<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 MARCH 31, 1999
-------------------------------------------------
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, 1999 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.)
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 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, 1999 and December 31, 1998 3
Statement of Operations
for the three months ended March 31, 1999 and 1998 4
Statement of Cash Flows
for the three months ended March 31, 1999 and 1998 5
Notes to the Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION:
Items 1 - 6 16
</TABLE>
2
<PAGE>
AFG Investment Trust C
STATEMENT OF FINANCIAL POSITION
March 31, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,007,549 $ 17,025,123
Restricted cash 4,919,327 4,919,327
Rents receivable 214,471 341,111
Accounts receivable - affiliate 484,928 678,673
Loan receivable - Kettle Valley 50,604 --
Investment in Kettle Valley 4,472,129 --
Equipment at cost, net of accumulated depreciation
of $37,204,347 and $42,241,976 at March 31, 1999
and December 31, 1998, respectively 43,183,106 49,944,695
----------------- -----------------
Total assets $ 74,332,114 $ 72,908,929
----------------- -----------------
----------------- -----------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 35,423,822 $ 35,072,883
Accrued interest 128,773 229,115
Accrued liabilities 317,800 311,500
Accrued liabilities - affiliate 60,062 54,202
Deferred rental income 478,290 481,439
Other liabilities 1,524,803 --
Cash distributions payable to participants 399,296 399,296
----------------- -----------------
Total liabilities 38,332,846 36,548,435
----------------- -----------------
Participants' capital (deficit):
Managing Trustee 9,019 12,631
Special Beneficiary 74,408 104,209
Class A Beneficiary Interests (1,787,153 Interests;
initial purchase price of $25 each) 29,801,482 30,022,170
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) 8,452,726 8,559,851
Treasury Interests (223,861 Class A Interests at Cost) (2,338,367) (2,338,367)
----------------- -----------------
Total participants' capital 35,999,268 36,360,494
----------------- -----------------
Total liabilities and participants' capital $ 74,332,114 $ 72,908,929
----------------- -----------------
----------------- -----------------
</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, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Income:
Lease revenue $ 2,852,619 $ 4,101,575
Interest income 277,854 264,078
Gain on sale of equipment 321,474 2,284,311
Other income 261,116 --
--------------- ---------------
Total income 3,713,063 6,649,964
--------------- ---------------
Expenses:
Depreciation 1,794,619 2,847,877
Interest expense 658,057 844,967
Equipment management fees
- affiliate 130,104 176,223
Operating expenses - affiliate 293,619 107,894
--------------- ---------------
Total expenses 2,876,399 3,976,961
--------------- ---------------
Net income $ 836,664 $ 2,673,003
--------------- ---------------
--------------- ---------------
Net income
per Class A Beneficiary Interest $ 0.29 $ 0.43
--------------- ---------------
--------------- ---------------
per Class B Beneficiary Interest $ 0.08 $ 0.17
--------------- ---------------
--------------- ---------------
Cash distributions declared
per Class A Beneficiary Interest $ 0.41 $ 0.41
--------------- ---------------
--------------- ---------------
per Class B Beneficiary Interest $ 0.12 $ 0.16
--------------- ---------------
--------------- ---------------
</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, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- ----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 836,664 $ 2,673,003
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,794,619 2,847,877
Gain on sale of equipment (321,474) (2,284,311)
Changes in assets and liabilities Decrease (increase) in:
rents receivable 126,640 378,590
accounts receivable - affiliate 193,745 132,872
loan receivable - Kettle Valley (50,604) --
Increase (decrease) in:
accrued interest (100,342) 124,789
accrued liabilities 6,300 9,423
accrued liabilities - affiliate 5,860 (54,549)
deferred rental income (3,149) 56,435
--------------- ---------------
Net cash from operating activities 2,488,259 3,884,129
--------------- ---------------
Cash flows from (used in) investing activities:
Investment in Kettle Valley (3,139,648) --
Other liabilities 1,524,803 --
Proceeds from equipment sales 5,288,444 2,419,041
--------------- ---------------
Net cash from investing activities 3,673,599 2,419,041
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (981,542) (1,460,953)
Distributions paid (1,197,890) (1,355,400)
--------------- ---------------
Net cash used in financing activities (2,179,432) (2,816,353)
--------------- ---------------
Net increase in cash and cash equivalents 3,982,426 3,486,817
Cash and cash equivalents at beginning of period 17,025,123 8,843,640
--------------- ---------------
Cash and cash equivalents at end of period $ 21,007,549 $ 12,330,457
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 758,399 $ 720,178
--------------- ---------------
--------------- ---------------
</TABLE>
Supplemental disclosure of non-cash activity: See Note 4 to the financial
statements.
The accompanying notes are an integral part
of these finanical statements.
5
<PAGE>
AFG Investment Trust C
Notes to the Financial Statements
March 31, 1999
(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 1998 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1998 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, 1999 and December 31, 1998 and results of operations for
the three months ended March 31, 1999 and 1998 have been made and are reflected.
NOTE 2 - CASH
At March 31, 1999, the Trust had $23,258,075 invested in federal agency
discount notes and reverse repurchase agreements secured by U.S. Treasury Bills
or interests in U.S. Government securities. Such cash includes $4,919,327 which
is classified as Restricted Cash and represents the net proceeds realized from
the offering of the Class B Interests less ( i ) the portion thereof used to pay
a special distribution to the Class A Beneficiaries and to redeem Class A
Interests and ( ii ) the portion used to pay a capital distribution to the Class
B Beneficiaries. The remainder is expected to be used according to terms
negotiated in conjunction with settling the Class Action Lawsuit described in
Note 9.
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.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of $18,004,959 are due as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending March 31, 2000 $ 7,969,984
2001 4,939,804
2002 2,125,899
2003 1,904,141
2004 1,065,131
------------------
Total $ 18,004,959
------------------
------------------
</TABLE>
6
<PAGE>
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
NOTE 4 - INVESTMENT IN KETTLE VALLEY
On March 1, 1999, the Trust and an affiliated trust (collectively, the
"Buyers") formed EFG/Kettle Development LLC, a Delaware limited liability
company, for the purpose of acquiring a 49.9% indirect ownership interest (the
"Interest") in a real estate development in Kelowna, British Columbia called
Kettle Valley. EFG/Kettle Development LLC, upon receiving the Buyers' equity
investment, purchased the Interest from a special purpose company ("SPC") whose
subsidiaries own a 99.9% limited partnership interest in Kettle Valley
Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were
established by the seller, in part, for income tax purposes and have no business
interests other than the development of Kettle Valley. KVD LP is a Canadian
Partnership that owns the property, consisting of approximately 280 acres of
land. The project, which is in the early stages of being marketed to home
buyers, is zoned for 1,000 residential units in addition to commercial space
that, currently, is being constructed. The seller is an unaffiliated third-party
company and has retained the remaining 50.1% ownership interest in the SPC. A
newly organized Canadian affiliate of EFG replaced the original general partner
of KVD LP on March 1, 1999.
The Trust's ownership share in EFG/Kettle Development LLC is 50.604% and
had a cost of $4,427,850, which was funded with cash of $3,095,369 and a
non-recourse note for $1,332,481. The note bears interest at an annualized rate
of 7.5% and will be fully amortized over 34 months commencing April 1, 1999. The
note is secured only by the Trust's stock interests in the SPC. In addition, the
seller purchased a residual sharing interest in a Boeing 767-300 owned by the
Buyers and leased to Scandinavian Airlines System ("SAS"). The seller paid
$3,013,206 to the Buyers ($1,524,803, or 50.604% to the Trust) for the residual
interest, which is subordinate to certain preferred payments to be made to the
Buyers in connection with the aircraft. Payment of the residual interest is due
only to the extent that the Trust receives net residual proceeds from the
aircraft. The residual interest is non-recourse to the Buyers and is reflected
as Other Liabilities on the accompanying Statement of Financial Position at
March 31, 1999. Investment in Kettle Valley at March 31, 1999 represents actual
cost paid by the Trust plus a 1% acquisition fee. See Note 8 for discussion of
amendment to the Trust Agreement to permit the investment in assets other than
leased equipment.
NOTE 5 - EQUIPMENT
The following is a summary of equipment owned by the Trust at March 31,
1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1999 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.
7
<PAGE>
<TABLE>
<CAPTION>
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
Remaining
Lease Term Equipment
Equipment Type (Months) At Cost
- ----------------------------------- ------------- --------------
<S> <C> <C>
Aircraft 7-45 $ 40,067,071
Locomotives 15-60 9,179,509
Manufacturing 9-53 9,053,648
Construction and mining 0-21 7,374,943
Materials handling 0-47 6,782,494
Computers and peripherals 0-9 4,132,225
Research & test 0 1,667,223
Retail store fixtures 3-6 1,624,736
Furniture & fixtures 0 203,261
Communications 3 151,460
Tractors & heavy duty trucks 0 148,079
Photocopying 0 2,804
--------------
Total equipment cost 80,387,453
Accumulated depreciation (37,204,347)
--------------
Equipment, net of accumulated depreciation $ 43,183,106
--------------
--------------
</TABLE>
At March 31, 1999, the Trust's equipment portfolio included equipment
having a proportionate original cost of $51,320,903, representing approximately
64% of total equipment cost.
At March 31, 1999, the cost and net book value of equipment held for sale
or re-lease was approximately $2,888,000 and $55,000, respectively. 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 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 three month periods ended March 31, 1999 and
1998, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Equipment management fees $ 130,104 $ 176,223
Administrative charges 22,686 22,686
Reimbursable operating expenses
due to third parties 270,933 85,208
--------------- ----------------
Total $ 423,723 $ 284,117
--------------- ----------------
--------------- ----------------
</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, 1999, the Trust was owed $484,928 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in April 1999.
8
<PAGE>
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
NOTE 7 - NOTES PAYABLE
Notes payable at March 31, 1999 consisted of installment notes of
$35,423,822 payable to banks and institutional lenders. The notes bear interest
rates ranging between 6.1% and 14.46%, except for one note which bears a
fluctuating interest rate based on LIBOR (4.94% at March 31, 1999) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments, except for one note
which is collateralized by certain stock interests (see Note 4). Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trust has balloon payment obligations of $20,469,318, $2,717,790 and $282,421 at
the expiration of the lease terms related to an aircraft leased to SAS, certain
rail equipment and its interest in an aircraft leased to Reno Air, Inc.,
respectively. The carrying amount of notes payable approximates fair value at
March 31, 1999.
The annual maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the year ending March 31, 2000 $ 3,824,221
2001 26,517,767
2002 2,167,847
2003 1,882,183
2004 1,031,804
--------------
Total $ 35,423,822
--------------
--------------
</TABLE>
NOTE 8 - SOLICITATION STATEMENT
On May 5, 1998, the Trust filed a definitive Solicitation Statement with
the United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a proposed
amendment (the "Amendment") to the Second Amended and Restated Declaration of
Trust (the "Trust Agreement"). The Solicitation Statement and Consent of
Beneficiary were mailed to all of the Beneficiaries of the Trust on May 6, 1998.
The Beneficiaries were requested to use the Consent of Beneficiary to vote on
seven proposals and return their votes on or before June 5, 1998. Equis II
Corporation, which has voting control of the Trust, agreed to vote all of its
Class B Interests in the same manner in which the majority of the Class A
Interests were actually voted. Accordingly, the Amendment would be adopted or
rejected based upon the voting results of the majority of Class A Interests that
were actually voted (including 9,210 Class A Interests owned by affiliates of
EFG), regardless of how few Class A Interests were actually voted.
The results of the voting reflected that a majority of Class A Interests
voted in favor of each of the proposals. Therefore, the Trust Agreement was
amended to (i) broaden the Trust's stated investment policies and objectives and
permit the Trust to invest in assets other than leased equipment; (ii) modify
the Trust's financing provisions to eliminate any cap on the amount of aggregate
Trust indebtedness and permit the Trust to use cross-collateralized and other
recourse debt structures; (iii) extend the Trust's reinvestment period, which
originally expired on September 2, 1997, until December 31, 2002; (iv) reduce
acquisition fees paid to EFG in connection with reinvestment assets acquired
after the Amendment date from a maximum of 3% to 1% and management fees earned
in connection with such assets from a maximum of 5% to 2%; and (v) institute a
management fee of 1% annually of the fair market value (or, if unattainable, the
cost) of non-equipment assets.
In addition, subject to attaining a settlement in the Class Action Lawsuit
described in Note 9 herein, the Trust Agreement will be modified in the
following principal respects: (i) the Trust will pay a Special Cash Distribution
to the Class A Beneficiaries of record as of September 1, 1997, or to their
successors or assigns, totaling $1,513,639 (or approximately $0.75 per Class A
Beneficiary Interest) using a portion of the Class B capital contributions that
otherwise would be distributed as a Class B Capital Distribution to Equis II
Corporation, the parent company of the Managing Trustee and an affiliate of EFG;
(ii) Equis II Corporation will be required to reduce its prospective Class B
Capital Distributions by $3,405,688 and treat such amount as a long-term equity
9
<PAGE>
AFG Investment Trust C
Notes to the Financial Statements
(Continued)
investment in the Trust and (iii) certain voting restrictions will be placed
upon the Class B Interests owned by Equis II Corporation.
NOTE 9 - 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 terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement."
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended Stipulation of Settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999.
The Amended Stipulation, among other things, divides the Class Action Lawsuit
into two separate sub-classes that can be settled individually. This revision is
expected to expedite the settlement of the Trust's claims by the middle of 1999.
The second sub-class, which does not include the Trust, is expected to remain
pending for a longer period.
On April 5, 1999, the Trust mailed a notice to all Class A and Class B
Beneficiaries describing, among other things, the Class Action Lawsuit and the
proposed settlement terms for the Trust. In addition, the notice advises the
Beneficiaries that the Court will conduct a fairness hearing on May 21, 1999 and
describes the rights of the Beneficiaries and the procedures they should follow
if they wish to object to the settlement.
Assuming the proposed settlement of the claims of the sub-class that
includes the Trust is effected according to present terms, the Trust's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $280,000, all of which was accrued and expensed by the Trust in
1998. There can be no assurance that settlement of the claims of the sub-class
that includes the Trust will receive final Court approval and be effected.
However, the Managing Trustee and its affiliates, in consultation with counsel,
concur that there is a reasonable basis to believe that a final settlement of
the claims of the sub-class that includes the Trust will be achieved. In the
absence of a final settlement approved by the Court, the Defendants intend to
defend vigorously against the claims asserted in the Class Action Lawsuit.
Neither the Managing Trustee nor its affiliates can predict with any degree of
certainty the cost of continuing litigation to the Trust or the ultimate
outcome.
10
<PAGE>
AFG Investment Trust C
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 C (the
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the outcome of the Class Action Lawsuit
described in Note 9 to the accompanying financial statements, the collection all
rents due under the Trust's lease agreements and remarketing of the Trust's
equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Trust uses information systems provided by Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") and has no information
systems of its own. EFG has adopted a plan to address the Year 2000 Issue that
consists of four phases: assessment, remediation, testing, and implementation
and has elected to utilize principally internal resources to perform all phases.
EFG has completed substantially all of its Year 2000 project at an aggregate
cost of less than $50,000 and at a di minimus cost to the Trust. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of
original design to use a four digit field to identify calendar year. All of the
Trust's lease billings, cash receipts and equipment remarketing processes are
performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Trust's significant vendors and third-party servicers are in the process, or
have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems are Year
2000 compliant.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Trust's results of operations,
liquidity, or financial position. The Trust's equipment leases were structured
as triple net leases, meaning that the lessees are responsible for, among other
things, (i) maintaining and servicing all equipment during the lease term, (ii)
ensuring that all equipment functions properly and is returned in good
condition, normal wear and tear excepted, and (iii) insuring the assets against
casualty and other events of loss. Non-compliance with lease terms on the part
of a lessee, including failure to address Year 2000 Issues could result in lost
revenues and impairment of residual values of the Trust's equipment assets under
a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Trust's business operations. However, EFG has no means of ensuring that all
customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Trust is not determinable.
11
<PAGE>
AFG Investment Trust C
FORM 10-Q
PART I. FINANCIAL INFORMATION
OVERVIEW
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit, the resolution of which remains pending. See Note 9 to the accompanying
financial statements. The Trust's operations commenced in 1992 and pursuant to
the Trust Agreement, the Trust is scheduled to be dissolved by December 31,
2004.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998:
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Trust recognized lease
revenue of $2,852,619 compared to $4,101,575 for same period in 1998. The
decrease in lease revenue from 1998 to 1999 resulted principally from 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 8 to the accompanying financial statements;
however, the extent of such impact cannot be determined at this time.
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, 1999 was $277,854
compared to $264,078 for the same period in 1998. Generally, interest income is
generated from the temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income in 1999 and 1998 includes
interest earned on proceeds resulting from the issuance of Class B Interests.
Future interest income will fluctuate in relation to prevailing interest rates,
the collection of lease revenue and the proceeds from equipment sales.
The Trust received $261,116 in 1999 as a breakage fee from a third-party
seller in connection with a transaction for new investments that was canceled by
the seller in the first quarter of 1999. This amount is reflected as Other
Income on the accompanying Statement of Operations for the three months ended
March 31, 1999.
During the three months ended March 31, 1999, the Trust sold equipment
having a net book value of $4,966,970 to existing lessees and third parties.
These sales resulted in a net gain, for financial statement purposes, of
$321,474 compared to a net gain of $2,284,311 on equipment having a net book
value of $134,730 during the same period in 1998. 1998 sales include the sale of
a printing press for $2,200,000 that had been fully depreciated.
12
<PAGE>
AFG Investment Trust C
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 expense was $1,794,619 and $2,847,877 for the three months
ended March 31, 1999 and 1998, 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 $658,057 or 23.1% of lease revenue in 1999 and
$844,967 or 20.6% of lease revenue in 1998. Interest expense in the near-term
may increase due to the financing of any newly acquired assets. Thereafter,
interest expense will decline in amount and as a percentage of lease revenue as
the principal balance of notes payable is reduced through the application of
rent receipts to outstanding indebtedness.
Management fees were 4.6% and 4.3% of lease revenue during the three months
ended March 31, 1999 and 1998, 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. Management fees also include a 1% management
fee on non-equipment assets. See Notes 4 and 8 to the accompanying financial
statements.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Collectively, operating expenses were
$293,619 and $107,894 during the three months ended March 31, 1999 and 1998,
respectively. Operating expenses were higher in 1999 principally as a result of
costs incurred of approximately $206,000 related to the repair and remarketing
of an aircraft formerly leased to Alaska Airlines, Inc. in which the Trust held
an interest. 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. 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
13
<PAGE>
AFG Investment Trust C
FORM 10-Q
PART I. FINANCIAL INFORMATION
activities generated net cash inflows of $2,488,259 and $3,884,129 for the three
months ended March 31, 1999 and 1998, 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.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During the three months ended March 31, 1999, the Trust
expended $3,139,648 to acquire its investment in Kettle Valley. In connection
with the investment, the Trust was paid $1,524,803 for a residual interest in an
aircraft in which the Trust owns an interest (see Note 4 for discussion of this
transaction). Cash realized from asset disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. During the
three months ended March 31, 1999, the Trust realized net cash proceeds of
$5,288,444 compared to $2,419,041 for the same period in 1998. Sale proceeds in
1999 include $4,997,297 related to the Trust's 42.83% interest in a McDonnell
Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. which was sold
in January 1999. Future inflows of cash from asset disposals will vary in timing
and amount and will be influenced by many factors including, but not limited to,
the frequency and timing of lease expirations, the type of equipment being sold,
its condition and age, and future market conditions.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. Generally, 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. During 1999, the Trust leveraged $1,332,481 of its
investment in Kettle Valley that will be amortized over 34 months (see Note 4).
In the near-term, the amount of cash used to repay debt obligations may increase
due to the financing of other newly acquired assets. Thereafter, the amount of
cash used to repay debt obligations will decline. In addition, the Trust has
balloon payment obligations of $20,469,318, $2,717,790 and $282,421 at the
expiration of the lease terms related to the SAS Aircraft, certain rail
equipment and the Reno Aircraft, respectively.
In accordance with the Trust Agreement, upon the dissolution of the Trust,
the Managing Trustee will be required to contribute to the Trust an amount equal
to any negative balance which may exist in the Managing Trustee's tax capital
account. At December 31, 1998, the Managing Trustee had a negative tax capital
account balance of $70,410.
At March 31, 1999, the Trust was due aggregate future minimum lease
payments of $18,004,959 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 $35,423,822 (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
14
<PAGE>
AFG Investment Trust C
FORM 10-Q
PART I. FINANCIAL INFORMATION
be re-leased to another lessee or sold to a third party. Accordingly, as the
Trust matures and a greater level of its equipment assets becomes available for
remarketing, the cash flows of the Trust will become less predictable. In
addition, the Trust will have cash needs to satisfy interest on indebtedness and
to pay management fees and operating expenses. Ultimately, the Trust is expected
to meet its future disbursement obligations and to distribute any excess of cash
inflows over cash outflows to the Participants in accordance with the Trust
Agreement. However, several factors, including month-to-month lease extensions,
lessee defaults, equipment casualty events, and early lease terminations could
alter the Trust's anticipated cash flows as described herein and in the
accompanying financial statements and result in fluctuations to the Trust's
periodic cash distribution payments.
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. Class A
distributions have been maintained at an annualized rate of $1.64 per Class A
Interest since October 1996. Class B distributions were set at an annualized
distribution rate of $0.66 per Class B Interest commencing July 18, 1997 and
decreased to an annualized distribution rate of $0.47 per Class B Interest in
August 1998 following the Class B Capital Distribution paid at that time. 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 three months ended March 31, 1999,
the Trust declared total cash distributions of $1,197,890. Of the total
distributions, the Beneficiaries were allocated $1,087,086 ($731,838 for Class A
Beneficiaries and $355,248 for Class B Beneficiaries); the Special Beneficiary
was allocated $98,825, and the Managing Trustee was allocated $11,979.
The nature of the Trust's operations and principal cash flows gradually
will shift from rental receipts to equipment sale proceeds as the Trust matures
and change as a result of new investments not consisting of equipment
acquisitions. As this occurs, the Trust's cash flows resulting from equipment
investments may become more volatile in that certain of the Trust's equipment
leases will be renewed and certain of its assets will be sold. In some cases,
the Trust may be required to expend funds to refurbish or otherwise improve the
equipment being remarketed in order to make it more desirable to a potential
lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will
attempt to monitor and manage these events in order to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
new investment activities and the collection of contractual rents, the
retirement of scheduled indebtedness, and the Trust's future working capital
requirements, in establishing future cash distribution rates.
15
<PAGE>
AFG Investment Trust C
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 9 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
16
<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 13, 1999
----------------------------------------
By: /s/ Gary Romano
----------------------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 13, 1999
----------------------------------------
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AFG
INVESTMENT TRUST C AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,926,876
<SECURITIES> 0
<RECEIVABLES> 750,003
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,676,879
<PP&E> 80,387,453
<DEPRECIATION> (37,204,347)
<TOTAL-ASSETS> 74,332,114
<CURRENT-LIABILITIES> 6,733,245
<BONDS> 31,599,601
0
0
<COMMON> 0
<OTHER-SE> 35,999,268
<TOTAL-LIABILITY-AND-EQUITY> 74,332,114
<SALES> 0
<TOTAL-REVENUES> 3,713,063
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,218,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 658,057
<INCOME-PRETAX> 836,664
<INCOME-TAX> 0
<INCOME-CONTINUING> 836,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 836,664
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
