-----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, VErtTXx2cTiIf5Q+mQb2BSNXxlevax4TxzhjNkpmAaxHD2DzQm5Aic+WvpCZtLZ1 0PQwKpMiTnbikP0AKq1Ktw== 0000912057-99-003417.txt : 19991105 0000912057-99-003417.hdr.sgml : 19991105 ACCESSION NUMBER: 0000912057-99-003417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991104 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-Q SEC ACT: SEC FILE NUMBER: 000-25648 FILM NUMBER: 99740761 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /XX/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- -------------------------- -------------- For Quarter Ended September 30, 1999 Commission File No. 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, Boston, MA 02110 - ---------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 ----------------------------- - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No --- --- AFG Investment Trust D FORM 10-Q INDEX
Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Statement of Financial Position at September 30, 1999 and December 31, 1998 3 Statement of Operations for the three and nine months ended September 30, 1999 and 1998 4 Statement of Changes in Participants' Capital for the nine months ended September 30, 1999 5 Statement of Cash Flows for the nine months ended September 30, 1999 and 1998 6 Notes to the Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16 PART II. OTHER INFORMATION: Items 1 - 6 17
2 AFG Investment Trust D STATEMENT OF FINANCIAL POSITION September 30, 1999 and December 31, 1998 (Unaudited)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS Cash and cash equivalents $ 11,312,017 $ 9,100,016 Restricted cash -- 5,110,315 Marketable securities 156,616 -- Rents receivable 771,826 2,322,608 Accounts receivable - affiliate 617,683 448,039 Loan receivable - Kettle Valley 49,396 -- Investment - affiliate 668,813 699,626 Investment in Kettle Valley 4,365,372 -- Investment in Kirkwood 1,818,000 -- Equipment at cost, net of accumulated depreciation of $39,839,389 and $45,307,297 at September 30, 1999 and December 31, 1998, respectively 53,809,602 60,837,372 ----------- ----------- Total assets $ 73,569,325 $ 78,517,976 ----------- ----------- ----------- -----------
LIABILITIES AND PARTICIPANTS' CAPITAL Notes payable $ 31,173,615 $ 35,030,985 Accrued interest 236,779 332,001 Accrued liabilities 30,000 321,500 Accrued liabilities - affiliates 80,274 69,248 Deferred rental income 112,428 408,652 Other liabilities 1,488,403 -- Cash distributions payable to participants 417,939 417,939 ----------- ----------- Total liabilities 33,539,438 36,580,325 ----------- ----------- Participants' capital (deficit): Managing Trustee 10,542 12,140 Special Beneficiary 86,968 100,157 Class A Beneficiary Interests (1,934,755 Interests; initial purchase price of $25 each) 33,460,829 35,230,782 Class B Beneficiary Interests (3,142,083 Interests; initial purchase price of $5 each) 8,086,870 8,209,894 Treasury Interests (154,275 Class A Interests at Cost) (1,615,322) (1,615,322) ----------- ----------- Total participants' capital 40,029,887 41,937,651 ----------- ----------- Total liabilities and participants' capital $ 73,569,325 $ 78,517,976 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 3 AFG Investment Trust D STATEMENT OF OPERATIONS for the three and nine months ended September 30, 1999 and 1998 (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Income: Lease revenue $ 3,538,502 $ 4,902,809 $ 11,268,966 $ 14,482,399 Interest income 161,744 172,028 483,523 612,151 Gain (loss) on sale of equipment 224,486 9,268 392,774 (110,235) Other income -- -- 261,116 -- ---------- ---------- ----------- ----------- Total income 3,924,732 5,084,105 12,406,379 14,984,315 ---------- ---------- ----------- ----------- Expenses: Depreciation and amortization 1,738,932 2,506,436 5,879,479 8,475,754 Interest expense 631,869 822,351 2,023,046 2,652,655 Equipment management fees - affiliates 185,848 234,149 580,952 685,949 Operating expenses - affiliate 310,490 87,616 609,420 388,427 ---------- ---------- ----------- ----------- Total expenses 2,867,139 3,650,552 9,092,897 12,202,785 ---------- ---------- ----------- ----------- Net income $ 1,057,593 $ 1,433,553 $ 3,313,482 $ 2,781,530 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Net income per Class A Beneficiary Interest $ 0.34 $ 0.07 $ 1.07 $ 0.26 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- per Class B Beneficiary Interest $ 0.09 $ 0.35 $ 0.29 $ 0.43 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Cash distributions declared per Class A Beneficiary Interest $ 0.41 $ 0.41 $ 2.00 $ 1.23 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- per Class B Beneficiary Interest $ 0.11 $ 1.89 $ 0.33 $ 2.22 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 4 AFG Investment Trust D STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL for the nine months ended September 30, 1999 (Unaudited)
Managing Special Class A Beneficiaries Class B Beneficiaries Trustee Beneficiary --------------------- ---------------------- Treasury Amount Amount Interests Amount Interests Amount Interests Total ------ ------ --------- --------- --------- --------- ---------- ----- Balance at December 31, 1998 $ 12,140 $ 100,157 1,934,755 $35,230,782 3,142,083 $ 8,209,894 $(1,615,322) $41,937,651 Net income 35,735 294,814 -- 2,077,033 -- 905,900 -- 3,313,482 Unrealized gain on marketable securities 281 2,317 -- 17,748 -- 7,741 -- 28,087 --------- ---------- --------- ----------- --------- ----------- ----------- ---------- Comprehensive income 36,016 297,131 -- 2,094,781 -- $ 913,641 -- 3,341,569 --------- ---------- --------- ----------- --------- ----------- ----------- ---------- Cash distributions declared (37,614) (310,320) -- (3,864,734) -- (1,036,665) -- (5,249,333) --------- ---------- --------- ----------- --------- ----------- ----------- ---------- Balance at September 30, 1999 $ 10,542 $ 86,968 1,934,755 $33,460,829 3,142,083 $ 8,086,870 $(1,615,322) $40,029,887 --------- ---------- --------- ----------- --------- ----------- ----------- ---------- --------- ---------- --------- ----------- --------- ----------- ----------- ----------
The accompanying notes are an integral part of these financial statements. 5 AFG Investment Trust D STATEMENT OF CASH FLOWS for the nine months ended September 30, 1999 and 1998 (Unaudited)
1999 1998 ---- ---- Cash flows from (used in) operating activities: Net income $ 3,313,482 $ 2,781,530 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 5,879,479 8,475,754 (Gain) loss on sale of equipment (392,774) 110,235 Changes in assets and liabilities Decrease (increase) in: Cash held in escrow -- (56,891) Rents receivable 1,550,782 842,684 Accounts receivable - affiliate (169,644) 19,009 Loan receivable - Kettle Valley (49,396) -- Increase (decrease) in: Accrued interest (95,222) (131,460) Accrued liabilities (291,500) 141,450 Accrued liabilities - affiliates 11,026 (18,168) Deferred rental income (296,224) 115,950 ------------ ------------ Net cash from operating activities 9,460,009 12,280,093 ------------ ------------ Cash flows from (used in) investing activities: Purchase of marketable securities (128,529) -- Investment - affiliate 30,813 (712,313) Investment in Kettle Valley (3,064,700) -- Investment in Kirkwood (1,818,000) -- Purchase of equipment -- (179,510) Proceeds from equipment sales 1,541,065 1,342,889 Other liabilities 1,488,403 -- ------------ ------------ Net cash from (used in) investing activities (1,950,948) 451,066 ------------ ------------ Cash flows from (used in) financing activities: Principal payments - notes payable (5,158,042) (6,595,058) Distributions paid (5,249,333) (9,800,280) Restricted cash 5,110,315 5,610,790 Purchase of treasury interests -- (9,000) ------------ ------------ Net cash used in financing activities (5,297,060) (10,793,548) ------------ ------------ Net increase in cash and cash equivalents 2,212,001 1,937,611 Cash and cash equivalents at beginning of period 9,100,016 4,218,502 ------------ ------------ Cash and cash equivalents at end of period $ 11,312,017 $ 6,156,113 ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 2,118,268 $ 2,784,115 ------------ ------------ ------------ ------------
Supplemental disclosure of non-cash activity: See Note 4 to the financial statements. The accompanying notes are an integral part of these financial statements 6 AFG Investment Trust D Notes to the Financial Statements September 30, 1999 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The financial statements presented herein are prepared in conformity with generally accepted accounting principles and the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and are unaudited. As such, these financial statements do not include all information and footnote disclosures required under generally accepted accounting principles for complete financial statements and, accordingly, the accompanying financial statements should be read in conjunction with the footnotes presented in the 1998 Annual Report. Except as disclosed herein, there has been no material change to the information presented in the footnotes to the 1998 Annual Report. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary to present fairly the financial position at September 30, 1999 and December 31, 1998 and results of operations for the three and nine months ended September 30, 1999 and 1998 have been made and are reflected. NOTE 2 - 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 which 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 Trust recorded an unrealized gain on available-for-sale securities of $28,087 during the nine months ended September 30, 1999 that is included as a separate component of participants' capital. NOTE 3 - REVENUE RECOGNITION Rents are payable to the Trust monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Trust may enter primary-term, renewal or re-lease agreements which expire beyond the Trust's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as the Managing Trustee and the Advisor would seek to sell the then remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. Future minimum rents of $17,710,495 are due as follows: For the year ending September 30, 2000 $ 9,805,262 2001 4,377,986 2002 3,483,896 2003 43,351 ----------- Total $17,710,495 ----------- -----------
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 7 AFG Investment Trust D Notes to the Financial Statements (Continued) 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 that, currently, is being constructed. The seller is an unaffiliated third-party company and has retained the remaining 50.1% ownership interest in the SPC. A newly organized Canadian affiliate of EFG replaced the original general partner of KVD LP on March 1, 1999. The Trust's ownership share in EFG/Kettle Development LLC is 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. 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 September 30, 1999. Investment in Kettle Valley at September 30, 1999 represents the actual cost paid by the Trust plus a 1% acquisition fee. NOTE 5 - INVESTMENT IN 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 acquiring preferred and common stock interests in Kirkwood Associates Inc. ("KAI"). 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 holders. 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. The Trust's ownership interest in EFG/Kirkwood had a cost of $1,818,000, including a 1% acquisition fee ($18,000) paid to EFG. NOTE 6 - EQUIPMENT The following is a summary of equipment owned by the Trust at September 30, 1999. Remaining Lease Term (Months), as used below, represents the number of months remaining from September 30, 1999 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value. 8 AFG Investment Trust D Notes to the Financial Statements (Continued)
Remaining Lease Term Equipment Equipment Type (Months) at Cost - ---------------------------- ------------- -------------- Aircraft 1-39 $ 52,946,296 Vessels 36 13,875,360 Locomotives 9 10,684,643 Construction and mining 0-33 4,734,756 Materials handling 0-44 4,605,045 Manufacturing 0-3 3,537,759 Miscellaneous 0-14 1,953,583 Tractors & heavy duty trucks 0 545,117 Computers and peripherals 0-10 370,940 Research & test 6 338,749 Motor vehicles 0 38,499 Retail store fixtures 3 11,712 Communications 0 6,532 -------------- Total equipment cost 93,648,991 Accumulated depreciation (39,839,389) -------------- Equipment, net of accumulated depreciation $ 53,809,602 -------------- --------------
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. 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. At September 30, 1999, the Trust's equipment portfolio included equipment having a proportionate original cost of $43,057,634, representing approximately 46% of total equipment cost. The summary above includes fully-depreciated equipment held for sale or re-lease with a cost of $746,763. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. NOTE 7 - RELATED PARTY TRANSACTIONS All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the nine month periods ended September 30, 1999 and 1998, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
1999 1998 ---------- ---------- Equipment acquisition fees $ 19,285 $ 2,556 Equipment management fees 580,952 685,949 Administrative charges 133,522 60,138 Reimbursable operating expenses due to third parties 475,898 328,289 ---------- ---------- Total $1,209,657 $1,076,932 ---------- ---------- ---------- ----------
9 AFG Investment Trust D Notes to the Financial Statements (Continued) All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Trust. At September 30, 1999, the Trust was owed $617,683 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in October 1999. 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. Administrative charges and reimbursable operating expenses for the nine months ended September 30, 1999 include adjustments for 1998 actual costs of approximately $38,000 and $28,000, respectively. NOTE 8 - NOTES PAYABLE Notes payable at September 30, 1999 consisted of installment notes of $31,173,615 payable to banks and institutional lenders. The notes bear interest rates ranging between 6.92% and 13.75%, except for one note which bears a fluctuating interest rate based on LIBOR (5.38% at September 30, 1999) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments, except for one note which is collateralized by certain stock interests (see Note 4). Generally, the installment notes will be fully amortized by noncancellable rents. However, the Trust has balloon payment obligations of $19,980,682, $1,400,074 and $282,421 at the expiration of lease terms related to an aircraft leased to SAS, certain rail equipment and its interest in an aircraft leased to Reno Air, Inc., respectively. The carrying amount of notes payable approximates fair value at September 30, 1999. The annual maturities of notes payable are as follows:
For the year ending September 30, 2000 $ 6,729,080 2001 22,311,328 2002 1,840,251 2003 292,956 -------------- Total $ 31,173,615 -------------- --------------
NOTE 9 - LEGAL PROCEEDINGS On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Trust (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the Managing Trustee, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit." The 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. 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 10 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 EVENT In October 1999, the Trust sold its 50% interest in a Boeing 747 aircraft formerly leased to British Airways PLC that had been fully depreciated. The Trust received sale proceeds of $1,000,000. 11 AFG Investment Trust D FORM 10-Q PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. AFG Investment Trust D (the "Trust") commenced operations in 1992 and, pursuant to its Trust Agreement, the Trust 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 May 1999. See Note 9 to the accompanying financial statements. Certain statements in this quarterly report that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the collection of the Trust's contracted rents, the realization of residual proceeds for the Trust's equipment, and future economic conditions. YEAR 2000 ISSUE The Year 2000 Issue generally refers to the capacity of computer programming logic to correctly identify the calendar year. Many companies utilize computer programs or hardware with date sensitive software or embedded chips that could interpret dates ending in "00" as the year 1900 rather than the year 2000. In certain cases, such errors could result in system failures or miscalculations that disrupt the operations of the affected businesses. The Trust uses information systems provided by Equis Financial Group Limited Partnership (formerly American Finance Group) ("EFG") and has no information systems of its own. EFG has adopted a plan to address the Year 2000 Issue that consists of four phases: assessment, remediation, testing, and implementation and has elected to utilize principally internal resources to perform all phases. EFG has completed its Year 2000 project at an aggregate cost of less than $50,000 and at a di minimus cost to the Trust. All costs incurred in connection with EFG's Year 2000 project have been expensed as incurred. EFG's primary information software was coded by a third party at the point of original design to use a four digit field to identify calendar year. All of the Trust's lease billings, cash receipts and equipment remarketing processes are performed using this proprietary software. In addition, EFG has gathered information about the Year 2000 readiness of significant vendors and third party servicers and continues to monitor developments in this area. All of EFG's peripheral computer technologies, such as its network operating system and third-party software applications, including payroll, depreciation processing, and electronic banking, have been evaluated for potential programming changes and have required only minor modifications to function properly with respect to dates in the year 2000 and thereafter. EFG understands that each of its and the Trust's significant vendors and third-party servicers are in the process, or have completed the process, of making their systems Year 2000 compliant. Substantially all parties queried have indicated that their systems are Year 2000 compliant. Presently, EFG is not aware of any outside customer with a Year 2000 Issue that would have a material effect on the Trust's results of operations, liquidity, or financial position. The Trust's equipment leases were structured as triple net leases, meaning that the lessees are responsible for, among other things, (i) maintaining and servicing all equipment during the lease term, (ii) ensuring that all equipment functions properly and is returned in good condition, normal wear and tear excepted, and (iii) insuring the assets against casualty and other events of loss. Non-compliance with lease terms on the part of a lessee, including failure to address Year 2000 Issues could result in lost revenues and impairment of residual values of the Trust's equipment assets under a worst-case scenario. EFG believes that its Year 2000 compliance plan will be effective in resolving all material Year 2000 risks in a timely manner and that the Year 2000 Issue will not pose significant operational problems with respect to its computer systems or result in a system failure or disruption of its or the Trust's business operations. However, EFG has no means of ensuring that all customers, vendors and third-party servicers will conform ultimately to Year 2000 standards. The effect of this risk to the Trust is not determinable. 12 AFG Investment Trust D FORM 10-Q PART I. FINANCIAL INFORMATION THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998: Results of Operations For the three and nine months ended September 30, 1999, the Trust recognized lease revenue of $3,538,502 and $11,268,966, respectively, compared to $4,902,809 and $14,482,399 for the same periods in 1998. The decrease in lease revenue from 1998 to 1999 resulted principally from lease term expirations and the sale of equipment. The level of lease revenue to be recognized by the Trust in the future may be impacted by 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 for the three and nine months ended September 30, 1999 was $161,744 and $483,523, respectively, compared to $172,028 and $612,151 for the same periods in 1998. Generally, interest income is generated from the temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1999 and 1998 includes interest earned on proceeds resulting from the issuance of Class B Interests. The amount of future interest income is expected to fluctuate as a result of changing interest rates, the collection of lease revenue, and the proceeds from equipment sales, among other factors. 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 nine months ended September 30, 1999. During the three and nine months ended September 30, 1999, the Trust sold equipment having a net book value of $139,333 and $1,148,291 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $224,486 and $392,774, respectively. During the three and nine months ended September 30, 1998, the Trust sold equipment having a net book value of $1,258,181 and $1,453,124 to existing lessees and third parties. These sales resulted in a net gain of $9,268 and a net loss of $110,235, respectively, for financial statement purposes. 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 for 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 13 AFG Investment Trust D FORM 10-Q PART I. FINANCIAL INFORMATION sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Trust classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Trust achieved from leasing the equipment. Depreciation and amortization expense for the three and nine months ended September 30, 1999 was $1,738,932 and $5,879,479, respectively, compared to $2,506,436 and $8,475,754 for the same periods in 1998. 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 $631,869 and $2,023,046 or 17.9% and 18% of lease revenue for the three and nine months ended September 30, 1999, respectively, compared to $822,351 and $2,652,655 or 16.8% and 18.3% of lease revenue for each of the same periods in 1998. Management fees were $185,848 and $580,952 for the three and nine months ended September 30, 1999, respectively, compared to $234,149 and $685,949 for the same periods in 1998. 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. 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 $310,490 and $609,420 during the three and nine months ended September 30, 1999 compared to $87,616 and $388,427 during the same periods in 1998. Operating expenses were higher in 1999 principally as a result of legal fees incurred of approximately $229,000 related to the Trust's investment in Kettle Valley and Kirkwood. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a trust. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Trust by its nature is a limited life entity. As an equipment leasing program, the Trust's principal operating activities derive from asset rental transactions. Accordingly, the Trust's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $9,460,009 and $12,280,093 for the nine months ended September 30, 1999 and 1998, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Trust's primary-term lease revenues and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities 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. 14 AFG Investment Trust D FORM 10-Q PART I. FINANCIAL INFORMATION Cash expended for asset acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. During the nine months ended September 30, 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 an aircraft in which the Trust owns an interest (see Note 4). Also during the nine months ended September 30, 1999, the Trust expended $1,818,000 to acquire its investment in Kirkwood (see Note 5). The Trust expended $179,510 to acquire equipment during the nine months ended September 30, 1998 and, during the nine months ended September 30, 1999, the Trust realized net cash proceeds from asset disposals of $1,541,065 compared to $1,342,889 for the same period in 1998. 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. The Trust obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal are reported as components of financing activities. Generally, each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. During 1999, the Trust leveraged $1,300,672 of its investment in Kettle Valley that will be amortized over 34 months (see Note 4). In the near-term, the amount of cash used to repay debt obligations may increase due to the financing of other newly acquired assets. Thereafter, the amount of cash used to repay debt obligations will decline. In addition, the Trust has balloon payment obligations of $19,980,682, $1,400,074 and $282,421 at the expiration of lease terms related to the SAS Aircraft, certain rail equipment and the Reno Aircraft, respectively. At September 30, 1999, the Trust was due aggregate future minimum lease payments of $17,710,495 from contractual lease agreements (see Note 3 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $31,173,615 (see Note 8 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. In addition, the Trust will have cash needs to satisfy interest on indebtedness and to pay management fees and operating expenses. Ultimately, the Trust is expected to meet its future disbursement obligations and to distribute any excess of cash inflows over cash outflows to the Participants in accordance with the Trust Agreement. However, several factors, including month-to-month lease extensions, lessee defaults, equipment casualty events, and early lease terminations could alter the Trust's anticipated cash flows as described herein and in the accompanying financial statements and result in fluctuations to the Trust's periodic cash distribution payments. It is the intention of the Managing Trustee to maintain a cash distribution level that is consistent with the operating cash flows of the Trust and to optimize the long-term value of the Trust. A distribution level that is higher than the Trust's operating cash flows could compromise the Trust's working capital position, as well as its ability to refurbish or upgrade equipment in response to lessee requirements or other market circumstances. Class A distributions have been maintained at an annualized rate of $1.64 per Class A Interest since October 1996. Class B distributions were set at an annualized distribution rate of $0.66 per Class B Interest commencing July 18, 1997 and decreased to an annualized distribution rate of $0.44 per Class B Interest in August 1998 following the Class B Capital Distribution paid at that time. Future distributions with respect to Class B Interests will be subordinate to certain distributions with respect to Class A Interests. Cash distributions to the Managing Trustee, the Special Beneficiary and the Beneficiaries are declared and generally paid within 45 days following the end of each calendar month. The payment of such distributions is 15 AFG Investment Trust D FORM 10-Q PART I. FINANCIAL INFORMATION presented as a component of financing activities. For the nine months ended September 30, 1999, the Trust declared total cash distributions of $5,249,333, including the special distribution described below. Of the total distributions, the Beneficiaries were allocated $4,901,399 ($3,864,734 to Class A Beneficiaries and $1,036,665 to Class B Beneficiaries); the Special Beneficiary was allocated $310,320, and the Managing Trustee was allocated $37,614. 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. Cash distributions paid to the Participants consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Trust and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. Future market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, could enhance or detract from individual asset yields and the collective performance of the Trust's equipment portfolio. 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 and the collection of contractual rents, the retirement of scheduled indebtedness, and the Trust's future working capital requirements, in establishing future cash distribution rates. 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 is considering returning a portion of the Trust's capital to the Trust Beneficiaries in the event that suitable reinvestment transactions are not identified. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance which may exist in the Managing Trustee's tax capital account. At December 31, 1998, the Managing Trustee had a negative tax capital account balance of $303,603. No such requirement exists with respect to the Special Beneficiary. 16 AFG Investment Trust D FORM 10-Q PART II. OTHER INFORMATION
Item 1. Legal Proceedings Response: Refer to Note 9 to the financial statements herein. Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6(a). Exhibits Response: None Item 6(b). Reports on Form 8-K Response: None
17 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AFG Investment Trust D By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee of the Registrant. By: /s/ Michael J. Butterfield ---------------------------------------- Michael J. Butterfield Treasurer AFG ASIT Corporation (Duly Authorized Officer and Principal Accounting Officer) Date: November 4, 1999 ---------------------------------------- By: /s/ Gary Romano ---------------------------------------- Gary M. Romano Clerk of AFG ASIT Corporation (Duly Authorized Officer and Principal Financial Officer) Date: November 4, 1999 ---------------------------------------- 18 EX-27 2 EXHIBIT 27
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 11,312,017 156,616 1,438,905 0 0 12,858,142 93,648,991 (39,839,389) 73,569,325 9,094,903 24,444,535 0 0 0 40,029,887 73,569,325 0 12,406,379 0 0 7,069,851 0 2,023,046 3,313,482 0 3,313,482 0 0 0 3,313,482 0 0
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