AFG INVESTMENT TRUST
AFG Investment Trust B
Annual Report to the Participants, December 31, 1999
AFG Investment Trust B
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page
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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 27-28
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 $ 1,325,194 $ 2,646,205 $ 5,400,331 $ 5,809,086 $ 6,173,972
Net income $ 1,470,149 $ 993,932 $ 1,174,206 $ 807,840 $ 527,564
Per Beneficiary Interest:
Net income
Class A Interests $ 0.98 $ 1.04 $ 1.05 $ 1.10 $ 0.72
Class B Interests $ 0.57 $ 0.23 $ 0.05 $ -- $ --
Cash distributions
Class A Interests $ 4.73 $ 1.64 $ 3.11 $ 1.42 $ 2.00
Class B Interests $ 3.76 $ 2.06 $ 0.30 $ -- $ --
Financial Position
- ---------------------------
Total assets $ 13,052,016 $ 14,037,315 $ 17,214,157 $ 16,631,159 $ 19,573,350
Total long-term obligations $ 656,454 $ 818,841 $ 2,038,628 $ 4,352,811 $ 7,097,113
Participants' capital $ 6,982,082 $ 12,635,661 $ 14,816,135 $ 11,925,600 $ 12,157,251
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 B (the "Trust") commenced operations in 1992 and is
scheduled to be dissolved by December 31, 2003. 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 8 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
$1,325,194 compared to $2,646,205 and $5,400,331 for the years ended December
31, 1998 and 1997, respectively. The decrease in lease revenue from 1997 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 year ended December 31, 1999 was $540,106 compared
to $387,410 and $264,503 for the years ended December 31, 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 $5,300,000 in January 2000, that will result in a
reduction of cash available for investment in the future.
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 $4,237,791 to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $508,542
3
compared to a net gain of $686,338 in 1998 on equipment having a net book value
of $942,188 and a net gain in 1997 of $76,559 on equipment having a net book
value of $272,233.
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 $645,123, $2,068,161 and
$3,862,631 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 $50,389 or 3.8% of lease revenue in 1999, $75,843 or
2.9% of lease revenue in 1998 and $196,589 or 3.6% of lease revenue in 1997.
Management fees were $72,020, $128,627 and $235,030 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.
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 $397,277,
$453,390 and $272,937 during the years ended December 31, 1999, 1998 and 1997,
respectively. During 1998, the Trust incurred or accrued approximately $103,000
for certain legal expenses related to the Class Action Lawsuit described in Note
8 to the financial statements. Additionally, operating expenses increased from
1997 to 1998 due to remarketing expenses incurred in 1998 in connection with the
sale of equipment. The amount of future operating expenses cannot be predicted
with certainty; however, such expenses are usually higher during the acquisition
and liquidation phases of a trust. Other fluctuations typically occur in
relation to the volume and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity. 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 $1,576,475, $3,304,397 and $4,399,596 in 1999, 1998 and
1997, respectively. Future renewal, re-lease and equipment sale activities will
cause a decline in the Trust's primary-term lease revenue and corresponding
sources of operating cash. Expenses associated with rental activities, such as
management fees, also will decline as the Trust experiences a higher frequency
of remarketing events.
4
The Trust's equipment is leased by a number of creditworthy,
investment-grade companies and, to date, the Trust has not experienced any
material collection problems and has not considered it necessary to provide an
allowance for doubtful accounts. Notwithstanding a positive collection history,
there is no assurance that all future contracted rents will be collected or that
the credit quality of the Trust's lessees will be maintained. Collection risk
could increase in the future, particularly as the Trust remarkets its equipment
and enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During 1999, the Trust expended $1,353,400 to acquire
its investment in EFG/Kirkwood (see Note 4) and $103,132 to purchase marketable
securities. During 1999, 1998 and 1997, the Trust realized net cash proceeds
from asset disposals of $4,746,333, $1,628,526 and $348,792, respectively. Sale
proceeds in 1999 include $4,619,262 related to the Trust's 39.59% interest in a
McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. which
was sold in January 1999. Future inflows of cash from asset 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 repayments of principal related to such indebtedness are reported as
a component of financing activities. Each note payable is recourse only to the
specific equipment financed and to the minimum rental payments contracted to be
received during the debt amortization period (which period generally coincides
with the lease rental term). As rental payments are collected, a portion or all
of the rental payment is used to repay the associated indebtedness. In future
years, the amount of cash used to repay debt obligations will decline as the
principal balance of notes payable is reduced through the collection and
application of rents. Notwithstanding the foregoing, the Trust has a balloon
payment obligation of $282,421 in 2003, at the expiration of the primary lease
term related to its interest in an aircraft leased to Reno Air, Inc.
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 $5,042.
At December 31, 1999, the Trust was due aggregate future minimum lease
payments of $972,675 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 $656,454 (see Note 6 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 1,000,961 Class B Interests at $5.00 per
interest, thereby generating $5,004,805 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,588 Class B Interests,
generating $17,940 of such aggregate capital contributions, and the then Special
Beneficiary, EFG, purchased 997,373 Class B Interests, generating $4,986,865 of
such aggregate capital contributions. The Trust incurred offering costs in the
amount of $50,048 and professional service costs of $62,170 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.
5
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 $979,449, to Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997,
the Trust used $785,295 of the net proceeds realized from the issuance of the
Class B Interests to purchase 82,837 of the Class A Interests tendered as a
result of the offer. On December 1, 1997, the Trust purchased 640 additional
Class A Interests at a cost of $6,080. On July 6, 1998, the Trust used
$1,500,539 of the Class B offering proceeds to pay a capital distribution to the
Class B Beneficiaries. In July 1999, the Trust distributed $500,709, including
legal fees of $26,913 paid to Plaintiffs' counsel, as a special cash
distribution in connection with the settlement of the Class Action Lawsuit
described in Note 8 to the financial statements ($0.81 per unit, net of legal
fees). In addition, the parent company of the Managing Trustee, Equis II
Corporation, agreed to commit $1,126,595 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
totaling $5,300,000 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 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.
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
$7,128,770, including the special distributions described above. Of the total
distributions, the Beneficiaries were allocated $6,513,184 ($2,751,224 to Class
A Beneficiaries and $3,761,960 to Class B Beneficiaries); the Special
Beneficiary was allocated $549,037, and the Managing Trustee was allocated
$66,549.
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
6
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 positive tax capital
account balance. No such requirement exists with respect to the Special
Beneficiary.
7
REPORT OF INDEPENDENT AUDITORS
To the Participants of AFG Investment Trust B:
We have audited the accompanying statements of financial position of AFG
Investment Trust B 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 B 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 B
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
1999 1998
----------------- -------------------
ASSETS
Cash and cash equivalents $ 10,193,277 $ 5,909,535
Restricted cash -- 1,627,304
Marketable securities 108,544 --
Rents receivable 635 234,774
Accounts receivable - affiliate 112,228 102,537
Interest receivable 3,681 --
Investment in EFG/Kirkwood 1,353,400 --
Equipment at cost, net of accumulated depreciation
of $6,686,836 and $10,713,524 at December 31, 1999
and 1998, respectively 1,280,251 6,163,165
----------------- -------------------
Total assets $ 13,052,016 $ 14,037,315
================= ===================
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 656,454 $ 818,841
Accrued interest 2,386 2,596
Accrued liabilities 53,608 133,500
Accrued liabilities - affiliate 15,436 16,028
Deferred rental income 42,050 14,058
Other liabilities -- 197,950
Cash distributions payable to participants 5,300,000 218,681
----------------- -------------------
Total liabilities 6,069,934 1,401,654
----------------- -------------------
Participants' capital (deficit):
Managing Trustee (26,988) 3,652
Special Beneficiary (222,647) 30,133
Class A Beneficiary Interests (582,017 Interests;
initial purchase price of $25 each) 8,336,812 10,514,496
Class B Beneficiary Interests (1,000,961 Interests;
Initial purchase price of $5 each) (313,720) 2,878,755
Treasury Interests (83,477 Class A Interests at Cost) (791,375) (791,375)
----------------- -------------------
Total participants' capital 6,982,082 12,635,661
----------------- -------------------
Total liabilities and participants' capital $ 13,052,016 $ 14,037,315
================= ===================
The accompanying notes are an integral part of
these financial statements.
9
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ------------------
Income:
Lease revenue $ 1,325,194 $ 2,646,205 $ 5,400,331
Interest income 540,106 387,410 264,503
Other income 261,116 -- --
Gain on sale of equipment 508,542 686,338 76,559
------------------ ------------------ ------------------
Total income 2,634,958 3,719,953 5,741,393
------------------ ------------------ ------------------
Expenses:
Depreciation and amortization 645,123 2,068,161 3,862,631
Interest expense 50,389 75,843 196,589
Equipment management fees - affiliates 72,020 128,627 235,030
Operating expenses - affiliate 397,277 453,390 272,937
------------------ ------------------ ------------------
Total expenses 1,164,809 2,726,021 4,567,187
------------------ ------------------ ------------------
Net income $ 1,470,149 $ 993,932 $ 1,174,206
================== ================== ==================
Net income
per Class A Beneficiary Interest $ 0.98 $ 1.04 $ 1.05
================== ================== ==================
per Class B Beneficiary Interest $ 0.57 $ 0.23 $ 0.05
================== ================== ==================
Cash distributions declared
per Class A Beneficiary Interest $ 4.73 $ 1.64 $ 3.11
================== ================== ==================
per Class B Beneficiary Interest $ 3.76 $ 2.06 $ 0.30
================== ================== ==================
The accompanying notes are an integral part of
these financial statements.
10
AFG Investment Trust B
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 $ (30,382) $ (257,894) 665,494 $ 12,213,876
Class B capital contribution -- -- -- --
Less: Offering costs -- -- -- --
Net income - 1997 48,593 408,133 -- 663,266
Cash distributions declared (14,676) (121,077) -- (2,012,992)
Acquisition of treasury interests, at cost -- -- (83,477) --
------------- -------------- -------------- ---------------
Balance at December 31, 1997 3,535 29,162 582,017 10,864,150
Net income - 1998 16,856 139,065 -- 603,689
Cash distributions declared (16,739) (138,094) -- (953,343)
------------- -------------- -------------- ---------------
Balance at December 31, 1998 3,652 30,133 582,017 10,514,496
Net income - 1999 35,859 295,841 -- 569,851
Unrealized gain on marketable
Securities 50 416 -- 3,689
------------- -------------- -------------- ---------------
Comprehensive income 35,909 296,257 -- 573,540
------------- -------------- -------------- ---------------
Cash distributions declared (66,549) (549,037) -- (2,751,224)
------------- -------------- -------------- ---------------
Balance at December 31, 1999 $ (26,988) $ (222,647) 582,017 $ 8,336,812
============= ============== ============== ===============
Class B Beneficiaries
---------------------------------- Treasury
Interests Amount Interests Total
-------------- --------------- -------------- ---------------
Balance at December 31, 1996 -- $ -- -- $ 11,925,600
Class B capital contribution 1,000,961 5,004,805 -- 5,004,805
Less: Offering costs -- (50,048) -- (50,048)
Net income - 1997 -- 54,214 -- 1,174,206
Cash distributions declared -- (298,308) -- (2,447,053)
Acquisition of treasury interests, at cost -- -- (791,375) (791,375)
-------------- --------------- -------------- ---------------
Balance at December 31, 1997 1,000,961 4,710,663 (791,375) 14,816,135
Net income - 1998 -- 234,322 -- 993,932
Cash distributions declared -- (2,066,230) -- (3,174,406)
-------------- --------------- -------------- ---------------
Balance at December 31, 1998 1,000,961 2,878,755 $ (791,375) $ 12,635,661
Net income - 1999 -- 568,598 -- 1,470,149
Unrealized gain on marketable
Securities -- 887 -- 5,042
-------------- --------------- -------------- ---------------
Comprehensive income -- 569,485 -- 1,475,191
-------------- --------------- -------------- ---------------
Cash distributions declared -- (3,761,960) -- (7,128,770)
-------------- --------------- -------------- ---------------
Balance at December 31, 1999 1,000,961 $ (313,720) $ (791,375) $ 6,982,082
============== =============== ============== ===============
The accompanying notes are an integral part of
these financial statements.
11
AFG Investment Trust B
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 $ 1,470,149 $ 993,932 $ 1,174,206
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 645,123 2,068,161 3,862,631
Accretion of bond discount (370) -- --
Gain on sale of equipment (508,542) (686,338) (76,559)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 234,139 440,855 (336,336)
Accounts receivable - affiliate (9,691) 247,472 (195,614)
Interest receivable (3,681) -- --
Increase (decrease) in:
Accrued interest (210) (24,799) (9,176)
Accrued liabilities (79,892) 121,950 (11,700)
Accrued liabilities - affiliate (592) (33,569) 2,419
Deferred rental income 27,992 (21,217) (10,275)
Other liabilities (197,950) 197,950 --
---------------- ---------------- ----------------
Net cash from operating activities 1,576,475 3,304,397 4,399,596
---------------- ---------------- ----------------
Cash flows from (used in) investing activities:
Purchase of marketable securities (103,132) -- --
Investment in EFG/Kirkwood (1,353,400) -- --
Proceeds from equipment sales 4,746,333 1,628,526 348,792
---------------- ---------------- ----------------
Net cash from investing activities 3,289,801 1,628,526 348,792
---------------- ---------------- ----------------
Cash flows from (used in) financing activities:
Proceeds from capital contributions -- -- 5,004,805
Payment of offering costs -- -- (50,048)
Purchase of treasury interests -- -- (791,375)
Restricted cash 1,627,304 1,494,459 (3,121,763)
Principal payments - notes payable (162,387) (1,219,787) (2,314,183)
Distributions paid (2,047,451) (3,191,302) (2,411,675)
---------------- ---------------- ----------------
Net cash used in financing activities (582,534) (2,916,630) (3,684,239)
---------------- ---------------- ----------------
Net increase in cash and cash equivalents 4,283,742 2,016,293 1,064,149
Cash and cash equivalents at beginning of year 5,909,535 3,893,242 2,829,093
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 10,193,277 $ 5,909,535 $ 3,893,242
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 50,599 $ 100,642 $ 205,765
================ ================ ================
The accompanying notes are an integral part of
these financial statements.
12
AFG Investment Trust B
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND TRUST MATTERS
AFG Investment Trust B (the "Trust") was organized as a Delaware business
trust in accordance with the Delaware Business Trust Act on May 28, 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" or the
"Advisor") and $100 from the Initial Beneficiary, AFG Assignor Corporation, a
wholly-owned affiliate of EFG. The Trust issued an aggregate of 665,494
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($16,637,350 in total) to 803 investors on
September 8, 1992. On July 18, 1997, the Trust issued 1,000,961 Class B
Interests at $5.00 each ($5,004,805 in total), of which (i) 997,373 interests
are held by Equis II Corporation, an affiliate of EFG, and (ii) 3,588 interests
are held by 5 other Class A investors. The Trust repurchased 82,837 Class A
Interests on October 10, 1997 using proceeds from the issuance of Class B
Interests. On December 1, 1997, the Trust repurchased 640 additional Class A
Interests. Accordingly, there are 582,017 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 September 8, 1992 when the Trust made its
initial equipment purchase. Pursuant to the Trust Agreement, each distribution
of Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Trust is made 90.75% to the Beneficiaries, 8.25% to the
Special Beneficiary and 1% to the Managing Trustee.
Under the terms of the Advisory Agreement between the Trust and EFG,
management services are provided by EFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also see Note 5.)
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 B
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
$5,042 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 $71,370 and a fair value of $72,250. During the year
ended December 31, 1999, total comprehensive income amounted to $1,475,191.
Revenue Recognition
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $972,675 are due as follows:
For the year ending December 31, 2000 $ 650,095
2001 163,100
2002 159,480
-------------
Total $ 972,675
=============
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
------------------ ------------------ ------------------
Reno Air, Inc. $ 153,980 $ -- $ --
Montgomery Ward and Company, Inc. $ 378,684 $ 576,457 $ 576,457
General Motors Corporation $ 276,429 $ 281,204 $ --
Alaska Airlines, Inc. $ -- $ -- $ 1,001,979
Tarmac Mid-Atlantic, Incorporated $ -- $ -- $ 640,293
14
AFG Investment Trust B
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.
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 5).
15
AFG Investment Trust B
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
$473,796 Class A special cash distributions paid in 1999 and $1,500,539 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 $69,821, $576,022, $4,833,632, and $1,502,607,
respectively. See Note 7 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 Beneficiary Interest are
based on 582,017 Class A Interests outstanding during the years ended December
31, 1999 and 1998, respectively. Net income and cash distributions per Class A
Interest in 1997 are based on 665,494 Class A Interests outstanding during the
period January 1, 1997 through October 9, 1997, 582,657 Class A Interests
outstanding during the period October 10, 1997 through November 30, 1997 and
582,017 Class A Interests outstanding during the period December 1, 1997 through
December 31, 1997. Net income and cash distributions per Class B Interest are
based on 1,000,961 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.
16
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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 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
- -------------------------------------- -------------- ----------------- --------------------------------
Communications 12 $ 2,703,591 AL/AR/AZ/CA/CO/FL/GA/IA/ID/IL/IN/
KS/KY/LA/MD/MI/MN/MO/MT/NC/
ND/NE/NH/NM/NV/NY/OH/OK/OR/
PA/SC/TN/TX/VA/VT/WA/WI/WV/WY
Materials handling 0-9 2,349,227 AR/CA/GA/IA/IL/IN/MI/NC/NY/PA/
TX/WV
Aircraft 36 1,239,741 NV
Computers and peripherals 0-7 1,051,435 NY/OH/WI
Tractors and heavy duty trucks 0 233,794 CO/FL/MI
Construction and mining 12 219,162 NV
Trailers/intermodal containers 0-14 128,443 OH/VA
Manufacturing 0 41,694 IL
-----------------
Total equipment cost 7,967,087
Accumulated depreciation (6,686,836)
-----------------
Equipment, net of accumulated depreciation $ 1,280,251
=================
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 $5,368,518, representing
approximately 67% 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 $1,240,000
and a net book value of approximately $1,017,000 at December 31, 1999. (See Note
6.)
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
17
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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. The summary above includes fully
depreciated equipment held for sale or re-lease with an original cost of
approximately $859,000 at December 31, 1999. The Managing Trustee is actively
seeking the sale or re-lease of all equipment not on lease. In addition, the
summary above includes equipment being leased on a month-to-month basis.
NOTE 4 - 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 $1,353,400, including a 1% acquisition fee ($13,400)
paid to EFG. The Trust's investment in EFG/Kirkwood is accounted for on the
equity method.
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the 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 $ 14,450 $ -- $ --
Offering costs -- -- 50,048
Equipment management fees 72,020 128,627 235,030
Administrative charges 127,120 70,524 65,196
Reimbursable operating expenses
Due to third parties 270,157 382,866 207,741
------------------ ------------------ ------------------
Total $ 483,747 $ 582,017 $ 558,015
================== ================== ==================
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 acquisition services
during the initial reinvestment period, which expired on September 8, 1996, 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
18
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
were reinstated through December 31, 2001 and the Trust was permitted to invest
in assets other than equipment. Acquisition fees paid to EFG in connection with
such reinvestment assets 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
March 31, 1998. For management services earned in connection with assets
acquired on or after April 1, 1998, 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 from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
December 31, 1999, the Trust was owed $112,228 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2000.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 839 Class A Interests
or less than 1% 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 6 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of an installment note of
$656,454 payable to an institutional lender. The note bears a fluctuating
interest rate based on LIBOR (6.4625% at December 31, 1999) plus a margin. The
installment note is non-recourse and is collateralized by the Trust's interest
in an aircraft leased to Reno Air, Inc. and the assignment of the related lease
payments. The Trust has a balloon payment obligation of $282,421 at the
expiration of the related lease term. The carrying amount of notes payable
approximates fair value at December 31, 1999.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 2000 $ 119,908
2001 128,484
2002 125,641
2003 282,421
-------------
Total $ 656,454
=============
19
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 7 - 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 $473,796 Class A special cash
distributions paid in 1999 and $1,500,539 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 positive tax capital account balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1999, 1998 and 1997:
1999 1998 1997
------------------ ------------------ ------------------
Net income $ 1,470,149 $ 993,932 $ 1,174,206
Financial statement depreciation in
excess of tax depreciation 132,483 395,240 766,944
Tax gain (loss) in excess of book gain 2,979,533 196,147 185,325
Deferred rental income 27,992 (21,217) (10,275)
Other 13,000 (13,000) (115,487)
------------------ ------------------ ------------------
Net income for federal income tax
reporting purposes $ 4,623,157 $ 1,551,102 $ 2,000,713
================== ================== ==================
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:
20
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
1999 1998
------------------ ------------------
Participants' capital $ 6,982,082 $ 12,635,661
Unrealized gain on marketable securities (5,042) --
Add back selling commissions and organization
and offering costs 1,625,692 1,625,692
Financial statement distributions in excess of
tax distributions 5,422,878 28,980
Deduct deferred step-down of capital basis (68,201) (68,201)
Cumulative difference between federal income tax
and financial statement income (loss) (1,344,717) (4,497,725)
------------------ ------------------
Participants' capital for federal income tax
reporting purposes $ 12,612,692 $ 9,724,407
================== ==================
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 8 - 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 $500,709,
including legal fees for Plaintiffs' counsel of $26,913, that was paid in July
1999 ($0.81 per unit, net of legal fees). In addition, the parent company of the
Managing Trustee, Equis II Corporation, agreed to commit $1,126,595 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 $88,000, all of which was accrued and
expensed by the Trust in 1998.
21
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
In addition to the foregoing, the Trust is a party to other lawsuits that
have arisen out of the conduct of its business, principally involving disputes
or disagreements with lessees over lease terms and conditions. The following
action was resolved during the year ended December 31, 1999:
Action involving National Steel Corporation
EFG, on behalf of the Trust and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Trust, National Steel Corporation ("National Steel"). The
Complaint sought reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. On May 11, 1999, the
parties executed a comprehensive settlement agreement to resolve all outstanding
issues, including reimbursement to the Trust for the disputed sales tax items
referenced above. This matter did not have a material effect on the Trust's
financial position or results of operations.
NOTE 9 - SUBSEQUENT EVENTS
On January 19, 2000, the Trust distributed $5,300,000 as a special cash
distribution to the Trust Beneficiaries. Of the total distributions, the
Beneficiaries were allocated $4,809,750 ($1,482,978 to Class A Beneficiaries and
$3,326,772 to Class B Beneficiaries); the Special Beneficiary was allocated
$437,250, and the Managing Trustee was allocated $53,000.
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
11.58% of the guaranteed amount, or $3,995,100. In consideration for its
guarantee, the Trust received an upfront cash fee equal to $57,900 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 $115,800, excluding interest.
22
AFG Investment Trust B
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 $ 6,729,842 $ 7,495,292 $ 1,777,768
Sale proceeds realized upon
disposition of equipment 4,746,333 1,628,526 348,792
------------------ ------------------ ------------------
Total cash generated from rents
and equipment sale proceeds 11,476,175 9,123,818 2,126,560
Original acquisition cost of equipment
disposed 8,909,602 7,092,845 1,500,126
------------------ ------------------ ------------------
Excess of total cash generated to cost
of equipment disposed $ 2,566,573 $ 2,030,973 $ 626,434
================== ================== ==================
23
AFG Investment Trust B
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 $ 961,607 $ 508,542 $ 1,470,149
Add:
Depreciation 645,123 -- 645,123
Accretion of bond discount (370) -- (370)
Management fees 72,020 -- 72,020
Book value of disposed equipment -- 4,237,791 4,237,791
Less:
Principal reduction of notes payable (162,387) -- (162,387)
------------------ ------------------ ------------------
Cash from operations, sales and
refinancings 1,515,993 4,746,333 6,262,326
Less:
Management fees (72,020) -- (72,020)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 1,443,973 4,746,333 6,190,306
Other sources and uses of cash:
Cash at beginning of year 2,350,342 3,559,193 5,909,535
Restricted cash 1,627,304 -- 1,627,304
Purchase of marketable securities (103,132) -- (103,132)
Investment in EFG/Kirkwood (1,353,400) -- (1,353,400)
Net change in receivables and accruals (29,885) -- (29,885)
Less:
Cash distributions paid (2,047,451) -- (2,047,451)
------------------ ------------------ ------------------
Cash at end of year $ 1,887,751 $ 8,305,526 $ 10,193,277
================== ================== ==================
24
AFG Investment Trust B
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 $ 475,734
25
AFG Investment Trust B
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:
Aircraft Maintenance $ 138,491
Legal 96,924
Selling & Remarketing 61,056
Accounting and Tax 54,119
Printing & Document Services 26,140
Office 19,960
Investor Services 16,711
Third Party Service Contracts 12,865
Bank Charges 12,514
Travel & Entertainment 6,029
Insurance 3,503
-----------------
448,312
Recovery of aircraft maintenance costs
incurred in prior years (178,155)
-----------------
Total $ 270,157
=================
26
AFG Investment Trust B
SCHEDULE OF EQUIPMENT
December 31, 1999
LEASE
EXPIRATION NET BOOK
LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT
- ---------------------------------- ---------------------- ------------------ -------------- ---------------- -------------
Amoco Corporation A-O-20 $ 20,748
Amoco Corporation A-O-22 75,336 $ 15,539
Amoco Corporation A-O-23 75,000 13,317
Collection Services, Inc. A-1 83,458
Cray Research, Inc. 1 859,132
International Paper A-24-122 19,891
International Paper B-24-64 12,879 1,314
International Paper B-71-84 09/30/00 202,056 86,595
Ford Motor Company A861530-RN3 33,194
Ford Motor Company 300581-2 15,319
GATX Logistics, Inc. E-2 41,694
GATX Logistics, Inc. E-3 68,861
General Motors Corporation A-22 13,451
General Motors Corporation A-26 27,463
General Motors Corporation A-26RN1 825,570
General Motors Corporation A-28 205,130
General Motors Corporation A-28RN1 410,497
General Motors Corporation A-34 27,274
Maytag Corporation A-13 03/31/00 29,382 5,137
Montgomery Ward & Co., Inc. 1ARN1 12/31/00 863,922
Montgomery Ward & Co., Inc. 1BRN1 12/31/00 1,753,271
Montgomery Ward & Co., Inc. 1CRN1 12/31/00 28,837
Montgomery Ward & Co., Inc. 1DRN1 12/31/00 57,557
Owens-Corning Fiberglass Corp. A-42 572
Tenneco Packaging B-72RN1 107,464
Reno Air, Inc. N753RA 01/14/03 1,239,741 1,017,113 $ 656,454
Temple-Inland Forest Product Group A-1RN1 12/31/00 144,841 51,711
USS/Kobe Steel Company A-1 122,886
USS/Kobe Steel Company A-2 44,254
USS/Kobe Steel Company A-6 71,467 24,467
Walker Manufacturing Company A-9RN1 02/28/01 56,975
27
AFG Investment Trust B
SCHEDULE OF EQUIPMENT
December 31, 1999
LEASE
EXPIRATION NET BOOK
LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT
- ---------------------------------- ---------------------- ------------------ -------------- ---------------- -------------
Xerox Corporation BB-57RN2 01/31/00 $ 110,738
Xerox Corporation BB-60RN3 07/31/00 24,592
Xerox Corporation BB-61RN1 10/31/00 50,975
Xerox Corporation BB-68RN1 10/31/01 23,499
Getchell Gold Corporation A-10 12/31/00 219,161 65,058
-------------- ---------------- -------------
Total $7,967,087 $ 1,280,251 $ 656,454
============== ================ =============
28