AFG INVESTMENT TRUST
AFG Investment Trust C
Annual Report to the Participants, December 31, 1997
AFG Investment Trust C
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page
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SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-9
FINANCIAL STATEMENTS:
Report of Independent Auditors 10
Statement of Financial Position
at December 31, 1997 and 1996 11
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 12
Statement of Changes in Participants' Capital
for the years ended December 31, 1997, 1996 and 1995 13
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 14
Notes to the Financial Statements 15-26
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 27
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 28
Schedule of Costs Reimbursed to the Managing Trustee
and its Affiliates as Required by Section 10.4 of the
Second Amended and Restated Declaration of Trust 29
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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 five years in the period ended December 31, 1997:
Summary of
Operations 1997 1996 1995 1994 1993
- --------------------------- -------------- -------------- --------------- -------------- -------------
Lease revenue $ 16,912,628 $ 27,695,097 $ 21,605,260 $ 19,732,736 $ 8,986,191
Net income $ 877,213 $ 85,636 $ 2,916,460 $ 3,566,958 $ 929,017
Per Beneficiary Interest:
Net income (loss)
Class A Interests $ 0.49 $ 0.04 $ 1.32 $ 1.61 $ 0.57
Class B Interests $ (0.12) $ -- $ -- $ -- $ --
Cash distributions
Class A Interests $ 3.11 $ 1.39 $ 2.10 $ 2.52 $ 2.62
Class B Interests $ 0.30 $ -- $ -- $ -- $ --
Financial Position
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Total assets $ 82,036,778 $ 55,127,347 $ 68,469,022 $ 76,477,918 $ 85,794,129
Total long-term obligations $ 39,928,173 $ 19,084,751 $ 29,517,713 $ 35,459,424 $ 36,455,647
Participants' capital $ 41,159,172 $ 35,053,486 $ 38,039,216 $ 39,776,342 $ 41,793,687
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year
ended December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of AFG Investment Trust C (the
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the outcome of the Class Action Lawsuit
described in Note 7 to the accompanying financial statements, and the ability of
Equis Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG"), to collect all rents due under the
attendant lease agreements and to successfully remarket the Trust's equipment,
upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. EFG's computer
programs were designed and written using four digits to define the applicable
year. As a result, EFG does not anticipate system failure or miscalculations
causing disruptions of operations. Based on recent assessments, EFG determined
that minimal modification of software is required so that its network operating
system will function properly with respect to dates in the year 2000 and
thereafter. EFG believes that with these modifications to the existing operating
system, the Year 2000 Issue will not pose significant operational problems for
its computer systems. EFG will utilize internal resources to upgrade software
for Year 2000 modifications and anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any anticipated impact on its operating
system. The total cost of the Year 2000 project is expected to be insignificant
and have no effect on the results of operations of the Trust.
OVERVIEW
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the future
business operations of the Trust. See Note 7 to the accompanying financial
statments. The Trust's operations commenced in 1992.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Trust recognized lease revenue of
$16,912,628 compared to $27,695,097 and $21,605,260 for the years ended December
31, 1996 and 1995, respectively. The decrease in lease revenue from 1996 to 1997
was due primarily to the sale of the Trust's interest in a vessel in December
1996 which in 1996 generated lease revenue of approximately $9,740,000 including
early termination rents of $7,304,730 (see discussion below). The increase in
lease revenue from 1995 to 1996 was due principally to the receipt of such early
termination rents in 1996. The Trust's original equipment acquisition and
leveraging processes were completed in 1995. The period during which the Trust
could reinvest Cash from Sales or Refinancings in additional equipment expired
on September 2, 1997. Over time, the level of lease revenue will decline due to
the expiration of the Trust's primary lease term agreements. The future level of
lease revenue to be recognized by the Trust may be impacted by the proposed
amendment to the Trust Agreement as described in Note 10 to the accompanying
financial statements.
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Interest income for the year ended December 31, 1997 was $988,610 compared
to $318,618 and $158,939 for the years ended December 31, 1996 and 1995,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income in 1997 included interest earned on unexpended
proceeds resulting from the issuance of Class B Interests (see below). Future
interest income will fluctuate in relation to prevailing interest rates, the
collection of lease revenue and the proceeds from equipment sales.
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.
During the year ended December 31, 1997, the Trust sold equipment having a
net book value of $1,059,344, to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $15,688. In
addition, during August 1997, the Trust and another EFG-sponsored investment
program exchanged certain locomotives for a proportionate interest in certain
replacement locomotives. The Trust's original locomotives had a cost and net
book value of $4,819,218 and $3,151,503, respectively, and had associated
indebtedness of $1,235,989 at the time of the exchange. The replacement
locomotives were recorded at their estimated fair value of $4,574,485 and the
Trust assumed associated debt of $3,120,127. The exchange resulted in the
recognition of a net loss, for financial statement purposes, of $461,153.
In February 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 Statement of
Operations 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
Managing Trustee actively pursued the reinvestment of all such proceeds in other
equipment which, during the third quarter of 1997, resulted in the acquisition
of a 50.6% ownership interest in an aircraft (the "SAS Aircraft") at an
aggregate cost to the Trust of $30,895,171. To acquire the interest in the SAS
Aircraft, the Trust obtained long-term financing of $25,654,667 from a
third-party lender and utilized cash of $5,240,504. Certain additional
equipment, having a cost of $7,992,512 was acquired pursuant to the reinvestment
provisions of the Trust Agreement in 1997 using cash of $1,695,923 and
leveraging of $6,296,589. Reinvestment during 1996 included the acquisition of
an 8.86% ownership interest in an aircraft (the "Reno Aircraft") at an aggregate
cost to the Trust 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. 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 in 1996 of
$6,809,659 related to the vessel sale, 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.
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 also received $228,700 in 1996 from this lessee
related to a residual sharing
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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.
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 $13,217,482, $15,219,989 and
$14,488,719 for the years ended December 31, 1997, 1996 and 1995, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the Trust
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life (see Note 2 to the
financial statements herein).
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 $1,894,703 or 11.2% of lease revenue in 1997 compared to
$1,775,651 or 6.4% and $2,263,191 or 10.5% of lease revenue in 1996 and 1995,
respectively. The Managing Trustee expects to use a portion of the Trust's
available cash to retire indebtedness and will continue to reduce the balance of
notes payable through the application of rent receipts to outstanding debt.
Interest expense will increase in 1998 due to the leveraging obtained during
1997 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.
Management fees were 4.3%, 3.5% and 3.9% of lease revenue for the years ended
December 31, 1997, 1996 and 1995, 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.
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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 4.4%, 1.5% and less than 1% of lease revenue for the years
ended December 31, 1997, 1996 and 1995, respectively. The increase in operating
expenses from 1996 to 1997 was due principally to professional service costs in
connection with the Solicitation and Registration Statements described in Note 8
to the accompanying financial statements. The increase in operating expenses
from 1995 to 1996 was due primarily to expenses incurred in 1996 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. For the year ended December 31, 1997,
operating activities generated net cash inflows of $15,138,576, after reductions
for equipment sale proceeds of $2,265,436 received in connection with the sale
of the vessel and debt proceeds of $3,846,898 which related to the leveraging of
certain rail equipment in the Trust's portfolio. These sale and debt proceeds
were due from EFG at December 31, 1996 and received by the Trust in January
1997. Operating activities generated net cash inflows of $25,623,583 (adjusted
for such sale and debt proceeds) and $17,246,439 for the years ended December
31, 1996 and 1995, respectively. Cash inflows generated from operating
activities during 1996 included the receipt of the early termination proceeds,
described above. Over time, 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.
The Trust's equipment is leased by a number of creditworthy, investment-grade
companies and, to date, the Trust has not experienced any material collection
problems and has not considered it necessary to provide an allowance for
doubtful accounts. Notwithstanding a positive collection history, there is no
assurance that all future contracted rents will be collected or that the credit
quality of the Trust's lessees will be maintained. Collection risk could
increase in the future, particularly as the Trust remarkets its equipment and
enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Ultimately, the Trust will dispose of all assets under lease. This will occur
principally through sale transactions whereby each asset will be sold to the
existing lessee or to a third party. Generally, this will occur upon expiration
of each asset's primary or renewal/re-lease term. In certain instances, casualty
or early termination events may result in the disposal of an asset. Such
circumstances are infrequent and usually result in the collection of stipulated
cash settlements pursuant to terms and conditions contained in the underlying
lease agreements.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. The Trust expended $38,887,683, $2,396,960
and $10,830,136 to acquire equipment during the years ended December 31, 1997,
1996 and 1995, respectively. All of the equipment acquisitions in 1997 and 1996
and approximately $4,200,000 of the 1995 acquisitions were purchased pursuant to
the reinvestment provisions of the Trust Agreement. Such reinvestment in 1997
included the acquisition of an interest in the SAS Aircraft discussed
previously. The reinvestment equipment was financed through a combination of
leveraging and the sale proceeds available from the aircraft and vessel
transactions, discussed above. During 1997, the Trust received $1,075,032 in
equipment sale proceeds. In 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 and; in 1995, the Trust
received sale proceeds of $4,191,845, including $4,091,193 of proceeds from the
vessel transaction. Future inflows of cash from asset disposals will vary in
timing and amount and will be influenced by many factors including, but not
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limited to, the frequency and timing of lease expirations, the type of equipment
being sold, its condition and age, and future market conditions. In addition,
during August 1997, the Trust and another EFG-sponsored investment program
exchanged certain locomotives for a proportionate interest in certain
replacement locomotives (see Results of Operations).
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
$31,951,256, $13,324,892 and $8,420,201 in 1997, 1996 and 1995, respectively,
resulted from leveraging a portion of the Trust's equipment portfolio with
third-party lenders (see Results of Operations). 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.) 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 is expected to increase as a result of leveraging obtained in
connection with the acquisition of reinvestment equipment. In addition, the
Managing Trustee expects to use a portion of the Trust's available cash to
retire certain indebtedness. Thereafter, the amount of indebtedness will decline
as the principal balance of notes payable is reduced through the collection and
application of rents. However, the Trust has balloon payment obligations of
$22,704,268, $2,867,081 and $282,421 at the expiration of the primary lease
terms related to the SAS Aircraft, certain rail equipment and the Reno Aircraft,
respectively. The lessee of the SAS aircraft has the option to renew the
attendant lease agreement for two one-year periods at the expiration of the
primary lease term on December 29, 1998. The repayment of the associated
indebtedness will be partly dependent on whether the lessee decides to renew
such leases or the outcome of alternative remarketing efforts, in the event the
lessee chooses not to do so.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at December 31, 1997. 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. 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. For income tax purposes, income is 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 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, 1997, the Managing Trustee had a negative tax
capital account balance of $4,832.
At December 31, 1997, the Trust had aggregate future minimum lease payments
of $24,614,151 from contractual lease agreements (see Note 2 to the financial
statements), a portion of which will be used to amortize the principal balance
of notes payable of $39,928,173 (see Note 5 to the financial statements and
discussion above). Additional cash inflows will be realized from future
remarketing activities, such as lease renewals and equipment sales, the timing
and extent of which cannot be predicted with certainty. This is because the
timing and extent of equipment sales is often dependent upon the needs and
interests of the existing lessees. Some lessees may choose to renew their lease
contracts, while others may elect to return the equipment. In the latter
instances, the equipment could be re-leased to another lessee or sold to a third
party. Accordingly, as the Trust matures and a greater level of its equipment
assets become available for remarketing, the cash flows of the Trust will become
less predictable. In addition, the Trust will have cash outflows to satisfy
interest on indebtedness and to pay management fees and operating expenses.
Ultimately, the Trust is expected to meet its future disbursement obligations
and to distribute any excess of cash inflows over cash outflows to the
Participants in accordance with the Trust Agreement. However, several factors,
including month-to-month lease extensions, lessee defaults, equipment casualty
events, and early lease terminations could alter the Trust's anticipated cash
flows as described herein and in the accompanying financial statements and
result in fluctuations to the Trust's periodic cash distribution payments.
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On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby
generating $15,123,700 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of aggregate
capital contributions, and the Special Beneficiary, EFG, purchased 3,019,220
Class B Interests, generating $15,096,100 of such aggregate capital
contributions. The Trust incurred offering costs in the amount of $151,237 and
professional service costs of $153,842 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of a majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution to
the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid
this special cash distribution of approximately $1.47 per Class A Interest,
aggregating $2,960,865, to the Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the
outstanding Class A Interests of the Trust by filing a Form 13E-4, Issuer Tender
Offer Statement, with the SEC and distributing to the Class A Beneficiaries
information (the "Tender Documents") concerning the offer. On October 10, 1997,
the Trust used $2,291,567 of the net proceeds realized from the issuance of the
Class B Interests to purchase 218,661 of the Class A Interests tendered as a
result of the offer. The Tender Documents describe, among other things, the
terms of the offer and the purchase price per Class A Interest being offered by
the Trust. The Trust intends to purchase additional Class A Interests through
future offers to purchase during the Initial Redemption Period (two years
following the close of the Class B offering which occurred on July 17,1997).
These purchases will be funded by the remaining net proceeds realized from the
issuance of the Class B Interests and are classified as Restricted Cash on the
Trust's Statement of Financial Position at December 31, 1997 (see also Note 10
to the accompanying financial statements).
Cash distributions paid to the Participants consist of both a return of and a
return on capital. Cash distributions do not represent and are not indicative of
yield on investment. Actual yield on investment cannot be determined with any
certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, and the residual value realized for each asset at its disposal
date. Future market conditions, technological changes, the ability of EFG to
manage and remarket the assets, and many other events and circumstances, could
enhance or detract from individual asset yields and the collective performance
of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash distribution
level that is consistent with the operating cash flows of the Trust and to
optimize the long-term value of the Trust. A distribution level that is higher
than the Trust's operating cash flows could compromise the Trust's working
capital position, as well as its ability to refurbish or upgrade equipment in
response to lessee requirements or other market circumstances. Accordingly, in
order to better align monthly cash distributions with the Trust's operating cash
flows, the Managing Trustee reduced the level of monthly cash distributions from
an annualized rate of $2.52 per Class A Interest (the rate established and paid
from the Trust's inception through September 1995) to an annualized rate of
$1.26 per Class A Interest commencing in October 1995. In October 1996, the
Managing Trustee increased the annualized distribution rate to $1.64 per Class A
Interest and has sustained this distribution rate throughout 1997. For the Class
B Beneficiaries, the Managing Trustee established and paid, from the Trust, an
annualized distribution of $0.66 per Class B Interest commencing July 18, 1997.
Future distributions, with respect to Class B Interests, will be subordinate to
certain distributions with respect to Class A Interests.
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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, 1997, the Trust
declared total cash distributions of $7,452,423, including the special
distribution described above. The Beneficiaries were allocated $7,036,954
($6,135,517 for Class A Beneficiaries and $901,437 for Class B Beneficiaries);
the Special Beneficiary was allocated $370,554; and the Managing Trustee was
allocated $44,915.
The nature of the Trust's principal cash flows gradually will shift from
rental receipts to equipment sale proceeds as the Trust matures. As this occurs,
the Trust's cash flows will become more volatile in that certain of the Trust's
equipment leases will be renewed and certain of its assets will be sold. In some
cases, the Trust may be required to expend funds to refurbish or otherwise
improve the equipment being remarketed in order to make it more desirable to a
potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing
Trustee will attempt to monitor and manage these events to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
the collection of contractual rents, the retirement of scheduled indebtedness
and the Trust's future working capital and equipment requirements, in
establishing future cash distribution rates. Ultimately, the Beneficiaries
should expect that cash distribution rates will fluctuate over the long term as
a result of future remarketing activities.
-9-
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, 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 11, 1997
-10-
AFG Investment Trust C
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
1997 1996
------------------- -------------------
ASSETS
Cash and cash equivalents $ 8,843,640 $ 10,634,493
Restricted cash 9,566,189 --
Rents receivable 819,736 2,139,372
Accounts receivable - affiliate 904,426 6,484,537
Equipment at cost, net of accumulated
depreciation of $50,635,609 and $43,782,922
at December 31, 1997 and 1996, respectively 61,902,787 35,868,028
Organization costs, net of accumulated
amortization of $5,000 and $4,083
at December 31, 1997 and 1996, respectively -- 917
------------------- -------------------
Total assets $ 82,036,778 $ 55,127,347
=================== ===================
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 39,928,173 $ 19,084,751
Accrued interest 240,434 188,983
Accrued liabilities 11,550 23,985
Accrued liabilities - affiliate 118,703 264,123
Deferred rental income 126,942 209,535
Cash distributions payable to participants 451,804 302,484
------------------- -------------------
Total liabilities 40,877,606 20,073,861
------------------- -------------------
Participants' capital (deficit):
Managing Trustee (123,674) (103,527)
Special Beneficiary (1,000,794) (861,348)
Class A Beneficiary Interests (1,792,353 and
2,011,014 Interests at December 31, 1997 and 1996,
respectively; initial purchase price of $25 each) 30,858,790 36,018,361
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) 13,716,417 --
Treasury Interests, 218,661 Interests at Cost (2,291,567) --
------------------- -------------------
Total participants' capital 41,159,172 35,053,486
------------------- -------------------
Total liabilities and participants' capital $ 82,036,778 $ 55,127,347
------------------- -------------------
------------------- -------------------
The accompanying notes are an integral part of
these financial statements.
-11-
AFG Investment Trust C
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------------ ------------------ ------------------
Income:
Lease revenue $ 16,912,628 $ 27,695,097 $ 21,605,260
Interest income 988,610 318,618 158,939
Other income -- 228,700 --
Loss on sale/exchange of equipment (445,465) (7,371,871) (185,044)
------------------ ------------------ ------------------
Total income 17,455,773 20,870,544 21,579,155
------------------ ------------------ ------------------
Expenses:
Depreciation and amortization 13,217,482 15,219,989 14,488,719
Write-down of equipment -- 2,400,000 880,717
Interest expense 1,894,703 1,775,651 2,262,128
Interest expense - affiliate -- -- 1,063
Equipment management fees - affiliate 725,116 962,622 838,282
Operating expenses - affiliate 741,259 426,646 191,786
------------------ ------------------ ------------------
Total expenses 16,578,560 20,784,908 18,662,695
------------------ ------------------ ------------------
Net income $ 877,213 $ 85,636 $ 2,916,460
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Net income (loss)
per Class A Beneficiary Interest $ 0.49 $ 0.04 $ 1.32
------------------ ------------------ ------------------
------------------ ------------------ ------------------
per Class B Beneficiary Interest $ (0.12) $ -- $ --
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Cash distributions declared
per Class A Beneficiary Interest $ 3.11 $ 1.39 $ 2.10
------------------ ------------------ ------------------
------------------ ------------------ ------------------
per Class B Beneficiary Interest $ 0.30 $ -- $ --
------------------ ------------------ ------------------
------------------ ------------------ ------------------
The accompanying notes are an integral part of
these financial statements.
-12-
AFG Investment Trust C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
Managing Special Class A Beneficiaries
Trustee Beneficiary ----------------------------
Amount Amount Interests Amount
------------ ------------ ------------ ------------
Balance at December 31, 1994 $ (56,298) $ (471,713) 2,011,014 $ 40,304,353
Net income - 1995 29,165 240,608 -- 2,646,687
Cash distributions declared (46,536) (383,921) -- (4,223,129)
------------ ------------ ------------ ------------
Balance at December 31, 1995 (73,669) (615,026) 2,011,014 38,727,911
Net income - 1996 856 7,065 -- 77,715
Cash distributions declared (30,714) (253,387) -- (2,787,265)
------------ ------------ ------------ ------------
Balance at December 31, 1996 (103,527) (861,348) 2,011,014 36,018,361
Class B capital contribution -- -- -- --
Less: Offering costs -- -- -- --
Net income (loss) - 1997 24,768 231,108 -- 975,946
Cash distributions declared (44,915) (370,554) -- (6,135,517)
Acquisition of Treasury Interests,
at Cost -- -- (218,661) --
------------ ------------ ------------ ------------
Balance at December 31, 1997 $ (123,674) $ (1,000,794) 1,792,353 $ 30,858,790
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Class B Beneficiaries
---------------------------- Treasury
Interests Amount Interests Total
------------ ------------ ------------ ------------
Balance at December 31, 1994 -- $ -- $ -- $ 39,776,342
Net income - 1995 -- -- -- 2,916,460
Cash distributions declared -- -- -- (4,653,586)
------------ ------------ ------------ ------------
Balance at December 31, 1995 -- -- -- 38,039,216
Net income - 1996 -- -- -- 85,636
Cash distributions declared -- -- -- (3,071,366)
------------ ------------ ------------ ------------
Balance at December 31, 1996 -- -- -- 35,053,486
Class B capital contribution 3,024,740 15,123,700 -- 15,123,700
Less: Offering costs -- (151,237) -- (151,237)
Net income (loss) - 1997 -- (354,609) -- 877,213
Cash distributions declared -- (901,437) -- (7,452,423)
Acquisition of Treasury Interests,
at Cost -- -- (2,291,567) (2,291,567)
------------ ------------ ------------ ------------
Balance at December 31, 1997 3,024,740 $ 13,716,417 $ (2,291,567) $ 41,159,172
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of
these financial statements.
-13-
AFG Investment Trust C
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------------- ---------------- ----------------
Cash flows from (used in) operating activities:
Net income $ 877,213 $ 85,636 $ 2,916,460
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 13,217,482 15,219,989 14,488,719
Write-down of equipment -- 2,400,000 880,717
Loss on sale/exchange of equipment 445,465 7,371,871 185,044
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 1,319,636 809,820 (1,262,125)
Accounts receivable - affiliate 5,580,111 (6,383,279) 109,224
Increase (decrease) in:
Accrued interest 51,451 (165,314) 64,726
Accrued liabilities (12,435) 3,985 4,500
Accrued liabilities - affiliate (145,420) 264,123 (129,505)
Deferred rental income (82,593) (95,582) (11,321)
---------------- ---------------- ----------------
Net cash from operating activities 21,250,910 19,511,249 17,246,439
---------------- ---------------- ----------------
Cash flows from (used in) investing activities:
Purchase of equipment (38,887,683) (2,396,960) (10,830,136)
Proceeds from equipment sales 1,075,032 6,675,611 4,191,845
---------------- ---------------- ----------------
Net cash from (used in) investing activities (37,812,651) 4,278,651 (6,638,291)
----------------- ---------------- ----------------
Cash flows from (used in) financing activities:
Proceeds from Class B capital contributions 15,123,700 -- --
Payment of offering costs (151,237) -- --
Purchase of Treasury Interests (2,291,567) -- --
Restricted cash (9,566,189) -- --
Proceeds from notes payable 31,951,256 13,324,892 8,420,201
Principal payments - notes payable (12,991,972) (23,757,854) (14,053,436)
Principal payments - notes payable - affiliate -- -- 21,771
Distributions paid (7,303,103) (3,001,561) (4,888,286)
---------------- ---------------- -----------------
Net cash from (used in) financing activities 14,770,888 (13,434,523) (10,543,292)
---------------- ---------------- -----------------
Net (decrease) increase in cash and cash equivalents (1,790,853) 10,355,377 64,856
Cash and cash equivalents at beginning of year 10,634,493 279,116 214,260
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 8,843,640 $ 10,634,493 $ 279,116
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,843,252 $ 1,940,965 $ 2,206,320
---------------- ---------------- ----------------
---------------- ---------------- ----------------
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.
Also, see Note 3 to the financial statements.
The accompanying notes are an integral part of
these financial statements.
-14-
AFG Investment Trust C
Notes to the Financial Statements
December 31, 1997
NOTE 1 - ORGANIZATION AND TRUST MATTERS
AFG Investment Trust C (the "Trust") was organized as a Delaware business
trust in accordance with the Delaware Business Trust Act (the "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 or the "Advisor". The Trust issued an aggregate of 2,011,014
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($50,275,350 in total) to 2,477 investors
through 9 serial closings commencing December 15, 1992 and ending September 2,
1993. On July 18, 1997, the Trust issued 3,024,740 Class B Interests at $5.00
each ($15,123,700 in total), of which (i) 3,019,220 interests are held by Equis
II Corporation, an affiliate of EFG, and (ii) 5,520 interests are held by 10
other Class A investors. The Trust repurchased 218,661 Class A Interests on
October 10, 1997 using proceeds from the issuance of Class B Interests.
Accordingly, there are 1,792,353 Class A Interests currently outstanding.
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, EFG. The Managing Trustee is
responsible for the general management and business affairs of the Trust while
the Special Beneficiary acts as Advisor to the Trust in connection with the
acquisition and remarketing of the Trust's assets. AFG ASIT Corporation is a
wholly-owned subsidiary of Equis II Corporation and an affiliate of EFG. Class A
Interests and Class B Interests basically have identical voting rights and,
therefore, Equis II Corporation has control over the Trust on all matters on
which the Beneficiaries may vote. The Managing Trustee and the Special
Beneficiary are not required to make any other capital contributions except as
may be required under the Second 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 (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 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. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its
-15-
AFG Investment Trust C
Notes to the Financial Statements
December 31, 1997
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS AND RESTRICTED CASH
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 federal agency discount
notes and 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, 1997, the Trust had $18,304,498 invested in federal agency discount notes
and reverse repurchase agreements secured by U.S. Treasury Bills or interests in
U.S. Government securities. Such cash includes $9,566,189 which represents the
net proceeds realized from the offering of the Class B Interests less the
portion thereof used to pay the Special Distribution (see Note 8) and to redeem
Class A Interests (see Note 9). These funds are reserved for future purchases of
Class A Interests pursuant to the Trust Agreement and are classified as
Restricted Cash on the Trust's Statement of Financial Position at December 31,
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 $24,614,151 are due as follows:
For the year ending December 31, 1998 $ 12,069,859
1999 4,063,938
2000 2,848,841
2001 2,145,367
2002 1,978,315
Thereafter 1,507,831
-------------
Total $ 24,614,151
-------------
-------------
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:
1997 1996 1995
------------ ------------ ------------
Stena Bulk AB $ -- $ 9,742,697 $ 2,651,992
During August 1997, the Partnership and another EFG-sponsored investment
program exchanged certain locomotives for a proportionate interest in
replacement locomotives. In aggregate, the Partnership will receive lease
revenues of approximately $3,816,000 over the life of the replacement lease (see
Note 3).
Also during August 1997, the Trust acquired a 50.6% proportionate
ownership interest in a Boeing 767-300ER aircraft leased by Scandinavian
Airlines System (the "SAS Aircraft") (see Note 3). The Trust will receive
approximately $3,788,000 of rental revenue during the year ending December 31,
1998. Scandinavian Airlines
-16-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
System has two one year renewal options in place which would commence following
the expiration of the primary lease term on December 29, 1998. If the options
are exercised, the renewal rental payments would be the lesser of 90% of the
primary lease term rents or the then current fair market value rents for the
aircraft.
During September 1997, the Trust acquired certain manufacturing equipment
leased by Hyundai Electronics America, Inc. (see Note 3). The Trust will receive
approximately $1,147,000 during each of the five years in the period ending
December 31, 2002 and approximately $765,000 during the year ending December 31,
2003.
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 be less than net
carrying value. Such adjustments are reflected separately on the accompanying
Statement of Operations as Write-Down of Equipment.
-17-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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.
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 and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).
ALLOCATION OF NET INCOME OR LOSS
Prior to adoption of the current Trust Agreement on July 15, 1997 (see
Note 8), the Trust allocated net income or loss to the Participants for
financial reporting purposes according to their respective beneficial interests
in the Trust (1% to the Managing Trustee, 8.25% to the Special Beneficiary, and
90.75% to the Class A Beneficiaries). Subsequent to adoption of the current
Trust Agreement, net income is allocated first, to eliminate any Participant's
negative capital account balance and second, 1% to the Managing Trustee, 8.25%
to the Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period. Net losses
are allocated first, to eliminate any positive capital account balance of the
Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second,
to eliminate any positive capital account balances of the Class A Beneficiaries;
and third, any remainder to the Managing Trustee.
The allocation of net income or loss pursuant to the Trust Agreement is
based upon government rules and regulations for federal income tax reporting
purposes and assumes, for each income tax reporting period, the liquidation of
all of the Trust's assets and the subsequent distribution of all available cash
to the Participants. For income tax purposes, the Trust adjusts its allocations
of income and loss to the Participants so as to cause their tax capital account
balances at the end of the reporting period to be equal to the amount that would
be distributed to them at such date in the event of a liquidation and
dissolution of the Trust. This methodology does not consider the costs attendant
to liquidation or whether the Trust intends to have future business operations.
If the Trust made similar assumptions and allocations for financial reporting
purposes and the Trust was liquidated at December 31, 1997 for an amount equal
to its net carrying value for financial reporting purposes, the capital accounts
of the Managing Trustee, Special Beneficiary, Class A Beneficiaries, and Class B
Beneficiaries would have reflected ending balances of $411,592, $3,395,632,
$21,015,323, and $16,336,625, respectively. See Note 6 for additional
information concerning the allocation of net income or loss for income tax
reporting purposes.
NET INCOME AND CASH DISTRIBUTIONS PER BENEFICIARY INTEREST
Net income and cash distributions per Class A Interest in 1997 are based on
2,011,014 Class A Interests outstanding during the period January 1, 1997
through October 9, 1997 and 1,792,353 Class A Interests outstanding during the
period October 10, 1997 through December 31, 1997. Net income and cash
distributions per Beneficiary Interest are based on 2,011,014 Class A Interests
outstanding during each of the years ended December 31, 1996 and 1995. Net
income and cash distributions per Class B Beneficiary Interest are based on
3,024,740 Class B Interests outstanding during the period July 18, 1997 through
December 31, 1997. For each of the aforementioned periods, net income and cash
distributions per Beneficiary Interest are computed after allocation of the
Managing Trustee's and Special Beneficiary's shares of net income and cash
distributions.
PROVISION FOR INCOME TAXES
-18-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1997. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1997 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------------------- -------------- ----------------- ---------------------------------------
Aircraft 0-60 $ 47,400,169 IL/NV/WA/Foreign
Computers and peripherals 0-24 11,219,698 AL/CA/CO/FL/GA/IL/IN/KS/LA/MA
MI/MN/MO/NJ/NC/NM/NY/OH/PA
SC/TN/TX/UT/VA/WI/WV
Retail store fixtures 0-21 11,112,212 AZ/CO/FL/GA/LA/NM/TX
Manufacturing 12-68 10,328,381 CA/MI
Locomotives 30-75 9,179,509 IL/NB
Materials handling 0-62 7,586,711 AR/AZ/CA/CO/FL/GA/IL/IN/IA/KS/KY
MA/MI/MS/NJ/NY/OH/OK/OR
PA/SC/TX/VA/WI/WV/Foreign
Construction and mining 0-36 7,557,664 FL/IL/IN/MI/NV/SC/VA
Commercial printing 0 3,542,761 GA
Communications 0-5 2,004,394 FL/LA/OH
Research and test 0-10 1,667,223 CA/FL/IL/MI/MO/NC/NJ/NY/OH/PA TN/TX/UT
Tractors and heavy duty trucks 0-3 285,299 IL/MD/MI/OH/TX
Furniture and fixtures 8-10 239,785 NY/PA
Trailers/intermodal containers 4 229,361 FL
Photocopying 0-6 118,652 CT
Energy systems 0 63,900 CA
Medical 8 2,206 WI
Miscellaneous 9 471 NY
-----------------
Total equipment cost 112,538,396
Accumulated depreciation (50,635,609)
-----------------
Equipment, net of accumulated depreciation $ 61,902,787
-----------------
-----------------
During August 1997, the Trust and another EFG-sponsored investment program
exchanged certain locomotives for a proportionate interest in certain
replacement locomotives. The Trust's original locomotives had a cost and net
book value of $4,819,218 and $3,151,503, respectively, and had associated
indebtedness of $1,235,989 at the time of the exchange. The replacement
locomotives were recorded at their estimated fair value of $4,574,485 and the
Trust assumed associated debt of $3,120,127. The exchange resulted in the
recognition of a net loss, for financial statement purposes, of $461,153.
-19-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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.
In February 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 Statement of
Operations 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.
In March 1996, the Trust acquired an 8.86% ownership interest in an
aircraft leased to Reno Air, Inc. (the "Reno Aircraft"), pursuant to the
reinvestment provisions of the Trust Agreement, 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 of $241,853 from the sale
of the United Aircraft. Additional cash proceeds of $1,157,219 were utilized
during the year ended December 31, 1996 to acquire certain construction and
mining and other equipment. In August 1997, the Trust acquired a 50.6% ownership
interest in the SAS Aircraft, pursuant to the reinvestment provisions of the
Trust Agreement, at a cost of $30,895,171. To acquire the interest in the SAS
Aircraft, the Trust obtained leveraging of $25,654,667 from a third-party lender
and utilized cash of $5,240,504. Certain additional equipment, having a cost of
$7,992,512 was acquired pursuant to the reinvestment provisions of the Trust
Agreement in 1997 using cash of $1,695,923 and leveraging of $6,296,589.
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, 1997, the Trust's equipment portfolio included
equipment having a proportionate original cost of $59,469,631, representing
approximately 53% 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
$60,900,000 and a net book value of approximately $52,200,000 at December 31,
1997 (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, 1997, the Trust held equipment for
sale or re-lease with a cost and net book value of approximately $739,000 and
$51,000, respectively. The Managing Trustee is actively seeking the sale of
re-lease of all equipment not on lease. In addition, the summary above also
includes equipment being leased on a month-to-month basis.
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.
-20-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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, 1997, 1996 and
1995, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
1997 1996 1995
------------ ------------ ------------
Equipment acquisition fees $ 1,121,157 $ 69,712 $ 242,898
Equipment management fees 725,116 962,622 838,282
Offering costs 151,237 -- --
Administrative charges 84,834 57,379 21,000
Reimbursable operating expenses
due to third parties 656,425 369,267 170,786
Interest on notes payable
- affiliate -- -- 1,063
------------ ------------ ------------
Total $ 2,738,769 $ 1,458,980 $ 1,274,029
============ ============ ============
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
(see Note 10 concerning proposed changes to the fees paid to EFG and its
affiliates). 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, 1997, the Trust was owed $904,426 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1998.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership formed in 1995 and owned and controlled by certain principals of
EFG, owns 9,210 Class A Interests or less than 1% of the total outstanding Class
A Interests of the Trust. EFG owns a 49% limited partnership interest in ONC,
which it acquired in December 1996.
Refer to Note 8 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and the change in ownership of the Managing
Trustee.
-21-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of installment notes of
$39,928,173 payable to banks and institutional lenders. The notes bear interest
rates ranging between 6.1% and 14.46%, except for one note which bears a
fluctuating interest rate based on LIBOR (5.72% at December 31, 1997) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trust has balloon payment obligations of $22,704,268, $2,867,081 and $282,421 at
the expiration of the primary lease terms related to the SAS Aircraft, certain
rail equipment and the Reno Aircraft, respectively. The carrying amount of notes
payable approximates fair value at December 31, 1997.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 1998 $ 27,553,263
1999 2,166,698
2000 5,016,436
2001 1,762,882
2002 1,988,260
Thereafter 1,440,634
--------------
Total $ 39,928,173
--------------
--------------
The weighted average interest rate on short-term borrowings from EFG for
the purchase of equipment was 10.9% during the year ended December 31, 1995.
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 first, to
eliminate any Participant's negative capital account balance and second, 1% to
the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively
to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period. Net losses are allocated first, to eliminate
any positive capital account balance of the Managing Trustee, the Special
Beneficiary and the Class B Beneficiaries; second, to eliminate any positive
capital account balances of the Class A Beneficiaries; and third, any remainder
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. For income tax purposes, the Trust allocates
net income or net loss in accordance with the provisions of such agreement.
Pursuant to 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, 1997, the Managing Trustee had a negative tax capital account
balance of $4,832.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1997, 1996 and 1995:
1997 1996 1995
------------------ ------------------ ------------------
Net income $ 877,213 $ 85,636 $ 2,916,460
Financial statement depreciation
-22-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
in excess of (less than) tax depreciation (1,722,944) 2,880,589 (1,663,092)
Write-down of equipment -- 2,400,000 880,717
Tax gain (loss) in excess of
book gain (loss) 1,015,849 (54,917) 1,001,438
Deferred rental income (82,593) (95,582) (11,321)
Other (37,114) 37,114 --
------------------ ------------------ ------------------
Net income for federal income tax
reporting purposes $ 50,411 $ 5,252,840 $ 3,124,202
------------------ ------------------ ------------------
------------------ ------------------ ------------------
The following is a reconciliation between participants' capital reported
for financial statement and federal income tax reporting purposes for the years
ended December 31, 1997 and 1996:
1997 1996
------------------ ------------------
Participants' capital $ 41,159,172 $ 35,053,486
Add back selling commissions and organization
and offering costs 4,922,397 4,771,160
Financial statement distributions in excess of
tax distributions -- 27,980
Cumulative difference between federal income tax
and financial statement income (loss) (8,654,404) (7,827,602)
------------------ ------------------
Participants' capital for federal income tax reporting purposes $ 37,427,165 $ 32,025,024
------------------ ------------------
------------------ ------------------
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 or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed
a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal
-23-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
Defendants. The Defendants have denied, and continue to deny, that any of them
have committed or threatened to commit any violations of law or breached any
fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
beneficiaries (or partners, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants.
(See Note 10) To the extent that the parties agree upon a Stipulation of
Settlement that is approved by the Court, the complete terms thereof will be
communicated to all of the beneficiaries (or partners) of the Nominal Defendants
to enable them to vote thereon.
There can be no assurance that the parties will agree on a Stipulation of
Settlement, or that it will be approved by the Court, or that the outcome of the
voting by the beneficiaries (or partners) of the Nominal Defendants, including
the Trust, will result in a settlement finally being effected or in the Trust
being included in any such settlement. The Managing Trustee and its affiliates,
in consultation with counsel, concur that there is a reasonable basis to believe
that a Stipulation of Settlement will be agreed upon by the parties and approved
by the Court. In the absence of a Stipulation of Settlement approved by the
Court, the Defendants intend to defend vigorously against the claims asserted in
the Class Action Lawsuit. The Managing Trustee and its affiliates cannot predict
with any degree of certainty the ultimate outcome of such litigation.
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Trust, National Steel
Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA")
for the lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and other
remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice
of Removal which removed the case to the United States District Court, District
of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's
Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory
relief and alleging breach of contract, implied covenant of good faith and fair
dealing and specific performance. EFG filed its Answer to these counterclaims on
September 29, 1995. Though the parties 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 - ISSUANCE OF CLASS B INTERESTS
On October 26, 1996, the Trust filed a Solicitation Statement with the United
States Securities and Exchange Commission (the "SEC") which subsequently was
sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the
Securities Exchange Act. The Solicitation Statement sought the consent of the
Beneficiaries to a proposed amendment (the "Amendment") to the Amended and
Restated Declaration of Trust (the "Trust Agreement") which would (i) amend the
provisions of the Trust Agreement governing the redemption of Beneficiary
Interests to permit the Trust to offer to redeem outstanding Beneficiary
Interests at such times, in such amounts, in such manner and at such prices as
the Managing Trustee might determine from time to time, in accordance with
applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an additional class of
security with such designations, preferences and relative, participating,
optional or other special rights, powers and duties as the Managing Trustee
might affix. The funds obtained through the issuance
-24-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
of such a security would be used by the Trust to (a) expand redemption
opportunities for Beneficiaries without using Trust funds which might otherwise
be available for cash distributions; and (b) make a special one-time cash
distribution to the Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required the
consent of the Beneficiaries holding more than 50% in the aggregate of the Class
A Interests held by all Beneficiaries. A majority of the Class A Interests,
representing 1,215,771 Interests or 60.5% of all Class A Interests, voted in
favor of the Amendment; 174,315 Interests or 8.7% of all Class A Interests voted
against the Amendment; and 49,787 Interests or 2.5% of all Class A Interests
abstained. Approximately 72% of all Class A Interests participated in the vote.
Accordingly, the Trust Agreement was amended.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby
generating $15,123,700 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of aggregate
capital contributions, and the Special Beneficiary, EFG, purchased 3,019,220
Class B Interests, generating $15,096,100 of such aggregate capital
contributions. The Trust incurred offering costs in the amount of $151,237 and
professional service costs of $153,842 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $2,960,865 to the Class A Beneficiaries on August 15, 1997.
NOTE 9 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the
outstanding Class A Interests of the Trust by filing a Form 13E-4, Issuer Tender
Offer Statement, with the SEC and distributing to the Class A Beneficiaries
information (the "Tender Documents") concerning the offer. On October 10, 1997,
the Trust used $2,291,567 of the net proceeds realized from the offering of the
Class B Interests to purchase 218,661 of the Class A Beneficiary Interests
tendered as a result of the offer. The Tender Documents describe, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. The Trust intends to purchase additional outstanding Class
A Interests through future offers to purchase during the Initial Redemption
Period (two years following the close of the Class B offering which occurred on
July 17,1997). These purchases will be funded by the remaining net proceeds
realized from the issuance of the Class B Interests and are classified as
Restricted Cash on the Trust's Statement of Financial Position at December 31,
1997 (see also Note 10 to the accompanying financial statements).
NOTE 10 - SUBSEQUENT EVENT
On March 11, 1998, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a
-25-
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
proposed amendment (the "Amendment") to the Second Amended and Restated
Declaration of Trust (the "Trust Agreement"). The Solicitation Statement is
subject to regulatory review and comment and thereafter is expected to be
distributed to all of the Beneficiaries of the Trust.
Subject to attaining a settlement in the Class Action Lawsuit described in
Note 8 herein, the Amendment, if approved, would modify the Trust Agreement in
the following principal respects: (i) the Trust would pay a Special Cash
Distribution to the Class A Beneficiaries of record as of September 1, 1997, or
to their successors or assigns, totaling $1,513,639 (or approximately $0.75 per
Class A Interest) using a portion of the Class B capital contributions that
otherwise would be distributed as a Class B Capital Distribution to Equis II
Corporation, (see Note 8) the parent company of the Managing Trustee and an
affiliate of EFG; (ii) Equis II Corporation will be required to reduce its
prospective Class B Capital Distributions by $3,405,688 and treat such amount as
a long-term equity investment in the Trust; (iii) certain voting restrictions
will be placed upon the Class B Interests owned by Equis II Corporation; (iv)
the Trust's reinvestment period, which originally expired on September 2, 1997,
will be reinstated until December 31, 2002; and (v) acquisition fees paid to EFG
in connection with reinvestment assets acquired after the Amendment date will be
reduced from a maximum of 3% to 1% and management fees earned in connection with
such assets will be reduced from a maximum of 5% to 2%.
The proposed Amendment also provides for other modifications to the Trust
Agreement which are not contingent upon reaching a settlement in the Class
Action Lawsuit, principally as follows: (i) the Trust's stated investment
policies and objectives will be broadened to permit the Trust to invest in
assets other than leased equipment, and (ii) the Trust's financing provisions
will be modified to eliminate any cap on the amount of aggregate Trust
indebtedness and permit the Trust to use cross-collateralized and other recourse
debt structures, thereby enabling the Trust to secure financing at interest
rates that, generally, would be lower than under current borrowing arrangements.
The Solicitation Statement contains additional information concerning the
proposed Amendment and associated risk factors. The Amendment will be adopted or
rejected based upon the majority of the Class A Interests actually voted
(including 9,210 Class A Interests owned by an affiliate of EFG, see Note 4).
Accordingly, the Amendment will be adopted no matter how few Class A Interests
are actually voted, provided a majority of those Interests are voted in favor of
the Amendment. Although Equis II Corporation has voting control of the Trust, it
will vote its Class B Interests in the same proportion in which the majority of
the Class A Interests are voted.
-26-
AFG Investment Trust C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995.
1997 1996 1995
------------------ ------------------ ------------------
Rents earned prior to disposal of
equipment, net of interest charges $ 5,772,819 $ 18,461,013 $ 2,892,121
Sale proceeds, including assumption
of debt, realized upon disposition/
exchange of equipment 2,959,170 6,675,611 4,502,309
------------------ ------------------ ------------------
Total cash generated from rents
and equipment sale proceeds 8,731,989 25,136,624 7,394,430
Original acquisition cost of equipment
disposed 5,755,478 21,097,744 6,312,760
------------------ ------------------ ------------------
Excess of total cash generated to cost
of equipment disposed $ 2,976,511 $ 4,038,880 $ 1,081,670
------------------ ------------------ ------------------
------------------ ------------------ ------------------
-27-
AFG Investment Trust C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
Net income (loss) $ 1,322,678 $ (445,465) $ 877,213
Add:
Depreciation and amortization 13,217,482 -- 13,217,482
Management fees 725,116 -- 725,116
Book value of disposed equipment -- 3,404,635 3,404,635
Less:
Principal reduction of notes payable (12,991,972) -- (12,991,972)
------------------ ------------------ ------------------
Cash from operations, sales
and refinancings 2,273,304 2,959,170 5,232,474
Less:
Management fees (725,116) -- (725,116)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 1,548,188 2,959,170 4,507,358
Other sources and uses of cash:
Cash at beginning of year -- 10,634,493 10,634,493
Assumption of debt -- (1,884,138) (1,884,138)
Proceeds from notes payable -- 31,951,256 31,951,256
Proceeds from capital contributions 15,123,700 -- 15,123,700
Payment of offering costs (151,237) -- (151,237)
Purchase of Treasury Interests (2,291,567) -- (2,291,567)
Restricted cash (9,566,189) -- (9,566,189)
Purchase of equipment -- (38,887,683) (38,887,683)
Net change in receivables and
accruals 6,710,750 -- 6,710,750
Less:
Cash distributions paid (7,303,103) -- (7,303,103)
------------------ ------------------ ------------------
Cash at end of year $ 4,070,542 $ 4,773,098 $ 8,843,640
------------------ ------------------ ------------------
------------------ ------------------ ------------------
-28-
ADDITIONAL FINANCIAL INFORMATION
AFG Investment Trust C
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED
AND RESTATED DECLARATION OF TRUST
December 31, 1997
For the year ended December 31, 1997, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
Operating expenses $ 722,195
Offering costs $ 151,237
-29-