AFG INVESTMENT TRUST
AFG Investment Trust B
Annual Report to the Participants, December 31, 1997
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 3-8
FINANCIAL STATEMENTS:
Report of Independent Auditors 9
Statement of Financial Position
at December 31, 1997 and 1996 10
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 11
Statement of Changes in Participants' Capital
for the years ended December 31, 1997, 1996 and 1995 12
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 13
Notes to the Financial Statements 14-24
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 25
Statement of Cash and Distributable Cash From
Operations, Sales and Refinancings 26
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 27
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SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For the years ended December 31, 1997, 1996, 1995, 1994 and 1993:
Summary of
Operations 1997 1996 1995 1994 1993
- ---------------------- ----------- ----------- ----------- ----------- ----------
Lease revenue $ 5,400,331 $ 5,809,086 $ 6,173,972 $ 5,507,765 $ 5,611,138
Net income $ 1,174,206 $ 807,840 $ 527,564 $ 1,771,705 $ 710,004
Per Beneficiary Interest:
Net income
Class A Interests $ 1.05 $ 1.10 $ 0.72 $ 2.42 $ 0.97
Class B Interests $ 0.05 $ -- $ -- $ -- $ --
Cash distributions
Class A Interests $ 3.11 $ 1.42 $ 2.00 $ 2.52 $ 2.52
Class B Interests $ 0.30 $ -- $ -- $ -- $ --
Financial Position
------------------
Total assets $17,214,157 $16,631,159 $19,573,350 $22,320,875 $25,677,488
Total long-term obligations $ 2,038,628 $ 4,352,811 $ 7,097,113 $ 8,713,009 $11,971,262
Participants' capital $14,816,135 $11,925,600 $12,157,251 $13,092,674 $13,168,952
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year ended
December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of AFG Investment Trust B (the
"Trust") 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 outcome of the Class Action Lawsuit
described in Note 7 to the accompanying financial statements, and the ability of
Equis Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG"), to collect all rents due under the
attendant lease agreements and to successfully remarket the Trust's equipment,
upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. EFG's computer
programs were designed and written using four digits to define the applicable
year. As a result, EFG does not anticipate system failure or miscalculations
causing disruptions of operations. Based on recent assessments, EFG determined
that minimal modification of software is required so that its network operating
system will function properly with respect to dates in the year 2000 and
thereafter. EFG believes that with these modifications to the existing operating
system, the Year 2000 Issue will not pose significant operational problems for
its computer systems. EFG will utilize internal resources to upgrade software
for Year 2000 modifications and anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any anticipated impact on its operating
system. The total cost of the Year 2000 project is expected to be insignificant
and have no effect on the results of operations of the Trust.
OVERVIEW
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the future business
operations of the Trust. See Note 7 to the accompanying financial statements.
The Trust's operations commenced in 1992.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Trust recognized lease revenue of
$5,400,331 compared to $5,809,086 and $6,173,972 for the years ended December
31, 1996 and 1995, respectively. The decrease in lease revenue from 1996 to 1997
resulted principally from primary lease term expirations and the sale of
equipment. The decrease in lease revenue from 1995 to 1996 was due primarily to
the Trust's sale of its interest in a Boeing 747-SP aircraft leased to United
Air Lines, Inc. (the "United Aircraft") in February 1996, as discussed below.
The future level of lease revenue to be recognized by the Trust may be impacted
by the proposed amendment to the Trust Agreement as described in Note 10 to the
accompanying financial statements.
Interest income for the year ended December 31, 1997 was $264,503 compared
to $106,186 and $45,156 for the years ended December 31, 1996 and 1995,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income
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in 1997 included interest earned on unexpended proceeds resulting from the
issuance of Class B Interests (see below). Future interest income will fluctuate
in relation to prevailing interest rates, the collection of lease revenue and
the proceeds from equipment sales.
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.
During 1997, the Trust sold equipment having a net book value of $272,233 to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $76,559.
In February 1996, the Trust concluded the sale of its interest in the United
Aircraft to the lessee, United Air Lines Inc. The Trust recognized a net loss of
$560,982 in connection with this transaction, of which $384,782 was recognized
as Write-Down of Equipment in 1995. The remainder of $176,200 was recognized as
a loss on sale of equipment on the accompanying financial statements for the
year ended December 31, 1996. In addition to lease rents, the Trust received net
sale proceeds of $1,684,292 for the aircraft. A portion of such sale proceeds
was reinvested in other equipment in March 1996 through the acquisition of an
8.86% ownership interest in an aircraft (the "Reno Aircraft") at an aggregate
cost of $1,239,741. To acquire its interest in the Reno Aircraft, the Trust
obtained long-term financing of $997,888 from a third-party lender and utilized
cash proceeds of $241,853 from the sale of the United Aircraft. During the year
ended December 31, 1996, the Trust sold other equipment having a net book value
of $389,885 to existing lessees and third parties. These sales resulted in a net
loss, for financial statement purposes, of $48,394.
During 1995, the Trust sold equipment having a net book value of $4,084,735
to existing lessees and third parties. These sales resulted in a net loss, for
financial statement purposes, of $225,037. The equipment sales included the
Trust's interest in a vessel with an original cost and net book value of
$5,406,468 and $4,023,021, respectively, which the Trust sold to an existing
lessee in June 1995. In connection with this sale, the Trust realized sale
proceeds of $3,567,942 and the purchaser assumed related debt and interest of
$269,023 and $1,734, respectively, which resulted in a net loss, for financial
statement purposes, of $184,322. This equipment was sold prior to the expiration
of the related lease term. The sale proceeds related to this transaction were
fully reinvested in other equipment in 1995. The Trust received $199,450 in 1996
from the lessee related to a residual sharing agreement between the lessee and
the Trust. In connection with this agreement, the Trust was entitled to a
portion of the sale proceeds realized by the lessee upon its ultimate
disposition of the vessel to a third party. This amount is reflected as Other
Income on the accompanying Statement of Operations for the year ended December
31, 1996.
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.
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Depreciation and amortization expense was $3,862,631, $4,284,049 and
$4,176,540 for the years ended December 31, 1997, 1996 and 1995, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the Trust
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life. The Trust
purchased equipment during both 1996 and 1995.
Interest expense was $196,589 or 3.6% of lease revenue in 1997, $408,153 or
7% of lease revenue in 1996 and $539,047 or 8.7% of lease revenue in 1995.
Interest expense in future periods will continue to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding indebtedness.
Management fees were 4.4%, 4.3% and 4% of lease revenue during the years
ended December 31, 1997, 1996 and 1995, 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.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 5%, 2.4% and 2% of lease revenue during the years ended December 31,
1997, 1996 and 1995, respectively. The increase in operating expenses from 1996
to 1997 was due primarily to costs incurred in connection with the Solicitation
and Registration Statements described in Note 8 to the accompanying financial
statements and increases in administrative and professional service costs. The
increase in operating expenses from 1995 to 1996 was due primarily to an
increase in administrative and professional service costs. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a trust.
Other fluctuations typically occur in relation to the volume and timing of
remarketing activities.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview". As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $4,399,596, $5,645,405 and $4,877,921 in 1997, 1996 and 1995,
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. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Trust experiences a higher frequency of remarketing events.
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.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in
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the collection of stipulated cash settlements pursuant to terms and conditions
contained in the underlying lease agreements.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. The Trust expended $1,441,796 and $5,605,829 to acquire
equipment during the years ended December 31, 1996 and 1995, respectively,
including new equipment acquired pursuant to the reinvestment provisions of the
Trust's Prospectus of approximately $1,400,000 and $3,500,000 during the
respective years. The reinvestment equipment was financed through a combination
of leveraging and the sale proceeds available from the aircraft and vessel
transactions, discussed above. There were no equipment acquisitions during 1997.
During 1997, the Trust received sale proceeds of $348,792. In 1996, the Trust
realized equipment sale proceeds of $2,025,783, including $1,684,292 of proceeds
from the United Aircraft and; in 1995, the Trust received sale proceeds of
$3,588,941, including $3,567,942 of proceeds from the vessel transaction. Future
inflows of cash from asset disposals will vary in timing and amount and will be
influenced by many factors including, but not limited to, the frequency and
timing of lease expirations, the type of equipment being sold, its condition and
age, and future market conditions.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. Cash inflows of
$997,888 and $2,296,728 in 1996 and 1995, respectively, resulted from leveraging
a portion of the Trust's equipment portfolio with third-party lenders. Each note
payable is recourse only to the specific equipment financed and to the minimum
rental payments contracted to be received during the debt amortization period
(which period generally coincides with the lease rental term). As rental
payments are collected, a portion or all of the rental payment is used to repay
the associated indebtedness. In future periods, the amount of cash used to repay
debt obligations will decline as the principal balance of notes payable is
reduced through the collection and application of rents. However, the Trust has
a balloon payment obligation of $282,421 at the expiration of the primary lease
term related to the Reno Aircraft. The Managing Trustee also expects to use a
portion of the Trust's available cash to retire certain indebtedness.
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, 1997, the Managing Trustee had a positive tax capital
account balance (see Note 6 to the financial statements).
At December 31, 1997, the Trust had aggregate future minimum lease payments
of $2,493,960 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 $2,038,628 (see Note 5 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often dependent upon the needs and interests of the existing
lessees. Some lessees may choose to renew their lease contracts, while others
may elect to return the equipment. In the latter instances, the equipment could
be re-leased to another lessee or sold to a third party. Accordingly, as the
Trust matures and a greater level of its equipment assets become available for
remarketing, the cash flows of the Trust will become less predictable. In
addition, the Trust will have cash outflows to satisfy interest on indebtedness
and to pay management fees and operating expenses. Ultimately, the Trust is
expected to meet its future disbursement obligations and to distribute any
excess of cash inflows over cash outflows to the Participants in accordance with
the Trust Agreement. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described herein
and in the accompanying financial statements and result in fluctuations to the
Trust's periodic cash distribution payments.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 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 Special Beneficiary, EFG, purchased
997,373 of such Class B Interests, generating
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$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. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution to
the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid
this special cash distribution of approximately $1.47 per Class A Interest,
aggregating $979,449, to the Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the
outstanding Class A Beneficiary Interests of the Trust by filing a Form 13E-4,
Issuer Tender Offer Statement, with the SEC and distributing to the Class A
Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $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. The Tender Documents describe, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. On December 1, 1997, the Trust used an additional $6,080
of such proceeds to purchase 640 of the remaining Class A Interests. The Trust
intends to continue to purchase additional outstanding Class A Interests through
future offers to purchase during the Initial Redemption Period (two years
following the close of the Class B offering which occurred on July 17,1997).
These purchases will be funded by the remaining net proceeds realized from the
issuance of the Class B Interests and are classified as Restricted Cash on the
Trust's Statement of Financial Position at December 31, 1997 (see also Note 10
to the accompanying 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.
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. Accordingly, in
order to better align monthly cash distributions with the Trust's operating cash
flows, the Managing Trustee reduced the level of monthly cash distributions from
an annualized rate of $2.52 per Class A Interest (the rate established and paid
from the Trust's inception through September 1995) to an annualized rate of
$1.26 per Class A Interest commencing in October 1995. In October 1996, the
Managing Trustee increased the annualized distribution rate to $1.64 per Class A
Interest and sustained this distribution rate throughout 1997. For the Class B
Beneficiaries, the Managing Trustee established and paid, from the Trust, an
annualized distribution of $0.66 per Class B Interest commencing July 18, 1997.
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 presented as a
component of financing activities. For the year ended December 31, 1997, the
Trust declared total cash distributions of $2,447,053, including the special
distribution described above. The Beneficiaries were allocated $2,311,300
($2,012,992 for Class A Beneficiaries and $298,308 for Class B Beneficiaries);
the Special Beneficiary was allocated $121,077; and the Managing Trustee was
allocated $14,676.
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The nature of the Trust's principal cash flows gradually will shift from
rental receipts to equipment sale proceeds as the Trust matures. As this occurs,
the Trust's cash flows will become more volatile in that certain of the Trust's
equipment leases will be renewed and certain of its assets will be sold. In some
cases, the Trust may be required to expend funds to refurbish or otherwise
improve the equipment being remarketed in order to make it more desirable to a
potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing
Trustee will attempt to monitor and manage these events to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
the collection of contractual rents, the retirement of scheduled indebtedness,
the Trust's future working capital and equipment requirements, in establishing
future cash distribution. Ultimately, the Beneficiaries should expect that cash
distribution rates will fluctuate over the long term as a result of future
remarketing activities.
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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, 1997 and 1996, 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, 1997. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AFG Investment Trust B at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Participants is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 11, 1998
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AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 3,893,242 $ 2,829,093
Restricted cash 3,121,763 --
Rents receivable 675,629 339,293
Accounts receivable - affiliate 350,009 154,395
Equipment at cost, net of accumulated
depreciation of $14,796,020 and $12,161,949
at December 31, 1997 and 1996, respectively 9,173,514 13,307,711
Organization costs, net of accumulated
amortization of $5,000 and $4,333
at December 31, 1997 and 1996, respectively -- 667
------------ ------------
Total assets $ 17,214,157 $ 16,631,159
------------ ------------
------------ ------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 2,038,628 $ 4,352,811
Accrued interest 27,395 36,571
Accrued liabilities 11,550 23,250
Accrued liabilities - affiliate 49,597 47,178
Deferred rental income 35,275 45,550
Cash distributions payable to participants 235,577 200,199
------------ ------------
Total liabilities 2,398,022 4,705,559
------------ ------------
Participants' capital:
Managing Trustee 3,535 (30,382)
Special Beneficiary 29,162 (257,894)
Class A Beneficiary Interests (582,017 and
665,494 Interests at December 31, 1997 and 1996,
respectively; initial purchase price of $25 each) 10,864,150 12,213,876
Class B Beneficiary Interests (1,000,961 Interests;
initial purchase price of $5 each) 4,710,663 --
Treasury Interests (83,477 Interests at Cost) (791,375) --
------------ ------------
Total participants' capital 14,816,135 11,925,600
------------ ------------
Total liabilities and participants' capital $ 17,214,157 $ 16,631,159
------------ ------------
------------ ------------
The accompanying notes are an integral part of
these financial statements.
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AFG Investment Trust B
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Income:
Lease revenue $ 5,400,331 $ 5,809,086 $ 6,173,972
Interest income 264,503 106,186 45,156
Other income -- 199,450 --
Gain (loss) on sale of equipment 76,559 (224,594) (225,037)
----------- ----------- -----------
Total income 5,741,393 5,890,128 5,994,091
----------- ----------- -----------
Expenses:
Depreciation and amortization 3,862,631 4,284,049 4,176,540
Write-down of equipment -- -- 384,782
Interest expense 196,589 408,153 539,047
Equipment management fees - affiliate 235,030 249,205 244,800
Operating expenses - affiliate 272,937 140,881 121,358
----------- ----------- -----------
Total expenses 4,567,187 5,082,288 5,466,527
----------- ----------- -----------
Net income $ 1,174,206 $ 807,840 $ 527,564
----------- ----------- -----------
----------- ----------- -----------
Net income
per Class A Beneficiary Interest $ 1.05 $ 1.10 $ 0.72
----------- ----------- -----------
----------- ----------- -----------
per Class B Beneficiary Interest $ 0.05 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
Cash distributions declared
per Class A Beneficiary Interest $ 3.11 $ 1.42 $ 2.00
----------- ----------- -----------
----------- ----------- -----------
per Class B Beneficiary Interest $ 0.30 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of
these financial statements.
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AFG Investment Trust B
STATEMENT OF CHANGES IN
PARTICIPANTS' CAPITAL for the years
ended December 31, 1997, 1996 and 1995
Managing Special Class A Beneficiaries Class B Beneficiaries
Trustee Beneficiary ----------------------- ----------------------- Treasury
Amount Amount Interests Amount Interests Amount Interests Total
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1994 $(18,711) $(161,611) 665,494 $ 13,272,996 -- $ -- $ -- $ 13,092,674
Net income - 1995 5,276 43,524 -- 478,764 -- -- -- 527,564
Cash distributions declared (14,630) (120,696) -- (1,327,661) -- -- -- (1,462,987)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1995 (28,065) (238,783) 665,494 12,424,099 -- -- -- 12,157,251
Net income - 1996 8,078 66,647 -- 733,115 -- -- -- 807,840
Cash distributions declared (10,395) (85,758) -- (943,338) -- -- -- (1,039,491)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1996 (30,382) (257,894) 665,494 12,213,876 -- -- -- 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 48,593 408,133 -- 663,266 -- 54,214 -- 1,174,206
Cash distributions declared (14,676) (121,077) -- (2,012,992) -- (298,308) -- (2,447,053)
Acquisition of Treasury
Interests, at Cost -- -- (83,477) -- -- -- (791,375) (791,375)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1997 $ 3,535 $ 29,162 582,017 $ 10,864,150 1,000,961 $ 4,710,663 $(791,375) $ 14,816,135
-------- --------- -------- ------------ --------- ----------- --------- ------------
-------- --------- -------- ------------ --------- ----------- --------- ------------
The accompanying notes are an integral part of
these financial statements.
-12-
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Cash flows from (used in) operating activities:
Net income $ 1,174,206 $ 807,840 $ 527,564
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 3,862,631 4,284,049 4,176,540
Write-down of equipment -- -- 384,782
(Gain) loss on sale of equipment (76,559) 224,594 225,037
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable (336,336) 390,262 (329,882)
Accounts receivable - affiliate (195,614) (48,901) (66,857)
Increase (decrease) in:
Accrued interest (9,176) (102,023) 80,950
Deferred interest -- 14,408 --
Accrued liabilities (11,700) 3,250 4,500
Accrued liabilities - affiliate 2,419 47,178 (83,863)
Deferred rental income (10,275) 24,748 (40,850)
----------- ----------- -----------
Net cash from operating activities 4,399,596 5,645,405 4,877,921
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment -- (1,441,796) (5,605,829)
Proceeds from equipment sales 348,792 2,025,783 3,588,941
----------- ----------- -----------
Net cash from (used in) investing activities 348,792 583,987 (2,016,888)
----------- ----------- -----------
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 (3,121,763) -- --
Proceeds from notes payable -- 997,888 2,296,728
Principal payments - notes payable (2,314,183) (3,742,190) (3,643,601)
Distributions paid (2,411,675) (993,290) (1,618,196)
----------- ----------- -----------
Net cash used in financing activities (3,684,239) (3,737,592) (2,965,069)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,064,149 2,491,800 (104,036)
Cash and cash equivalents at beginning of year 2,829,093 337,293 441,329
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,893,242 $ 2,829,093 $ 337,293
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 205,765 $ 495,768 $ 458,097
----------- ----------- -----------
----------- ----------- -----------
Supplemental schedule of non-cash investing and financing activities:
During 1995, the Trust sold equipment to a lessee which assumed related debt
and interest of $269,023 and $1,734, respectively.
The accompanying notes are an integral part of
these financial statements.
-13-
AFG Investment Trust B
Notes to the Financial Statements
December 31, 1997
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 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
and an additional 640 Class A Interests on December 1, 1997 using proceeds from
the issuance of Class B Interests. Accordingly, there are 582,017 Class A
Interests currently outstanding.
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, EFG. The Managing Trustee is
responsible for the general management and business affairs of the Trust while
the Special Beneficiary acts as Advisor to the Trust and provides services in
connection with the acquisition and remarketing of the Trust's assets. AFG ASIT
Corporation is a wholly-owned subsidiary of Equis II Corporation and an
affiliate of EFG. Class A Interests and Class B Interests basically have
identical voting rights and, therefore, Equis II Corporation has control over
the Trust on all matters on which the Beneficiaries may vote. 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 (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 shall be made 90.75% to the Beneficiaries,
8.25% to the Special Beneficiary and 1% to the Managing Trustee.
Under the terms of the Advisory Agreement between the Trust and EFG,
management services are provided by EFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also see Note 4.)
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Trust and several
other Direct-Participation equipment leasing programs sponsored or co-sponsored
by EFG (the "Other Investment Programs"). The Company arranges to broker or
originate equipment leases, acts as remarketing agent and asset manager, and
provides leasing support services, such as billing, collecting, and asset
tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating
primarily to the business of originating new leases, and the name "American
Finance Group," and its acronym, to a third party. AFG changed its name
-14-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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
STATEMENT OF CASH FLOWS AND RESTRICTED CASH
The Trust considers liquid investment instruments purchased with a maturity
of three months or less to be cash equivalents. From time to time, the Trust
invests excess cash with large institutional banks in federal agency discount
notes and reverse repurchase agreements with overnight maturities. Under the
terms of the agreements, title to the underlying securities passes to the Trust.
The securities underlying the agreements are book entry securities. At December
31, 1997, the Trust had $6,911,300 invested in federal agency discount notes and
reverse repurchase agreements secured by U.S. Treasury Bills or interests in
U.S. Government securities. Such cash includes $3,121,763 which represents net
proceeds realized from the offering of the Class B Interests less the portion
thereof used to pay a special distribution to the Class A Beneficiaries and to
redeem Class A Interests (see Note 9). These funds are reserved for future
purchases of Class A Interests pursuant to the Trust Agreement and are
classified as Restricted Cash on the Trust's Statement of Financial Position at
December 31, 1997.
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 $2,493,960 are due as follows:
For the year ending December 31, 1998 $1,576,201
1999 340,958
2000 257,841
2001 159,480
2002 159,480
----------
Total $2,493,960
----------
----------
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:
1997 1996 1995
---------- ---------- ----------
Alaska Airlines, Inc. $1,001,979 $1,004,770 $1,004,770
Tarmac Mid-Atlantic, Incorporated $ 640,293 $ -- $ --
Montgomery Ward and Company, Inc. $ 576,457 $ -- $ --
OMI Corporation $ -- $ -- $ 623,598
USE OF ESTIMATES
-15-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment cost represents Asset Base Price plus acquisition
fees and was determined in accordance with the Trust Agreement and certain
regulatory guidelines. Asset Base Price is affected by the relationship of the
seller to the Trust as summarized herein. Where the seller of the equipment was
EFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid
for the equipment by EFG or the Affiliate plus all actual costs accrued by EFG
or the Affiliate while carrying the equipment less the amount of all primary
term rents earned by EFG or the Affiliate prior to selling the equipment or (ii)
fair market value as determined by the Managing Trustee in its best judgment,
including all liens and encumbrances on the equipment and other actual expenses.
Where the seller of the equipment was a third party who did not manufacture the
equipment, Asset Base Price was the lower of (i) the price invoiced by the third
party or (ii) fair market value as determined by the Managing Trustee. Where the
seller of the equipment was a third party who also manufactured the equipment,
Asset Base Price was the manufacturer's invoice price, net of any manufacturer
rebates or incentives, which price was considered to be representative of fair
market value.
DEPRECIATION AND AMORTIZATION
The Trust's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Trust depreciates the difference between (i) the
cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Trust continues to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
Periodically, the Managing Trustee evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. For purposes of
this comparison, "net carrying value" represents, at a given date, the net book
value (equipment cost less accumulated depreciation for financial reporting
purposes) of the Trust's equipment and "net realizable value" represents, at the
same date, the aggregate undiscounted cash flows resulting from future
contracted lease payments plus the estimated residual value of the Trust's
equipment. The Managing Trustee evaluates significant equipment assets, such as
aircraft and vessels, individually. All other assets are evaluated collectively
by equipment type unless the Managing Trustee learns of specific circumstances,
such as a lessee default, technological obsolescence, or other market
developments, which could affect the net realizable value of particular assets.
Adjustments to reduce the net carrying value of equipment are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value. Such adjustments are reflected separately on the accompanying
Statement of Operations as Write-Down of Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Organization costs are amortized using the straight-line method over a
period of five years.
ACCRUED LIABILITIES - AFFILIATE
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (See Note 4).
-16-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
ALLOCATION OF NET INCOME OR LOSS
Prior to adoption of the current Trust Agreement on July 15, 1997 (see
Note 8), 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). Subsequent to adoption of the current
Trust Agreement, net income is allocated 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. Net losses
are allocated 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.
The allocation of net income or loss pursuant to the Trust Agreement 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, 1997 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 $151,696, $1,251,493,
$7,904,516, and $5,508,430, respectively. See Note 6 for additional information
concerning the allocation of net income or loss for income tax reporting
purposes.
NET INCOME AND CASH DISTRIBUTIONS PER BENEFICIARY INTEREST
Net income and cash distributions per Class A Interest in 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 A Beneficiary Interest are based on
665,494 Class A Interests outstanding during each of the years ended December
31, 1996 and 1995. Net income and cash distributions per Class B Interest are
based on 1,000,961 Class B Interests outstanding during the period July 18, 1997
through December 31, 1997. For each of the aforementioned periods, net income
and cash distributions per Beneficiary Interest are computed after allocation of
the Managing Trustee's and Special Beneficiary's shares of net income and cash
distributions.
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1997. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1997 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-
-17-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
lease or being leased on a month-to-month basis. In the opinion of EFG, the
acquisition cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------------- ------------ -------------- ----------------------------------
Aircraft 0-60 $ 8,018,105 NV/WA
Computers and peripherals 0-12 4,210,804 AL/CA/CO/FL/GA/IL/IN/KS/LA/MA
Materials handling 0-33 4,167,304 MD/MI/MN/NC/NJ/NM/NY/OH
Communications 3-12 2,908,263 OK/OR/PA/SC/TN/TX/VA/WI/WV
AR/CA/FL/GA/IA/IL/IN/MI/NC/NY/OH
PA/TX/VA/WV
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
General plant and warehouse 0 1,576,077 VA
Retail store fixtures 0-3 1,101,551 CO/FL/GA/LA/TX
Construction and mining 0-36 836,390 NV/VA
Manufacturing 0 449,902 IL/VA
Furniture and fixtures 10 284,019 PA
Tractors and heavy duty trucks 0-21 245,851 CO/FL/MI/VA
Trailers/intermodal containers 0-6 128,443 OH/VA
Photocopying 0 42,825 CT/IN
--------------
Total equipment cost 23,969,534
Accumulated depreciation (14,796,020)
--------------
Equipment, net of accumulated depreciation $ 9,173,514
--------------
--------------
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, 1997 the Trust's equipment portfolio included
equipment having a proportionate original cost of $13,229,034, representing
approximately 55% 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
$11,551,000 and a net book value of approximately $6,900,000 at December 31,
1997. (See Note 5.)
Generally, the costs associated with maintaining, insuring and operating
the Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust.
As equipment is sold to third parties, or otherwise disposed of, the Trust
will recognize a gain or loss equal to the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition. The ultimate realization of estimated residual value
in the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment
-18-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
upon the expiration of the primary lease terms. At December 31, 1997, the Trust
held equipment which had been fully depreciated for sale or re-lease with an
original cost of approximately $18,000. The Managing Trustee is actively seeking
the sale or re-lease of this equipment. In addition, the summary above also
includes equipment being leased on a month-to-month basis.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1997, 1996 and
1995, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
1997 1996 1995
-------- -------- --------
Equipment acquisition fees $ -- $ 36,673 $107,415
Offering costs 50,048 -- --
Equipment management fees 235,030 249,205 244,800
Administrative charges 65,196 42,123 21,000
Reimbursable operating expenses
due to third parties 207,741 98,758 100,358
-------- -------- --------
Total $558,015 $426,759 $473,573
-------- -------- --------
-------- -------- --------
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG is compensated
by an amount equal to .28% of Equipment Base Price paid by the Trust. For
acquisition services resulting from reinvestment, EFG is compensated by an
amount equal to 3% of Equipment Base Price paid by the Trust. For management
services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Trust or (ii) fees which the Managing Trustee
reasonably believes to be competitive for similar services for similar
equipment. Both of these fees are subject to certain limitations defined in the
Trust Agreement (see Note 10 concerning proposed changes to the fees paid to EFG
and its affiliates). 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.
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, 1997, the Trust was owed $350,009 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1998.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership formed in 1995 and owned and controlled by certain principals of
EFG, owns 839 Class A Interests or less than 1% of the total outstanding Class A
Interests of the Trust. EFG owns a 49% limited partnership interest in ONC,
which it acquired in December 1996.
-19-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Refer to Note 8 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and the change in ownership of the Managing
Trustee.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of installment notes of
$2,038,628 payable to banks and institutional lenders. The notes bear interest
rates ranging between 5.69% and 8.11%, except for one note which bears a
fluctuating interest rate based on LIBOR (5.72% at December 31, 1997) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trust has a balloon payment obligation of $282,421 at the expiration of the
primary lease term related to the Reno Aircraft. The carrying amount of notes
payable approximates fair value at December 31, 1997.
The annual maturities of the notes payable are as follows:
For the year ending December 31,1998 $1,284,439
1999 109,537
2000 118,459
2001 128,106
2002 398,087
----------
Total $2,038,628
----------
----------
NOTE 6 - INCOME TAXES
The Trust is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Trust.
For financial statement purposes, the Trust allocates net income 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. Net losses are allocated 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, 1997, 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, 1997, 1996 and 1995:
1997 1996 1995
----------- ----------- ---------
Net income $ 1,174,206 $ 807,840 $ 527,564
Tax depreciation in excess of
financial statement depreciation 766,944 (279,916) (830,733)
Tax gain in excess of book gain (loss) 185,325 619,935 865,755
Deferred rental income (10,275) 24,748 (40,850)
-20-
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Other (115,487) 21,123 --
----------- ----------- ---------
Net income for federal income tax
reporting purposes $ 2,000,713 $ 1,193,730 $ 521,736
----------- ----------- ---------
----------- ----------- ---------
The following is a reconciliation between participants' capital
reported for financial statement and federal income tax reporting purposes for
the years ended December 31, 1997 and 1996:
1997 1996
----------- -----------
Participants' capital $14,816,135 $11,925,600
Add back selling commissions and organization
and offering costs 1,625,692 1,575,644
Financial statement distributions in excess of
tax distributions -- 18,518
Cumulative difference between federal income tax
and financial statement income (loss) (5,054,895) (5,881,402)
----------- -----------
Participants' capital for federal income tax
reporting purposes $11,386,932 $ 7,638,360
----------- -----------
----------- -----------
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - 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 Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
beneficiaries (or partners, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants.
(See Note 10) To the extent that the
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AFG Investment Trust B
Notes to the Financial Statements
(Continued)
parties agree upon a Stipulation of Settlement that is approved by the Court,
the complete terms thereof will be communicated to all of the beneficiaries (or
partners) of the Nominal Defendants to enable them to vote thereon.
There can be no assurance that the parties will agree on a Stipulation
of Settlement, or that it will be approved by the Court, or that the outcome of
the voting by the beneficiaries (or partners) of the Nominal Defendants,
including the Trust, will result in a settlement finally being effected or in
the Trust being included in any such settlement. The Managing Trustee and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that a Stipulation of Settlement will be agreed upon by the
parties and approved by the Court. In the absence of a Stipulation of Settlement
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit. The Managing Trustee and its
affiliates cannot predict with any degree of certainty the ultimate outcome of
such litigation.
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Trust, National Steel
Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA")
for the lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and other
remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice
of Removal which removed the case to the United States District Court, District
of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's
Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory
relief and alleging breach of contract, implied covenant of good faith and fair
dealing and specific performance. EFG filed its Answer to these counterclaims on
September 29, 1995. Though the parties have been discussing settlement with
respect to this matter for some time, to date, the negotiations have been
unsuccessful. Notwithstanding these discussions, EFG recently filed an Amended
and Supplemental Complaint alleging further default under the MLA and the matter
remains pending before the Court. The Trust has not experienced any material
losses as a result of this action.
NOTE 8 - ISSUANCE OF CLASS B INTERESTS
On October 26, 1996, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission (the "SEC") which subsequently
was sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the
Securities Exchange Act. The Solicitation Statement sought the consent of the
Beneficiaries to a proposed amendment (the "Amendment") to the Amended and
Restated Declaration of Trust (the "Trust Agreement") which would (i) amend the
provisions of the Trust Agreement governing the redemption of Beneficiary
Interests to permit the Trust to offer to redeem outstanding Beneficiary
Interests at such times, in such amounts, in such manner and at such prices as
the Managing Trustee might determine from time to time, in accordance with
applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an additional class of
security with such designations, preferences and relative, participating,
optional or other special rights, powers and duties as the Managing Trustee
might affix. The funds obtained through the issuance of such a security would be
used by the Trust to (a) expand redemption opportunities for Beneficiaries
without using Trust funds which might otherwise be available for cash
distributions; and (b) make a special one-time cash distribution to the Class A
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required the
consent of the Beneficiaries holding more than 50% in the aggregate of the Class
A Interests held by all Class A Beneficiaries. A majority of Class A Interests,
representing 369,960 Interests or 55.6% of all Class A Interests, voted in favor
of the Amendment; 69,792 Interests or 10.5% of all Class A Interests voted
against the Amendment; and 24,444 Interests or 3.7% of all Class A Interests
abstained. Approximately 69.8% of all Class A Interests participated in the
vote. Accordingly, the Trust Agreement was amended.
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AFG Investment Trust B
Notes to the Financial Statements
(Continued)
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 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 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 all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A 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. See Note 9
regarding the redemption of Class A Interests.
NOTE 9 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust by filing a Form
13E-4, Issuer Tender Offer Statement, with the SEC and distributing to the Class
A Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $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. The Tender Documents describe, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. On December 1, 1997, the Trust used an additional $6,080
of such proceeds to purchase 640 of the remaining Class A Interests. The Trust
intends to continue to purchase additional outstanding Class A Interests through
future offers to purchase during the Initial Redemption Period (two years
following the close of the Class B offering which occurred on July 17,1997).
These purchases will be funded by the remaining net proceeds realized from the
issuance of the Class B Interests less the portion thereof used to pay a special
distribution to the Class A Geneficiaries and to redeem Class A Interests. These
funds are reserved for future purchases of Class A Interests pursuant to the
Trust Agreement and are classified as Restricted Cash on the Trust's Statement
of Financial Position at December 31, 1997 (see also Note 10 to the accompanying
financial statements).
NOTE 10 - SUBSEQUENT EVENT
On March 11, 1998, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a proposed
amendment (the "Amendment") to the Second Amended and Restated Declaration of
Trust (the "Trust Agreement"). The Solicitation Statement is subject to
regulatory review and comment and thereafter is expected to be distributed to
all of the Beneficiaries of the Trust.
Subject to attaining a settlement in the Class Action Lawsuit described
in Note 8 herein, the Amendment, if approved, would modify the Trust Agreement
in the following principal respects: (i) the Trust would pay a Special
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AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Cash Distribution to the Class A Beneficiaries of record as of September 1,
1997, or to their successors or assigns, totaling $500,709 (or approximately
$0.75 per Class A Interest) using a portion of the Class B capital contributions
that otherwise would be distributed as a Class B Capital Distribution to Equis
II Corporation, the parent company of the Managing Trustee and an affiliate of
EFG; (ii) Equis II Corporation will be required to reduce its prospective Class
B Capital Distributions by $1,126,596 and treat such amount as a long-term
equity investment in the Trust; (iii) certain voting restrictions will be placed
upon the Class B Interests owned by Equis II Corporation; (iv) the Trust's
reinvestment period, which originally expired on September 8, 1996, will be
reinstated until December 31, 2001; and (v) acquisition fees paid to EFG in
connection with reinvestment assets acquired after the Amendment date will be
reduced from a maximum of 3% to 1% and management fees earned in connection with
such assets will be reduced from a maximum of 5% to 2%.
The proposed Amendment also provides for other modifications to the Trust
Agreement which are not contingent upon reaching a settlement in the Class
Action Lawsuit, principally as follows: (i) the Trust's stated investment
policies and objectives will be broadened to permit the Trust to invest in
assets other than leased equipment, and (ii) the Trust's financing provisions
will be modified to eliminate any cap on the amount of aggregate Trust
indebtedness and permit the Trust to use cross-collateralized and other recourse
debt structures, thereby enabling the Trust to secure financing at interest
rates that, generally, would be lower than under current borrowing arrangements.
The Solicitation Statement contains additional information concerning the
proposed Amendment and associated risk factors. The Amendment will be adopted or
rejected based upon the majority of the Class A Interests actually voted
(including 839 Class A Interests owned by an affiliate of EFG). Accordingly, the
Amendment will be adopted no matter how few Class A Interests are actually
voted, provided a majority of those Interests are voted in favor of the
Amendment. Although Equis II Corporation has voting control of the Trust, it
will vote its Class B Interests in the same proportion in which the majority of
the Class A Interests are voted.
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ADDITIONAL FINANCIAL INFORMATION
AFG Investment Trust B
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995.
1997 1996 1995
---------- ---------- ----------
Rents earned prior to disposal of
equipment, net of interest charges $1,777,768 $2,609,305 $2,619,020
Sale proceeds including assumption of
debt and interest, realized upon
disposition of equipment 348,792 2,025,783 3,859,698
---------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds 2,126,560 4,635,088 6,478,718
Original acquisition cost of
equipment disposed 1,500,126 4,311,864 5,576,700
---------- ---------- ----------
Excess of total cash generated to
cost of equipment disposed $ 626,434 $ 323,224 $ 902,018
---------- ---------- ----------
---------- ---------- ----------
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AFG Investment Trust B
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
Sales and
Operations Refinancings Total
----------- ------------ ------------
Net income $ 1,097,647 $ 76,559 $ 1,174,206
Add:
Depreciation and amortization 3,862,631 -- 3,862,631
Management fees 235,030 -- 235,030
Book value of disposed equipment -- 272,233 272,233
Less:
Principal reduction of notes
payable (2,314,183) -- (2,314,183)
----------- ----------- -----------
Cash from operations, sales and
refinancings 2,881,125 348,792 3,229,917
Less:
Management fees (235,030) -- (235,030)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings 2,646,095 348,792 2,994,887
Other sources and uses of cash:
Cash at beginning of year 1,247,218 1,581,875 2,829,093
Proceeds from capital contributions 5,004,805 -- 5,004,805
Payment of offering costs (50,048) -- (50,048)
Purchase of Treasury Interests (791,375) -- (791,375)
Restricted cash (3,121,763) -- (3,121,763)
Net change in receivables and
accruals (560,682) -- (560,682)
Less:
Cash distributions paid (2,411,675) -- (2,411,675)
----------- ----------- -----------
Cash at end of year $ 1,962,575 $ 1,930,667 $ 3,893,242
----------- ----------- -----------
----------- ----------- -----------
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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, 1997
For the year ended December 31, 1997, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
Operating expenses $ 263,484
Offering costs $ 50,048
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