<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1997 Commission File No. 0-25648
AFG Investment Trust D
- -----------------------------------------------------------------------------
(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
---- ----
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AFG Investment Trust D
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1997 and December 31, 1996.............................. 3
Statement of Operations
for the three and nine months ended September 30, 1997 and 1996.......... 4
Statement of Cash Flows
for the nine months ended September 30, 1997 and 1996.................... 5
Notes to the Financial Statements.......................................... 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 11-16
PART II. OTHER INFORMATION:
Items 1-6.................................................................... 17
</TABLE>
2
<PAGE>
AFG Investment Trust D
STATEMENT OF FINANCIAL POSITION
September 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 8,092,310 $ 6,640,347
Restricted cash.................................................................... 12,477,493 --
Rents receivable................................................................... 1,779,291 3,347,306
Accounts receivable--affiliate..................................................... 431,079 3,845,655
Equipment at cost, net of accumulated depreciation of $36,191,725 and $29,093,445
at September 30, 1997 and December 31, 1996...................................... 75,995,172 61,357,491
Organization costs, net of accumulated amortization of $4,000 and $3,250 at
September 30, 1997 and December 31, 1996......................................... 1,000 1,750
------------- -------------
Total assets................................................................... $ 98,776,345 $ 75,192,549
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------------- -------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable...................................................................... $ 45,991,598 $ 32,827,977
Accrued interest................................................................... 313,409 727,187
Accrued liabilities................................................................ 23,725 23,250
Accrued liabilities--affiliate..................................................... 174,350 214,247
Deferred rental income............................................................. 50,888 200,836
Cash distributions payable to participants......................................... 480,438 314,216
------------- -------------
Total liabilities.............................................................. 47,034,408 34,307,713
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Participants' capital (deficit):
Managing Trustee................................................................. (101,470) (62,865)
Special Beneficiary.............................................................. (843,497) (525,884)
Class A Beneficiary Interests (2,089,030 Interests; initial purchase price
of $25 each)................................................................... 37,554,700 41,473,585
Class B Beneficiary Interests (3,142,083 Interests; initial purchase price
of $5 each).................................................................... 15,132,204 --
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Total participants' capital.................................................... 51,741,937 40,884,836
------------- -------------
Total liabilities and participants' capital.................................... $ 98,776,345 $ 75,192,549
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AFG Investment Trust D
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ------------ ------------- -------------
Income:
Lease revenue........................................ $ 4,821,059 $ 5,508,081 $ 14,411,576 $ 16,637,773
Interest income...................................... 254,187 53,701 500,325 100,550
Loss on sale of equipment............................ (860,449) -- (951,347) (92,007)
------------ ------------ ------------- -------------
Total income....................................... 4,214,797 5,561,782 13,960,554 16,646,316
------------ ------------ ------------- -------------
Expenses:
Depreciation and amortization........................ 3,124,338 3,522,837 9,336,856 10,604,049
Interest expense..................................... 547,250 864,785 1,854,193 2,628,115
Equipment management fees--affiliate................. 224,727 242,532 660,444 733,004
Operating expenses--affiliate........................ 232,331 182,792 460,518 443,035
------------ ------------ ------------- -------------
Total expenses..................................... 4,128,646 4,812,946 12,312,011 14,408,203
------------ ------------ ------------- -------------
Net income............................................. $ 86,151 $ 748,836 $ 1,648,543 $ 2,238,113
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net income
per Class A Beneficiary Interest..................... $ -- $ 0.33 $ 0.68 $ 0.97
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
per Class B Beneficiary interest..................... $ -- $ -- $ -- $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Cash distributions declared
per Class A Beneficiary Interest..................... $ 1.73 $ 0.35 $ 2.55 $ 0.98
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
per Class B Beneficiary Interest..................... $ 0.13 $ -- $ 0.13 $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AFG Investment Trust D
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income.......................................................................... $ 1,648,543 $ 2,238,113
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization..................................................... 9,336,856 10,604,049
Loss on sale of equipment......................................................... 951,347 92,007
Changes in assets and liabilities
Decrease (increase) in:
rents receivable................................................................ 1,568,015 1,006,461
accounts receivable--affiliate.................................................. 3,414,576 (555,726)
Increase (decrease) in:
accrued interest................................................................ (399,779) (141,013)
accrued liabilities............................................................. 475 (25,101)
accrued liabilities--affiliate.................................................. (39,897) 17,348
deferred rental income.......................................................... (149,948) (147,500)
Net cash from operating activities.......................................... 16,330,188 13,088,638
------------- -------------
Cash flows from (used in) investing activities:
Purchase of equipment............................................................. (30,166,351) (1,243,539)
Proceeds from equipment sales..................................................... 2,602,580 268,503
------------- -------------
Net cash used in investing activities....................................... (27,563,771) (975,036)
------------- -------------
Cash flows from (used in) financing activities:
Proceeds from capital contributions............................................... 15,710,415 --
Payment of offering costs......................................................... (157,104) --
Proceeds from notes payable....................................................... 25,042,248 7,882,204
Principal payments--notes payable................................................. (9,253,988) (11,738,172)
Distributions paid................................................................ (6,178,531) (2,175,350)
------------- -------------
Net cash from (used in) financing activities................................ 25,163,040 (6,031,118)
------------- -------------
Net increase in cash and cash equivalents and restricted cash....................... 13,929,457 6,082,484
Cash and cash equivalents at beginning of period.................................... 6,640,347 669,998
------------- -------------
Cash and cash equivalents and restricted cash at end of period...................... $ 20,569,804 $ 6,752,482
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................................... $ 2,253,973 $ 2,769,128
------------- -------------
------------- -------------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, the Trust sold equipment to a third party which assumed related
debt and interest of $2,624,639 and $13,998, respectively.
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AFG Investment Trust D
Notes to the Financial Statements
September 30, 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 September 30, 1997 and December 31, 1996 and results of
operations for the three and nine month periods ended September 30, 1997 and
1996 have been made and are reflected.
NOTE 2--CASH
At September 30, 1997, the Trust had $20,460,000 invested in reverse
repurchase secured by U.S. Treasury Bills or interests in U. S. Government
securities. Approximately $7,000,000 of the Trust's cash is expected to be
used to acquire reinvestment equipment during the remainder of 1997 and
during 1998.
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 $38,064,686 are due as follows:
<TABLE>
<S> <C>
For the year ending September 30, 1998.................. $17,899,835
1999.................. 9,480,651
2000.................. 5,680,617
2001.................. 2,629,531
2002.................. 2,334,182
Thereafter.................. 39,870
-----------
Total $38,064,686
-----------
-----------
</TABLE>
During August 1997, the Trust acquired a 49.4% proportionate ownership
interest in a Boeing 767-300 ER aircraft leased by Scandinavian Airlines
System (the "SAS Aircraft")--See Note 4 herein. The Trust will receive
approximately $4,034,000 of rental revenue during the year ending September
30, 1998 and approximately $1,008,000 in the year ending September 30, 1999.
Scandinavian Airlines System has two one year renewal options in place which
will commence following the expiration of the primary lease term on December
29, 1998. If the options are exercised, the renewal rental payments will be
the lesser of 90% of the primary lease term rents or the then current fair
market value rents for such equipment.
6
<PAGE>
AFG Investment Trust D
Notes to the Financial Statements
(Continued)
NOTE 4--EQUIPMENT
The following is a summary of equipment owned by the Trust at September 30,
1997. In the opinion of Equis Financial Group Limited Partnership ("EFG"), the
acquisition cost of the equipment did not exceed its fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------ ------------- -------------
<S> <C> <C>
Aircraft........................................................................... 3-63 $ 52,946,296
Vessels............................................................................ 60 13,875,360
Railroad........................................................................... 33 10,684,643
Construction & mining.............................................................. 6-57 6,205,962
Materials handling................................................................. 3-54 6,124,032
Computers & peripherals............................................................ 0-30 6,045,859
Retail store fixtures.............................................................. 3-27 4,926,665
Manufacturing...................................................................... 8-15 3,849,128
Miscellaneous...................................................................... 3-38 3,564,568
Communications..................................................................... 3-5 1,834,800
Tractors & heavy duty trucks....................................................... 0-18 901,053
Research & test.................................................................... 0-30 664,901
Furniture & fixtures............................................................... 3-5 271,945
Trailers/intermodal containers..................................................... 9 187,474
Photocopying....................................................................... 0-6 65,711
Motor vehicles..................................................................... 15 38,500
-------------
Total equipment cost 112,186,897
Accumulated depreciation (36,191,725)
-------------
Equipment, net of accumulated depreciation $ 75,995,172
-------------
-------------
</TABLE>
In August 1997 the Trust acquired proportionate interest in the SAS
Aircraft, pursuant to the reinvestment provisions of the Trust Agreement, at
a cost of $30,166,351. To acquire the interest in the SAS Aircraft, the Trust
obtained leveraging of $25,042,248 from a third-party lender and utilized
cash of $5,124,103.
At September 30, 1997, the Trust's equipment portfolio included equipment
having a proportionate original cost of $45,527,100, representing
approximately 41% of total equipment cost.
At September 30, 1997, the cost and net book value of equipment held for
sale or re-lease was approximately $574,000 and $243,000, respectively. The
Managing Trustee is actively seeking the sale or re-lease of all equipment
not on lease. In addition, the summary above also includes equipment being
leased on a month-to-month basis.
7
<PAGE>
AFG Investment Trust D
Notes to the Financial Statements
(Continued)
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 the nine month periods ended September
30, 1997 and 1996, which were paid or accrued by the Trust to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Reimbursement of offering costs....................................................... $ 157,104 $ --
Equipment acquisition fees............................................................ 869,818 36,120
Equipment management fees............................................................. 660,444 733,004
Administrative charges................................................................ 56,373 15,750
Reimbursable operating expenses due to third parties.................................. 404,145 427,285
------------ ------------
Total............................................................................ $ 1,990,780 $ 1,212,159
------------ ------------
------------ ------------
</TABLE>
All rents and the 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
September 30, 1997, the Trust was owed $431,079 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in October 1997.
NOTE 6--NOTES PAYABLE
Notes payable at September 30, 1997 consisted of installment notes of
$45,991,598 payable to banks and institutional lenders. The notes bear
interest rates ranging between 5.1% and 13.75%, except for one note which
bears a fluctuating interest rate based on LIBOR (5.66% at September 30,
1997) plus a margin. All of the installment notes are non-recourse, and are
collateralized by the equipment and assignment of the related lease payments.
Generally, the installment notes will be fully amortized by noncancellable
rents. However, the Trust has balloon payment obligations at the expiration
of the primary lease terms related to the Reno Aircraft, certain rail
equipment and the SAS Aircraft of $282,421, $1,476,981 and $22,162,280,
respectively. The carrying value of notes payable approximates fair value at
September 30, 1997.
The annual maturities of the notes payable are as follows:
<TABLE>
<S> <C>
For the year ending September 30, 1998............. $10,005,245
1999............. 27,342,104
2000............. 4,635,673
2001............. 2,005,594
2002............. 1,709,289
Thereafter............. 293,693
------------
Total............. $45,991,598
------------
------------
</TABLE>
8
<PAGE>
AFG Investment Trust D
Notes to the Financial Statements
(Continued)
NOTE 7--PROFIT AND LOSS ALLOCATION AND DISTRIBUTION OF DISTRIBUTABLE CASH
Effective for the third quarter of 1997, the allocation of net income or
loss, for financial statement purposes, and distributions of distributable
cash are made to each Beneficiary in accordance with the Trust Agreement, as
Amended (see Note 9).
NOTE 8--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 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 request for 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.
On June 24, 1997, four plaintiffs (the "Plaintiffs") owning limited
partner units or beneficiary interests in eight investment programs sponsored
by EFG filed a lawsuit, as a derivative action, on behalf of the Trust and 27
other investment programs (collectively, the "Nominal Defendants") in the
Superior Court of the Commonwealth of Massachusetts for the County of Suffolk
against EFG and certain of EFG's affiliates, including the Managing Trustee
of the Trust and four other wholly-owned subsidiaries of EFG which are the
general partner or managing trustee of one or more of the investment
programs, (collectively, the "Managing Defendants"), and certain other
entities and individuals that have control of the Managing Defendants and the
Nominal Defendants (the "Controlling Defendants"). The Plaintiffs assert
claims of breach of fiduciary duty, breach of contract, unjust enrichment,
and equitable relief and seek various remedies, including compensatory and
punitive damages to be determined at trial.
The Managing Trustee and EFG are in the early stages of evaluating the
nature and extent of the claims asserted in this lawsuit and cannot predict
its outcome with any degree of certainty. However, based upon all of the
facts presently being considered by management, the Managing Trustee and EFG
do not believe that any likely outcome will have a material adverse effect on
the Trust. The Managing Trustee, EFG and their affiliates intend to
vigorously defend against the lawsuit.
NOTE 9--ISSUANCE OF CLASS B INTERESTS
On October 26, 1996, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission (the "SEC") which subsequently
was sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the
Securities Exchange Act. The Solicitation Statement sought the consent of the
Beneficiaries to a proposed amendment (the "Amendment") to the Amended and
Restated Declaration of Trust (the "Trust
9
<PAGE>
AFG Investment Trust D
Notes to the Financial Statements
(Continued)
Agreement") which would (i) amend the provisions of the Trust Agreement
governing the redemption of Beneficiary Interests to permit the Trust to
offer to redeem outstanding Beneficiary Interests at such times, in such
amounts, in such manner and at such prices as the Managing Trustee might
determine from time to time, in accordance with applicable law; and (ii) add
a provision to the Trust Agreement that would permit the Trust to issue, at
the discretion of the Managing Trustee and without further consent or
approval of the Beneficiaries, an additional class of security with such
designations, preferences and relative, participating, optional or other
special rights, powers and duties as the Managing Trustee might affix. The
funds obtained through the issuance of such a security would be used by the
Trust to (a) expand redemption opportunities for Beneficiaries without using
Trust funds which might otherwise be available for cash distributions; and
(b) make a special one-time cash distribution to the Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required
the consent of the Beneficiaries holding more than 50% in the aggregate of
the Beneficiary Interests held by all Beneficiaries. A majority of
Beneficiary Interests, representing 1,210,746 or 58% of all Beneficiary
Interests, voted in favor of the Amendment; 229,836 or 11% of all Beneficiary
Interests voted against the Amendment; and 39,233 or 2% of all Beneficiary
Interests abstained. Approximately 71% of all Beneficiary Interests
participated in the vote. Accordingly, the Trust Agreement was amended.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries
and purchasers of the Class B Interests were set forth in a Prospectus sent to
the Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997
the Trust issued 3,142,083 Class B Interests at $5.00 per interest, thereby
generating $15,710,415 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 1,400 Class B Interests, generating $7,000 of such
aggregate capital contributions, and the Special Beneficiary, EFG, purchased
3,140,683 Class B Interests, generating $15,703,415 of such aggregate capital
contributions.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred
its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to
Equis II Corporation. As a result, Equis II Corporation has voting control of
the Trust through its ownership of the majority of all of the Trust's
outstanding voting interests, as well as its ownership of AFG ASIT
Corporation. Equis II Corporation is controlled by EFG's President and Chief
Executive Officer, Gary D. Engle. Accordingly, control of the Managing
Trustee did not change as a result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from
the offering of the Class B Interests to pay a one-time special cash
distribution of approximately $1.47 per Class A Beneficiary Interest to the
Class A Beneficiaries of the Trust. The Managing Trustee declared and paid
this special cash distribution, aggregating $3,075,818, to the Class A
Beneficiaries on August 15, 1997.
NOTE 10--OFFER TO REDEEM CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust by filing a Form
13E-4, Issuer Tender Offer Statement, with the SEC and distributing to the
Class A Beneficiaries information (the "Tender Documents") concerning the
offer. On October 10, 1997, the Trust used $1,606,322 of the net proceeds
realized from the offering of the Class B Interests to purchase 153,275 of
the Class A Beneficiary Interests tendered as a result of the offer.
10
<PAGE>
AFG Investment Trust D
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 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, i) the ability of the Trust to satisfy its equipment reinvestment
requirements and ii) the ability of EFG to collect all rents due under the
attendant lease agreements and to successfully remarket the Partnership's
equipment upon the expiration of such leases.
Three and nine months ended September 30, 1997 compared to the three and
nine months ended September 30, 1996:
Overview
As an equipment leasing trust, AFG Investment Trust D ("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 1993.
Results of Operations
For the three and nine months ended September 30, 1997, the Trust
recognized lease revenue of $4,821,059 and $14,411,576, respectively,
compared to $5,508,081 and $16,637,773 for the same periods in 1996. The
decrease in lease revenue from 1996 to 1997 was attributable principally to
primary lease term expirations and the sale of equipment, including the
Trust's sale of its interest in a vessel (which generated $258,667 of gross
quarterly rents in 1996) to the lessee in December 1996. In the near-term,
aggregate rental revenues are expected to increase due to reinvestment of
available proceeds in other equipment, including proceeds resulting from the
Trust's sale of its interest in the vessel discussed previously and certain
rail equipment which the Trust sold during the three months ended September
30, 1997. Over time, the level of lease revenue will decline due to the
expiration of the Trust's lease 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 and nine months ended September 30, 1997
was $254,187 and $500,325, respectively, compared to $53,701 and $100,550 for
the same periods in 1996. Interest income was generated
11
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART I. FINANCIAL INFORMATION
from temporary investment of available cash in short-term money market
instruments. Interest income was higher in the three and nine months ended
September 30, 1997 than in the same periods in 1996 due to interest earned on
equipment sale proceeds. The amount of future interest income is expected to
fluctuate in relation to prevailing interest rates and the collection of
lease revenue and sales proceeds.
For the three months ended September 30, 1997, the Trust sold equipment
having a net book value of $5,615,691 to existing lessees and third parties.
These sales resulted in a net loss, for financial statement purposes, of
$860,449. There were no equipment sales for the corresponding period of 1996.
For the nine months ended September 30, 1997, the Trust sold equipment
having a net book value of $6,192,565 to existing lessees and third parties.
These sales resulted in a net loss, for financial statement purposes, of
$951,347, compared to a net loss of $92,007 on equipment having a net book
value of $360,510 for the same period in 1996.
The equipment sales during the three and nine months ended September 30,
1997 included certain railroad equipment with an original cost and net book
value of $6,513,773 and $5,488,323, respectively, which the Trust sold to a
third party in September 1997. In connection with this sale, the Trust
realized sale proceeds of $2,000,000 and the purchaser assumed related debt
and interest of $2,624,639 and $13,998, respectively, which resulted in a net
loss, for financial statement purposes, of $849,685. This equipment was sold
prior to the expiration of the related lease term. The Managing Trustee
intends to reinvest these sale proceeds in other equipment in 1997 and 1998,
pursuant to the reinvestment provisions of the Trust.
It cannot be determined whether future sales of equipment will result in
a net gain or a net loss to the Trust, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at
the time of sale. In addition, the amount of gain or loss reported for
financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological
advances, and many other events can converge to enhance or detract from asset
values at any given time. EFG attempts to monitor these changes in order to
identify opportunities which may be advantageous to the Trust and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset,
together with its residual value. The latter consists of cash proceeds
realized upon the asset's sale in addition to all other cash receipts
obtained from renting the asset on a re-lease, renewal or month-to-month
basis. The Trust classifies such residual rental payments as lease revenue.
Consequently, the amount of gain or loss reported in the financial statements
is not necessarily indicative of the total residual value the Trust achieved
from leasing the equipment.
Depreciation and amortization expense for the three and nine months ended
September 30, 1997 was $3,124,338 and $9,336,856, respectively, compared to
$3,522,837 and $10,604,049 for the same periods in 1996. 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.
12
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART I. FINANCIAL INFORMATION
Interest expense was $547,250 and $1,854,193 or 11.4% and 12.9% of lease
revenue for the three and nine months ended September 30, 1997, respectively,
compared to $864,785 and $2,628,115 or 15.7% and 15.8% of lease revenue for
each of the same periods 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 4.7% and 4.6% of lease revenue for the three and
nine months ended September 30, 1997, respectively, compared to 4.4% of lease
revenue for each of the same periods in 1996. Management fees are based on 5%
of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as accounting and legal fees, as well as
printing, distribution and remarketing expenses. Collectively, operating
expenses represented 4.8% and 3.2% of lease revenue during the three and nine
months ended September 30, 1997 compared to 3.3% and 2.7% of lease revenue
during the same periods in 1996. Operating expenses in 1997 include
professional service costs incurred in connection with the Solicitation and
Registration Statements described in Note 9 to the accompanying financial
statements whereas operating expenses in 1996 included remarketing fees
incurred related to the sale of certain equipment. 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
nine months ended September 30, 1997, operating activities generated net cash
inflows of $12,732,115, after reductions for equipment sale proceeds of
approximately $1,618,000 received in connection with the sale of the vessel
and debt proceeds of $1,980,073 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 and received by the Trust in January 1997.
For the nine months ended September 30, 1996, the Trust generated net cash
inflows from operating activities of $13,088,638. In the near-term, net cash
inflows generated from operating activities are expected to increase due to
the acquisition of reinvestment equipment as described below. Thereafter,
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.
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.
13
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART I. FINANCIAL INFORMATION
Cash expended for asset acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. The Trust expended $30,166,351 for the
SAS Aircraft during the nine months ended September 30, 1997 and $1,243,539
for other equipment during the same period of 1996. The SAS Aircraft was
purchased using cash of $5,124,103 and indebtedness of $25,042,248. During
the nine months ended September 30, 1997, the Trust realized equipment sale
proceeds of $2,602,580, including $2,000,000 of sale proceeds from the rail
transaction, compared to $268,503 during 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.
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 $25,042,248 and $7,882,204 in 1997 and in 1996, respectively,
resulted from leveraging a portion of the Trust's equipment portfolio with
third-party lenders. 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.
Thereafter, the amount of indebtedness will decline as the principal balance
of notes payable is reduced through the collection and application of rents.
However, the Trust has balloon payment obligations of $282,421, $1,476,981
and $22,162,280 at the expiration of the primary lease terms related to the
Reno Aircraft, certain rail equipment and the SAS Aircraft, respectively.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at September 30, 1997.
This is the result of aggregate cash distributions to these Participants
being in excess of their aggregate capital contributions ($1,000 each) and
their respective allocations of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the Managing Trustee or
the Special Beneficiary for financial reporting purposes is not indicative of
any further capital obligations to the Trust by either the Managing Trustee
or the Special Beneficiary. For income tax purposes, income is allocated
first to those Participants having negative tax capital account balances so
as to eliminate any such balances. In accordance with the Trust Agreement,
upon the dissolution of the Trust, the Managing Trustee will be required to
contribute to the Trust an amount equal to any negative balance which may
exist in the Managing Trustee's tax capital account. No such requirement
exists with respect to the Special Beneficiary. At December 31, 1996, the
Managing Trustee had a negative tax capital account balance.
At September 30, 1997, the Trust had aggregate future minimum lease
payments of $38,064,686 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 (see Note 6 to the financial statements)
along with the balloon payment obligations discussed above. 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 from the Trust's anticipated reinvestment activities.
Presently, the Trust expects to acquire approximately $28,000,000 of
reinvestment equipment using on-hand cash of approximately $7,000,000 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
14
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART I. FINANCIAL INFORMATION
lessee or sold to a third party. Accordingly, as the Trust matures and a
greater level of its equipment assets become available for remarketing, the
cash flows of the Trust will become less predictable. In addition, the Trust
will have cash outflows to satisfy interest on indebtedness and to pay
management fees and operating expenses. Ultimately, the Trust is expected to
meet its future disbursement obligations and to distribute any excess of cash
inflows over cash outflows to the Participants in accordance with the Trust
Agreement. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described
herein and in the accompanying financial statements and result in
fluctuations to the Trust's periodic cash distribution payments.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries
and purchasers of the Class B Interests were set forth in a Prospectus sent to
the Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997
the Trust issued 3,142,083 Class B Interests at $5.00 per interest, thereby
generating $15,710,415 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 1,400 Class B Interests, generating $7,000 of such
aggregate capital contributions, and the Special Beneficiary, EFG, purchased
3,140,683 Class B Interests, generating $15,703,415 of such aggregate capital
contributions. The Trust incurred costs in the amount of $157,104 in
connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred
its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to
Equis II Corporation. As a result, Equis II Corporation has voting control of
the Trust through its ownership of the majority of all of the Trust's
outstanding voting interests, as well as its ownership of AFG ASIT
Corporation. Equis II Corporation is controlled by EFG's President and Chief
Executive Officer, Gary D. Engle. Accordingly, control of the Managing
Trustee did not change as a result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from
the offering of the Class B Interests to pay a one-time special cash
distribution to the Class A Beneficiaries of the Trust. The Managing Trustee
declared and paid this special cash distribution of approximately $1.47 per
Class A Beneficiary Interest, aggregating $3,075,818, to Class A
Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust by filing a
Form 13E-4, Issuer Tender Offer Statement, with the SEC and distributing to
the Class A Beneficiaries information (the "Tender Documents") concerning the
offer. On October 10, 1997, the Trust used $1,606,322 of the net proceeds
realized from the offering of the Class B Interests to purchase 153,275 of
the Class A Beneficiary Interests tendered as a result of the offer on
October 10, 1997.
Cash distributions paid to the Beneficiaries 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.
15
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 Class A Beneficiary Interest (the rate
established and paid from the Trust's inception through September 1995) to an
annualized rate of $1.26 per Class A Beneficiary Interest commencing in
October 1995. In October 1996, the Managing Trustee increased the annualized
distribution rate to $1.64 per Class A Beneficiary Interest and expects that
the Trust will be able to sustain this distribution rate throughout 1997. For
the Class B Beneficiaries, the Managing Trustee established and paid, from
the Trust, an annualized distribution of $0.66 per Class B Beneficiary
commencing in August 1997. The Managing Trustee also expects to maintain this
distribution throughout 1997. Future distributions, with respect to Class B
Interests, will be subordinate to certain distributions to Class A Interests.
The nature of the Trust's principal cash flows gradually will shift from
rental receipts to equipment sale proceeds as the Trust matures. As this
occurs, the Trust's cash flows will become more volatile in that certain of
the Trust's equipment leases will be renewed and certain of its assets will
be sold. In some cases, the Trust may be required to expend funds to
refurbish or otherwise improve the equipment being remarketed in order to
make it more desirable to a potential lessee or purchaser. The Trust's
Advisor, EFG, and the Managing Trustee will attempt to monitor and manage
these events to maximize the residual value of the Trust's equipment and will
consider these factors, in addition to the collection of contractual rents,
the retirement of scheduled indebtedness and the Trust's future working
capital and equipment requirements, in establishing future cash distribution
rates. Ultimately, the Beneficiaries should expect that cash distribution
rates will fluctuate over the long term as a result of future remarketing
activities.
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 calendar month. The payment of such distributions
is presented as a component of financing activities. For the nine months
ended September 30, 1997, the Trust declared total cash distributions of
Distributable Cash From Operations and Distributable Cash From Sales and
Refinancings of $6,344,753. In accordance with the Trust Agreement, as
Amended, the Beneficiaries were allocated 90.75% of these distributions, or
$5,757,863 ($5,336,756 to Class A Beneficiaries and $421,107 to Class B
Beneficiaries); the Special Beneficiary was allocated 8.25%, or $523,443; and
the Managing Trustee was allocated 1%, or $63,447.
16
<PAGE>
AFG Investment Trust D
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Response:
Refer to Note 8 to the financial statements
herein.
Item 2. Changes in Securities Response:
On July 18, 1997, the Trust issued 3,142,083 Class B
Interests at $5.00 per interest, generating $15,710,415
in aggregate Class B capital contributions. Class A
Beneficiaries purchased 1,400 Class B Interests,
generating $7,000 of such aggregate capital
contributions, and the Special Beneficiary, EFG,
purchased 3,140,683 Class B Interests, generating
$15,703,415 of such aggregate capital contributions.
Subsequently, EFG transferred its Class B Interests to a
special-purpose company, Equis II Corporation. (See Note 9
to the accompanying financial statements.)
The Trust Agreement grants limited voting rights to the
Class A Beneficiaries and Class B Beneficiaries.
However, each Class A Beneficiary and Class B
Beneficiary is entitled to cast one vote for each
Interest owned by him or her. Equis II Corporation has
voting control of the Trust through its ownership of its
Class B Interests.
Future cash distributions with respect to the Class B
Interests will be subordinate to certain distributions
with respect to the Class A Interests.
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
17
<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 D
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee
of the Registrant.
By:
----------------------------------------------
Michael J. Butterfield
Treasurer of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date:
-------------------------------------------
By:
----------------------------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date:
--------------------------------------------
18
<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 D
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee
of the Registrant.
By: /s/ Michael J. Butterfield
----------------------------------------------
Michael J. Butterfield
Treasurer of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 14, 1997
--------------------------------------------
By: /s/ Gary M. Romano
----------------------------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 1997
--------------------------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,569,803
<SECURITIES> 0
<RECEIVABLES> 2,210,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,780,173
<PP&E> 112,186,897
<DEPRECIATION> 36,191,725
<TOTAL-ASSETS> 98,776,345
<CURRENT-LIABILITIES> 1,042,810
<BONDS> 45,991,598
0
0
<COMMON> 0
<OTHER-SE> 51,741,937
<TOTAL-LIABILITY-AND-EQUITY> 98,776,345
<SALES> 0
<TOTAL-REVENUES> 13,960,554
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,457,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,854,193
<INCOME-PRETAX> 1,648,543
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,648,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,648,543
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
