AFG INVESTMENT TRUST
AFG INVESTMENT TRUST C
Annual Report to the Participants, December 31, 1996
AFG Investment Trust C
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
PAGE
---------
SELECTED FINANCIAL DATA............................................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................................ 8
Statement of Financial Position at December 31, 1996 and 1995......................... 9
Statement of Operations for the years ended December 31, 1996, 1995 and 1994.......... 10
Statement of Changes in Participants' Capital for the years ended December 31, 1996,
1995 and 1994....................................................................... 11
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994.......... 12
Notes to the Financial Statements..................................................... 13-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment
Disposed............................................................................ 23
Statement of Cash and Distributable Cash From Operations, Sales and Refinancings...... 24
Schedule of Costs Reimbursed to the Managing Trustee and its Affiliates as Required by
Section 10.4 of the Amended and Restated Declaration of Trust....................... 25
-1-
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the financial statements.
For the years ended December 31, 1996, 1995, 1994 and 1993 and for the
period December 15, 1992 (commencement of operations) to December 31, 1992:
Summary of Operations 1996 1995 1994 1993 1992
- --------------------- ------------- ------------- ------------- ------------- -------------
Lease revenue........................ $ 27,695,097 $ 21,605,260 $ 19,732,736 $ 8,986,191 $ 40,491
Net income (loss).................... $ 85,636 $ 2,916,460 $ 3,566,958 $ 929,017 $ (272,423)
Per Beneficiary Interest: Net income
(loss)............................. $ 0.04 $ 1.32 $ 1.61 $ 0.57 $ (0.43)
Cash distributions................. $ 1.39 $ 2.10 $ 2.52 $ 2.62 $ 0.21
Financial Position
- ------------------
Total assets......................... $ 55,127,347 $ 68,469,022 $ 76,477,918 $ 85,794,129 $ 30,190,464
Total long-term obligations.......... $ 19,084,751 $ 29,517,713 $ 35,459,424 $ 36,455,647 $ 9,278,623
Participants' capital................ $ 35,053,486 $ 38,039,216 $ 39,776,342 $ 41,793,687 $ 14,253,184
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to the year
ended December 31, 1995 and the year ended December 31, 1995
compared to the year ended December 31, 1994
OVERVIEW
As an equipment leasing trust, AFG Investment Trust C (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 Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("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 begin to fluctuate. Ultimately, all equipment will
be sold and the Trust will be dissolved. The Trust's operations commenced in
1992.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Trust recognized lease revenue
of $27,695,097 compared to $21,605,260 and $19,732,736 for the years ended
December 31, 1995 and 1994, respectively. The increase in lease revenue from
1995 to 1996 is due primarily to the recognition of early termination
proceeds received in connection with the Trust's sale of its interest in a
vessel, discussed below. The increase in lease revenue from 1994 to 1995 was
due to the acquisition of additional equipment in 1994 and 1995, including
the effects of reinvestment. The Trust's original equipment acquisition and
leveraging processes were completed in 1995. In the near-term, lease revenue
is expected to increase, due to reinvestment of available proceeds in other
equipment, including cash proceeds realized from the Trust's sale of its
interest in a Boeing 747-SP aircraft leased to United Air Lines, Inc. (the
"United Aircraft") in February 1996 and the net proceeds resulting from the
Trust's sale of its interest in a vessel to the lessee (see below). Over
time, the level of lease revenue will decline due to the expiration of the
Trust's primary lease term agreements. The Trust also earns interest income
from temporary investments of rental receipts and equipment sales proceeds in
short-term instruments.
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.
On February 5, 1996, the Trust concluded the sale of its interest in a
Boeing 747-SP to the lessee, United Air Lines, Inc., ("United"). The Trust
recognized a net loss of $1,313,122 in connection with this transaction, of
which $880,717 was recognized as Write-Down of Equipment in 1995. The
remainder of $432,405 was recognized as a loss on sale of equipment on the
accompanying financial statements for the year ended December 31, 1996. In
addition to lease rents, the Trust received net sale proceeds of $4,048,779
from United for the aircraft. The Trust plans to have completed the
reinvestment of all such proceeds in other equipment by December 31, 1997, a
portion of which was completed in March 1996 through the acquisition of an
8.86% ownership interest in an aircraft (the "Reno Aircraft") at an aggregate
cost of $1,239,741. To acquire its interest in the Reno Aircraft, the Trust
obtained long-term financing of $997,888 from a third-party lender and
utilized cash proceeds of $241,853 from the sale of the United Aircraft. In
addition, cash
-3-
proceeds of $257,219 were utilized in 1996, to acquire certain construction
and mining equipment. During the year ended December 31, 1996, the Trust sold
other equipment having a net book value of $9,566,298 to existing lessees and
third parties. These sales resulted in net a loss, for financial statement
purposes, of $6,939,466. The equipment sales in 1996 included the Trust's
interest in a vessel with an original cost and net book value of $13,014,544
and $9,075,095, respectively, which the Trust sold to an existing lessee in
December 1996. In connection with this sale, the Trust realized aggregate
cash proceeds of $9,570,166, consisting of early termination proceeds of
$7,304,730 and sale proceeds of $2,265,436. For financial statement purposes,
the Trust recognized a net loss of $6,809,659, excluding early termination
proceeds recognized as lease revenue on the accompanying Statement of
Operations. This equipment was sold prior to the expiration of the related
lease term. The Trust intends to reinvest these proceeds, net of associated
debt, in other equipment in 1997.
During 1995, the Trust sold equipment having a net book value of
$4,687,353 to existing lessees and third parties. These sales resulted in a
net loss, for financial statement purposes, of $185,044. The equipment sales
included the Trust's interest in a vessel with an original cost and net book
value of $6,199,161 and $4,612,874, respectively, which the Trust sold to the
existing lessee in June 1995. In connection with this sale, the Trust
realized sale proceeds of $4,091,193 and the purchaser assumed related debt
and interest of $308,476 and $1,988, respectively, which resulted in a net
loss, for financial statement purposes, of $211,217. This equipment was sold
prior to the expiration of its related lease term. The sale proceeds were
fully reinvested in other equipment in 1995. The Trust received $228,700 in
1996 from the lessee related to a residual sharing agreement between the
lessee and the Trust. In connection with this agreement, the Trust was
entitled to a portion of the sale proceeds realized by the lessee upon its
ultimate disposition of the vessel to a third party. This amount is reflected
as Other Income on the accompanying Statement of Operations.
During 1994, the Trust sold equipment having a net book value of
$2,609,383 to existing lessees and third parties. These sales resulted in a
net gain, for financial statement purposes, of $427,107. The equipment sales
included certain railroad equipment with an original cost and net book value
of $2,924,697 and $2,472,909, respectively, which the Trust sold to a third
party in March 1994. In connection with this sale, the Trust realized sales
proceeds of $812,853 and the purchaser assumed related debt of $2,078,997,
which resulted in a net gain, for financial statement purposes, of $418,941.
This equipment was sold prior to the expiration of the related lease term.
The sales proceeds were subsequently reinvested in other equipment.
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 $15,219,989, $14,488,719 and
$13,231,942 for the years ended December 31, 1996, 1995 and 1994,
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
-4-
book value of the asset on a straight-line basis over the asset's remaining
economic life. (See Note 2 to the financial statements herein). The increase
in depreciation expense from 1994 to 1996 reflects the acquisition of
equipment during 1994, 1995 and 1996.
The Trust recorded a write-down of the carrying value of its interest in
a Boeing 747 aircraft, representing an impairment, during the year ended
December 31, 1996. The resulting charge, $2,400,000 ($1.08 per Beneficiary
Interest) in 1996 was based on a comparison of the estimated net realizable
value and corresponding net carrying value for the Trust's interest in the
aircraft. Net realizable value was estimated based on (i) third-party
appraisals of the Trust's aircraft and (ii) EFG's assessment of prevailing
market conditions for similar aircraft. In recent years, market values for
used commercial jet aircraft have deteriorated, particularly with respect to
certain older aircraft, such as the Trust's Boeing 747, which may not meet
noise regulation standards set to commence in 2000. In addition, consistent
price competition and other pressures within the airline industry have
inhibited sustained profitability for many carriers. Most major airlines have
had to re-evaluate their aircraft fleets and operating strategies. Such
issues complicate the determination of net realizable value for specific
aircraft, and particularly used aircraft, because cost-benefit and market
considerations may differ significantly between the major airlines. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors also influence market demand and market values for passenger
jet aircraft.
Interest expense was $1,775,651 or 6.4% of lease revenue for year ended
December 31, 1996 compared to $2,263,191 or 10.5% and $2,577,357 or 13.1% of
lease revenue in 1995 and 1994, respectively. Interest expense in the
near-term is expected to increase due to anticipated leveraging to be
obtained to finance the acquisition of reinvestment equipment discussed
above. Thereafter, interest expense will decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is
reduced through the application of rent receipts to outstanding indebtedness.
Management fees were 3.5%, 3.9% and 3.7% of lease revenue for the years
ended December 31, 1996, 1995 and 1994, 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.
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 1.5%, less than 1% and 1% of lease revenue for the years
ended December 31, 1996, 1995 and 1994, respectively. The increase in
operating expenses from 1995 to 1996 was due primarily to expenses incurred
in connection with the sale of the Trust's interest in the vessel and
aircraft described above. 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. Operating
activities generated net cash inflows of $19,511,249, $17,246,439 and
$16,639,605 for the years ended December 31, 1996, 1995 and 1994,
respectively. In the near-term, net cash inflows generated from operating
activities are expected to increase due to additional reinvestment of the
cash proceeds from the United and vessel transactions previously discussed.
Thereafter, renewal, re-lease and equipment sale activities 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.
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
-5-
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 asset acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. The Trust expended $2,396,960,
$10,830,136 and $7,754,378 to acquire equipment during the years ended
December 31, 1996, 1995 and 1994, respectively, including new equipment
acquired pursuant to the reinvestment provisions of the Trust's Prospectus of
approximately $2,400,000, $4,200,000 and $800,000 during the years ended
December 31, 1996, 1995 and 1994, respectively. The reinvestment equipment
was financed through a combination of leveraging and the sale proceeds
available from the aircraft, vessel and rail transactions, discussed above.
During 1996, the Trust realized equipment sale proceeds of $6,675,611,
including $4,048,779 of proceeds from the United aircraft and $2,265,436 of
proceeds from the vessel transaction. In 1995, the Trust received sale
proceeds of $4,191,845, including $4,091,193 of proceeds from the vessel
transaction and; in 1994, the Trust received sale proceeds of $957,493,
including $812,853 of proceeds from the rail transaction. 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 origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities.
Cash inflows of $13,324,892, $8,420,201 and $12,352,182 in 1996, 1995 and
1994, respectively, resulted from leveraging a portion of the Trust's
equipment portfolio with third-party lenders. In September 1996, the Trust
received $7,583,333 from the refinancing of its interest in a vessel. The
Trust repaid the existing debt associated with the vessel of $2,677,627 plus
accrued interest thereon. (Subsequently, the indebtedness resulting from this
refinancing was retired as a result of the asset being sold to the lessee.)
EFG also provided interim financing of $25,080 to the Trust during 1994,
until third-party financing was finalized. No interim financing was provided
in 1996 and 1995. Each note payable is recourse only to the specific
equipment financed and to the minimum rental payments contracted to be
received during the debt amortization period (which period generally
coincides with the lease rental term). As rental payments are collected, a
portion or all of the rental payment is used to repay the associated
indebtedness. The amount of cash used to repay debt in 1996 increased as a
result of leveraging obtained in 1996 and 1995 and the refinancing described
above. In the near-term, the amount of cash used to repay debt obligations
will continue to increase as a result of anticipated leveraging to be
obtained in connection with the acquisition of reinvestment equipment,
discussed above. 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 $282,421 and $2,867,081
at the expiration of the primary lease terms related to the Reno Aircraft and
certain rail equipment, respectively.
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 year ended December
31, 1996, the Trust declared total cash distributions of Distributable Cash
From Operations and Distributable Cash From Sales and Refinancings of
$3,071,366. In accordance with the Trust Agreement, the Beneficiaries were
allocated 90.75% of these distributions, or $2,787,265, the Special
Beneficiary was allocated 8.25%, or $253,387, and the Managing Trustee was
allocated 1%, or $30,714.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at December 31, 1996. This
is the result of aggregate cash distributions to these Participants being in
excess of their aggregate capital contributions ($1,000 each) and their
respective allocations of financial statement net income or loss. (See Note 2
to the financial statements--Allocation of Profits and Losses.) Ultimately,
the existence of a capital deficit for the Managing Trustee or the Special
Beneficiary for financial reporting purposes is not indicative of any further
capital obligations to the Trust by either the Managing Trustee or the
Special Beneficiary. However, for income tax purposes, the Trust Agreement
requires that income be allocated first to those Participants having negative
tax capital account balances so as to eliminate any such balances. In
accordance with the Trust Agreement, upon the dissolution of the Trust, the
Managing Trustee will
-6-
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. No
such requirement exists with respect to the Special Beneficiary. At December
31, 1996, the Managing Trustee has a positive tax capital account balance.
(See Note 6 to the financial statements.)
At December 31, 1996, the Trust had aggregate future minimum lease
payments of $23,789,705 from contractual lease agreements (see Note 2 to the
financial statements), of which $19,084,751 will be used to amortize the
principal balance of notes payable (see Note 5 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, as well as from lease revenues
generated by equipment acquisitions from the Trust's anticipated reinvestment
activities. Presently, the Trust expects to acquire approximately $60,000,000
of reinvestment equipment using working capital of approximately $15,000,000
and additional indebtedness, which will be amortized from the associated
rental streams. However, the extent of the Trust's total future reinvestment
activities may exceed this projection as a result of future 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.
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 and, during its reinvestment period, to purchase replacement
equipment as original equipment is remarketed. 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 Beneficiary Interest (the rate
established and paid from the Trust's inception through September 1995) to an
annualized rate of $1.26 per Beneficiary Interest commencing in October 1995.
In October 1996, the Managing Trustee increased the annualized distribution
rate to $1.64 per Beneficiary Interest and expects that the Trust will be
able to sustain this distribution rate throughout 1997. However, 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
Participants should expect that cash distribution rates will fluctuate over
the long term as a result of future remarketing activities.
-7-
REPORT OF INDEPENDENT AUDITORS
To the Participants of AFG Investment Trust C:
We have audited the accompanying statements of financial position of AFG
Investment Trust C as of December 31, 1996 and 1995, and the related
statements of operations, changes in participants' capital, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AFG Investment
Trust C at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Participants is
presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
-8-
AFG INVESTMENT TRUST C
STATEMENT OF FINANCIAL POSITION
December 31, 1996 and 1995
1996 1995
------------- -------------
ASSETS
- ------
Cash and cash equivalents............................................................. $ 10,634,493 $ 279,116
Rents receivable...................................................................... 2,139,372 2,949,192
Accounts receivable--affiliate........................................................ 6,484,537 101,258
Equipment at cost, net of accumulated depreciation of $43,782,922 and $33,214,195 at
December 31, 1996 and 1995, respectively............................................ 35,868,028 65,137,539
Organization costs, net of accumulated amortization of $4,083 and $3,083 at December
31, 1996 and 1995, respectively..................................................... 917 1,917
------------- -------------
Total assets.................................................................. $ 55,127,347 $ 68,469,022
------------- -------------
------------- -------------
LIABILITIES AND PARTICIPANTS' CAPITAL
- -------------------------------------
Notes payable......................................................................... $ 19,084,751 $ 29,517,713
Accrued interest...................................................................... 188,983 354,297
Accrued liabilities................................................................... 23,985 20,000
Accrued liabilities--affiliate........................................................ 264,123 --
Deferred rental income................................................................ 209,535 305,117
Cash distributions payable to participants............................................ 302,484 232,679
------------- -------------
Total liabilities............................................................. 20,073,861 30,429,806
------------- -------------
Participants' capital (deficit):
Managing Trustee................................................................... (103,527) (73,669)
Special Beneficiary................................................................ (861,348) (615,026)
Beneficiary Interests (2,011,014 Interests; initial purchase price of $25 each).... 36,018,361 38,727,911
------------- -------------
Total participants' capital................................................... 35,053,486 38,039,216
------------- -------------
Total liabilities and participants' capital................................... $ 55,127,347 $ 68,469,022
------------- -------------
------------- -------------
The accompanying notes are an integral part of
these financial statements.
- 9 -
AFG INVESTMENT TRUST C
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- ------------- -------------
Income:
Lease revenue................................................... $ 27,695,097 $ 21,605,260 $ 19,732,736
Interest income................................................. 318,618 158,939 142,747
Other income.................................................... 228,700 -- --
Gain (loss) on sale of equipment................................ (7,371,871) (185,044) 427,107
------------- ------------- -------------
Total income......................................... 20,870,544 21,579,155 20,302,590
------------- ------------- -------------
Expenses:
Depreciation and amortization................................... 15,219,989 14,488,719 13,231,942
Write-down of equipment......................................... 2,400,000 880,717 --
Interest expense................................................ 1,775,651 2,262,128 2,491,390
Interest expense-affiliate...................................... -- 1,063 85,967
Equipment management fees--affiliate...... ..................... 962,622 838,282 725,439
Operating expenses-affiliate.................................... 426,646 191,786 200,894
------------- ------------- -------------
Total expenses.................. ........................ 20,784,908 18,662,695 16,735,632
------------- ------------- -------------
Net income.......................................................... $ 85,636 $ 2,916,460 $ 3,566,958
------------- ------------- -------------
------------- ------------- -------------
Net income per Beneficiary Interest................................. $ 0.04 $ 1.32 $ 1.61
------------- ------------- -------------
------------- ------------- -------------
Cash distributions declared per Beneficiary Interest................ $ 1.39 $ 2.10 $ 2.52
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of
these financial statements.
- 10 -
AFG INVESTMENT TRUST C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the years ended December 31, 1996, 1995 and 1994
MANAGING SPECIAL BENEFICIARIES
TRUSTEE BENEFICIARY -------------------------
AMOUNT AMOUNT INTERESTS AMOUNT TOTAL
-------------- ----------- ---------- ------------- -------------
Balance at
December 31, 1993................ $ (36,125) $ (305,282) 2,011,014 $ 42,135,094 $ 41,793,687
Net income-1994...................... 35,670 294,274 -- 3,237,014 3,566,958
Cash distributions
declared.......................... (55,843) (460,705) -- (5,067,755) (5,584,303)
-------------- ----------- ---------- ------------- -------------
Balance at
December 31,1994.................. (56,298) (471,713) 2,011,014 40,304,353 39,776,342
Net income-1995...................... 29,165 240,608 -- 2,646,687 2,916,460
Cash distributions
declared.......................... (46,536) (383,921) -- (4,223,129) (4,653,586)
-------------- ----------- ---------- ------------- -------------
Balance at
December 31, 1995................. (73,669) (615,026) 2,011,014 38,727,911 38,039,216
Net income-1996...................... 856 7,065 -- 77,715 85,636
Cash distributions
declared.......................... (30,714) (253,387) -- (2,787,265) (3,071,366)
-------------- ----------- ---------- ------------- -------------
Balance at
December 31, 1996................. $ (103,527) $ (861,348) 2,011,014 $ 36,018,361 $ 35,053,486
-------------- ----------- ---------- ------------- -------------
-------------- ----------- ---------- ------------- -------------
The accompanying notes are an integral part of
these financial statements.
- 11 -
AFG INVESTMENT TRUST C
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- --------------- -----------------
Cash flows from (used in) operating activities:
Net income $ 85,636 $ 2,916,460 $ 3,566,958
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 15,219,989 14,488,719 13,231,942
Write-down of equipment 2,400,000 880,717 --
(Gain) loss on sale of equipment 7,371,871 185,044 (427,107)
Changes in assets and Liabilities:
Decrease (increase) in:
Rents receivable 809,820 (1,262,125) (575,510)
Accounts receivable-affiliate (6,383,279) 109,224 706,435
Increase (decrease) in:
Accrued interest (165,314) 64,726 (12,112)
Accrued liabilities 3,985 4,500 (4,000)
Accrued liabilities-affiliate 264,123 (129,505) 66,238
Deferred rental income (95,582) (11,321) 86,761
--------------- -------------- -----------------
Net cash from operating activities 19,511,249 17,246,439 16,639,605
--------------- -------------- -----------------
Cash flows from (used in) investing activities:
Purchase of equipment (2,396,960) (10,830,136) (7,754,378)
Proceeds from equipment sales 6,675,611 4,191,845 957,493
--------------- -------------- -----------------
Net cash from (used in) investing activities 4,278,651 (6,638,291) (6,796,885)
--------------- -------------- -----------------
Cash flows from (used in) financing activities:
Proceeds from notes payable 13,324,892 8,420,201 12,352,182
Proceeds from notes payable-affiliate -- -- 25,080
Principal payments - notes payable (23,757,854) (14,053,436) (11,269,408)
Principal payments - notes payable - affiliate -- (21,771) (6,464,610)
Distributions paid (3,001,561) (4,888,286) (5,584,303)
Net cash used in financing activities --------------- -------------- -----------------
(13,434,523) (10,543,292) (10,941,059)
--------------- -------------- -----------------
Net increase (decrease) in cash and 10,355,377 64,856 (1,098,339)
cash equivalents
Cash and cash equivalents at beginning of year 279,116 214,260 1,312,599
--------------- -------------- -----------------
Cash and cash equivalents at end of year $10,634,493 $ 279,116 $214,260
--------------- -------------- -----------------
--------------- -------------- -----------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $1,940,965 $2,206,320 $2,615,188
-------------- -------------- ------------------
-------------- -------------- ------------------
Supplemental schedule of non-cash investing and financing activities:
During 1995, the Trust sold equipment to a lessee which assumed related
debt and interest of $308,476 and $1,988, respectively.
During 1994, the Trust sold equipment to a third party which assumed
related debt of $2,078,997.
The accompanying notes are an integral part of
these financial statements.
- 12 -
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--ORGANIZATION AND TRUST MATTERS
The Trust was organized as a Delaware business trust in accordance with
the Delaware Business Trust Act on August 31, 1992 for the purpose of
acquiring and leasing to third parties a diversified portfolio of capital
equipment. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the
Special Beneficiary, Equis Financial Group Limited Partnership (formerly
American Finance Group), a Massachusetts limited partnership ("EFG"), and
$100 from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned
affiliate of EFG. The Trust issued 571,830 Beneficiary Interests to 692
investors for an aggregate purchase price of $14,295,750 on December 15,
1992, its first Interim Close. Eight subsequent Interim Closings in 1992 and
1993 resulted in the issuance by the Trust of an additional 1,439,184
Beneficiary Interests to 1,785 investors for an aggregate purchase price of
$35,979,600. The Trust's Final Closing occurred on September 2, 1993. In
total, the Trust has issued 2,011,014 Beneficiary Interests representing a
total purchase price of $50,275,350 to 2,477 investors. The Trust's Managing
Trustee, AFG ASIT Corporation, a Massachusetts corporation and affiliate of
EFG, is responsible for the general management and business affairs of the
Trust. EFG is the sole Special Beneficiary of the Trust and also acts as
Advisor to the Trust. As Advisor, EFG provides services in connection with
the acquisition and remarketing of the Trust's assets. The Managing Trustee
and the Special Beneficiary are not required to make any other capital
contributions except as may be required under the Amended and Restated
Declaration of Trust (the "Trust Agreement").
Significant operations commenced coincident with the Trusts initial
purchase of equipment and the associated lease commitments on December 15,
1992. Pursuant to the Trust Agreement, each distribution of Distributable
Cash From Operations and Distributable Cash From Sales or Refinancings of the
Trust shall be made 90.75% to the Beneficiaries, 8.25% to the Special
Beneficiary and 1% to the Managing Trustee.
Under the terms of a Management Agreement between the Trust and EFG,
management services are provided by EFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also see Note 4.)
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Trust and several
other Direct-Participation equipment leasing programs sponsored or co-sponsored
by AFG (the "Other Investment Programs"). The Company arranges to broker or
originate equipment leases, acts as remarketing agent and asset manager, and
provides leasing support services, such as billing, collecting, and asset
tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating
primarily to the business of originating new leases, and the name "American
Finance Group," and its acronym to a third party (the "Buyer"). AFG changed
its name to Equis Financial Group Limited Partnership after the sale was
concluded. Pursuant to terms of the sale agreements, EFG agreed not to
compete with the Buyer's lease origination business for a period of five
years; however, EFG is permitted to originate certain equipment leases,
principally those involving non-investment grade lessees and ocean-going
vessels, which are not in competition with the Buyer. In addition, the sale
agreements specifically reserved to EFG the rights to continue using the name
American Finance Group and its
-13-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
acronym in connection with the Trust and the Other Investment Programs and to
continue managing all assets owned by the Trust and the Other Investment
Programs, including the right to satisfy all required equipment acquisitions
utilizing either brokers or the Buyer. Geoffrey A. MacDonald, Chairman of
Equis Corporation and Gary D. Engle agreed not to compete with the sold
business on terms and conditions similar to those for the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Trust considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time,
the Trust invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Trust. The
securities underlying the agreements are book entry securities. At December
31, 1996, the Trust had $10,530,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
Approximately $15,000,000 of the Trust's working capital at December 31,
1996, including approximately $10,000,000 of cash, is expected to be used to
acquire reinvestment equipment in 1997.
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 $23,789,705 are due as follows:
For the year ending December 31, 1997 $13,946,677
1998 6,590,290
1999 2,069,250
2000 864,528
2001 159,480
Thereafter 159,480
-----------
Total $23,789,705
-----------
-----------
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is as
follows:
1996 1995 1994
--------- ----------- ----------
Stena Bulk AB........ $9,742,697 $2,651,992 $2,761,056
In 1996, the Trust realized early termination proceeds of $7,304,730 related
to the sale of the Stena vessel to the existing lessee. Refer to Note 3 to the
financial statements for further discussion of this transaction.
-14-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
During March 1996, the Trust acquired an 8.86% proportionate ownership
interest in an MD-87 jet aircraft leased by Reno Air, Inc. (the "Reno
Aircraft") -See Note 3 herein. The Trust will receive approximately $159,000
of rental revenue in each of the years in the period ending December 31,
2002. Rents from the Reno Aircraft, as provided for in the lease agreement,
are adjusted monthly for changes of the London Inter-Bank Offered Rate
("LIBOR"). Future rents from the Reno Aircraft included above reflect the
most recent LIBOR effected rental payment.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment cost represents Asset Base Price plus acquisition
fees and was determined in accordance with the Trust Agreement and certain
regulatory guidelines. Asset Base Price is affected by the relationship of the
seller to the Trust as summarized herein. Where the seller of the equipment was
EFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid
for the equipment by EFG or the Affiliate plus all actual costs accrued by EFG
or the Affiliate while carrying the equipment less the amount of all primary
term rents earned by EFG or the Affiliate prior to selling the equipment or (ii)
fair market value as determined by the Managing Trustee in its best judgment,
including all liens and encumbrances on the equipment and other actual expenses.
Where the seller of the equipment was a third party who did not manufacture the
equipment, Asset Base Price was the lower of (i) the price invoiced by the third
party or (ii) fair market value as determined by the Managing Trustee. Where the
seller of the equipment was a third party who also manufactured the equipment,
Asset Base Price was the manufacturer's invoice price, net of any manufacturer
rebates or incentives, which price was considered to be representative of fair
market value.
Depreciation and Amortization
The Trust's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each
asset's primary lease term, which term generally represents the period of
greatest revenue potential for each asset. Accordingly, to the extent that an
asset is held on primary lease term, the 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. Periodically, the Managing Trustee evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. For purposes of this comparison, "net carrying value"
represents, at a given date, the net book value (equipment cost less
accumulated depreciation for financial reporting purposes) of the Trust's
equipment and "net realizable value" represents, at the same date, the
aggregate undiscounted cash flows resulting from future contracted lease
payments plus the estimated residual value of the Trust's equipment. The
Managing Trustee evaluates significant equipment assets, such as aircraft and
vessels, individually. All other assets are evaluated collectively by
equipment type unless the Managing Trustee learns of specific circumstances,
such as a lessee default, technological obsolescence, or other market
developments, which could affect the net realizable value of particular
assets. Adjustments to reduce the net carrying value of equipment are
recorded in those instances where estimated net realizable value is
considered to
-15-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
be less than net carrying value. Such adjustments are reflected separately on
the accompanying Statement of Operations as Write-Down of Equipment.
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.
Organization costs are amortized using the straight-line method over a
period of five years.
Accrued Liabilities--Affiliate
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges are reported as Accrued Liabilities
- -Affiliate. (See Note 4.)
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Participant according to their respective ownership percentages (90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee).
See Note 6 concerning allocation of income or loss for income tax purposes.
Net Income and Cash Distributions per Beneficiary Interest
Net income and cash distributions per Beneficiary Interest are based on
2,011,014 Beneficiary Interests outstanding during each of the three years in
the period ended December 31, 1996 and computed after allocation of the Managing
Trustee's and Special Beneficiary's shares of net income and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The Trust
adopted Statement 121 in the first quarter of 1996. The adoption of Statement
121 did not have a material effect on the financial statements of the Trust.
NOTE 3--EQUIPMENT
The following is a summary of equipment owned by the Trust at December
31, 1996. Remaining Lease Term (Months), as used below, represents the number
of months remaining from December 31, 1996 under contracted lease terms and
is presented as a range when more than one lease agreement is contained in the
-16-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
stated equipment category. In the opinion of EFG, the acquisition cost of the
equipment did not exceed its fair market value.
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- ---------------------------------- ---------- ------------ --------------------------------
Aircraft.......................... 12-73 $ 16,504,999 IL/NV/WA/Foreign
Computers and peripherals......... 1-36 13,929,873 AL/CA/CO/FL/GA/IL/IN/KS/KY/MA
MI/MN/NJ/NC/NM/NY/OH/OK/PA
SC/TN/TX/UT/VA/WI/WV
Retail store fixtures............. 1-33 11,133,408 CO/FL/GA/LA/NM/TX
Locomotives....................... 21-43 9,438,818 CA/IL
Construction and mining........... 1-48 8,149,933 FL/GA/IL/IN/MI/NV/SC/VA
Materials handling................ 1-43 7,983,236 AR/AZ/CA/CO/FL/GA/IL/IN/IA/KS/KY
MA/MI/MN/MS/NC/NJ/NY/OH/OK/OR
PA/SC/TN/TX/VA/WI/WV/Foreign
Manufacturing..................... 24-36 3,815,155 CA/MI
Commercial printing............... 12 3,542,761 GA
Communications.................... 12-17 2,004,394 FL/LA/OH
Research and test................. 18-22 1,667,223 CA/FL/IL/MI/MO/NC/NJ/NY/OH/PA
TN/TX/UT
Tractors and heavy duty trucks.... 3-22 714,107 IL/GA/KY/LA/MD/MI/NJ/OH/TX
Trailers/intermodal containers.... 16-18 342,029 KY/FL
Furniture and fixtures............ 10-20 239,785 NY/PA
Photocopying...................... 1-18 118,652 CT
Energy systems.................... 1 63,900 CA
Medical........................... 20 2,206 WI
Miscellaneous..................... 21 471 NY
-----------
Total equipment cost.............. 79,650,950
Accumulated depreciation.......... (43,782,922)
----------
Equipment, net of accumulated
depreciation.................... $ 35,868,028
------------
------------
In December 1996, the Trust sold its ownership interest in a vessel with a
cost and net book value of $13,014,544 and $9,075,095, respectively. In
connection with this sale, the Trust realized early termination proceeds of
$7,304,730 and sale proceeds of $2,265,436 which resulted in a net loss, for
financial statement purposes, of $6,809,659. This equipment was sold prior to
the expiration of the related lease term. The Trust intends to reinvest these
proceeds, net of associated debt, in other equipment in 1997.
On February 5, 1996, the Trust concluded the sale of its interest in a
Boeing 747-SP to the lessee, United Air Lines, Inc., ("United"). The Trust
recognized a net loss of $1,313,122 in connection with this transaction, of
which $880,717 was recognized as Write-Down of Equipment in 1995. The
remainder of $432,405 was recognized as a loss on sale of equipment on the
accompanying financial statements for the year ended December 31, 1996. In
addition to lease rents, the Trust received net sale proceeds of $4,048,779
from United for the aircraft. The Trust plans to have completed the
reinvestment of all such proceeds in other equipment by December 31, 1997. In
March 1996, the Trust acquired an 8.86% ownership interest in a replacement
aircraft (the "Reno Aircraft"), pursuant to the reinvestment provisions of
the Trust's prospectus, at a cost of $1,239,741. To acquire its interest in
the Reno Aircraft, the Trust obtained leveraging of $997,888 from a
third-party lender and utilized cash proceeds of $241,853 from the sale of
the United Aircraft. Additional cash proceeds of $257,219 were
-17-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
utilized in August 1996, to acquire certain construction and mining
equipment. The Managing Trustee intends to reinvest the remaining proceeds
from the sale of the United Aircraft in other equipment in 1997.
In certain cases, the cost of the Trust's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. 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. 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. At December 31, 1996, the Trust's equipment portfolio included
equipment having a proportionate original cost of $28,589,094, representing
approximately 36% 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
$55,200,000 and a net book value of approximately $26,843,000 at December 31,
1996. (See Note 5.)
Generally, the costs associated with maintaining, insuring and operating the
Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust.
As equipment is sold to third parties, or otherwise disposed of, the Trust
will recognize a gain or loss equal to the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition. The ultimate realization of estimated residual value
in the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment upon the expiration
of the primary lease terms. At December 31, 1996, the Trust held equipment for
sale or re-lease with a cost and net book value of approximately $996,000 and
$239,000, respectively. The Managing Trustee is actively seeking the sale of
re-lease of all equipment not on lease.
The Trust recorded a write-down of the carrying value of its interest in an
aircraft, representing an impairment, during the year ended December 31, 1996.
The resulting charge, $2,400,000 ($1.08 per Beneficiary Interest) in 1996 was
based on a comparison of the estimated net realizable value and corresponding
carrying value for the Trust's interest in the aircraft.
NOTE 4--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 years ended December 31, 1996, 1995
and 1994, which were paid or accrued by the Trust to EFG or its Affiliates,
are as follows:
1996 1995 1994
--------- ----------- ----------
Equipment acquisition fees........ $ 69,712 $ 242,898 $ 100,889
Equipment management fees......... 962,622 838,282 725,439
Administrative charges............ 57,379 21,000 12,000
Reimbursable operating
expenses due to third parties... 369,267 170,786 188,894
Interest on notes
payable- affiliate.............. -- 1,063 85,967
---------- ----------- ----------
Total............................. $1,458,980 $1,274,029 $1,113,189
---------- ----------- ----------
---------- ----------- ----------
-18-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
As provided under the terms of the Trust Agreement, EFG is compensated
for its services to the Trust. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG
is compensated by an amount equal to .28% of Equipment Base Price paid by the
Trust. For acquisition services resulting from reinvestment, EFG is
compensated by an amount equal to 3% of Equipment Base Price paid by the
Trust. For management services, EFG is compensated by an amount equal to the
lesser of (i) 5% of gross operating lease rental revenue and 2% of gross full
payout lease rental revenue received by the Trust or (ii) fees which the
Managing Trustee reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Trust Agreement. Compensation to EFG for services connected to
the remarketing of equipment is calculated as the lesser of (i) 3% of gross
sale proceeds or (ii) one-half of reasonable brokerage fees otherwise payable
under arm's length circumstances. Payment of the remarketing fee is
subordinated to Payout and is subject to certain limitations defined in the
Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG.
All equipment was purchased from EFG, one of its Affiliates or directly from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid by the lessee
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 December 31, 1996, the Trust was owed $2,637,639 by EFG for such funds and
the interest thereon. This balance includes equipment sale proceeds of
approximately $2,265,000 which relate to the sale of certain vessel equipment in
December 1996. Debt proceeds of $3,846,898, which relate to the leveraging of
certain rail equipment in the Trust's portfolio, were deposited into the escrow
account on December 31, 1996. These funds were remitted to the Trust in January
1997.
NOTE 5--NOTES PAYABLE
Notes payable at December 31, 1996 consisted of installment notes of
$19,084,751 payable to banks and institutional lenders. The notes bear
interest rates ranging between 5.1% and 11.25%, except for one note which
bears a fluctuating interest rate based on LIBOR plus a margin (5.5% at
December 31, 1996). 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 $282,421 and
$2,867,081 at the expiration of the primary lease terms related to the Reno
Aircraft and certain rail equipment, respectively. The carrying amount of
notes payable approximates fair value at December 31, 1996.
THE ANNUAL MATURITIES OF THE NOTES PAYABLE ARE AS FOLLOWS:
For the year ending December 31, 1997 $ 9,456,507
1998 4,162,699
1999 1,443,347
2000 3,509,220
2001 128,106
Thereafter 384,872
-----------
Total $19,084,751
-----------
-----------
-19-
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
The weighted average interest rate on short-term borrowings from EFG for the
purchase of equipment was 10.9% and 9.10% during the years ended December 31,
1995 and 1994, respectively.
NOTE 6--INCOME TAXES
The Trust is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Trust.
For financial statement purposes, the Trust allocates net income or loss to
each class of participant according to their respective ownership percentages
(90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the
Managing Trustee). This convention differs from the income or loss allocation
requirements for income tax and Dissolution Event purposes as delineated in the
Trust Agreement. Pursuant to the Trust Agreement, for income tax purposes, the
Trust allocates net income, to the extent available, pro-rata to any Participant
with a negative capital account balance so as to eliminate any such balance. In
accordance with the Trust Agreement, upon 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, 1996, the Managing Trustee had a positive tax capital account
balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:
1996 1995 1994
------------ ------------- -----------
Net income $ 85,636 $2,916,460 $3,566,958
Financial statement depreciation
in excess of (less than tax depreciation $2,880,589 (1,663,092) (6,339,977)
Write-down of equipment 2,400,000 880,717 -
Tax gain (loss) in excess of
book gain (loss) (54,917) 1,001,438 437,522
Prepaid rental income (95,582) (11,321) 86,761
Other 37,114 - -
----------- ------------ -----------
Net income (loss) for federal income tax
reporting purposes $ 5,252,840 $ 3,124,202 $(2,248,736)
----------- ------------ -------------
----------- ------------ -------------
The following is a reconciliation between participants' capital
reported for financial statement and federal income tax reporting purposes
for the years ended December 31, 1996 and 1995:
20
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
1996 1995
----------- -----------
Participants' capital $35,053,486 $38,039,216
Add back selling commissions and organization
and offering costs 4,771,160 4,771,160
Financial statement distributions in excess of
tax distributions 27,980 21,523
Cumulative difference between federal income tax
and financial statement income (loss) (7,827,602) (12,994,806)
------------ ------------
Participants' capital for federal income tax
reporting purposes $32,025,024 $29,837,093
----------- -----------
----------- -----------
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7--LEGAL PROCEEDINGS
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 have been discussing settlement with
respect to this matter for some time, to date, the negotiations have been
unsuccessful. Notwithstanding these discussions, EFG recently filed an Amended
and Supplemental Complaint alleging further default under the MLA and the matter
remains pending before the Court. The Trust has not experienced any material
losses as a result of this action.
NOTE 8--SOLICITATION STATEMENT
On October 26, 1996, the Managing Trustee, on behalf of the Trust, filed a
Solicitation Statement with the Securities and Exchange Commission which was
subsequently sent to the Beneficiaries pursuant to Regulation 14A of Section 14
of the Securities Exchange Act. The Solicitation Statement sought to solicit the
consent of the Beneficiaries to a proposed amendment ("the Amendment") to the
Trust Agreement.
The Amendment would (i) amend the provisions of the Trust Agreement
governing the redemption of Interests to permit the Trust to offer to redeem
outstanding interests at such times, in such amounts, in such manner and at such
prices as the Managing Trustee may 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
21
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
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 may fix. Such a security, if it
were to be offered and sold, would provide the Trust with the funds to (a)
implement more expansive Interest redemption opportunities for Beneficiaries
without using Trust funds which may otherwise be available for current cash
distributions; and (b) make a special one-time distribution to the
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required
the consent of the Beneficiaries holding more than fifty percent in the
aggregate of the Interests held by all Beneficiaries. A majority of
Beneficiary Interests, representing 1,215,771 or 60.5% of all Beneficiary
Interests, voted in favor of the Amendment; 174,315 or 8.7% of all
Beneficiary Interests voted against the Amendment; and 49,787 or 2.5% of all
Beneficiary Interests abstained. Approximately 72% of all Beneficiary
Interests participated in the vote. Accordingly, the Amendment was adopted.
NOTE 9--SUBSEQUENT EVENT
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the United States Securities and Exchange Commission which covers, among
other things, the creation and sale of a new class of beneficiary interest in
the Trust (the "Class B Interests"). A portion of the proceeds from the offering
of the Class B Interests would be used to make a one-time special cash
distribution to existing Beneficiaries (the "Class A Beneficiaries") of the
Trust and to enable the Trust to redeem a portion of the existing Beneficiary
Interests (the "Class A Interests"). The characteristics of the Class B
Interests, associated risk factors, and other matters of importance to the
Beneficiaries and prospective purchasers of the Class B Interests are contained
in the Registration Statement. Presently, the Registration Statement is
undergoing regulatory review and has not been declared effective.
22
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1996, 1995 and 1994
The Trust classifies all rents from leasing equipment as lease revenue.
Upon expiration of the primary lease terms, equipment may be sold, rented on
a month-to-month basis or re-leased for a defined period under a new or
extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book
value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition, may not reflect the aggregate residual
proceeds realized by the Trust for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994
------------ ------------ ------------
Rents earned prior to disposal of $18,461,013 $2,892,121 $ 352,035
equipment, net of interest charges
Sale proceeds, including assumption
of debt, realized upon disposition 6,675,611 4,502,309 3,036,490
of equipment ------------- ------------ ------------
Total cash generated from rents
and equipment sale proceeds 25,136,624 7,394,430 3,388,525
Original acquisition cost of equipment
disposed 21,097,744 6,312,760 3,067,939
------------ ------------ ----------
Excess of total cash generated to cost
of equipment disposed $ 4,038,880 $1,081,670 $ 320,586
------------ ------------ ----------
------------ ------------ ----------
23
AFG INVESTMENT TRUST C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1996
Sales and
Operations Refinancings Total
------------- -------------- -------------
Net income (loss)........................ $7,457,507 $ (7,371,871) $ 85,636
Add:
Depreciation and amortization.......... 15,219,989 -- 15,219,989
Write-down of equipment................ 2,400,000 -- 2,400,000
Management fees........................ 962,622 -- 962,622
Book value of disposed equipment....... -- 14,047,482 14,047,482
Less:
Principal reduction of notes payable... (21,080,227) (2,677,627) (23,757,854)
-------------- --------------- -------------
Cash from operations, sales
and refinancings....................... 4,959,891 3,997,984 8,957,875
Less:
Management fees.......................... (962,622) -- (962,622)
--------------- ---------------- -------------
Distributable cash from operations,
sales and refinancings................. 3,997,269 3,997,984 7,995,253
Other sources and uses of cash:
Cash at beginning of year.............. 279,116 -- 279,116
Proceeds from notes payable............ 3,843,671 9,481,221 13,324,892
Purchase of equipment.................. -- (2,396,960) (2,396,960)
Net change in receivables and
accruals............................... (5,566,247) -- (5,566,247)
Less:
Cash distributions paid................ (2,553,809) (447,752) (3,001,561)
------------------ ---------------- -----------
Cash at end of year...................... -- $ 10,634,493 $ 10,634,493
------------------ ---------------- -----------
------------------ ---------------- -----------
24
AFG INVESTMENT TRUST C
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE AMENDED AND
RESTATED DECLARATION OF TRUST
December 31, 1996
For the year ended December 31, 1996, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
Operating expenses................................................ $ 415,557
25