<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
---------------
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 March 31, 1997 Commission File No. 0-21444
AFG Investment Trust C
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3157232
- -------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- --------------------------------------- ----------------------------
(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 not been
subject to such filing requirements for the past 90 days. Yes No
----- -----
<PAGE>
AFG Investment Trust C
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1997 and December 31, 1996..................................... 3
Statement of Operations
for the three months ended March 31, 1997 and 1996.......................... 4
Statement of Cash Flows
for the three months ended March 31, 1997 and 1996.......................... 5
Notes to the Financial Statements............................................. 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10-14
PART II. OTHER INFORMATION:
Items 1-6....................................................................... 15
</TABLE>
2
<PAGE>
AFG Investment Trust C
STATEMENT OF FINANCIAL POSITION
March 31,1997 and December 31,1996
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents...................................... $ 16,385,269 $ 10,634,493
Rents receivable............................................... 1,991,399 2,139,372
Accounts receivable--affiliate................................. 603,242 6,484,537
Equipment at cost, net of accumulated depreciation of
$46,069,890 and $43,782,922 at March 31, 1997 and December
31, 1996, respectively....................................... 33,529,703 35,868,028
Organization costs, net of accumulated amortization of $4,333
and $4,083 at March 31, 1997 and December 31, 1996,
respectively................................................. 667 917
------------- -------------
Total assets.............................................. $ 52,510,280 $ 55,127,347
------------- -------------
------------- -------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable.................................................. $ 16,971,977 $ 19,084,751
Accrued interest............................................... 256,011 188,983
Accrued liabilities............................................ 18,750 23,985
Accrued liabilities--affiliate................................. 131,777 264,123
Deferred rental income......................................... 331,888 209,535
Cash distributions payable to participants..................... 302,484 302,484
------------- -------------
Total liabilities......................................... 18,012,887 20,073,861
------------- -------------
Participants' capital (deficit):
Managing Trustee............................................... (109,088) (103,527)
Special Beneficiary............................................ (907,226) (861,348)
Beneficiary Interests (2,011,014 Interests;
initial purchase price of $25 each).......................... 35,513,707 36,018,361
------------- -------------
Total participants' capital................................. 34,497,393 35,053,486
------------- -------------
Total liabilities and participants' capital................. $52,510,280 $55,127,347
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AFG Investment Trust C
STATEMENT OF OPERATIONS
for the three months ended March 31,1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Income:
Lease revenue.................................................. $ 3,994,410 $ 5,465,302
Interest income................................................ 197,831 8,693
Gain (loss) on sale of equipment............................... 34,537 (442,120)
------------ ------------
Total income................................................ 4,226,778 5,031,875
------------ ------------
Expenses:
Depreciation and amortization.................................. 3,265,846 3,999,259
Interest expense............................................... 310,922 465,462
Equipment management fees--affiliate........................... 169,391 217,598
Operating expenses--affiliate.................................. 129,264 34,457
------------ ------------
Total expenses.............................................. 3,875,423 4,716,776
------------ ------------
Net income........................................................ $ 351,355 $ 315,099
------------ ------------
------------ ------------
Net income
per Beneficiary Interest....................................... $ 0.16 $ 0.14
------------ ------------
------------ ------------
Cash distributions declared
per Beneficiary Interest....................................... $ 0.41 $ 0.32
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AFG Investment Trust C
STATEMENT OF CASH FLOWS
for the three months ended March 31,1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income....................................................... $ 351,355 $ 315,099
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization................................ 3,265,846 3,999,259
(Gain) loss on sale of equipment............................. (34,537) 442,120
Changes in assets and liabilities
Decrease (increase) in:
rents receivable............................................. 147,973 502,578
accounts receivable--affiliate............................... 5,881,295 (276,386)
Increase (decrease) in:
accrued interest............................................. 67,028 (61,256)
accrued liabilities.......................................... (5,235) (250)
accrued liabilities--affiliate............................... (132,346) 74,213
deferred rental income....................................... 122,353 (60,090)
------------- -----------
Net cash from operating activities......................... 9,663,732 4,935,287
------------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment.......................................... (1,054,800) (1,239,741)
Proceeds from equipment sales.................................. 162,066 4,066,199
------------- -----------
Net cash from (used in) investing activities............... (892,734) 2,826,458
------------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable.................................... -- 997,888
Principal payments--notes payable.............................. (2,112,774) (4,322,067)
Distributions paid............................................. (907,448) (698,038)
------------- -----------
Net cash used in financing activities...................... (3,020,222) (4,022,217)
------------- -----------
Net increase in cash and cash equivalents........................ 5,750,776 3,739,528
Cash and cash equivalents at beginning of period................. 10,634,493 279,116
------------- -----------
Cash and cash equivalents at end of period....................... $ 16,385,269 $ 4,018,644
------------- -----------
------------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....................... $ 243,894 $ 526,718
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1997
(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 1996 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1996 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1997 and December 31, 1996 and results of operations
for the three month periods ended March 31, 1997 and 1996 have been made and
are reflected.
NOTE 2--CASH
At March 31, 1997, the Trust had $16,255,00 invested in reverse
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities. Approximately $14,000,000 of the Trust's cash is
expected to be used to acquire reinvestment equipment in 1997.
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.
Rents from Reno Air, Inc. ("Reno Air"), as provided for in the lease
agreement, are adjusted monthly for changes in the London Inter-Bank Offered
Rate ("LIBOR"). Future rents from Reno Air, included below, reflect the most
recent LIBOR effected rental payment. The leases are accounted for as
operating leases and are noncancellable. Rents received prior to their due
dates are deferred. Future minimum rents of $20,401,275 are due as follows:
For the year ending March 31, 1998 $12,957,033
1999 4,970,863
2000 1,660,158
2001 534,131
2002 159,480
Thereafter 119,610
-----------
Total $20,401,275
-----------
-----------
6
<PAGE>
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4--EQUIPMENT
The following is a summary of equipment owned by the Trust at March 31,
1997. In the opinion of Equis Financial Group ("EFG"), (formerly American
Finance Group), 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 45-78 $ 16,504,999
Computers & peripherals 9-69 12,884,572
Retail store fixtures 33-57 11,117,511
Locomotives 33-81 9,438,818
Materials handling 9-81 8,993,077
Construction & mining 33-69 8,149,933
Manufacturing 57-69 3,815,155
Commercial printing 63 3,542,761
Communications 27-37 2,004,394
Research & test 33-57 1,667,223
Tractors and heavy duty trucks 24-57 714,107
Trailers/intermodal containers 48-57 342,029
Furniture & fixtures 57 239,785
Photocopying 33-57 118,652
Energy systems 33 63,900
Medical 33 2,206
Miscellaneous 33 471
--------------
Total equipment cost 79,599,593
Accumulated depreciation (46,069,890)
---------------
Equipment, net of accumulated depreciation $ 33,529,703
---------------
---------------
</TABLE>
At March 31, 1997, the Trust's equipment portfolio included equipment
having a proportionate original cost of $28,589,094, representing
approximately 36% of total equipment cost.
At March 31, 1997, the cost and net book value of equipment held for sale
or re-lease was approximately $740,000 and $307,000, respectively. The
Managing Trustee is actively seeking the sale or re-lease of all equipment
not on lease.
NOTE 5--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 each of the three month periods ended
March 31, 1997 and 1996, which were paid or accrued by the Trust to EFG or
its Affiliates, are as follows:
7
<PAGE>
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment acquisition fees............................................ $ 30,722 $ 36,109
Equipment management fees............................................. 169,391 217,598
Administrative charges................................................ 14,346 5,250
Reimbursable operating expenses due to third parties.................. 114,918 29,207
---------- ----------
Total........................................ $ 329,377 $ 288,164
---------- ----------
---------- ----------
</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
March 31, 1997, the Trust was owed $603,242 by EFG for such funds, and the
interest thereon. These funds were remitted to the Trust in April 1997.
NOTE 6--NOTES PAYABLE
Notes payable at March 31, 1997 consisted of installment notes of
$16,971,977 payable to banks and institutional lenders. The notes bear
interest rates ranging between 5.1% and 11.25%, except for one note which
bears a fluctuating interest rate based on LIBOR plus a margin (5.7% at March
31, 1997). All of the installment notes are non-recourse and are
collateralized by the equipment and assignment of the related lease payments.
Generally, the installment notes will be fully amortized by noncancellable
rents. However, the Trust has balloon payment obligations of $282,421 and
$2,867,081 at the expiration of the primary lease terms related to the Reno
Air aircraft and certain rail equipment, respectively. The carrying amount of
notes payable approximates fair value at March 31, 1997.
The annual maturities of the notes payable are as follows:
For the year ending March 31, 1998 $ 8,656,334
1999 3,364,530
2000 1,136,917
2001 3,323,658
2002 130,639
Thereafter 359,899
-----------
Total $16,971,977
-----------
-----------
NOTE 7--LEGAL PROCEEDINGS
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of
Suffolk, for damages and declaratory relief against a lessee of the Trust,
National Steel Corporation ("National Steel"), under a certain Master Lease
Agreement ("MLA") for the lease of certain equipment. EFG is seeking the
reimbursement by National Steel of certain sales and/or use taxes paid to the
State of Illinois and other remedies provided by the MLA. On August 30, 1995,
National Steel filed a Notice of Removal which removed the case to the United
States District Court, District of Massachusetts. On September 7, 1995,
National Steel filed its Answer to EFG's Complaint along with Affirmative
Defenses and Counterclaims, seeking declaratory relief and alleging breach of
contract, implied covenant of good faith and fair dealing and specific
performance. EFG filed its Answer
8
<PAGE>
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
to these counterclaims on September 29, 1995. Though the parties have been
discussing settlement with respect to this matter for some time, to date, the
negotiations have been unsuccessful. Notwithstanding these discussions, EFG
recently filed an Amended and Supplemental Complaint alleging a further
default by National Steel under the MLA and EFG recently filed a Summary
Judgment on all claims and counterclaims. The matter remains pending before
the Court. The Trust has not experienced any material losses as a result of
this action.
NOTE 8--SOLICITATION AND REGISTRATION STATEMENTS
On October 26, 1996, the Managing Trustee, on behalf of the Trust, filed
a Solicitation Statement with the Securities and Exchange Commission which
was subsequently sent to the Beneficiaries pursuant to Regulation 14A of
Section 14 of the Securities Exchange Act. The Solicitation Statement sought
to solicit the consent of the Beneficiaries to a proposed amendment ("the
Amendment") to the Amended and Restated Declaration of Trust (the "Trust
Agreement").
The Amendment would (i) amend the provisions of the Trust Agreement
governing the redemption of Interests to permit the Trust to offer to redeem
outstanding interests at such times, in such amounts, in such manner and at
such prices as the Managing Trustee may determine from time to time, in
accordance with applicable law; and (ii) add a provision to the Trust
Agreement that would permit the Trust to issue, at the discretion of the
Managing Trustee and without further consent or approval of the
Beneficiaries, an additional class of security with such designations,
preferences and relative, participating, optional or other special rights,
powers and duties as the Managing Trustee may fix. Such a security, if it
were to be offered and sold, would provide the Trust with the funds to (a)
implement more expansive Interest redemption opportunities for Beneficiaries
without using Trust funds which may otherwise be available for current cash
distributions; and (b) make a special one-time distribution to the
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required
the consent of the Beneficiaries holding more than fifty percent in the
aggregate of the Interests held by all Beneficiaries. A majority of
Beneficiary Interests, representing 1,215,771 or 60.5% of all Beneficiary
Interests, voted in favor of the Amendment; 174,315 or 8.7% of all
Beneficiary Interests voted against the Amendment; and 49,787 or 2.5% of all
Beneficiary Interests abstained. Approximately 72% of all Beneficiary
Interests participated in the vote. Accordingly, the Amendment was adopted.
On February 12, 1997, the Trust filed a Registration Statement on Form
S-1 (which was amended on April 11, 1997 and May 9, 1997) with the Securities
and Exchange Commission which covers, among other things, the creation and
sale of a new class of beneficiary interests in the Trust (the "Class B
Interests"). A portion of the proceeds from the offering of the Class B
Interests would be used to make a one-time special cash distribution to
existing Beneficiaries (the "Class A Beneficiaries") of the Trust and to
enable the Trust to redeem a portion of the existing Beneficiary Interests
(the "Class A Interests"). The characteristics of the Class B Interests,
associated risk factors, and other matters of importance to the Beneficiaries
and prospective purchasers of the Class B Interests are contained in the
Registration Statement. Presently, the Registration Statement is undergoing
regulatory review and has not been declared effective.
9
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three months ended March 31, 1997 compared to the three months ended March 31,
1996:
OVERVIEW
As an equipment leasing trust, AFG Investment Trust C (the "Trust") was
organized to acquire a diversified portfolio of capital equipment subject to
lease agreements with third parties. The Trust was designed to progress
through three principal phases: acquisitions, operations, and liquidation.
During the operations phase, a period of approximately six years, all
equipment in the Trust's portfolio will progress through various stages.
Initially, all equipment will generate rental revenues under primary term
lease agreements. During the life of the Trust, these agreements will expire
on an intermittent basis and equipment held pursuant to the related leases
will be renewed, re-leased or sold, depending on prevailing market conditions
and the assessment of such conditions by EFG to obtain the most advantageous
economic benefit. Over time, a greater portion of the Trust's original
equipment portfolio will become available for remarketing and cash generated
from operations and from sales or refinancings will begin to fluctuate.
Ultimately, all equipment will be sold and the Trust will be dissolved. The
Trust's operations commenced in 1992.
RESULTS OF OPERATIONS
For the three months ended March 31, 1997, the Trust recognized lease
revenue of $3,994,410 compared to $5,465,302 for the same period in 1996. The
decrease in lease revenue from 1996 to 1997 is attributable to the Trust's
sale of its interest in a Boeing 747-SP aircraft leased to United Airlines,
Inc. (the "United Aircraft") in February 1996, as discussed below, the sale
of the Trust's interest in a vessel in December 1996 and primary lease term
expirations. In the near-term, lease revenue is expected to increase, due to
reinvestment of available proceeds in other equipment, including cash
proceeds realized from the Trust's sale of its interest in the United
Aircraft and the net proceeds resulting from the Trust's sale of its interest
in a vessel to the lessee. Over time, 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 three months ended March 31, 1997 was $197,831,
compared to $8,693 for the same period in 1996. Interest income was generated
from temporary investment of available cash in short-term money market
instruments. Interest income was higher in the three months ended March 31,
1997 than in the same period in 1996 due to interest earned on sale proceeds
associated with the aircraft and vessel, discussed above. The amount of
future interest income is expected to fluctuate in relation to prevailing
interest rates and the collection of lease revenue and equipment sales
proceeds.
During the three months ended March 31, 1997, the Trust sold equipment
having a net book value of $127,529 to existing lessees and third parties.
These sales resulted in a net gain, for financial statement purposes, of
$34,537.
On February 5, 1996, the Trust concluded the sale of its interest in a
Boeing 747-SP to the lessee, United Air Lines, Inc., ("United"). The Trust
recognized a net loss of $1,313,122 in connection with this transaction, of
which
10
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 1. FINANCIAL INFORMATION
$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 three months ended March 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 is actively pursuing the
reinvestment of all such proceeds in other equipment and anticipates a
significant amount of equipment will be purchased during the third quarter of
1997. A portion of such reinvestment was completed in March 1996 through 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 three months ended March 31,
1996, the Trust sold other equipment having a net book value of $27,135 to
existing lessees and third parties. These sales resulted in net a loss, for
financial statement purposes, of $9,715.
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 $3,265,846 and $3,999,259 for
the three months ended March 31, 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.
Interest expense was $310,922 or 7.8% of lease revenue for the three
months ended March 31, 1997 compared to $465,462 or 8.5% of lease revenue for
the same period in 1996. Interest expense in the near-term is expected to
increase due to anticipated leveraging to be obtained to finance the
acquisition of reinvestment equipment discussed above. Thereafter, interest
expense will decline in amount and as a percentage of lease revenue as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding indebtedness.
Management fees were 4.2% and 4% of lease revenue for the three months
ended March 31, 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.
11
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 1. FINANCIAL INFORMATION
Operating expenses consist principally of administrative charges,
professional service costs, such as audit, insurance and legal fees, as well
as printing, distribution and remarketing expenses. Collectively, operating
expenses represented approximately 3.2% and 1% of lease revenue for the three
months ended March 31, 1997 and 1996, respectively. The amount of
future operating expenses cannot be predicted with certainty; however, such
expenses are usually higher during the acquisition and liquidation phases of
a trust. Other fluctuations typically occur in relation to the volume and
timing of remarketing activities.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Trust by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Trust's principal operating activities derive from asset
rental transactions. Accordingly, the Trust's principal source of cash from
operations is provided by the collection of periodic rents. These cash
inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. For the
three months ended March 31, 1997, operating activities generated net cash
inflows of $3,551,398, after reductions for equipment sale proceeds of
$2,265,436 received in connection with the sale of the vessel and debt
proceeds of $3,846,898 which relate to the leveraging of certain rail
equipment in the Trust's portfolio. These sale and debt proceeds were due
from EFG at December 31, 1996. For the three months ended March 31, 1996, the
Trust generated net cash inflows from operating activities of $4,935,287. In
the future, operating activities are expected to increase due to the
acquisition of reinvestment equipment, as described below. 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.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of
an asset. Such circumstances are infrequent and usually result in the
collection of stipulated cash settlements pursuant to terms and conditions
contained in the underlying lease agreements.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. The Trust expended $1,054,800 and
$1,239,741 during the three months ended March 31, 1997 and 1996,
respectively, to acquire equipment pursuant to the reinvestment provisions of
the Trust's prospectus. During the three months ended March 31, 1997, the
Trust realized net sale proceeds of $162,066 compared to $4,066,199
(including the proceeds from the United sale) for the same period in 1996.
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.
12
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 1. FINANCIAL INFORMATION
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 $997,888 in 1996 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 the
near-term, the amount of cash used to repay debt obligations is expected to
increase as a result of anticipated leveraging to be obtained in connection
with the acquisition of reinvestment equipment, see below. Thereafter, the
amount will decline as the principal balance of notes payable is reduced
through the collection and application of rents. However, the Trust has
balloon payment obligations of $282,421 and $2,867,081 at the expiration of
the primary lease terms related to the Reno Aircraft and certain rail
equipment, respectively.
Cash distributions to the Managing Trustee, the Special Beneficiary, and
the Beneficiaries are declared and generally paid within fifteen days
following the end of each month. The payment of such distributions is
presented as a component of financing activities. For the three months ended
March 31, 1997, the Trust declared total cash distributions of Distributable
Cash From Operations and Distributable Cash From Sales and Refinancings of
$907,448. In accordance with the Trust Agreement, the Beneficiaries were
allocated 90.75% of these distributions, or $823,509, the Special Beneficiary
was allocated 8.25% or $74,865, and the Managing Trustee was allocated 1%, or
$9,074.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at March 31, 1997. This is
the result of aggregate cash distributions to these Participants being in
excess of their aggregate capital contributions ($1,000 each) and their
respective allocations of financial statement net income or loss. Ultimately,
the existence of a capital deficit for the Managing Trustee or the Special
Beneficiary for financial reporting purposes is not indicative of any further
capital obligations to the Trust by either the Managing Trustee or the
Special Beneficiary. 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. No such requirement exists with respect to the Special Beneficiary.
At December 31, 1996, the Managing Trustee had a positive tax capital account
balance.
At March 31, 1997, the Trust had aggregate future minimum lease payments
of $20,401,275 from contractual lease agreements (see Note 3 to the financial
statements), of which $16,971,977 will be used to amortize the principal
balance of notes payable (see Note 6 to the financial statements). Additional
cash inflows will be realized from future remarketing activities, such as
lease renewals and equipment sales, as well as from lease revenues generated
by equipment acquisitions resulting from the Trust's anticipated reinvestment
activities. Presently, the Trust expects to acquire approximately $59,000,000
of reinvestment equipment using cash of approximately $14,000,000 and
additional indebtedness, which will be amortized from the associated rental
streams. However, the extent of the Trust's total future reinvestment
activities may exceed this projection as a result of future equipment sales,
the timing and extent of which cannot be predicted with certainty. This is
because the timing and extent of equipment sales is often dependent upon the
needs and interests of the existing lessees. Some lessees may choose to renew
their lease contracts, while others may elect to return the equipment. In the
latter instances, the equipment could be re-leased to another lessee or sold
to a third party. Accordingly, as the Trust matures and a greater level of
its equipment assets become available for remarketing, the cash flows of the
Trust will become less predictable. In addition, the Trust will have cash
outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses. Ultimately, the Trust is expected to meet its future
disbursement obligations and to distribute any excess of cash inflows over
cash outflows to the Participants in accordance with the Trust Agreement.
However, several factors, including month-to-month lease
13
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 1. FINANCIAL INFORMATION
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described
herein and in the accompanying financial statements and result in
fluctuations to the Trust's periodic cash distribution payments.
Cash distributions paid to the Participants consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Trust and will be
dependent upon the collection of all future contracted rents, the generation
of renewal and/or re-lease rents, and the residual value realized for each
asset at its disposal date. Future market conditions, technological changes,
the ability of EFG to manage and remarket the assets, and many other events
and circumstances, could enhance or detract from individual asset yields and
the collective performance of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash
distribution level that is consistent with the operating cash flows of the
Trust and to optimize the long-term value of the Trust. A distribution level
that is higher than the Trust's operating cash flows could compromise the
Trust's working capital position, as well as its ability to refurbish or
upgrade equipment in response to lessee requirements or other market
circumstances and, during its reinvestment period, to purchase replacement
equipment as original equipment is remarketed. Accordingly, in order to
better align monthly cash distributions with the Trust's operating cash
flows, the Managing Trustee reduced the level of monthly cash distributions
from an annualized rate of $2.52 per Beneficiary Interest (the rate
established and paid from the Trust's inception through September 1995) to an
annualized rate of $1.26 per Beneficiary Interest commencing in October 1995.
In October 1996, the Managing Trustee increased the annualized distribution
rate to $1.64 per Beneficiary Interest and expects that the Trust will be
able to sustain this distribution rate throughout 1997. However, the nature
of the Trust's principal cash flows gradually will shift from rental receipts
to equipment sale proceeds as the Trust matures. As this occurs, the Trust's
cash flows will become more volatile in that certain of the Trust's equipment
leases will be renewed and certain of its assets will be sold. In some cases,
the Trust may be required to expend funds to refurbish or otherwise improve
the equipment being remarketed in order to make it more desirable to a
potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing
Trustee will attempt to monitor and manage these events to maximize the
residual value of the Trust's equipment and will consider these factors, in
addition to the collection of contractual rents, the retirement of scheduled
indebtedness and the Trust's future working capital and equipment
requirements, in establishing future cash distribution rates. Ultimately, the
Participants should expect that cash distribution rates will fluctuate over
the long term as a result of future remarketing activities.
14
<PAGE>
AFG INVESTMENT TRUST C
FORM 10-Q
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 7 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: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
15
<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 C
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: May 15, 1997
By: /s/ Gary Romano
-----------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1997
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,385,269
<SECURITIES> 0
<RECEIVABLES> 2,594,641
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,980,577
<PP&E> 79,599,593
<DEPRECIATION> 46,069,890
<TOTAL-ASSETS> 52,510,280
<CURRENT-LIABILITIES> 1,040,910
<BONDS> 16,971,977
0
0
<COMMON> 0
<OTHER-SE> 34,497,393
<TOTAL-LIABILITY-AND-EQUITY> 52,510,280
<SALES> 3,994,410
<TOTAL-REVENUES> 4,226,778
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,564,501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,922
<INCOME-PRETAX> 351,355
<INCOME-TAX> 0
<INCOME-CONTINUING> 351,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,355
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
