AFG INVESTMENT TRUST
AFG Investment Trust C
Annual Report to the Participants, December 31, 1998
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 3-8
FINANCIAL STATEMENTS:
Report of Independent Auditors 9
Statement of Financial Position
at December 31, 1998 and 1997 10
Statement of Operations
for the years ended December 31, 1998, 1997 and 1996 11
Statement of Changes in Participants' Capital
for the years ended December 31, 1998, 1997 and 1996 12
Statement of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 13
Notes to the Financial Statements 14-27
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 28
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 29
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 30
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 each of the five years in the period ended December 31, 1998:
Summary of
Operations 1998 1997 1996 1995 1994
- --------------------- ------------ ----------- ----------- ----------- ------------
Lease revenue $ 15,201,411 $16,912,628 $27,695,097 $21,605,260 $ 19,732,736
Net income $ 4,999,220 $ 877,213 $ 85,636 $ 2,916,460 $ 3,566,958
Per Beneficiary Interest:
Net income (loss)
Class A Interests $ 1.17 $ 0.49 $ 0.04 $ 1.32 $ 1.61
Class B Interests $ 0.39 $ (0.12) $ -- $ -- $ --
Cash distributions
Class A Interests $ 1.64 $ 3.11 $ 1.39 $ 2.10 $ 2.52
Class B Interests $ 2.10 $ 0.30 $ -- $ -- $ --
Financial Position
- ---------------------
Total assets $ 72,908,929 $82,036,778 $55,127,347 $68,469,022 $ 76,477,918
Total long-term
obligations $ 35,072,883 $39,928,173 $19,084,751 $29,517,713 $ 35,459,424
Participants' capital $ 36,360,494 $41,159,172 $35,053,486 $38,039,216 $ 39,776,342
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1998 compared to the year
ended December 31, 1997 and the year ended December 31, 1997
compared to the year ended December 31, 1996
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 11 to the accompanying financial statements, the collection
all rents due under the Trust's lease agreements and remarketing of the Trust's
equipment.
Year 2000 Issue
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Trust uses information systems provided by Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") and has no information
systems of its own. EFG has adopted a plan to address the Year 2000 Issue that
consists of four phases: assessment, remediation, testing, and implementation
and has elected to utilize principally internal resources to perform all phases.
EFG completed substantially all of its Year 2000 project by December 31, 1998 at
an aggregate cost of less than $50,000 and at a di minimus cost to the Trust.
Remaining items are expected to be minor and be completed by March 31, 1999. All
costs incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of
original design to use a four digit field to identify calendar year. All of the
Trust's lease billings, cash receipts and equipment remarketing processes are
performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Trust's significant vendors and third-party servicers are in the process, or
have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Trust's results of operations,
liquidity, or financial position. The Trust's equipment leases were structured
as triple net leases, meaning that the lessees are responsible for, among other
things, (i) maintaining and servicing all equipment during the lease term, (ii)
ensuring that all equipment functions properly and is returned in good
condition, normal wear and tear excepted, and (iii) insuring the assets against
casualty and other events of loss. Non-compliance with lease terms on the part
of a lessee, including failure to address Year 2000 Issues, could result in lost
revenues and impairment of residual values of the Trust's equipment assets under
a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Trust's business operations. However, EFG has no means of ensuring that all
customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Trust is not determinable.
3
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 resolution of which remains pending. See Note 11 to the
accompanying financial statements. The Trust's operations commenced in 1992 and
pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by
December 31, 2004.
Results of Operations
For the year ended December 31, 1998, the Trust recognized lease revenue
of $15,201,411 compared to $16,912,628 and $27,695,097 for the years ended
December 31, 1997 and 1996, 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 that had generated 1996 lease revenue of approximately
$9,740,000, including early termination rents of $7,304,730 (see discussion
below). The decrease in lease revenue from 1997 to 1998 is due to lease term
expirations and the sale of equipment. The decrease was partially offset by the
acquisition of additional equipment in 1997 pursuant to the reinvestment
provisions of the Trust Agreement. The level of lease revenue to be recognized
by the Trust in the future is expected to be impacted by the amendment to the
Trust Agreement described in Note 9 to the accompanying financial statements;
however the extent of such impact cannot be determined at this time. Over the
long term, the level of lease revenue will decline due to the expiration of the
Trust's primary lease term agreements.
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.
Interest income for the year ended December 31, 1998 was $1,096,363
compared to $988,610 and $318,618 for the years ended December 31, 1997 and
1996, respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income in 1998 and 1997 includes interest earned on
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.
During 1998, the Trust sold equipment having a net book value of
$2,355,043 to existing lessees and third parties. These sales resulted in a net
gain, for financial statement purposes, of $2,855,732.
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 $15,691. 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 $461,156.
4
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.
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 $9,603,049, $13,217,482 and
$15,219,989 for the years ended December 31, 1998, 1997 and 1996, 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.
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.
5
Interest expense was $3,098,019 or 20.4% of lease revenue in 1998 compared
to $1,894,703 or 11.2% and $1,775,651 or 6.4% of lease revenue in 1997 and 1996,
respectively. Interest expense increased due to additional leveraging obtained
to finance the acquisition of reinvestment equipment during 1997. Interest
expense in the near-term may increase due to the financing of any newly acquired
assets. Thereafter, interest expense will decline in amount and as a percentage
of lease revenue as the principal balance of notes payable is reduced through
the application of rent receipts to outstanding indebtedness.
Management fees were 4.3%, 4.3% and 3.5% of lease revenue for the years
ended December 31, 1998, 1997 and 1996, respectively. Management fees are based
on 5% of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit, insurance and legal fees, as well as
printing, distribution and remarketing expenses. Operating expenses were
$793,279, $741,259 and $426,646 for the years ended December 31, 1998, 1997 and
1996, respectively. During 1998, the Trust incurred or accrued approximately
$280,000 for certain legal expenses related to the Class Action Lawsuit
described in Note 11 to the financial statements. Additionally, operating
expenses increased from 1997 to 1998 due to professional service costs incurred
in connection with the Solicitation Statement described in Note 9 to the
financial statements. The increase in operating expenses from 1996 to 1997 was
due primarily to costs incurred in connection with the Solicitation and
Registration Statements described in Note 7 to the accompanying financial
statements.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity. As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $13,029,542 for the year ended December 31, 1998. For the year ended
December 31, 1997, operating activities generated net cash inflows of
$15,138,576, adjusted to reflect (i) equipment sale proceeds of $2,265,436
received in connection with the sale of a vessel and (ii) debt proceeds of
$3,846,898 from leveraging certain rail equipment, both of which amounts were
due from EFG at December 31, 1996 and reflected as cash inflows on the
accompanying 1997 Statement of Cash Flows. Operating activities generated net
cash inflows of $25,623,583 (adjusted for such sale and debt proceeds) for the
year ended December 31, 1996. Cash inflows generated from operating activities
during 1996 included the receipt of early termination proceeds of $7,304,730. In
the future, operating cash flows may increase due to the acquisition of
reinvestment equipment. Subsequently, 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.
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 and
$2,396,960 to acquire equipment during the years ended December 31, 1997 and
1996, respectively. All of the equipment acquisitions in 1997 and 1996 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 1998, the Trust realized net sale
proceeds of $5,210,775 compared to $1,075,032 in 1997. In 1996, the Trust
realized equipment sale proceeds of
6
$6,675,611, including $4,048,779 of proceeds from the United aircraft and
$2,265,436 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 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 and $13,324,892 in 1997 and 1996, respectively, resulted
from leveraging a portion of the Trust's equipment portfolio with third-party
lenders (see Results of Operations). 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. In future
years, the amount of cash used to repay debt obligations will decline as the
principal balance of notes payable is reduced through the collection and
application of rents. Notwithstanding the foregoing, the Trust has balloon
payment obligations of $20,469,318, $2,717,790 and $282,421 at the expiration of
the lease terms related to the SAS Aircraft, certain rail equipment and the Reno
Aircraft, respectively. During 1998, SAS exercised its option to extend the term
of its existing lease for a period of two years at a base rent to the Trust of
$302,536 per month, beginning December 30, 1998. As a result of SAS exercising
the renewal lease option, the balloon payment has been postponed until the
termination of the two-year extension period.
The Trust entered into a 1-year renewal lease agreement with British
Airways PLC for its proportionate interest in a Boeing 747 aircraft at a base
rent to the Trust of $82,500 per month, beginning October 29, 1998.
In accordance with the Trust Agreement, upon the dissolution of the Trust,
the Managing Trustee will be required to contribute to the Trust an amount equal
to any negative balance which may exist in the Managing Trustee's tax capital
account. At December 31, 1998, the Managing Trustee had a negative tax capital
account balance of $70,410.
At December 31, 1998, the Trust was due aggregate future minimum lease
payments of $20,510,564 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 $35,072,883 (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 becomes available for remarketing, the cash flows of the Trust will
become less predictable. In addition, the Trust will have cash needs to satisfy
interest on indebtedness and to pay management fees and operating expenses.
Ultimately, the Trust is expected to meet its future disbursement obligations
and to distribute any excess of cash inflows over cash outflows to the
Participants in accordance with the Trust Agreement. However, several factors,
including month-to-month lease extensions, lessee defaults, equipment casualty
events, and early lease terminations could alter the Trust's anticipated cash
flows as described herein and in the accompanying financial statements and
result in fluctuations to the Trust's periodic cash distribution payments.
On July 18, 1997, the Trust issued 3,024,740 Class B Interests at $5.00
per interest, thereby generating $15,123,700 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 5,520 Class B Interests,
generating $27,600 of such aggregate capital contributions, and the Special
Beneficiary, EFG, purchased 3,019,220 Class B Interests, generating $15,096,100
of such aggregate capital contributions. The Trust incurred offering costs in
the amount of $151,237 and professional service costs of $153,842 in connection
with this offering. Subsequently, EFG transferred its Class B Interests to a
special-purpose company, Equis II Corporation, a Delaware corporation. EFG also
transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the
Trust, to Equis II Corporation. As a result, Equis II Corporation has voting
control of the Trust through its ownership of the majority of the Trust's
outstanding voting interests, as well as its ownership of AFG ASIT Corporation.
Equis II Corporation is controlled by EFG's President and Chief Executive
Officer, Gary D. Engle.
7
Accordingly, control of the Managing Trustee did not change as a result of the
foregoing transactions (see also Note 7 to the accompanying financial
statements).
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $2,960,865, to Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997,
the Trust used $2,291,567 of the net proceeds realized from the issuance of the
Class B Interests to purchase 218,661 of the Class A Interests tendered as a
result of the offer. On July 6, 1998, the Trust used $4,646,862 of such proceeds
to pay a capital distribution to the Class B Beneficiaries. The remaining net
proceeds from the Class B offering of $4,919,327 will be used according to terms
negotiated in connection with settling the Class Action Lawsuit described in
Note 11 (see also Notes 8, 9 and 10 to the accompanying financial statements).
On April 28, 1998, the Trust purchased 5,200 additional Class A Interests at a
cost of $46,800.
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 and 1998. For the Class B Beneficiaries, the Managing Trustee established
and paid, from the Trust, an annualized distribution of $0.66 per Class B
Interest commencing July 18, 1997. Future distributions, with respect to Class B
Interests, will be subordinate to certain distributions with respect to Class A
Interests.
Cash distributions to the Managing Trustee, the Special Beneficiary, and
the Beneficiaries are declared and generally paid within fifteen days following
the end of each month. The payment of such distributions is presented as a
component of financing activities. For the year ended December 31, 1998, the
Trust declared total cash distributions of $9,751,098. The Beneficiaries were
allocated $9,278,956 ($2,929,485 for Class A Beneficiaries and $6,349,471 for
Class B Beneficiaries); the Special Beneficiary was allocated $421,100; and the
Managing Trustee was allocated $51,042.
The nature of the Trust's operations and principal cash flows gradually
will shift from rental receipts to equipment sale proceeds as the Trust matures
and change as a result of new investments not consisting of equipment
acquisitions. As this occurs, the Trust's cash flows resulting from equipment
investments may become more volatile in that certain of the Trust's equipment
leases will be renewed and certain of its assets will be sold. In some cases,
the Trust may be required to expend funds to refurbish or otherwise improve the
equipment being remarketed in order to make it more desirable to a potential
lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will
attempt to monitor and manage these events in order to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
new investment activities and the collection of contractual rents, the
retirement of scheduled indebtedness, and the Trust's future working capital
requirements, in establishing future cash distribution rates.
8
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, 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 26, 1999
9
AFG Investment Trust C
STATEMENT OF FINANCIAL POSITION
December 31, 1998 and 1997
1998 1997
----------------- -----------------
ASSETS
Cash and cash equivalents $ 17,025,123 $ 8,843,640
Restricted cash 4,919,327 9,566,189
Rents receivable 341,111 819,736
Accounts receivable - affiliate 678,673 904,426
Equipment at cost, net of accumulated depreciation
of $42,241,976 and $50,635,609 at December 31, 1998
1997, respectively 49,944,695 61,902,787
----------------- -----------------
Total assets $ 72,908,929 $ 82,036,778
================= =================
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 35,072,883 $ 39,928,173
Accrued interest 229,115 240,434
Accrued liabilities 311,500 11,550
Accrued liabilities - affiliate 54,202 118,703
Deferred rental income 481,439 126,942
Cash distributions payable to participants 399,296 451,804
----------------- -----------------
Total liabilities 36,548,435 40,877,606
----------------- -----------------
Participants' capital (deficit):
Managing Trustee 12,631 (123,674)
Special Beneficiary 104,209 (1,000,794)
Class A Beneficiary Interests (1,787,153 and 1,792,353 Interests
at December 31, 1998 and 1997, respectively,
initial purchase price of $25 each) 30,022,170 30,858,790
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) 8,559,851 13,716,417
Treasury Interests (223,861 and 218,661 Class A Interests
at December 31, 1998 and 1997,respectively, at Cost) (2,338,367) (2,291,567)
----------------- -----------------
Total participants' capital 36,360,494 41,159,172
----------------- -----------------
Total liabilities and participants' capital $ 72,908,929 $ 82,036,778
================= =================
The accompanying notes are an integral part of
these financial statements
10
AFG Investment Trust C
STATEMENT OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------------ ------------------ ------------------
Income:
Lease revenue $ 15,201,411 $ 16,912,628 $ 27,695,097
Interest income 1,096,363 988,610 318,618
Other income -- -- 228,700
Gain (loss) on sale/exchange
of equipment 2,855,732 (445,465) (7,371,871)
------------------ ------------------ ------------------
Total income 19,153,506 17,455,773 20,870,544
------------------ ------------------ ------------------
Expenses:
Depreciation and amortization 9,603,049 13,217,482 15,219,989
Write-down of equipment -- -- 2,400,000
Interest expense 3,098,019 1,894,703 1,775,651
Equipment management fees - affiliate 659,939 725,116 962,622
Operating expenses - affiliate 793,279 741,259 426,646
------------------ ------------------ ------------------
Total expenses 14,154,286 16,578,560 20,784,908
------------------ ------------------ ------------------
Net income $ 4,999,220 $ 877,213 $ 85,636
================== ================== ==================
Net income (loss)
per Class A Beneficiary Interest $ 1.17 $ 0.49 $ 0.04
================== ================== ==================
per Class B Beneficiary Interest $ 0.39 $ (0.12) $ --
================== ================== ==================
Cash distributions declared
per Class A Beneficiary Interest $ 1.64 $ 3.11 $ 1.39
================== ================== ==================
per Class B Beneficiary Interest $ 2.10 $ 0.30 $ --
================== ================== ==================
The accompanying notes are an integral part of
these financial statements
11
AFG Investment Trust C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the years ended December 31, 1998, 1997 and 1996
Managing Special Class A Beneficiaries
Trustee Beneficiary ----------------------------
Amount Amount Interests Amount
------------ ------------ ------------ ------------
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
Net income - 1998 187,347 1,526,103 -- 2,092,865
Cash distributions declared (51,042) (421,100) -- (2,929,485)
Acquisition of treasury interests, at cost -- -- (5,200) --
------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 12,631 $ 104,209 1,787,153 $ 30,022,170
============ ============ ============ ============
Class B Beneficiaries
--------------------------- Treasury
Interests Amount Interests Total
------------ ------------ ------------ ------------
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 13,716,41 (2,291,567) 41,159,172
Net income - 1998 -- 1,192,905 -- 4,999,220
Cash distributions declared -- (6,349,471) -- (9,751,098)
Acquisition of treasury interests, at cost -- -- (46,800) (46,800)
------------ ------------ ------------ ------------
Balance at December 31, 1998 3,024,740 $ 8,559,851 $ (2,338,367) $ 36,360,494
============ ============ ============ ============
The accompanying notes are an integral part of
these financial statements
12
AFG Investment Trust C
STATEMENT OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from (used in) operating activities:
Net income $ 4,999,220 $ 877,213 $ 85,636
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 9,603,049 13,217,482 15,219,989
Write-down of equipment -- -- 2,400,000
(Gain) loss on sale/exchange
of equipment (2,855,732) 445,465 7,371,871
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 478,625 1,319,636 809,820
Accounts receivable - affiliate 225,753 5,580,111 (6,383,279)
Increase (decrease) in:
Accrued interest (11,319) 51,451 (165,314)
Accrued liabilities 299,950 (12,435) 3,985
Accrued liabilities - affiliate (64,501) (145,420) 264,123
Deferred rental income 354,497 (82,593) (95,582)
---------------- ---------------- ----------------
Net cash from operating activities 13,029,542 21,250,910 19,511,249
---------------- ---------------- ----------------
Cash flows from (used in) investing activities:
Purchase of equipment -- (38,887,683) (2,396,960)
Proceeds from equipment sales 5,210,775 1,075,032 6,675,611
---------------- ---------------- ----------------
Net cash from (used in) investing activities 5,210,775 (37,812,651) 4,278,651
---------------- ---------------- ----------------
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 (46,800) (2,291,567) --
Restricted cash 4,646,862 (9,566,189) --
Proceeds from notes payable -- 31,951,256 13,324,892
Principal payments - notes payable (4,855,290) (12,991,972) (23,757,854)
Distributions paid (9,803,606) (7,303,103) (3,001,561)
---------------- ---------------- ----------------
Net cash from (used in) financing activities (10,058,834) 14,770,888 (13,434,523)
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents 8,181,483 (1,790,853) 10,355,377
Cash and cash equivalents at beginning of year 8,843,640 10,634,493 279,116
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 17,025,123 $ 8,843,640 $ 10,634,493
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,109,338 $ 1,843,252 $ 1,940,965
================ ================ ================
Supplemental disclosure of non-cash activity:
See Note 3 to the financial statements.
The accompanying notes are an integral part of
these financial statements
13
AFG Investment Trust C
Notes to the Financial Statements
December 31, 1998
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 known as 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. On April
28, 1998, the Trust repurchased 5,200 additional Class A Interests. Accordingly,
there are 1,787,153 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. EFG
acts as Advisor to the Trust and provides services 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, as
amended (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 is
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, Chief Executive Officer and sole Director. 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.
14
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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 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, 1998, the Trust had $19,310,000 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 $4,919,327 which
is classified as Restricted Cash and represents the net proceeds realized from
the offering of the Class B Interests less ( i ) the portion thereof used to pay
a special distribution to the Class A Beneficiaries and to redeem Class A
Interests (see Notes 7 and 8) and ( ii ) the portion used to pay a capital
distribution to the Class B Beneficiaries (see Note 10). The remainder is
expected to be used according to terms negotiated in conjunction with settling
the Class Action Lawsuit described in Note 11.
Revenue Recognition
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $20,510,564 are due as follows:
For the year ending December 31, 1999 $ 8,702,273
2000 6,176,778
2001 2,145,367
2002 1,978,315
2003 1,361,022
Thereafter 146,809
-----------
Total $20,510,564
===========
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is as
follows:
1998 1997 1996
--------------- --------------- ---------------
Stena Bulk AB $ -- $ -- $ 9,742,697
Scandinavian Airlines System $ 4,153,770 $ -- $ --
15
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
During 1998, Scandinavian Airlines System ("SAS") exercised its option to
extend the term of its existing lease for a period of two years at a base rent
to the Trust of $302,536 per month, beginning December 30, 1998. As a result of
SAS exercising the renewal lease option, the balloon payment (originally due at
the end of the primary lease term) has been postponed until the termination of
the two-year extension period.
The Trust entered into a 1-year renewal lease agreement with British
Airways PLC for its proportionate interest in a Boeing 747 aircraft at a base
rent to the Trust of $82,500 per month, beginning October 29, 1998.
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 means the actual cost paid by the Trust to
acquire the equipment, including acquisition fees. Where equipment was acquired
from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the
equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the
Affiliate while carrying the equipment, including all liens and encumbrances,
less the amount of all primary term rents earned by EFG or the Affiliate prior
to selling the equipment. Where the seller of the equipment was a third party,
Equipment Cost reflects the seller's invoice price.
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. To the extent that such adjustments were recorded, they are
reflected separately on the accompanying Statement of Operations as Write-Down
of Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Organization costs were amortized using the straight-line method over a
period of five years.
16
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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
Net income is allocated quarterly 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 (excluding
$4,646,862 Class B capital distributions paid in 1998). Net losses are allocated
quarterly 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. Prior to adoption of the
current Trust Agreement on July 15, 1997 (see Note 7), 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).
The allocation of net income or loss pursuant to the Trust Agreement
differs from the foregoing and 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, 1998 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 $363,605, $2,999,741, $20,264,745, and $12,732,403,
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 1998 are based
on 1,792,353 Class A Interests outstanding during the period January 1, 1998
through April 27, 1998 and 1,787,153 Class A Interests outstanding during the
period April 28, 1998 through December 31, 1998. 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 the year
ended December 31, 1996. Net income and cash distributions per Class B
Beneficiary Interest are based on 3,024,740 Class B Interests outstanding during
the year ended December 31, 1998 and 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.
17
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1998 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of 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 0-48 $ 47,400,169 NV/WA/Foreign
Locomotives 18-63 9,179,509 IL/NB
Manufacturing 12-56 9,053,648 CA/MI
Construction and mining 0-24 7,374,943 FL/IL/IN/MI/NV/SC/VA
Materials handling 0-50 6,933,550 AR/CA/FL/GA/IL/IN/IA/KY
MA/MI/MS/NJ/OH/OR
PA/SC/TX/VA/WI/WV/Foreign
AL/CA/CO/FL/GA/IL/IN/KS/
MI/NJ/NY/OH/PA
Computers and peripherals 0-12 5,166,613 SC/TN/TX/UT/VA/WI/WV
Retail store fixtures 0-9 4,741,269 AZ/CO/LA/NM/TX
Research and test 0 1,667,223 CA/FL/IL/MI/MO/NC/NJ/NY/OH/PA
TN/TX/UT
Furniture and fixtures 0 203,261 NJ
Communications 6 151,460 FL
Tractors and heavy duty trucks 0 148,079 IL/MI
Trailers/intermodal containers 0 104,255 FL
Photocopying 0 60,486 CT
Medical 0 2,206 WI
---------------
Total equipment cost 92,186,671
Accumulated depreciation (42,241,976)
---------------
Equipment, net of accumulated depreciation $ 49,944,695
===============
During August 1997, the Trust and another EFG sponsored investment program
exchanged certain locomotives for a proportionate interest in certain other
locomotives. The Trust's original locomotives had a cost and a 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 $461,156. 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,
1998, the Trust's equipment portfolio included equipment having a proportionate
original cost of $58,661,251, representing approximately 64% of total equipment
cost.
18
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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
$52,257,000 and a net book value of approximately $42,622,000 at December 31,
1998 (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, 1998, the cost and net book value of
equipment held for sale or re-lease was approximately $8,965,000 and $4,608,000,
respectively. This equipment includes the Trust's proportionate interest in a
McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. with a
cost and net book value of $7,333,098 and $4,489,744, respectively (See Note 12
- - Subsequent Events). The Managing Trustee is actively seeking the sale or
re-lease of all equipment not on lease. In addition, the summary above includes
equipment being leased on a month-to-month.
The Trust recorded a write-down of the carrying value of its interest in an
aircraft, representing an impairment, during the year ended December 31, 1996.
The resulting charge, $2,400,000 ($1.08 per Beneficiary Interest) in 1996 was
based on a comparison of the estimated net realizable value and corresponding
carrying value for the Trust's interest in the aircraft.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1998, 1997 and
1996, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
1998 1997 1996
--------------- --------------- ---------------
Equipment acquisition fees $ -- $ 1,121,157 $ 69,712
Equipment management fees 659,939 725,116 962,622
Offering costs -- 151,237 --
Administrative charges 90,744 84,834 57,379
Reimbursable operating expenses
due to third parties 702,535 656,425 369,267
--------------- --------------- ---------------
Total $ 1,453,218 $ 2,738,769 $ 1,458,980
=============== =============== ===============
19
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
EFG and its Affiliates were reimbursed for their out-of-pocket offering
costs incurred on behalf of the Trust in an amount equal to 1% of the gross
proceeds of the four trusts which sold Class B Interests, pursuant to the
Registration Statement on Form S-1. The amount of reimbursement made by the
Trust was prorated in proportion to the number of Beneficiary Interests sold in
the Trust.
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 was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 2, 1997, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In connection with the Solicitation Statement and consent of Beneficiaries (See
Note 9), the Trust's reinvestment provisions were reinstated through December
31, 2002. In addition, the Trust is now permitted to invest in assets other than
equipment (See Note 12). Acquisition fees paid to EFG in connection with such
reinvestment assets are equal to 1% of Asset Base Price paid by the Trust. For
management services, EFG is compensated by an amount equal to (i) 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Trust with respect assets acquired on or prior to March 31,
1998. For management services earned in connection with assets acquired on or
after April 1, 1998, EFG is compensated by an amount equal to 2% of gross lease
rental revenue received by the Trust. Both of these fees are subject to certain
limitations defined in the Trust Agreement. For non-equipment investments other
than cash, the Managing Trustee receives an annualized management fee of 1%.
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 at actual cost.
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, 1998, the Trust was owed $678,673 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1999.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D.
Engle is Chairman and CEO of Semele.
Refer to Note 7 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and the change in ownership of the Managing
Trustee.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1998 consisted of installment notes of
$35,072,883 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 (5.54% at December 31, 1998) plus a
margin. All of the
20
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
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 $20,469,318, $2,717,790 and $282,421 at the expiration of
the lease terms related to the SAS Aircraft, certain rail equipment and the Reno
Aircraft, respectively. During 1998, pursuant to the lease agreement, SAS
exercised its option to extend the term of the existing lease for a period of
two years, beginning December 30, 1998. As a result of SAS exercising the
renewal lease option, the balloon payment has been postponed until the
termination of the two-year extension period. The carrying amount of notes
payable approximates fair value at December 31, 1998.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 1999 $ 4,397,193
2000 25,477,920
2001 1,762,882
2002 1,711,833
2003 1,578,686
Thereafter 144,369
--------------
Total $ 35,072,883
==============
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 quarterly
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 (excluding $4,646,862 Class B capital
distributions paid in 1998). Net losses are allocated quarterly 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, 1998, the Managing Trustee had a negative tax capital account
balance of $70,410.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1998, 1997 and 1996:
21
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
1998 1997 1996
--------------- --------------- -------------
Net income $ 4,999,220 $ 877,213 $ 85,636
Financial statement depreciation
in excess of (less than) tax depreciation (5,652,952) (1,722,944) 2,880,589
Write-down of equipment -- -- 2,400,000
Tax gain (loss) in excess of
book gain (loss) 139,615 1,015,849 (54,917)
Deferred rental income 354,497 (82,593) (95,582)
Other (46,700) (37,114) 37,114
--------------- --------------- -------------
Net income (loss) for federal income tax
reporting purposes $ (206,320) $ 50,411 $ 5,252,840
=============== =============== =============
The following is a reconciliation between participants' capital reported
for financial statement and federal income tax reporting purposes for the years
ended December 31, 1998 and 1997:
1998 1997
--------------- ---------------
Participants' capital $ 36,360,494 $ 41,159,172
Add back selling commissions and organization
and offering costs 4,922,397 4,922,397
Financial statement distributions in excess of
tax distributions 16,957 --
Deduct deferred step-down of capital basis (689,869) --
Cumulative difference between federal income tax
and financial statement income (loss) (13,859,944) (8,654,404)
--------------- ---------------
Participants' capital for federal income tax reporting purposes $ 26,750,035 $ 37,427,165
=============== ===============
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 - 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
22
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
additional class of security with such designations, preferences and relative,
participating, optional or other special rights, powers and duties as the
Managing Trustee might affix. The funds obtained through the issuance of such a
security were intended to 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 Amendment was adopted.
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 8 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Interests of the Trust by filing a Form 13E-4, Issuer
Tender Offer Statement, with the SEC and distributing to the Class A
Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $2,291,567 of the net proceeds realized from
the issuance of the Class B Interests to purchase 218,661 of the Class A
Interests tendered as a result of the offer. On April 28, 1998, the Trust
purchased 5,200 additional Class A Interests at a cost of $46,800.
23
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
NOTE 9 - SOLICITATION STATEMENT
On May 5, 1998, the Trust filed a definitive Solicitation Statement with
the United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a proposed
amendment (the "Amendment") to the Second Amended and Restated Declaration of
Trust (the "Trust Agreement"). The Solicitation Statement and Consent of
Beneficiary were mailed to all of the Beneficiaries of the Trust on May 6, 1998.
The Beneficiaries were requested to use the Consent of Beneficiary to vote on
seven proposals and return their votes on or before June 5, 1998. Equis II
Corporation, which has voting control of the Trust, agreed to vote all of its
Class B Interests in the same manner in which the majority of the Class A
Interests were actually voted. Accordingly, the Amendment would be adopted or
rejected based upon the voting results of the majority of Class A Interests that
were actually voted (including 9,210 Class A Interests owned by affiliates of
EFG), regardless of how few Class A Interests were actually voted.
The results of the voting reflected that a majority of Class A Interests
voted in favor of each of the proposals. Therefore, the Trust Agreement was
amended to (i) broaden the Trust's stated investment policies and objectives and
permit the Trust to invest in assets other than leased equipment; (ii) modify
the Trust's financing provisions to eliminate any cap on the amount of aggregate
Trust indebtedness and permit the Trust to use cross-collateralized and other
recourse debt structures; (iii) extend the Trust's reinvestment period, which
originally expired on September 2, 1997, until December 31, 2002 and (iv) reduce
acquisition fees paid to EFG in connection with reinvestment assets acquired
after the Amendment date from a maximum of 3% to 1% and management fees earned
in connection with such assets from a maximum of 5% to 2%.
In addition, subject to attaining a settlement in the Class Action Lawsuit
described in Note 11 herein, the Trust Agreement will be modified in the
following principal respects: (i) the Trust will 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
Beneficiary 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, 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 and (iii) certain voting restrictions will be placed
upon the Class B Interests owned by Equis II Corporation.
NOTE 10 - CLASS B CAPITAL DISTRIBUTION
The Managing Trustee and certain of its affiliates were named as
defendants in the Class Action Lawsuit discussed in Note 11 herein. In
connection with this litigation and subject to a settlement being effected, the
Managing Trustee has agreed to adopt certain modifications to the Trust
Agreement as described in the Solicitation Statement referred to in Note 9
herein. One aspect of the proposed settlement would result in using of a portion
of Equis II Corporation's Class B Capital Contribution to the Trust to (i) pay a
second special cash distribution to Class A Beneficiaries totaling $1,513,639,
approximately $.75 per Class A Interest, and (ii) invest $3,405,688 in the
Trust's long-term business activities. The remainder of the Class B Capital
Contributions (not otherwise used to repurchase Class A Interests in the Tender
Offer closed on October 10, 1997 or to pay for offering and related costs
associated with the Class B Interests or to pay the first special cash
distribution), $4,646,862 in total, was returned to Equis II Corporation
($4,629,404) and the other third-party Class B capital contributors ($17,458) on
July 6, 1998.
NOTE 11 - 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
24
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth 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 Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Trust and all other plaintiff class members in
the Class Action Lawsuit will receive a Notice of Settlement and other
information pertinent to the settlement of their claims in advance of the
fairness hearing. Since first executing the Stipulation of Settlement, the Court
has scheduled two fairness hearings, the first on December 11, 1998 and the
second on March 19, 1999, each of which was postponed because of delays in
finalizing certain information materials that are subject to regulatory review
prior to being distributed to investors, but none of which involved the Trust's
settlement.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of the
Trust's claims by the middle of 1999. The second sub-class, which does not
include the Trust, is expected to remain pending for a longer period.
Assuming the proposed settlement is effected according to present terms,
the Trust's share of legal fees and expenses related to the Class Action Lawsuit
is estimated to be approximately $280,000, all of which was accrued and expensed
by the Trust in 1998. There can be no assurance that settlement of either
sub-class of the Class Action Lawsuit will receive final Court approval and be
effected. However, the Managing Trustee and its affiliates, in consultation with
counsel, concur that there is a reasonable basis to believe that final
settlements of each sub-class will be achieved. In the absence of final
settlements approved by the Court, the Defendants intend to defend vigorously
against the claims asserted in the Class Action Lawsuit. Neither the Managing
Trustee nor its affiliates can predict with any degree of certainty the cost of
continuing litigation to the Trust or the ultimate outcome.
In addition to the foregoing, the Trust is a party to other lawsuits that
have arisen out of the conduct of its business, principally involving disputes
or disagreements with lessees over lease terms and conditions. The following
action had not been finally adjudicated at December 31, 1998:
25
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
Action involving National Steel Corporation
EFG, on behalf of the Trust and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Trust, National Steel Corporation ("National Steel"). The
Complaint seeks reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. In March 1999, the
Plaintiffs obtained payment for certain of the disputed items and have resumed
settlement discussions to resolve remaining issues. The Managing Trustee does
not believe that the resolution of the remaining claims will have a material
adverse effect on the Trust's financial position or results of operations.
NOTE 12 - SUBSEQUENT EVENTS
Sale of Aircraft
In January 1999, the Trust sold its 42.83% interest in a McDonnell Douglas
MD-82 aircraft formerly leased to Alaska Airlines, Inc. The Trust received sale
proceeds of $4,997,297. At December 31, 1998, the net carrying value of this
aircraft to the Trust was $4,489,744.
Investment in Kettle Valley Development
On March 1, 1999, the Trust and an affiliated trust (collectively, the
"Buyers") formed EFG/Kettle Development LLC, a Delaware limited liability
company, for the purpose of acquiring a 49.9% indirect ownership interest (the
"Interest") in a real estate development in Kelowna, British Columbia called
Kettle Valley. EFG/Kettle Development LLC, upon receiving the Buyers' equity
investment, purchased the Interest from a special purpose company ("SPC") whose
subsidiaries own a 99.9% limited partnership interest in Kettle Valley
Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were
established by the seller, in part, for income tax purposes and have no business
interests other than the development of Kettle Valley. KVD LP is a Canadian
Partnership that owns the property, consisting of approximately 280 acres of
land. The project, which is in the early stages of being marketed to home
buyers, is zoned for 1,000 residential units in addition to commercial space
that, currently, is being constructed. The seller is an unaffiliated third-party
company and has retained the remaining 50.1% ownership interest in the SPC. A
newly organized Canadian affiliate of EFG replaced the original general partner
of KVD LP on March 1, 1999.
The Trust's ownership share in EFG/Kettle Development LLC is 50.604% and
had a cost of $4,427,850, which was funded with cash of $3,095,369 and a
non-recourse note for $1,332,481. The note bears interest at an annualized rate
of 7.5% and will be fully amortized over 34 months commencing April 1, 1999. The
note is secured only by the Trust's stock interests in the SPC. In addition, the
seller purchased a residual sharing interest in a Boeing 767-300 owned by the
Buyers and leased to Scandinavian Airlines System. The seller paid $3,013,206 to
the Buyers ($1,524,803, or 50.604% to the Trust) for the residual interest,
which is subordinate to
26
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
certain preferred payments to be made to the Buyers in connection with the
aircraft. Payment of the residual interest is due only to the extent that the
Trust receives net residual proceeds from the aircraft. The residual interest is
non-recourse to the Buyers.
27
ADDITIONAL FINANCIAL INFORMATION
AFG Investment Trust C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1998, 1997 and 1996
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, 1998, 1997 and 1996.
1998 1997 1996
--------------- --------------- ---------------
Rents earned prior to disposal of
equipment, net of interest charges $ 20,592,192 $ 5,772,819 $ 18,461,013
Sale proceeds, including assumption
of debt, realized upon disposition/
exchange of equipment 5,210,775 2,959,170 6,675,611
--------------- --------------- ---------------
Total cash generated from rents
and equipment sale proceeds 25,802,967 8,731,989 25,136,624
Original acquisition cost of equipment
disposed 20,351,725 5,755,478 21,097,744
--------------- --------------- ---------------
Excess of total cash generated to cost
of equipment disposed $ 5,451,242 $ 2,976,511 $ 4,038,880
=============== =============== ===============
28
AFG Investment Trust C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1998
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
Net income $ 2,143,488 $ 2,855,732 $ 4,999,220
Add:
Depreciation 9,603,049 -- 9,603,049
Management fees 659,939 -- 659,939
Book value of disposed equipment -- 2,355,043 2,355,043
Less:
Principal reduction of notes payable (4,855,290) -- (4,855,290)
------------------ ------------------ ------------------
Cash from operations, sales
and refinancings 7,551,186 5,210,775 12,761,961
Less:
Management fees (659,939) -- (659,939)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 6,891,247 5,210,775 12,102,022
Other sources and uses of cash:
Cash at beginning of year 4,070,542 4,773,098 8,843,640
Purchase of Treasury Interests (46,800) -- (46,800)
Restricted cash 4,646,862 -- 4,646,862
Net change in receivables and
accruals 1,283,005 -- 1,283,005
Less:
Cash distributions paid (9,803,606) -- (9,803,606)
------------------ ------------------ ------------------
Cash at end of year $ 7,041,250 $ 9,983,873 $ 17,025,123
================== ================== ==================
29
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, 1998
For the year ended December 31, 1998, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
Operating expenses $ 517,586
30