-----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, Gf7IwjFvhok/GivLaxfG/DrdoCccVtZ7oOUSK/rz+0GNieEE+7FL9EatFvzPUTl4 OikXQ+8t0Sk8oXJCDazjkQ== 0000912057-00-014925.txt : 20000331 0000912057-00-014925.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014925 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFG INVESTMENT TRUST D CENTRAL INDEX KEY: 0000879497 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043157233 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25648 FILM NUMBER: 586525 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 FORM 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 For the fiscal year ended December 31, 1999 ----------------------------------------------------- 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 0-25648 --------------------------------------------------------- AFG Investment Trust D - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3157233 - -------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 88 Broad Street, Sixth Floor, Boston, MA 02110 - ----------------------------------------- ------------------- (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: 2,089,030 Trust Class A 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, 1999 (Part I and II) AFG Investment Trust D 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 14-15
2 PART I Item 1. Business. (a) General Development of Business AFG Investment Trust D (the "Trust") was organized as a Delaware business trust in accordance with the Delaware Business Trust Act on August 31, 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 known as 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 an aggregate of 2,089,030 Beneficiary Interests (hereinafter referred to as Class A Interests) at a subscription price of $25.00 each ($52,225,750 in total) to 2,635 investors through 17 serial closings commencing October 26, 1993 and ending February 6, 1995. On July 18, 1997, the Trust issued 3,142,083 Class B Interests at $5.00 each ($15,710,415 in total), of which (i) 3,140,683 interests are held by Equis II Corporation, an affiliate of EFG, and (ii) 1,400 interests are held by 4 other Class A investors. The Trust repurchased 153,275 Class A Interests on October 10, 1997 at a cost of $1,606,322 using proceeds from the issuance of Class B Interests. On April 28, 1998, the Trust repurchased 1,000 additional Class A Interests at a cost of $9,000. Accordingly, there are 1,934,755 Class A Interests currently outstanding. The Class A and Class B Interest holders are collectively referred to as the "Beneficiaries". The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation, and one Special Beneficiary, Semele Group Inc. ("Semele"). Semele purchased the Special Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues to act as Advisor to the Trust and provides services in connection with the acquisition and remarketing of the Trust's assets. The Managing Trustee is responsible for the general management and business affairs of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation and an affiliate of EFG. Class A Interests and Class B Interests basically have identical voting rights and, therefore, Equis II Corporation has control over the Trust on all matters on which the Beneficiaries may vote. Gary D. Engle, has voting control of Equis II Corporation. The Managing Trustee and the Special Beneficiary are not required to make any other capital contributions except as may be required under the Second Amended and Restated Declaration of Trust, as amended (the "Trust Agreement"). (b) Financial Information About Industry Segments Historically, the Trust has been 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 undiscounted, noncancellable rents equal or exceed the Purchase Price of the leased equipment. Operating leases are those in which the aggregate undiscounted, noncancellable rental payments are less than the Purchase Price of the leased equipment. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust Agreement was modified to permit the Trust to invest in assets other than equipment. During 1999, the Trust made certain non-equipment investments that the Managing Trustee believes have the potential to enhance the Trust's overall economic performance for the benefit of all of the Beneficiaries. 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. Significant operations commenced coincident with the Trust's initial purchase of equipment and associated lease commitments on October 26, 1993. 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. Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by December 31, 2006. The Trust was a Nominal Defendant in a Class Action Lawsuit, the resolution of which is described in Note 9 to the accompanying financial statements. 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 3 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 6 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 expenses. In addition, the leasing industry is very competitive. The Trust is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Trust must 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. In addition, 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. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1999, 1998 and 1997 is incorporated herein by reference to Note 2 to the financial statements in the 1999 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. The Trust Agreement originally provided for the reinvestment of Cash From Sales or Refinancings in additional equipment until February 6, 1999, a period of four years following the Final Closing. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions were extended through December 31, 2002 (see Note 6 to the financial statements included in Item 14 herein) and the Trust was permitted to invest in assets other than equipment. 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. Similarly, any non-equipment investments will be liquidated as the Trust nears its scheduled dissolution date. 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, Chief Executive Officer and sole Director. 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. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved 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. (d) Financial Information About Foreign and Domestic Operations and Export Sales 4 Not applicable. Item 2. Properties. Incorporated herein by reference to Note 3 to the financial statements in the 1999 Annual Report. Item 3. Legal Proceedings. Incorporated herein by reference to Note 9 to the Financial Statements in the 1999 Annual Report. Item 4. Submission of Matters to a Vote of Security Holders. None. 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, 1999, there were 2,093 record holders (2,088 Class A Interests and 5 Class B Interests) in the Trust. (c) Dividend History and Restrictions Historically, cash distributions have been declared and paid within 45 days after the completion of each calendar month and described in a statement sent to the Beneficiaries. Distributions prior to Class B Payout (defined below) were allocated to the Class A and Class B Beneficiaries as follows: first, 100% to the Class A Beneficiaries up to $0.41 per Class A Interest; second, 100% to the Class B Beneficiaries up to $0.164 per Class B Interest, reduced by the Class B Distribution Reduction Factor (defined below); third, 100% to the Class A Beneficiaries up to an additional $0.215 per Class A Interest; and fourth, until Class B Payout was attained, 80% to the Class B Beneficiaries and 20% to the Class A Beneficiaries. During the past year, the Managing Trustee evaluated and pursued a number of potential new investments, several of which the Managing Trustee concluded had market returns that it believed were less than adequate given the potential risks. Most transactions have involved the equipment leasing, business finance and real estate development industries. Although the Managing Trustee intends to continue to evaluate additional new investments, it anticipates that the Trust will be able to fund these new investments with cash on hand or from other sources, such as the proceeds from future asset sales or refinancings and new indebtedness. As a result, the Trust declared a special cash distribution to the Trust Beneficiaries totaling $13,200,000 which was paid on January 19, 2000. After the special distribution on January 19, 2000, the Trust adopted a new distribution policy and suspended the payment of regular monthly cash distributions. Looking forward, the Managing Trustee does not expect to reinstate cash distributions until expiration of the Trust's reinvestment period in December 2001; however, the Managing Trustee periodically will review and consider other one-time distributions. In addition to maintaining sale proceeds for reinvestment, the Managing Trustee expects that the Trust will retain cash from operations to pay down debt and for the continued maintenance of the Trust's assets. The Managing Trustee believes that this change in policy is in the best interests of the Trust over the long term and will have the added benefit of reducing the Trust's distribution expenses. Class A Payout means the first time when the aggregate amount of all distributions actually made to the Class A Beneficiaries equals $25 per Class A Interest (minus all uninvested capital contributions returned to the Class A Beneficiaries) plus a cumulative annual distribution of 10% compounded quarterly and calculated beginning with the last day of the month of the Trust's initial Class A Closing. Class B Payout means the first time when the aggregate amount of all distributions actually made to the Class B Beneficiaries equals $5 per Class B Interest plus a cumulative annual return of 8% per annum compounded quarterly with respect to capital contributions returned to them as a Class B Capital Distribution and 10% per annum, compounded quarterly, with respect to the balance of their capital contributions calculated beginning August 1, 1997, the first day of the month following the Class B Closing. Class B Payout occurred on January 19, 2000 in conjunction with the special cash distribution paid on that date. As Class B Payout has been attained, all further distributions will be made to the Class A Beneficiaries and the Class B Beneficiaries in amounts so that each Class A Beneficiary receives, with respect to each Class A Interest, an amount equal to 400%, divided by the difference between 100% and the Class B Distribution 6 Reduction Factor, of the amount so distributed with respect to each Class B Interest. The Class B Distribution Reduction Factor means the percentage determined as a fraction, the numerator of which is the aggregate amount of any cash distributions paid to the Class B Beneficiaries as a return of their original capital contributions (on a per Class B Subordinated Interest basis), discounted at 8% per annum (commencing August 1, 1997, the first day of the month following the Class B Closing) and the denominator of which is $5.00. Distributions in 1999 and 1998 were as follows:
Managing Special Total Trustee Beneficiary Beneficiaries --------------- --------------- --------------- --------------- Total 1999 distributions Class A Interests $ 7,904,866 $ 64,170 $ 529,400 $ 7,311,296 Class B Interests 11,380,345 113,803 938,880 10,327,662 --------------- --------------- --------------- --------------- Total $ 19,285,211 $ 177,973 $ 1,468,280 $ 17,638,958 =============== =============== =============== =============== Total 1998 distributions Class A Interests $ 3,492,606 $ 34,926 $ 288,141 $ 3,169,539 Class B Interests 7,498,995 18,972 156,519 7,323,504 --------------- --------------- --------------- --------------- Total $ 10,991,601 $ 53,898 $ 444,660 $ 10,493,043 =============== =============== =============== ===============
Distributions payable were $13,200,000 and $417,939 at December 31, 1999 and 1998, respectively. Item 6. Selected Financial Data. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1999 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 1999 Annual Report. Item 8. Financial Statements and Supplementary Data. Incorporated herein by reference to the financial statements and supplementary data included in the 1999 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, 2000 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 successor and President and a Director is duly of the Managing Trustee 51 elected and Gary D. Engle President and Chief Executive Officer qualified and a member of the Executive Committee of EFG and a Director of the Managing Trustee 51 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the Managing Trustee 40 Michael J. Butterfield Senior Vice President, Finance and Treasurer of EFG and Treasurer of the Managing Trustee 40 James A. Coyne Executive Vice President, Capital Markets of EFG and Senior Vice President of the Managing Trustee 39 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 49 Gail D. Ofgant Senior Vice President, Lease Operations of EFG 34
(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 51, 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 President of American Finance Group Securities Corp. Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 51, is President and Chief Executive Officer of EFG and sole shareholder and Director of its general partner, Equis Corporation and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is Vice President and a Director of certain of EFG's subsidiaries and affiliates, and controls the general partner of Old North Capital Limited Partnership ("ONC"). Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). 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 a MBA from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Romano, age 40, became Executive Vice President and Chief Operating Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in November 1989, became Vice President and Controller in April 1993 and Chief Financial Officer in April 1995. Mr. Romano assumed his current position in April 1996. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately held real estate development and mortgage origination company that he joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is a Certified Public Accountant and holds a B.S. degree from Boston College. Mr. Coyne, age 39, is Executive Vice President, Capital Markets of EFG and President, Chief Operating Officer and a member of the Board of Directors of Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. From May 1993 through November 1994, he was employed by 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 B.S. in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 40, is Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates and is Treasurer of the Managing Trustee and Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance and Treasurer of EFG and certain of it's affiliates in April 1996 and in July 1998, was promoted to Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates. 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 (UK) 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 CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Simonsen, age 49, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors 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 34, is Senior Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to Manager Lease Operations in April 1994, and became Vice President of Lease Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. 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 the Advisor 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, herein and in Note 6 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, of the assets of the Trust (except in the orderly liquidation of the Trust upon its termination and dissolution). As of March 1, 2000, the following person or group owns beneficially more than 5% of the Trust's outstanding Beneficiary interests:
Name and Amount Percent Title Address of of Beneficial of of Class Beneficial Owner Ownership Class --------------------------- ------------------------- ----------------------- ---------------- Interests Representing Equis II Corporation Class B Beneficiary 88 Broad Street 3,140,683 Interests 99.96% Boston, MA 02110
No person or group is known by the Managing Trustee to own beneficially more than 5% of the Trust's 1,934,755 outstanding Class A Interests as of March 1, 2000. Equis II Corporation is controlled by EFG's President and Chief Financial Officer, Gary D. Engle (see Item 10 and Item 13 of this report). 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, 1999, 1998 and 1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
1999 1998 1997 ------------------ ------------------ ------------------ Acquisition fees $ 74,774 $ 5,227 $ 871,096 Equipment management fees 1,074,800 886,096 895,643 Offering costs -- -- 157,104 Administrative charges 169,978 80,184 76,419 Reimbursable operating expenses due to third parties 604,239 543,699 596,354 ------------------ ------------------ ------------------ Total $ 1,923,791 $ 1,515,206 $ 2,596,616 ================== ================== ==================
EFG and its Affiliates were reimbursed for their out-of-pocket offering costs incurred on behalf of the Trust in an amount equal to 1% of the gross proceeds realized by the four trusts which sold Class B Interests pursuant to a Registration Statement on Form S-1 in 1997. The amount of reimbursement made by the Trust was prorated in proportion to the number of Beneficiary Interests sold in the Trust. 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 was compensated by an amount equal to .28% of Asset Base Price paid by the Trust for each asset acquired for the Trust's initial asset portfolio. For reinvestment acquisitions completed prior to February 7, 1999, EFG is compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions, which were scheduled to expire on February 6, 1999, were extended through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Acquisition fees paid to EFG in connection with reinvestment assets acquired after February 6, 1999 are equal to 1% of Asset Base Price paid by the Trust. For management services, EFG is 11 compensated by an amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust with respect to assets acquired on or prior to February 6, 1999. For management services earned in connection with assets acquired on or after February 7, 1999, EFG is compensated by an amount equal to 2% of gross lease rental revenue received by the Trust. Both of these fees are subject to certain limitations defined in the Trust Agreement. For non-equipment investments other than cash, the Managing Trustee receives an annualized management fee of 1%. 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) 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 at actual cost. 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 by the lessee 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, 1999, the Trust was owed $3,528,141 by EFG for such funds and the interest thereon. These funds include $3,087,838 related to the sale of a vessel in December 1999. These funds were remitted to the Trust in January 2000. During 1998, the Trust purchased limited partnership units (the "Units") in AFG International Limited Partnership (the "Partnership"), a real estate limited partnership sponsored by EFG that owns two commercial buildings leased to an investment grade educational institution. The Trust purchased 7.25 Units at a cost of $100,000 per unit for an aggregate purchase price of $725,000. As a result of the purchase of the Units, the Trust owns approximately 22.5% of the Partnership. The Trust accounts for its investment in the Partnership under the equity method of accounting. As such, the carrying value of the Trust's investment in the Partnership is increased or decreased by an amount equal to the Trust's share of the Partnership's income or losses, respectively, and decreased for any distributions received from the Partnership. At December 31, 1999, this investment had a carrying balance of $668,813 and is reflected as Investment - affiliate on the accompanying Statement of Financial Position. Old North Capital Limited Partnership ("ONC"), a Massachusetts limited partnership formed in 1995 and an affiliate of EFG, owns 44,084 Class A Interests or 2.28% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by a subsidiary of Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. On July 18, 1997, the Trust issued 3,142,083 Class B Interests at $5.00 per interest, thereby generating $15,710,415 in aggregate Class B capital contributions. Class A Beneficiaries purchased 1,400 Class B Interests, generating $7,000 of such aggregate capital contributions, and the Special Beneficiary, EFG, purchased 3,140,683 of such Class B Interests, generating $15,703,415 of such aggregate capital contributions. The Trust incurred offering costs in the amount of $157,104 and professional service costs of $159,066 in connection with this offering. Subsequently, EFG transferred its Class B Interests to a special-purpose company, Equis II Corporation, a Delaware corporation. EFG also transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis II Corporation. As a result, Equis II Corporation has voting control of the Trust through its ownership of the majority of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. Equis II Corporation is controlled by EFG's President and Chief Executive Officer, Gary D. Engle. Accordingly, control of the Managing Trustee did not change as a result of the foregoing transactions. During the fourth quarter of 1999, Semele Group Inc. purchased an 85% interest in Equis II Corporation; however, voting control with respect to the Class B Interests owned by Equis II Corporation remains vested in Mr. Engle. 12 (b) Certain Business Relationships None. (c) Indebtedness of Management to the Trust None. (d) Transactions with Promoters See Item 13(a) above. 13 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, 1999 and 1998........................* Statement of Operations for the years ended December 31, 1999, 1998 and 1997.............................................* Statement of Changes in Participants' Capital for the years ended December 31, 1999, 1998 and 1997 ............................................* Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997.............................................* 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 Second Amended and Restated Declaration of Trust. 10.1 Guarantee Agreement dated March 8, 2000 between AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) and Heller Affordable Housing of Florida, Inc. (among others as Beneficiaries) is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.1 and is included herein. 10.2 Guarantee Fee Agreement dated March 8, 2000 between AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) and Echelon Commercial LLC is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.2 and is included herein. 10.3 Guarantors' Contribution Agreement dated March 8, 2000 by and among AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.3 and is included herein. * Incorporated herein by reference to the appropriate portion of the 1999 Annual Report to security holders for the year ended December 31, 1999 (see Part II). 14 Exhibit Number ---------- 13 The 1999 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 Scandinavian Airlines System was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (a) and is incorporated herein by reference. 99(b) Lease agreement with KGJS/Gearbulk Holding Limited was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (b) and is incorporated herein by reference. 99(c) Lease agreement with Emery Worldwide was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference. 99(d) Lease agreement with Chantel Shipping Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (g) and is incorporated herein by reference. (b) Reports on Form 8-K None. 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 D 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 30, 2000 Date: March 30, 2000 ---------------------------- ----------------------------- By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield ------------------------------- ------------------------------- Gary M. Romano Michael J. Butterfield Executive Vice President and Chief Senior 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 30, 2000 Date: March 30, 2000 ---------------------------- ----------------------------- 17 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 GUARANTEE THIS GUARANTEE, dated as of March 8, 2000 (this "Guarantee") is made, jointly and severally, by AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust D, each a Delaware business trust (each, a "Guarantor" and together, the "Guarantors") in favor of the Beneficiaries (as defined below). WITNESSETH: WHEREAS, Echelon Commercial LLC a Delaware limited liability company (the "Master Lessee"), is a party to and has undertaken payment and performance obligations under the Amended and Restated Master Lease Agreement ("Master Lease"), dated as of March 7, 2000 between Heller Affordable Housing Florida, Inc., a Florida corporation, HAHF Trust I, a Delaware business trust; and HAHF Trust I, a Delaware business trust (collectively, the "Master Lessor") and Master Lease; WHEREAS, in order to induce the Beneficiaries to enter into the Master Lease, the Guarantors are executing and delivering this Guarantee to Master Lessor (collectively, along with its successors and permitted assigns, the "Beneficiaries"): NOW, THEREFORE, for value received, each Guarantor hereby agrees with and for the benefit of the Beneficiaries as follows: ARTICLE I DEFINED TERMS Unless the context shall otherwise require, capitalized terms used herein but not otherwise defined herein shall have the meanings assigned thereto in the Master Lease. ARTICLE II GUARANTEE AND INDEMNITIES SECTION 2.01 Guarantee of Obligations Under Master Lease. (a) The Guarantors irrevocably and unconditionally, jointly and severally guarantee to each of the beneficiaries the due, complete and punctual performance and observance of all payment obligations of the Master Lessee under the Master Lease, and the due. complete and punctual performance of, and compliance with, each and all other obligations. covenants and agreements of the Master Leasee under the Master Lease (in each case, including any and all indemnities and Liabilities for breach of covenant or warranty now or hereafter incurred by the Master Leasee to any Beneficiary arising pursuant or with respect to the Master Lease), in each case strictly in accordance with the terms thereof (all such obligations and other covenants, indemnities and agreements being referred to herein as the "Obligations"). The Guarantors agree to pay upon demand any and all expenses (including reasonable attorneys' fees and disbursements) that may be paid or incurred by any Beneficiary in enforcing any rights with respect to, or collecting, any or all payments due pursuant to the terms of the Master Lease and/or enforcing any rights with respect to, or collecting against, the Guarantor under this Guarantee (whether pursuant to this Section 2.01(a) or any other provision hereof). (b) In the event that Master Lessee fails to pay, perform or observe duly, completely and punctually any Obligation when and as the same shall be due and payable, or required to be observed or performed, as the case may be, in accordance with the terms of the Master Lease, the Guarantors shall forthwith pay, perform and observe such Obligation or cause the same forthwith to be paid, performed or observed, regardless of whether or not any Beneficiary or anyone on behalf of any of them shall have instituted any suit, action or proceeding or exhausted its remedies or taken any steps to enforce any rights against Master Lessee or any other Person or entity to compel any such performance or observance or to collect all or any port of such amount pursuant to the provisions of the Master Lease or am law or in equity, or otherwise, and regardless of any other condition or contingency. SECTION 2.02 Unconditional Obligations. This Guarantee is a primary obligation of each Guarantor independent of the obligations of the Master Lessee under the Master Lease. and is an unconditional, absolute, present and continuing obligation and guarantee of payment and performance (and not merely of collection) and the validity and enforceability of this Guarantee shall be absolute and unconditional irrespective of, and, shall not be impaired. affected or in any way conditioned or contingent upon (a) the making of a demand, the institution of suit or the taking of any other action to enforce performance or observance by Master Lessee of the Obligations, (b) the validity, regularity or enforceability of the Master Lease or any of the Obligations or any collateral security, other guarantee, if any, or credit support therefor or right of offset with respect thereto at any time or from time to time held by any Beneficiary, (c) any defense, setoff or counterclaim (other than the defense of prior payment or performance) that may at any time be available to or be asserted by Master Lessee or any Guarantor against any beneficiary, (d) any attempt to collect from Master Lessee or any other entity or to perfect or enforce any security or (e) upon any other action, occurrence or circumstance whatsoever. The Guarantors waive any requirement that any Beneficiary shall have instituted any suit, action or proceeding or exhausted its remedies or taken any steps to enforce any rights against Master Lessee or any other Person or entity to compel any such performance or to collect all or any part of such amount pursuant to the provisions of the Master Lease or at law or in equity, or otherwise, and regardless of any other condition or contingency. SECTION 2.03 Amendments, etc., With Respect to the Obligations. The Guarantors shall remain obligated hereunder and this Guarantee shall remain in full force and effect without any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors, notwithstanding that (a) any demand for payment or performance or observance of any of the Obligations made by any Beneficiary may be rescinded by such Beneficiary and any of the other Obligations continue to be in effect; (b) the Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by any Beneficiary; (c) the Master Lease, or any collateral security document or other guarantee or document executed and delivered in connection therewith or related thereto, may be amended, modified, supplemented or terminated, in accordance with its terms, as the parties thereto may deem advisable; (d) any - 2 - collateral security, guarantee or right to offset held by any Beneficiary for the payment or performance or observance of the Obligations may be sold, exchanged, waived, surrendered or released; or (e) any default with respect to any ObIigation may be waived by any Beneficiary. No Beneficiary shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. For purposes hereof, "demand" shall include the commencement and continuance of any legal proceedings. The Guarantors hereby ratify and confirm any such extension, renewal, change, sale, release, waiver, surrender, exchange, modification, amendment, impairment, substitution. settlement, adjustment or compromise and agrees that the same shall be binding upon it, and hereby waive to the fullest extent permitted by Applicable Law any and all defenses, counterclaims or offsets which it might or could have by reason thereof, it being understood that the Guarantors shall at all times be bound by this Guarantee and remain liable hereunder. SECTION 2.04 The Guarantors' Obligations Not Affected. The Guarantors expressly agree that the duties and obligations of the Guarantors under this Guarantee shall remain in full force and effect, without the necessity of any reservation of rights against the Guarantors or notice to or further assent by the Guarantors at any time and from time to time, in whole or in part, and without regard to, and shall not be impaired, released, discharged, terminated or affected by any of the following actions or the occurrence of any of the following: (a) any extension, modification, amendment or renewal of, termination, addition or supplement to, or deletion from, any of the terms of or indulgence with respect to, or substitutions for, or the taking of any action or the giving of any consent with respect to, the Obligations or any part thereof or the Master Lease or other agreement relating thereto at any time; (b) any failure, refusal or omission to enforce any right, power or remedy with respect to the Obligations or any part thereof or the Master Lease or other agreement relating thereto; (c) any waiver of any right, power or remedy or of any default with respect to the Obligations or any part thereof or the Master Lease or other agreement relating thereto or to provide for any insurance on the Property, or to establish or maintain the priority or perfection of any interest in the Property; (d) any release, surrender, compromise. settlement, waiver, subordination or modification, with or without consideration, of any collateral security or other guarantees with respect to the Obligations or any part thereof, or any other obligation of any Person with respect to the Obligations or any part thereof; (e) the lack of genuineness, unenforceability, impossibility of performance or invalidity of the Obligations or any part thereof or the lack of genuineness, unenforceability, impossibility of performance or invalidity of the Master Lease or other agreement relating thereto or the power or authority or lack of power or authority of the Master Lessee to execute - 3 - and deliver the Master Lease or to perform any of its obligations thereunder or the existence or continuance of the Master Lessee or any other Person as a legal entity; (f) any change in the ownership of the Master Lessee or the insolvency, bankruptcy or any other change in the legal status of the Master Lessee or any rejection, modification or release of the obligations of the Master Lessee or those of any Person under the Master Lease as a result of any bankruptcy, reorganization, insolvency or similar proceeding; (g) the change in or the imposition of any Applicable Law or other governmental act that does or might impair, delay or in any way affect the validity, enforceability, or the payment when due, of the Obligations to the extent not prohibited by Applicable Law or otherwise. (h) the existence of any claim, counterclaim, setoff or other rights that the Guarantors may have at any time against the Master Lessee or any other Person in connection herewith or with an unrelated transaction; (i) any merger or consolidation of the Master Lessee or any Guarantor into or with any other Person, or any sale, release or transfer of any or all of the assets of the Master Lessee or any Guarantor to any other Person; (j) the rights, powers or privileges any Beneficiary may now or hereafter have against any Person or collateral; (k) any assignment of the Master Lease or subletting of the Property or any part thereof or any transfer, sale or other disposition or any destruction of the Property or any failure of title with respect to any interest in the Property, (l) the failure of any Guarantor to receive any benefit from or as a result of its execution, delivery and performance of this Guarantee; or (m) any other action, omission, occurrence or circumstance whatsoever which may in any manner or to any extent constitute a legal or equitable defense of any Guarantor or vary the risk, prejudice any rights of subrogation, limit the recourse or effect a discharge of any Guarantor hereunder as a matter of law or otherwise; provided that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, that are not specifically mentioned above, it being the purpose and intent of this paragraph that the obligations of the Guarantors hereunder shall be absolute and unconditional and shall not be discharged, impaired or varied except by the payment, observance or performance to the appropriate Beneficiary of the Master Lessee's obligations under the Master Lease, and then only to the extent of such payments, observance or performance. Without limitation any of the other teams or provisions hereof, in order to hold the Guarantors liable hereunder, there shall be no obligation on the part of any Beneficiary at any time to enforce or attempt to enforce any right or remedy against the Master Lessee or any other Person or to resort, in any manner or form, to any collateral, property or estates or any other - 4 - rights or remedies whatsoever. Without limiting the foregoing, it is understood that repeated and successive demands may be made and recoveries may be had hereunder but without duplication of payment as and when, from time to time, the Master Lessee shall default under the terms of any of the Master Lease and that notwithstanding the recovery hereunder for or in respect of any given default by the Master Lessee wider the Master Lease, this Guarantee shall remain in full force and effect and shall apply to each and every subsequent default. Each and every default in any payment. observance or performance of any Obligation of the Master Lessee under the Master Lease shall give rise to a separate claim and cause of action hereunder, and separate claims or suits may be made and brought, as the case may be, hereunder as each such default occurs. SECTION 2.05 Waiver by the Guarantors. The Guarantors unconditionally waive and release, to the fullest extent permitted by Applicable Law, any and all (a) notice of the acceptance of this Guarantee by any Beneficiary and of any change in the financial condition of the Master Lessee; (b) notices of the creation. renewal, extension or accrual of any Obligation or any of the matters referred to in Section 2.04 hereof or any notice of or proof of reliance by any of the Beneficiaries upon this Guarantee or acceptance of this Guarantee (the Obligations, and any of them, shall conclusively be deemed to have been created, contracted, incurred, renewed, extended, amended or waived in reliance upon this Guarantee and all dealings between the Master Lessee or the Guarantors and each Beneficiary shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee); (c) notices which may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights of any of the Beneficiaries against the Guarantors; (d) the right to interpose all substantive and procedural defenses to the law of guarantee, indemnification and suretyship, except the defenses of prior payment or prior performance by the Master Lessee or the Guarantors of the Obligations; (e) all rights, defenses and remedies accorded by Applicable Law to guarantors or sureties, including any extension of time conferred by any law now or hereafter in effect; (f) any right or claim of right to cause a marshaling of the assets of the Master Lessee or to cause any Beneficiary to proceed against the Master Lessee or any collateral held by any Beneficiary at any time or in any particular order; (g) rights to the enforcement, assertion or exercise by any of the Beneficiaries of any right, power, privilege or remedy conferred herein or in the Master Lease or otherwise; (h) requirements of promptness or diligence on the part of any of the Beneficiaries; (i) notices of the sale, transfer or other disposition of any right, title to or interest in the Master Lease; (j) demand of payment by any Beneficiary or any other Person from the Master Lessee or any other Person indebted or in any manner liable on or for the Obligations hereby guaranteed; (k) presentment for payment by any Beneficiary or any other Person of the Obligations, protest thereof and notice of dishonor to any party, or (l) other circumstances whatsoever (except the defenses of prior payment or prior performance by the Master Lessee or the Guarantors of the Obligations) which might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety, or which might otherwise limit recourse against the Guarantors. No failure to exercise and no delay in exercising, on the part of any Beneficiary, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power, privilege or right. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. - 5 - SECTION 2.06 Payments. All payments hereunder shall be made in compliance with Section 7.15. SECTION 2.07 Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be. if at any time payment, in whole or in part, of any of the Obligations is invalidated, voided, declared to be fradulent or preferential, set aside, rescinded or must otherwise be repaid, restored or returned to a trustee, receiver or any other Person by any Beneficiary upon the bankruptcy, insolvency, reorganization, arrangement, adjustment, composition, dissolution, liquidation, or the like, of the Master Lessee or the Guarantors, or as a result of, the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to the Master Lessee or the Guarantors or any substantial part of such Person's respective property, or otherwise, all as though such payment had nor been made notwithstanding any termination of this Guarantee or the Master Lease. The liability of the Guarantors shall not he reduced or discharged, in whole or in part, by any payment to any Beneficiary from any source that is thereafter repaid, returned or refunded in whole or in part by reason of the assertion of a claim of any kind relating thereto, including, but not limited to, any claim for breach of contract, breach of warranty, preference, illegality, invalidity or fraud asserted by any account debtor or by any other Person. SECTION 2.08 Expenses. If the Guarantors fail to pay any amount hereunder when due, the Guarantor shall pay interest, on demand, on such amount at the Overdue Rate, to such Beneficiary entitled thereto. The Guarantors further agree to pay to any Beneficiary any and all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and disbursements) incurred by such Beneficiary in connection with enforcing its rights under the Master Lease and/or this Guarantee. SECTION 2.09 Limitation. The maximum liability under this Guarantee will be the lesser of $34,500,000 or the Guaranteed Amount (as hereinafter defined) (plus in either case, any interest on any amounts sought to be recovered hereunder, and fees and expenses related to the enforcement of this Guarantee as provided in Section 2.08 hereof). ARTICLE III COVENANTS Each Guarantor hereby covenants, for the benefit of each Beneficiary, as follows: SECTlON 3.01 Information. Each Guarantor will deliver to the Beneficiaries: (a) promptly after the filing thereof, copies of all reports on Forms 10-K, 10-Q and 8-K (or their equivalents), which such Guarantor shall have filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended; (b) as soon as possible and in any event within ten (10) Business Days after a Responsible Employee of such Guarantor obtains knowledge of the occurrence of each Event of Default or each event that, with the giving of notice or time elapse, or both, would constitute an Event of Default continuing on the date of such statement, a statement of the authorized officer setting forth details of such Event of Default or event and the action that the Guarantor proposes - 6 - to take with respect thereto; provided that the Guarantor shall not be obligated to give notice of any Event of Default which is remedied within ten (10) Business Days after such Responsible Employee first obtains knowledge; (c) promptly upon becoming aware thereof, written notice of the commencement or existence of any proceeding against the Guarantor or any Affiliate of the Guarantor by or before any court or governmental agency that might, in the reasonable judgment of the Guarantor, result in a Material Adverse Effect on the business, operations or financial conditions of the Guarantor or the ability of the Guarantor to perform its obligations hereunder or under the Master Lease; (d) as soon as possible and in any event within ten (10) Business Days after the occurrence of any violation or alleged violation of an Environmental Law by Guarantor or Master Lessee, a statement of an authorized officer setting forth the details of such violation and the action which the Guarantor proposes to take with respect thereto; and (e) from time to time such additional information regarding the business, properties, condition or operations, financial or otherwise, of such Guarantor as the Beneficiaries may reasonably request. SECTION 3.02 Compliance with Laws. The Guarantors will comply in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder). SECTION 3.03 Further Assurances. Each Guarantor will promptly execute and deliver to the Beneficiaries such further documents, instruments and assurances and take such further action as the Beneficiaries from time to time reasonably may request in order to carry out the intent and purpose of this Guarantee and to establish and protect the rights and remedies created or intended to be created in favor of the beneficiaries hereunder. SECTION 3.04 Preservation of Existence, Etc. Each Guarantor will preserve and maintain its existence and. all rights, privileges and franchises necessary and desirable in the normal conduct of its business and the performance of its obligations hereunder and under the Master Lease, provided that a Guarantor may consolidate with or merge with or into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, if either the Guarantor shall be the continuing Delaware business trust (if other than the Guarantor) formed by such consolidation or into which the Guarantor is merged or the Person which acquires by conveyance or transfer the properties and assets of the Guarantor substantially as an entirety shall expressly assume, by an assumption agreement executed and delivered to the Beneficiaries, the performance of the Guarantor's obligations hereunder and under the Master Lease. SECTION 3.05 Payment of Taxes. Each Guarantor shall promptly pay when due all Taxes owing by the Guarantors where such failure could reasonably be expected to have a Material Adverse Effect, except for such Taxes that are being contested in good faith by appropriate proceedings and adequate reserves shall have been set aside therefor. - 7 - SECTION 3.06 Books and Records. Each Guarantor shall maintain its books and financial statements in accordance with GAAP, and permit the Beneficiaries to make or cause to be made inspections and audits of any books, records and papers of such Guarantor and in make extracts therefrom at all such reasonable times and as often as any such Person may reasonably require. SECTION 3.07 Employee Benefit Plans. Each Guarantor shall maintain each Plan as to which it may have liability, in compliance with all Applicable Laws. SECTION 3.08 Payment of Dividends, Each Guarantor agrees not to pay any dividends or make any other distribution on its capital interests during the term of this Guarantee except with the consent of the Beneficiary; provided, however, the Guarantors agree not to request the Beneficiary's consent to such distributions more than once a fiscal quarter; provided, that, for all tax years ending on or after December 31, 2001. the Guarantors, if required, may distribute to its owners amounts solely to compensate such owners for U.S. federal income tax liability generated by their ownership interest in any Guarantor. Such amount in no event will exceed 39.5% of the taxable income allocated to such owner. SECTION 3.09 Agreements with Affiliates. Each Guarantor agrees not to amend, modify or terminate any of the agreements with its Affiliates set forth on Schedule I attached hereto, or to enter into any agreement with any Affiliate except as set forth on Exhibit A hereto, except to the extent such amendment, modification, or termination or this Agreement does not (i) affect the assets held by any Guarantor in an adverse manner, (ii) increase any fees payable for any liability of any Guarantor, or (iii) create a new fee or liability by any Guarantor to such Affiliate. SECTION 3.10 Stipulated Value. The Guarantors may not acquire or invest in additional assets unless (a) the Guarantors jointly hold not less than $7,000,000 in cash and cash equivalents (as such terms are defined under GAAP), and (b) the Stipulated Value (as defined below) as calculated immediately prior to such asset acquisition or investment (after giving effect to such investment or asset acquisition in the calculation) is equal to the lesser of $40 million ($40,000,000) or the Guaranteed Amount (as defined below). (a) Stipulated Value means the sum of the net book values (defined as determined by GAAP unless otherwise noted) of each individual Asset reduced by its corresponding non-recourse debt ("NBV'), with no such NBV for an individual asset being less than zero, included in each Category of Assets set forth below multiplied by the Adjustment Percentage reduced by all Recourse Indebtedness of the Guarantors. Category of Assets Adjustment Percentage ------------------ --------------------- (i) Unencumbered cash, cash equivalents, and accounts receivable 100 front affiliates where cash is held by such affiliate and remitted within 15 days - 8 - Category of Assets Adjustment Percentage ------------------ --------------------- (ii) Present Value (at a discount rate of 10%) of the difference between the contractual rents payable on any equipment lease and the contractual non-recourse debt service requirements in connection with such equipment lease rents 90 (iii) The cost of any contract acquired to manage equipment leasing assets, or the cost of equity interests in equipment leasing funds, less any non-recourse debt incurred to acquire such contract or equity interest (without duplication) 82.5 (iv) The NBV (which NBV at the date hereof is deemed to be $20,000,000) of any residual interests on any equipment currently under lease 75 (v) The NBV (which NBV at the date hereof is deemed to be $2,700,000) of any residual interests on any equipment no longer under lease 50 (vi) The NBV of existing real estate investments 40 (vii) The NBV of real estate investments made after the date hereof 10 For purposes of the above: (A) any investment or asset acquisitions alter the date hereof will be valued at cost. (B) any writedowns of asset value required by GAAP will also be required for purposes of determining Stipulated Value. (C) Upon the sale of any asset included in (iv) or (v) above, the book value of a Category of Assets will be reduced by the actual amount of sales - 9 - proceeds received for such asset multiplied by the Adjustment Percentage for that Category of Assets. Notwithstanding anything above to the contrary, the Guarantors may (i) invest up to $2,500.000 into Equis Kirkwood LLC and (ii) invest up to $2,500,000 (net of any non-recourse debt) pursuant to existing obligations under outstanding leases or on improvements to existing equipment provided that such improvements are incurred in connection with a sale or release of such equipment; provided that upon consummation of such Investment, the Guarantors continue to hold not less than $7,000,000 in cash and cash equivalents (as defined under GAAP). (b) Guaranteed Amount means 125% of the total of Lease Balance plus Recourse Debt less amounts held in the Cash Collateral Account (c) Ten days prior to any asset acquisition or investment in excess of $1,000,000 the Guarantors will deliver a certificate to Beneficiary, in a form reasonably acceptable to it, evidencing compliance with this Section 3.10. SECTION 3.11 Asset Acquisition Limitation. In no event will the Guarantors acquire additional assets or make additional investments with an aggregate purchase price in excess of $30,000,000 plus the amount by which $34,500,000 exceeds the Guaranteed Amount For purposes of this section, if the Guarantors make investments after the date hereof and later sell those investments, the sale proceeds may be reinvested in addition to the limitation set forth in the preceding sentence. The calculation of purchase price for purposes of this Section shall include any indebtedness (whether with recourse to any Guarantor or not) incurred to finance any portion of the purchase price of any asset. No single asset may be acquired where the cash paid by the Guarantor is greater than $5,000,000; however, an acquisition consisting of a portfolio of individual assets, or an entity than owns individual assets, shall be deemed to be an investment in each underlying asset rather than taken as a whole. Notwithstanding any other restrictions in this agreement, any payments by any Guarantor to Master Lessee shall not be deemed investments for purposes of Sections 3.10 or 3.11 hereof SECTION 3. Guarantees. In no event shall any Guarantor become liable to any third party (including Affiliates) as guarantor, surety or any similar arrangement (including any obligations to perform any obligations of such third party under any contracts or agreements). ARTICLE IV RIGHTS OF THE PARTIES SECTION 4.01 Concerning the Beneficiaries. The Guarantors acknowledge that no Beneficiary shall have any obligation to perform any duty, covenant or condition hereunder. The Guarantors further acknowledge and agree that the rights of the beneficiaries in and to any payments hereunder in respect of obligations assigned by the Master Lessee shall not be subject to any defense, setoff, or recoupment or reduction of any kind for any reason (whether asserted by counterclaim or otherwise) whatsoever. including, without limitation, any other indebtedness or liability, howsoever and whenever arising, of the Master Lessee to the - 10 - Guarantors or to any other Person or for any cause whatsoever, it being the intent hereof that the Guarantors shall be unconditionally and absolutely obligated to pay the Beneficiaries all amounts due hereunder for so long as the Master Lease is in effect. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS SECTION 5.01 Representations and Warranties of the Guarantors. Each Guarantor hereby represents and warrants as of the date hereof as follows: (a) Status. Each Guarantor (i) is a duly organized and validly existing business trust in good standing under the laws of the State of Delaware and (ii) has the power and authority to own its properties and to conduct the business in which it is currently engaged. (b) Power and Authority. The Guarantor has the power and authority to execute, deliver and carry out the terms and provisions of this Guarantee and has taken all necessary action to authorize the execution, delivery and performance of this Guarantee and has duly executed and delivered this Guarantee and, assuming the due authorization, execution and delivery thereof on the part of each other party thereto, this Guarantee constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by insolvency, bankruptcy, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally and by equitable principles whether enforcement is sought by proceedings in equity or at law and except as the same may be limited by certain circumstances under law or court decisions in respect of provisions providing for indemnification of a party with respect to liability where such indemnification is contrary to public policy. (c) No Legal Bar. Neither the execution, delivery and performance by each Guarantor of this Guarantee nor compliance with the terms and provisions hereof and thereof, nor the consummation by such Guarantor of the transactions contemplated herein and therein (i) will result in a violation by such Guarantor of any provision of any Applicable Law that would have a Material Adverse Effect (x) the validity or enforceability of this Guarantee, or (y) the consolidated financial position, business or consolidated results of operations of such Guarantor or the ability of such Guarantor to perform its obligations under this Guarantee, (ii) will conflict with or result in any breach which would constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of such Guarantor pursuant to the terms of any indenture, loan agreement or other agreement for borrowed money to which the Guarantor is a party or by which it or any of its property or assets is bound or to which it may be subject, or (iii) will violate any provision of the declaration of trust or governing instrument of such Guarantor. (d) Litigation. There are no actions, suits or proceedings pending or, to the knowledge of any Guarantor, threatened (i) that are reasonably likely to have a Material Adverse Effect on the Property or on the ability of such Guarantor to perform its obligations under the Guarantee or (ii) that question the validity of the Guarantee or the rights or remedies of the Beneficiaries with respect to rite Guarantor or the Property under the Master Lease. - 11 - (e) Governmental Approvals. No Governmental Action by any Governmental Authority having jurisdiction over any Guarantor or the Property is required to authorize or is required in connection with (i) the execution, delivery and performance by the Guarantor under the Guarantee, or (ii) the legality, validity, binding effect or enforceability against the Guarantor under the Guarantor. (f) Investment Company Act, No Guarantor is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act. (g) Public Utility Holding Company Act. No Guarantor is a "holding company" or a "subsidiary company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Company Act of 1935, as amended. (h) Financial Statements. The consolidated balance sheet of each Guarantor as at December 31, 1998, and the related consolidated statements of income and cash flows of each Guarantor for the fiscal year then ended, accompanied by an opinion of Ernst & Young LLP, independent accountants, and the consolidated balance sheet of such Guarantor as at September 30, 1999, and the related consolidated statements of income and cash flows of the Guarantor for the nine months then ended, duly certified by the chief financial officer of the Guarantor, copies of which have been furnished to the Beneficiaries, fairly present, subject, in the case of said balance sheet as at September 30, 1999, and said statements of income and cash flows for the nine months then ended, to year-end audit adjustments, the consolidated financial condition of the Guarantor as at such dates and the consolidated results of the operations of the Guarantor for the periods ended on such dates, all in accordance with GAAP consistently applied. Since September 30, 1999, no event has occurred which could have a Material Adverse Effect. (i) Defaults. No Default or Event of Default or similar event has occurred and is continuing hereunder or under any material bond, debenture, note or other evidence of indebtedness or material mortgage, deed of trust, indenture or loan agreement or other instrument to which any Guarantor is a party or is subject to or bound. (j) Tax Returns. Each Guarantor has filed or caused to be filed all Federal, state, local and foreign tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Guarantor shall have set aside on its books adequate reserves. (k) No Material Misstatements. No information, report, financial statement, exhibit or schedule furnished by or on behalf of any Guarantor to the Beneficiaries in connection with the negotiation of this Guarantee or the Master Lease or included therein or delivered pursuant thereto contained, contains or will contain any misstatement of a material fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. - 12 - Notwithstanding the foregoing, any financial projections provided by any Guarantor based upon assumptions believed to be reasonable at the time by the management of such Guarantor and are not intended to be guarantees of future results (l) Investment. No Guarantor has made a cash investment in the Master Lessee, its parent, or any related transaction, it being understood, however, that the Guarantors may advance all or a portion of the security deposit with respect to a related transaction, provided the security deposit is returned to the Guarantors within 5 business days of the Commencement Date. ARTICLE VI GUARANTEE EVENTS OF DEFAULT SECTION 6.01 Guarantee Events of Default. If any of the following events ("Guarantee Events of Default") shall occur and be continuing: (a) The Guarantor shall fail to make any payment of any amount when due hereunder to any Beneficiary; or (b) Any representation or warranty made by the Guarantor under or in connection with Article V of this Guarantee shall prove to have been incorrect in any material respect when made or deemed made and such materiality is continuing; or (c) The Guarantor shall fail to perform or observe any term, covenant or agreement contained in Article III and such failure shall remain unremedied for thirty (30) days after written notice thereof shall have been given to the Guarantor by the Beneficiaries; provided, however, that if such failure is capable of cure but cannot be cured by payment of money or cannot be cured by diligent efforts within such thirty (30) day period but such diligent efforts shall be properly commenced within the cure period and the Guarantor is diligently pursuing, and shall continue to pursue diligently, remedy of such failure, the cure period shall be extended for an additional period of time as may be necessary to cure, not to exceed an additional forty-five (45) days or to extend beyond the Expiration Date; or (d) The Guarantor shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or the whole or any substantial part of its property, (v) fail to cause the discharge of any custodian, trustee or receiver appointed for the Guarantor or the whole or a substantial part of its property within sixty (60) days after such appointment, or (vi) file a petition or answer seeking or consenting to reorganization under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof; or (e) Insolvency proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any - 13 - State or Commonwealth thereof shall be filed against the Guarantor and not dismissed within sixty (60) days from the date of its filing, or a court of competent jurisdiction shall enter an order or decree appointing, without the consent of the Guarantor, a receiver of the Guarantor or the whole or a substantial part of any of its property and such order or decree shall not be vacated or set aside within ninety (90) days from the date of the entry thereof; or (f) An event of default, as defined in any agreement, mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money of the Guarantor in a principal amount in excess of $5,000,000, whether such indebtedness now exists or shall hereafter be created, shall happen and be continuing, if the effect of such default is to accelerate the maturity of such indebtedness, unless the Guarantor is diligently and in good faith contesting such default in appropriate proceedings; provided, however, any default on the non-recourse debt shall not constitute a default hereunder; or (g) At any time the Guarantors shall hold less than Two Million ($2,000,000) in unencumbered cash and cash equivalents (as defined by GAAP), or (h) At any time that the Guarantors shall have a combined book value (as defined by GAAP) less than the lesser of $30,000,000 and the Guaranteed Amount. ARTICLE VII MISCELLANEOUS SECTION 7.01 No Waiver; Cumulative Remedies. The failure or delay of any Beneficiary in exercising any right or remedy granted it hereunder shall not operate as a waiver of such right or remedy or be construed to be a waiver of any breach of any of the terms and conditions hereof or to be an acquiescence therein. Each and every right, power and remedy herein specifically given to each Beneficiary shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute and the exercise or the beginning of the exercise of any right, power or remedy shall not be construed as a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. A waiver by a Beneficiary of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that such Beneficiary or any other Beneficiary would otherwise have. SECTION 7.02 Notices. All notices, demands, declarations, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof shall be in writing and delivered (i) personally, (ii) by a nationally recognized overnight courier service, (iii) by mail (by registered or certified mail, return receipt requested, postage prepaid) or (iv) by facsimile (with confirmation of such transmission), in each case directed to the address of such Person as indicated below: If to the Guarantors: AFG Investment Trust A, - 14 - AFG Investment Trust B, AFG Investment Trust C, or AFG Investment Trust D, as applicable Equis Financial Group 88 Broad Street Boston, MA 02110 Telephone No.: (617) 854-5800 Facsimile No.: (617) 695-0596 Attn: James A. Coyne If to any Beneficiary: Heller Affordable Housing of Florida, Inc. c/o Heller EMX, Inc. 111 West 50th Street New York, New York 10020 Attn: Senior Vice President Telephone No.: (212) 408-0476 Facsimile No.: (212) 586-3017 Any such notice shall be effective upon receipt or refusal. From time to time any party may designate a new address for purposes of notice hereunder by written notice to each of the other parties hereto in accordance with this Section 7.02. SECTION 7.03 Amendments and Waivers; Successors and Assigns. (a) Neither this Guarantee nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the Guarantors and the Beneficiaries. (b) This Guarantee shall be binding upon the Guarantors and their successors and permitted assigns and shall inure to the benefit of the Beneficiaries and their respective successors and assigns permitted under the Master Lease. (c) The Guarantors shall not assign any of their obligations hereunder without the express prior written consent of the Beneficiary. SECTION 7.04 Severability. Any provision of or obligation under this Guarantee that is determined by competent authority to be prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions or obligations hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render uneforceable such provision or obligation in any other jurisdiction. To the extent permitted by Applicable Law, the Guarantors hereby waive any provision of law that renders any provision or obligation hereof prohibited or unenforceable in any respect. - 15 - SECTION 7.05 Termination. Subject to the provisions of Section 2.07 hereof, this Guarantee and the Guarantors' duties and obligations hereunder shall remain in full force and effect and be binding in accordance with their terms, until the earlier of (i) the date on which all Obligations and the obligations of the Guarantors hereunder shall have been satisfied by payment and performance in full, (ii) the date on which the Master Lease terminates, or (iii) the date on which Full Collateralization occurs. If the Beneficiary releases the Guarantor from any or all of the Guarantors' duties and obligations hereunder owing to such Beneficiary. such release shall in no way effect the remaining Guarantors duties and obligations to the Beneficiaries hereunder SECTION 7.06 Entire Agreement. This Guarantee constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral between or among the Guarantors, and each Beneficiary with respect to the subject matter hereof. SECTION 7.07 Article Headings. The heading of the various Articles and Sections of this Guarantee are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. SECTION 7.08 Jurisdiction. Any suit, action or proceeding, whether at law or in equity, including any declaratory judgment or similar suit or action, instituted by or against the Guarantors arising out of or relating in any way to this Guarantee may be brought and enforced in the Supreme Court of the State of New York, New York County, or of the United States District Court for the Southern District of New York and the Guarantors irrevocably consent and submit to the jurisdiction of each such court in respect of any suit, action or proceeding. The Guarantors further irrevocably consent to the service of process in any such suit, action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, return receipt requested, to the Guarantors or to agents at the address as set forth in Section 7.02 or as set forth below, respectively. The foregoing shall not limit the right of the Beneficiaries to serve process in any other manner permitted by law or to bring any action or proceeding, or to obtain execution of any judgment, in any other jurisdiction. SECTION 7.09 Waiver of Venue. The Guarantors hereby irrevocably waives any option or objection that they may now or hereafter have to the laying of venue of any action or proceeding arising under or relating to this Guarantee in any court located in the County of New York, State of New York, and hereby further irrevocably waives any claim that a court located in the County of New York is not a convenient forum for any such action or proceeding. SECTION 7.10 Waiver of Jury Trial. THE GUARANTORS HEREBY WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THE MASTER LEASE OR ANY TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE GUARANTORS ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE BENEFICIARIES TO ENTER INTO A BUSINESS - 16 - RELATIONSHIP, THAT THE BENEFICIARIES HAVE ALREADY RELIED ON THE WAIVER IN ENTERING INTO THE MASTER LEASE, AND THAT THE BENEFICIARIES WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE GUARANTORS FURTHER WARRANT AND REPRESENT THAT THEY HAVE REVIEWED THIS WAIVER WITH LEGAL COUNSEL, AND THAT THEY KNOWINGLY AND VOLUNTARILY WAIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTEE OR THE MASTER LEASE. IN THE EVENT OF LITIGATION, THIS WAIVER MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. SECTION 7.11 Waiver of Immunity. The Guarantors hereby irrevocably waive, to the fullest extent permitted by applicable United States federal and state law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which they might otherwise be entitled in any action or proceeding relating in any way to this Guarantee in the courts specified in Section 7.O8 and the Guarantors hereby waive any right they right otherwise have to raise or claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding. SECTION 7.12 GOVERNING LAW. THIS GUARANTEE SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCLUDING ANY CONFLICT-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE INTERNAL LAWS OF ANY OTHER JURISDICTION). SECTION 7.13 Subordination. The Guarantors hereby acknowledge and agree that any rights of the Guarantors hereunder, whether by way of subrogation or otherwise, may not be enforced until all amounts due from the Master Lessee under the Master Lease shall have been paid in full to the parties entitled thereto. The Guarantors agree (a) not to take any action to hinder or delay the exercise of any right or remedy granted to any Beneficiary under the Master Lease or any law applicable thereto and (b) not to exercise or pursue any other rights, remedies, powers, privileges or benefits of any kind hereunder (whether available to Guarantors hereunder or at law or in equity) until such time as all amounts due from the Master Lessee under the Master Lease have been paid in full to the parties entitled thereto. SECTION 7.14 Survival. All warranties, representations and covenants made by the Guarantors herein or in any certificate or other instrument delivered by it or on its behalf under this Guarantee shall be considered to have been relied upon by the Beneficiaries and shall survive the execution and delivery of this Guarantee, regardless of any investigation made by the Beneficiaries on behalf of any of them. All statements in any such certificate or other instrument shall constitute warranties and representations by the Guarantors hereunder. - 17 - SECTION 7.15 Currency. All amounts payable hereunder shall be paid in lawful currency of the United States of America. SECTION 7.16 Counterparts. This Guarantee may be executed simultaneously in two or more counterparts each of which shall be deemed an original, and it shall not be necessary in making proof of this Guarantee to produce or account for more than one such counterpart. [Signature Page Follows] - 18 - IN WITNESS WHEREOF, each Guarantor has caused this Guarantee to be executed as of the day and year first set forth above. AFG INVESTMENT TRUST A AFG INVESTMENT TRUST B AFG INVESTMENT TRUST C AFG INVESTMENT TRUST D By: AFG ASIT CORPORATION its Managing Trustee By: /s/ [ILLEGIBLE] ----------------------------- Its V.P. EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 GUARANTY FEE AGREEMENT This Agreement made and entered into as of the 8th day of March, 2000, by and between Echelon Commercial LLC, a Delaware limited liability company (the "Lessee") and each of AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust D, each a Delaware business trust (each, a "Guarantor" and together, the "Guarantors"). WITNESSETH: WHEREAS, the Lessee has entered into a Lease Agreement dated as of March 8, 2000 (the "Lease") between Heller Affordable Housing of Florida, Inc., a Florida corporation, as lessor (the "Lessor"), and Lessee, as lessee; WHEREAS, the Lessor has requested that the Guarantors enter into that certain Guarantee (the "Guarantee") dated of even date with the Lease, whereby the Guarantors have agreed to jointly and severally guaranty the obligations of the Lessee under the Lease; WHEREAS, the Guarantors are willing to enter into the Guarantee on the terms and conditions set forth therein subject to the Lessee's execution and delivery of this Agreement. NOW THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Guarantee. 2. Guaranty Fee. In consideration of the execution and delivery of the Guarantee, the Lessee hereby agrees to pay the Guarantors the following amounts (the "Guarantee Fee"): (i) the Lessee shall pay to the Guarantors on the date hereof a nonrefundable upfront fee equal to $500,000, which fee shall constitute an offset in such amount against the Quarterly Fee payable to the Guarantors as set forth below; (ii) the Lessee shall pay to the Guarantors on the Guaranty Payment Date a fee (the "Quarterly Fee") in an amount equal to four percent (4%) per annum multiplied by the average of the amounts deemed outstanding under Section 2.10 of the Guaranty during each calendar quarter, which amount shall accrue and compound quarterly at a per annum rate equal to 7.5% until paid by the Lessee. As used herein, the "Guaranty Payment Date" shall mean the Expiration Date (as defined in the Lease), provided, however, that no payment shall be made hereunder until such time as Echelon Development LLC, the parent of the Lessee (the "Parent"), shall have satisfied its obligations under is operating agreement to make all tax distributions to its members or the manager of the Parent shall determine that it shall have properly set aside any such amount. 3. Minimum Fee. The Lessee further agrees that, notwithstanding the foregoing, the Guarantors shall be paid a minimum Guarantee Fee in an amount equal to $1,000,000. 4. Allocation. The Lessee hereby agrees to allocate the Guaranty Fee between and among the Guarantors in the following manner (unless and until all of the Guarantors shall notify the Lessee to the contrary): AFG Investment Trust A: 7.00% AFG Investment Trust B: 11.58% AFG Investment Trust C: 35.08% AFG Investment Trust D: 46.34% 5. Amendments. This Agreement may be amended only by the written agreement of an authorized representative of each of the parties hereto. 6. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts, without regard to its conflict of laws provisions, and shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first written above. ECHELON COMMERCIAL LLC By: Echelon Development LLC, Manager By: Equis/Echelon Development Management Corp., Manager /s/ Michael J. Butterfield ----------------------------------- Print: Michael J. Butterfield Title: Vice President, Finance AFG INVESTMENT TRUST A AFG INVESTMENT TRUST B AFG INVESTMENT TRUST C AFG INVESTMENT TRUST D By: AFG ASIT Corporation, their Managing Trustee /s/ Gail D. Ofgant ----------------------------------- Print: Gail D. Ofgant Title: Vice President 2 EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 GUARANTORS' CONTRIBUTION AGREEMENT This Agreement is made as of March 8, 2000, by and among AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust D, each a Delaware business trust (each, a "Guarantor" and together, the "Guarantors"). RECITALS WHEREAS, each of the Guarantors is a party to that certain Guarantee dated as of March 8, 2000 (the "Guarantee") in favor of Heller Affordable Housing of Florida, Inc., as lessor under that certain Lease Agreement dated as of March 8, 2000 with Echelon Commercial LLC, a Delaware limited liability company; WHEREAS, each Guarantor is jointly and severally liable under the Guarantee; and WHEREAS, each Guarantor desires to limit its liability under the Guarantee to an amount reflecting its relative net worth vis a vis the other Guarantors. NOW THEREFORE, the parties hereto hereby agree as follows: 1. Contribution. The Guarantors agree that, as among themselves in their capacity as guarantors, the ultimate responsibility for repayment of the Obligations (as defined in the Guarantee) shall be apportioned among the respective Guarantors pro rata in accordance with their respective net worth as of December 31, 1999, which percentage allocation is set forth on Schedule A hereto. In the event that any Guarantor, in its capacity as a guarantor, pays an amount with respect to the Obligations in excess of its proportionate share as set forth on such schedule, each other Guarantor shall make a contribution payment to such Guarantor in an amount such that the aggregate amount paid by each Guarantor reflects its proportionate share of the Obligations. In the event of any default by any Guarantor under this Section 1, each other Guarantor will bear its proportionate share of the defaulting Guarantors obligation under this Section 1. 2. Miscellaneous. This Agreement may be amended only by the written agreement of an authorized representative of each of the parties hereto. This Agreement shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts, without regard to its conflict of laws provisions, and shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first above written. AFG INVESTMENT TRUST A AFG INVESTMENT TRUST B AFG INVESTMENT TRUST C AFG INVESTMENT TRUST D By: AFG ASIT Corporation, their Managing Trustee /s/ Gail D. Ofgant ----------------------------------- Print: Gail D. Ofgant Title: Senior Vice President 2 SCHEDULE A Allocation ---------- AFG Investment Trust A 7.00% AFG Investment Trust B 11.58% AFG Investment Trust C 35.08% AFG Investment Trust D 46.34% 3 EX-13 5 EXHIBIT 13 Exhibit 13 AFG INVESTMENT TRUST AFG Investment Trust D Annual Report to the Participants, December 31, 1999 AFG Investment Trust D 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, 1999 and 1998 9 Statement of Operations for the years ended December 31, 1999, 1998 and 1997 10 Statement of Changes in Participants' Capital for the years ended December 31, 1999, 1998 and 1997 11 Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 12 Notes to the Financial Statements 13-22 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed 23 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings 24 Schedule of Costs Reimbursed to the Managing Trustee and its Affiliates as Required by Section 10.4 of the Second Amended and Restated Declaration of Trust 25 Schedule of Reimbursable Operating Expenses due to Third Parties 26 Schedule of Equipment 27-29 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 each of the five years in the period ended December 31, 1999:
Summary of Operations 1999 1998 1997 1996 1995 - ----------------------------- -------------- -------------- -------------- -------------- ------------ Lease revenue $ 20,894,408 $ 18,701,765 $ 19,427,577 $ 27,093,125 $ 17,068,315 Net income $ 5,277,987 $ 3,875,037 $ 2,017,457 $ 630,535 $ 3,629,331 Per Beneficiary Interest: Net income Class A Interests $ 1.07 $ 0.99 $ 0.68 $ 0.27 $ 1.59 Class B Interests $ 0.60 $ 0.29 $ -- $ -- $ -- Cash distributions Class A Interests $ 3.78 $ 1.64 $ 3.11 $ 1.39 $ 2.10 Class B Interests $ 3.29 $ 2.33 $ 0.30 $ -- $ -- Financial Position - ----------------------------- Total assets $ 69,336,372 $ 78,517,976 $ 93,302,725 $ 75,192,549 $ 87,519,870 Total long-term obligations $ 25,790,190 $ 35,030,985 $ 43,102,250 $ 32,827,977 $ 42,655,805 Participants' capital $ 27,950,594 $ 41,937,651 $ 49,063,215 $ 40,884,836 $ 43,444,819
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31, 1999 compared to the year ended December 31, 1998 and the year ended December 31, 1998 compared to the year ended December 31, 1997 AFG Investment Trust D (the "Trust") commenced operations in 1992 and is scheduled to be dissolved by December 31, 2006. The Trust was a Nominal Defendant in a Class Action Lawsuit that was settled, with respect to the Trust and certain affiliates, in 1999. See Note 9 to the accompanying financial statements. Certain statements in this annual report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the collection of the Trust's contracted rents, the realization of residual proceeds for the Trust's equipment, the performance of the Trust's non-equipment investments, and future economic conditions. Year 2000 Issue The Trust uses information systems provided by EFG and has no information systems of its own. EFG completed all Year 2000 readiness work prior to December 31, 1999 and did not experience any significant problems. Additionally, EFG is not aware of any outside customer or vendor that experienced a Year 2000 issue that would have a material effect on the Trust's results of operations, liquidity, or financial position. However, EFG has no means of ensuring that all customers, vendors and third-party servicers have conformed to Year 2000 standards. The effect of this risk to the Trust is not determinable. Results of Operations For the year ended December 31, 1999, the Trust recognized lease revenue of $20,894,408 compared to $18,701,765 and $19,427,577 for the years ended December 31, 1998 and 1997, respectively. Lease revenue for the year ended December 31, 1999 includes the receipt of $6,354,183 of lease termination rents received in connection with the sale of a vessel (see discussion below). The decrease in lease revenue from 1997 to 1998 was attributable principally to lease term expirations and the sale of equipment, including the Trust's sale of its interest in certain railroad equipment in 1997 (see discussions below). The level of lease revenue to be recognized by the Trust in the future may be impacted by future reinvestment; however, the extent of such impact cannot be determined at this time. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income in 1999 was $662,508, compared to $779,649 and $725,303 in 1998 and 1997, respectively. Generally, interest income is generated from the temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income also includes interest earned on proceeds from the issuance of the Trust's Class B Interests in 1997. Future interest income will fluctuate as a result of changing interest rates, the collection of lease revenue and the proceeds from equipment sales, among other factors. In addition, the Trust distributed $13,200,000 in January 2000, that will result in a reduction of cash available for investment in the future. 3 The Trust received $261,116 in 1999 as a breakage fee from a third-party seller in connection with a transaction for new investments that was canceled by the seller in the first quarter of 1999. This amount is reflected as Other Income on the accompanying Statement of Operations for the year ended December 31, 1999. During the year ended December 31, 1999, the Trust sold equipment having a net book value of $8,676,173 to existing lessees and third parties. These sales resulted in a net loss, for financial statement purposes, of $4,444,557 compared to a net loss of $412,404 in 1998 on equipment having a net book value of $1,820,166. The 1999 equipment sales included the sale of a vessel with an original cost and net book value of $13,875,360 and $7,256,443, respectively, which the Trust sold to the existing lessee in December 1999. In connection with this sale, the Trust realized sale proceeds of $1,277,143, which resulted in a net loss, for financial statement purposes, of $5,979,300. The vessel was sold prior to the expiration of the related lease term. The Trust also realized lease termination rents equal to $6,354,183 relating to this vessel. During the year ended December 31, 1997, the Trust sold equipment having a net book value of $6,431,659 to existing lessees and third parties resulting in a net loss, for financial statement purposes, of $1,038,989. These equipment sales included certain railroad equipment with an original cost and net book value of $6,513,773 and $5,488,323, respectively, which the Trust sold to a third party in September 1997. In connection with this sale, the Trust realized sale proceeds of $2,000,000 and the purchaser assumed related debt and interest of $2,624,639 and $13,998, respectively, which resulted in a net loss, for financial statement purposes, of $849,685. This equipment was sold prior to the expiration of the related lease term. 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 $7,399,744, $10,234,690 and $12,486,537 for the years ended December 31, 1999, 1998 and 1997, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Interest expense was $2,846,727 or 13.6% of lease revenue in 1999, $3,449,304 or 18.4% of lease revenue in 1998 and $3,041,481 or 15.7% of lease revenue in 1997. The increase in interest expense from 1997 to 1998 is the result of indebtedness obtained in connection with reinvestment equipment. Interest expense in the near-term may increase due to the financing of any newly acquired assets. Management fees were $1,074,800, $886,096 and $895,643 during the years ended December 31, 1999, 1998 and 1997, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Management fees also include a 1% management fee on non-equipment investments, excluding cash. 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. Operating expenses were $774,217, $623,883 and $672,773 during the years ended December 31, 1999, 1998 and 1997, respectively. Operating expenses were higher in 1999 principally as a result of legal fees incurred of approximately $238,000 related to the Trust's investments in Kettle Valley and EFG/Kirkwood. Operating expenses in 1998 include approximately $290,000 of legal fees incurred or accrued in 1998 related to the Class Action Lawsuit described in Note 9 to the financial statements. Additionally, operating expenses in 1997 and 1998 include professional service costs incurred in connection a solicitation statement filed in 1998. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a trust. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. Liquidity and Capital Resources and Discussion of Cash Flows The Trust by its nature is a limited life entity. As an equipment leasing program, the Trust's principal operating activities have been derived 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 $17,013,649 for the year ended December 31, 1999, adjusted for sale proceeds of $1,277,143 and early termination rents of $1,810,695 received in connection with the sale of a vessel. The balance of the early termination rents received in connection with the sale of the vessel, $4,543,488, was paid to the lender to service remaining debt and interest. Operating activities generated net cash inflows of $17,885,461 during the year ended December 31, 1998. Such cash inflows reflect cash previously held in escrow of $3,017,318. For the year ended December 31, 1997, operating activities generated net cash inflows of $12,983,604, adjusted to reflect (i) equipment sale proceeds of $1,618,169 received in connection with the sale of a vessel and (ii) debt proceeds of $1,980,073 from leveraging certain rail equipment, both of which amounts were due from EFG at December 31, 1996 and reflected as cash inflows on the accompanying 1997 Statement of Cash Flows. Future renewal, re-lease and equipment sale activities will cause a decline in the Trust's primary-term lease revenue and corresponding sources of operating cash. Expenses associated with rental activities, such as management fees, also will decline as the Trust experiences a higher frequency of remarketing events. The Trust's equipment is leased by a number of creditworthy, investment-grade companies and, to date, the Trust has not experienced any material collection problems and has not considered it necessary to provide an allowance for doubtful accounts. Notwithstanding a positive collection history, there is no assurance that all future contracted rents will be collected or that the credit quality of the Trust's lessees will be maintained. Collection risk could increase in the future, particularly as the Trust remarkets its equipment and enters re-lease agreements with different lessees. The Managing Trustee will continue to evaluate and monitor the Trust's experience in collecting accounts receivable to determine whether a future allowance for doubtful accounts may become appropriate. Cash expended for asset acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. The Trust expended $179,510 and $30,271,673 to acquire equipment during the years ended December 31, 1998 and 1997, respectively. All of the equipment acquisitions were purchased pursuant to the reinvestment provisions of the Trust Agreement. Acquisitions during the year ended December 31, 1997 include the Trusts 49.4% proportionate ownership interest in a Boeing 767-300 ER aircraft leased to Scandinavian Airlines System (the "SAS Aircraft"). The SAS Aircraft was purchased in August 1997 using cash of $5,124,103 and indebtedness of $25,042,248. During 1999, the Trust expended $3,064,700 to acquire its investment in Kettle Valley. In connection with the investment, the Trust was paid $1,488,403 for a residual interest in the SAS Aircraft (see Note 4). Also during 1999, the Trust expended $2,030,100 to acquire its investment in EFG/Kirkwood (see Note 5) and $412,529 to purchase marketable securities. During 1999, 1998 and 1997, the Trust realized net cash proceeds from asset disposals of $4,231,616, $1,407,762 and $2,754,033, respectively. Sale proceeds in 1997 include $2,000,000 from the rail transaction noted previously. Future inflows of cash from asset disposal transactions 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. In addition, the 5 Trust's investment in an affiliated limited partnership is reported under investing activities during the years ended December 31, 1999 and 1998 (see Note 6 to the accompanying financial statements). 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. During 1999, the Trust leveraged $1,300,672 of its investment in Kettle Valley that will be amortized over 34 months (see Note 4). Cash inflows of $25,042,248 in 1997 resulted from leveraging a portion of the Trust's interest in the SAS Aircraft discussed above. Generally, each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. The increase in cash used to repay debt during 1999 resulted from the repayment of $4,324,968 of principal in connection with the sale of the vessel discussed above. Future debt obligations may increase due to the financing of other newly acquired assets. Over time, the amount of cash used to repay debt obligations will decline. However, the Trust has balloon payment obligations of $19,980,682, $1,400,074 and $282,421 at the expiration of the lease terms related to the SAS Aircraft, certain rail equipment and an MD-87 jet aircraft leased by Reno Air Inc., respectively. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable debt and equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1999, the Trust recorded an unrealized gain on available-for-sale securities of $20,167. At December 31, 1999, the Trust was due aggregate future minimum lease payments of $10,559,908 from contractual lease agreements (see Note 2 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $25,790,190 (see Note 7 to the financial statements). Additional cash inflows will be realized from future remarketing activities, such as lease renewals and equipment sales, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of equipment sales is often dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as the Trust matures and a greater level of its equipment assets becomes available for remarketing, the cash flows of the Trust will become less predictable. On July 18, 1997, the Trust issued 3,142,083 Class B Interests at $5.00 per interest, thereby generating $15,710,415 in aggregate Class B capital contributions. Class A Beneficiaries purchased 1,400 Class B Interests, generating $7,000 of such aggregate capital contributions, and the then Special Beneficiary, EFG, purchased 3,140,683 Class B Interests, generating $15,703,415 of such aggregate capital contributions. The Trust incurred offering costs in the amount of $157,104 and professional service costs of $159,066 in connection with this offering. Subsequently, EFG transferred its Class B Interests to a special-purpose company, Equis II Corporation, a Delaware corporation. EFG also transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis II Corporation. As a result, Equis II Corporation has voting control of the Trust through its ownership of the majority of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. Control of the Managing Trustee did not change as a result of the foregoing transactions, as Equis II Corporation was controlled by EFG's President and Chief Executive Officer, Gary D. Engle. During the fourth quarter of 1999, an affiliate of EFG, Semele Group Inc. acquired the Special Beneficiary Interests from EFG and an economic interest in Equis II Corporation. Gary D. Engle is President and CEO of Semele Group Inc. Mr. Engle continues to have voting control with respect to the Class B Interests owned by Equis II Corporation. As described in the Prospectus for the offering of the Class B Interests, the Managing Trustee used a portion of the net cash proceeds realized from the offering of the Class B Interests to pay a one-time special cash distribution of approximately $1.47 per Class A Interest to the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid this special cash distribution, aggregating $3,075,818, to the Class A Beneficiaries on August 15, 1997. On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997, the Trust used $1,606,322 of the net proceeds realized from the issuance of the Class B Interests to purchase 153,275 of the Class A Interests tendered as a result of the offer. On April 28, 1998, the Trust purchased 1,000 additional Class A Interests at a cost of $9,000. On July 6 6, 1998, the Trust used $5,601,790 of the Class B offering proceeds to pay a capital distribution to the Class B Beneficiaries. In July 1999, the Trust distributed $1,572,405, including legal fees of $84,520 paid to Plaintiffs' counsel, as a special cash distribution in connection with the settlement of the Class Action Lawsuit described in Note 9 to the financial statements ($0.77 per unit, net of legal fees). In addition, the parent company of the Managing Trustee, Equis II Corporation, agreed to commit $3,537,910 of its Class B Capital Contributions (paid in connection with its purchase of Class B Interests in July 1997) to the Trust for the Trust's investment purposes. During the past year, the Managing Trustee has evaluated and pursued a number of potential new investments, several of which the Managing Trustee concluded had market returns that it believed were less than adequate given the potential risks. Most transactions have involved the equipment leasing, business finance and real estate development industries. Although the Managing Trustee intends to continue to evaluate additional new investments, it anticipates that the Trust will be able to fund these new investments with cash on hand or other sources, such as the proceeds from future asset sales or refinancings and new indebtedness. As a result, the Trust declared a special cash distribution to the Trust Beneficiaries totaling $13,200,000 which was paid on January 19, 2000. After the special distribution on January 19, 2000, the Trust will adopt a new distribution policy and suspend the payment of regular monthly cash distributions. Looking forward, the Managing Trustee presently does not expect to reinstate cash distributions until expiration of the Trust's reinvestment period in December 2002; however, the Managing Trustee periodically will review and consider other one-time distributions. In addition to maintaining sale proceeds for reinvestment, the Managing Trustee expects that the Trust will retain cash from operations to pay down debt and for the continued maintenance of the Trust's assets. The Managing Trustee believes that this change in policy is in the best interests of the Trust over the long term and will have the added benefit of reducing the Trust's distribution expenses. Historically, cash distributions to the Managing Trustee, the Special Beneficiary and the Beneficiaries have been 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, 1999, the Trust declared total cash distributions of $19,285,211, including the special distribution described above. Of the total distributions, the Beneficiaries were allocated $17,638,958 ($7,311,296 to Class A Beneficiaries and $10,327,662 to Class B Beneficiaries); the Special Beneficiary was allocated $1,468,280, and the Managing Trustee was allocated $177,973. 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, the residual value realized for each asset at its disposal date, and the performance of the Trust's non-equipment investments. 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 asset portfolio. In the future, the nature of the Trust's operations and principal cash flows gradually will shift from rental receipts to equipment sale proceeds as the Trust matures and change as a result of potential new investments not consisting of equipment acquisitions. As this occurs, the Trust's cash flows resulting from equipment investments may become more volatile in that certain of the Trust's equipment leases will be renewed and certain of its assets will be sold. In some cases, the Trust may be required to expend funds to refurbish or otherwise improve the equipment being remarketed in order to make it more desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to monitor and manage these events in order to maximize the residual value of the Trust's equipment and will consider these factors, in addition to new investment activities, the collection of contractual rents, the retirement of scheduled indebtedness, and the Trust's future working capital requirements, in establishing the amount and timing of future cash distributions. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance which may exist in the Managing Trustee's tax capital account. At December 31, 1999, the Managing Trustee had a negative tax capital account balance of $309,285. No such requirement exists with respect to the Special Beneficiary. 7 REPORT OF INDEPENDENT AUDITORS To the Participants of AFG Investment Trust D: We have audited the accompanying statements of financial position of AFG Investment Trust D as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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 D at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 30, 2000 8 AFG Investment Trust D STATEMENT OF FINANCIAL POSITION December 31, 1999 and 1998
ASSETS 1999 1998 - ------ ----------------- ----------------- Cash and cash equivalents $ 11,335,028 $ 9,100,016 Restricted cash -- 5,110,315 Marketable securities 434,176 -- Rents receivable 1,790,533 2,322,608 Accounts receivable - affiliate 3,528,141 448,039 Interest receivable 14,722 -- Loan receivable - Kettle Valley 75,220 -- Investment - affiliate 668,813 699,626 Investment - Kettle Valley 4,365,372 -- Investment - EFG/Kirkwood 2,030,100 -- Other assets 332,812 -- Equipment at cost, net of accumulated depreciation of $24,612,634 and $45,307,297 at December 31, 1999 and 1998, respectively 44,761,455 60,837,372 ----------------- ----------------- Total assets $ 69,336,372 $ 78,517,976 ================= ================= LIABILITIES AND PARTICIPANTS' CAPITAL - ------------------------------------- Notes payable $ 25,790,190 $ 35,030,985 Accrued interest 129,587 332,001 Accrued liabilities 86,370 321,500 Accrued liabilities - affiliate 384,990 69,248 Deferred rental income 306,238 408,652 Other liabilities 1,488,403 -- Cash distributions payable to participants 13,200,000 417,939 ----------------- ----------------- Total liabilities 41,385,778 36,580,325 ----------------- ----------------- Participants' capital (deficit): Managing Trustee (23,853) 12,140 Special Beneficiary (196,792) 100,157 Class A Beneficiary Interests (1,934,755; initial purchase price of $25 each) 30,012,322 35,230,782 Class B Beneficiary Interests (3,142,083 Interests; initial purchase price of $5 each) (225,761) 8,209,894 Treasury Interests (154,275 Class A interests at Cost) (1,615,322) (1,615,322) ----------------- ----------------- Total participants' capital 27,950,594 41,937,651 ----------------- ----------------- Total liabilities and participants' capital $ 69,336,372 $ 78,517,976 ================= =================
The accompanying notes are an integral part of these financial statements. 9 AFG Investment Trust D STATEMENT OF OPERATIONS for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------------ ------------------ ------------------ Income: Lease revenue $ 20,894,408 $ 18,701,765 $ 19,427,577 Interest income 662,508 779,649 725,303 Other income 261,116 -- -- Loss on sale of equipment (4,444,557) (412,404) (1,038,989) ------------------ ------------------ ------------------ Total income 17,373,475 19,069,010 19,113,891 ------------------ ------------------ ------------------ Expenses: Depreciation and amortization 7,399,744 10,234,690 12,486,537 Interest expense 2,846,727 3,449,304 3,041,481 Equipment management fees - affiliates 1,074,800 886,096 895,643 Operating expenses - affiliate 774,217 623,883 672,773 ------------------ ------------------ ------------------ Total expenses 12,095,488 15,193,973 17,096,434 ------------------ ------------------ ------------------ Net income $ 5,277,987 $ 3,875,037 $ 2,017,457 ================== ================== ================== Net income per Class A Beneficiary Interest $ 1.07 $ 0.99 $ 0.68 ================== ================== ================== per Class B Beneficiary Interest $ 0.60 $ 0.29 $ -- ================== ================== ================== Cash distributions declared per Class A Beneficiary Interest $ 3.78 $ 1.64 $ 3.11 ================== ================== ================== per Class B Beneficiary Interest $ 3.29 $ 2.33 $ 0.30 ================== ================== ==================
The accompanying notes are an integral part of these financial statements. 10 AFG Investment Trust D STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL for the years ended December 31, 1999, 1998 and 1997
Managing Special Class A Beneficiaries Trustee Beneficiary ------------------------------- Amount Amount Interests Amount ------------- ------------- ------------- --------------- Balance at December 31, 1996 $ (62,865) $ (525,884) 2,089,030 $ 41,473,585 Class B capital contribution -- -- -- -- Less: Offering costs -- -- -- -- Net income - 1997 64,415 535,171 -- 1,417,871 Cash distributions declared (47,103) (388,595) -- (6,413,961) Acquisition of treasury interests, at cost -- -- (153,275) -- ------------- ------------- ------------- --------------- Balance at December 31, 1997 (45,553) (379,308) 1,935,755 36,477,495 Net income - 1998 111,591 924,125 -- 1,922,826 Cash distributions declared (53,898) (444,660) -- (3,169,539) Acquisition of treasury interests, at cost -- -- (1,000) -- ------------- ------------- ------------- --------------- Balance at December 31, 1998 12,140 100,157 1,934,755 35,230,782 Net income - 1999 141,778 1,169,668 -- 2,077,033 Unrealized gain on marketable securities 202 1,663 -- 15,803 ------------- ------------- ------------- --------------- Comprehensive income 141,980 1,171,331 -- 2,092,836 Cash distributions declared (177,973) (1,468,280) -- (7,311,296) ------------- ------------- ------------- --------------- Balance at December 31, 1999 $ (23,853) $ (196,792) 1,934,755 $ 30,012,322 ============= ============= ============= =============== Class B Beneficiaries ------------------------------- Treasury Interests Amount Interests Total -------------- --------------- -------------- --------------- Balance at December 31, 1996 -- $ -- $ -- $ 40,884,836 Class B capital contribution 3,142,083 15,710,415 -- 15,710,415 Less: Offering costs -- (157,104) -- (157,104) Net income - 1997 -- -- -- 2,017,457 Cash distributions declared -- (936,408) -- (7,786,067) Acquisition of treasury interests, at cost -- -- (1,606,322) (1,606,322) -------------- --------------- -------------- --------------- Balance at December 31, 1997 3,142,083 14,616,903 (1,606,322) 49,063,215 Net income - 1998 -- 916,495 -- 3,875,037 Cash distributions declared -- (7,323,504) -- (10,991,601) Acquisition of treasury interests, at cost -- -- (9,000) (9,000) -------------- --------------- -------------- --------------- Balance at December 31, 1998 3,142,083 8,209,894 (1,615,322) 41,937,651 Net income - 1999 -- 1,889,508 -- 5,277,987 Unrealized gain on marketable securities -- 2,499 -- 20,167 -------------- --------------- -------------- --------------- Comprehensive income -- 1,892,007 -- 5,298,154 Cash distributions declared -- (10,327,662) -- (19,285,211) -------------- --------------- -------------- --------------- Balance at December 31, 1999 3,142,083 $ (225,761) $ (1,615,322) $ 27,950,594 ============== =============== ============== ===============
The accompanying notes are an integral part of these financial statements. 11 AFG Investment Trust D STATEMENT OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---------------- ---------------- ---------------- Cash flows from (used in) operating activities: Net income $ 5,277,987 $ 3,875,037 $ 2,017,457 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 7,399,744 10,234,690 12,486,537 Accretion of bond discount (1,480) -- -- Loss on sale of equipment 4,444,557 412,404 1,038,989 Changes in assets and liabilities: Decrease (increase) in: Cash held in escrow -- 3,017,318 (3,017,318) Rents receivable 532,075 (188,735) 1,213,433 Accounts receivable - affiliate (3,080,102) 60,170 3,337,446 Interest receivable (14,722) -- -- Loan receivable - Kettle Valley (75,220) -- -- Other assets (332,812) -- -- Increase (decrease) in: Accrued interest (202,414) (160,619) (220,569) Accrued liabilities (235,130) 309,950 (11,700) Accrued liabilities - affiliate 315,742 (44,075) (100,924) Deferred rental income (102,414) 369,321 (161,505) ---------------- ---------------- ---------------- Net cash from operating activities 13,925,811 17,885,461 16,581,846 ---------------- ---------------- ---------------- Cash flows from (used in) investing activities: Purchase of marketable securities (412,529) -- -- Purchase of equipment -- (179,510) (30,271,673) Proceeds from equipment sales 4,231,616 1,407,762 2,754,033 Investment - affiliate 30,813 (699,626) -- Investment - Kettle Valley (3,064,700) -- -- Investment - EFG/Kirkwood (2,030,100) -- -- Other liabilities 1,488,403 -- -- ---------------- ---------------- ---------------- Net cash from (used in) investing activities 243,503 528,626 (27,517,640) ---------------- ---------------- ---------------- Cash flows from (used in) financing activities: Proceeds from capital contributions -- -- 15,710,415 Payment of organization and offering costs -- -- (157,104) Restricted cash 5,110,315 5,601,790 (10,712,105) Purchase of treasury interests -- (9,000) (1,606,322) Proceeds from notes payable -- -- 25,042,248 Principal payments - notes payable (10,541,467) (8,071,265) (12,143,336) Distributions paid (6,503,150) (11,054,098) (7,619,847) ---------------- ---------------- ---------------- Net cash from (used in) financing activities (11,934,302) (13,532,573) 8,513,949 ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 2,235,012 4,881,514 (2,421,845) Cash and cash equivalents at beginning of year 9,100,016 4,218,502 6,640,347 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 11,335,028 $ 9,100,016 $ 4,218,502 ================ ================ ================ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 3,049,141 $ 3,609,923 $ 3,262,050 ================ ================ ================
Supplemental schedule of non-cash investing and financing activities: See Note 4 to the financial statements. During 1997, the Trust sold equipment to third parties which assumed related debt and interest of $2,624,639 and $13,998, respectively. The accompanying notes are an integral part of these financial statements. 12 AFG Investment Trust D Notes to the Financial Statements December 31, 1999 NOTE 1 - ORGANIZATION AND TRUST MATTERS AFG Investment Trust D (the "Trust") was organized as a Delaware business trust in accordance with the Delaware Business Trust Act on August 31, 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 known as 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 an aggregate of 2,089,030 Beneficiary Interests (hereinafter referred to as Class A Interests) at a subscription price of $25.00 each ($52,225,750 in total) to 2,635 investors through 17 serial closings commencing October 26, 1993 and ending February 6, 1995. On July 18, 1997, the Trust issued 3,142,083 Class B Interests at $5.00 each ($15,710,415 in total), of which (i) 3,140,683 interests are held by Equis II Corporation, an affiliate of EFG, and (ii) 1,400 interests are held by 4 other Class A investors. The Trust repurchased 153,275 Class A Interests on October 10, 1997 using proceeds from the issuance of Class B Interests. On April 28, 1998, the Trust repurchased 1,000 additional Class A Interests. Accordingly, there are 1,934,755 Class A Interests currently outstanding. The Class A and Class B Interest holders are collectively referred to as the "Beneficiaries". The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation, and one Special Beneficiary, Semele Group Inc. ("Semele"). Semele purchased the Special Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues to act as Advisor to the Trust and provides services in connection with the acquisition and remarketing of the Trust's assets. The Managing Trustee is responsible for the general management and business affairs of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation and an affiliate of EFG. Class A Interests and Class B Interests basically have identical voting rights. Gary D. Engle, has voting control of the Class B Interests owned by Equis II Corporation. The Managing Trustee and the Special Beneficiary are not required to make any other capital contributions except as may be required under the Second Amended and Restated Declaration of Trust, as amended (the "Trust Agreement"). Significant operations commenced coincident with the Trust's initial purchase of equipment and the associated lease commitments on October 26, 1993. Pursuant to the Trust Agreement, each distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings of the Trust is made 90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee. Under the terms of the Management 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 (see Note 6). 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, Chief Executive Officer and sole Director. 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. 13 AFG Investment Trust D Notes to the Financial Statements (Continued) 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. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents and Marketable Securities The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Marketable securities consist of equity securities and debt securities that are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of participants' capital. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income on the accompanying Statement of Operations. The Trust recorded an unrealized gain on available-for-sale securities of $20,167 during the year ended December 31, 1999 that is included as a separate component of participants' capital. At December 31, 1999, total debt securities had an amortized cost of $285,480 and a fair value of $289,000 and total equity securities had a cost of $128,529 and a fair value of $145,176. During the year ended December 31, 1999, total comprehensive income amounted to $5,298,154. Revenue Recognition Rents are payable to the Trust monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Trust may enter primary-term, renewal or re-lease agreements which expire beyond the Trust's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as the Managing Trustee and the Advisor would seek to sell the then remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. Future minimum rents of $10,559,908 are due as follows: For the year ending December 31, 2000 $ 7,501,715 2001 1,713,287 2002 1,342,730 2003 2,176 -------------- Total $ 10,559,908 ============= Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------------------ ------------------ ------------------ Scandinavian Airlines System $ 3,543,768 $ 4,054,613 $ -- Emery Worldwide $ 2,409,224 $ 2,409,224 $ 2,409,224 KGJS/Gearbulk Holding Limited $ 8,664,792 $ 2,297,772 $ -- Chantel Shipping Corporation $ -- $ -- $ 2,310,614
14 AFG Investment Trust D Notes to the Financial Statements (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 means the actual cost paid by the Trust to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. 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, 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. To the extent that such adjustments are recorded, they 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. Organization costs were 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 and management fees are reported as Accrued Liabilities - Affiliate (See Note 6). 15 AFG Investment Trust D Notes to the Financial Statements (Continued) Allocation of Net Income or Loss Net income is allocated quarterly first, to eliminate any Participant's negative capital account balance and second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively to the Class A and Class B Beneficiaries. The latter is allocated proportionately between the Class A and Class B Beneficiaries based upon the ratio of cash distributions declared and allocated to the Class A and Class B Beneficiaries during the period (excluding $1,487,885 Class A special cash distributions paid in 1999 and $5,601,790 Class B capital distributions paid in 1998). Net losses are allocated quarterly first, to eliminate any positive capital account balance of the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second, to eliminate any positive capital account balances of the Class A Beneficiaries; and third, any remainder to the Managing Trustee. Prior to adoption of the current Trust Agreement on July 15, 1997, the Trust allocated net income or loss to the Participants for financial reporting purposes according to their respective beneficial interests in the Trust (1% to the Managing Trustee, 8.25% to the Special Beneficiary, and 90.75% to the Class A Beneficiaries). The allocation of net income or loss pursuant to the Trust Agreement differs from the foregoing and is based upon government rules and regulations for federal income tax reporting purposes and assumes, for each income tax reporting period, the liquidation of all of the Trust's assets and the subsequent distribution of all available cash to the Participants. For income tax purposes, the Trust adjusts its allocations of income and loss to the Participants so as to cause their tax capital account balances at the end of the reporting period to be equal to the amount that would be distributed to them at such date in the event of a liquidation and dissolution of the Trust. This methodology does not consider the costs attendant to liquidation or whether the Trust intends to have future business operations. If the Trust made similar assumptions and allocations for financial reporting purposes and the Trust was liquidated at December 31, 1999 for an amount equal to its net carrying value for financial reporting purposes, the capital accounts of the Managing Trustee, Special Beneficiary, Class A Beneficiaries, and Class B Beneficiaries would have reflected ending balances of $279,506, $2,305,924, $20,422,800, and $4,942,364, respectively. See Note 8 for additional information concerning the allocation of net income or loss for income tax reporting purposes. Net Income and Cash Distributions Per Beneficiary Interest Net income and cash distributions per Class A Interest in 1999 are based on 1,934,755 Class A Interests outstanding. Net income and cash distributions per Class A Interest in 1998 are based on 1,935,755 Class A Interests outstanding during the period January 1, 1998 through April 27, 1998 and 1,934,755 Class A Interests outstanding during the period April 28, 1998 through December 31, 1998. Net income and cash distributions per Class A Interest in 1997 are based on 2,089,030 Class A Interests outstanding during the period January 1, 1997 through October 9, 1997 and 1,935,755 Class A Interests outstanding during the period October 10, 1997 through December 31, 1997. Net income and cash distributions per Class B Interest are based on 3,142,083 Class B Interests outstanding during the years ended December 31, 1999 and 1998 and the period July 18, 1997 through December 31, 1997. For each of the aforementioned periods, net income and cash distributions per Beneficiary Interest are 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. NOTE 3 - EQUIPMENT The following is a summary of equipment owned by the Trust at December 31, 1999. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1999 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated 16 AFG Investment Trust D Notes to the Financial Statements (Continued) equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
Remaining Lease Term Equipment Equipment Type (Months) at Cost Location - -------------------------------------- -------------- ----------------- -------------------------------- Aircraft 0-36 $ 45,014,136 NV/OH/Foreign Locomotives 6 10,684,643 IL/NE Materials handling 0-41 4,589,249 AR/CA/CO/GA/IN/IL/IA/MI/MN/MS/ NC/NJ/NY/OH/OR/TN/WI/WV Construction and mining 0-30 3,518,352 FL/IL/NC/NV/PA/VA/Foreign Manufacturing 0 3,154,694 CA/NJ Miscellaneous 11 1,692,068 NC Research and test 3 338,749 WI Computers and peripherals 0-7 175,870 CO/GA/IN/KY/MN/OH/PA/TX/WI Tractors and heavy duty trucks 0 149,585 NJ Motor vehicles 0 38,499 MI Retail store fixtures 0 11,712 TX Communications 0 6,532 CA ----------------- Total equipment cost 69,374,089 Accumulated depreciation (24,612,634) ----------------- Equipment, net of accumulated depreciation $ 44,761,455 =================
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, 1999, the Trust's equipment portfolio included equipment having a proportionate original cost of $35,027,855, representing approximately 50% 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 $50,980,000 and a net book value of approximately $39,033,000 at December 31, 1999 (see Note 7). 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. As equipment is sold to third parties, or otherwise disposed of, the Trust recognizes 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, 1999, the cost and net book value of equipment held for sale or re-lease was approximately $392,000 and $3,000, respectively. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. In addition, the summary above also includes equipment being leased on a month-to-month basis. 17 AFG Investment Trust D Notes to the Financial Statements (Continued) NOTE 4 - INVESTMENT IN KETTLE VALLEY On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers") formed EFG/Kettle Development LLC, a Delaware limited liability company, for the purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a real estate development in Kelowna, British Columbia called Kettle Valley. EFG/Kettle Development LLC, upon receiving the Buyers' equity investment, purchased the Interest from a special purpose company ("SPC") whose subsidiaries own a 99.9% limited partnership interest in Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were established by the seller, in part, for income tax purposes and have no business interests other than the development of Kettle Valley. KVD LP is a Canadian Partnership that owns the property, consisting of approximately 280 acres of land. The project, which is in the early stages of being marketed to homebuyers, is zoned for 1,000 residential units in addition to commercial space. The seller is an unaffiliated third-party company and has retained the remaining 50.1% ownership interest in the SPC. A newly organized Canadian affiliate of EFG replaced the original general partner of KVD LP on March 1, 1999. The Trust's ownership share in EFG/Kettle Development LLC is 49.396% and had a cost of $4,322,150, which was funded with cash of $3,021,478 and a non-recourse note for $1,300,672. The note bears interest at an annualized rate of 7.5% and will be fully amortized over 34 months commencing April 1, 1999. The note is secured only by the Trust's stock interests in the SPC. Investment in Kettle Valley at December 31, 1999 represents the actual cost paid by the Trust plus a 1% acquisition fee. The Trust's investment is accounted for on the equity method. Its cost basis in this investment was approximately $642,000 greater than its equity interest in the underlying net assets at December 31, 1999. The unaudited summarized balance sheet of KVD LP at December 31, 1999 reflected total assets of approximately $17,593,000, total liabilities of approximately $1,910,000 and net equity of approximately $15,683,000. In addition, the seller purchased a residual sharing interest in a Boeing 767-300 owned by the Buyers and leased to Scandinavian Airlines System ("SAS"). The seller paid $3,013,206 to the Buyers ($1,488,403, or 49.396% to the Trust) for the residual interest, which is subordinate to certain preferred payments to be made to the Buyers in connection with the aircraft. Payment of the residual interest is due only to the extent that the Trust receives net residual proceeds from the aircraft. The residual interest is non-recourse to the Buyers and is reflected as Other Liabilities on the accompanying Statement of Financial Position at December 31, 1999. NOTE 5 - INVESTMENT IN EFG/KIRKWOOD On May 1, 1999, the Trust and three affiliated trusts (collectively the "Trusts") and another affiliate formed EFG/Kirkwood Capital LLC ("EFG/Kirkwood") for the purpose of making an investment in Kirkwood Associates Inc. ("KAI"). EFG/Kirkwood's investment consists of a common stock interest in KAI of approximately 16% as well as preferred stock and convertible debt. The Trusts purchased Class A Interests in EFG/Kirkwood and the other affiliate purchased Class B Interests in EFG/Kirkwood. Generally, the Class A Interest holders are entitled to certain preferred returns prior to distribution payments to the Class B Interest holder. KAI owns a ski resort, a local public utility, and land which is held for development. The resort is located in Kirkwood, California and is approximately 30 miles from South Lake Tahoe, Nevada. Subsequent to making its investment in KAI, EFG/Kirkwood made a 50% investment in Mountain Springs Resorts LLC, an entity formed for the purpose of acquiring an ownership interest in a Colorado ski resort that remains pending. The Trust's ownership interest in EFG/Kirkwood had a cost of $2,030,100, including a 1% acquisition fee ($20,100) paid to EFG. The Trust's investment in EFG/Kirkwood is accounted for under the equity method. NOTE 6 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1999, 1998 and 1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows: 18 AFG Investment Trust D Notes to the Financial Statements (Continued)
1999 1998 1997 ------------------ ------------------ ------------------ Acquisition fees $ 74,774 $ 5,227 $ 871,096 Equipment management fees 1,074,800 886,096 895,643 Offering costs -- -- 157,104 Administrative charges 169,978 80,184 76,419 Reimbursable operating Expenses due to third parties 604,239 543,699 596,354 ------------------ ------------------ ------------------ Total $ 1,923,791 $ 1,515,206 $ 2,596,616 ================== ================== ==================
EFG and its Affiliates were reimbursed for their out-of-pocket offering costs incurred on behalf of the Trust in an amount equal to 1% of the gross proceeds realized by the four trusts which sold Class B Interests pursuant to a Registration Statement on Form S-1 in 1997. The amount of reimbursement made by the Trust was prorated in proportion to the number of Beneficiary Interests sold in the Trust. 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 was compensated by an amount equal to .28% of Asset Base Price paid by the Trust for each asset acquired for the Trust's initial asset portfolio. For reinvestment acquisitions completed prior to February 7, 1999, EFG was compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions, which were scheduled to expire on February 6, 1999, were extended through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Acquisition fees paid to EFG in connection with reinvestment assets acquired after February 6, 1999 are equal to 1% of Asset Base Price paid by the Trust. For management services, EFG is compensated by an amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust with respect to assets acquired on or prior to February 6, 1999. For management services earned in connection with assets acquired on or after February 7, 1999, EFG is compensated by an amount equal to 2% of gross lease rental revenue received by the Trust. Both of these fees are subject to certain limitations defined in the Trust Agreement. For non-equipment investments other than cash, the Managing Trustee receives an annualized management fee of 1%. 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) 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 at actual cost. All equipment was purchased from EFG, one of its Affiliates, or directly 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 by the lessee 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, 1999, the Trust was owed $3,528,141 by EFG for such funds and the interest thereon, including $3,087,838 related to the sale of a vessel in December 1999. These funds were remitted to the Trust in January 2000. During 1998, the Trust purchased limited partnership units (the "Units") in AFG International Limited Partnership (the "Partnership"), a real estate limited partnership sponsored by EFG that owns two commercial buildings leased to an investment grade educational institution. The Trust purchased 7.25 Units at a cost of $100,000 per unit for an aggregate purchase price of $725,000. As a result of the purchase of the Units, the Trust 19 AFG Investment Trust D Notes to the Financial Statements (Continued) owns approximately 22.5% of the Partnership. The Trust accounts for its investment in the Partnership under the equity method of accounting. As such, the carrying value of the Trust's investment in the Partnership is increased or decreased by an amount equal to the Trust's share of the Partnership's income or losses, respectively, and decreased for any distributions received from the Partnership. At December 31, 1999, this investment had a carrying balance of $668,813 and is reflected as Investment - affiliate on the accompanying Statement of Financial Position. Old North Capital Limited Partnership ("ONC"), a Massachusetts limited partnership formed in 1995 and an affiliate of EFG, owns 44,084 Class A Interests or 2.28% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by a subsidiary of Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. NOTE 7 - NOTES PAYABLE Notes payable at December 31, 1999 consisted of installment notes of $25,790,190 payable to banks and institutional lenders. The notes bear interest rates ranging between 6.92% and 13.75%, except for two notes which bear a fluctuating interest rate based on LIBOR plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments, except for one note which is collateralized by certain stock interests (see Note 4). Generally, the installment notes will be fully amortized by noncancellable rents. However, the Trust has balloon payment obligations of $19,980,682, $1,400,074 and $282,421 at the expiration of the lease terms related to an aircraft leased to Scandinavian Airlines System, certain rail equipment and an MD-87 jet aircraft leased to Reno Air, Inc., respectively. The carrying amount of notes payable approximates fair value at December 31, 1999. The annual maturities of the installment notes payable are as follows: For the year ending December 31, 2000 $ 24,749,466 2001 632,662 2002 125,641 2003 282,421 ------------------ Total $ 25,790,190 ================== NOTE 8 - 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 quarterly first, to eliminate any Participant's negative capital account balance and second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively to the Class A and Class B Beneficiaries. The latter is allocated proportionately between the Class A and Class B Beneficiaries based upon the ratio of cash distributions declared and allocated to the Class A and Class B Beneficiaries during the period (excluding $1,487,885 Class A special cash distributions paid in 1999 and $5,601,790 Class B capital distributions paid in 1998). Net losses are allocated quarterly first, to eliminate any positive capital account balance of the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second, to eliminate any positive capital account balances of the Class A Beneficiaries; and third, any remainder 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. For income tax purposes, the Trust allocates net income or net loss in accordance with the provisions of such agreement. Pursuant to 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, 1999, the Managing Trustee had a negative tax capital account balance of $309,285. 20 AFG Investment Trust D Notes to the Financial Statements (Continued) The following is a reconciliation between net income (loss) reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ------------------ ------------------ ------------------ Net income $ 5,277,987 $ 3,875,037 $ 2,017,457 Tax depreciation in excess of financial statement depreciation (3,007,887) (5,594,998) (4,292,255) Tax gain (loss) in excess of book gain (loss) (3,391,348) 608,670 2,507,051 Deferred rental income (102,414) 369,321 (161,505) Other 151,042 (59,552) (28,038) ------------------ ------------------ ------------------ Net income (loss) for federal income tax reporting purposes $ (1,072,620) $ (801,522) $ 42,710 ================== ================== ==================
The following is a reconciliation between participants' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1999 and 1998:
1999 1998 ------------------ ------------------ Participants' capital $ 27,950,594 $ 41,937,651 Unrealized gain on marketable securities (20,167) -- Add back selling commissions and organization and offering costs 5,113,551 5,113,551 Financial statement distributions in excess of tax distribution 13,326,498 -- Deferred step-down of capital basis (366,869) (366,869) Cumulative difference between federal income tax and financial statement income (loss) (26,295,700) (19,945,093) ------------------ ------------------ Participants' capital for federal income tax reporting purposes $ 19,707,907 $ 26,739,240 ================== ==================
Cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 9 - LEGAL PROCEEDINGS On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Trust (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the Managing Trustee, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et al., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein 21 AFG Investment Trust D Notes to the Financial Statements (Continued) collectively as the "Class Action Lawsuit." The Class Action Lawsuit was divided into two sub-classes on March 22, 1999. On May 26, 1999, the Court issued its Order and Final Judgment approving settlement of the Class Action Lawsuit with respect to claims asserted by the Plaintiffs on behalf of the sub-class that includes the Trust. Claims involving the second sub-class, not including the Trust, remain pending. As a result of the settlement, the Trust declared a special cash distribution of $1,572,405, including legal fees for Plaintiffs' counsel of $84,520, that was paid in July 1999 ($0.77 per unit, net of legal fees). In addition, the parent company of the Managing Trustee, Equis II Corporation, agreed to commit $3,537,910 of its Class B Capital Contributions (paid in connection with its purchase of Class B Interests in July 1997) to the Trust for the Trust's investment purposes. In the absence of this commitment, Equis II Corporation would have been entitled to receive a Class B Capital Distribution for this amount pursuant to the Trust Agreement, as amended. The Trust's share of legal fees and expenses related to the Class Action Lawsuit, including the fees for Plaintiff's counsel referenced above, was estimated to be approximately $290,000, all of which was accrued and expensed by the Trust in 1998. NOTE 10 - SUBSEQUENT EVENTS Special Cash Distribution On January 19, 2000, the Trust distributed $13,200,000 as a special cash distribution to the Trust Beneficiaries. Of the total distributions, the Beneficiaries were allocated $11,979,000 ($2,918,373 to Class A Beneficiaries and $9,060,627 to Class B Beneficiaries); the Special Beneficiary was allocated $1,089,000, and the Managing Trustee was allocated $132,000. Leveraging of Emery Worldwide Lease Renewal On February 3, 2000, the Trust obtained financing of $6,091,738 in connection with a lease renewal with Emery Worldwide ("Emery"). The Trust entered into a 30-month renewal agreement with Emery at a semi-annual rent payment of $566,084, beginning January 2, 2000. Emery has the option to extend the lease agreement for an additional 30 months at the expiration of the lease term on July 1, 2002. The financing includes a balloon payment of $4,600,000 due on July 1, 2002 if Emery decides not extend the lease agreement. If the lease agreement is extended, the balloon payment will be postponed until the termination of the 30-month extension period at which time the balloon payment will be $2,750,000. Echelon On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the trusts, jointly and severally, have guaranteed the payment obligations under a master lease agreement between Echelon Commercial LLC, a newly-formed Delaware company that is controlled by Gary D. Engle, President and Chief Executive Officer of EFG, as lessee, and Heller Affordable Housing of Florida, Inc., and two other entities, as lessor ("Heller"). The lease payments of Echelon Commercial LLC to Heller are supported by lease payments to Echelon Commercial LLC from various sub-lessees who are parties to commercial and residential lease agreements under the master lease agreement. The guarantee of lease payments by the Trust and the three affiliated trusts is capped at a maximum of $34,500,000, excluding expenses that could result in the event that Echelon Commercial LLC experiences a default under the terms of the master lease agreement. An agreement among the four trusts provides that the Trust is responsible for 46.34% of the guaranteed amount, or $15,987,300. In consideration for its guarantee, the Trust received an upfront cash fee equal to $231,700 and will receive an annualized fee equal to 4% per annum of the average guarantee amount outstanding during each quarterly period. Accrued but unpaid fees will accrue and compound interest quarterly at an annualized interest rate of 7.5% until paid. The Trust will receive minimum aggregate fees for its guarantee of not less than $463,400, excluding interest. 22 AFG Investment Trust D SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED for the years ended December 31, 1999, 1998 and 1997 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, 1999, 1998 and 1997.
1999 1998 1997 --------------- --------------- --------------- Rents earned prior to disposal of equipment, net of interest charges $ 38,159,634 $ 4,633,505 $ 4,798,925 Sale proceeds, including assumption of debt and interest, realized upon disposition of equipment 4,231,616 1,407,762 5,392,670 --------------- --------------- --------------- Total cash generated from rents and equipment sale proceeds 42,391,250 6,041,267 10,191,595 Original acquisition cost of equipment disposed 36,770,580 5,558,107 9,199,335 --------------- --------------- --------------- Excess of total cash generated to cost of equipment disposed $ 5,620,670 $ 483,160 $ 992,260 =============== =============== ===============
23 AFG Investment Trust D STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS for the year ended December 31, 1999
Sales and Operations Refinancings Total ------------------ ------------------ ------------------ Net income (loss) $ 9,722,544 $ (4,444,557) $ 5,277,987 Add: Depreciation 7,399,744 -- 7,399,744 Accretion of bond discount (1,480) -- (1,480) Management fees 1,074,800 -- 1,074,800 Book value of disposed equipment -- 8,676,173 8,676,173 Less: Principal reduction of notes payable (10,541,467) -- (10,541,467) ------------------ ------------------ ------------------ Cash from operations, sales and refinancings 7,654,141 4,231,616 11,885,757 Less: Management fees (1,074,800) -- (1,074,800) ------------------ ------------------ ------------------ Distributable cash from operations, sales and refinancings 6,579,341 4,231,616 10,810,957 Other sources and uses of cash: Cash at beginning of year 7,664,645 1,435,371 9,100,016 Restricted cash 5,110,315 -- 5,110,315 Investment - affiliate 30,813 -- 30,813 Investment - Kettle Valley (3,064,700) -- (3,064,700) Investment - EFG/Kirkwood (2,030,100) -- (2,030,100) Purchase of marketable securities (412,529) -- (412,529) Other liabilities 1,488,403 -- 1,488,403 Net change in receivables and accruals (3,194,997) -- (3,194,997) Less: Cash distributions paid (6,503,150) -- (6,503,150) ------------------ ------------------ ------------------ Cash at end of year $ 5,668,041 $ 5,666,987 $ 11,335,028 ================== ================== ==================
24 AFG Investment Trust D SCHEDULE OF COSTS REIMBURSED TO THE MANAGING TRUSTEE AND ITS AFFILIATES AS REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED AND RESTATED DECLARATION OF TRUST December 31, 1999 For the year ended December 31, 1999 the Trust reimbursed the Managing Trustee and its Affiliates for the following costs: Operating expenses $ 1,004,754 25 AFG Investment Trust D SCHEDULE OF REIMBURSABLE OPERATING EXPENSES DUE TO THIRD PARTIES December 31, 1999 Operating expenses for the year ended December 31, 1999 consisted of the following: Legal $ 301,036 Accounting and Tax 81,128 Investor Services 54,763 Insurance 39,450 Selling & Remarketing 29,456 Office 28,340 Bank Charges 23,445 Third Party Service Contracts 17,816 Travel & Entertainment 10,801 Printing & Document Services 7,800 Aircraft Maintenance 6,334 Other 3,870 ----------------- Total $ 604,239 ================= 26 ADDITIONAL FINANCIAL INFORMATION AFG Investment Trust D SCHEDULE OF EQUIPMENT December 31, 1999
LEASE EXPIRATION NET BOOK LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT - ---------------------------------- ---------------------- ------------------ -------------- ---------------- ------------- Advanced Micro Devices, Inc. 008-RN1 $ 1,249,392 Alliant Techsystems A-1 298,492 Alliant Techsystems A-3 879,414 Alliant Techsystems A-4 727,397 A.O. Smith Corporation A-20RN1 9/30/01 103,307 $ 18,723 Chrysler Corporation B-4 463,151 57,613 Chrysler Corporation B-4B 113,752 26,837 Chrysler Corporation B-4C 30,005 6,749 Chrysler Corporation B-6 593,084 75,910 Chrysler Corporation B-6B 148,512 35,968 Chrysler Corporation B-6C 29,525 6,798 Chrysler Corporation B-7 433,629 55,501 Chrysler Corporation B-7B 175,600 42,542 Chrysler Corporation B-7C 30,021 6,912 Chrysler Corporation B-8-4A 5/31/00 3,798 1,756 Chrysler Corporation B-8B 158,052 39,318 Chrysler Corporation B-8C 47,266 10,882 Chrysler Corporation G-3 9/30/02 61,449 47,828 Cooper Tire & Rubber Company A-3 10/31/00 37,738 10,228 Cooper Tire & Rubber Company A-4 10/31/00 19,462 5,275 Corning Lab Services, Inc. A-12 3/31/00 341,688 17,374 $ 24,189 Emery Worldwide N961R-RN1 7/1/02 13,608,044 9,826,731 1,033,969 International Paper B-45-71 33,320 3,876 International Paper B-50-63 171,275 28,431 International Paper B-50-67 125,936 18,178 International Paper B-51-73 12/31/99 45,906 5,924 International Paper B-56-70 52,851 6,148 International Paper C-45-6 3/31/02 33,242 11,656 International Paper C-65-5 12/31/01 245,125 73,538 International Paper C-65-6 6/30/02 179,567 67,338 GE Appliances, A Division of GE A-2 15,666
27 AFG Investment Trust D SCHEDULE OF EQUIPMENT December 31, 1999
LEASE EXPIRATION NET BOOK LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT - ----------------------------------- ------------------- --------------- ------------- ---------------- -------------- General Motors Corporation H-10 9/30/00 $ 42,821 $ 11,112 General Motors Corporation H-7 6,461 759 General Motors Corporation I-1 98,031 14,835 General Motors Corporation C-16 4/30/00 74,529 13,719 General Motors Corporation C-7 715,630 89,714 General Motors Corporation C-8 581,358 31,150 H E Butt Grocery Company A-23 11,712 Maytag Corporation A-14 6/30/00 18,494 4,108 Maytag Corporation A-3 69,513 6,820 Mobil Oil Corporation C-1ARN1 104,739 15,703 Mobil Oil Corporation C-1RN2 44,847 6,724 Missouri Pacific Railroad Company 4/15/84 7/14/00 8,312,336 4,571,277 National Steel Corporation A-104 110,484 12,823 National Steel Corporation A-96 120,380 8,626 National Steel Corporation A-97 38,499 National Steel Corporation A-99A 87,877 2,741 Owens-Corning Fiberglass Corp. A-103 2/29/00 87,748 47,384 Owens-Corning Fiberglass Corp. A-104 7/31/00 45,781 29,300 Owens-Corning Fiberglass Corp. A-50 6/30/00 20,912 7,078 Owens-Corning Fiberglass Corp. A-56 29,317 7,840 Owens-Corning Fiberglass Corp. A-59 0 $ 50,034 Owens-Corning Fiberglass Corp. A-65 23,466 Owens-Corning Fiberglass Corp. A-7 5/31/01 20,051 4,485 Quanterra, Inc. AA-1 110 Reno Air, Inc. N753RA 1/14/03 1,239,741 1,017,113 656,454 Scandinavian Airlines System LN-RCGRN1 1/29/01 30,166,351 26,591,513 20,942,499 Tama Paperboard A-1 5/31/03 28,010 19,974 Tarmac Mid-Atlantic, Inc. A-6 452,148 6,459 Tarmac Florida, Inc. A-10RN1 12/31/00 231,312 Teledyne Wah Chang B-1 8/31/00 21,263 5,261 Teledyne Wah Chang B-2 8/31/00 29,640 7,334
28 AFG Investment Trust D SCHEDULE OF EQUIPMENT December 31, 1999
LEASE EXPIRATION NET BOOK LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT - ----------------------------------- ------------------- --------------- ------------ -------------- ---------------- Teledyne Wah Chang B-3 8/31/00 49,566 12,264 Temple-Inland Forest Product Group A-1RN1 12/31/00 $ 144,841 $ 51,711 TTX Company 02 / 01 / 80RN1 7/14/00 2,372,307 804,507 $ 1,541,935 USX Corporation A-3 130 Western Bulk Carriers A-1RN1 12/31/00 1,559,699 465,204 267,574 Weyerhaeuser Company 91-C-99396 11/30/00 1,692,068 310,212 339,169 Getchell Gold Corporation A-10 12/31/00 225,107 66,228 Xerox Corporation BB-78 34,612 8,620 Seven-Up / RC Bottling Company A-1 6,532 823 ------------ ------------- ---------------- TOTAL $ 69,374,089 $ 44,761,455 $ 24,855,823 ============ ============= ================
29 EX-23 6 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of AFG Investment Trust D of our report dated March 30, 2000, included in the 1999 Annual Report to the Participants of AFG Investment Trust D. ERNST & YOUNG LLP Boston, Massachusetts March 30, 2000 EX-27 7 EXHIBIT 27
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 11,335,028 434,176 5,408,616 0 0 17,102,600 69,374,089 (24,612,634) 69,336,372 14,107,185 25,790,190 0 0 0 27,950,594 69,336,372 0 17,373,475 0 0 9,248,761 0 2,846,727 5,277,987 0 5,277,987 0 0 0 5,277,987 0 0
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