<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________________to________________________
_______________________
For Quarter Ended June 30, 1998 Commission File No. 0-21396
AFG Investment Trust A
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3145953
- --------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
- --------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No
----- -----
<PAGE>
AFG Investment Trust A
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1998 and December 31, 1997 3
Statement of Operations
for the three and six months ended June 30, 1998 and 1997 4
Statement of Changes in Participants' Capital
For the six months ended June 30, 1998 5
Statement of Cash Flows
for the six months ended June 30, 1998 and 1997 6
Notes to the Financial Statements 7-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-22
PART II. OTHER INFORMATION:
Items 1 - 6 23
</TABLE>
2
<PAGE>
AFG Investment Trust A
STATEMENT OF FINANCIAL POSITION
June 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,659,184 $ 3,176,850
Restricted cash 2,592,096 2,606,496
Rents receivable 301,158 533,052
Accounts receivable - affiliate 64,822 305,209
Note receivable - affiliate 462,353 462,353
Investment securities - affiliate 170,376 157,270
Equipment at cost, net of accumulated depreciation
of $11,096,973 and $11,445,495 at June 30, 1998
and December 31, 1997, respectively 5,029,632 6,817,333
----------------- -------------------
Total assets $ 12,279,621 $ 14,058,563
----------------- -------------------
----------------- -------------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 1,524,696 $ 2,342,924
Accrued interest 17,424 31,244
Accrued liabilities 114,534 11,550
Accrued liabilities - affiliate 3,425 35,621
Deferred rental income 12,070 79,776
Cash distributions payable to participants 194,568 195,306
----------------- -------------------
Total liabilities 1,866,717 2,696,421
----------------- -------------------
----------------- -------------------
Participants' capital (deficit):
Managing Trustee (13,357) (12,052)
Special Beneficiary (106,648) (92,015)
Class A Beneficiary Interests (482,016 Interests,
initial purchase price of $25 each) 7,962,021 8,357,529
Class B Beneficiary Interests (826,072 Interests;
initial purchase price of $5 each) 3,205,299 3,728,691
Treasury Interests (67,202 Interests at Cost) (634,411) (620,011)
----------------- -------------------
Total participants' capital 10,412,904 11,362,142
----------------- -------------------
Total liabilities and participants' capital $ 12,279,621 $ 14,058,563
----------------- -------------------
----------------- -------------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AFG Investment Trust A
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 549,647 $ 1,477,298 $ 1,281,535 $ 2,567,135
Interest income 76,249 27,119 155,120 52,919
Interest income - affiliate 11,716 -- 23,275 --
Loss on sale/exchange of equipment (77,440) (364,901) (78,738) (362,806)
--------------- --------------- --------------- ---------------
Total income 560,172 1,139,516 1,381,192 2,257,248
--------------- --------------- --------------- ---------------
Expenses:
Depreciation and amortization 610,333 861,524 1,263,921 1,794,021
Interest expense 25,734 67,229 57,870 110,587
Equipment management fees
- affiliate 24,101 49,807 57,227 94,385
Operating expenses - affiliate 165,419 60,403 215,652 99,260
--------------- --------------- --------------- ---------------
Total expenses 825,587 1,038,963 1,594,670 2,098,253
--------------- --------------- --------------- ---------------
Net income (loss) $ (265,415) $ 100,553 $ (213,478) $ 158,995
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income (loss)
per Class A Beneficiary Interest $ -- $ 0.17 $ -- $ 0.26
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
per Class B Beneficiary Interest $ (0.32) $ -- $ (0.32) $ --
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Cash distributions declared
per Class A Beneficiary Interest $ 0.41 $ 0.41 $ 0.82 $ 0.82
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
per Class B Beneficiary Interest $ 0.16 $ -- $ 0.33 $ --
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AFG Investment Trust A
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the six months ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Managing Special Class A Beneficiaries
Trustee Beneficiary ----------------------
Amount Amount Interests Amount
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ (12,052) $ (92,015) 483,816 $ 8,357,529
Net income (loss) 5,916 46,021 -- --
Unrealized gain on investment
securities - affiliate 131 -- -- --
----------- ----------- ----------- -----------
Comprehensive income 6,047 46,021 -- --
----------- ----------- ----------- -----------
Cash distributions declared (7,352) (60,654) -- (395,508)
Acquisition of Treasury Interests, at Cost -- -- (1,800) --
----------- ----------- ----------- -----------
Balance at June 30, 1998 $ (13,357) $(106,648) 482,016 $7,962,021
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Beneficiaries
--------------------- Treasury
Interests Amount Interests Total
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 826,072 $ 3,728,691 $ (620,011) $ 11,362,142
Net income (loss) -- (265,415) -- (213,478)
Unrealized gain on investment
securities - affiliate -- 12,975 -- 13,106
----------- ----------- ----------- -----------
Comprehensive income -- (252,440) -- (200,372)
----------- ----------- ----------- -----------
Cash distributions declared -- (270,952) -- (734,466)
Acquisition of Treasury Interests, at Cost -- -- (14,400) (14,400)
----------- ----------- ----------- -----------
Balance at June 30, 1998 826,072 $ 3,205,299 $ (634,411) $10,412,904
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AFG Investment Trust A
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (213,478) $ 158,995
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 1,263,921 1,794,021
Loss on sale/exchange of equipment 78,738 362,806
Changes in assets and liabilities Decrease (increase) in:
rents receivable 231,894 (50,147)
accounts receivable - affiliate 240,387 (105,543)
Increase (decrease) in:
accrued interest (13,820) (17,442)
accrued liabilities 102,984 (8,250)
accrued liabilities - affiliate (32,196) (7,702)
deferred rental income (67,706) (6,598)
--------------- ---------------
Net cash from operating activities 1,590,724 2,120,140
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sales 445,042 115,532
--------------- ---------------
Net cash from investing activities 445,042 115,532
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (818,228) (1,005,133)
Distributions paid (735,204) (495,658)
--------------- ---------------
Net cash used in financing activities (1,553,432) (1,500,791)
--------------- ---------------
Net increase in cash and cash equivalents 482,334 734,881
Cash and cash equivalents at beginning of period 3,176,850 1,832,248
--------------- ---------------
Cash and cash equivalents at end of period $ 3,659,184 $ 2,567,129
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 71,690 $ 128,029
--------------- ---------------
--------------- ---------------
Supplemental disclosure of non-cash activity:
See Note 5 to the financialstatements.
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
June 30, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not include
all information and footnote disclosures required under generally accepted
accounting principles for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 1998 and December 31, 1997 and results of operations for
the three and six months ended June 30, 1998 and 1997 have been made and are
reflected.
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Trust's net income or participants' capital.
Statement 130 requires unrealized gains or losses on the Trust's
available-for-sale securities, which prior to adoption were reported separately
in participants' capital, to be included in comprehensive income. During the six
months ended June 30, 1998, total comprehensive income amounted to $200,372.
NOTE 2 - CASH
At June 30, 1998, the Trust had $6,144,104 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 $2,592,096 which
is classified as Restricted Cash and represents the remaining net proceeds
realized from the offering of the Class B Interests less the portion thereof
used to pay a special distribution to the Class A Beneficiaries and to redeem
Class A Interests (see Notes 9 and 10). A portion of these funds will be used to
pay a Class B Capital Distribution (see Note 12). The remainder is expected to
be used according to terms negotiated in conjunction with settling the Class
Action Lawsuit described in Note 8.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time. 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
$1,448,721 are due as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending June 30, 1999 $ 704,542
2000 267,420
2001 206,397
2002 179,149
2003 91,213
-----------
Total $ 1,448,721
-----------
-----------
</TABLE>
7
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Trust at June 30,
1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 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.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
<S> <C> <C>
Aircraft 0-54 $ 6,814,662
Materials handling 0-27 2,686,098
Communications 6 1,802,423
Computers and peripherals 0-3 1,334,312
Retail store fixtures 0-9 1,261,032
Construction and mining 0-54 1,206,181
Research and test 0 459,282
Manufacturing 0 442,590
Energy systems 0 108,975
Photocopying 16 11,050
----------------
Total equipment cost 16,126,605
Accumulated depreciation (11,096,973)
Equipment, net of accumulated depreciation $ 5,029,632
----------------
----------------
</TABLE>
At June 30, 1998, the Trust's equipment portfolio included equipment having
a proportionate original cost of $5,484,216, representing approximately 34% of
total equipment cost.
At June 30, 1998, the cost and net book value of equipment held for sale or
re-lease was approximately $2,439,000 and $902,000, 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 $1,153,983 and $738,375, respectively. The Managing Trustee is currently
holding discussions with a potential lessee regarding the re-lease of this
aircraft. The Managing Trustee is actively seeking the sale or re-lease of all
equipment not on lease. In addition, the summary above includes equipment being
leased on a month-to-month basis.
NOTE 5 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
On April 30, 1997, the vessel partnerships, in which the Trust and certain
affiliated investment programs are limited partners and through which the Trust
and the affiliated investment programs shared economic interests in three cargo
vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian
Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership
interests in the Vessels for aggregate consideration of $11,565,375, consisting
of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele
Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele"), a purchase
money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware
corporation organized on April 14, 1987 and has its common stock listed on
NASDAQ. At the date of the exchange transaction, the common stock of Semele had
a net book value of approximately $1.50 per share and closing market value of
$1.00 per share. Semele has one
8
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
principal real estate asset consisting of an undeveloped 274 acre parcel of land
near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Trust sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 33% beneficial
ownership interest in Hato Arrow, one of the three Vessels, the Trust received
$433,036 in cash, became the beneficial owner of 209,694 shares of Semele common
stock (valued at $314,541 ($1.50 per share) at the time of the exchange
transaction) and received a beneficial interest in the Semele Note of $462,353.
At June 30, 1998, Semele performed both a reverse stock split and a forward
stock split resulting in a change of the Trust's beneficial ownership in its
stock to 20,969 shares. The Semele Note bears an annual interest rate of 10% and
will be amortized over three years with mandatory principal reductions, if and
to the extent that net proceeds are received by Semele from the sale or
refinancing of Rancho Malibu. The Trust recognized interest income of $23,275
related to the Semele Note during the six months ended June 30, 1998. The
Trust's interest in the Hato Arrow had an original cost and net book value of
$2,399,580 and $1,185,726, respectively. The proceeds realized by the Trust of
$777,326 resulted in a net loss, for financial statement purposes, of $408,400.
In addition, as this vessel was disposed of prior to the expiration of the
related lease term, the Trust received a prepayment of the remaining contracted
rent due under the vessel's lease agreement of $432,604.
Pursuant to terms of the exchange, cash equal to the amount of the Semele
Note was placed in a segregated escrow account for the benefit of Semele pending
the outcome of certain shareholder proposals. Specifically, as part of the
exchange, Semele agreed to seek consent ("Consent") from its shareholders to:
(1) amend its certificate of incorporation and by-laws; (2) make additional
amendments to restrict the acquisition of its common stock in a way to protect
Semele's net operating loss carry-forwards, and (3) engage EFG to provide
administrative services to Semele, which services EFG will provide at cost. On
October 21, 1997, such Consent was obtained from Semele's shareholders. The
Consent also allowed for (i) the election of a new Board of Directors nominated
by EFG for terms of up to three years and an increase in the size of the Board
to as many as nine members, provided a majority of the Board shall consist of
members independent of Semele, EFG or any affiliate; and (ii) an amendment
extending Semele's life to perpetual and changing its name from Banyan Strategic
Land Fund II. Contemporaneously with the Consent being obtained, Semele declared
a $0.20 per share dividend to be paid on all shares, including those
beneficially owned by the Trust. A dividend of $41,939 was paid to the Trust on
November 17, 1997. This dividend represented a return of equity to the Trust,
which proportionately reduced the Trust's investment in Semele. Subsequent to
the exchange transaction, Gary D. Engle, President and Chief Executive Officer
of EFG, was elected to the Board of Directors and appointed Chief Executive
Officer of Semele and James A. Coyne, Executive Vice President of EFG was
appointed Semele's President and Chief Operating Officer, and elected to the
Board of Directors.
In accordance with Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. On June 30, 1998, Semele effected a 1-for-300 reverse stock split
followed by a 30-for-1 forward stock split resulting in a reduction of the
number of shares of Semele common stock owned by the Trust to 20,969 shares.
During the six months ended June 30, 1998, the Trust increased the carrying
value of its investment in Semele common stock to $8.125 per share (the quoted
price of the Semele stock on NASDAQ at June 30, 1998) resulting in an unrealized
gain in 1998 of $13,106. This gain was reported as a component of comprehensive
income, included in participants' capital. The split adjusted market price of
Semele's stock was $7.50 per share at December 31, 1997.
9
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
NOTE 6 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the six month periods ended June 30, 1998 and
1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------
<S> <C> <C>
Equipment management fees $ 57,227 $ 94,385
Administrative charges 34,140 30,114
Reimbursable operating expenses
due to third parties 181,512 69,146
--------------- ----------------
Total $ 272,879 $ 193,645
--------------- ----------------
--------------- ----------------
</TABLE>
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
June 30, 1998, the Trust was owed $64,822 by EFG for such funds and the interest
thereon. These funds were remitted to the Trust in July 1998.
Refer to Note 9 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and a change in ownership of the Managing
Trustee.
NOTE 7 - NOTES PAYABLE
Notes payable at June 30, 1998 consisted of installment notes of $1,524,696
payable to banks and institutional lenders. The notes bear interest rates
ranging between 5.7% and 8.9%, except for one note which bears a fluctuating
interest rate based on LIBOR (5.66% at June 30, 1998) plus a margin. All of the
installment notes are non-recourse and are collateralized by the equipment and
assignment of the related lease payments. Generally, the installment notes will
be fully amortized by noncancellable rents. However, the Trust has a balloon
payment obligation of $282,421 at the expiration of the primary lease term
related to its interest in an aircraft leased to Reno Air, Inc. The carrying
amount of notes payable approximates fair value at June 30, 1998.
The annual maturities of the notes payable are as follows:
<TABLE>
<S> <C> <C>
For the year ending June 30, 1999 $ 821,293
2000 113,911
2001 123,188
2002 133,220
2003 333,084
-------------
Total $ 1,524,696
-------------
-------------
</TABLE>
10
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
NOTE 8 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth the terms pursuant to which a settlement
of the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and supersedes 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
remains pending. Ultimately, the Court must review and approve the Stipulation
of Settlement prior to its becoming effective. Further, the Stipulation of
Settlement prescribes certain conditions necessary to effecting a settlement and
contemplates various changes that, if effected, would alter the future
operations of the Nominal Defendants (see Note 11). To the extent that the
Stipulation of Settlement is approved by the Court, the complete terms thereof
will be communicated to all of the beneficiaries (or partners) of the Nominal
Defendants.
There can be no assurance that the Stipulation of Settlement will be
approved by the Court. However, the Managing Trustee and its affiliates, in
consultation with counsel, concur that there is a reasonable basis to believe
that the Stipulation of Settlement will be approved by the Court. In the absence
of a Stipulation of Settlement approved by the Court, the Defendants intend to
defend vigorously against the claims asserted in the Class Action Lawsuit. The
Managing Trustee and its affiliates cannot predict with any degree of certainty
the ultimate outcome of such litigation.
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Trust, National Steel
Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA")
for the lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and other
remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice
of Removal which removed the case to the United States District Court, District
of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's
Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory
relief and alleging breach of contract, implied covenant of good faith and fair
dealing and specific performance. EFG filed its Answer to these counterclaims on
September 29, 1995. Though the parties discussed settlement with respect to this
matter for some time, the negotiations were unsuccessful. Notwithstanding these
discussions, EFG recently filed an Amended and Supplemental Complaint alleging
further default under the MLA and EFG recently filed a motion for Summary
Judgment on all claims and counterclaims. The Court held a hearing on EFG's
motion in December 1997 and the Court recently entered a decision dismissing
certain of National Steel's counterclaims and finding in
11
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
favor of EFG on certain issues and in favor of National Steel on other issues.
The parties have since resumed settlement discussions. The Trust does not
anticipate that it will experience any material losses as a result of this
action.
NOTE 9 - 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 "Amended Trust Agreement") which would (i)
amend the provisions of the Amended 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 Amended Trust Agreement
that would permit the Trust to issue, at the discretion of the Managing Trustee
and without further consent or approval of the Beneficiaries, an additional
class of security with such designations, preferences and relative,
participating, optional or other special rights, powers and duties as the
Managing Trustee might affix. The funds obtained through the issuance of such a
security 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 Class A Beneficiaries.
Pursuant to the Amended 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 Class A Beneficiaries. A majority of Class
A Interests, representing 286,868 Interests or 52.2% of all Class A Interests,
voted in favor of the Amendment; 49,019 Interests or 8.9% of all Class A
Interests voted against the Amendment; and 16,104 Interests or 2.9% of all Class
A Interests abstained. Approximately 64% 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 826,072 Class B Interests at $5.00 per interest, thereby generating
$4,130,360 in aggregate Class B capital contributions. Class A Beneficiaries
purchased 3,209 Class B Interests, generating $16,045 of such aggregate capital
contributions, and the Special Beneficiary, EFG, purchased 822,863 Class B
Interests, generating $4,114,315 of such aggregate capital contributions. The
Trust incurred offering costs in the amount of $41,304 and professional service
costs of $54,186 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 $808,363, to Class A Beneficiaries on August 15, 1997. See Note 10
regarding the redemption of Class A Interests.
12
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
NOTE 10 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary 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 concerning the offer. On October 10, 1997, the Trust
used $620,011 of the net proceeds realized from the issuance of the Class B
Interests to purchase 65,402 of the Class A Interests tendered as a result of
the offer. The Tender Documents described, among other things, the terms of the
offer and the purchase price per Class A Interest being offered by the Trust. On
April 28, 1998, the Trust used an additional $14,400 of such proceeds to
purchase 1,800 of the remaining Class A Interests.
NOTE 11 - 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 1,702 Class A Interests owned by affiliates of
EFG), regardless of how few Class A Interests were actually voted.
The results of the voting are presented herein and reflect that a majority
of Class A Interests were voted in favor of each of the proposals. Therefore,
the Trust Agreement will be amended to (i) broaden the Trust's stated investment
policies and objectives and permit the Trust to invest in assets other than
leased equipment and (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.
In addition, subject to attaining a settlement in the Class Action Lawsuit
described in Note 8 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 $413,247 (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 $929,806 and treat such amount as a long-term equity
investment in the Trust; (iii) certain voting restrictions will be placed upon
the Class B Interests owned by Equis II Corporation; (iv) the Trust's
reinvestment period, which originally expired on May 29, 1996, will be
reinstated until December 31, 2001; and (v) acquisition fees paid to EFG in
connection with reinvestment assets acquired after the Amendment date will be
reduced from a maximum of 3% to 1% and management fees earned in connection with
such assets will be reduced from a maximum of 5% to 2%.
The voting results submitted by the Beneficiaries on the Consent of
Beneficiary forms returned to the Managing Trustee in connection with the
Solicitation Statement are summarized below:
13
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
Proposal 1. Subject to attaining a settlement in the Class Action Lawsuit,
provide for a special cash distribution to Class A Beneficiaries.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 193,758 825,075
Percentage (of total returned) in favor 89.6% 99.9%
Votes against 14,920 831
Percentage (of total returned) against 6.9% 0.1%
Votes abstaining 7,517 0
Percentage (of total returned) abstaining 3.5% 0
</TABLE>
Proposal 2. Subject to attaining a settlement in the Class Action Lawsuit,
provide for an additional commitment of funds to the Trust by Equis II
Corporation.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 192,558 825,075
Percentage (of total returned) in favor 89.1% 99.9%
Votes against 14,920 831
Percentage (of total returned) against 6.9% 0.1%
Votes abstaining 8,717 0
Percentage (of total returned) abstaining 4.0% 0
</TABLE>
Proposal 3. Permit the Trust to acquire property in addition to equipment.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 183,598 825,075
Percentage (of total returned) in favor 84.9% 99.9%
Votes against 22,680 831
Percentage (of total returned) against 10.5% 0.1%
Votes abstaining 9,917 0
Percentage (of total returned) abstaining 4.6% 0
</TABLE>
14
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
Proposal 4. Extend the Trust's reinvestment period.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 182,798 825,075
Percentage (of total returned) in favor 84.5% 99.9%
Votes against 24,600 831
Percentage (of total returned) against 11.4% 0.1%
Votes abstaining 8,797 0
Percentage (of total returned) abstaining 4.1% 0
</TABLE>
Proposal 5. Modify certain fees payable to the Managing Trustee and EFG.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 186,078 825,075
Percentage (of total returned) in favor 86.1% 99.9%
Votes against 20,280 831
Percentage (of total returned) against 9.4% 0.1%
Votes abstaining 9,837 0
Percentage (of total returned) abstaining 4.5% 0
</TABLE>
Proposal 6. Subject to attaining a settlement in the Class Action Lawsuit,
impose voting restrictions on Class B Interests.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 188,758 825,075
Percentage (of total returned) in favor 87.3% 99.9%
Votes against 17,520 831
Percentage (of total returned) against 8.1% 0.1%
Votes abstaining 9,917 0
Percentage (of total returned) abstaining 4.6% 0
</TABLE>
15
<PAGE>
AFG Investment Trust A
Notes to the Financial Statements
(Continued)
Proposal 7. Remove the current limitations on the amount and terms of the debt
the Trust may incur and modify the requirements with respect to joint ventures.
<TABLE>
<CAPTION>
Class A Interests Class B Interests
<S> <C> <C>
Total Interests of record 483,816 826,072
Total votes returned 216,195 825,906
Percentage returned 44.7% 99.9%
Votes in favor 179,531 825,075
Percentage (of total returned) in favor 83.1% 99.9%
Votes against 27,947 831
Percentage (of total returned) against 12.9% 0.1%
Votes abstaining 8,717 0
Percentage (of total returned) abstaining 4.0% 0
</TABLE>
NOTE 12 - SUBSEQUENT EVENT
The Managing Trustee and certain of its affiliates were named as defendants
in the Class Action Lawsuit discussed in Note 8 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 11 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 $413,247, approximately $.75 per Class A
Benficiary Interest, and (ii) invest $929,806 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), $1,263,443 in total,
was returned to Equis II Corporation and the other third party Class B capital
contributors on July 6, 1998.
16
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this quarterly report of AFG Investment Trust A (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 8 to the accompanying financial statements, and the ability of
Equis Financial Group Limited Partnership (formerly American Finance Group)
("EFG"), to collect all rents due under the attendant lease agreements and to
successfully remarket the Trust's equipment, upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. EFG's computer
programs were designed and written using four digits to define the applicable
year. As a result, EFG does not anticipate system failure or miscalculations
causing disruptions of operations. Based on recent assessments, EFG determined
that minimal modification of software is required so that its network operating
system will function properly with respect to dates in the year 2000 and
thereafter. EFG believes that with these modifications to the existing operating
system, the Year 2000 Issue will not pose significant operational problems for
its computer systems. EFG will utilize internal resources to upgrade software
for Year 2000 modifications and anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any anticipated impact on its operating
system. The total cost of the Year 2000 project is expected to be insignificant
and have no effect on the results of operations of the Trust.
Three and six months ended June 30, 1998 compared to the three and six months
ended June 30, 1997:
Overview
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the future business
operations of the Trust. See Note 8 to the accompanying financial statements.
The Trust's operations commenced in 1992.
Results of Operations
For the three and six months ended June 30, 1998, the Trust recognized
lease revenue of $549,647 and $1,281,535, respectively, compared to $1,477,298
and $2,567,135 for the same periods in 1997. The decrease in lease revenue from
1997 to 1998 resulted principally from the exchange in the second quarter of
1997 of the Trust's interest in a vessel, as described in Note 5 to the
accompanying financial statements. During the six months ended June 30, 1997,
the Trust recognized lease revenue of $565,318 related to this vessel. Other
reductions in lease revenue from 1997 to 1998 occurred from primary lease term
expirations and the sale of equipment. The level of lease revenue to be
recognized by the Trust in the future may be impacted by 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.
17
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
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.
For the three and six months ended June 30, 1998, the Trust earned interest
income of $87,965 and $178,395, respectively, compared to $27,119 and $52,919
for the same periods in 1997. Interest income is typically generated from
temporary investment of rental receipts and equipment sales proceeds in
short-term instruments. Interest income during the three and six months ended
June 30, 1998 included $11,716 and $23,275, respectively earned on the note
receivable from Semele and interest earned on unexpended proceeds from the
issuance of Class B Interests (see below). The amount of future interest income
is expected to fluctuate in relation to prevailing interest rates, the
collection of lease revenue, and the proceeds from equipment sales.
During the three and six months ended June 30, 1998, the Trust sold
equipment having a net book value of $384,582 and $523,780 to existing lessees
and third parties. These sales resulted in a net loss, for financial statement
purposes, of $77,440 and $78,738, respectively.
During the three and six months ended June 30, 1997, the Trust sold or
exchanged equipment having a net book value of $1,244,327 and $1,255,232,
respectively, to existing lessees and third parties. These transactions resulted
in a net loss, for financial statement purposes, of $364,901 and $362,806,
respectively. The equipment transactions included the Trust's interest in a
vessel with an original cost and net book value of $2,399,580 and $1,185,726,
respectively. In connection with this transaction, the Trust realized proceeds
of $777,326, which resulted in a net loss, for financial statement purposes, of
$408,400. In addition, as this vessel was disposed of prior to the expiration of
the related lease term, the Trust received a prepayment of the remaining
contracted rent due under the vessel's lease agreement in the amount of
$432,604.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Trust, as such transactions will be dependent upon
the condition and type of equipment being sold and its marketability at the time
of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
Depreciation and amortization expense was $610,333 and $1,263,921 for the
three and six months ended June 30, 1998, respectively, compared to $861,524 and
$1,794,021 for the same periods in 1997. 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
18
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of primary lease expiration. To the
extent that an asset is held beyond its primary lease term, the Trust continues
to depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Interest expense was $25,734 and $57,870 or 4.7% and 4.5 % of lease revenue
for the three and six months ended June 30, 1998, respectively, compared to
$67,229 and $110,587 or 4.6% and 4.3% of lease revenue for the same periods in
1997. Interest expense is expected to decrease as the principal balance of notes
payable is reduced through the application of rent receipts to outstanding debt.
Management fees were 4.4% and 4.5% of lease revenue for the three and
six month periods ended June 30, 1998 compared to 3.4% and 3.7% of lease
revenue for each of the same periods in 1997. 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 and legal fees, as well as printing,
distribution and remarketing expenses. Operating expenses were $165,419 and
$215,652 for the three and six months ended June 30, 1998, respectively,
compared to $60,403 and $99,260 for the same periods in 1997. During the three
months ended June 30, 1998, the Trust accrued $108,000 for certain legal
expenses related to the Class Action Lawsuit described in Note 8 to the
financial statements. The amount of future operating expenses cannot be
predicted with certainty; however, such expenses are usually higher during the
acquisition and liquidation phases of a trust.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview". As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $1,590,724 and $2,120,140 for the six months ended June 30, 1998 and
1997, respectively. Future renewal, re-lease and equipment sale activities will
cause a decline in the Trust's primary-term lease revenue and corresponding
sources of operating cash. Overall, expenses associated with rental activities,
such as management fees, and net cash flow from operating activities will also
decline as the Trust experiences a higher frequency of remarketing events.
The Trust's equipment is leased by a number of creditworthy,
investment-grade companies and, to date, the Trust has not experienced any
material collection problems and has not considered it necessary to provide an
allowance for doubtful accounts. Notwithstanding a positive collection history,
there is no assurance that all future contracted rents will be collected or that
the credit quality of the Trust's lessees will be maintained. Collection risk
could increase in the future, particularly as the Trust remarkets its equipment
and enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
19
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the six months
ended June 30, 1998, the Trust realized net cash proceeds of $445,042, compared
to $115,532, for the same period in 1997. Future inflows of cash from asset
disposals will vary in timing and amount and will be influenced by many factors
including, but not limited to, the frequency and timing of lease expirations,
the type of equipment being sold, its condition and age, and future market
conditions.
As a result of the vessel exchange (see Results of Operations), the Trust
became the beneficial owner of 209,694 shares of Semele common stock (valued at
$314,541 ($1.50 per share) at the time of the exchange transaction). The Trust
also received a beneficial interest in the Semele Note of $462,353 in connection
with the exchange.
In accordance with Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. On June 30, 1998, Semele effected a 1-for-300 reverse stock split
followed by a 30-for-1 forward stock split resulting in a reduction of the
number of shares of Semele common stock owned by the Trust to 20,969 shares.
During the six months ended June 30, 1998, the Trust increased the carrying
value of its investment in Semele common stock to $8.125 per share (the quoted
price of the Semele stock on NASDAQ at June 30, 1998) resulting in an unrealized
gain in 1998 of $13,106. This gain was reported as a component of comprehensive
income, included in participants' capital. The Managing Trustee believes that
the underlying tangible assets of Semele, particularly the Rancho Malibu
property, can be sold or developed on a tax free basis due to Semele's net
operating loss carryforwards and can provide an attractive economic return to
the Trust.
The Trust obtained long-term financing in connection with certain equipment
leases. The repayments of principal related to such indebtedness are reported as
a component of financing activities. Each note payable is recourse only to the
specific equipment financed and to the minimum rental payments contracted to be
received during the debt amortization period (which period generally coincides
with the lease rental term). As rental payments are collected, a portion or all
of the rental payment is used to repay the associated indebtedness. In future
periods, 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. However, the Trust has a balloon payment obligation of
$282,421 at the expiration of the primary lease term related to its interest in
an aircraft leased to Reno Air, Inc.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at June 30, 1998. This is the
result of aggregate cash distributions to these Participants being in excess of
their aggregate capital contributions ($1,000 each) and their respective
allocations of financial statement net income or loss. Ultimately, the existence
of a capital deficit for the Managing Trustee or the Special Beneficiary for
financial reporting purposes is not indicative of any further capital
obligations to the Trust by either the Managing Trustee or the Special
Beneficiary. However, for income tax purposes, the Trust Agreement requires that
income be allocated first to those Participants having negative tax capital
account balances so as to eliminate any such balances. In accordance with the
Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be
required to contribute to the Trust an amount equal to any negative balance
which may exist in the Managing Trustee's tax capital account. At December 31,
1997, the Managing Trustee had a positive tax capital account balance. No such
requirement exists with respect to the Special Beneficiary.
At June 30, 1998, the Trust had aggregate future minimum lease payments of
$1,448,721 from contractual lease agreements (see Note 3 to the financial
statements), a portion of which will be used to amortize the principal balance
of notes payable of $1,524,696 (see Note 7 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often dependent upon the needs and interests of the existing
lessees. Some lessees may choose to renew their lease contracts, while others
may elect to return the equipment. In the latter instances, the equipment could
be
20
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
re-leased to another lessee or sold to a third party. Accordingly, as the
Trust matures and a greater level of its equipment assets become available for
remarketing, the cash flows of the Trust will become less predictable. In
addition, the Trust will have cash outflows to satisfy interest on indebtedness
and to pay management fees and operating expenses. Ultimately, the Trust is
expected to meet its future disbursement obligations and to distribute any
excess of cash inflows over cash outflows to the Participants in accordance with
the Trust Agreement. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described herein
and in the accompanying financial statements and result in fluctuations to the
Trust's periodic cash distribution payments.
On July 18, 1997, the Trust issued 826,072 Class B Interests at $5.00 per
interest, thereby generating $4,130,360 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,209 Class B Interests,
generating $16,045 of such aggregate capital contributions, and the Special
Beneficiary, EFG, purchased 822,863 Class B Interests, generating $4,114,315 of
such aggregate capital contributions. The Trust incurred offering costs in the
amount of $41,304 and professional service costs of $54,186 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 (see also Note 9 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 to
the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid
this special cash distribution of approximately $1.47 per Class A Interest,
aggregating $808,363, 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 $620,011 of the net proceeds realized from issuance of the Class
B Interests to purchase 65,402 of the Class A Interests tendered as a result of
the offer. On April 28, 1998, the Trust used an additional $14,400 of such
proceeds to purchase 1,800 of the remaining Class A Interests. The remaining net
proceeds from the Class B offering of $2,592,096 will be used to pay a Class B
Capital Distribution and according to terms negotiated in connection with
settling the Class Action Lawsuit described in Note 8 (see also Notes 10, 11 and
12 to the accompanying financial statements).
Cash distributions paid to the Participants consist of both a return of and
a return on capital. Cash distributions do not represent and are not indicative
of yield on investment. Actual yield on investment cannot be determined with any
certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, and the residual value realized for each asset at its disposal
date. Future market conditions, technological changes, the ability of EFG to
manage and remarket the assets, and many other events and circumstances, could
enhance or detract from individual asset yields and the collective performance
of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash distribution
level that is consistent with the operating cash flows of the Trust and to
optimize the long-term value of the Trust. A distribution level that is higher
than the Trust's operating cash flows could compromise the Trust's working
capital position, as well as its ability to refurbish or upgrade equipment in
response to lessee requirements or other market circumstances. Accordingly, in
order to better align monthly cash distributions with the Trust's operating cash
flows, the Managing Trustee reduced the level of monthly cash distributions from
an annualized rate of $2.52 per Class A Interest (the rate established and paid
from the Trust's inception through September 1995) to an annualized rate of
$1.26 per Class A Interest commencing in October 1995. In October 1996, the
Managing Trustee increased the annualized
21
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART I. FINANCIAL INFORMATION
distribution rate to $1.64 per Class A Interest and has sustained this
distribution rate throughout 1997 and the six months ended June 30, 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 45 days following the end
of each calendar month. The payment of such distributions is presented as a
component of financing activities. For the six months ended June 30, 1998, the
Trust declared total cash distributions of $734,466. Of the total distributions,
the Beneficiaries were allocated $666,460 ($395,508 for Class A Beneficiaries
and $270,952 for Class B Beneficiaries); the Special Beneficiary was allocated
$60,654, and the Managing Trustee was allocated $7,352.
The nature of the Trust's principal cash flows gradually will shift from
rental receipts to equipment sale proceeds as the Trust matures. As this occurs,
the Trust's cash flows will become more volatile in that certain of the Trust's
equipment leases will be renewed and certain of its assets will be sold. In some
cases, the Trust may be required to expend funds to refurbish or otherwise
improve the equipment being remarketed in order to make it more desirable to a
potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing
Trustee will attempt to monitor and manage these events to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
the collection of contractual rents, the retirement of scheduled indebtedness
and the Trust's future working capital and equipment requirements, in
establishing future cash distribution rates. Ultimately, the Beneficiaries
should expect that cash distribution rates will fluctuate over the long term as
a result of future remarketing activities.
22
<PAGE>
AFG Investment Trust A
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 to the financial
statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response:
Refer to Note 11 to the financial
statements herein.
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
23
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AFG Investment Trust A
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee of
the Registrant.
By: /s/ Michael J. Butterfield
--------------------------------------------------
Michael J. Butterfield
Treasurer AFG ASIT Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: August 14, 1998
By: /s/ Gary Romano
--------------------------------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1998
24
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,251,280
<SECURITIES> 170,376
<RECEIVABLES> 828,333
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,249,989
<PP&E> 16,126,605
<DEPRECIATION> 11,096,973
<TOTAL-ASSETS> 12,279,621
<CURRENT-LIABILITIES> 342,021
<BONDS> 1,524,696
0
0
<COMMON> 0
<OTHER-SE> 10,412,904
<TOTAL-LIABILITY-AND-EQUITY> 12,279,621
<SALES> 0
<TOTAL-REVENUES> 1,381,192
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,536,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,870
<INCOME-PRETAX> (213,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (213,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (213,478)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
