the Trust's acquisition of
interests in MILPI during the six months ended June 30, 2001.
The accompanying notes are an integral part of these financial statements.
6
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
accounting principles generally accepted in the United States for interim
financial reporting 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 accounting principles generally accepted
in the United States for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein,
there has been no material change to the information presented in the footnotes
to the 2000 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, 2001 and December 31, 2000 and results of operations for
the three and six months ended June 30, 2001 and 2000 have been made and are
reflected. Operating results for the six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the entire year.
Certain amounts previously reported in the December 31, 2000 financial
statements have been reclassified to conform to the June 30, 2001 presentation.
NOTE 2 - CASH EQUIVALENTS AND INVESTMENT SECURITIES
- ----------------------------------------------------------
AFG Investment Trust C (the "Trust") considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Investment securities consisted of equity securities and debt securities that
were classified as available-for-sale. Available-for-sale securities were
carried at fair value, with unrealized gains and losses reported as a separate
component of participants' capital. The amortized cost of debt securities was
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in interest income on the
accompanying Statement of Operations.
At June 30, 2001, the Trust had $1,358,974 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 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 noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of $12,859,733 are due as follows:
For the year ending June 30, 2002 $ 5,599,567
2003 5,250,380
2004 1,883,088
2005 126,698
-----------
. Total $12,859,733
===========
7
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 2001
(UNAUDITED)
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the three months ended June 30, 2001 and its share of
the maintenance payment was $35,440, which was accrued as a maintenance
obligation at June 30, 2001. Coincident with the termination of the Reno lease,
the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of
four years. The Reno Programs will receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Trust at June 30, 2001.
Remaining Lease Term (Months), as used below, represents the number of months
remaining from June 30, 2001 under contracted lease terms and is presented as a
range when more than one lease agreement is contained in the stated equipment
category. A Remaining Lease Term equal to zero reflects equipment either held
for sale or re-lease or being leased on a month-to-month basis. 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 30-48 $ 32,134,911
Manufacturing 0-26 9,053,648
Locomotives 33 4,574,489
Materials handling 0-20 3,216,678
Computer and peripherals 0-5 1,716,673
Construction and mining 0-6 1,085,567
-------------
Total equipment cost . 51,781,966
Accumulated depreciation . (20,393,771)
-------------
Equipment, net of accumulated depreciation . $ 31,388,195
=============
At June 30, 2001, the Trust's equipment portfolio included equipment having a
proportionate original cost of approximately $38,342,000, representing
approximately 74% 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
$44,277,000 and a net book value of approximately $30,967,000 at June 30, 2001
(see Note 9).
At June 30, 2001, the cost and net book value of equipment held for sale or
re-lease was approximately $1,788,000 and $4,000, respectively. The Managing
Trustee is actively seeking the sale or re-lease of all equipment not on lease.
In addition, the summary above includes equipment being leased on a
month-to-month basis.
8
- ------
NOTE 5 - INTEREST IN KETTLE VALLEY
- ----------------------------------------
On March 1, 1999, the Trust and an affiliated trust (collectively, the
"Buyers") formed EFG Kettle Development LLC, a Delaware limited liability
company, for the purpose of acquiring a 49.9% indirect ownership interest (the
"Interest") in a real estate development in Kelowna, British Columbia in Canada
called Kettle Valley. EFG Kettle Development LLC, upon receiving the Buyers'
contributions for their membership interests, purchased the Interest from a
special purpose company ("SPC") whose subsidiaries own a 99.9% limited
partnership interest in Kettle Valley Development Limited Partnership ("KVD
LP"). The SPC and its subsidiaries were established by the seller, in part, for
income tax purposes and have no business interests other than the development of
Kettle Valley. KVD LP is a Canadian Partnership that owns the property,
consisting of approximately 280 acres of land. The project is zoned for 1,120
residential units in addition to commercial space. To date, 97 residential units
have been constructed and 10 are under construction, all of which have been
sold. The seller is an unaffiliated third-party company and has retained the
remaining 50.1% ownership interest in the SPC. A newly organized Canadian
affiliate of EFG replaced the original general partner of KVD LP on March 1,
1999.
The Trust's ownership share in EFG Kettle Development LLC is 50.604% and had a
cost of $4,472,129, including a 1% acquisition fee of $44,729 paid to EFG. The
acquisition was funded with cash of $3,139,648 and a non-recourse note for
$1,332,481. The note bears interest at an annualized rate of 7.5% and will be
fully amortized over 34 months commencing April 1, 1999. The note is secured by
the Trust's interest in EFG Kettle Development LLC. The Trust's cost basis in
this joint venture was approximately $658,000 greater than its equity interest
in the underlying net assets at December 31, 1999. This difference is being
amortized over a period of 10 years beginning January 1, 2000. The amount
amortized is included as an offset to Interest in Kettle Valley and was $32,900
for each of the six months ended June 30, 2001 and 2000.
The Trust accounts for its interest in Kettle Valley using the equity method of
accounting. Under the equity method of accounting, the Trust's interest is (i)
increased (decreased) to reflect the Trust's share of income (loss) of the joint
venture and (ii) decreased to reflect any distributions the Trust received from
the joint venture. The Trust's interest was decreased by $449,031 and $508,543,
respectively, during the three and six months ended June 30, 2001, reflecting
its share of loss from Kettle Valley.
In addition, the seller purchased a residual sharing interest in a Boeing
767-300 aircraft owned by the Buyers and leased to Scandinavian Airlines System
("SAS"). The seller paid $3,013,206 to the Buyers ($1,524,803, or 50.604% to the
Trust) for the residual interest, which is subordinate to certain preferred
payments to be made to the Buyers in connection with the aircraft. Payment of
the residual interest is due only to the extent that the Trust receives net
residual proceeds from the aircraft. The residual interest is non-recourse to
the Buyers and is reflected as Other Liabilities on the accompanying Statement
of Financial Position at both June 30, 2001 and December 31, 2000.
NOTE 6 - INTEREST IN EFG KIRKWOOD
- ---------------------------------------
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and Semele Group Inc. ("Semele") formed a joint venture, EFG Kirkwood
LLC ("EFG Kirkwood"), for the purpose of acquiring preferred and common stock
interests in Kirkwood Associates Inc. ("KAI"). The Trusts purchased Class A
membership interests in EFG Kirkwood and Semele purchased Class B membership
interests in EFG Kirkwood. Generally, the Class A interest holders are entitled
to certain preferred returns prior to distribution payments to the Class B
interest holder. The Trusts collectively own 100% of the Class A membership
interests in EFG Kirkwood and Semele owns 100% of the Class B membership
interests. The Trusts' interests in EFG Kirkwood constitute 50% of the voting
securities of that entity under the operating agreement for the LLC, which gives
equal voting rights to Class A and Class B membership interests. The Managing
Trustee is the manager of EFG Kirkwood.
9
On April 30, 2000, KAI's ownership interests in certain assets and substantially
all of its liabilities were transferred to Mountain Resort Holdings LLC
("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in
KAI's common and preferred stock for corresponding pro-rata membership interests
in Mountain Resort. EFG Kirkwood holds approximately 37.9% of the membership
interests in Mountain Resort. Mountain Resort, through four wholly owned
subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort
located in northern California, a public utility that services the local
community, and land that is held for residential and commercial development. The
Trust holds a 37.2% membership interest in EFG Kirkwood and correspondingly
holds 40% of EFG Kirkwood's Class A voting rights.
Subsequent to making its ownership interest in Mountain Resort, EFG Kirkwood
acquired 50% of the membership interests in Mountain Springs Resorts LLC
("Mountain Springs"). Mountain Springs, through a wholly owned subsidiary, owns
80% of the common stock and 100% of the Class B Preferred stock in an entity
that owns the Purgatory Ski resort in Durango, Colorado.
The Trust's ownership interest in EFG Kirkwood had an original cost of
$3,994,150; including a 1% acquisition fee of $39,546 paid to EFG. The Trust's
ownership interest in EFG Kirkwood is accounted for on the equity method and the
Trust recorded a loss of $538,507 and income of $824,777, respectively, for the
three and six months ended June 30, 2001, representing its pro-rata share of the
net income (loss) of EFG Kirkwood.
NOTE 7 - INTEREST IN MILPI
- -------------------------------
In December 2000, the Trust and three affiliated Trusts (collectively, the
"Trusts") formed MILPI Holdings, LLC ("MILPI"), which formed MILPI Acquisition
Corp. ("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts
collectively paid $1.2 million for their membership interests in MILPI and MILPI
purchased the shares of MILPI Acquisition for an aggregate purchase price of
$1.2 million at December 31, 2000. MILPI Acquisition entered into a definitive
agreement (the "Agreement") with PLM International, Inc. ("PLM"), an equipment
leasing and asset management company, for the purpose of acquiring up to 100% of
the outstanding common stock of PLM, for an approximate purchase price of up to
$27 million. In connection with the acquisition, on December 29, 2000, MILPI
Acquisition commenced a tender offer to purchase any and all of PLM's
outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of the PLM common stock in February 2001 for a total purchase price of
approximately $21.7 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition will merge into PLM, with PLM being the surviving entity. PLM filed
a proxy statement with the Securities and Exchange Commission ("SEC") on
February 9, 2001 for a special meeting of its shareholders to vote on the merger
proposal. Because MILPI Acquisition owns approximately 83% of the PLM common
stock, its vote alone would be sufficient to assure the approval of the merger
proposal at the special meeting and MILPI has agreed to vote all of its shares
in favor of the merger proposal. Once the merger is approved, the Trusts would
then jointly own 100% of the outstanding common stock of PLM through their 100%
interest in MILPI. However, completion of the SEC staff's review of the proxy
statement for approval of the merger is dependent in part on the satisfactory
resolution of the Trust's discussions with the staff regarding its possible
status as an inadvertent investment company. If the merger is approved, the
Trusts may be required to provide an additional $4.4 million to acquire the
remaining approximate 17% of PLM's outstanding common stock.
10
The Trust has a 34% membership interest in MILPI having an original cost of
$7,732,783. The cost of the Trust's interest in MILPI reflects MILPI
Acquisition's cost of acquiring the common stock of PLM, including the amount
paid for the shares tendered of $7,403,746, a 1% acquisition fee paid to a
wholly-owned subsidiary of Semele of $74,037 and capitalized transaction costs
of $255,000. The capitalized transaction costs will be reimbursed by the Trust
to MILPI and are included in Accrued Liabilities - Affiliates on the
accompanying Statement of Financial Position at June 30, 2001. During the three
months ended June 30, 2001, the Trusts obtained additional information to refine
the estimate of fair values the underlying net assets of MILPI at February 9,
2001. The Trust's cost basis in its interest in MILPI was approximately $356,000
greater than its equity interest in the underlying net assets of MILPI at
February 9, 2001. This difference is being amortized over a period of 7 years
beginning March 1, 2001. The amount amortized is included as an offset to
Interest in MILPI and was $15,489 during the six months ended June 30, 2001.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne
who are a director and an officer of the Trust, respectively, are also officers
and directors of, and own significant stock in, Semele. Mr. Engle and Mr. Coyne
are officers and directors of MILPI Acquisition.
The Trust's ownership interest in MILPI is accounted for on the equity method
and the Trust recorded income of $71,679 and $110,058, respectively, during the
three and six months ended June 30, 2001, representing its pro rata share of the
income of MILPI.
NOTE 8 - 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 the six months ended June 30, 2001 and 2000, which
were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
2001 2000
---------- --------
Acquisition fees $ 74,037 $ 6,145
Management fees 216,721 229,504
Administrative charges 81,834 96,131
Reimbursable operating expenses
due to third parties 666,350 101,455
---------- --------
Total $1,038,942 $433,235
========== ========
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 June 30,
2001, the Trust was owed $135,070 by EFG for such funds and the interest
thereon. These funds were remitted to the Trust in July 2001.
11
- ------
NOTE 9 - NOTES PAYABLE
- --------------------------
Notes payable at June 30, 2001 consisted of installment notes of $24,128,362
payable to banks and institutional lenders. The notes bear interest rates
ranging between 6.76% and 9.176%, except for two notes, which bear fluctuating
interest rates. All of the installment notes are non-recourse and are
collateralized by the Trust's equipment and assignment of the related lease
payments, except for one note in the amount of $219,914, which is collateralized
by the Trust's ownership interests in EFG Kettle Development LLC (see Note 5).
Generally, the equipment-related installments notes will be fully amortized by
noncancellable rents. However, the Trust has a balloon payment obligation of
$16,193,280 at the expiration of the lease term related to its interest in an
aircraft leased to SAS in December 2003.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 3 -
Revenue Recognition). The Reno Programs executed a debt agreement with a new
lender collateralized by the aircraft and assignment of the Aerovias de Mexico,
S.A. de C.V. lease payments. The Reno Programs received debt proceeds of
$5,316,482, of which the Trust's share was $471,032. The Trust used the new
debt proceeds and a portion of certain other receipts from Reno to repay the
outstanding balance of the existing indebtedness related to the aircraft of
$493,137 and accrued interest and fees of $7,347. The new indebtedness bears a
fluctuating interest rate based on LIBOR (approximately 4.73% at June 30, 2001)
plus 2.3%.
Management believes that the carrying amount of the notes payable approximates
fair value at June 30, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the note are as follows:
For the year ending June 30, 2002 $ 3,365,849
2003 3,282,331
2004 17,357,827
2005 122,355
-----------
. Total $24,128,362
===========
NOTE 10 - GUARANTEE AGREEMENT
- ---------------------------------
On March 8, 2000, the Trust and three affiliated trusts (collectively, the
"Trusts") entered into a guarantee agreement whereby the Trusts, jointly and
severally, have guaranteed the payment obligations under a master lease
agreement between Echelon Commercial LLC, a newly-formed Delaware company that
is controlled by Gary D. Engle, President and Chief Executive Officer of EFG, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor ("Heller"). The lease payments of Echelon Commercial LLC to Heller are
supported by lease payments to Echelon Commercial LLC from various sub-lessees
who are parties to commercial and residential lease agreements under the master
lease agreement. The guarantee of lease /payments by the Trusts was capped at a
maximum of $34,500,000, excluding expenses that could result in the event that
Echelon Commercial LLC experiences a default under the terms of the master lease
agreement.
12
As a result of principal reductions on the average guarantee amount, an amended
and restated agreement was entered into in December 2000, which reduced the
guaranteed amount among the Trusts. At June 30, 2001, the Trust was responsible
for 35.08% of the current guaranteed amount of $7,000,000, or $2,455,600. In
consideration for its guarantee, the Trust will receive an annualized fee equal
to 4% of the average guarantee amount outstanding during each quarterly period.
Accrued but unpaid fees will accrue and compound interest quarterly at an
annualized interest rate of 7.5% until paid. The Trust will receive minimum
aggregate fees for its guarantee of not less than $350,800, excluding interest.
During the six months ended June 30, 2001, the Trust recognized income of
$60,449 related to the guarantee fee. During the six months ended June 30,
2000, the Trust received an upfront cash fee of $175,400 and recognized total
income of $206,329 from the guarantee. The guarantee fee is reflected as Other
Income on the accompanying Statement of Operations.
NOTE 11 - CONTINGENCIES
- --------------------------
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interest in EFG Kirkwood and Kettle Valley. The Trust does not intend to engage
in investment activities in a manner or to an extent that would require the
Trust to register as an investment company under the Act. However, it is
possible that the Trust may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the Act. The Managing Trustee
is engaged in discussions with the staff of the Securities and Exchange
Commission regarding whether or not the Trust may be an inadvertent investment
company by virtue of its recent acquisition activities. The Managing Trustee has
consulted counsel and believes that the Trust is not an investment company. If
the Trust was determined to be an investment company, its business would be
adversely affected. The Act, among other things, prohibits an unregistered
investment company from offering securities for sale or engaging in any business
or interstate commerce. If necessary, the Trust intends to avoid being deemed
an investment company by disposing of or acquiring certain assets that it might
not otherwise dispose of or acquire.
NOTE 12 - OPERATING SEGMENTS
- --------------------------------
The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment lease portfolio and the Trust's
interest in MILPI. MILPI owns MILPI Acquisition, which owns the majority
interest in PLM, an equipment leasing and asset management company (see Note 7).
The Real Estate segment includes the ownership, management and development of
commercial properties, recreational properties, condominiums, interval ownership
units, townhomes, single family homes and land sales through the Trust's
ownership interests in EFG Kirkwood and Kettle Valley.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
13
Segment information for the three and six months ended June 30, 2001 and 2000 is
summarized below.
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
Total Income:
Equipment leasing $ 1,826,863 $2,312,029 $3,663,540 $5,163,317
Real estate (987,538) - 316,234 -
------------ ---------- ----------- ----------
Total $ 839,325 $2,312,029 $3,979,774 $5,163,317
============ ========== =========== ==========
Operating Expenses, Management Fees
And Other Expenses:
Equipment leasing $ 387,062 $ 184,841 $ 893,034 $ 388,476
Real estate 50,833 19,865 71,871 38, 614
------------ ---------- ----------- ----------
Total $ 437,895 $ 204,706 $ 964,905 $ 427,090
============ ========== =========== ==========
Interest Expense:
Equipment leasing $ 546,264 $ 626,202 $1,101,323 $1,282,590
Real estate 5,735 15,007 13,854 28,456
------------ ---------- ----------- ----------
Total $ 551,999 $ 641,209 $1,115,177 $1,311,046
============ ========== =========== ==========
Depreciation and Amortization Expense:
Equipment leasing $ 965,136 $1,107,799 $1,931,249 $2,224,127
Real estate 16,450 16,450 32,900 32,900
------------ ---------- ----------- ----------
Total $ 981,586 $1,124,249 $1,964,149 $2,257,027
============ ========== =========== ==========
Net Income (Loss) $(1,132,155) $ 341,865 $ (64,457) $1,168,154
============ ========== =========== ==========
Three and six months ended June 30, 2001 compared to the three and six months
- --------------------------------------------------------------------------------
ended June 30, 2000:
- -----------------------
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the three and six months ended June 30, 2001, the Trust recognized lease
revenue of $1,642,867 and $3,250,361, respectively, compared to $2,035,590 and
$4,180,687, respectively, for same periods in 2000. The decrease in lease
revenue from 2000 to 2001 resulted primarily from lease term expirations and the
sale of equipment. The level of lease revenue to be recognized by the Trust in
the future may be impacted by future reinvestment; however, the extent of such
impact cannot be determined at this time. Future lease term expirations and
equipment sales will result in a reduction in the lease revenue recognized.
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 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.
14
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the three months ended June 30, 2001 and its share of
the maintenance payment was $35,440, which was accrued as a maintenance
obligation at June 30, 2001. Coincident with the termination of the Reno lease,
the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of
four years. The Reno Programs will receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864.
Interest income for the three and six months ended June 30, 2001 was $35,069 and
$103,986, respectively, compared to $152,309 and $338,232, respectively, for the
same periods in 2000. Interest income is typically generated from the temporary
investment of rental receipts and equipment sales proceeds in short-term
instruments. 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, 2001, the Trust sold equipment
having a net book value of $55,160 and $60,151, respectively, to existing
lessees and third parties. These sales resulted in a net gain, for financial
statement purposes, of $22,159 and $113,999, respectively.
During the three and six month periods ended June 30, 2000, the Trust sold
equipment having a net book value of $6,270 and $49,410, respectively to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $124,130 and $351,990, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a 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 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 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.
During the six months ended June 30, 2000, the Trust sold investment securities
having a book value of $128,529, resulting in a gain, for financial statement
purposes, of $86,079.
15
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor. (See Note 10) In consideration for its guarantee, the Trust will
receive an annualized fee equal to 4% of the average guarantee amount
outstanding during each quarterly period. Accrued but unpaid fees will accrue
and compound interest quarterly at an annualized interest rate of 7.5% until
paid. During the six months ended June 30, 2001, the Trust recognized income of
$60,449 related to the guarantee fee. During the six months ended June 30,
2000, the Trust received an upfront cash fee of $175,400 and recognized total
income of $206,329 from the guarantee. The guarantee fee is reflected as Other
Income on the accompanying Statement of Operations.
Depreciation expense for the three and six month periods ended June 30, 2001 was
$952,413 and $1,915,760 compared to $1,107,799 and $2,224,127, respectively, for
the same periods in 2000. 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 for the three and six month periods ended June 30, 2001 was
$546,264 and $1,101,323, respectively, compared to $626,202 and $1,282,590 for
the periods in 2000. Interest expense will decrease in the future as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt.
Management fees related to equipment leasing were $-----73,077 and $144,850 for
the three and six month periods ended June 30, 2001 and $92,795 and $190,890,
respectively, for the same periods in 2000. 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, subject to certain limitations. In addition,
management fees include a fee of 1% of the cost of the MILPI interests.
Operating expenses were $313,985 and $748,184 during the three and six month
periods ended June 30, 2001 compared to $92,046 and $197,586, respectively, for
the same periods in 2000. In 2001, operating expenses included approximately
$140,000 for ongoing legal matters and approximately $162,000 for remarketing
costs related to the re-lease of aircraft leased to SAS and Aerovias de Mexico,
S.A. de C.V.. Operating expenses also included approximately $114,000 of costs
reimbursed to EFG as a result of the successful acquisition of the PLM common
stock by MILPI Acquisition, as discussed below. In conjunction with the
acquisition of the PLM common stock, EFG became entitled to recover certain out
of pocket expenses which it had previously incurred. Other operating expenses
consist primarily of administrative charges, professional service costs, such as
audit and legal fees, as well as printing, distribution and remarketing
expenses. 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.
During the three and six months ended June 30, 2001, the Trust recorded income
of $71,679 and $110,058, respectively, from its ownership interest in MILPI.
This income represents the Trust's share of the net income of MILPI recorded
under the equity method of accounting. The Trust recorded $12,723 and $15,489,
respectively, of amortization expense for the three and six months ended June
30, 2001, which related to the goodwill recorded at the time of the acquisition
of the PLM common stock by MILPI Acquisition. (See Note 7).
16
- ------
Real Estate
- ------------
Management fees for non-equipment assets were $50,833 and $71,871, respectively,
for the three and six months ended June 30, 2001 compared to $19,865 and
$38,614, respectively, for the same periods in 2000. Management fees for
non-equipment assets, excluding cash, are 1% of such assets under management.
Interest expense on a note payable related to the Trust's acquisition of its
interest in Kettle Valley was $5,735 and $13,854, respectively, for the three
and six months ended June 30, 2001 compared to $15,007 and $28,456,
respectively, for the same periods in 2000. Interest expense will decrease in
the future as payments reduce the outstanding principal balance of the note.
For the three and six months ended June 30, 2001, the Trust recorded a loss of
$449,031 and $508,543, respectively, from its ownership interest in Kettle
Valley. This loss represents the Trust's share of the net loss of Kettle Valley
recorded under the equity method of accounting. In addition, the Trust recorded
amortization expense of $16,450 and $32,900, respectively, during the three and
six month periods ended June 30, 2001 and 2000, in connection with its interest
in Kettle Valley. (See Note 5.)
For the three and six month periods ended June 30, 2001, the Trust recorded a
loss of $538,507 and income of $824,777, respectively, from its ownership
interest in EFG Kirkwood. This income (loss) represents the Trust's share of the
net income (loss) of EFG Kirkwood recorded under the equity method of
accounting. Due to the seasonal nature of EFG Kirkwood's operations, the
financial results of the three and six months ended June 30, 2001 may not be
indicative of future periods (See Note 6).
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", (collectively the
"Statements") effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Trust will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of Statements is not anticipated to have an impact on
the Trust's financial statements. During 2002, the Trust will perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002 and has not yet determined what the effect of these
tests will be on the earnings and financial position of the Trust.
17
- ------
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 collection of the Trust's contracted rents,
the realization of residual proceeds for the Trust's equipment, the performance
of the Trust's non-equipment assets, and future economic conditions.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interest in EFG Kirkwood LLC ("EFG Kirkwood") and EFG Kettle Development LLC
("Kettle Valley"). The Trust does not intend to engage in investment activities
in a manner or to an extent that would require the Trust to register as an
investment company under the Act. However, it is possible that the Trust may
unintentionally engage in an activity or activities that may be construed to
fall within the scope of the Act. The Managing Trustee is engaged in discussions
with the staff of the Securities and Exchange Commission regarding whether or
not the Trust may be an inadvertent investment company by virtue of its recent
acquisition activities. The Managing Trustee has consulted counsel and believes
that the Trust is not an investment company. If the Trust was determined to be
an investment company, its business would be adversely affected. The Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business or interstate commerce. If
necessary, the Trust intends to avoid being deemed an investment company by
disposing of or acquiring certain assets that it might not otherwise dispose of
or acquire.
Segment Reporting
- ------------------
The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment lease portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp.
("MILPI Acquisition"), which owns the majority interest in PLM International,
Inc.("PLM"), an equipment leasing and asset management company. The Real Estate
segment includes the ownership, management and development of commercial
properties, recreational properties, condominiums, interval ownership units,
townhomes, single family homes and land sales through the Trust's ownership
interests in EFG Kirkwood and Kettle Valley.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
18
Segment information for the three and six months ended June 30, 2001 and 2000 is
summarized below.
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
Total Income:
Equipment leasing $ 1,826,863 $2,312,029 $3,663,540 $5,163,317
Real estate (987,538) - 316,234 -
------------ ---------- ----------- ----------
Total $ 839,325 $2,312,029 $3,979,774 $5,163,317
============ ========== =========== ==========
Operating Expenses, Management Fees
And Other Expenses:
Equipment leasing $ 387,062 $ 184,841 $ 893,034 $ 388,476
Real estate 50,833 19,865 71,871 38, 614
------------ ---------- ----------- ----------
Total $ 437,895 $ 204,706 $ 964,905 $ 427,090
============ ========== =========== ==========
Interest Expense:
Equipment leasing $ 546,264 $ 626,202 $1,101,323 $1,282,590
Real estate 5,735 15,007 13,854 28,456
------------ ---------- ----------- ----------
Total $ 551,999 $ 641,209 $1,115,177 $1,311,046
============ ========== =========== ==========
Depreciation and Amortization Expense:
Equipment leasing $ 965,136 $1,107,799 $1,931,249 $2,224,127
Real estate 16,450 16,450 32,900 32,900
------------ ---------- ----------- ----------
Total $ 981,586 $1,124,249 $1,964,149 $2,257,027
============ ========== =========== ==========
Net Income (Loss) $(1,132,155) $ 341,865 $ (64,457) $1,168,154
============ ========== =========== ==========
Three and six months ended June 30, 2001 compared to the three and six months
- --------------------------------------------------------------------------------
ended June 30, 2000:
- -----------------------
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the three and six months ended June 30, 2001, the Trust recognized lease
revenue of $1,642,867 and $3,250,361, respectively, compared to $2,035,590 and
$4,180,687, respectively, for same periods in 2000. The decrease in lease
revenue from 2000 to 2001 resulted primarily from lease term expirations and the
sale of equipment. The level of lease revenue to be recognized by the Trust in
the future may be impacted by future reinvestment; however, the extent of such
impact cannot be determined at this time. Future lease term expirations and
equipment sales will result in a reduction in the lease revenue recognized.
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
by owned an affiliated equipment leasing program sponsored by Equis Financial
Group Limited Partnership ("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.
19
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the three months ended June 30, 2001 and its share of
the maintenance payment was $35,440, which was accrued as a maintenance
obligation at June 30, 2001. Coincident with the termination of the Reno lease,
the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of
four years. The Reno Programs will receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864.
Interest income for the three and six months ended June 30, 2001 was $35,069 and
$103,986, respectively, compared to $152,309 and $338,232, respectively, for the
same periods in 2000. Interest income is typically generated from the temporary
investment of rental receipts and equipment sales proceeds in short-term
instruments. 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, 2001, the Trust sold equipment
having a net book value of $55,160 and $60,151, respectively, to existing
lessees and third parties. These sales resulted in a net gain, for financial
statement purposes, of $22,159 and $113,999, respectively.
During the three and six month periods ended June 30, 2000, the Trust sold
equipment having a net book value of $6,270 and $49,410, respectively to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $124,130 and $351,990, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or a 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 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 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.
During the six months ended June 30, 2000, the Trust sold investment securities
having a book value of $128,529, resulting in a gain, for financial statement
purposes, of $86,079.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor. (See Note 10 to the financial statements.) In consideration for its
guarantee, the Trust will receive an annualized fee equal to 4% of the average
guarantee amount outstanding during each quarterly period. Accrued but unpaid
fees will accrue and compound interest quarterly at an annualized interest rate
of 7.5% until paid. During the six months ended June 30, 2001, the Trust
recognized income of $60,449 related to the guarantee fee. During the six
months ended June 30, 2000, the Trust received an upfront cash fee of $175,400
and recognized total income of $206,329 from the guarantee. The guarantee fee is
reflected as Other Income on the accompanying Statement of Operations.
20
Depreciation expense for the three and six month periods ended June 30, 2001 was
$952,413 and $1,915,760 compared to $1,107,799 and $2,224,127, respectively, for
the same periods in 2000. 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 for the three and six month periods ended June 30, 2001 was
$546,264 and $1,101,323, respectively, compared to $626,202 and $1,282,590 for
the periods in 2000. Interest expense will decrease in the future as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt.
Management fees related to equipment leasing were $-----73,077 and $144,850 for
the three and six month periods ended June 30, 2001 and $92,795 and $190,890,
respectively, for the same periods in 2000. 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, subject to certain limitations. In addition,
management fees include a fee of 1% of the cost of the MILPI interests.
Operating expenses were $313,985 and $748,184 during the three and six month
periods ended June 30, 2001 compared to $92,046 and $197,586, respectively, for
the same periods in 2000. In 2001, operating expenses included approximately
$140,000 for ongoing legal matters and approximately $162,000 for remarketing
costs related to the re-lease of aircraft leased to Scandinavian Airlines System
and Aerovias de Mexico, S.A. de C.V.. Operating expenses also included
approximately $114,000 of costs reimbursed to EFG as a result of the successful
acquisition of the PLM common stock by MILPI Acquisition, as discussed below.
In conjunction with the acquisition of the PLM common stock, EFG became entitled
to recover certain out of pocket expenses which it had previously incurred.
Other operating expenses consist primarily of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. 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.
During the three and six months ended June 30, 2001, the Trust recorded income
of $71,679 and $110,058, respectively, from its ownership interest in MILPI.
This income represents the Trust's share of the net income of MILPI recorded
under the equity method of accounting. (See Note 7 to the financial
statements). The Trust recorded $12,723 and $15,489, respectively, of
amortization expense for the three and six months ended June 30, 2001, which
related to the goodwill recorded at the time of the acquisition of the PLM
common stock by MILPI Acquisition.
Real Estate
- ------------
Management fees for non-equipment assets were $50,833 and $71,871, respectively,
for the three and six months ended June 30, 2001 compared to $19,865 and
$38,614, respectively, for the same periods in 2000. Management fees for
non-equipment assets, excluding cash, are 1% of such assets under management.
Interest expense on a note payable related to the Trust's acquisition of its
interest in Kettle Valley was $5,735 and $13,854, respectively, for the three
and six months ended June 30, 2001 compared to $15,007 and $28,456,
respectively, for the same periods in 2000. Interest expense will decrease in
the future as payments reduce the outstanding principal balance of the note.
For the three and six months ended June 30, 2001, the Trust recorded a loss of
$449,031 and $508,543, respectively, from its ownership interest in Kettle
Valley. This loss represents the Trust's share of the net loss of Kettle Valley
recorded under the equity method of accounting. In addition, the Trust recorded
amortization expense of $16,450 and $32,900, respectively, during the three and
six month periods ended June 30, 2001 and 2000, in connection with its interest
in Kettle Valley. (See Note 5 to the financial statements.)
21
For the three and six month periods ended June 30, 2001, the Trust recorded a
loss of $538,507 and income of $824,777, respectively, from its ownership
interest in EFG Kirkwood. This income (loss) represents the Trust's share of the
net income (loss) of EFG Kirkwood recorded under the equity method of
accounting. Due to the seasonal nature of EFG Kirkwood's operations, the
financial results of the three and six months ended June 30, 2001 may not be
indicative of future periods (See Note 6 to the financial statements).
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Trust by its nature is a limited life entity. 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. Operating activities generated net cash inflows of $1,596,943
and $3,471,211 for the six months ended June 30, 2001 and 2000, respectively.
Future renewal, re-lease and equipment sale activities will cause a decline in
the Trust's lease revenue and corresponding sources of operating cash. Expenses
associated with rental activities, such as management fees, also will decline as
the Trust remarkets its equipment. The amount of future interest income is
expected to fluctuate as a result of changing interest rates and the level of
cash available for investment, among other factors.
At lease inception, the Trust's equipment was 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 leases will be
maintained. The credit quality of an individual lease may deteriorate after the
lease is entered into. 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.
At June 30, 2001, the Trust was due aggregate future minimum lease payments of
$12,859,733 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 $24,128,362 (see Note 9 to the financial statements).
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 becomes available for
remarketing, the cash flows of the Trust will become less predictable.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows.
In December 2000, the Trust and three affiliated Trusts (collectively, the
"Trusts") formed MILPI, which formed MILPI Acquisition, a wholly owned
subsidiary of MILPI. The Trusts collectively paid $1.2 million for their
membership interests in MILPI and MILPI purchased the shares of MILPI
Acquisition for an aggregate purchase price of $1.2 million at December 31,
2000. MILPI Acquisition entered into a definitive agreement (the "Agreement")
with PLM, an equipment leasing and asset management company, for the purpose of
acquiring up to 100% of the outstanding common stock of PLM, for an approximate
purchase price of up to $27 million. In connection with the acquisition, on
December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any
and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of the PLM common stock in February 2001 for a total purchase price of
approximately $21.7 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition will merge into PLM, with PLM being the surviving entity. PLM filed
a proxy statement with the Securities and Exchange Commission (the "SEC") on
February 9, 2001 for a special meeting of its shareholders to vote on the merger
proposal. Because MILPI Acquisition owns approximately 83% of the PLM common
stock, its vote alone would be sufficient to assure the approval of the merger
proposal at the special meeting and MILPI has agreed to vote all of its shares
in favor of the merger proposal. Once the merger is approved, the Trusts would
then jointly own 100% of the outstanding common stock of PLM through their 100%
interest in MILPI. However, completion of the SEC
22
staff's review of the proxy statement for approval of the merger is dependent in
part on the satisfactory resolution of the Trust's discussions with the staff
regarding its possible status as an inadvertent investment company. If the
merger is approved, the Trusts may be required to provide an additional $4.4
million to acquire the remaining approximate 17% of PLM's outstanding common
stock.
The Trust has a 34% membership interest in MILPI having an original cost of
$7,732,783. The cost of the Trust's interest in MILPI reflects MILPI
Acquisition's cost of acquiring the common stock of PLM, including the amount
paid for the shares tendered of $7,403,746, a 1% acquisition fee paid to a
wholly-owned subsidiary of Semele Group Inc. ("Semele") of $74,037 and
capitalized transaction costs of $255,000. The capitalized transaction costs
will be reimbursed by the Trust to MILPI and are included in Accrued Liabilities
- - Affiliates on the accompanying Statement of Financial Position at June 30,
2001. During the three months ended June 30, 2001, the Trusts obtained
additional information to refine the estimate of fair values the underlying net
assets of MILPI at February 9, 2001. The Trust's cost basis in its interest in
MILPI was approximately $356,000 greater than its equity interest in the
underlying net assets of MILPI at February 9, 2001. This difference is being
amortized over a period of 7 years beginning March 1, 2001. The amount
amortized is included as an offset to Interest in MILPI and was $15,489 during
the six months ended June 30, 2001. The Trust's ownership interest in MILPI is
accounted for on the equity method, as discussed above.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr.
Coyne, who are a director and an officer of the Trust, respectively, are also
officers and directors of, and own significant stock in, Semele. Mr. Engle and
Mr. Coyne are officers and directors of MILPI Acquisition.
During the six months ended June 30, 2000, the Trust expended $620,750 for its
interest in EFG Kirkwood (see Note 6 to the financial statements) and $72,000
for other investments. During the six months ended June 30, 2001 and 2000, the
Trust realized net cash proceeds from equipment disposals of $174,150 and
$401,400, respectively. Future inflows of cash from equipment 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 also realized proceeds from the sale of investment securities of $214,608
during the six months ended June 30, 2000.
The Trust has a 50.6% ownership interest in Kettle Valley. Kettle Valley is a
joint venture among the Trust and an affiliated trust, formed for the purpose of
acquiring a 49.9% indirect ownership interest in a real estate development in
Kelowna, British Columbia in Canada. AFG ASIT Corporation manages Kettle Valley
and the development is managed by a Canadian affiliate of EFG (See Note 5 to the
financial statements).
The Trust also has an ownership interest in EFG Kirkwood. EFG Kirkwood is a
joint venture among the Trust, certain affiliated Trusts and Semele and is
managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures,
Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC
("Mountain Springs"). (See Note 6 to the financial statements.)
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development. Mountain Springs, through a wholly owned subsidiary,
owns a controlling interest in the Purgatory Ski resort in Durango, Colorado.
The risks generally associated with real estate include, without limitation, the
existence of senior financing or other liens on the properties, general or local
economic conditions, property values, the sale of properties, interest rates,
real estate taxes, other operating expenses, the supply and demand for
properties involved, zoning and environmental laws and regulations, and other
governmental rules.
The Trust's involvement in real estate development also introduces financial
risks, including the potential need to borrow funds to develop the real estate
projects. While the Trust's management presently does not foresee any unusual
risks in this regard, it is possible that factors beyond the control of the
Trust, its affiliates and joint venture partners, such as a tightening credit
environment, could limit or reduce its ability to secure adequate credit
facilities at a time when they might be needed in the future. Alternatively, the
Trust could establish joint ventures with other parties to share participation
in its development projects.
23
Ski resorts are subject to a number of risks, including weather-related risks.
The ski resort business is seasonal in nature and insufficient snow during the
winter season can adversely effect the profitability of a given resort. Many
operators of ski resorts have greater resources and experience in the industry
than the Trust, its affiliates and its joint venture partners.
Recent changes in economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Trust and the residual
value of the commercial jet aircraft. Currently, all of the commercial jet
aircraft in which the Trust has a proportionate ownership interest are subject
to contracted lease agreements.
The Trust obtained long-term financing in connection with certain equipment
leases. The originations of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. At June 30, 2001,
the Trust had debt obligations outstanding totaling $24,128,362. These notes
will be partially amortized by the remaining contracted lease payments.
However, the Trust has a balloon payment obligation of $16,193,280 at the
expiration of the lease term related to its interest in an aircraft leased to
SAS in December 2003.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years (see Results of
Operations). The Reno Programs executed a debt agreement with a new lender
collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de
C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of
which the Trust's share was $471,032. The Trust used the new debt proceeds and
a portion of certain other receipts from Reno to repay the outstanding balance
of the existing indebtedness related to the aircraft of $493,137 and accrued
interest and fees of $7,347. The new indebtedness bears a fluctuating interest
rate based on LIBOR (approximately 4.73% at June 30, 2001) plus 2.3% and
principal is amortized monthly.
The Managing Trustee evaluated and pursued a number of potential new
acquisitions, several of which the Managing Trustee concluded had market returns
that it believed were less than adequate given the potential risks. Most
transactions involved the equipment leasing, business finance and real estate
development industries. Although the Managing Trustee intends to continue to
evaluate additional new investments, it anticipates that the Trust will be able
to fund these new investments with cash on hand or other sources, such as the
proceeds from future asset sales or refinancing and new indebtedness. As a
result, the Trust declared a special cash distribution during the fourth quarter
of 1999 to the Trust Beneficiaries totaling $15,200,000, which was paid in
January 2000.
After the special distribution in January 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. Looking forward, the Managing Trustee presently does not expect
to reinstate cash distributions until expiration of the Trust's reinvestment
period in December 2002; however, the Managing Trustee periodically will review
and consider other one-time distributions. In addition to maintaining sale
proceeds for reinvestment, the Managing Trustee expects that the Trust will
retain cash from operations to fully retire its indebtedness and for the
continued maintenance of the Trust's assets. The Managing Trustee believes that
this change in policy is in the best interests of the Trust over the long term.
Historically, cash distributions to the Managing Trustee, the Special
Beneficiary and the Beneficiaries had been declared and generally paid within 45
days following the end of each calendar month. No cash distributions were
declared for either of the six month periods ended June 30, 2001 or 2000. In any
given year, it is possible that Beneficiaries will be allocated taxable income
in excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Beneficiaries adequate to cover any tax
obligation. The Trust Agreement requires that sufficient distributions be made
to enable the Beneficiaries to pay any state and federal income taxes arising
from any sale or refinancing transactions, subject to certain limitations.
24
Cash distributions when paid to the Participants generally consist of both a
return of and a return on capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Trust and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, the residual value realized for each asset at its
disposal date, and the performance of the Trust's non-equipment assets. Future
market conditions, technological changes, the ability of EFG to manage and
remarket the equipment, and many other events and circumstances, could enhance
or detract from individual yields and the collective performance of the Trust's
equipment portfolio. The ability of the Managing Trustee and its affiliates to
develop and profitably manage its real estate assets and its interest in MILPI
will impact the Trust's overall performance.
In the future, the nature of the Trust's operations and principal cash flows
will shift from rental receipts to equipment sale proceeds. As this occurs, the
Trust's cash flows resulting from equipment investments may 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 in order to maximize the residual value of the Trust's equipment and will
consider these factors, in addition to new investment activities, the collection
of contractual rents, the retirement of scheduled indebtedness, and the Trust's
future working capital requirements, in establishing the amount and timing of
future cash distributions.
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, 2000, the Managing Trustee had a negative tax capital
account balance of $165,559. No such requirement exists with respect to the
Special Beneficiary.
25
AFG INVESTMENT TRUST C
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response: None
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response:
. Exhibit 1. Lease agreement with Aerovias de Mexico, S.A. de C.V.
Item 6(b). Reports on Form 8-K
. Response: None
26
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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 Financial and Accounting Officer)
Date: August 14, 2001
-----------------
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