-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L7RO2eSXOo90EyWtL4mwtZk/X564unaYT/PZLl3Bzh0zeJtUK2w0UlS7XkMmCzvA RBNylMmAtZGfUztkDYgp3Q== 0000912057-97-011354.txt : 19970401 0000912057-97-011354.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011354 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFG INVESTMENT TRUST A CENTRAL INDEX KEY: 0000879494 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043145953 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21396 FILM NUMBER: 97570647 BUSINESS ADDRESS: STREET 1: 98 N WASINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 FORMER COMPANY: FORMER CONFORMED NAME: AFG SECURED INCOME TRUST I-A DATE OF NAME CHANGE: 19600201 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 -------------------------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from-----------------------------to-------------------------------- Commission file number 0-21396 -------------------------------------------------------- AFG Investment Trust A - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 04-3145953 - ---------------------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 98 N. Washington St., Fifth Floor, Boston, MA 02114 - --------------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 ------------------------------------------ Securities registered pursuant to Section 12(b) of the Act NONE ----------------------------------- Title of each class Name of each exchange on which registered - ----------------------------------------- ---------------------------------------------- - ----------------------------------------- ---------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: 549,218 Trust Beneficiary Interests - --------------------------------------------------------------------------------------------- (Title of class) - --------------------------------------------------------------------------------------------- (Title of class)
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 XX No State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders for the year ended December 31, 1996 (Part I and II) AFG INVESTMENT TRUST A FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business 3 Item 2 Properties 5 Item 3 Legal Proceedings 5 Item 4 Submission of Matters to a Vote of Security Holders 5 PART II Item 5 Market for the Trust's Securities and Related Security Holder Matters 6 Item 6 Selected Financial Data 7 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8 Financial Statements and Supplementary Data 7 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 7 PART III Item 10 Directors and Executive Officers of the Trust 8 Item 11 Executive Compensation 10 Item 12 Security Ownership of Certain Beneficial Owners and Management 10 Item 13 Certain Relationships and Related Transactions 11 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 13-15
2 PART I ITEM 1. BUSINESS. - ---------------- (a) General Development of Business AFG Investment Trust A, (the "Trust") was organized as a Delaware business trust in accordance with the Delaware Business Trust Act on February 26, 1992 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Participants' capital initially consisted of contributions of $1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special Beneficiary, Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG" or the "Advisor"), and $100 from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate of EFG. On May 29, 1992 the Trust issued 549,218 Beneficiary Interests to 645 investors. The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation and affiliate of EFG, and one Special Beneficiary, EFG. The Managing Trustee and the Special Beneficiary are not required to make any other capital contributions except as may be required under the Amended and Restated Declaration of Trust (the "Trust Agreement"). (b) Financial Information About Industry Segments The Trust is engaged in only one industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full-payout or operating lease basis. Full-payout leases are those in which aggregate noncancellable rents equal or exceed the Purchase Price of the leased equipment. Operating leases are those in which the aggregate noncancellable rental payments are less than the Purchase Price of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Trust was organized to acquire a diversified portfolio of capital equipment subject to various full-payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Trust's primary investment objectives are to acquire and lease equipment which will: 1. Generate monthly cash distributions; 2. Preserve and protect Trust capital; and 3. Maximize residual value for ultimate sale The Trust has the additional objective of providing certain federal income tax benefits. The Closing Date of the offering of Beneficiary Interests of the Trust was May 29, 1992. Significant operations commenced coincident with the Trust's initial purchase of equipment and associated lease commitments on May 29, 1992. The acquisition of the equipment and its associated leases is described in detail in Note 3 to the financial statements included in Item 14, herein. The Trust is expected to terminate by December 31 of the eleventh year following its Closing Date, or December 31, 2003. The Trust has no employees; however, it entered into an Advisory Agreement with EFG. EFG's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Advisor is compensated for such services as described in the Trust Agreement, Item 13 herein, and in Note 4 to the financial statements included in Item 14, herein. The Trust's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating 3 expenses. Consequently, the success of the Trust is largely dependent upon the ability of the Managing Trustee and its Affiliates to forecast technological advances, the ability of the lessees to fulfill their lease obligations and the quality and marketability of the equipment at the time of sale. In addition, the leasing industry is very competitive. Although substantially all funds available for acquisitions have been invested in equipment, subject to noncancellable lease agreements, the Trust will encounter considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Trust will compete with lease programs offered directly by manufacturers and other equipment leasing companies, including business trusts and limited partnerships organized and managed similarly to the Trust and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Trust. Many competitors have greater financial resources and more experience than the Trust, the Managing Trustee and the Advisor. The Trust Agreement provided for the reinvestment of Cash From Sales or Refinancings in additional equipment until May 1996, a period of four years following Closing. Upon the expiration of each primary lease term, the Managing Trustee will determine whether to sell or re-lease the Trust's equipment, depending on the economic advantages of each alternative. Over time, the Trust will begin to liquidate its portfolio of equipment. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1996, 1995 and 1994 is incorporated herein by reference to Note 2 to the financial statements in the 1996 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. Default by a lessee under a lease agreement may cause equipment to be returned to the Trust at a time when the Managing Trustee or the Advisor is unable to arrange the sale or re-lease of such equipment. This could result in the loss of a portion of potential lease revenues and weaken the Trust's ability to repay related indebtedness. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Equipment Manager or Advisor to the Trust and several other Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President and Chief Executive Officer. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party (the "Buyer"). AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG agreed not to compete with the Buyer's lease origination business for a period of five years; however, EFG is permitted to originate certain equipment leases, principally those involving non-investment grade lessees and ocean-going vessels, which are not in competition with the Buyer. In addition, the sale agreements specifically reserved to EFG the rights to continue using the name American Finance Group and its acronym in connection with the Trust and the Other Investment Programs and to continue managing all assets owned by the Trust and the Other Investment Programs, including the right to satisfy all required equipment acquisitions utilizing either brokers or the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and Gary D. Engle agreed not to compete with the sold business on terms and conditions similar to those for the Company. 4 (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. ITEM 2. PROPERTIES. - ------------------ Incorporated herein by reference to Note 3 to the financial statements in the 1996 Annual Report. ITEM 3. LEGAL PROCEEDINGS. - ------------------------- Incorporated herein by reference to Note 7 to the financial statements in the 1996 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ----------------------------------------------------------- Incorporated herein by reference to Note 8 to the financial statements in the 1996 Annual Report. 5 PART II ITEM 5. MARKET FOR THE TRUST'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. - ----------------------------------------------------------------------------- (a) Market Information There is no public market for the resale of the Interests and it is not anticipated that a public market for resale of the Interests will develop. (b) Approximate Number of Security Holders At December 31, 1996, there were 636 Beneficiaries in the Trust. (c) Dividend History and Restrictions Pursuant to Article VIII of the Trust Agreement, the Trust's Distributable Cash From Operations and Distributable Cash From Sales or Refinancings (each as defined below) are determined and distributed to the Trust's Participants monthly. Each monthly distribution may vary in amount. Currently, there are no restrictions that materially limit the Trust's ability to distribute Distributable Cash From Operations and Distributable Cash From Sales or Refinancings or that the Trust believes are likely to materially limit the future distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. The Trust expects to continue to distribute Distributable Cash From Operations and Distributable Cash From Sales or Refinancings on a monthly basis. Distributions in 1996 and 1995 were as follows:
MANAGING SPECIAL TOTAL TRUSTEE BENEFICIARY BENEFICIARIES ------------ ----------- ----------- ------------- Total 1996 distributions $ 857,869 $ 8,579 $ 70,774 $ 778,516 Total 1995 distributions 1,207,372 12,074 99,608 1,095,690 ------------ ----------- ----------- ------------- $ 2,065,241 $ 20,653 $ 170,382 $ 1,874,206 ------------ ----------- ----------- ------------- ------------ ----------- ----------- -------------
Distributions payable were $165,220 and $127,092 at December 31, 1996 and 1995, respectively. "Distributable Cash From Operations" means the net cash provided by the Trust's normal operations after general expenses and current liabilities of the Trust are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the Managing Trustee, and increased by any portion of such reserves deemed by the Managing Trustee not to be required for Trust operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From Operations does not include any Distributable Cash From Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts reinvested in additional equipment in accordance with Sections 4.2(b)(v) and 4.2(b)(vi) of the Trust Agreement, or (b) the proceeds from the sale of an interest in a joint venture which are reinvested in additional equipment, (ii) any accrued and unpaid Equipment Management Fee and Acquisition Fees and Acquisition Expenses paid with respect to additional equipment acquired through 6 reinvestment of Cash From Sales or Refinancings in accordance with Section 4.2(b)(v) of the Trust Agreement and (iii) after Payout, any accrued and unpaid Subordinated Resale Fees. "Cash From Sales or Refinancings" means cash received by the Trust from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Trust required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the Managing Trustee, but not including any Subordinated Resale Fees whether or not then due and payable) and (b) general expenses and current liabilities of the Trust and (c) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the Managing Trustee and (ii) increased by any portion of such reserves deemed by the Managing Trustee not to be required for Trust operations. In the event the Trust accepts a note in connection with any sale or refinancing transaction, all payments subsequently received in cash by the Trust with respect to such note shall be included in Cash From Sales or Refinancings, regardless of the treatment of such payments by the Trust for tax or accounting purposes. If the Trust receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. Each distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings of the Trust shall be made 90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee. "Payout" is defined as the first time when the aggregate amount of all distributions to the Beneficiaries of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Beneficiaries' original capital contributions plus a cumulative annual distribution of 10% (compounded quarterly and calculated beginning with the last day of the month of the Trust's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Beneficiaries exceed the amount required to satisfy the cumulative annual distribution of 10% (compounded quarterly) on the Beneficiaries' aggregate unreturned capital contributions, such calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each month. Distributable Cash From Operations and Distributable Cash From Sales or Refinancings ("Distributions") must be distributed within 45 days after the completion of each calendar month. Each Distribution is described in a statement sent to the Beneficiaries. ITEM 6. SELECTED FINANCIAL DATA. - ------------------------------- Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1996 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - ------------------------------------------------------------------------------- Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - --------------------------------------------------- Incorporated herein by reference to the financial statements and supplementary data included in the 1996 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - ----------------------------------------------------------------------- None. 7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE TRUST. - ------------------------------------------------------ (a-b) Identification of Directors and Executive Officers THE TRUST HAS NO DIRECTORS OR OFFICERS. As indicated in Item 1 of this report, AFG ASIT Corporation is the Managing Trustee of the Trust. Under the Trust Agreement, the Managing Trustee is solely responsible for the operation of the Trust's properties and the Beneficiaries have no right to participate in the control of such operations. The names, titles and ages of the Directors and Executive Officers of the Managing Trustee as of March 15, 1997 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING TRUSTEE (See Item 13) - -------------------------------------
NAME TITLE AGE TERM - ---------------------------------- ---------------------------------- --- ----------- Geoffrey A. MacDonald Chairman and a member of the Until a Executive Committee of EFG and successor President and a Director of the is duly Managing Trustee 48 elected and Gary D. Engle President and Chief Executive qualified Officer and member of the Executive Committee of EFG and a Director of the Managing Trustee 48 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the Managing Trustee 37 Michael J. Butterfield Vice President, Finance and Treasurer of EFG and Treasurer of the Managing Trustee 37 James A. Coyne Senior Vice President of EFG and Vice President of the Managing Trustee 36 James F. Livesey Vice President, Aircraft and Vessels of EFG 47 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 46 Gail D. Ofgant Vice President, Lease Operations of EFG 31
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Directors or Executive Officers. 8 (e) Business Experience Mr. MacDonald, age 48, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the Managing Trustee. Mr. MacDonald was also a co-founder, Director and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is Vice President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition Limited Partnership ("AALP"). Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds an M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 48, is President and Chief Executive Officer and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle is Vice President and a Director of certain of EFG's affiliates and a Director of the Managing Trustee. On December 16, 1994, Mr. Engle acquired control of the Managing Trustee, EFG and each of EFG's subsidiaries. Mr. Engle controls the general partner of AALP and is also a limited partner in AALP. From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has an M.B.A. from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Romano, age 37, is Executive Vice President and Chief Operating Officer of EFG and certain of its affiliates and Clerk of the Managing Trustee. Mr. Romano joined EFG in November 1989 and was appointed Executive Vice President and Chief Operating Officer in April 1996. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately-held real estate company which he joined in 1987. Mr. Romano held audit staff and manager positions at Ernst & Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a C.P.A. and holds a B.S. degree from Boston College. Mr. Butterfield, age 37, joined EFG in June 1992 and was appointed Vice President, Finance and Treasurer of EFG and certain affiliates in April 1996, and is Treasurer of the Managing Trustee. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (U.K.) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his C.P.A. requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Mr. Coyne, age 36, is Senior Vice President of EFG. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. From May 1993 through November 1994, he was with the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985 he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Livesey, age 47, is Vice President, Aircraft and Vessels. Mr. Livesey joined EFG in October, 1989, and was promoted to Vice President in January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing positions with two privately-held leasing firms. Mr. Livesey holds an M.B.A. from Boston College and B.A. degree from Stonehill College. Ms. Simonsen, age 46, joined EFG in February 1990. She became Senior Vice President, Information Systems in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems withInvestors Mortgage Insurance Company which she joined in 1973. Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a B.A. degree from Wilson College. 9 Ms. Ofgant, age 31, joined EFG in July 1989, and is currently Vice President, Lease Operations. Ms. Ofgant held the position of Manager, Lease Operations at EFG through March, 1996. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS Degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. - ------------------------------- (a) Cash Compensation Currently, the Trust has no employees. However, under the terms of the Trust Agreement, the Trust is obligated to pay all costs of personnel employed full or part-time by the Trust, including officers or employees of the Managing Trustee or its Affiliates. There is no plan at the present time to make any officers or employees of the Managing Trustee or its Affiliates employees of the Trust. The Trust has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the Managing Trustee or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Trust has no employees, as discussed in Item 11(a), pursuant to section 10.4(c) of the Trust Agreement, the Trust incurs a monthly charge for personnel costs of EFG for persons engaged in providing administrative services to the Trust. A description of the remuneration paid by the Trust to the Managing Trustee and its Affiliates for such services is included in Item 13 of this report and in Note 4 to the financial statements included in Item 14 herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the Managing Trustee or its Affiliates which results or may result from their resignation, retirement or any other termination. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ----------------------------------------------------------------------- By virtue of its organization as a trust, the Trust has no outstanding securities possessing traditional voting rights. However, as provided in Section 11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a majority interest of the Beneficiaries have voting rights with respect to: 1. Amendment of the Trust Agreement; 2. Termination of the Trust; 3. Removal of the Managing Trustee; and 10 4. Approval or disapproval of the sale of all or substantially all the assets of the Trust (except in the orderly liquidation of the Trust upon its termination and dissolution). No person or group is known by the Managing Trustee to own beneficially more than 5% of the Trust's 549,218 outstanding Interests as of March 1, 1997. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ------------------------------------------------------- The Managing Trustee of the Trust is AFG ASIT Corporation, an affiliate of EFG. (a) Transactions with Management and Others All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1996, 1995 and 1994, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
1996 1995 1994 ---------- ---------- ---------- Equipment acquisition fees $ 36,673 $ 47,131 $ 104,825 Equipment management fees 186,001 201,373 175,122 Administrative charges 40,533 21,000 12,000 Reimbursable operating expenses due to third parties 97,206 90,979 52,908 Interest on notes payable--affiliate -- -- 991 ---------- ---------- ---------- Total $ 360,413 $ 360,483 $ 345,846 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Trust Agreement, EFG is compensated for its services to the Trust. Such services include all aspects of acquisition, management and sale of equipment. For acquisition services, EFG is compensated by an amount equal to .28% of Asset Base Price paid by the Trust. For management services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust or (ii) fees which the Managing Trustee reasonably believes to be competitive for similar services for similar equipment. Both of these fees are subject to certain limitations defined in the Trust Agreement. Compensation to EFG for services connected to the remarketing of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under arm's length circumstances. Payment of the remarketing fee is subordinated to Payout and is subject to certain limitations defined in the Trust Agreement. Administrative charges represent amounts owed to the EFG, pursuant to Section 10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in providing administrative services to the Trust. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Trust which are reimbursed to EFG. All equipment was purchased from EFG or directly from external vendors. The Trust's Purchase Price is determined by the method described in Note 2 to the Trust's financial statements included in Item 14, herein. 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 December 31, 1996, the Trust was owed $55,849 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in January 1997. 11 (b) Certain Business Relationships None. (c) Indebtedness of Management to the Trust None. (d) Transactions with Promoters See Item 13(a) above. 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - ------------------------------------------------------------------------ (a) Documents filed as part of this report:
(1) Financial Statements: Report of Independent Auditors............................................................* Statement of Financial Position at December 31, 1996 and 1995.............................................................* Statement of Operations for the years ended December 31, 1996, 1995 and 1994......................................* Statement of Changes in Partners' Capital for the years ended December 31, 1996, 1995 and 1994......................................* Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994......................................* Notes to the Financial Statements.........................................................*
(2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable.
EXHIBIT NUMBER - ----------- 4 Amended and Restated Declaration of Trust included as Exhibit A to the Prospectus which is included in Registration Statement on Form S-1 (No. 33-42946). 13 The 1996 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99 (a) Lease agreement with Kristian Gerhard Jebsen Skipsrederi A/S was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 as Exhibit 28 (a) and is incorporated herein by reference.
- ------------------------ * Incorporated herein by reference to the appropriate portion of the 1996 Annual Report to security holders for the year ended December 31, 1996. (See Part II) 13
EXHIBIT NUMBER - ----------- 99 (b) Lease agreement with Comair, Incorporated was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 as Exhibit 28 (c) and is incorporated herein by reference. 99 (c) Lease agreement with National Steel Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 as Exhibit 28 (e) and is incorporated herein by reference.
(b) Reports on Form 8-K None. 14 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of AFG Investment Trust A of our report dated March 14, 1997, included in the 1996 Annual Report to the Participants of AFG Investment Trust A. ERNST & YOUNG LLP Boston, Massachusetts March 14, 1997 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AFG INVESTMENT TRUST A By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee of the Registrant. By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle -------------------------------- -------------------------- Geoffrey A. MacDonald Gary D. Engle Chairman and a member of the President and Chief Executive Executive Committee of EFG and Officer and a member of the President and a Director of the Executive Committee of EFG and a Managing Trustee Director of the Managing Trustee (Principal Executive Officer) Date: March 31, 1997 Date: March 31, 1997 ------------------------------ ------------------------ By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield ------------------------------- -------------------------- Gary M. Romano Michael J.Butterfield Executive Vice President and Chief Vice President, Finance and Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer of the Managing Trustee of the Managing Trustee (Principal Financial Officer) (Principal Accounting Officer) Date: March 31, 1997 Date: March 31, 1997 ----------------------------- -------------------------
16 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report has been sent to the Beneficiaries. A report will be furnished to the Beneficiaries subsequent to the date hereof. No proxy statement has been or will be sent to the Beneficiaries. 17 EX-13 2 EX-13 Ex. 13 AFG INVESTMENT TRUST AFG INVESTMENT TRUST A Annual Report to the Participants, December 31, 1996 AFG INVESTMENT TRUST A INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
PAGE --------- SELECTED FINANCIAL DATA 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3-7 FINANCIAL STATEMENTS: Report of Independent Auditors 8 Statement of Financial Position at December 31, 1996 and 1995 9 Statement of Operations for the years ended December 31, 1996, 1995 and 1994 10 Statement of Changes in Participants' Capital for the years ended December 31, 1996, 1995 and 1994 11 Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 12 Notes to the Financial Statements 13-21 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed 22 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings 23 Schedule of Costs Reimbursed to the Managing Trustee and its Affiliates as Required by Section 10.4 of the Amended and Restated Declaration of Trust 24
-1- SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For the years ended December 31, 1996, 1995, 1994 and 1993 and for the period May 29, 1992 (commencement of operations) to December 31, 1992:
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- Lease revenue $ 4,820,860 $ 5,276,233 $ 4,731,141 $ 4,678,922 $ 1,651,017 Net income $ 476,102 $ 488,063 $ 1,350,553 $ 701,454 $ 174,073 Per Beneficiary Interest: Net income $ 0.79 $ 0.81 $ 2.23 $ 1.16 $ 0.29 Cash distributions $ 1.42 $ 2.00 $ 2.52 $ 2.52 $ 1.47 Financial Position - ------------------ Total assets $ 14,175,369 $ 16,603,124 $ 18,742,285 $ 20,926,719 $ 22,010,410 Total long-term obligations $ 4,249,311 $ 6,323,893 $ 7,543,509 $ 9,625,987 $ 9,473,902 Participants' capital $ 9,618,214 $ 9,999,981 $ 10,719,290 $ 10,893,838 $ 11,717,485
-2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31, 1996 compared to the year ended December 31, 1995 and the year ended December 31, 1995 compared to the year ended December 31, 1994 OVERVIEW - -------- As an equipment leasing trust, AFG Investment Trust A ("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 Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG") to obtain the most advantageous economic benefit. Over time, a greater portion of the Trust's original equipment portfolio will become available for remarketing and cash generated from operations and from sales or refinancings will begin to fluctuate. Ultimately, all equipment will be sold and the Trust will be dissolved. The Trust's operations commenced in 1992. RESULTS OF OPERATIONS - --------------------- For the year ended December 31, 1996, the Trust recognized lease revenue of $4,820,860, compared to $5,276,233 and $4,731,141 for the years ended December 31, 1995 and 1994, respectively. The decrease in lease revenue from 1995 to 1996 is due primarily to the Trust's sale of its interest in a Boeing 747-SP aircraft leased to United Air Lines, Inc. (the "United Aircraft") in February 1996, as discussed below. The increase in lease revenue from 1994 to 1995 was due to the acquisition of additional equipment during 1994 and 1995, including the effects of reinvestment. The Trust also earns interest income from temporary investments of rental receipts and equipment sales proceeds in short-term instruments. 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. On February 5, 1996, the Trust concluded the sale of its interest in the United Aircraft to the lessee, United Air Lines, Inc., ("United"). The Trust recognized a net loss of $458,638 in connection with this transaction, of which $311,621 was recognized as Write-Down of Equipment in 1995. The remainder of $147,017 was recognized as a loss on sale of equipment on the accompanying financial statements for the year ended December 31, 1996. In addition to lease rents, the Trust received net sale proceeds of $1,392,779 from United for the aircraft. A portion of such sale proceeds was reinvested in other equipment in March 1996 through the acquisition of an 8.86% ownership interest in an aircraft (the "Reno Aircraft") at an aggregate cost of $1,239,741. To acquire its interest in the Reno Aircraft, the Trust obtained long-term financing of $997,888 from a third-party lender and utilized cash proceeds of $241,853 from the sale of the United Aircraft. During the year ended December 31, 1996, the Trust sold other equipment having a net book value of $31,554, to existing lessees and third parties. These sales resulted in a net loss, for financial statement purposes, of $6,406. During 1995, the Trust sold equipment having a net book value of $2,019,625 to existing lessees and third parties. These sales resulted in a net loss, for financial statement purposes, of $260,567. The equipment sales included the Trust's interest in a vessel with an original cost and net book value of $1,948,190 and $1,449,673, -3- respectively, which the Trust sold to an existing lessee in June, 1995. In connection with this sale, the Trust realized sale proceeds of $1,285,318 and the purchaser assumed related debt and interest of $96,913 and $625, respectively, which resulted in a net loss, for financial statement purposes, of $66,817. This equipment was sold prior to the expiration of the related lease term. The majority of the Trust's sales proceeds related to this transaction were reinvested in other equipment in 1995 with the balance reinvested in 1996. The Trust received $71,850 in 1996 from the lessee related to a residual sharing agreement between the lessee and the Trust. In connection with this agreement, the Trust was entitled to a portion of the sale proceeds realized by the lessee upon its ultimate disposition of the vessel to a third party. This amount is reflected as Other Income on the accompanying Statement of Operations. During 1994, the Trust sold equipment having a net book value of $2,868,712 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $409,572. The equipment sales included certain railroad equipment with an original cost and net book value of $3,221,564 and $2,723,919, respectively, which the Trust sold to a third party in March 1994. In connection with this sale, the Trust realized sales proceeds of $895,361 and the purchaser assumed related debt of $2,290,023, which resulted in a net gain, for financial statement purposes, of $461,465. This equipment was sold prior to the expiration of the related lease term. The sale proceeds were fully reinvested in other equipment in 1994. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Trust, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Trust classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Trust achieved from leasing the equipment. Depreciation and amortization expense was $3,628,279, $3,414,318 and $3,084,402 for the years ended December 31, 1996, 1995 and 1994, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. The increase in depreciation expense from 1994 to 1996 reflects the acquisition of equipment during 1994, 1995 and 1996. Interest expense was $396,793 or 8.2% of lease revenue in 1996, $534,365 or 10.1% of lease revenue in 1995 and $532,191 or 11.2% of lease revenue in 1994. Interest expense in future periods will continue to 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 3.9%, 3.8% and 3.7% of lease revenue during the years ended December 31, 1996, 1995 and 1994, 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. -4- 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 represented 2.9%, 2.1% and 1.4% of lease revenue during the years ended December 31, 1996, 1995 and 1994, respectively. The increase in operating expenses from 1994 to 1996 was due primarily to an increase in professional service costs and expenses incurred in connection with the sale of the Trust's interest in the vessel and aircraft described above. 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. Operating activities generated net cash inflows of $4,295,178, $4,296,416, and $3,984,457 for the years ended December 31, 1996, 1995 and 1994, respectively. Future renewal, re-lease and equipment sale activities will cause a gradual 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 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. Cash expended for asset acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. At December 31, 1995, the Trust had completed its initial equipment acquisition and leveraging processes. The Trust expended $1,441,796, $3,051,827 and $5,978,665 to acquire equipment during the years ended December 31, 1996, 1995 and 1994, respectively, including new equipment acquired pursuant to the reinvestment provisions of the Trust's Prospectus of approximately $1,400,000 during each of the years ended December 31, 1996 and 1995 and $3,300,000 during the year ended December 31, 1994. The reinvested equipment was financed through a combination of leveraging and sale proceeds available from the aircraft, vessel and rail transactions, discussed above. During 1996, the Trust realized equipment sale proceeds of $1,417,927, including $1,392,779 of proceeds from the United Aircraft. In 1995, the Trust received sale proceeds of $1,661,520, including $1,285,318 of proceeds from the vessel transaction and; in 1994, the Trust received sale proceeds of $988,261, including $895,361 of proceeds from the rail transaction. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. The Trust obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal are reported as components of financing activities. Cash inflows of $997,888, $1,747,173 and $2,933,632 in 1996, 1995 and 1994, respectively, resulted from leveraging a portion of the Trust's equipment portfolio with third-party lenders. EFG also provided interim financing for the Trust of $1,744,327 during 1994, until third-party financing was finalized. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. In future periods, the amount of cash used to repay debt obligations will decline as the principal balance of notes payable is reduced through the collection and application of rents. However, the Trust has a balloon payment obligation of $282,421 at the expiration of the primary lease term related to the Reno Aircraft. -5- 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 year ended December 31, 1996, the Trust declared total cash distributions of Distributable Cash From Operations and Distributable Cash From Sales and Refinancings of $857,869. In accordance with the Trust Agreement, the Beneficiaries were allocated 90.75% of these distributions, or $778,516; the Special Beneficiary was allocated 8.25%, or $70,774; and the Managing Trustee was allocated 1%, or $8,579. For financial reporting purposes, the Managing Trustee and the Special Beneficiary each has accumulated a capital deficit at December 31, 1996. 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. (See Note 2 to the financial statements - Allocation of Profits and Losses.) Ultimately, the existence of a capital deficit for the Managing Trustee or the Special Beneficiary for financial reporting purposes is not indicative of any further capital obligations to the Trust by either the Managing Trustee or the Special Beneficiary. However, for income tax purposes, the Trust Agreement requires that income be allocated first to those Participants having negative tax capital account balances so as to eliminate any such balances. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance which may exist in the Managing Trustee's tax capital account. No such requirement exists with respect to the Special Beneficiary. At December 31, 1996, the Managing Trustee has a positive tax capital account balance. (See Note 6 to the financial statements.) At December 31, 1996, the Trust had aggregate future minimum lease payments of $6,506,434 from contractual lease agreements (see Note 2 to the financial statements), of which $4,249,311 will be used to amortize the principal balance of notes payable (see Note 5 to the financial statements). Additional cash inflows will be realized from future remarketing activities, such as lease renewals and equipment sales, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of equipment sales is often dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as the Trust matures and a greater level of its equipment assets become available for remarketing, the cash flows of the Trust will become less predictable. In addition, the Trust will have cash outflows to satisfy interest on indebtedness and to pay management fees and operating expenses. Ultimately, the Trust is expected to meet its future disbursement obligations and to distribute any excess of cash inflows over cash outflows to the Participants in accordance with the Trust Agreement. However, several factors, including month-to-month lease extensions, lessee defaults, equipment casualty events, and early lease terminations could alter the Trust's anticipated cash flows as described herein and in the accompanying financial statements and result in fluctuations to the Trust's periodic cash distribution payments. Cash distributions paid to the Participants consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Trust and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. Future market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, could enhance or detract from individual asset yields and the collective performance of the Trust's equipment portfolio. It is the intention of the Managing Trustee to maintain a cash distribution level that is consistent with the operating cash flows of the Trust and to optimize the long-term value of the Trust. A distribution level that is higher than the Trust's operating cash flows could compromise the Trust's working capital position, as well as its ability to refurbish or upgrade equipment in response to lessee requirements or other market circumstances and, during its reinvestment period, to purchase replacement equipment as original equipment is remarketed. Accordingly, in order to better align monthly cash distributions with the Trust's operating cash flows, the Managing Trustee reduced the level of monthly cash distributions from an annualized rate of $2.52 per Beneficiary Interest (the rate established and paid from the Trust's inception through September 1995) to an annualized rate of $1.26 per Beneficiary Interest commencing in October 1995. In October 1996, the Managing Trustee increased the -6- annualized distribution rate to $1.64 per Beneficiary Interest and expects that the Trust will be able to sustain this distribution rate throughout 1997. However, the nature of the Trust's principal cash flows gradually will shift from rental receipts to equipment sale proceeds as the Trust matures. As this occurs, the Trust's cash flows will become more volatile in that certain of the Trust's equipment leases will be renewed and certain of its assets will be sold. In some cases, the Trust may be required to expend funds to refurbish or otherwise improve the equipment being remarketed in order to make it more desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to monitor and manage these events to maximize the residual value of the Trust's equipment and will consider these factors, in addition to the collection of contractual rents, the retirement of scheduled indebtedness and the Trust's future working capital and equipment requirements, in establishing future cash distribution rates. Ultimately, the Participants should expect that cash distribution rates will fluctuate over the long term as a result of future remarketing activities. -7- REPORT OF INDEPENDENT AUDITORS ------------------------------ To the Participants of AFG Investment Trust A: We have audited the accompanying statements of financial position of AFG Investment Trust A as of December 31, 1996 and 1995, and the related statements of operations, changes in participants' capital, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AFG Investment Trust A at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Participants is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 14, 1997 -8- AFG INVESTMENT TRUST A STATEMENT OF FINANCIAL POSITION December 31, 1996 and 1995
1996 1995 ------------- ------------- ASSETS Cash and cash equivalents $ 1,832,248 $ 455,262 Rents receivable 623,237 642,680 Accounts receivable--affiliate 55,849 83,314 Equipment at cost, net of accumulated depreciation of $11,280,817 and $8,310,244 at December 31, 1996 and 1995, respectively 11,663,702 15,420,535 Organization costs, net of accumulated amortization of $4,667 and $3,667 at December 31, 1996 and 1995, respectively 333 1,333 ------------- ------------- Total assets $ 14,175,369 $ 16,603,124 ------------- ------------- ------------- ------------- LIABILITIES AND PARTICIPANTS' CAPITAL - ------------------------------------- Notes payable $ 4,249,311 $ 6,323,893 Accrued interest 62,360 83,426 Accrued liabilities 23,250 24,135 Accrued liabilities--affiliate 38,293 4,744 Deferred rental income 18,721 39,853 Cash distributions payable to participants 165,220 127,092 ------------- ------------- Total liabilities 4,557,155 6,603,143 ------------- ------------- Participants' capital (deficit): Managing Trustee (27,148) (23,330) Special Beneficiary (231,225) (199,729) Beneficiary Interests (549,218 Interests; initial purchase price of $25 each) 9,876,587 10,223,040 ------------- ------------- Total participants' capital 9,618,214 9,999,981 ------------- ------------- Total liabilities and participants' capital $ 14,175,369 $ 16,603,124 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. -9- AFG INVESTMENT TRUST A STATEMENT OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Income: Lease revenue $ 4,820,860 $ 5,276,233 $ 4,731,141 Interest income 85,627 46,053 66,463 Other income 71,850 -- -- Gain (loss) on sale of equipment (153,423) (260,567) 409,572 ------------ ------------ ------------ Total income 4,824,914 5,061,719 5,207,176 ------------ ------------ ------------ Expenses: Depreciation and amortization 3,628,279 3,414,318 3,084,402 Write-down of equipment -- 311,621 -- Interest expense 396,793 534,365 531,200 Interest expense--affiliate -- -- 991 Equipment management fees--affiliate 186,001 201,373 175,122 Operating expenses--affiliate 137,739 111,979 64,908 ------------ ------------ ------------ Total expenses 4,348,812 4,573,656 3,856,623 ------------ ------------ ------------ Net income $ 476,102 $ 488,063 $ 1,350,553 ------------ ------------ ------------ ------------ ------------ ------------ Net income per Beneficiary Interest $ 0.79 $ 0.81 $ 2.23 ------------ ------------ ------------ ------------ ------------ ------------ Cash distributions declared per Beneficiary Interest $ 1.42 $ 2.00 $ 2.52 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. -10- AFG INVESTMENT TRUST A STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL for the years ended December 31, 1996, 1995 and 1994
MANAGING SPECIAL BENEFICIARIES TRUSTEE BENEFICIARY ------------------------ AMOUNT AMOUNT INTERESTS AMOUNT TOTAL ---------- ----------- --------- ------------- ------------- Balance at December 31, 1993 $ (14,391) $ (125,986) 549,218 $ 11,034,215 $ 10,893,838 Net income--1994 13,505 111,421 -- 1,225,627 1,350,553 Cash distributions declared (15,251) (125,821) -- (1,384,029) (1,525,101) ---------- ----------- --------- ------------- ------------- Balance at December 31, 1994 (16,137) (140,386) 549,218 10,875,813 10,719,290 Net income--1995 4,881 40,265 -- 442,917 488,063 Cash distributions declared (12,074) (99,608) -- (1,095,690) (1,207,372) ---------- ----------- --------- ------------- ------------- Balance at December 31, 1995 (23,330) (199,729) 549,218 10,223,040 9,999,981 Net income--1996 4,761 39,278 -- 432,063 476,102 Cash distributions declared (8,579) (70,774) -- (778,516) (857,869) ---------- ----------- --------- ------------- ------------- Balance at December 31, 1996 $ (27,148) $ (231,225) 549,218 $ 9,876,587 $ 9,618,214 ---------- ----------- --------- ------------- ------------- ---------- ----------- --------- ------------- -------------
The accompanying notes are an integral part of these financial statements. -11- AFG INVESTMENT TRUST A STATEMENT OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----------- ----------- ------------ Cash flows from (used in) operating activities: Net income $ 476,102 $ 488,063 $ 1,350,553 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 3,628,279 3,414,318 3,084,402 Write-down of equipment -- 311,621 -- (Gain) loss on sale of equipment 153,423 260,567 (409,572) Changes in assets and liabilities: Decrease (increase) in: Rents receivable 19,443 (65,740) (202,020) Accounts receivable--affiliate 27,465 (40,045) 88,502 Increase (decrease) in: Accrued interest (21,066) 11,749 (20,217) Accrued liabilities (885) 8,635 -- Accrued liabilities--affiliate 33,549 (68,009) 72,753 Deferred rental income (21,132) (24,743) 20,056 ----------- ----------- ------------ Net cash from operating activities 4,295,178 4,296,416 3,984,457 ----------- ----------- ------------ Cash flows from (used in) investing activities Purchase of equipment (1,441,796) (3,051,827) (5,978,665) Proceeds from equipment sales 1,417,927 1,661,520 988,261 ----------- ----------- ------------ Net cash used in investing activities (23,869) (1,390,307) (4,990,404) ----------- ----------- ------------ Cash flows from (used in) financing activities: Proceeds from notes payable 997,888 1,747,173 2,933,632 Proceeds from notes payable--affiliate -- -- 1,744,327 Principal payments--notes payable (3,072,470) (2,869,876) (2,726,087) Principal payments--notes payable--affiliate -- -- (1,744,327) Distributions paid (819,741) (1,334,615) (1,525,101) ----------- ----------- ------------ Net cash used in financing activities (2,894,323) (2,457,318) (1,317,556) ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents 1,376,986 448,791 (2,323,503) Cash and cash equivalents at beginning of year 455,262 6,471 2,329,974 ----------- ----------- ------------ ----------- ----------- ------------ Cash and cash equivalents at end of year $ 1,832,248 $ 455,262 $ 6,471 ----------- ----------- ------------ ----------- ----------- ------------ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 417,859 $ 522,616 $ 551,417 ----------- ----------- ------------ ----------- ----------- ------------
Supplemental schedule of non-cash investing and financing activities: During 1995, the Trust sold equipment to a third party which assumed related debt and interest of $96,913 and $625, respectively. During 1994, the Trust sold equipment to a third party which assumed related debt of $2,290,023. The accompanying notes are an integral part of these financial statements. -12- AFG INVESTMENT TRUST A NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1-ORGANIZATION AND TRUST MATTERS - ------------------------------------- The Trust was organized as a Delaware business trust in accordance with the Delaware Business Trust Act on February 26, 1992 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Participants' capital initially consisted of contributions of $1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special Beneficiary, Equis Financial Group Limited Partnership (formerly American Finance Group), a Massachusetts limited partnership ("EFG"), and $100 from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate of EFG. The Trust issued 549,218 Beneficiary Interests to 645 investors on May 29, 1992. The Trust's Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation and an Affiliate of EFG, is responsible for the general management and business affairs of the Trust. EFG is the sole Special Beneficiary of the Trust and also acts as Advisor to the Trust. As Advisor, EFG provides services in connection with the acquisition and remarketing of the Trust's assets. The Managing Trustee and the Special Beneficiary are not required to make any other capital contributions except as may be required under the Amended and Restated Declaration of Trust (the "Trust Agreement"). Significant operations commenced May 29, 1992 when the Trust made its initial equipment purchase. Pursuant to the Trust Agreement, each distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings of the Trust shall be made 90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee. Under the terms of the Advisory Agreement between the Trust and EFG, management services are provided by EFG to the Trust at fees which the Managing Trustee believes to be competitive for similar services. (Also see Note 4.) EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Equipment Manager or Advisor to the Trust and several other Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President and Chief Executive Officer. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party (the "Buyer"). AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG agreed not to compete with the Buyer's lease origination business for a period of five years; however, EFG is permitted to originate certain equipment leases, principally those involving non-investment grade lessees and ocean-going vessels, which are not in competition with the Buyer. In addition, the sale agreements specifically reserved to EFG the rights to continue using the name American Finance Group and its acronym in connection with the Trust and the Other Investment Programs and to continue managing all assets owned by the Trust and the Other Investment Programs, including the right to satisfy all required equipment acquisitions utilizing either brokers or the Buyer. Geoffrey A. MacDonald, Chairman of Equis -13- AFG Investment Trust A Notes to the Financial Statements (Continued) Corporation and Gary D. Engle agreed not to compete with the sold business on terms and conditions similar to those for the Company. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------- STATEMENT OF CASH FLOWS - ----------------------- The Trust considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Trust invests excess cash with large institutional banks in reverse repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Trust. The securities underlying the agreements are book entry securities. At December 31, 1996, the Trust had $1,730,000 invested in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government Securities. REVENUE RECOGNITION - ------------------- Rents are payable to the Trust monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Trust may enter primary-term, renewal or re-lease agreements which expire beyond the Trust's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as the Managing Trustee and the Advisor would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future non-cancelable rental payments associated with the attendant lease agreements. Future minimum rents of $6,506,434 are due as follows:
For the year ending December 31, 1997 $3,984,674 1998 1,643,662 1999 309,665 2000 215,262 2001 175,766 Thereafter 177,405 --------- Total $6,506,434 --------- ---------
Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ---------- ---------- ---------- Comair, Incorporated $ 645,627 $ 645,627 $ 645,627 Gearbulk Shipowning Ltd (Formerly Kristian Gerhard Jebsen Skipsrederi A/S) $ 530,881 $ 528,515 $ 529,984 National Steel Corporation -- -- $ 506,482
During March 1996, the Trust acquired an 8.86% proportionate ownership interest in an MD-87 jet aircraft leased by Reno Air, Inc. (the "Reno Aircraft")--See Note 3 herein. The Trust will receive approximately $159,000 of rental revenue in each of the years in the period ending December 31, 2002. Rents from the Reno Aircraft, as provided for in the lease agreement, are adjusted monthly for changes of the London Inter-Bank Offered Rate ("LIBOR"). Future rents from the Reno Aircraft included above reflect the most recent LIBOR effected rental payment. -14- AFG Investment Trust A Notes to the Financial Statments (Continued) USE OF ESTIMATES - ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EQUIPMENT ON LEASE - ------------------ All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment cost represents Asset Base Price plus acquisition fees and was determined in accordance with the Trust Agreement and certain regulatory guidelines. Asset Base Price is affected by the relationship of the seller to the Trust as summarized herein. Where the seller of the equipment was EFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid for the equipment by EFG or the Affiliate plus all actual costs accrued by EFG or the Affiliate while carrying the equipment less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment or (ii) fair market value as determined by the Managing Trustee in its best judgment, including all liens and encumbrances on the equipment and other actual expenses. Where the seller of the equipment was a third party who did not manufacture the equipment, Asset Base Price was the lower of (i) the price invoiced by the third party or (ii) fair market value as determined by the Managing Trustee. Where the seller of the equipment was a third party who also manufactured the equipment, Asset Base Price was the manufacturer's invoice price, net of any manufacturer rebates or incentives, which price was considered to be representative of fair market value. DEPRECIATION AND AMORTIZATION - ----------------------------- The Trust's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Periodically, the Managing Trustee evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. For purposes of this comparison, "net carrying value" represents, at a given date, the net book value (equipment cost less accumulated depreciation for financial reporting purposes) of the Trust's equipment and "net realizable value" represents, at the same date, the aggregate undiscounted cash flows resulting from future contracted lease payments plus the estimated residual value of the Trust's equipment. The Managing Trustee evaluates significant equipment assets, such as aircraft and vessels, individually. All other assets are evaluated collectively by equipment type unless the Managing Trustee learns of specific circumstances, such as a lessee default, technological obsolescence, or other market developments, which could affect the net realizable value of particular assets. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. Such adjustments are reflected separately on the accompanying Statement of Operations as Write-Down of Equipment. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. 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. -15- AFG INVESTMENT TRUST A NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Organization costs are amortized using the straight-line method over a period of five years. ACCRUED LIABILITIES--AFFILIATE - ------------------------------ Unpaid fees and operating expenses paid by EFG on behalf of the Trust and accrued but unpaid administrative charges are reported as Accrued Liabilities--Affiliate. (See Note 4.) ALLOCATION OF PROFITS AND LOSSES - -------------------------------- For financial statement purposes, net income or loss is allocated to each Participant according to their respective ownership percentages (90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee). See Note 6 concerning allocation of income or loss for income tax purposes. NET INCOME AND CASH DISTRIBUTIONS PER BENEFICIARY INTEREST - ---------------------------------------------------------- Net income and cash distributions per Beneficiary Interest are based on 549,218 Beneficiary Interests outstanding during each of the three years in the period ended December 31, 1996 and computed after allocation of the Managing Trustee's and Special Beneficiary's shares of net income and cash distributions. PROVISION FOR INCOME TAXES - -------------------------- No provision or benefit from income taxes is included in the accompanying financial statements. The Participants are responsible for reporting their proportionate shares of the Trust's taxable income or loss and other tax attributes on their tax returns. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - ---------------------------------------------- In March 1995, the Financial Accounting Standards Board issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Trust adopted Statement 121 in the first quarter of 1996. The adoption of Statement 121 did not have a material effect on the financial statements of the Trust. NOTE 3--EQUIPMENT - ----------------- The following is a summary of equipment owned by the Trust at December 31, 1996. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1996 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value. -16- AFG INVESTMENT TRUST A NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
REMAINING LEASE TERM EQUIPMENT EQUIPMENT TYPE (MONTHS) AT COST LOCATION - -------------------------------------- ------------- ------------ -------------------------------------------- Aircraft 12-74 $ 6,814,662 IL/OH/WA Materials handling 1-46 3,723,929 AR/CA/GA/IL/KS/MI/MO/NY/OH/PA SC/TX/VA/WV Retail store fixtures 3-27 2,992,236 FL/GA/OK/TX Vessels 14 2,399,580 NY/Foreign Computers and peripherals 1-21 2,226,777 AK/AL/AZ/HI/IL/IN/KS/KY/LA/MI MN/NM/NY/OH/PA/VA/TX/WI Construction and mining 1-73 1,945,484 IL/MI/MN/PA Communications 24 1,802,423 AL/AR/AZ/CA/CO/FL/GA/IA/ID/IL/IN KS/KY/LA/MD/MI/MN/MO/MT/NC Research and test 9 459,282 MI Manufacturing.. 18 442,590 NJ Energy systems. 12 108,975 IL Photocopying... 1-10 28,581 GA/IL ------------- ------------ -------------------------------------------- Total equipment cost 22,944,519 Accumulated depreciation (11,280,817) ------------- Equipment, net of accumulated depreciation $ 11,663,702 ------------ ------------
On September 29, 1995, the Trust entered into an agreement with United Air Lines, Inc. ("United") to transfer the Trust's proportionate ownership interest in a Boeing 747-SP aircraft (the "United Aircraft"), to United for cash consideration of $1,609,894, including unpaid rents through the date of sale, which event concluded in February 1996. In March 1996, the Trust acquired an 8.86% ownership interest in a replacement aircraft (the "Reno Aircraft"), pursuant to the reinvestment provisions of the Trust's prospectus, at a cost of $1,239,741. To acquire its interest in the Reno Aircraft, the Trust obtained leveraging of $997,888 from a third-party lender and utilized cash proceeds of $241,853 from the sale of the United Aircraft. In certain cases, the cost of the Trust's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. At December 31, 1996, the Trust's equipment portfolio included equipment having a proportionate original cost of $8,721,813, representing approximately 38% of total equipment cost. Certain of the equipment and related lease payment streams were used to secure term loans with third-party lenders. The preceding summary of equipment includes leveraged equipment having an original cost of approximately $16,268,000 and a net book value of approximately $8,878,000 at December 31, 1996. (See Note 5.) Generally, the costs associated with maintaining, insuring and operating the Trust's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Trust. -17- AFG Investment Trust A Notes to the Financial Statements (Continued) As equipment is sold to third parties, or otherwise disposed of, the Trust will recognize a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment will be dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. At December 31, 1996, the Trust held equipment for sale or re-lease with an original cost and net book value of approximately $22,000 and $6,000, respectively. The Managing Trustee is actively seeking the sale or re-lease of this equipment. NOTE 4-RELATED PARTY TRANSACTIONS - --------------------------------- All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1996, 1995 and 1994 which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
1996 1995 1994 ---------- ---------- ---------- Equipment acquisition fees $ 36,673 $ 47,131 $ 104,825 Equipment management fees 186,001 201,373 175,122 Administrative charges 40,533 21,000 12,000 Reimbursable operating expenses due to third parties 97,206 90,979 52,908 Interest on notes payable--affiliate. -- -- 991 ---------- ---------- ---------- Total $ 360,413 $ 360,483 $ 345,846 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Trust Agreement, EFG is compensated for its services to the Trust. Such services include all aspects of acquisition, management and sale of equipment. For acquisition services, EFG is compensated by an amount equal to .28% of Equipment Base Price paid by the Trust. For acquisition services resulting from Reinvestment, EFG is compensated by an amount equal to 3% of Equipment Base Price paid by the Trust. For management services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust or (ii) fees which the Managing Trustee reasonably believes to be competitive for similar services for similar equipment. Both of these fees are subject to certain limitations defined in the Trust Agreement. Compensation to EFG for services connected to the remarketing of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under arm's length circumstances. Payment of the remarketing fee is subordinated to Payout and is subject to certain limitations defined in the Trust Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 10.4(c) the Trust Agreement, for persons employed by EFG who are engaged in providing administrative services to the Trust. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Trust which are reimbursed to EFG. All equipment was purchased from EFG, one of its Affiliates or from third-party sellers. The Trust's Purchase Price is determined by the method described in Note 2, Equipment on Lease. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Trust. At December 31, 1996, the Trust was owed $55,849 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in January 1997. -18 AFG Investment Trust A Notes to the Financial Statements (Continued) NOTE 5--NOTES PAYABLE - --------------------- Notes payable at December 31, 1996 consisted of installment notes of $4,249,311 payable to banks and institutional lenders. The notes bear interest rates ranging between 5.7% and 9.17%, except for one note which bears a fluctuating interest rate based on LIBOR plus a margin (5.5% at December 31, 1996). All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Trust has a balloon payment obligation of $282,421 at the expiration of the primary lease term related to the Reno Aircraft. The carrying amount of notes payable approximates fair value at December 31, 1996. THE ANNUAL MATURITIES OF THE NOTES PAYABLE ARE AS FOLLOWS: For the year ending December 31, 1997 $2,362,745 1998 1,083,581 1999 171,548 2000 118,459 2001 128,106 Thereafter 384,872 --------- Total $4,249,311 --------- ---------
The weighted average interest rate on short-term borrowings from EFG for the purchase of equipment was 9.25% during the year ended December 31, 1994. NOTE 6--INCOME TAXES - -------------------- The Trust is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Trust. For financial statement purposes, the Trust allocates net income or loss to each class of participant according to their respective ownership percentages (90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Trust Agreement. Pursuant to the Trust Agreement, for income tax purposes, the Trust allocates net income, to the extent available, pro-rata to any Participant with a negative capital account balance so as to eliminate any such balance. In accordance with the Trust Agreement, upon dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance which may exist in the Managing Trustee's tax capital account. At December 31, 1996, the Managing Trustee had a positive tax capital account balance. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1996, 1995 and 1994: -19- AFG Investment Trust A Notes to the Financial Statements (Continued)
1996 1995 1994 ------------ ---------- ------------ Net income $476,102 $ 488,063 $ 1,350,553 Financial statement depreciation in excess of (less than) tax depreciation 68,453 (523,542) (1,636,691) Tax gain in excess of book gain (loss) 446,154 443,827 796,434 Prepaid rental income (21,132) (24,743) 20,056 Other 15,399 4,135 -- ------------ ---------- ------------ Net income for federal income tax reporting purposes $984,976 $ 387,740 $ 530,352 ------------ ---------- ------------ ------------ ---------- ------------
The following is a reconciliation between participants' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1996 and 1995:
1996 1995 ------------ ------------ Participants' capital $ 9,618,214 $ 9,999,981 Add back selling commissions and organization and offering costs 1,299,393 1,299,393 Financial statement distributions in excess of tax distributions 15,283 11,756 Cumulative difference between federal income tax and financial statement income (4,783,320) (5,292,194) ------------ ------------ Participants' capital for federal income tax reporting purposes $ 6,149,570 $ 6,018,936 ------------ ------------ ------------ ------------
Financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income represent timing differences. NOTE 7--LEGAL PROCEEDINGS - ------------------------- On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored investment programs, filed an action in the Commonwealth of Massachusetts Superior Court Department of the Trial Court in and for the County of Suffolk, for damages and declaratory relief against a lessee of the Trust, National Steel Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is seeking the reimbursement by National Steel of certain sales and/or use taxes paid to the State of Illinois and other remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice of Removal which removed the case to the United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory relief and alleging breach of contract, implied covenant of good faith and fair dealing and specific performance. EFG filed its Answer 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 further default under the MLA -20- and the matter remains pending before the Court. The Trust has not experienced any material losses as a result of this action. NOTE 8--SOLICITATION STATEMENT - ------------------------------ On October 26, 1996, the Managing Trustee, on behalf of the Trust, filed a Solicitation Statement with the Securities and Exchange Commission which was subsequently sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the Securities Exchange Act. The Solicitation Statement sought to solicit the consent of the Beneficiaries to a proposed amendment ("the Amendment") to the Trust Agreement. The Amendment would (i) amend the provisions of the Trust Agreement governing the redemption of Interests to permit the Trust to offer to redeem outstanding interests at such times, in such amounts, in such manner and at such prices as the Managing Trustee may determine from time to time, in accordance with applicable law; and (ii) add a provision to the Trust Agreement that would permit the Trust to issue, at the discretion of the Managing Trustee and without further consent or approval of the Beneficiaries, an additional class of security with such designations, preferences and relative, participating, optional or other special rights, powers and duties as the Managing Trustee may fix. Such a security, if it were to be offered and sold, would provide the Trust with the funds to (a) implement more expansive Interest redemption opportunities for Beneficiaries without using Trust funds which may otherwise be available for current cash distributions; and (b) make a special one-time distribution to the Beneficiaries. Pursuant to the Trust Agreement, the adoption of the Amendment required the consent of the Beneficiaries holding more than fifty percent in the aggregate of the Interests held by all Beneficiaries. A majority of Beneficiary Interests, representing 286,868 or 52.2% of all Beneficiary Interests, voted in favor of the Amendment; 49,019 or 8.9% of all Beneficiary Interests voted against the Amendment; and 16,104 or 2.9% of all Beneficiary Interests abstained. Approximately 64% of all Beneficiary Interests participated in the vote. Accordingly, the Amendment was adopted. NOTE 9--SUBSEQUENT EVENT - ------------------------ On February 12, 1997, the Trust filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission which covers, among other things, the creation and sale of a new class of beneficiary interest in the Trust (the "Class B Interests"). A portion of the proceeds from the offering of the Class B Interests would be used to make a one-time special cash distribution to existing Beneficiaries (the "Class A Beneficiaries") of the Trust and to enable the Trust to redeem a portion of the existing Beneficiary Interests (the "Class A Interests"). The characteristics of the Class B Interests, associated risk factors, and other matters of importance to the Beneficiaries and prospective purchasers of the Class B Interests are contained in the Registration Statement. Presently, the Registration Statement is undergoing regulatory review and has not been declared effective. -21- ADDITIONAL FINANCIAL INFORMATION AFG INVESTMENT TRUST A SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED for the years ended December 31, 1996, 1995 and 1994 The Trust classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenues, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Trust for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994 ------------ ------------ ---------- Rents earned prior to disposal of equipment, net of interest charges $ 925,719 $ 2,767,006 $ 541,850 Sale proceeds, including assumption of debt and interest, realized upon disposition of equipment 1,417,927 1,759,058 3,278,284 ------------ ------------ ---------- Total cash generated from rents and equipment sale proceeds 2,343,646 4,526,064 3,820,134 Original acquisition cost of equipment disposed 2,228,056 4,065,355 3,460,533 ------------ ------------ ---------- Excess of total cash generated to cost of equipment disposed $ 115,590 $ 460,709 $ 359,601 ------------ ------------ ---------- ------------ ------------ ----------
-22- AFG INVESTMENT TRUST A STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS for the year ended December 31, 1996
SALES AND OPERATIONS REFINANCINGS TOTAL ----------- ------------ ----------- Net income (loss) $ 629,525 $ (153,423) $ 476,102 Add: Depreciation and amortization 3,628,279 -- 3,628,279 Management fees 186,001 -- 186,001 Book value of disposed equipment -- 1,571,350 1,571,350 Less: Principal reduction of notes payable (3,072,470) -- (3,072,470) ----------- ------------ ----------- Cash from operations, sales and refinancings 1,371,335 1,417,927 2,789,262 Less: Management fees (186,001) -- (186,001) ----------- ------------ ----------- Distributable cash from operations, sales and refinancings 1,185,334 1,417,927 2,603,261 Other sources and uses of cash: Cash at beginning of year 216,386 238,876 455,262 Proceeds from notes payable 997,888 -- 997,888 Purchase of equipment (997,888) (443,908) (1,441,796) Net change in receivables and accruals 37,374 -- 37,374 Less: Cash distributions paid (819,741) -- (819,741) ----------- ------------ ----------- Cash at end of year $ 619,353 $ 1,212,895 $ 1,832,248 ----------- ------------ ----------- ----------- ------------ -----------
-23- AFG INVESTMENT TRUST A SCHEDULE OF COSTS REIMBURSED TO THE MANAGING TRUSTEE AND ITS AFFILIATES AS REQUIRED BY SECTION 10.4 OF THE AMENDED AND RESTATED DECLARATION OF TRUST December 31, 1996 For the year ended December 31, 1996, the Trust reimbursed the Managing Trustee and its Affiliates for the following costs: Operating expenses $ 122,915
-24- EX-27 3 EXHIBIT 27
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,832,248 0 679,086 0 0 2,511,667 22,944,519 11,280,817 14,175,369 307,844 4,249,311 0 0 0 9,618,214 14,175,369 4,820,860 4,824,914 0 0 3,952,019 0 396,793 476,102 0 476,102 0 0 0 476,102 0 0
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