<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION NO. 333-21697
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
AFG INVESTMENT TRUST B
(Name of Registrant)
DELAWARE
(State or other Jurisdiction of Organization)
7394
(Primary Standard Industrial Classification Code Number)
04-3157230
(IRS Employer Identification Number of Registrant)
C/O EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP
98 NORTH WASHINGTON STREET, BOSTON, MASSACHUSETTS 02114 (617) 854-5800
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's
Principal Executive Offices)
JAMES A. COYNE
C/O EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP
98 NORTH WASHINGTON STREET, BOSTON, MASSACHUSETTS 02114 (617) 854-5800
(Address, including Zip Code, and Telephone Number, including Area Code, of
Agent for
Service)
------------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
THOMAS F. GLOSTER III, P.C.
PEABODY & BROWN
101 FEDERAL STREET, BOSTON, MA 02110 (617) 345-1000
(Counsel for Registrant)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER INTEREST OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Rights to Acquire Class B Subordinated
Beneficiary Interests................ 1,000,961 -0- -0- -0-
Class B Subordinated Beneficiary
Interests............................ 1,000,961 $5.00 $5,004,805 $1,517
</TABLE>
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
AFG INVESTMENT TRUST B*
/ / MINIMUM OF 459,191 CLASS B SUBORDINATED INTERESTS ($2,295,955)
AND
MAXIMUM OF 1,000,961 CLASS B SUBORDINATED INTERESTS ($5,004,805)
/ / $5 PER INTEREST
AFG Investment Trust B (the "Trust") is offering Class B Subordinated
Interests exclusively to the current Beneficiaries and the Special Beneficiary
of the Trust. The Class B Subordinated Interests will be issued in accordance
with, and the rights and obligations of the Class B Beneficiaries will be
governed by, the Trust Agreement of the Trust. The Class B Beneficiaries will
have the right to vote on limited matters and there are significant restrictions
on the transferability of the Class B Interests.
The Trust expects to make distributions with respect to each Class B
interest on a quarterly basis in an amount equal to $0.164. Additional
distributions are expected to be made from time to time as determined by the
Managing Trustee.
Each purchaser of Class B Subordinated Interests will be required to make a
minimum purchase equal to the lesser of (a) the full amount of such interests
which the purchaser is permitted to purchase, as described herein under "THE
OFFERING", or (b) 400 Class B Subordinated Interests ($2,000) for IRAs or other
Qualified Plans or 1,000 Class B Subordinated Interests ($5,000) for all other
Investors (with a higher minimum purchase in certain states). Subscriptions for
Class B Interests are irrevocable and may not be terminated or withdrawn by
Investors for any reason.
Approximately 20% of the proceeds of the offering (after payment of offering
expenses) is to be used by the Trust to make a special distribution to the Class
A Beneficiaries and the balance of such net proceeds is intended to be used by
the Trust to repurchase interests held by the current Beneficiaries (the "Class
A Interests").
The closing is currently scheduled to occur on , 1997 but may occur no
later than December 31, 1997. All funds will be returned to the subscribers,
with interest thereon, in the event that the minimum offering is not reached
prior to the offering termination date. The Special Beneficiary and its
Affiliates expect to purchase all Class B Subordinated Interests not otherwise
subscribed for and, therefore, depending on the number of Class B Interests sold
and, possibly, Class A Interests redeemed, may obtain control over all matters
on which Beneficiaries may vote.
INVESTMENT IN THE CLASS B SUBORDINATED INTERESTS INVOLVES SIGNIFICANT RISKS.
THESE RISKS INCLUDE:
- Class B Beneficiaries will have a 40% participation if the Minimum
Offering is reached and a 60% participation if the Maximum Offering is
reached on all matters on which Beneficiaries may vote. Voting control may
be obtained by the Special Beneficiary and its Affiliates.
- Distributions with respect to the Class B Subordinated Interests will be
subordinated to certain distributions with respect to the Class A
Interests, including in particular quarterly distributions of $0.41 per
Class A Interest.
- A special distribution will be made from 20% of the net Offering proceeds
exclusively to the Class A Beneficiaries. The Class B Beneficiaries will
not participate therein.
- There is no assurance that the 80% net proceeds remaining after the
special distribution to the Class A Beneficiaries will be successfully
applied by the Trust to redeem a significant portion of the Class A
Interests, nor is there any assurance as to the amount of the purchase
price for the Class A Interests.
- Any portion of the Offering proceeds not applied to redemption of the
Class A Interests will be returned to the Class B Beneficiaries with a
return thereon of 8% per annum and with a corresponding reduction in
certain distributions thereafter to be made to Class B Beneficiaries.
- No resale market or redemption program exists for the Class B Subordinated
Interests and, accordingly, Investors will probably not be able to dispose
of their Class B Subordinated Interests.
- Lessee defaults may result in lower distributions.
- Conflicts of interest may arise out of transactions between the Trust and
the Managing Trustee and its Affiliates and between the Class A
Beneficiaries and the Class B Beneficiaries, particularly as to the level
and timing of distributions and the exercise of voting rights.
- A material portion of distributions will constitute a return of capital.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- THE TRUST IS NOT A MUTUAL FUND OR OTHER TYPE OF INVESTMENT COMPANY WITHIN
THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940 AND IS NOT SUBJECT TO
REGULATION THEREUNDER.
<TABLE>
<CAPTION>
PRICE TO BENEFICIARIES NET PROCEEDS TO TRUST
(1) (2)(3)
<S> <C> <C>
Price Per Interest............................................ $ 5 $ 5
Total Minimum................................................. $ 2,295,955 $ 2,215,484
Total Maximum................................................. $ 5,004,805 $ 4,897,245
</TABLE>
ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE THIS
PROSPECTUS ARE CONTAINED INSIDE THE BACK COVER.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(See "RISK FACTORS" and "CONFLICTS OF INTEREST" for a discussion of the risk
factors and conflicts of interest associated with an investment in the Class B
Subordinated Interests.) The Trust will use 20% of the proceeds of the Offering
(after deduction for offering expenses) to make a special distribution to the
Class A Beneficiaries and the balance of the proceeds is intended by the
Managing Trustee to be applied from time to time to the redemption of a portion
of the Class A Interests. Any portion of such net proceeds which are not so
applied to redeem Class A Interests within 24 months of the Closing (the
"Initial Redemption Period") will be distributed to the Class B Beneficiaries as
a return of their capital and Distributions with respect to the Class B
Subordinated Interests will be correspondingly reduced. (See "ESTIMATED USE OF
PROCEEDS.")
The Special Beneficiary and its Affiliates presently intend to acquire 8.25%
of the Class B Subordinated Interests in the event that all of the Class A
Investors elect to subscribe for their share of the Class B Subordinated
Interests and to acquire all other Class B Subordinated Interests not otherwise
subscribed for. The purchases by the Special Beneficiary and its Affiliates will
be included by the Trust in determining whether the Minimum Offering has been
raised.
(FOOTNOTES TO TABLE ON PREVIOUS PAGE)
(1) The Trust will offer exclusively to the Class A Beneficiaries and the
Special Beneficiary a minimum of 459,191 Class B Subordinated Interests (the
"Minimum Offering") and a maximum of 1,000,961 Class B Subordinated
Interests (the "Maximum Offering"). The Trust is offering the Class B
Subordinated Interests on a reasonable "best efforts" basis, which means
that no one is guaranteeing the amount of capital which will be raised. (See
"THE OFFERING" for additional information concerning the method of
offering.)
(2) Proceeds to the Trust are calculated after deducting offering expenses
payable by the Trust, which expenses are estimated to be $80,471 if the
Minimum Offering is attained and $107,560 if the Maximum Offering is
attained. (See "THE OFFERING" for information concerning the method of
allocating the Class B Subordinated Interests among the Class A
Beneficiaries and the Special Beneficiary and the minimum purchase
requirements.)
(3) Payments made by investors will be deposited in an interest-bearing escrow
account (the "Escrow Account") at Trust Company of America (the "Escrow
Agent"). If the Trust does not raise the Minimum Offering, the investors'
funds, and escrow interest earned thereon, will be returned to investors
within seven (7) days of the termination of the Offering. If the Closing
occurs, escrow interest (net of certain fees and expenses of the Escrow
Agent) earned on subscriptions accepted by the Managing Trustee will be
distributed to all Class B Beneficiaries within 30 days after the Closing,
pro rata based on the length of time that the investors' funds have been
held in the Escrow Account. Subscriptions are absolutely irrevocable and may
not be terminated or withdrawn by Investors for any reason. (No expenses of
the Offering will be deducted from funds in the Escrow Account (other than
fees and expenses of the Escrow Agent) and the expenses of the Offering will
be paid by the Trust if the Minimum Offering is not raised and from Offering
proceeds if the Closing occurs.)
The Trust is intended to be classified as a partnership for federal income
tax purposes. (See "FEDERAL TAX CONSIDERATIONS" and "STATE, LOCAL AND FOREIGN
TAXES" for a description of the tax consequences of an investment in the Class B
Subordinated Interests.) The Trust will furnish tax information and other
reports to investors on a periodic basis as described in "REPORTS TO
BENEFICIARIES."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO
THE CONTRARY AND ANY PREDICTION, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THE TRUST IS NOT PERMITTED.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY OF THE OFFERING.................................................................................... 6
Introduction............................................................................................. 6
The Offering............................................................................................. 9
Over-Subscription Privilege.............................................................................. 9
Investor Suitability Standards........................................................................... 9
Risk Factors............................................................................................. 9
Estimated Use of Proceeds................................................................................ 9
Compensation and Fees.................................................................................... 10
Conflicts of Interest.................................................................................... 10
Fiduciary Responsibility................................................................................. 10
Business of Trust........................................................................................ 10
Management............................................................................................... 10
Trust Distributions and Allocations...................................................................... 11
Certain Distribution Policies............................................................................ 12
Federal Tax Considerations............................................................................... 12
Summary of the Trust Agreement........................................................................... 12
THE OFFERING............................................................................................... 13
Terms of the Offer....................................................................................... 13
Subscription Price....................................................................................... 13
No Modification or Revocation............................................................................ 13
Expiration of Offering................................................................................... 13
Subscription Agent....................................................................................... 13
Over-Subscription Privilege.............................................................................. 14
Exercise of Rights....................................................................................... 15
Exercise of Over-Subscription Privilege.................................................................. 15
Example of Exercise of Rights and the Over-Subscription Privilege........................................ 15
Payment for Securities................................................................................... 16
Foreign Record Date Unitholders.......................................................................... 17
RISK FACTORS............................................................................................... 18
Investment and Business Risks............................................................................ 18
Federal Income Tax Risks................................................................................. 20
ESTIMATED USE OF PROCEEDS.................................................................................. 23
COMPENSATION AND FEES...................................................................................... 24
CONFLICTS OF INTEREST...................................................................................... 24
FIDUCIARY RESPONSIBILITY................................................................................... 26
Conflicts................................................................................................ 27
Indemnification of Trustees and their Affiliates......................................................... 27
BUSINESS OF THE TRUST...................................................................................... 29
In General............................................................................................... 29
Financial Information About Industry Segments............................................................ 29
Description of Business.................................................................................. 29
Properties............................................................................................... 30
Legal Proceedings........................................................................................ 30
MARKET FOR THE TRUST'S SECURITIES AND RELATED SECURITY HOLDER MATTERS...................................... 30
Market Information....................................................................................... 30
Approximate Number of Security Holders................................................................... 30
Dividend History and Restrictions........................................................................ 30
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA FINANCIAL STATEMENTS............................................................................. 33
SELECTED FINANCIAL DATA.................................................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS..................... 37
Overview................................................................................................. 37
Results of Operations.................................................................................... 37
Liquidity and Capital Resources and Discussion of Cash Flows............................................. 39
MANAGEMENT OF THE TRUST.................................................................................... 42
EXECUTIVE COMPENSATION..................................................................................... 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 45
TRUST DISTRIBUTIONS AND ALLOCATIONS........................................................................ 47
General.................................................................................................. 47
Certain Distribution Policies............................................................................ 47
Distributions and Allocations............................................................................ 48
Allocation of Profits and Losses......................................................................... 50
FEDERAL TAX CONSIDERATIONS................................................................................. 52
Brief Overview of Federal Tax Considerations............................................................. 52
General; Opinions of Peabody & Brown..................................................................... 55
Tax Rates and Capital Gains.............................................................................. 56
Trust Status............................................................................................. 57
Tax Consequences of Special Distribution................................................................. 59
General Principles of Partnership Taxation............................................................... 59
Allocation of Profits and Losses......................................................................... 60
Active/Passive Income and Loss........................................................................... 62
Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations................................... 63
Tax Status of Leases..................................................................................... 63
Depreciation (Cost Recovery)............................................................................. 64
Recapture of Depreciation................................................................................ 67
Sale or Other Disposition of Trust Property.............................................................. 68
Sale or Other Disposition of Interests................................................................... 68
Tax Treatment of Certain Trust Expenses.................................................................. 69
Limitations on the Deductibility of Interest............................................................. 71
Trust Tax Elections...................................................................................... 72
Use of Nominees.......................................................................................... 72
Section 467.............................................................................................. 73
Joint Ventures with Manufacturers........................................................................ 73
Transferability-Termination of the Trust................................................................. 73
Termination and Liquidation of the Trusts................................................................ 74
Estate Taxes............................................................................................. 74
Alternative Minimum Tax.................................................................................. 74
Interest and Penalties on Underpayment of Taxes; Audit................................................... 75
Tax Shelter Registration................................................................................. 77
Trusts as Investors...................................................................................... 77
Investment By Foreign Beneficiaries...................................................................... 77
Possible Changes in Tax Law.............................................................................. 80
STATE, LOCAL AND FOREIGN TAXES............................................................................. 81
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY OF THE TRUST AGREEMENT............................................................................. 82
Special Redemption Provisions............................................................................ 82
Additional Class of Interest............................................................................. 82
The Trustees............................................................................................. 82
Responsibilities and Liabilities of the Managing Trustee................................................. 82
Resignation of the Managing Trustee...................................................................... 83
Indemnification of Managing Trustee...................................................................... 83
Certain Rights of Managing Trustee With Respect to the Interests......................................... 83
Liability of the Beneficiaries........................................................................... 84
Voting Rights............................................................................................ 84
Meetings................................................................................................. 85
Amendment of the Trust Agreement......................................................................... 85
Transferability of Interests............................................................................. 85
Change of Status of Beneficiary.......................................................................... 87
Distributions and Allocations............................................................................ 87
Other Transactions Involving the Managing Trustee and its Affiliates..................................... 87
No Withdrawal of Capital................................................................................. 87
Roll-Up.................................................................................................. 87
Dissolution.............................................................................................. 88
Fiscal Year.............................................................................................. 88
REPORTS TO BENEFICIARIES................................................................................... 89
ERISA AND OTHER CONSIDERATIONS............................................................................. 90
General.................................................................................................. 90
Unrelated Business Taxable Income........................................................................ 92
SUPPLEMENTAL LITERATURE.................................................................................... 93
INVESTOR SUITABILITY STANDARDS............................................................................. 93
General.................................................................................................. 93
Tax-Exempt Investors..................................................................................... 93
Representations and Warranties........................................................................... 93
LEGAL MATTERS.............................................................................................. 93
EXPERTS.................................................................................................... 94
ADDITIONAL INFORMATION..................................................................................... 94
GLOSSARY................................................................................................... 95
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
5
<PAGE>
SUMMARY OF THE OFFERING
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE MORE DETAILED
INFORMATION IN THE REST OF THIS PROSPECTUS FOLLOWS IN THE SAME ORDER AS THE
TOPICS APPEAR IN THIS SUMMARY AFTER THE "INTRODUCTION." SEE "GLOSSARY" FOR
DEFINITIONS OF CERTAIN TERMS USED IN THIS SUMMARY AND THROUGHOUT THIS
PROSPECTUS.
INTRODUCTION
AFG Investment Trust B is a Delaware business trust created on May 29, 1992,
to engage in the business of leasing equipment. The Managing Trustee of the
Trust and three other Delaware business trusts (collectively, the "AFG
Investment Trusts" or the "Trusts") is AFG ASIT Corporation, a Massachusetts
corporation which was organized on August 13, 1991, and is an affiliate of Equis
Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG" or the "Advisor"). EFG is the Special
Beneficiary of, and Advisor to, the Trust. (See "MANAGEMENT OF THE TRUST.") The
Trust issued 665,494 beneficiary interests in 1992 (the "Class A Interests"),
which are currently held by 784 investors (the "Class A Beneficiaries"). The net
proceeds of the offering (the "Offering") of the Class B Subordinated
Beneficiary Interests (the "Class B Subordinated Interests" or the "Interests")
will be applied to make the Special Class A Distribution to the Class A
Beneficiaries and thereafter are intended by the Managing Trustee to be applied
to enable the Trust for a period of 24 months after the Closing ( the "Initial
Redemption Period") to redeem a portion of the Class A Interests.
The Class B Subordinated Interests are being offered exclusively to the
Class A Beneficiaries and the Special Beneficiary. (See "Terms of the Offer" in
this Summary.) The Trust will hold one closing (the "Closing"). The Closing has
been scheduled for , 1997 [30 days after the Offering commencement date],
provided that the Minimum Offering of 459,191 Interests has been reached.
However, the Managing Trustee may extend the date of Closing but in no event to
later than December 31, 1997.
<TABLE>
<S> <C>
Securities Offered......... Class B Subordinated Beneficiary Interests
Minimum Offering........... 459,191 Interests ($2,295,955)
Maximum Offering........... 1,000,961 Interests ($5,004,805)
Price Per Interest......... $5.00
Minimum Purchase........... Each Class A Beneficiary desiring to purchase Class B
Subordinated Interests will be required to make a minimum
purchase (the "Minimum Purchase Amount") equal to the lesser of
(a) the amount of the Class B Subordinated Interests which he
is permitted to purchase, as described under "Terms of
Offering" in this Summary, or (b) 400 Class B Subordinated
Interests ($2,000) for IRAs or other Qualified Plans or 1,000
Class B Subordinated Interests ($5,000) for all other Investors
(with a higher minimum purchase in certain states).
Offering Termination The Offering will terminate at Closing, which in no event will
Date..................... be later than December 31, 1997.
Escrow Arrangement......... Subscription payments will be held in an interest-bearing
escrow account with Trust Company of America until Closing.
Each subscription will generally earn interest from the time
deposited with the Escrow Agent until Closing; provided,
however, that no Escrow Interest will be paid to a Subscriber
whose subscription payment is received fewer than three days
prior to Closing.
</TABLE>
6
<PAGE>
THE PURPOSES OF THE OFFERING ARE TO PROVIDE (A) FUNDS TO ENABLE THE TRUST TO
MAKE A SPECIAL DISTRIBUTION TO THE CLASS A BENEFICIARIES AND TO PURCHASE CLASS A
INTERESTS AT A PRICE THAT WILL ENABLE THE TRUST TO MAKE DISTRIBUTIONS TO THE
NON-REDEEMING CLASS A BENEFICIARIES IN AN AMOUNT GREATER THAN THE TRUST WOULD
OTHERWISE BE ABLE TO MAKE AND (B) DISTRIBUTIONS TO THE CLASS B PARTNERS TO
ENABLE THEM TO RECEIVE FROM THE TRUST THEIR CAPITAL, PLUS A RETURN THEREON. TO
THE EXTENT THAT THE TRUST CANNOT PURCHASE SUFFICIENT CLASS A INTERESTS AT A
PRICE DEEMED APPROPRIATE BY THE MANAGING TRUSTEE, THE TRUST WILL RETURN TO THE
CLASS B BENEFICIARIES THE REMAINING PORTION OF THE PROCEEDS OF THE OFFERING,
WITH AN 8% RETURN THEREON. THERE IS NO ASSURANCE THAT THE PURPOSES OF THE
OFFERING WILL BE ACHIEVED.
The Trust described the proposed issuance of Class B Interests in the
solicitation statement distributed to Beneficiaries on or about October 23, 1996
(the "Solicitation Statement"). In response thereto the Trust has recently
received approval from the Class A Beneficiaries to permit the issuance of the
Class B Interests, the redemption of Class A Interests contemplated hereby and
the Special Class A Distribution.
The Solicitation Statement stated, and the Offering has been structured so,
that: (1) the Class B Interests would have subordination features to prevent
distributions to purchasers of the Class B Interests if the holders of the Class
A Interests did not receive distributions at least equal to the current rate
($0.41 per quarter); and (2) the Class B Interests would have significant
participation on all matters on which Beneficiaries may vote.
Based on the recent secondary market trading activity, the Trust expects to
offer an amount for Class A Interests which, together with the Special Class A
Distribution, will exceed the price recently available in the secondary market.
In making a determination as to whether or not to purchase Class B
Interests, Class A Beneficiaries should consider that the redemption price the
Trust currently intends to offer for the Class A Interests will be less than
what the Managing Trustee believes the liquidation value of such Interests might
be, but in excess of the recent prices that such Interests have recently traded
for in the secondary market (after discounting such prices by the Special Class
A Distribution). After taking into account distributions to Class B
Beneficiaries, the redemption of the Class A Interests is intended to be carried
out by the Trust at prices which will increase distributions with respect to the
Class A Interests not redeemed. There is no assurance, however, that the
purposes of the Offering will be achieved. To the extent that the Trust cannot
fully utilize the proceeds of the Offering so to purchase Class A Interests,
such proceeds will be returned to the Class B Beneficiaries as the Class B
Capital Distribution.
The following table sets forth the reported secondary market sale prices for
Class A Interests over the past two years:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW VOLUME
- -------------- --------- --------- -----------
<S> <C> <C> <C>
3/31/95 NA NA NA
6/30/95 $ 16.71 $ 16.71 2,000
9/30/95 $ 14.75 $ 14.75 5,160
12/31/95 $ 10.00 $ 10.00 1,200
3/31/96 $ 7.97 $ 7.97 400
6/30/96 $ 7.50 $ 7.00 600
9/39/96 NA NA NA
12/31/96 $ 9.10 $ 8.61 1,120
NA--No Activity
</TABLE>
7
<PAGE>
The Trust is currently expected to be liquidated in 2003. The Managing
Trustee believes that the liquidation value per Class A Interest will be $14.60,
before giving effect to the Special Class A Distribution. The net book value per
Class A Interest at December 31, 1996 was $18.35 (which does not take into
account the 9.25% combined participation of the Managing Trustee and Special
Beneficiary in Trust distributions). The Managing Trustee currently estimates
that the redemption price (the "ERP") per Class A Interest will be between
$10.17 and $11.97, after giving effect to the Special Class A Distribution of
approximately $1.47 or $0.67 if the maximum proceeds or minimum proceeds,
respectively, are raised.
The following table sets forth the net book value, average cumulative
distributions and estimated fair market value of Trust Assets, on a per Class A
Interest basis:
<TABLE>
<CAPTION>
PER CLASS A
BENEFICIARY INTEREST
AT DECEMBER 31, 1996
---------------------
<S> <C>
Net Book Value......................................................... $ 18.35
Cumulative Distributions since Inception............................... $ 9.29
Estimated Fair Market Value of Trust Assets............................ $ 14.60
</TABLE>
The estimated fair market value of the Trust's assets is based upon the
Managing Trustee's assessment of the net present value of the distributions that
a Class A Interest might realize (the "NPV"), assuming a discount rate of 10%
per annum. (Assuming discount rates of 8% and 15%, the NPV would be $15.76 and
$12.12, respectively.) The Managing Trustee believes that the NPV is in excess
of the amount of cash consideration which an independent third party buyer would
be willing to pay for the Trust's Assets, after taking into account lease
encumbrances and related indebtedness. In determining the NPV, the Managing
Trustee did not take into account reinvestment of sale proceeds, which could
increase or decrease the NPV. It is important to note that in many cases Assets
are re- leased by Lessees instead of being purchased at the end of the Lease
terms and it is difficult to predict accurately the amount and time of receipt
of any residual proceeds.
Current net book value of the Trust's Assets results from the Trust's
depreciation policy which is intended to allocate the cost of Assets over the
period during which they produce economic benefit. The period of greatest
economic benefit is considered to correspond to each Asset's primary Lease term.
Accordingly, the Trust depreciates the difference between the cost of each Asset
and its estimated end-of-primary Lease residual value over the primary Lease
term. To the extent that an Asset is leased beyond its primary Lease term, the
Trust continues to depreciate the then remaining net book value over the Asset's
then remaining economic life. Using this methodology, the Managing Trustee
expects that the periodic reductions in net book value, resulting from
depreciation, will be consistent with corresponding reductions in fair market
value, resulting from normal wear and tear, age and obsolescence. However, the
Managing Trustee periodically evaluates the net carrying value of the Trust's
Assets to determine whether it exceeds estimated net realizable value.
Adjustments to reduce the net carrying value of Assets are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value. In the judgment of the Managing Trustee, the current fair market
value of the Trust's Assets is not representative of net realizable value, which
is greater than fair market value as it gives consideration to the aggregate
undiscounted future cash flows resulting from future contracted lease payments
plus the estimated residual value of the Trust's Assets. (See Note
2--Depreciation and Amortization, of the financial statements of the Trust
included with this Prospectus.)
The Managing Trustee estimates that the Trust would be able to purchase over
the Initial Redemption Period between 373,123 and 412,400 Class A Interests,
assuming the maximum number of Class B Interest are sold, and between 168,799
and 186,567 Class A Interests, assuming the minimum number of Class B Interests
are sold, depending upon the prices offered and the number of Class A Interests
actually tendered for redemption. The Trust will not, however, purchase Class A
Interests if the Managing Trustee
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believes that such purchases would cause the Trust to be taxed as a corporation
or result in the Trust having fewer than 300 Beneficiaries.
THE OFFERING
The Trust is issuing non-transferable subscription rights (each, a "Right")
to holders of record (the "Record Date Holders") as of the close of business on
April 1, 1997 (the "Record Date") of Class A Interests and Special Beneficiary
Interests, in proportion to the relative economic interest in the Trust of such
holders. (See "THE OFFERING".) The issuance by the Trust of each Right to Record
Date Holders is subject to compliance with applicable state securities laws and,
accordingly, there is no assurance that such Rights may be issued in all the
jurisdictions in which the Class A Beneficiaries reside. The Class A
Beneficiaries have a 90.75% economic interest and the Special Beneficiary has an
8.25% economic interest in the Trust. Each Class A Beneficiary will receive 1.38
Rights for each Class A Interest held, for a total of 918,382 Rights for all the
Class A Beneficiaries, and the Special Beneficiary will receive 82,579 Rights,
representing its economic interest in the Trust relative to that of the Class A
Beneficiaries. Each Right entitles the holder thereof (the "Rights Holder") to
purchase, at any time prior to 5:00 p.m., Boston time, on the date of Closing,
one Class B Subordinated Interest at a subscription price of $5.00 per Interest
(the "Subscription Price").
Each Rights Holder will be required to make a minimum purchase (the "Minimum
Purchase Amount") equal to the lesser of (a) the amount of Class B Subordinated
Interests which he is permitted to purchase pursuant to the Rights granted to
him or (b) 400 Class B Subordinated Interests ($2,000) for IRA's or other
Qualified Plans or 1,000 Class B Subordinated Interests ($5,000) for all other
Investors (with a higher minimum purchase in certain states).
OVER-SUBSCRIPTION PRIVILEGE
If less than all of the Basic Subscription Rights are exercised, each
Exercising Rights Holder will be entitled to subscribe for all or any portion of
the Class B Subordinated Interests that were not otherwise subscribed for by
other Rights Holders (the "Over-Subscription Privilege"). The available Class B
Subordinated Interests will be allocated pro rata (according to the aggregate
number of Basic Subscription Rights exercised) among those Exercising Rights
Holders who exercise the Over-Subscription Privilege.
INVESTOR SUITABILITY STANDARDS
The Trust established certain minimum suitability standards which the Class
A Investors represented that they met at the time of acquisition of the Class A
Interests. Class B Subordinated Interests will be sold only to the Special
Beneficiary and to current Class A Beneficiaries, some of whom may be required
to satisfy special suitability standards required by their states as set forth
in their Subscription Certificates.
RISK FACTORS
An investment in the Trust involves certain risks, many of which are
significant. The "RISK FACTORS" Section of this Prospectus contains a discussion
of the most important risks associated with an investment in Class B
Subordinated Interests. These risks include possible loss of voting control over
such matters as removal of the Managing Trustee and amendments to the Trust
Agreement, the subordination of certain Class B distributions to distributions
to be made with respect to Class A Interests, Federal income tax risks and risks
with respect to the business operations of the Trust.
ESTIMATED USE OF PROCEEDS
The Trust will use 20% of the proceeds of the Offering after payment of
Offering expenses to make a special distribution to the Class A Investors (the
"Special Class A Distribution") and the balance of such net proceeds are
intended to be applied from time to time to enable the Trust to redeem Class A
Interests
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during the Initial Redemption Period. Any net proceeds not so applied will be
used from time to time throughout the Initial Redemption Period to make the
Class B Capital Distributions. (See "ESTIMATED USE OF PROCEEDS.")
COMPENSATION AND FEES
The Managing Trustee, the Advisor and their Affiliates will not receive
additional compensation or fees from the Trust as a result of the Offering.
However, the Managing Trustee, the Advisor and certain of their Affiliates have
received, and will continue to receive, substantial compensation and fees in
connection with the organization, management and operation of the Trust. Also,
the Trust has reimbursed, and will reimburse, the Managing Trustee and its
Affiliates for certain expenses in connection with the Offering. (See
"COMPENSATION AND FEES.")
CONFLICTS OF INTEREST
The Managing Trustee, the Advisor and certain of their Affiliates will have
various conflicts of interest with respect to the Trust. These conflicts
include, but are not limited to:
- exercise of voting rights, particularly with respect to the rights,
obligations and removal of the Managing Trustee and any amendments to the
Trust Agreement;
- determination of the amount and timing of the Distributions, in particular
Distributions with respect to any Class B Subordinated Interests in the
event such Interests are acquired, as expected, by the Special Beneficiary
and its Affiliates;
- competition with other equipment leasing programs sponsored by the
Managing Trustee or its Affiliates for the acquisition, leasing,
re-leasing and sale of equipment and with respect to the allocation of
management time, services or functions to be provided by officers,
directors and employees of the Managing Trustee and its Affiliates.
The Trust Agreement contains provisions intended to reduce conflicts between
the Managing Trustee and its Affiliates and the Beneficiaries. (See "SUMMARY OF
THE TRUST AGREEMENT" and "CONFLICTS OF INTEREST.")
FIDUCIARY RESPONSIBILITY
The Managing Trustee is accountable to the Trust and the Beneficiaries as a
fiduciary and, consequently, must exercise good faith and act with integrity in
Trust affairs. However, the Trust will be required to provide certain
indemnities to the Managing Trustee and its Affiliates. Further, the Managing
Trustee and its Affiliates will be permitted to engage in certain activities
which will involve conflicts of interest with the Trust.
BUSINESS OF TRUST
The Trust was organized as a Delaware business trust on May 29, 1992, for
the purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment (the "Assets"). For a description of the Trust and its
business, see "BUSINESS OF THE TRUST" and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
MANAGEMENT
The Managing Trustee of the Trust will continue to be AFG ASIT Corporation,
an affiliate of EFG. The Managing Trustee will manage and control the affairs of
the Trust and will have general responsibility and ultimate authority over
matters affecting the Trust. The Managing Trustee has contracted on behalf of
the Trust with EFG for certain management services relating to the Leases and
Assets. The business
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address of the Managing Trustee, EFG and the Trust is 98 North Washington
Street, Boston, Massachusetts 02114 (telephone (617) 854-5800). (See "MANAGEMENT
OF THE TRUST" for further information concerning EFG and its Affiliates.)
TRUST DISTRIBUTIONS AND ALLOCATIONS
Distributions of all Distributable Cash from Operations and Distributable
Cash from Sales or Refinancings will be made monthly to the Managing Trustee,
the Special Beneficiary and the Beneficiaries.
Promptly after the Closing, the Class A Beneficiaries will receive the
Special Class A Distribution in an amount equal to 20% of the net proceeds of
the Offering. From time to time and in any event not later than the expiration
of the Initial Redemption Period, the Class B Beneficiaries will receive Class B
Capital Distributions from any proceeds of the Offering remaining after paying
Offering expenses, making the Special Class A Distribution and redeeming Class A
Interests.
Class B Capital Distributions, if any, would have no effect on the voting
rights of the Class B Beneficiaries. The Class A Beneficiaries and the Class B
Beneficiaries will have one vote for each Interest held in all matters on which
their Interests are entitled to be voted under the Trust Agreement. See "SUMMARY
OF THE TRUST AGREEMENT--Voting Rights."
Commencing as of the first day of the month following Closing (the
"Distribution Commencement Date"), Distributions will be made (a) 1% to the
Managing Trustee, (b) 8.25% to the Special Beneficiary and (c) 90.75% to Class A
Beneficiaries and the Class B Beneficiaries.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
first, 100% to the Class A Beneficiaries up to $0.41 per Class A
Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per Class B
Subordinated Interest, reduced by the Class B Distribution Reduction Factor;
third, 100% to the Class A Beneficiaries up to an additional $0.215 per
Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
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After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries and
the Class B Beneficiaries in amounts so that each Class A Beneficiary
receives with respect to each Class A Interest an amount equal to %,
divided by the difference between 100% and the Class B Capital Reduction
Factor, of the amount so distributed with respect to each Class B
Subordinated Interest.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 8% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and 10%
per annum, compounded quarterly, with respect to the balance of their capital
contributions. The term "Class B Distribution Reduction Factor" means aggregate
Class B Capital Distributions, discounted at 8% to the Distribution Commencement
Date, as a percentage of the $5.00 per Class B Subordinated Interest capital
contribution.
The provisions of the Trust Agreement relating to Distributions are complex
and prospective Investors should review carefully the examples provided under
the section "TRUST DISTRIBUTIONS AND ALLOCATIONS."
CERTAIN DISTRIBUTION POLICIES
The Managing Trustee intends to cause the Trust to make Distributions to the
Class A Beneficiaries and the Class B Beneficiaries generally in level quarterly
amounts prior to Class B Payout. If in any fiscal quarter Distributions are not
made of at least $0.41 per Class A Interest no Distributions will be made with
respect to the Class B Subordinated Interests. However, the Managing Trustee
expects that the Trust will have sufficient cash available to make, and will
make, Distributions each quarter of at least $0.41 per Class A Interest and
$0.164 per Class B Subordinated Interest(as such amount may be reduced by the
Class B Distribution Reduction Factor). From time to time and at least annually,
the Managing Trustee will review the available cash of the Trust to determine
whether additional Distributions should be made. It will be the policy of the
Managing Trustee to cause the Trust to make annual Distributions of all
available Cash from Operations and, Cash from Sales and Refinancings, subject to
the establishment and maintenance of reasonable reserves and, to the extent
deemed appropriate by the Managing Trustee, the prepayment of Trust debt.
FEDERAL TAX CONSIDERATIONS
The section of this Prospectus entitled "FEDERAL TAX CONSIDERATIONS"
includes a discussion of the most significant federal income tax issues which
may be important to investors and the opinion of tax counsel to the Trust as to
material tax issues.
SUMMARY OF THE TRUST AGREEMENT
The Declaration of Trust of the Trust will be restated in its entirety at
Closing (as so restated, the "Trust Agreement"). A copy of the Trust Agreement
will be given to investors of certain states with this Prospectus or to other
prospective investors upon request. The Trust Agreement is a complex instrument
which will govern the relationship between the Trustees and the Beneficiaries
after Closing. The principal provisions of the Trust Agreement have been
summarized in this Prospectus under various headings, including "SUMMARY OF THE
TRUST AGREEMENT" and "TRUST DISTRIBUTIONS AND ALLOCATIONS."
Prospective Class B Investors should be particularly aware that under the
Trust Agreement:
- they will have limited voting rights; and
- their Interests will not be freely transferable.
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THE OFFERING
TERMS OF THE OFFER
Each Record Date Holder is being issued 1.38 Rights for each Class A
Interest (or, in the case of the Special Beneficiary, for each relative economic
equivalent of a Class A Interest) owned on the Record Date. No fractional Rights
will be issued in the Offering. The number of Rights issued to a Record Date
Holder of other than a whole number of Class A Interests (or their relative
economic equivalents) will be determined by rounding up to the nearest whole
number if the fractional amount owned is greater than or equal to .5 and
rounding down to the nearest whole number if the fractional amount owned is less
than .5. The Rights entitle the holders thereof to acquire at the Subscription
Price one Class B Subordinated Interest for each Right held. The Rights are
evidenced by Subscription Certificates that are being mailed with this
Prospectus to Record Date Holders other than Foreign Record Date Holders.
Each Rights Holder will be required to make a minimum purchase (the "Minimum
Purchase Amount") equal to the lesser of (a) the amount of Class B Subordinated
Interests which he is permitted to purchase pursuant to the Rights granted to
him or (b) 400 Class B Subordinated Interests ($2,000) for IRA's or other
Qualified Plans or 1,000 Class B Subordinated Interests ($5,000) for all other
Investors (with a higher minimum purchase in certain states).
Completed Subscription Certificates may be delivered to the Subscription
Agent (described below) at any time during the Subscription Period, which
commences , 1997 and ends at 5:00 p.m., Boston time, at Closing, unless
extended by the Trust. All Rights may be exercised immediately upon receipt and
until 5:00 p.m., Boston time, on the date of Closing.
Rights may be executed by completing a Subscription Certificate in the form
enclosed and delivering it, together with payment in full, by means of a money
order or check, to the Subscription Agent. If a Rights Holder chooses to send a
Subscription Certificate, such Certificate must be accompanied by payment in
full. The method by which Rights may be exercised and Class B Subordinated
Interests paid for is set forth under "Exercise of Rights" and "Payment for
Securities" below. An example demonstrating the exercise of Rights, including
the Over-Subscription Privilege, is set forth under "Example of Exercise of
Rights and the Over-Subscription Privilege."
The Trust does not have the right to withdraw this Offering after the Rights
have been distributed.
SUBSCRIPTION PRICE
The Subscription Price for Class B Subordinated Interests subscribed for
through the exercise of Basic Subscription Rights and the Over-Subscription
Privilege is $5.
NO MODIFICATION OR REVOCATION
ONCE A HOLDER OF RIGHTS HAS PROPERLY EXERCISED HIS OR HER BASIC SUBSCRIPTION
RIGHTS AND THE OVER-SUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE MODIFIED OR
REVOKED.
EXPIRATION OF OFFERING
This Offering will expire at 5:00 p.m., Boston time, on the date of Closing.
Rights will expire on the date of Closing and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is Gemisys Corporation, a California corporation. The
Subscription Agent is not affiliated with either the Trust or EFG. The
Subscription Agent will receive, for its administration, processing, invoicing
and other services as subscription agent, a fee estimated to be approximately
$3,761,
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including reimbursement for all out-of-pocket expenses related to this Offering.
Questions regarding the manner of completion of Subscription Certificates should
be directed to the Subscription Agent at (800) 387-7391. Rights Holders may also
consult their financial advisors. Signed Subscription Certificates should be
sent by mail, hand, express mail or overnight courier, together with payment of
the Subscription Price in full to Trust Company of America, 7103 South Revere
Parkway, Dept. 350, Englewood, CO 80112 . See "Payment for Securities."
Any questions or requests for assistance may be directed to the Subscription
Agent at (800) 387-7391.
OVER-SUBSCRIPTION PRIVILEGE
If less than all of the Basic Subscription Rights are exercised, Class B
Subordinated Interests not subscribed for by Exercising Rights Holders will be
offered, by means of the Over-Subscription Privilege, to Exercising Rights
Holders who wish to acquire additional Class B Subordinated Interests. The Over-
Subscription Privilege may be exercised by any Rights Holder who exercised any
of his or her Basic Subscription Rights. Rights Holders should indicate, on the
Subscription Certificate which they submit with respect to the exercise of their
Basic Subscription Rights, how many additional Class B Subordinated Interests
they are willing to acquire pursuant to the Over-Subscription Privilege. If all
Basic Subscription Rights are exercised, the Over-Subscription Privilege will
not be granted.
The available Class B Subordinated Interests will be allocated pro rata
among those who over-subscribed according to the aggregate number of Basic
Subscription Rights exercised. The percentage of remaining Class B Subordinated
Interests each Rights Holder may acquire may be rounded up or down to result in
delivery of whole Class B Subordinated Interests. The allocation process may
involve a series of allocations in order to assure that the total number of
Class B Subordinated Interests available pursuant to the Over-Subscription
Privilege is distributed on a pro rata basis. In the event a Rights Holder
exercising the Over-Subscription Privilege is allocated less than the number of
Class B Subordinated Interests that such Holder subscribed for, excess
subscription payments will be promptly refunded. See "Payment for Securities"
below. An example demonstrating the exercise of Rights, including the
Over-Subscription Privilege, is set forth under "Example of Exercise of Rights
and the Over-Subscription Privilege."
The Special Beneficiary and its Affiliates who will become Rights Holders by
virtue of their ownership interest in the Trust on the Record Date currently
intend to subscribe for and purchase the amount of Class B Subordinated
Interests to which they are entitled through the exercise of their Basic
Subscription Rights. In addition, the Special Beneficiary currently intends to
subscribe for a substantial number of Class B Subordinated Interests pursuant to
the Over-Subscription Privilege, and, subject to proration as described above,
to purchase such additional Class B Subordinated Interests. There can be no
assurance, however, that the Special Beneficiary or such Affiliates will in fact
carry out such current intentions. If no Rights are exercised by Rights Holders
other than the Special Beneficiary and its Affiliates, following the Offering
such entities will beneficially own in the aggregate all of the Class B
Subordinated Interests that are issued.
The Trust has been advised by the Special Beneficiary and its Affiliates who
will become Rights Holders that such entities intend to acquire any Class B
Subordinated Interests that they acquire in connection with the Offering solely
for investment purposes. The Special Beneficiary has further advised the Trust
that in the event it purchases a substantial number of Class B Subordinated
Interests pursuant to the Over-Subscription Privilege, it will have to borrow
funds to do so, and that it anticipates that in connection with such a borrowing
it will have to pledge its Class B Subordinated Interests as collateral. If the
Special Beneficiary's Class B Subordinated Interests are used as collateral and
the Special Beneficiary is unable to repay such borrowing, the Special
Beneficiary or the lender may be forced to attempt to sell such Class B
Subordinated Interests to repay the borrowing. No prediction can be made as to
the effect, if any, that such sales of Class B Subordinated Interests or the
availability of Class B Subordinated Interests for sale will have on the market
price of the Class B Subordinated Interests prevailing from time to time.
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Nevertheless, attempts to sell substantial amounts of the Class B Subordinated
Interests could adversely affect prevailing prices. As noted above, it is not
anticipated that a public market for the resale of the Class B Subordinated
Interests will develop.
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with full payment of the
Subscription Price for the Class B Subordinated Interests as described below
under "Payment for Securities." Completed Subscription Certificates must be
received by the Subscription Agent at the address set forth above. An example
demonstrating the exercise of Rights, including the Over-Subscription Privilege,
is set forth under "Example of Exercise of Rights and the Over-Subscription
Privilege."
Nominees who hold Class A Interests for the account of others, such as
brokers or trustees should notify the respective beneficial owners of such Class
A Interests as soon as possible to ascertain such beneficial owners' intentions
and to obtain instructions with respect to the Rights. If the beneficial owner
so instructs, the nominee should complete the Subscription Certificate and
submit it to the Subscription Agent with the proper payment. In addition,
beneficial owners of Class A Interests or Rights held through such a nominee
should contact the nominee and request the nominee to effect transactions in
accordance with the beneficial owner's instructions.
EXERCISE OF OVER-SUBSCRIPTION PRIVILEGE
Any Exercising Rights Holder may participate in the Over-Subscription
Privilege, if it is granted, by indicating on his or her Subscription
Certificate the number of Class B Subordinated Interests he or she is willing to
acquire pursuant thereto. There is no limit on the number of Class B
Subordinated Interests that Exercising Rights Holders may seek to subscribe for
pursuant to the Over-Subscription Privilege. The number of Class B Subordinated
Interests issued to each Rights Holder participating in the Over-Subscription
Privilege will be allocated as described above under "Over-Subscription
Privilege." An example demonstrating the exercise of Rights, including the
Over-Subscription Privilege, is set forth under "Example of Exercise of Rights
and the Over-Subscription Privilege."
EXAMPLE OF EXERCISE OF RIGHTS AND THE OVER-SUBSCRIPTION PRIVILEGE
If you owned 200 Class A Interests you would receive 276 Rights entitling
you to subscribe for up to 276 Class B Subordinated Interests. If you exercised
any or all of your 276 Rights, you would be entitled to participate in the
Over-Subscription Privilege.
Assume, for example, that you decided to exercise all of the Rights granted
to you and also purchase an additional 50 Class B Subordinated Interests
pursuant to exercise of your Over-Subscription Privilege. You would indicate on
your Subscription Certificate which is enclosed with this Prospectus, in Section
I, Item A "Basic Subscription Rights," that you were exercising 276 Rights to
acquire 276 Class B Subordinated Interests and in Item B "Over-Subscription
Privilege" that you were requesting an additional 50 Class B Subordinated
Interests.
In calculating the amount of the payment to be tendered along with the
executed Subscription Certificate, as per Item C, include the total Subscription
Price payable for both the number of Class B Subordinated Interests subscribed
for through the exercise of Basic Subscription Rights and the number of Class B
Subordinated Interests subscribed for through the exercise of the
Over-Subscription Privilege. In the above example this would equal 276 Class B
Subordinated Interests times the Subscription Price for the Basic Subscription
Rights exercised plus 50 Class B Subordinated Interests times the Subscription
Price for the exercise of the Over-Subscription Privilege for a total payment of
$1,630. You will receive a pro rata allocation of such amount determined by the
number of Basic Subscription Rights you exercised. Any
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excess funds paid by you will be returned to you promptly. Notification of the
number of Class B Subordinated Interests purchased by you will be mailed
promptly following the Closing of the Offering. See "Payment for Securities"
below.
The foregoing example is for illustrative purposes only. Exercising Rights
Holders participating in the Over-Subscription Privilege are entitled to
purchase as many additional Class B Subordinated Interests as they desire
(subject to proration), which may be more or less than the number of Class B
Subordinated Interests such Exercising Rights Holder acquired pursuant to
exercise of his or her Basic Subscription Rights.
PAYMENT FOR SECURITIES
Payment for Class B Subordinated Interests subscribed for pursuant to the
exercise of Basic Subscription Rights and the Over-Subscription Privilege by
Exercising Rights Holders must be tendered to the Subscription Agent along with
a properly executed Subscription Certificate on or prior to the date of Closing.
Each Exercising Rights Holder should send the Subscription Certificate
together with payment in full for the Class B Subordinated Interests subscribed
for through exercise of his or her Basic Subscription Rights and the maximum
number of Class B Subordinated Interests the Exercising Rights Holder wishes to
subscribe for pursuant to the Over-Subscription Privilege to the Subscription
Agent based upon the Subscription Price of $5.00. Subscriptions will be accepted
when payment, together with the executed Subscription Certificate, is received
by the Subscription Agent at Gemisys Corporation, 7103 South Revere Parkway,
Englewood, CO 80112, Dept. #250; such payment and Subscription Certificate must
be received by the Subscription Agent no later than 5:00 p.m., Boston time, on
the date of Closing. The Subscription Agent will deposit all checks received by
it for the purchase of Class B Subordinated Interests into a segregated
interest-bearing account of the Trust pending proration and distribution of the
Class B Subordinated Interests. ALL PAYMENTS MUST BE IN U.S. DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
TRUST COMPANY OF AMERICA, AS SUBSCRIPTION AGENT FOR AFG INVESTMENT TRUST A, AND
MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED AND BE RECEIVED BY 5:00 P.M., BOSTON TIME, ON THE
EXPIRATION DATE.
Within 15 business days following the Closing, the Subscription Agent will
send to each Exercising Rights Holder (or, if the Class A Interests are held by
a nominee, to such nominee) a notice as to the number of Class B Subordinated
Interests purchased pursuant to exercise of the Basic Subscription Rights and,
if applicable, the Over-Subscription Privilege along with a letter explaining
the allocation of Class B Subordinated Interests pursuant to the
Over-Subscription Privilege. Any excess payment to be refunded by the Trust to a
Rights Holder who is not allocated the full amount of Class B Subordinated
Interests subscribed for pursuant to the Over-Subscription Privilege will be
mailed by the Subscription Agent as promptly as practicable. All payments by a
Rights Holder must be in United States dollars by money order or check drawn on
a bank located in the United States and payable to Trust Company of America, as
agent for AFG Investment Trust B.
Issuance of Class B Subordinated Interests purchased is subject to
collection of checks and actual payment.
If an Exercising Rights Holder who acquires Class B Subordinated Interests
through the exercise of his or her Basic Subscription Rights or pursuant to the
Over-Subscription Privilege does not make payment of any amounts due, the Trust
and the Subscription Agent reserve the right to take any or all of the following
actions: (i) find other holders of Class A Interests for such subscribed and
unpaid for Class B Subordinated Interests; (ii) apply any payment actually
received by it toward the purchase of the greatest whole number of Class B
Subordinated Interests which could be acquired by such Holder upon exercise of
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his or her Basic Subscription Rights and/or pursuant to the Over-Subscription
Privilege; and/or (iii) exercise any and all other rights or remedies to which
it may be entitled, including, without limitation, the right to set-off against
payments actually received by it with respect to such subscribed Class B
Subordinated Interests.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE TRUST WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., BOSTON TIME,
ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST
FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Trust, whose determinations
will be final and binding. The Trust in its sole discretion may waive any defect
or irregularity or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Trust
determines in its sole discretion. The Trust will not be under any duty to give
notification of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification.
FOREIGN RECORD DATE UNITHOLDERS
Subscription Certificates will not be mailed to Foreign Record Date Holders.
The Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Holders' accounts until
instructions are received to exercise or not exercise the Rights. If no
instructions have been received by 12:00 noon, Boston time, three business days
prior to the date of Closing, they will be deemed unexercised.
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RISK FACTORS
Investment in the Trust involves various risks. In addition to matters set
forth elsewhere in this Prospectus, prospective investors should consider the
following:
INVESTMENT AND BUSINESS RISKS
1. VOTING CONTROL MAY CHANGE. The Class B Beneficiaries will have a 40%
participation if the Minimum Offering is attained and a 60% participation if the
Maximum Offering is attained in all matters on which Beneficiaries may vote. The
Special Beneficiary and its Affiliates currently intend to acquire all Class B
Interests which are not subscribed for by the Class A Beneficiaries and,
depending on the level of participation in the Offering by the Class A
Beneficiaries and, to a lesser extent, the number of Class A Interests redeemed
by the Trust, may acquire voting control. Matters on which the Special
Beneficiary may vote include votes with respect to the rights, obligations,
removal and withdrawal of the Managing Trustee and proposed amendments to the
Trust Agreement. Amendments which may be so proposed include, without
limitation, changes to the investment objectives and policies of the Trust and
to the term of the Trust and various other matters which may significantly
affect the Trust and its future operations. See "CONFLICTS OF INTEREST. Exercise
of Voting Rights by the Special Beneficiary with Respect to Class B Subordinated
Interests Purchased."
2. DISTRIBUTIONS ON THE CLASS B SUBORDINATED INTERESTS WILL BE SUBORDINATED.
No Distributions will be made with respect to the Class B Subordinated Units in
any fiscal quarter unless $0.41 is distributed for each Class A Unit outstanding
and subsequent Distributions are subordinated and may be reduced. See "TRUST
DISTRIBUTIONS AND ALLOCATIONS--Distributions and Allocations." There is no
assurance, therefore, that the Trust will generate sufficient cash from its
Assets and Leases to enable the Managing Trustee to cause the Trust to make
Distributions which will permit the Class B Beneficiaries to receive a return of
their capital, together with a satisfactory return thereon.
3. A PORTION OF THE OFFERING PROCEEDS WILL BE DISTRIBUTED EXCLUSIVELY TO
CLASS A INVESTORS. This special distribution will be made from the capital
contributions made to the Trust by the Class B Investors. The Class B Investors
will not participate in such distribution.
4. THERE IS NO ASSURANCE THAT THE PURPOSE OF THE OFFERING TO REDEEM CLASS A
INTERESTS WILL BE ACHIEVED. In the event that a sufficient number of Class A
Interests are not redeemed by the Trust, then the Class B Beneficiaries will
receive a partial return of their capital, together with a return thereon at a
rate of 8% per annum.
5. CLASS B SUBORDINATED INTERESTS ARE ILLIQUID AND TRANSFERS ARE RESTRICTED.
There is no public market, and it is not anticipated that a public market will
develop, for the Interests. Further, the Trust will not redeem Class B
Subordinated Interests. Therefore, Class B Beneficiaries may not be able to
liquidate their investment in the Class B Subordinated Interests in the event of
an emergency or for any other reason. (See "SUMMARY OF THE TRUST
AGREEMENT--Transferability of Interests" for a description of the significant
restrictions on transferability.)
6. GREATER REMARKETING RISKS FROM OPERATING LEASES. The Trust has entered
into Operating Leases for a substantial portion of its Asset portfolio.
Operating Leases are leases under which the aggregate rental payments during the
initial Lease term are in an amount less than the Purchase Price of the Assets,
including related Acquisition Fees and Acquisition Expenses. Therefore, the
Trust will, on termination of an Operating Lease, either have to obtain a
renewal from the original Lessee, find a new Lessee or sell the Assets in order
to recover the Trust's investment in such Assets and earn a return thereon.
There can be no assurance that this will occur.
7. INVESTORS MUST RELY SOLELY ON MANAGEMENT. All decisions with respect to
the management of the Trust, will be made by the Managing Trustee and the
Advisor, and the success of the Trust will depend to a
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large extent on the management of the Trust. The interests of investors may be
inconsistent in some respects with the interests of the Managing Trustee, the
Advisor and their Affiliates. No Persons should purchase Interests unless they
are willing to entrust all aspects of the management of the Assets and the Trust
to the Managing Trustee, the Advisor and their Affiliates.
8. MOST PRIOR PROGRAMS WITH INVESTMENT OBJECTIVES SIMILAR TO THE TRUSTS
SPONSORED BY AFFILIATES OF THE MANAGING TRUSTEE HAVE EXPERIENCED ADVERSE
DEVELOPMENTS. Certain prior investment programs sponsored by Affiliates of the
Managing Trustee have experienced lessee bankruptcies which have adversely
affected, or may in the future adversely affect, possibly significantly, the
economic results of those prior investment programs. Most prior investment
programs sponsored by Affiliates of the Managing Trustee have experienced
financial losses on the sale of some equipment. These losses will adversely
affect, and possibly materially, the financial results of such programs.
9. FINANCING MAY CAUSE ADDITIONAL RISKS. The Trust has incurred significant
indebtedness in order to acquire Assets. An Asset purchased on a leveraged basis
generally can be expected to be profitable only if it generates sufficient cash
revenues to pay interest on and to amortize the related debt, to recover the
equity investment and to cover operating expenses. The use of leverage will
cause the risk to the Beneficiaries to be greater than if the Trust purchased
its Assets for all cash, because fixed payment obligations must be met on
certain specified dates regardless of the amount of revenues derived by the
Trust from such Assets. Default on any debt financing obtained by the Trust
could result in foreclosure of Assets and possible tax liability to the
Beneficiaries which could exceed the amount of cash available from the
foreclosure sale.
10. RETURN OF INVESTORS' CAPITAL IS DEPENDENT UPON UNCERTAIN RESIDUAL VALUE
OF ASSETS. Since, in general, capital equipment is a depreciating Asset,
Distributions generated from lease rental payments and Asset sale proceeds will
include a return of the investors' capital as well as a return on investment in
the Interests. Therefore, the full return of the Class B Beneficiaries' Capital
Contributions is subject to all of the risks associated with the realization of
the residual value of the Assets. The residual values ultimately realized, in
turn, will depend on, among other factors, the condition of the Assets, the cost
of new assets comparable to the Assets, rates of inflation, the ability to
remarket the Assets and demand for used assets. Most of these factors are not
within the control of the Managing Trustee.
11. DEFAULTS BY LESSEES COULD JEOPARDIZE INVESTOR RETURNS. There can be no
assurance as to the ability of any Lessee to perform its financial and other
obligations under its Lease. The default by a Lessee under its Lease, including
a default occasioned by the Lessee's bankruptcy, insolvency or other serious
financial difficulty, may cause Assets to be returned to the Trust at a time
when the Managing Trustee or the Advisor may be unable to arrange for the
re-leasing or sale of such Assets, thus resulting in the loss of anticipated
revenues and the inability to repay the related debt and recover the Trust's
investment in such Assets.
12. LIMITED LIABILITY OF BENEFICIARIES IS NOT CLEARLY ESTABLISHED. The Trust
is governed by the Delaware Business Trust Act and under such law and the Trust
Agreement the Beneficiaries have liability limited to that of shareholders of a
business corporation. However, the principles of law governing the limitation of
liability of beneficiaries of a business trust have not been authoritatively
established as to business trusts organized under the laws of one jurisdiction
but operating or owning property in other jurisdictions. A number of states have
adopted legislation containing provisions comparable to the Delaware Business
Trust Act. Accordingly, in such states, the limitation of liability of
Beneficiaries to the Trust provided by Delaware law should be respected.
However, in those jurisdictions which have not adopted similar legislative
provisions, since there is no authoritative precedent on this issue, it is
possible that a court in such a jurisdiction might hold that the Beneficiaries
are not entitled to the limitation of liability set forth in the Trust
Agreement. In some states, the courts have held that the beneficiaries of a
business trust are personally liable for the obligations of the trust even
though by the terms of the trust they have no control over the conduct of the
trustee. However, there is no case law where a beneficiary of a Delaware
business trust has been held liable for the obligation of the trust. Any
Trustee, and possibly, the Beneficiaries (if
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their limited liability were successfully challenged) may incur general
liability by virtue of the Trust's ownership of Assets and the use thereof.
13. JOINT INVESTMENTS MAY REDUCE TRUST CONTROL OVER ASSETS. Some of the
Trust's Assets are owned jointly by the Trust and affiliated joint venture
partners. The indirect ownership of Assets through a joint venture may involve
risks not present in direct ownership. In addition, any joint venture would be
subject to the various tax risks applicable to the Trust, including the possible
treatment of the joint venture as an association taxable as a corporation rather
than as a partnership and the possible reallocation of the joint venture's
profits and losses. (See "FEDERAL TAX CONSIDERATIONS--Joint Ventures with
Manufacturers.")
14. CASUALTY LOSSES MAY NOT BE FULLY INSURED. The Lessees generally are
obligated to maintain casualty insurance on the Assets in such amounts and
covering such risks as the Managing Trustee deems advisable and liability
insurance in amounts which are customary in the applicable industry. The Trust
will be responsible for insuring any Assets not on lease. However, there is no
assurance in either case that sufficient coverage will continue to be available,
that any specific casualty will be insured or that, if insured, the insurance
proceeds will be sufficient to cover the loss fully. There are certain
categories of risk of loss which may be or may become either uninsurable or not
economically insurable, such as war, air piracy, earthquakes and floods.
15. RISKS ASSOCIATED WITH EQUIPMENT LEASING BUSINESS IN GENERAL. The
equipment leasing business is subject to various risks, including delays in the
delivery of equipment, physical deterioration and increasing maintenance and
operating costs of equipment, economic and technological equipment obsolescence,
defaults by lessees and numerous other risks relating to operation of a
business. General economic conditions such as inflation and the availability of
financing will affect the demand for leasing (as opposed to purchase) of
equipment. The success of the Trust will in large part depend upon the quality
of the Assets, the ability of the Managing Trustee and its Affiliates to
forecast technological advances concerning such Assets and the ability of its
Lessees to satisfy their obligations under the Leases.
16. THE EQUIPMENT LEASING INDUSTRY IS HIGHLY COMPETITIVE. The equipment
leasing industry is highly competitive and the Trust will be facing competition
for acquisition, leasing, re-leasing and sale of Assets from various industry
sources, many of which have significantly greater financial resources and
greater experience than the Trust.
FEDERAL INCOME TAX RISKS
Although certain federal income tax aspects may be important in analyzing
the attractiveness of an investment in the Interests, prospective investors
should make an investment primarily based on economic rather than tax factors.
While the Trust has obtained an opinion of Peabody & Brown, tax counsel for the
Trust ("Tax Counsel"), as to various tax matters, such tax opinion is subject to
certain assumptions concerning the future operations of the Trust (which may
vary from such assumptions) and is not binding upon the Service. In addition, no
ruling has been or will be sought from the Service on any federal income tax
issue. Resulting from such facts and because each investor's other income and
expenses may materially affect the tax consequences of an investment in the
Interests, there can be no assurance that the tax consequences described in this
Prospectus will be obtained by every investor. Prospective investors and their
advisors should, therefore, carefully review the "FEDERAL TAX CONSIDERATIONS"
Section of this Prospectus.
17. FEDERAL INCOME TAX RISKS IN GENERAL. No ruling has been obtained from
the Service with respect to any of the tax considerations associated with an
investment in, or the proposed operations of, the Trust. Availability of the tax
benefits described under "FEDERAL TAX CONSIDERATIONS" may be challenged by the
Service upon audit of the Trust's information tax return. Many of the tax
consequences are unclear because of the recent passage of major tax legislation,
and many of the anticipated tax consequences could be changed by future
legislation. Any adjustment to the tax return of the Trust as a result of
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an audit would also result in adjustments to the tax returns of the individual
Beneficiaries, and may result in an examination of other items in such returns
unrelated to the Trust, or an examination of tax returns filed in prior years.
Moreover, the Beneficiaries could incur substantial legal and accounting costs
in contesting any Service challenge, regardless of the outcome.
18. RISK OF TAX CLASSIFICATION AS A CORPORATION RESULTING IN DOUBLE
TAXATION. The Trust Agreement provides that the Trust is intended to be
classified as a partnership for federal income tax purposes. However, the
Service may successfully contend that the Trust should be treated as a
corporation or trust or as a "publicly traded partnership" taxable as a
corporation for federal income tax purposes rather than as a partnership, in
which event substantially all of the possible tax benefits (resulting from the
pass-through to investors of all income and losses) from an investment in the
Trust would be eliminated.
It should be noted that the opinion of Peabody & Brown that the Trust will
not be treated as a "publicly traded partnership" for federal income tax
purposes is based upon the representation of the Managing Trustee that it will
not allow the transfer, disposition or redemption of any Interest if such
transfer, disposition or redemption would cause the Trust to be treated as a
"publicly traded partnership." If such representation were determined to be
inaccurate or the Managing Trustee acted in a manner which was not in accordance
with such representation, the Trust could be treated as a "publicly traded
partnership" taxable as a corporation for federal income tax purposes. (See
"FEDERAL TAX CONSIDERATIONS--Trust Status.") If the Trust were treated as a
corporation or "publicly traded partnership," Profits and Losses would not pass
through to Beneficiaries, income of the Trust would be subject to the income tax
rates applicable to corporations and Distributions would be taxable as dividend
(portfolio) income to the extent of current and accumulated earnings and
profits.
19. POSSIBLE TAX TREATMENT OF LEASES AS SALES OR FINANCINGS. It is possible
that the Service may challenge certain of the Trust's leasing transactions and
assert that they are properly characterized as deferred payment sales or
financings for federal tax purposes. Such treatment would result in the loss of
cost recovery deductions by the Trust with respect to the Assets involved and a
recharacterization of Trust income from passive to portfolio. The opinion of
Peabody & Brown that the existing Leases will be treated as true leases for
federal income tax purposes is based entirely upon the representation of the
Managing Trustee regarding the characteristics of the Leases without undertaking
any independent verification of the accuracy thereof. If such representation
were determined to be incorrect, the tax benefits associated with an investment
in the Trust could be significantly reduced. (See "FEDERAL TAX CONSIDERATIONS--
Tax Status of Leases.")
20. RISK OF TAX LIABILITY IN EXCESS OF CASH RECEIVED. A sale or other
disposition of Trust property, including a foreclosure, or the disposition of an
Interest, may result in a substantial tax liability to the Beneficiaries which
could exceed the amount of cash available from the sale. (See "FEDERAL TAX
CONSIDERATIONS--Sale or Other Disposition of Trust Property.")
21. RISK OF UNRELATED BUSINESS INCOME FOR IRA OR OTHER QUALIFIED PLAN. An
investment in the Trust by an IRA or other Qualified Plan or Exempt Organization
is expected to generate income subject to the unrelated business income tax.
Investors who are fiduciaries of Qualified Plans or Exempt Organization should
consider the effect of unrelated business income taxation on such entities and
the impact of the fiduciary responsibility provisions of ERISA before making an
investment. (See "ERISA AND OTHER CONSIDERATIONS" and "FEDERAL TAX
CONSIDERATIONS--Investment by Qualified Pension, Profit-Sharing and Stock Bonus
Plans and Individual Retirement Accounts and by Other Tax-Exempt
Organizations.")
22. RISK OF UNANTICIPATED TAX LIABILITY. For any year in which the Trust has
income in excess of deductions, each Beneficiary will be required to report his
share of such income on his federal, state and local income tax returns and will
be responsible for the payment of taxes attributable to this income. A
Beneficiary's annual tax liability may exceed the amount of his annual
Distributions if funds otherwise available as Distributions are required to be
expended on non-deductible items, such as principal payments
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on indebtedness. Upon a disposition of his Interests, a Beneficiary could have
ordinary income and a capital loss because ordinary income or loss from his
share of the Trust's unrealized receivables and substantially appreciated assets
is computed separately from his share of gain or loss attributable to other
Trust assets. There are substantial limitations on the ability of a Beneficiary
to use capital losses to offset ordinary income. (See "FEDERAL TAX
CONSIDERATIONS --Tax Rates and Capital Gains.")
23. ALTERNATIVE MINIMUM TAX AND OTHER ADDITIONAL TAXES AND REPORTING
OBLIGATIONS. A Beneficiary may be required to pay various taxes in connection
with an investment in the Trust, such as the alternative minimum tax. Since the
Trust is expected to elect to use an accelerated method of cost recovery, each
Beneficiary will be allocated a ratable share of excess depreciation which is a
tax preference item added to income for purposes of determining the alternative
minimum tax. (See "FEDERAL TAX CONSIDERATIONS--Depreciation (Cost Recovery) and
Alternative Minimum Tax.") The alternative minimum tax is treated in the same
manner as the regular income tax for purposes of payment of estimated taxes.
Beneficiaries will also be subject to state or local taxation, such as income,
franchise or personal property taxes, as a result of an investment in the Trust,
and any use of the Assets outside the United States may subject Beneficiaries to
income taxation in foreign countries. (See "STATE, LOCAL AND FOREIGN TAXES.")
24. PASSIVE ACTIVITY INCOME AND LOSS. It is expected that the Trust's
leasing activities will generate passive income or loss to the Beneficiaries.
Passive losses can be used by investors, other than corporate investors, to
offset only passive income in calculating tax liability. It is possible,
however, that regulations will be issued which will provide that income from
entities treated as partnerships for federal income tax purposes, like the
Trust, will be treated as portfolio income while losses will be treated as
passive losses. (See "FEDERAL TAX CONSIDERATIONS--Active/Passive Income and
Loss.")
25. RISKS OF SALES OF INTERESTS TO FOREIGN BENEFICIARIES. If the Trust
admits Foreign Beneficiaries, the proper withholding and tax liability imposed
with respect to such Participants will depend on whether or not the Trust is
engaged in a trade or business. If the Service contests the conclusion that the
Trust is engaged in a trade or business for federal income tax purposes, Foreign
Beneficiaries will be subject to substantially higher United States taxes and
Trust assets could be required to be used to satisfy unmet withholding
requirements. (See "FEDERAL TAX CONSIDERATIONS--Investment By Foreign
Beneficiaries.")
26. RISK OF ADVERSE CHANGES IN TAX LAWS AND REGULATIONS AND IN
INTERPRETATIONS THEREOF. Tax benefits associated with an investment in Interests
could be lost and substantial tax liabilities could be incurred by reason of
changes in the tax laws. (See "FEDERAL TAX CONSIDERATIONS --General; Opinions of
Peabody & Brown and Possible Changes in Tax Law.") Therefore, the discussion of
the tax considerations relevant to an investment in the Trust could be modified
as the result of future laws which could apply to Trust investments made prior
to the adoption of such changes.
27. TAX STATUS OF INDEBTEDNESS. The opinion of Peabody & Brown that interest
paid with respect to Trust indebtedness will be deductible for federal income
tax purposes is based entirely upon the representations of the Managing Trustee
regarding the characteristics of the indebtedness without independent
verification of the accuracy. If such representation were determined to be
inaccurate in any respect, the tax benefits associated with an investment in the
Trust could be significantly reduced. (See "FEDERAL TAX
CONSIDERATIONS--Limitations on the Deductibility of Interest.")
28. OTHER TAX RISKS. Investors should also consider certain other tax
consequences, including: (1) the possible reallocation by the Service of Profits
or Losses among the Managing Trustee, the Special Beneficiary and the
Beneficiaries in the event that the allocation provisions provided for in the
Trust Agreement are found to lack economic substance; (2) the possibility that
an audit by the Service of the Trust's information tax return could result in
the disallowance of certain deductions and the imposition of certain penalties
and could result in an audit of the Beneficiaries' individual returns (which
could result in adjustments to items which are unrelated to the Trust); and (3)
the possibility that the Trust could be
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determined to lack a profit objective in the conduct of its operations,
resulting in a denial of certain deductions. (See "FEDERAL TAX CONSIDERATIONS.")
29. STATE TAX RISKS. Although Peabody & Brown will render its opinion that
the Trust will be treated as a partnership for federal income tax purposes,
there can be no assurance that the Trust will be treated as a partnership for
state and local tax purposes. The criteria for partnership classification for
state and local tax purposes can be substantially different from the criteria
employed for federal income tax purposes. (See "STATE, LOCAL AND FOREIGN
TAXES.")
30. ERISA RISKS. Under certain circumstances, ERISA and the Code, as
interpreted by the Department of Labor, will apply a "look-through" rule under
which the assets of an entity in which an IRA or other Qualified Plan has made
an equity investment may generally constitute "plan assets." For this reason,
the Trust is limiting sales to IRAs or other Qualified Plans to less than 25% of
the total Interests sold in any Trust. In the event that IRAs or other Qualified
Plans acquire 25% or more of the Interests either because the investors have
misrepresented the status of their investment or because of transfers made to
IRAs or other Qualified Plans, the Assets of the Trust might be treated as "plan
assets." In the event assets of the Trust were considered "plan assets" of a
Qualified Plan investing in the Trust, the Trust or Qualified Plan could become
liable for penalties resulting from violations of ERISA. (See "ERISA AND OTHER
CONSIDERATIONS.")
ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the Estimated Use of
Proceeds of the Offering of the Trust. The Trust will use 20% of the proceeds of
the Offering, after deduction of offering expenses estimated to be approximately
$80,471 if the Minimum Offering is attained and $107,560 if the Maximum Offering
is attained, to make a Special Distribution to the Class A Investors (the "Class
A Special Distribution") and the balance of such proceeds are intended by the
Managing Trustee to be applied from time to time during the Initial Redemption
Period to enable the Trust to redeem Class A Interests. Any net proceeds not so
applied will be used from time to time during and after the expiration of the
Initial Redemption Period to make a special return of capital to the Class B
Investors (the "Class B Capital Distributions").
The Gross Proceeds of the Offering will be held in trust for the benefit of
the Class B Beneficiaries and used solely for the purposes set forth in this
Section.
ESTIMATED USE OF PROCEEDS
<TABLE>
<CAPTION>
MINIMUM PROCEEDS MAXIMUM PROCEEDS
------------------------- -------------------------
<S> <C> <C> <C> <C>
% OF GROSS % OF GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
------------ ----------- ------------ -----------
Gross Proceeds............................................... $ 2,295,955 100.00% $ 5,004,805 100.00%
Less Offering Expenses (1)................................. $ 80,471 3.50% $ 107,560 2.15%
Special Class A Distribution............................... $ 443,097 19.30% $ 979,449 19.57%
Cash for Redemption of Class A Interests (2)............... $ 1,772,387 77.20% $ 3,917,796 78.28%
</TABLE>
- ------------------------
(1) The amounts given include estimated expenses incurred in connection with
registration and qualification fees, legal and accounting fees, printing
costs and reimbursement for non-accountable and accountable offering
expenses made in connection with the sale and distribution of the Class B
Subordinated Interests. (See "COMPENSATION AND FEES" and "PLAN OF
DISTRIBUTION.")
(2) The Managing Trustee will seek during the Initial Redemption Period to
redeem Class A Interests at a price to be determined by the Managing Trustee
in its sole discretion with the objective of enabling the Class A Investors
desiring to do so to liquidate their Class A Interests at a price which will
enable
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the Trust to be able to increase Distributions to the non-tendering Class A
Investors and Class B Investors. There is no assurance that the Managing
Trustee will be successful in so redeeming Class A Interests. Any portion of
the net proceeds not applied so to redeem Class A Interests will be returned
from time to time to the Class B Investors during the Initial Redemption
Period as Class B Capital Distributions.
COMPENSATION AND FEES
The Managing Trustee, EFG and their Affiliates will not receive additional
compensation and fees as a result of the Offering except for a non-accountable
expense allowance. However, the Managing Trustee, EFG and certain other
Affiliates have received, and will continue to receive, substantial compensation
and fees in connection with the organization management and operation of the
Trust. In particular, the Managing Trustee and the Advisor have received
Acquisition Fees and reimbursement for Acquisition Expenses in connection with
the acquisition of Assets from the proceeds of the offering of the Class A
Interests and will receive such Acquisition Fees and reimbursement of
Acquisition Expenses in connection with the acquisition of additional Assets by
the Trust from Cash from Sales or Refinancings. Further, the Advisor and the
Managing Trustee receive the Asset Management Fee for services rendered in
connection with the management of Leases and Assets equal to the lesser of (i)
5% of gross Operating Lease rental revenues and 2% of gross Full-Payout Lease
rental revenues for the month in which such payment is being made or (ii) fees
which the Managing Trustee reasonably believes to be competitive for similar
services for similar assets. Further, the Managing Trustee and the Special
Beneficiary receive Distributions from the Trust, as described under "TRUST
DISTRIBUTIONS AND ALLOCATIONS." The Special Beneficiary intends to subscribe for
Class B Subordinated Interests pursuant to the Offering and will receive
Distributions in connection with any Interests so acquired.
The Managing Trustee and its Affiliates will receive an amount equal to 1%
of the Gross Proceeds ($22,960 in the case of the Minimum Offering and $50,048
in the case of the Maximum Offering) as a non-accountable expense allowance in
connection with the Offering. Otherwise, the Managing Trustee and its Affiliates
will not receive, directly or indirectly, any other compensation or expense
reimbursements from the Trust in connection with the Offering.
CONFLICTS OF INTEREST
The Managing Trustee and its Affiliates will have various conflicts of
interest with the Trust. See "MANAGEMENT OF TRUST" for descriptions of the
Managing Trustee and its Affiliates. Also see "FIDUCIARY RESPONSIBILITY" for a
discussion of the Managing Trustee's fiduciary duties to the Beneficiaries
which, in general, require the Managing Trustee to act in the best interest of
the Beneficiaries in managing the Trust. The conflicts of interest include the
following:
1. EXERCISE OF VOTING RIGHTS BY THE SPECIAL BENEFICIARY WITH RESPECT TO
CLASS B SUBORDINATED INTERESTS PURCHASED. The Special Beneficiary intends to
exercise complete voting rights with respect to Class B Subordinated Interests
acquired by it along with all other Beneficiaries in all matters voted upon
under the Trust Agreement, in particular with respect to the rights, duties, and
withdrawal of its Affiliate, the Managing Trustee, and any proposed amendments
to the Trust Agreement. The exercise of these voting rights in situations
involving the duties or rights of the Managing Trustee could involve the
Managing Trustee in a conflict of interest between its best interest and the
best interest of the Class A Beneficiaries and the Class B Beneficiaries.
Further, the Special Beneficiary intends to acquire a substantial number of
Class B Subordinated Interests and it is possible that it could acquire voting
control over all matters on which Beneficiaries may vote.
2. DETERMINATION OF THE TIMING AND AMOUNT OF DISTRIBUTIONS TO BE MADE TO THE
BENEFICIARIES. The Managing Trustee will have a conflict of interest in
determining the amount and timing of Distributions to be made by the Trust to
the Beneficiaries. There are various priorities with respect to the
Distributions so
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to be made and, in particular, the Class A Beneficiaries are required to receive
an amount equal to $0.41 per Class A Interest before any Distributions are made
with respect to Class B Interests. Various other Distributions to the Class B
Beneficiaries are subordinated to certain Distributions with respect to the
Class A Interests and Distribution to the Class B. This conflict will be more
significant if the Special Beneficiary, as is currently intended, acquires a
substantial number of the Class B Subordinated Interests. In order to reduce the
conflict both as to the amount and the timing of Distributions, the Managing
Trustee has adopted certain distribution policies. (See "TRUST DISTRIBUTIONS AND
ALLOCATIONS--Distribution Policies.")
3. COMPETITION FOR THE PURCHASE, FINANCING, LEASE AND SALE OF ASSETS. The
Managing Trustee expects will re-lease or sell Assets upon termination of the
related Lease terms. In addition to the Investment Trusts, the Managing Trustee,
EFG and their Affiliates are Affiliates of the general partners of ten general
equipment public limited partnerships, all of which have investment objectives
similar to those of the Trusts. The Managing Trustee, EFG and their Affiliates
are also Affiliates of the general partner of two aircraft public limited
partnerships with certain different investment objectives from the Trusts, whose
offerings have concluded.
EFG and its Affiliates currently provide management services to these public
limited partnerships and other private investment programs. The Trust Agreement
will not prohibit the Managing Trustee and its Affiliates from competing on
their own behalf with the Trust.
(a) SALE OR RE-LEASE OF ASSETS. If the Managing Trustee, EFG or an
Affiliate or any of the investment entities (including the Trusts) advised,
managed or controlled by EFG have at the same time available for sale or
re-lease assets of a particular class or type and the supply of equipment of
the class or type exceeds the demand, the Managing Trustee and EFG will try
to arrange for the sale or re-lease of assets of the class or type to be
made in the order in which the items came off lease and became available for
sale or re-lease, or, if the leases expire simultaneously, the reverse
chronological order of the date on which the leases took effect. However,
the Managing Trustee and EFG in their discretion may make exceptions to this
general policy where equipment is subject to remarketing commitments or
where there are other circumstances which, in their judgment, make the
application of such a policy inequitable for a particular entity.
Disposition of equipment is almost exclusively governed by the preferences
of third parties buying or leasing the equipment and the Managing Trustee
and its Affiliates will be required to take into account such preferences. A
conflict of interest may arise because certain investment entities may pay
EFG or its Affiliates greater compensation for services rendered in
connection with the sale or re-lease of assets than those fees payable by
the Trusts.
(b) GENERAL CONSIDERATIONS. In attempting to prevent or minimize
conflicts of interest among investment entities advised, managed or
controlled by EFG and its Affiliates, good business practice and the bona
fide preferences or expectations of other parties to transactions will also
be considered. In establishing criteria for the resolution of conflicts of
interest among the Trusts and the Managing Trustee and its Affiliates, the
Managing Trustee will act in accordance with its fiduciary duty to the
Trust. (See "FIDUCIARY RESPONSIBILITY.")
4. COMPETITION FOR MANAGEMENT SERVICES. The Managing Trustee is an Affiliate
of EFG. Affiliates of the Managing Trustee performing services for the Trust
pursuant to agreements with the Managing Trustee and the Trust are performing
similar services for EFG and its Affiliates. Conflicts of interest may arise in
allocating management time, services or functions among the businesses of the
Trust and the other entities for which officers, directors, employees and
Affiliates of the Managing Trustee are performing services. The Managing
Trustee, which intends to operate from its principal business office in Boston,
Massachusetts, is only required to devote such time to the affairs of the Trusts
as it in its sole discretion shall deem necessary for the business and
operations of the Trust.
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<PAGE>
5. DETERMINATION OF RESERVES AND LIABILITY OF MANAGING TRUSTEE FOR TRUST
OBLIGATIONS. The amount of Distributions from the Trust to the Beneficiaries is
subject, among other things, to the discretion of the Managing Trustee in
establishing and maintaining Trust reserves for working capital and contingent
liabilities. Since the amount of reserves will affect the potential liability of
the Managing Trustee to creditors of the Trust, the Managing Trustee may be
considered to have a conflict of interest in determining the amount of such
reserves.
6. LACK OF SEPARATE REPRESENTATION AND PARTICIPATION IN NEGOTIATIONS. The
Class B Beneficiaries, as a group, have not been represented by counsel. The
attorneys and other experts who perform services for the Trusts will perform
additional services for the Managing Trustee, its Affiliates and for other
trusts or entities sponsored by the Managing Trustee or its Affiliates. However,
should a dispute arise between the Trust and the Managing Trustee, the Managing
Trustee will cause the Trust to retain separate legal counsel, at the Trust's
expense, to represent the Trust in connection with such dispute.
7. NON-ARM'S LENGTH AGREEMENTS. None of the arrangements and agreements
relating to compensation between the Trust and the Managing Trustee or its
Affiliates has been negotiated on an arm's length basis nor have the
Beneficiaries, as a group, been a party to the determination of compensation
payable to the Managing Trustee and its Affiliates.
8. MANAGING TRUSTEE TO ACT AS TAX MATTERS PARTICIPANT. The Managing Trustee
has been designated as the Tax Matters Participant for the purposes of dealing
with the Service on any audit or other proceeding. As Tax Matters Participant,
the Managing Trustee is empowered to enter into negotiations with the Service,
to settle tax disputes and thereby bind the Trust and the Beneficiaries by such
settlement. While the Managing Trustee will take into consideration the
interests of the Beneficiaries generally in agreeing to any settlement, there is
no assurance that such settlement will be in the best interests of any specific
Beneficiary.
FIDUCIARY RESPONSIBILITY
The Managing Trustee is accountable to the Trust as a fiduciary and
consequently is under a fiduciary duty to exercise good faith and act with
integrity in handling Trust affairs in the best interests of the Trust. Although
the Trust Agreement permits the Managing Trustee and its Affiliates to
participate in other business ventures, including equipment leasing ventures,
for their own accounts, the Managing Trustee is required to act at all times in
a manner consistent with its fiduciary duty to the Trust. Under the Business
Trust Act, a beneficiary may bring a legal action (1) on behalf of himself and
all other similarly situated beneficiaries (a Class Action) to recover damages
for a breach by a trustee of its fiduciary duty or (2) on behalf of a business
trust (a trust derivative action) to recover damages in the trust's favor if the
trustees with authority to do so have refused to bring the action or if an
effort to cause those trustees to bring an action is not likely to succeed. In
order to bring a derivative action, the beneficiary must (a) be a beneficial
owner at the time of bringing the action and (b) either: (i) was a beneficial
owner at the time of the transaction of which he complains; or (ii) his status
as beneficiary has devolved upon him by operation of law or pursuant to the
terms of the governing instrument of the business trust from a person who was a
beneficiary at the time of the transaction.
Based upon the present state of the law, it appears that: (1) Beneficiaries
have the right, subject to applicable procedural rules and statutes, to (a)
bring Trust Class Actions, (b) enforce the rights of all Beneficiaries similarly
situated, and (c) bring Trust derivative actions to enforce the rights of the
Trust; and (2) Beneficiaries who have suffered losses in connection with the
purchase and sale of their Interests, including misapplication by the Managing
Trustee of the proceeds from the sale of the Interests, may have a right to
recover such losses from the Managing Trustee based upon Rule 10b-5 under the
Securities Exchange Act of 1934. The Managing Trustee will provide quarterly and
annual reports of operations and must, on demand, give any Beneficiary and/or
his legal representative true and full information concerning
26
<PAGE>
the Trust's affairs. Further, the Trust's books and records may be inspected or
copied by its Beneficiaries or their legal representatives at any time during
normal business hours.
Since any action would involve a rapidly developing and changing area of the
law, Beneficiaries who believe that a breach of fiduciary duty by the Managing
Trustee has occurred should consult with their own counsel. If the Managing
Trustee fails to perform its obligations as a fiduciary, there can be no
assurance that adequate remedies will in all instances be available.
CONFLICTS
The Trust Agreement provides that, subject to certain restrictions, neither
the Managing Trustee nor its Affiliates will be obligated to present to the
Trust investment opportunities that come to their attention, regardless of
whether the opportunity would be suitable for investment by the Trust. To the
extent that the foregoing provisions do limit such obligations, they may serve
to relieve the Managing Trustee from the common law fiduciary duty, to which it
might otherwise be subject, to refrain from competing on its own behalf or on
behalf of its Affiliates with the Trusts for investment opportunities. The Trust
Agreement permits the Managing Trustee and its Affiliates to act as a sponsor of
more than one similar investment program and for the Trust to benefit from their
experience resulting therefrom but relieves the Managing Trustee and its
Affiliates of the strict fiduciary duty of a sponsor acting as such for only one
investment program. The Trust Agreement contains provisions intended to resolve
possible conflicts of interest arising from the fact that Affiliates of the
Managing Trustee are currently managing, and will continue to manage during the
terms of the Trusts, a number of other equipment leasing programs. These
provisions are intended to reconcile the applicable requirements of the Business
Trust Act, the Managing Trustee's fiduciary duty to the Beneficiaries and the
expectations of the investors of all such programs as to the resolution of such
conflicts. (See "CONFLICTS OF INTEREST--Competition for the Purchase, Financing,
Lease and Sale of Assets.")
INDEMNIFICATION OF TRUSTEES AND THEIR AFFILIATES
The Trust Agreement provides that each Trustee and its Affiliates shall have
no liability to the Trust or to any Beneficiary for any loss suffered by a Trust
which arises out of any action or inaction of the Trustee or its Affiliates if
the Trustee or its Affiliates upon a reasonable basis determined in good faith
that such course of conduct was in the best interest of the Trust, and such
course of conduct did not constitute negligence or misconduct of the Trustee or
its Affiliates. Accordingly, Beneficiaries may have a more limited right of
action than they would have absent such limitations in the Trust Agreements
because such provisions could be asserted by a Trustee as a defense to suit by a
Beneficiary for alleged breach by the Trustee of its fiduciary duty in
conducting the affairs of the Trust. Each Trustee and its Affiliates shall be
indemnified by the Trusts against any losses, judgments, liabilities, expenses
and amounts paid in settlement of any claims sustained by them in connection
with the Trusts, provided that the same were not the result of negligence or
misconduct on the part of the Trustee or its Affiliates. A successful claim for
indemnification would deplete a Trust's assets by the amount paid and could
reduce the amount of Distributions subsequently paid to the Beneficiaries.
Notwithstanding the above, a Trustee and its Affiliates shall not be
indemnified by the Trust for any losses, liabilities or expenses arising from or
out of any alleged violation of any obligations any such Persons might have as
ERISA fiduciaries unless (i) there has been a successful adjudication on the
merits of each count involving alleged violations of such obligations as to the
particular indemnitee, and a court of competent jurisdiction approves the
indemnification of litigation costs, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee, and such court approves the indemnification of litigation
costs, or (iii) a court of competent jurisdiction approves the settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made. Further, notwithstanding the above,
a Trustee and its Affiliates and any Person acting as a broker-dealer shall not
be indemnified for any losses, liabilities or
27
<PAGE>
expenses arising from or out of any alleged violation of federal or state
securities laws unless (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee, and a court of competent jurisdiction approves the
indemnification of litigation costs, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee, and such court approves the indemnification of litigation
costs, or (iii) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made. In any claim for indemnification
for federal or state securities law violations, the parties seeking
indemnification shall place before the court the position of the Securities and
Exchange Commission, the Massachusetts Securities Division, the Michigan
Corporation & Securities Bureau, the Pennsylvania Securities Commission, the
Tennessee Securities Commission, the Commissioner of Corporations of the State
of California, and other applicable state securities commissions with respect to
the issue of indemnification for securities law violations. Any indemnity shall
be provided out of and to the extent of Trust assets only, and no Participant
shall have or incur any personal liability on account thereof. To the extent
that indemnification is provided against liabilities arising under the
Securities Act of 1933, it should be noted: IN THE OPINION OF THE SECURITIES AND
EXCHANGE COMMISSION, INDEMNIFICATION OF LIABILITIES ARISING OUT OF THE
SECURITIES ACT IS CONTRARY TO PUBLIC POLICY AND IS, THEREFORE, UNENFORCEABLE.
28
<PAGE>
BUSINESS OF THE TRUST
IN GENERAL
The Trust was created as a Delaware business trust in accordance with the
Delaware Business Trust Act on May 29, 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, $1,000 from the Special Beneficiary and $100 from the Initial
Beneficiary. The Trust issued 665,494 Class A Interests to 803 investors on
September 8, 1992. The Trust has one Managing Trustee, AFG ASIT Corporation, an
Affiliate of EFG, and one Special Beneficiary, EFG. The Managing Trustee and the
Special Beneficiary are not required to make any other capital contributions.
(See "Management of the Trust.")
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Trust is engaged in only one industry segment: the business of acquiring
capital equipment and leasing the equipment to creditworthy lessees on a
full-payout or operating lease basis. Full-payout leases are those in which
aggregate noncancellable rents equal or exceed the purchase price of the leased
equipment. Operating leases are those in which the aggregate noncancellable
rental payments are less than the purchase price of the leased equipment.
DESCRIPTION OF BUSINESS
The Trust was organized to acquire a diversified portfolio of capital
equipment subject to various full-payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Trust's primary investment objectives are to acquire and lease equipment
which will:
1. generate monthly cash distributions;
2. preserve and protect Trust capital; and
3. maximize residual value.
The Trust has the additional objective of providing certain federal income
tax benefits.
The closing date of the offering of Class A Interests was September 8, 1992.
Significant operations commenced coincident with the Trust's initial purchase of
equipment and associated lease commitments on September 8, 1992. The acquisition
of the equipment and its associated leases is described in detail in Note 3 to
the Trust's Financial Statements for 1996, included elsewhere herein. The Trust
will terminate no later than December 31, 2003.
The Trust has no employees. However, it entered into an Advisory Agreement
with EFG (the "Advisor"). The Advisor's role, among other things, is to (i)
evaluate, select, negotiate, and consummate the acquisition of equipment, (ii)
manage the leasing, re-leasing, financing, and refinancing of equipment, and
(iii) arrange the resale of equipment. The Advisor is compensated for such
services in accordance with the Trust Agreement. See "Certain Relationships and
Related Transactions," Note 4 to the Trust's Financial Statements for 1996.
The Trust's investment in equipment is, and will continue to be, subject to
various risks, including physical deterioration, technological obsolescence and
defaults by lessees. A principal business risk of owning and leasing equipment
is the possibility that aggregate lease revenues and equipment sale proceeds
will be insufficient to provide an acceptable rate of return on invested capital
after payment of debt service and operating expenses. Consequently, the success
of the Trust will be largely dependent upon the ability of the Managing Trustee
and its Affiliates to forecast technological advances, the ability of the
lessees to fulfill their lease obligations and the quality and marketability of
the equipment at the time of sale.
29
<PAGE>
In addition, the leasing industry is very competitive. Although
substantially all funds available for equipment acquisitions have been invested
in equipment, subject to noncancellable lease agreements, the Trust will
encounter considerable competition when equipment is re-leased or sold at the
expiration of primary lease terms. The Trust will compete with lease programs
offered directly by manufacturers and other equipment leasing companies,
including limited partnerships organized and managed similarly to the Trust and
including other EFG-sponsored partnerships and trusts, which may seek to
re-lease or sell equipment within their own portfolios to the same customers as
the Trust. Many competitors have greater financial resources and more experience
than the Trust, the Managing Trustee and the Advisor.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the year ended December 31, 1996, 1995 and 1994 is
described in Note 2 to the Trust's 1995 Financial Statements.
Default by a lessee under a lease agreement may cause equipment to be
returned to the Trust at a time when the Managing Trustee or the Advisor is
unable to arrange the sale or re-lease of such equipment. This could result in
the loss of lease revenues and weaken the Trust's ability to repay related debt.
PROPERTIES
See Note 3 to the Trust's 1996 Financial Statements.
LEGAL PROCEEDINGS
See Note 7 to the Trust's 1996 Financial Statements.
MARKET FOR THE TRUST'S SECURITIES
AND RELATED SECURITY HOLDER MATTERS
MARKET INFORMATION
Currently, there is no public market for the resale of the Class A
Interests. It is not anticipated that a public market for resale of either the
Class A Interests or the Class B Subordinated Interests will develop. There has
been some trading of Class A Interests in the secondary market as described in
the "SUMMARY OF THE OFFERING--Introduction."
APPROXIMATE NUMBER OF SECURITY HOLDERS
At January 31, 1997, there were 784 Class A Beneficiaries in the Trust and
one Special Beneficiary.
DIVIDEND HISTORY AND RESTRICTIONS
Pursuant to Article VIII of the Trust Agreement, the Trust's Distributable
Cash From Operations and Distributable Cash From Sales or Refinancings (each as
defined below) are determined and distributed to the Trust's participants
monthly. Each monthly distribution may vary in amount. Currently, there are no
restrictions that materially limit the Trust's ability to distribute
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings or that the Trust believes are likely to materially limit the
future distribution of Distributable Cash From Operations and Distributable Cash
From Sales or Refinancings. The Trust expects to continue to distribute all
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings on a monthly basis.
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<PAGE>
Distributions for each of the three years ended December 31, 1996, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
MANAGING SPECIAL CLASS A
TOTAL TRUSTEE BENEFICIARY BENEFICIARIES
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Total 1996 distributions...................................... $ 1,039,491 $ 10,395 $ 85,758 $ 943,338
Total 1995 distributions...................................... 1,462,987 14,630 120,696 1,327,661
Total 1994 distributions...................................... 1,847,983 18,480 152,459 1,677,044
------------ ----------- ----------- ------------
Total......................................................... $ 4,350,461 $ 43,505 $ 358,913 $ 3,948,043
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Distributions payable at December 31, 1996 and 1995 were $200,199 and
$153,998, respectively.
"Distributable Cash From Operations" means the net cash provided by the
Trust's normal operations after general expenses and current liabilities of the
Trust are paid, reduced by any reserves for working capital and contingent
liabilities to be funded from such cash, to the extent deemed reasonable by the
Managing Trustee, and increased by any portion of such reserves deemed by the
Managing Trustee not to be required for Trust operations and reduced by all
accrued and unpaid Equipment Management Fees and, after Payout, further reduced
by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From
Operations does not include any Distributable Cash From Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) amounts reinvested in additional equipment in
accordance with Sections 4.2(b)(v) and 4.2(b)(vi) of the Trust Agreement, or (b)
the proceeds from the sale of an interest in a joint venture which are
reinvested in additional equipment, (ii) any accrued and unpaid Equipment
Management Fee and Acquisition Fees and Acquisition Expenses paid with respect
to additional equipment acquired through reinvestment of Cash From Sales or
Refinancings in accordance with Section 4.2(b)(v) of the Trust Agreement and
(iii) after Payout, any accrued and unpaid Subordinated Resale Fees.
"Cash From Sales or Refinancings" means cash received by the Trust from sale
or refinancing transactions, as reduced by (i)(a) all debts and liabilities of
the Trust required to be paid as a result of sale or refinancing transactions,
whether or not then due and payable (including any liabilities on an item of
equipment sold which are not assumed by the buyer and any remarketing fees
required to be paid to persons not affiliated with the Managing Trustee, but not
including any Subordinated Resale Fees whether or not then due and payable) and
(b) general expenses and current liabilities of the Trust and (c) any reserves
for working capital and contingent liabilities funded from such cash to the
extent deemed reasonable by the Managing Trustee and (ii) increased by any
portion of such reserves deemed by the Managing Trustee not to be required for
Trust operations. In the event the Trust accepts a note in connection with any
sale or refinancing transaction, all payments subsequently received in cash by
the Trust with respect to such note shall be included in Cash From Sales or
Refinancings, regardless of the treatment of such payments by the Trust for tax
or accounting purposes. If the Trust receives purchase money obligations in
payment for equipment sold, which are secured by liens on such equipment, the
amount of such obligations shall not be included in Cash From Sales or
Refinancings until the obligations are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Trust shall be made 90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee.
"Payout" is defined as Class A Payout and Class B Payout collectively. For a
description of Class B Payout, see "Trust Distributions and Allocations." "Class
A Payout" is defined as the first time when the aggregate amount of all
distributions to the Class A Beneficiaries of Distributable Cash From Operations
and Distributable Cash From Sales or Refinancings equals the aggregate amount of
the Beneficiaries' original capital contributions plus a cumulative annual
distribution of 10% (compounded quarterly and calculated beginning with the last
day of the month of the Trust's original closing date) on their aggregate
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<PAGE>
unreturned capital contributions. For purposes of this definition, capital
contributions shall be deemed to have been returned only to the extent that
distributions of cash to the Beneficiaries exceed the amount required to satisfy
the cumulative annual distribution of 10% (compounded quarterly) on the
Beneficiaries' aggregate unreturned capital contributions, such calculation to
be based on the aggregate unreturned capital contributions outstanding on the
first day of each month.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are made within 45 days after the completion of
each calendar month. Each Distribution is described in a statement sent to the
Beneficiaries.
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<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The Offering will result in the creation and issuance of the Class B
Beneficiary Interests. A minimum of 459,191 and a maximum of 1,000,961 Class B
Beneficiary Interests may be issued at a price of $5.00 per Interest. The
effects of the Offering on the Statement of Operations of AFG Investment Trust B
at December 31, 1996 and for the year then ended would not have been significant
except for the effects of distributing 20% of the Offering proceeds, after
reduction for Offering costs, to the Class A Beneficiaries. Pro forma
presentations of the Statement of Financial Position at December 31, 1996 and
the Statement of Operations for the Year Ended December 31, 1996 for AFG
Investment Trust B are presented below and are based on the assumption that the
Offering was concluded on January 1, 1996. The Pro Forma Statement of Financial
Position incorporates capital which would be contributed from the issuance of
the minimum and the maximum number of Class B Beneficiary Interests. For
purposes of the Pro Forma Statement of Financial Position, these capital
contributions were reduced by the minimum and maximum amounts of Offering costs
expected to be incurred as a result of the Offering and the minimum and maximum
amounts of the Special Class A Distribution. Actual cash distributions declared
and paid to the Beneficiaries during 1996 were less than or equal to $.41 per
quarter per Class A Beneficiary Interest (this amount being equal to the first
level of cash distribution accruing to the Class A Beneficiaries as described
under "Trust Distributions and Allocations"). Accordingly, the Class B
Beneficiary Interests would not have received any of the actual cash
distributions paid to the Beneficiaries in 1996 and none are reflected in the
pro-forma financial statements which follow. To the extent that future quarterly
cash distributions exceed $.41 per Class A Beneficiary Interest, the allocations
of cash distributions and income and loss to the Class A Beneficiaries and to
the Class B Beneficiaries will be different than shown in the pro-forma
financial statements. "Restricted Cash" as used on the Pro Forma Statement of
Financial Position represents the amount of cash generated from the Offering of
Class B Beneficiary Interests after Offering costs and payment of the Special
Class A Distribution. This cash will be restricted to the repurchase of Class A
Interests or returned to the Class B Beneficiaries, as described in this
Prospectus.
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<PAGE>
PRO FORMA
AFG INVESTMENT TRUST B
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING OFFERING
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 2,829,093 $ 2,829,093
Restricted cash.................................................................... 1,772,387 3,917,796
Rents receivable................................................................... 339,293 339,293
Accounts receivable--affiliate..................................................... 154,395 154,395
Equipment at cost, net of accumulated depreciation of $12,161,949 and $9,940,387 at
December 31, 1996 and 1995, respectively......................................... 13,307,711 13,307,711
Organization costs, net of accumulated amortization of $4,333 and $3,333 at
December 31, 1996 and 1995, respectively......................................... 667 667
------------- -------------
Total assets................................................................. $ 18,403,546 $ 20,548,955
------------- -------------
------------- -------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable...................................................................... $ 4,352,811 $ 4,352,811
Accrued interest................................................................... 36,571 36,571
Accrued liabilities................................................................ 23,250 23,250
Accrued liabilities--affiliate..................................................... 47,178 47,178
Deferred rental income............................................................. 45,550 45,550
Cash distributions payable to participants......................................... 200,199 200,199
------------- -------------
Total liabilities............................................................ 4,705,559 4,705,559
------------- -------------
Participants' capital (deficit):
Managing Trustee................................................................. (30,382) (30,382)
Special Beneficiary.............................................................. (257,894) (257,894)
Class A Beneficiary Interests (665,494 Interests; initial purchase price of $25
each).......................................................................... 11,770,779 11,234,427
Class B Beneficiary Interests (459,191 minimum Interests, 1,000,961 maximum
Interests; initial purchase price of $5 each).................................. 2,215,484 4,897,245
------------- -------------
Total participants' capital.................................................. 13,697,987 15,843,396
------------- -------------
Total liabilities and participants' capital.................................. $ 18,403,546 $ 20,548,955
------------- -------------
------------- -------------
</TABLE>
34
<PAGE>
PRO FORMA
AFG INVESTMENT TRUST B
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING OFFERING
------------ ------------
<S> <C> <C>
Income:
Lease revenue....................................................................... $ 5,809,086 $ 5,809,086
Interest income..................................................................... 106,186 106,186
Other income........................................................................ 199,450 199,450
Loss on sale of equipment........................................................... (224,594) (224,594)
------------ ------------
Total income.................................................................... 5,890,128 5,890,128
------------ ------------
Expenses:
Depreciation and amortization....................................................... 4,284,049 4,284,049
Interest expense.................................................................... 408,153 408,153
Equipment management fees--affiliate................................................ 249,205 249,205
Operating expenses--affiliate....................................................... 140,881 140,881
------------ ------------
Total expenses.................................................................. 5,082,288 5,082,288
------------ ------------
Net income............................................................................ $ 807,840 $ 807,840
------------ ------------
Net income
per Class A Beneficiary Interest.................................................... $ 1.10 $ 1.10
------------ ------------
per Class B Beneficiary Interest.................................................... $ -- $ --
------------ ------------
Cash distributions declared
per Class A Beneficiary Interest.................................................... $ 2.08 $ 2.89
------------ ------------
per Class B Beneficiary Interest.................................................... $ -- $ --
------------ ------------
</TABLE>
35
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For the years ended December 31, 1996, 1995, 1994 and 1993 and for the
period September 8, 1992 (commencement of operations) to December 31, 1992:
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue........................ $ 5,809,086 $ 6,173,972 $ 5,507,765 $ 5,611,138 $ 450,996
Net income (loss).................... $ 807,840 $ 527,564 $ 1,771,705 $ 710,004 $ (140,780)
Per Beneficiary Interest:
Net income (loss).................. $ 1.10 $ 0.72 $ 2.42 $ 0.97 $ (0.19)
Cash distributions................. $ 1.42 $ 2.00 $ 2.52 $ 2.52 $ 0.84
Financial Position
Total assets......................... $ 16,631,159 $ 19,573,350 $ 22,320,875 $ 25,677,488 $ 28,928,691
Total long-term obligations.......... $ 4,352,811 $ 7,097,113 $ 8,713,009 $ 11,971,262 $ 13,155,157
Participants' capital................ $ 11,925,600 $ 12,157,251 $ 13,092,674 $ 13,168,952 $ 14,306,931
</TABLE>
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31, 1995
COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
OVERVIEW
As an equipment leasing trust, AFG Investment Trust B (the "Trust") was
organized to acquire a diversified portfolio of capital equipment subject to
lease agreements with third parties. The Trust was designed to progress through
three principal phases: acquisitions, operations, and liquidation. During the
operations phase, a period of approximately six years, all equipment in the
Trust's portfolio will progress through various stages. Initially, all equipment
will generate rental revenues under primary term lease agreements. During the
life of the Trust, these agreements will expire on an intermittent basis and
equipment held pursuant to the related leases will be renewed, re-leased or
sold, depending on prevailing market conditions and the assessment of such
conditions by Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership ("EFG") to obtain the most
advantageous economic benefit. Over time, a greater portion of the Trust's
original equipment portfolio will become available for remarketing and cash
generated from operations and from sales or refinancings will begin to
fluctuate. Ultimately, all equipment will be sold and the Trust will be
dissolved. The Trust's operations commenced in 1992.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Trust recognized lease revenue of
$5,809,086 compared to $6,173,972 and $5,507,765 for the years ended December
31, 1995 and 1994, respectively. The decrease in lease revenue from 1995 to 1996
is due primarily to the Trust's sale of its interest in a Boeing 747-SP aircraft
leased to United Air Lines, Inc. (the "United Aircraft") in February 1996, as
discussed below. The increase in lease revenue from 1994 to 1995 was due to the
acquisition of additional equipment during 1995, including the effects of
reinvestment. The Trust also earns interest income from temporary investments of
rental receipts and equipment sales proceeds in short-term instruments.
The Trust's equipment portfolio includes certain assets in which the Trust
holds a proportionate ownership interest. In such cases, the remaining interests
are owned by EFG or an affiliated equipment leasing program sponsored by EFG.
Proportionate equipment ownership enables the Trust to further diversify its
equipment portfolio by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could result from a
concentration in any single equipment type, industry or lessee. The Trust and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment.
On February 5, 1996, the Trust concluded the sale of its interest in the
United Aircraft to the lessee, United Air Lines Inc., ("United"). The Trust
recognized a net loss of $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 from United for the
aircraft. A portion of such sale proceeds was reinvested in other equipment in
March 1996 through the acquisition of an 8.86% ownership interest in an aircraft
(the "Reno Aircraft") at an aggregate cost of $1,239,741. To acquire its
interest in the Reno Aircraft, the Trust obtained long-term financing of
$997,888 from a third-party lender and utilized cash proceeds of $241,853 from
the sale of the United Aircraft. During the year ended December 31, 1996, the
Trust sold other equipment having a
37
<PAGE>
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.
During 1994, the Trust sold equipment having a net book value of $4,290,653
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $638,594. The equipment sales included certain
railroad equipment with an original cost and net book value of $4,848,839 and
$4,099,823, respectively, which the Trust sold to a third party in March 1994.
In connection with this sale, the Trust realized sales proceeds of $1,347,625
and the purchaser assumed related debt of $3,446,759, which resulted in a net
gain, for financial statement purposes, of $694,561. This equipment was sold
prior to the expiration of the related lease term. The sale proceeds were fully
reinvested in other equipment in 1994.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Trust, as such transactions will be dependent upon
the condition and type of equipment being sold and its marketability at the time
of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
Depreciation and amortization expense was $4,284,049, $4,176,540 and
$3,559,119 for the years ended December 31, 1996, 1995 and 1994, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the Trust
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life. The increase in
depreciation expense from 1994 to 1996 reflects the acquisition of equipment
during 1994, 1995 and 1996.
38
<PAGE>
Interest expense was $408,153 or 7% of lease revenue in 1996, $539,047 or
8.7% of lease revenue in 1995 and $635,157 or 11.5% of lease revenue in 1994.
Interest expense in future periods will continue to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding indebtedness.
Management fees were 4.3%, 4% and 3.4% of lease revenue during the years
ended December 31, 1996, 1995 and 1994, respectively. Management fees are based
on 5% of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 2.4%, 2% and 1.3% of lease revenue during the years ended December
31, 1996, 1995 and 1994, respectively. The overall increase in operating
expenses from 1994 to 1996 was due primarily to an increase in administrative
and professional service costs and expenses incurred in connection with the sale
of the Trust's interest in the vessel and aircraft described above. The amount
of future operating expenses cannot be predicted with certainty; however, such
expenses are usually higher during the acquisition and liquidation phases of a
trust. Other fluctuations typically occur in relation to the volume and timing
of remarketing activities.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview". As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $5,645,405, $4,877,921 and $4,767,811 in 1996, 1995 and 1994,
respectively. Future renewal, re-lease and equipment sale activities will cause
a gradual decline in the Trust's primary-term lease revenue and corresponding
sources of operating cash. Overall, expenses associated with rental activities,
such as management fees, and net cash flow from operating activities will
decline as the Trust experiences a higher frequency of remarketing events.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. The Trust expended $1,441,796, $5,605,829 and
$5,427,991 to acquire equipment during the years ended December 31, 1996, 1995
and 1994, respectively, including new equipment acquired pursuant to the
reinvestment provisions of the Trust Agreement of approximately $1,400,000,
$3,500,000 and $5,000,000 during the years ended December 31, 1996, 1995 and
1994, respectively. The reinvestment equipment was financed through a
combination of leveraging and the sale proceeds available from the aircraft,
vessel and rail transactions, discussed above. During 1996, the Trust realized
equipment sale proceeds of $2,025,783, including $1,684,292 of proceeds from the
United Aircraft. In 1995, the Trust received sale proceeds of $3,588,941,
including $3,567,942 of proceeds from the vessel transaction and; in 1994, the
Trust received sale proceeds of $1,482,488, including $1,347,625 of proceeds
from the rail transaction. Future inflows of cash from asset disposals will vary
in timing and amount and will be influenced by many factors including, but not
limited to, the frequency and timing of lease expirations, the type of equipment
being sold, its condition and age, and future market conditions.
39
<PAGE>
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, $2,296,728 and $3,982,078 in 1996, 1995 and 1994, respectively,
resulted from leveraging a portion of the Trust's equipment portfolio with
third-party lenders. EFG also provided interim financing to the Trust of $41,440
during 1994, until third-party financing was finalized. No interim financing was
provided during the same periods in 1996 and 1995. 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.
Cash distributions to the Managing Trustee, the Special Beneficiary and the
Beneficiaries are declared and generally paid within 45 days following the end
of each calendar month. The payment of such distributions is presented as a
component of financing activities. For the year ended December 31, 1996, the
Trust declared total cash distributions of Distributable Cash From Operations
and Distributable Cash From Sales and Refinancings of $1,039,491. In accordance
with the Trust Agreement, the Beneficiaries were allocated 90.75% of these
distributions, or $943,338; the Special Beneficiary was allocated 8.25%, or
$85,758; and the Managing Trustee was allocated 1%, or $10,395.
For financial reporting purposes, the Managing Trustee and the Special
Beneficiary each has accumulated a capital deficit at December 31, 1996. This is
the result of aggregate cash distributions to these Participants being in excess
of their aggregate capital contributions ($1,000 each) and their respective
allocations of financial statement net income or loss. (See Note 2 to the
financial statements--Allocation of Profits and Losses.) Ultimately, the
existence of a capital deficit for the Managing Trustee or the Special
Beneficiary for financial reporting purposes is not indicative of any further
capital obligations to the Trust by either the Managing Trustee or the Special
Beneficiary. However, for income tax purposes, the Trust Agreement requires that
income be allocated first to those Participants having negative tax capital
account balances so as to eliminate any such balances. In accordance with the
Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be
required to contribute to the Trust an amount equal to any negative balance
which may exist in the Managing Trustee's tax capital account. No such
requirement exists with respect to the Special Beneficiary. At December 31,
1996, the Managing Trustee has a positive tax capital account balance. (See Note
6 to the financial statements.)
At December 31, 1996, the Trust had aggregate future minimum lease payments
of $7,370,938 from contractual lease agreements (see Note 2 to the financial
statements), of which $4,352,811 will be used to amortize the principal balance
of notes payable (see Note 5 to the financial statements). Additional cash
inflows will be realized from future remarketing activities, such as lease
renewals and equipment sales, the timing and extent of which cannot be predicted
with certainty. This is because the timing and extent of equipment sales is
often dependent upon the needs and interests of the existing lessees. Some
lessees may choose to renew their lease contracts, while others may elect to
return the equipment. In the latter instances, the equipment could be re-leased
to another lessee or sold to a third party. Accordingly, as the Trust matures
and a greater level of its equipment assets become available for remarketing,
the cash flows of the Trust will become less predictable. In addition, the Trust
will have cash outflows to satisfy interest on indebtedness and to pay
management fees and operating expenses. Ultimately, the Trust is expected to
meet its future disbursement obligations and to distribute any excess of cash
inflows over cash outflows to the Participants in accordance with the Trust
Agreement. However, several factors, including month-to-month lease extensions,
lessee defaults, equipment casualty events, and early lease terminations could
alter the Trust's anticipated cash flows as described herein and in the
accompanying financial statements and result in fluctuations to the Trust's
periodic cash distribution payments.
40
<PAGE>
Cash distributions paid to the Participants consist of both a return of and
a return on capital. Cash distributions do not represent and are not indicative
of yield on investment. Actual yield on investment cannot be determined with any
certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, and the residual value realized for each asset at its disposal
date. Future market conditions, technological changes, the ability of EFG to
manage and remarket the assets, and many other events and circumstances, could
enhance or detract from individual asset yields and the collective performance
of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash distribution
level that is consistent with the operating cash flows of the Trust and to
optimize the long-term value of the Trust. A distribution level that is higher
than the Trust's operating cash flows could compromise the Trust's working
capital position, as well as its ability to refurbish or upgrade equipment in
response to lessee requirements or other market circumstances and, during its
reinvestment period, to purchase replacement equipment as original equipment is
remarketed. Accordingly, in order to better align monthly cash distributions
with the Trust's operating cash flows, the Managing Trustee reduced the level of
monthly cash distributions from an annualized rate of $2.52 per Beneficiary
Interest (the rate established and paid from the Trust's inception through
September 1995) to an annualized rate of $1.26 per Beneficiary Interest
commencing in October 1995. In October 1996, the Managing Trustee increased the
annualized distribution rate to $1.64 per Beneficiary Interest and expects that
the Trust will be able to sustain this distribution rate throughout 1997.
However, the nature of the Trust's principal cash flows gradually will shift
from rental receipts to equipment sale proceeds as the Trust matures. As this
occurs, the Trust's cash flows will become more volatile in that certain of the
Trust's equipment leases will be renewed and certain of its assets will be sold.
In some cases, the Trust may be required to expend funds to refurbish or
otherwise improve the equipment being remarketed in order to make it more
desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the
Managing Trustee will attempt to monitor and manage these events to maximize the
residual value of the Trust's equipment and will consider these factors, in
addition to the collection of contractual rents, the retirement of scheduled
indebtedness and the Trust's future working capital and equipment requirements,
in establishing future cash distribution rates. Ultimately, the Participants
should expect that cash distribution rates will fluctuate over the long term as
a result of future remarketing activities.
41
<PAGE>
MANAGEMENT OF THE TRUST
The Managing Trustee of the Trust is AFG ASIT Corporation, an Affiliate of
EFG, a Massachusetts partnership engaged in various aspects of the equipment
leasing business since 1980. The Managing Trustee is a Massachusetts corporation
which was formed in 1991. EFG is the Advisor to and Special Beneficiary of the
Trust.
The business address of the Managing Trustee, EFG and the Trust is 98 North
Washington Street, Boston, MA 02114 (telephone: (617) 854-5800).
EFG is a Massachusetts 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 AFG. 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, which has a one percent 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 one percent 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, including the name "American Finance Group," to a third party.
As of January 1, 1996, EFG (under its former name AFG) sold to an equipment
leasing company certain of its assets, primarily relating to the origination of
new leases, and agreed at that time not to compete with the sold business for a
period of five years thereafter. The assets purchased included the name
"American Finance Group" and its acronym. EFG was permitted, however, to
continue using the name and its acronym in connection with its existing
programs, including the Trust. It was at this time that AFG changed its name to
Equis Financial Group. The sale specifically reserved to EFG the right to
continue managing all Assets owned by the Trust, including enforcing all rights
of the Trust under all Leases and all acquisition requirements (if done through
brokers or the buyer of the business). EFG was also permitted to originate
non-investment grade equipment leases if they are not of a type originated by
the buyer of the business and vessel leases.
Certain principals of EFG, including Gary D. Engle and Geoffrey A.
MacDonald, agreed to not compete with the sold business on similar terms and
conditions.
The executive officers and directors of the Managing Trustee are:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------ ---------------------------------------------------------------------------
<S> <C>
Geoffrey A. MacDonald............... President and Director
James F. Livesey.................... Vice President
Gail D. Ofgant...................... Vice President, Lease Operations
Michael J. Butterfield.............. Treasurer
Gary M. Romano...................... Clerk
Gary D. Engle....................... Director
</TABLE>
42
<PAGE>
The following table and management summary outlines the key management of
EFG and its general partner Equis Corporation:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Gary D. Engle........................................ 48 President and Chief Executive Officer
Geoffrey A. MacDonald................................ 48 Chairman
Gary M. Romano....................................... 37 Executive Vice President and Chief Operating Officer
James A. Coyne....................................... 37 Senior Vice President
Sandra L. Simonsen................................... 46 Senior Vice President, Information Systems
James F. Livesey..................................... 47 Vice President, Aircraft and Vessels
Gail D. Ofgant....................................... 31 Vice President of Lease Operations
Michael J. Butterfield............................... 37 Vice President, Finance and Treasurer
</TABLE>
GARY D. ENGLE is President and Chief Executive Officer of EFG. Mr. Engle
owns the controlling interest of EFG which he acquired in December, 1994. From
1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners
Development, Inc., a real estate and mortgage banking company, with principal
offices in Florida. From 1980 to 1987, Mr. Engle served in various capacities
with Arvida Disney Company, a large scale community real estate development
company owned by the Walt Disney Company. Mr. Engle has an MBA from Harvard
University and a BS Degree from the University of Massachusetts (Amherst).
GEOFFREY A. MACDONALD is a co-founder and Chairman of EFG. Mr. MacDonald was
also a co-founder, director and Senior Vice President of EFG's predecessor
corporation from 1980 to 1988. Prior to co-founding EFG's predecessors, Mr.
MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds an MBA from Boston College and a
BA Degree from the University of Massachusetts (Amherst).
GARY M. ROMANO became Executive Vice President and Chief Operating Officer
and Clerk of EFG in April 1996. Mr. Romano joined EFG in November 1989 and was
appointed Vice President and Controller in April 1993. Prior to joining EFG, Mr.
Romano was Assistant Controller for a privately held real estate company which
he joined in 1987. Mr. Romano held audit staff and manager positions at Ernst &
Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a CPA and holds
a BS Degree from Boston College.
JAMES A. COYNE is Senior Vice President of EFG. Mr. Coyne joined EFG in
1989, remained until May 1993, and rejoined EFG in November 1994. From May 1993
through November 1994, he was with the Raymond Company, a private investment
firm, where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he was
with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS
in Business Administration from John Carroll University, a Masters Degree in
Accounting from Case Western Reserve University and is a Certified Public
Accountant.
SANDRA L. SIMONSEN joined EFG in February 1990. She became Senior Vice
President, Information Systems in April 1996. Prior to joining EFG, Ms. Simonsen
was Vice President, Information Systems with Investors Mortgage Insurance
Company which she joined in 1973. Ms. Simonsen provided systems consulting for a
subsidiary of American International Group and authored a software program
published by IBM. Ms. Simonsen holds a BA Degree from Wilson College.
43
<PAGE>
JAMES F. LIVESEY is Vice President, Aircraft and Vessels. Mr. Livesey joined
EFG in October, 1989 and was promoted to Vice President in January, 1992. Prior
to joining EFG, Mr. Livesey held sales and marketing positions with two
privately-held leasing firms. Mr. Livesey holds an MBA from Boston College and
BA Degree from Stonehill College.
MICHAEL J. BUTTERFIELD joined EFG in June 1992 and was appointed Vice
President, Finance and Treasurer of EFG and certain affiliates in April 1996.
Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young
LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting
and industry positions in New Zealand and London (U.K.) prior to coming to the
United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has completed
his CPA requirements in the United States. Mr. Butterfield holds a Bachelor of
Commerce degree from the University of Otago, Dunedin, New Zealand.
GAIL D. OFGANT joined EFG in July 1989, and is currently Vice President,
Lease Operations. Ms. Ofgant held the position of Manager, Lease Operations at
EFG through March, 1996. Prior to joining EFG, Ms. Ofgant was employed by
Security Pacific National Trust Company. Ms. Ofgant holds a BS Degree in Finance
from Providence College.
The Managing Trustee has retained EFG to serve as Advisor to the Trust and
EFG and the Managing Trustee, acting jointly, will make all decisions regarding
acquisition, leasing, re-leasing and sale of Assets. The Advisor itself will be
managed by its Executive Committee, officers and employees. In carrying out its
responsibilities, the Advisor will also engage other Affiliates of EFG in
connection with the operations of the Trust. The officers, directors and members
of the Executive Committee of the Managing Trustee, the Advisor and other
Affiliates have substantial experience in evaluating, structuring, negotiating
and financing of equipment lease transactions. The officers, directors and
members of the Executive Committee of the Managing Trustee, the Advisor and
other Affiliates also have significant experience in the remarketing of capital
equipment.
The services and obligations of the Advisor include advice and assistance in
locating, evaluating and negotiating the acquisition of Assets; negotiating the
terms of Leases; negotiating and administering any debt obligations of the
Trusts; negotiating re-leases or sales of Assets upon the expiration of the
Leases; collecting lease revenues from Lessees; inspecting the Assets;
maintaining liaison with and general supervision of Lessees to ensure that
Assets are being properly operated and maintained; supervising maintenance to be
performed by third parties; monitoring performance by the Trusts and by Lessees
of their obligations under the Leases; and performing various administrative
tasks associated with the operations of the Trusts.
EXECUTIVE COMPENSATION
Currently, the Trust has no employees. However, under the terms of the Trust
Agreement, the Trust is obligated to pay all costs of personnel employed full or
part-time by the Trust, including officers or employees of the Managing Trustee
or its Affiliates. There is no plan at the present time to make any officers or
employees of the Managing Trustee or its Affiliates employees of the Trust. The
Trust has not paid and does not propose to pay any options, warrants or rights
to the officers or employees of the Managing Trustee or its Affiliates.
Although the Trust has no employees, pursuant to the Trust Agreement, the
Trust incurs a monthly charge for personnel costs of EFG for persons engaged in
providing administrative services to the Trust. For a description of the
remuneration paid by the Trust to the Managing Trustee and its Affiliates for
such services see "Certain Relationships and Related Transactions," Note 4 to
the Trust's Financial Statements for 1996.
44
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
By virtue of its organization as a trust, the Trust has no outstanding
securities possessing traditional voting rights. However, as provided in Section
11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a majority interest
of the Class A Beneficiaries and Class B Beneficiaries will have voting rights
with respect to:
1. Amendment of the Trust Agreement;
2. Termination of the Trust;
3. Removal of the Managing Trustee; and
4. Approval or disapproval of the sale of all or substantially all of the
assets of the Trust (except in the orderly liquidation of the Trust upon
its termination and dissolution).
No person or group is known by the Managing Trustee to own beneficially more
than 5% of the Trust's 665,494 outstanding Class A Interests as of January 31,
1997.
For a description of the ownership and organization of EFG, see "MANAGEMENT
OF THE TRUST."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing Trustee of the Trust is AFG ASIT Corporation, an Affiliate of
EFG.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1996, 1995 and
1994, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Equipment acquisition fees................................................... $ 36,673 $ 107,415 $ 147,800
Equipment management fees.................................................... 249,205 244,800 188,998
Administrative charges....................................................... 42,123 21,000 12,000
Reimbursable operating expenses due to third parties......................... 98,758 100,358 57,179
Interest on notes payable--affiliate......................................... -- -- 441
---------- ---------- ----------
Total.................................................................... $ 426,759 $ 473,573 $ 406,418
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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. Compensation to EFG for services connected to the remarketing
of
45
<PAGE>
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, 1996, the Trust was owed $154,395 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1997.
46
<PAGE>
TRUST DISTRIBUTIONS AND ALLOCATIONS
GENERAL
The Trust will make Distributions to the Managing Trustee, the Special
Beneficiary, the Class A Beneficiaries and the Class B Beneficiaries of (1)
Distributable Cash From Operations and (2) Distributable Cash From Sales or
Refinancings (collectively, "Distributions"). Distributable Cash From Operations
means, in general, the cash from normal operations of the Trust after payment of
all expenses of the Trust, establishment of appropriate reserves and after
payment of any accrued and unpaid Asset Management Fee, and, after Payout, any
Subordinated Resale Fee. Distributable Cash From Sales or Refinancings means, in
general, proceeds resulting from a sale of any Assets or any refinancing of any
debt thereon after payment of all expenses of the Trust, less amounts under
certain circumstances to be reinvested in replacement Assets and any accrued and
unpaid Asset Management Fees and Acquisition Fees and Acquisition Expenses paid
with respect to additional Assets acquired through reinvestment of Cash From
Sales or Refinancings, and, after Payout, payment of any accrued and unpaid
Subordinated Resale Fee. "Payout" means, collectively, Class A Payout and Class
B Payout. Class A Payout basically means the first time when all the
Distributions to the Class A Beneficiaries equal $25 per Interest, plus the
Cumulative Class A Annual Distribution. Cumulative Class A Annual Distribution
basically means an annual, aggregate distribution of 10% per annum on the Class
A Beneficiaries' net investment in the Trust. "Class B Payout" means the first
time that the Class B Beneficiaries have received cash from the Trust in an
aggregate amount equal to $5 per Class B Subordinated Interest, together with a
return from the Distribution Commencement Date of 8% per annum, compounded
quarterly, with respect to the portion of their capital contributions returned
to them as Class B Capital Distributions and 10% per annum, compounded
quarterly, with respect to the balance of their capital contributions.
Profits and Losses from normal operations of the Trust will be allocated by
determining the Profits and Losses from normal operations attributable to each
fiscal quarter on the basis of an interim closing of the books of the Trust as
of the close of business on the last day of such fiscal quarter and by
allocating the amount of such Profits and Losses allocable with respect to the
Interests among the Persons that are Beneficiaries as of the close of business
on the last day of such fiscal quarter. Profits and Losses from Sales or
Refinancings allocable with respect to the Interests that have been transferred
during any year will be allocated to Persons that are Beneficiaries as of the
close of business on the last day of the quarter that includes the date of the
Sale or Refinancing to which such Profit or Loss is attributable; provided,
however, that any Profits from Sales or Refinancings that are recognized by the
Trust upon the receipt of a deferred payment after the close of the quarter that
includes the date of the Sale or Refinancing relating to such deferred payment
will be allocated to the Persons who are Beneficiaries as of the close of
business on the last day of the quarter in which the Trust receives such
deferred payment. The Managing Trustee may, without the Consent of any
Beneficiary, make allocations in any other manner that it determines will
satisfy the requirements of Sections 704 and 706 of the Code. Profits and Losses
will be allocated in the manner described under "Allocations of Profits and
Losses" below.
All Distributions or allocations to the Class B Beneficiaries, other than
those based on Capital Account balances (as such term is defined in the
"GLOSSARY") will be shared by the Class B Beneficiaries in the ratio of the
number of Class B Subordinated Interests held by each of them to the total
number of Interests held by all of the Class B Beneficiaries. Distributions will
be described in statements of Cash From Operations, Cash From Sales or
Refinancings, Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings required to be sent to the Class B Beneficiaries under
each Trust Agreement. (See "REPORTS TO BENEFICIARIES.")
CERTAIN DISTRIBUTION POLICIES
The Managing Trustee intends to make Distributions to the Class A
Beneficiaries and the Class B Beneficiaries generally in level quarterly amounts
prior to Class B Payout. If in any fiscal quarter
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Distributions are not made of at least $0.41 per Class Interest, no
Distributions will be made with respect to the Class B Subordinated Interests.
However, the Managing Trustee expects that the Trust will have sufficient cash
available to make, and will make, Distributions each quarter of at least $0.41
per Class A Interest and $0.164 per Class B Subordinated Interest (as such
amount may be reduced by the Class B Distribution Reduction Factor). From time
to time and at least annually, the Managing Trustee will review the available
cash of the Trust to determine whether additional Distributions should be made.
It will be the policy of the Managing Trustee to cause the Trust to make annual
Distributions of all available Cash from Operations and Cash from Sales and
Refinancings, subject only to the establishment and maintenance of reasonable
reserves and, to the extent deemed appropriate by the Managing Trustee, the
prepayment of Trust debt.
DISTRIBUTIONS AND ALLOCATIONS
Distributions of all Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings (collectively, "Distributions") will be made to
the Managing Trustee, the Special Beneficiary and the Beneficiaries as set forth
below.
Promptly after the Closing, the Class A Beneficiaries will receive the
Special Class A Distribution in an amount equal to 20% of the net proceeds of
the Offering. The Class B Beneficiaries will receive any Class B Capital
Distributions to be made to them not later than the expiration of the Initial
Redemption Period provided that there are Offering proceeds remaining after
paying Offering expenses, making the Special Class A Distribution and redeeming
Class A Interests.
Class B Capital Distributions, if any, would have no effect on the voting
rights of the Class B Beneficiaries. The Class A Beneficiaries and the Class B
Beneficiaries will have one vote for each Interest held in all matters on which
their Interests are entitled to be voted under the Trust Agreement. See "SUMMARY
OF THE TRUST AGREEMENT--Voting Rights."
Non-liquidating Distributions. Commencing as of the first day of the month
following Closing (the "Distribution Commencement Date"), non-liquidating
Distributions will be made (a) 1% to the Managing Trustee, (b) 8.25% to the
Special Beneficiary and (c) 90.75% to Class A Beneficiaries and the Class B
Beneficiaries.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
first, 100% to the Class A Beneficiaries up to $0.41 per Class A Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per Class B
Subordinated Interest, reduced by the Class B Distribution Reduction Factor;
third, 100% to the Class A Beneficiaries up to an additional $0.215 per
Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries and the
Class B Beneficiaries in amounts so that each Class A Beneficiary receives with
respect to each Class A Interest an amount equal to %, divided by the
difference between 100% and the Class B Capital Reduction Factor, of the amount
so distributed with respect to each Class B Interest.
As used herein:
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"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 8% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and 10%
per annum, compounded quarterly, with respect to the balance of their capital
contributions.
"Class B Capital Distributions" means the aggregate amount of any cash
payments made by the Trust to the Class B Beneficiaries as a return of their
capital contributions from excess Offering proceeds.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator of which is the Class B Capital Distributions (on a
per Class B Subordinated Interest basis), discounted at 8% per annum from the
Distribution Commencement Date, and the denominator of which is $5.
The following are two examples intended to illustrate how the foregoing
provisions will apply:
Example 1: Assuming 300,000 Class A Interests and 300,000 Class B
Subordinated Interests are outstanding and no Class B Capital Distributions have
been made, Distributions prior to Class B Payout would be made as follows:
first, $123,000 ($0.41 x 300,000 Class A Interests) to the Class A
Beneficiaries;
second, $49,200 ($0.164 x 300,000 Class B Subordinated Interests) to the
Class B Beneficiaries;
third, $64,500 ($0.215 x 300,000 Class A Interests) to the Class A
Beneficiaries;
fourth, until Class B Payout, any remaining Distributions 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries. Assuming an additional
$200,000 is distributed, $160,000 would be paid to the Class B Beneficiaries and
$40,000 would be paid to the Class A Beneficiaries.
All Distributions after Class B Payout, will be made such that the Class A
Interests each receive % of the amount received per Class B Subordinated
Interest. Assuming $ is distributed after Class B Payout, the Class A
Beneficiaries would receive $ per Class A Interest (for a total of
$ ) and the Class B Beneficiaries would receive $ per Class B
Subordinated Interest (for a total of $ ).
Example 2: Assuming 300,000 Class A Interests and 300,000 Class B
Subordinated Interests are outstanding, and Class B Capital Distributions have
been made such that the Class B Distribution Reduction Factor is 25%,
Distributions would be made as follows;
first, $123,000 ($0.41 x 300,000 Class A Interests) to the Class A
Beneficiaries;
second, $36,900 (($0.164--(.25 x $0.164)) x 300,000 Class B Subordinated
Interests) to the Class B Beneficiaries;
third, $64,500 ($0.215 x 300,000 Class A Interests) to the Class A
Beneficiaries;
fourth, until Class B Payout, any remaining Distributions 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries. Assuming an additional
$200,000 is distributed, $160,000 would be distributed to the Class B
Beneficiaries and $40,000 would be paid to the Class A Beneficiaries.
All Distributions after Class B Payout, will be made such that the Class A
Interests each receive % ( %/ ( %- %)) of the amount received
per Class B Subordinated Interest. Assuming $ is distributed after Class
B Payout, the Class A Beneficiaries would receive $ per Class A Interest
(for a total of $ ) and the Class B Beneficiaries would receive
$ per Class B Subordinated Interest (for a total of $ ).
LIQUIDATING DISTRIBUTIONS. Upon the occurrence of a Dissolution Event,
after payment of, or adequate provision for, the debts and obligations of the
Trust, the remaining assets of the Trust (or the proceeds of
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sales or other dispositions in liquidation of Trust assets, as may be determined
by the Managing Trustee) will be distributed to the Managing Trustee, the
Special Beneficiary and the Beneficiaries to the extent of the positive balances
in their Capital Accounts. The term "Dissolution Event" is defined in the Trust
Agreement to mean, generally, a sale, condemnation, eminent domain taking,
casualty or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust. The Trust
will not make in-kind Distributions to the Beneficiaries or the Special
Beneficiary.
DISTRIBUTIONS TO FOREIGN BENEFICIARIES. The Managing Trustee has the right
to request, from time to time, each Beneficiary to certify, in form acceptable
to the Managing Trustee, that such Beneficiary is not a Foreign Beneficiary. Any
Beneficiary who fails to deliver such certification will be treated as a Foreign
Beneficiary until such time as such Beneficiary delivers an acceptable
certification to the Trust.
The Managing Trustee has the right, with respect to any Beneficiary who is
so determined to be a Foreign Beneficiary, to (i) pay to the Service on behalf
of such Foreign Beneficiary such amounts as it may determine may be required to
comply with Sections 1441, 1442 and 1446 of the Code and (ii) to deduct and
maintain in a non-interest bearing escrow account for the benefit of a Foreign
Beneficiary all or a portion of Distributions to be made to a Foreign
Beneficiary to the extent that the Managing Trustee determines that such
Distributions may be needed by the Trust to comply at a later date with Sections
1441, 1442 and 1446 of the Code or to repay principal, interest and other
borrowing costs on any borrowings made by the Trust to comply with the
requirements of Sections 1441, 1442 or 1446 of the Code. To the extent that the
Managing Trustee determines that any amounts deducted from the Distributions of
any Foreign Beneficiaries under clause (ii) above are not needed to enable the
Trust to comply with Sections 1441, 1442 and 1446 of the Code or to pay
principal, interest or other borrowing costs on any borrowings made by the Trust
in connection therewith, such amounts shall be paid over to the Foreign
Beneficiaries with respect to whom the amounts were deducted. Any Foreign
Beneficiary shall on demand reimburse the Trust for any amounts received by such
Foreign Beneficiary as Distributions which are necessary to satisfy the Trust's
obligations under Section 1441, 1442 and 1446 of the Code. Each Foreign
Beneficiary grants to the Trust a first lien and security interest in and to the
Interests of such Foreign Beneficiary and all proceeds thereof to secure the
obligations of such Foreign Beneficiary under the Trust Agreement. A pledge of
any Interests by a Foreign Beneficiary must include an acknowledgment of the
Trust's lien on his interest in Distributions.
ALLOCATION OF PROFITS AND LOSSES
Profits from the normal operations of the Trust or from Sales or
Refinancings or a Dissolution Event for each fiscal year or portion thereof will
be allocated:
First, to the extent that the Managing Trustee or any Trust Beneficiary
has a negative balance in its or his Capital Account (after taking into
account the reduction in Capital Accounts resulting from any Distributions
during such fiscal year), to such Person(s) until such Capital Account
balance(s) are increased to zero; and if Profits are insufficient to bring
all such Capital Accounts up to zero, then pro rata according to the
negative balances in their respective Capital Accounts; and
Second, any remaining Profit shall be allocated among the Managing
Trustee, the Beneficiaries and the Special Beneficiary in such a manner
that, as of the end of such fiscal year the Capital Account of each shall be
equal (without taking into account the reduction in such Capital Account
resulting from any Distributions made during the fiscal year) to the
respective net amounts which would be distributed to each under the Trust
Agreement if the Trust were to (i) sell its assets for an amount equal to
their adjusted basis determined under Regulation Section 1.704-
1(b)(2)(iv)(g) and (ii) distribute all Trust cash in accordance with the
Trust Agreement.
Losses from the normal operations of the Trust or from Sales or Refinancings
or a Dissolution Event for each fiscal year or portion thereof will be
allocated:
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First, to the extent that the Managing Trustee or any Class B
Beneficiary has a positive balance in his Capital Account, to such Person(s)
until such Capital Account balance(s) are decreased to zero, and if Losses
are insufficient to reduce all such Capital Accounts to zero, then pro rata
according to the positive balances in each Capital Account; and
Second, to the extent that any Class A Beneficiary has a positive
balance in his Capital Account, to such Class A Beneficiary(ies) until such
Capital Account balance(s) are decreased to zero, and if Losses are
insufficient to reduce all such Capital Accounts to zero, then pro rata
according to the positive balances in each Capital Account; and
Third, the remainder to the Managing Trustee.
A special provision requires that at least 1% of all Profits and Losses of
the Trust be allocated to the Managing Trustee unless Section 704(b) or Section
704(c) of the Code mandates otherwise.
To the extent that a Trust incurs any costs or expenses in connection with
the withholding obligations applicable to Foreign Beneficiaries, such costs or
expenses shall be allocated solely to the Foreign Beneficiaries (and shall not
enter into the computation of Profits and Losses allocated under other
provisions of the Trust Agreements) and shall reduce their Capital Accounts
accordingly.
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FEDERAL TAX CONSIDERATIONS
BRIEF OVERVIEW OF FEDERAL TAX CONSIDERATIONS
This summary briefly outlines certain of the material federal income tax
considerations associated with an investment in the Class B Subordinated
Interests. All material federal income tax considerations associated with an
investment in the Trust are discussed in "FEDERAL TAX CONSIDERATIONS" in its
entirety. Investors should read the sections following this summary for a more
detailed discussion of these federal income tax considerations.
OPINIONS OF PEABODY & BROWN. Peabody & Brown is of the opinion that, subject
to the assumptions and other considerations discussed in "Federal Tax
Considerations" and based upon the Managing Trustee representations discussed in
"Federal Tax Considerations," it is more likely than not that (a) the Trust will
be treated as a partnership for federal income tax purposes, (b) the Trust will
be not be treated as a publicly traded partnership, (c) the Trust Agreement's
allocations of Profits and Losses (attributable to Trust Beneficiaries' Capital
Contributions) will be respected for tax purposes, (d) the Trust's Profits and
Losses from the business of leasing Assets will be treated as passive income and
losses to the Beneficiaries, (e) substantially all of the existing Leases will
be treated as true leases for federal income tax purposes, (f) Trust
Indebtedness will constitute indebtedness for federal income tax purposes and
any interest paid with respect thereto will be deductible under Section 163 of
the Code, and (g) substantially more than half of the material tax benefits from
an investment in the Trust will be realized. No other opinions of counsel are
being obtained with respect to any other tax issues raised in connection with an
investment in the Trust.
TAX RATES AND CAPITAL GAINS. The maximum individual tax rate is now 39.6%
for ordinary income and 28% for capital gains. The maximum corporate tax rate is
35%.
TRUST STATUS. The ability of the Trust to pass through Profits and Losses
to the Beneficiaries is dependent upon its being classified as a partnership for
tax purposes. The Trust will receive an opinion of Peabody & Brown that it will
be treated as a partnership for federal income tax purposes.
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION. The Trust will file annual
partnership tax returns, but is not subject to federal income taxation. Each
Beneficiary must report on his federal income tax return his distributive share
of income, gain, losses, deductions or credits of the Trust for the taxable year
whether or not actual distributions of cash or other property are made to him.
A cash distribution from the Trust to a Beneficiary is taxable to the extent
it exceeds the Beneficiary's tax basis in the Trust. A Beneficiary's tax basis
is equal to his paid-in Capital Contribution plus his allocable share of Trust
liabilities as to which no Participant bears the economic risk of loss,
increased by his allocable share of Profits and decreased by (a) his allocable
share of Losses and (b) cash and other distributions.
For each year, a Beneficiary (other than a widely held corporation) may not
deduct its share of Losses to the extent they exceed the Beneficiary's amount at
risk at the end of the year. A Beneficiary will generally have an initial at
risk amount equal to paid-in Capital Contributions. This initial at risk amount
will increase by such Beneficiary's share of the Trust's Profits and decrease by
(a) such Beneficiary's share of Losses, and (b) the amount of cash and other
distributions made to such Beneficiary.
ALLOCATION OF PROFITS AND LOSSES. Allocations of a partnership's income,
gain, loss, deduction or credit under a partnership agreement will be given
effect for federal income tax purposes if the allocations have "substantial
economic effect" or are otherwise in accordance with the partners' interests in
the partnership, taking into account all facts and circumstances. The Trust
Agreement has been drafted in an effort to satisfy the requirements of
"substantial economic effect," and, therefore, it is the opinion of Peabody &
Brown that all Trust allocations of Profits and Losses (attributable to Trust
Beneficiaries' Capital Contributions) will be respected for tax purposes. There
can, however, be no assurance that the Service will not
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challenge the allocations of Profits and Losses under the Trust Agreement. (See
"Allocations of Profits and Losses" below for a more complete discussion.)
ACTIVE/PASSIVE INCOME AND LOSS. The Code divides income and loss into three
categories: active, passive and portfolio. Passive losses can be applied to
offset a taxpayer's passive income, but cannot be used to offset portfolio or
active income. These passive loss limitations apply to taxpayers who are
individuals, personal service corporations, estates and trusts. Regular "C"
corporations which are not personal service corporations are not subject to
these rules, although closely-held corporations (defined as corporations in
which 50% or more of the stock is held, directly or indirectly, by five or fewer
individuals) may use passive losses to offset passive or active trade or
business income, but may not use passive losses to offset portfolio income.
Peabody & Brown will render its opinion that, subject to regulations which
may be issued by the Service, Trust Profits and Losses from the business of
leasing the Assets will be treated as passive income and losses to
Beneficiaries. See "FEDERAL TAX CONSIDERATIONS--Active/Passive Income and Loss"
below for a more complete discussion.
Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations. The
Trust's business of leasing personal property will likely constitute an
unrelated trade or business with respect to a Qualified Plan or an Exempt
Organization which invests in the Trust and will cause a Qualified Plan or
Exempt Organization to have unrelated business taxable income. Unrelated
business taxable income in excess of $1,000 in any taxable year will be taxable
at income tax rates applicable to trusts or corporations (whichever is
applicable) and may be subject to alternative minimum tax. Investors which are
Qualified Plans or Exempt Organizations should consult with their own tax
advisors with regard to the application of the unrelated business taxable income
rules.
TAX STATUS OF LEASES. The Trust's status as owner of the Assets for tax
purposes is dependent upon whether a Lease is recognized as a true lease, rather
than a financing arrangement or installment sale, for federal income tax
purposes. Based solely upon the representation of the Managing Trustee, without
verification of the accuracy thereof, regarding the characteristics of the
Leases, Peabody & Brown will render its opinion that substantially of the Leases
will be treated as true leases for federal income tax purposes. (See "Tax Status
of Leases" below, for a more complete discussion.)
DEPRECIATION (COST RECOVERY) AND RECAPTURE. The modified accelerated cost
recovery system (MACRS) under the Code establishes categories of 3-, 5-, 7-, 10
and 20-year recovery period property and permits the use of the 200% declining
balance method (150% in the case of 15- or 20-year property) with half year
convention switching to the straight-line method to maximize depreciation.
Because the Trust will utilize this accelerated method of depreciation with
respect to its Assets, Beneficiaries will be allocated cost recovery deductions
which will be treated as adjustment items for alternative minimum tax purposes.
Depending upon facts and circumstances, limitations on the use of accelerated
depreciation and the amount of depreciation deductions which can be claimed in
the year property is placed in service may apply to the Trust or its Assets.
All depreciation deductions previously claimed by the Trust (to the extent
of gain) will be taxable as ordinary income in the event of sale, foreclosure,
casualty or other disposition (other than a refinancing and certain like-kind
exchanges) of Assets, and an allocable portion of such depreciation will be
subject to recapture to the extent of gain, if any, in the event of a sale or
other disposition of any of a Beneficiary's Interests.
SALE OR OTHER DISPOSITION OF TRUST PROPERTY. Upon a sale or other
disposition of Assets, the selling Trust will realize gain or loss equal to the
difference between the basis of the Assets at the time of sale or disposition
and the amount realized upon sale or disposition. All depreciation previously
taken will, to the
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extent of any gain realized on the disposition, be treated as ordinary income.
The characterization of gain in excess of the amount of depreciation will depend
upon specific facts and circumstances.
SALE OF OTHER DISPOSITION OF INTERESTS. As a general rule, gain or loss
recognized by a Beneficiary (who is not a "dealer" in Interests) on the sale of
his Interests which have been held for more than one year will be taxable as
long-term capital gain or loss. However, that portion of a selling Beneficiary's
gain allocable to "unrealized receivables" (such as depreciation recapture) and
"substantially appreciated inventory" (as defined in Section 751 of the Code) of
the Trust in which he is a Beneficiary would be treated as ordinary income.
TAX TREATMENT OF CERTAIN TRUST EXPENSES. The Trust will incur costs for
which it will claim deductions for federal income tax purposes. There is no
assurance that the Service will not challenge these deductions on various
grounds. Accordingly, no representation or warranty of any kind with respect to
any deduction can be made. If it is ultimately determined that any deduction of
the Trust is not allowable, an adjustment of the taxable income or loss of the
Trust for the year of the deduction would be necessitated. Such an adjustment
would, in turn, cause an adjustment in the federal income tax liabilities of the
Trust and the Managing Trustee, the Special Beneficiary and each Beneficiary for
that year.
LIMITATIONS ON THE DEDUCTIBILITY OF INTEREST. Investment interest is only
deductible to the extent of net investment income. Interest expense attributable
to a passive activity (such as the Trust) will not be treated as investment
interest. Consequently, interest expense of the Trust will be subject to passive
loss limitations, but not investment interest limitations.
TRUST TAX ELECTIONS. The Trust does not intend to make an election under
Section 754 of the Code to adjust the basis of its assets upon the transfer of
any Interests unless the Interests are listed on a registered securities
exchange, which is not presently contemplated.
TAX SHELTER REGISTRATION. The Code imposes certain requirements, including
registration, upon offerings which constitute "tax shelters." The Trusts are not
expected to be treated as "tax shelters" for this purpose.
NOMINEE CORPORATIONS. If the Trust uses a nominee corporation to hold title
to Assets, such corporation may, under certain circumstances, be treated as a
separate entity for tax purposes.
TRANSFERABILITY AND TERMINATION OF THE TRUST. The Code provides that if 50%
or more of the capital and profit interests in a partnership are sold or
exchanged within a single twelve month period, such partnership generally will
terminate for federal income tax purposes. Consequently, the Trust Agreement
provides that Interests cannot be transferred without the consent of the
Managing Trustee if the transfer would result in the termination of the Trust.
ALTERNATIVE MINIMUM TAX. Both corporate and non-corporate taxpayers are
subject to an alternative minimum tax imposed at the rate of 26% or 28%
(depending upon the amount of alternative minimum taxable income) of alternative
minimum taxable income in the case of individuals and 20% of alternative minimum
taxable income in the case of corporations. It is expected that all
Beneficiaries will be allocated tax adjustment items for purposes of the
alternative minimum tax attributable to the use of accelerated depreciation
methods.
INTEREST AND PENALTIES ON UNDERPAYMENT OF TAXES; AUDIT. Interest rates on
tax overpayments and underpayments are set quarterly. The interest rate on
deficiencies is currently 9% per annum (compounded daily) which will remain in
effect through March 31, 1997. Many of the penalty provisions of the Code have
been consolidated into a single, more cohesive accuracy-related penalty, imposed
at the rate of 20%, to the portion of any underpayment of tax that is
attributable to (1) negligence, (2) any substantial understatement of income tax
or (3) any substantial valuation overstatement.
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The Service is engaged in an intensified audit program for partnerships. As
a consequence, audits of the Trust's information returns are more likely to
occur than they were prior to the commencement of such audit program. A federal
income tax audit of the Trust's tax information return may result in an audit of
the returns of its Beneficiaries, and such an examination could result in
adjustments both to items that are related to such Trust and to unrelated items.
TRUSTS AS INVESTORS. Any trust which is considering purchasing Interests
should consider the issue of whether the investment would cause the trust to be
treated as an association taxable as a corporation. According to the
Regulations, the determination of whether an entity formed as a trust will be
treated as a trust or as an association depends on whether there are associates
and an objective to carry on business and divide the gains therefrom. Treatment
as a corporation would mean that the trust will be taxed at corporate rates at
the trust level, whether or not income is distributed to beneficiaries, and cash
distributions to beneficiaries would be treated as dividends only to the extent
of earnings and profit.
INVESTMENT BY FOREIGN BENEFICIARIES. The United States income tax treatment
applicable to a Foreign Beneficiary is complex and will vary depending on the
particular circumstances applicable to such Foreign Beneficiary. Foreign
Beneficiaries are urged to consult with their tax counsel regarding the United
States and foreign tax consequences of an investment in the Trust. Generally, it
is anticipated that the Trust will withhold income tax with respect to taxable
income allocable to Foreign Beneficiaries at the rate of 39.6% in the case of
individuals and 35% in the case of corporations. However, in the event that the
Trust were deemed not to be engaged in a trade or business, a Foreign
Beneficiary could be subject to a U.S. tax at a rate of 30% of such
Beneficiary's share of gross lease payments. The Trust will admit Foreign
Beneficiaries only if the Managing Trustee receives satisfactory assurances that
it will be deemed to be engaged in a trade or business.
CHANGES IN TAX LAW. There may be changes to the Code in future years
(including amendments having a retroactive effect) which could adversely affect
an investment in the Trust.
GENERAL; OPINIONS OF PEABODY & BROWN
The following discussion provides a summary of the material federal income
tax considerations which may be relevant to an investment in the Class B
Subordinated Interests. The discussion is based upon the existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and by Treasury
Regulations, published rulings and judicial decisions in effect as of the date
of this Prospectus, any of which could be changed at any time. (See "Possible
Changes in Tax Law", below.) Any such changes may be retroactive and could
modify the statements expressed herein.
Although the Trust will be formed as a business trust under the Delaware
Business Trust Act, it will be treated as a partnership for federal income tax
purposes. Consequently, the following discussion of federal income tax
considerations has been drafted in the context of an investment in a partnership
by the Beneficiaries.
Each prospective investor should be aware that the following discussion is
merely a summary, as it is impractical to set forth all aspects of federal
income tax law that may be relevant to an investment in the Trust. In addition,
additional considerations may apply to certain types of investors because of
peculiar tax considerations which are not specifically discussed herein. FOR THE
FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN THE
TRUST WITH REGARD TO HIS PARTICULAR TAX SITUATION.
It is the opinion of Peabody & Brown that the Trust will be treated as a
partnership for federal income tax purposes and that, if the issue were
litigated, a court would so hold. In addition, the following numbered paragraphs
state the opinions of Peabody & Brown concerning other specific federal income
tax issues raised in connection with an investment in the Trust with respect to
which Peabody & Brown is able
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to render an opinion. Reference is made to "FEDERAL TAX CONSIDERATIONS" in its
entirety for a more complete discussion of these issues. It is the opinion of
Peabody & Brown that, based on current law as of the date of this Prospectus, if
the following issues were litigated, although the outcome of litigation cannot
be predicted with certainty, it is more likely than not that a court would hold
for federal income tax purposes that:
I. Based upon the representation of the Managing Trustee that it will
not consent to the transfer, assignment or disposition of any Interest or
cause the Trust to undertake the redemption of any Interest, if such
transfer, assignment, disposition or redemption would cause the Trust to be
treated as a publicly traded partnership for federal income tax purposes and
assuming that the Managing Trustee acts in accordance with such
representation and the Trust Agreement the Trust will not be treated as a
publicly traded partnership;
II. The allocations set forth in the Trust Agreement of Profits and
Losses (attributable to Trust Beneficiaries' Capital Contributions) have
"substantial economic effect" and/or are in accordance with the interests of
the Participants in the Trust (however, because of various fees payable to
the Managing Trustee and its Affiliates (including the Special Beneficiary),
the Service could require a reallocation of interests in the Trust);
III. Profits and Losses generated by the Trust from the business of
leasing of Assets will be treated as passive losses or passive income to a
Beneficiary (however, the Service has been broadly authorized to prepare
regulations to prevent the conversion of portfolio income into passive
income which might be drafted to include investments such as the Trust);
IV. Based solely upon the representation of the Managing Trustee,
without independent verification of the accuracy thereof, regarding the
terms of the Leases and the valuation of the Assets, substantially all of
the existing Leases will be treated as true leases for federal income tax
purposes; and
V. Based solely upon the representation of the Managing Trustee
regarding the characteristics of the Trust Indebtedness, the Trust
Indebtedness will constitute indebtedness for federal income tax purposes
and any interest paid with respect thereto will be deductible under Section
163 of the Code.
In addition, assuming that the Trust operates in the manner described in the
Prospectus, Peabody & Brown is of the opinion that substantially more than half
of the material tax benefits described herein, in the aggregate, will more
likely than not be realized. Investors should note that such opinion assumes
that each agreement between the Trust and a Lessee will constitute a "true
lease" for federal income tax purposes. However, the determination of whether a
particular agreement constitutes a true lease depends on the facts of the
specific transaction. Peabody & Brown's opinion regarding the status of the
Leases as true leases is based solely upon the representations of the Managing
Trustee regarding the terms of the Leases and valuation of the Assets. If such
representations were determined to be inaccurate, the Leases may not be treated
as true leases for federal income tax purposes.
No other opinions of counsel are being obtained with respect to any other
federal income tax issues raised in connection with an investment in the Trust,
including the proper federal income tax treatment of any fees or other expenses
or the availability and amounts of cost recovery deductions. Each of these and
all other material federal income tax issues are discussed in other sections of
"FEDERAL TAX CONSIDERATIONS."
TAX RATES AND CAPITAL GAINS
The Omnibus Budget Reconciliation Act of 1993 (the "1993 OBRA") restructured
federal tax rates applicable to individual taxpayers. There are five tax
brackets for individuals: the first at a 15% marginal tax rate, the second at a
28% marginal tax rate, the third at a 31% marginal tax rate, the fourth at a 36%
marginal tax rate and the fifth at a 39.6% marginal tax rate. The effective
maximum marginal tax rate may
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exceed 39.6% as a result of the phase out of the personal exemption deduction
and the limitation on itemized deductions. The levels of income to which the
various marginal tax rates apply and the base amounts for computing the personal
exemption phase out and the itemized deduction reduction will be adjusted for
inflation.
The maximum rate of tax on capital gains for individuals is now 28% and
there are other differences between ordinary income and capital gains. To the
extent that a taxpayer shows a net capital loss for a taxable year, the amount
used to offset ordinary income is limited to $3,000 ($1,500 in the case of a
married individual filing a separate return) for the taxable year. The remainder
is carried forward to be utilized against income earned in succeeding taxable
years.
The top corporate tax rate is 35%. The 35% rate commences at a taxable
income in excess of $10 million. The graduated rate structure is not available
to personal service corporations; all income of a personal service corporation
is taxed at 35%. The maximum rate of tax on net corporate capital gains is 35%.
Corporations and individuals are subject to an alternative minimum tax (see
"Alternative Minimum Tax" below) which has broad application.
TRUST STATUS
The Federal income tax treatment of an investment in the Trust will depend
upon, among other things, the classification of the Trust as a partnership for
federal income tax purposes rather than as an "association" taxable as a
corporation or as a trust. The Trust will not request a ruling from the Service
that it will be treated as a partnership, but the Trust will instead rely upon
the opinion of Peabody & Brown that it will be treated as a partnership for
federal income tax purposes.
The opinion of Peabody & Brown is not binding on the Service. The opinion of
Peabody & Brown as to partnership status assumes compliance from the date of
formation of the Trust throughout the term of its existence with the following
conditions: (1) that the Trust's activities will be conducted in accordance with
the provisions of the Trust Agreement; and (2) that the Trust and its
Participants will have the objective of carrying on business for profit and
dividing the gains therefrom.
CLASSIFICATION AS A TRUST. Although the Trust will be formed as a business
trust under the Delaware Business Trust Act, it will not be treated as a trust
for federal income tax purposes. Regulation Section 301.7701-4 provides that an
arrangement will not be treated as a trust for tax purposes merely because it is
cast in the form of a trust. Regardless of its form, it will be treated as a
trust only if its purpose is to vest in the trustees the responsibility for the
protection and conservation of property for beneficiaries who cannot share in
the discharge of this responsibility and, therefore, are not associates in a
joint enterprise for the conduct of business for profit. Under the Trust
Agreement, the purpose of the Trust and the responsibility of the Managing
Trustee is not the protection and conservation of property. The Trust Agreement
provides that the purpose of the Trust is to engage in all activities associated
with the business of leasing the Assets and the Trust and the Trustees are
granted all of the powers necessary to carry out that purpose. Consequently, the
Trust Beneficiaries should be treated as "associates in a joint enterprise for
the conduct of business for profit" and the Trust will not be treated as a trust
for federal income tax purposes.
DETERMINATION OF PARTNERSHIP STATUS. On December 17, 1996, the Service
issued Treasury Regulation Sections 301.7701-1 through 301.7701-3, the so-called
"check the box" regulations regarding classification of entities for federal
income tax purposes. These regulations replace the existing rules for
classification of an entity as a partnership for federal income tax purposes,
including the guidelines of Revenue Ruling 89-12 and Revenue Procedure 92-88,
and replace them with a "check the box" system pursuant to which an entity, such
as the Trust, which is not formed under a state corporate statute or similar
law, can elect to be taxed as a partnership or an association taxable as a
corporation by filing a form with the Service. Furthermore, under a default rule
which is operative if no such election is made., such an entity will be
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treated as a partnership. In addition, under these regulations, each existing
entity which claimed to be a partnership will be treated as a partnership for
prior years if it had a reasonable basis (determined under Section 6662 of the
Code) for claiming partnership classification. The regulations apply to periods
beginning on or after January 1, 1997.
The Trust was not formed under a state corporate statute or similar law and
the Managing Trustee has represented that it will not elect to have the Trust
treated as a corporation for federal income tax purposes. Accordingly, it is the
opinion of Peabody & Brown that the Trust will be treated as a partnership for
federal income tax purposes and that, although the outcome of litigation cannot
be predicted with certainty, it is more likely than not that, if the issue were
litigated, a court would so hold.
The Code provides that publicly traded partnerships engaged in the business
of leasing personal property, such as the Trust, will be treated as corporations
for federal income tax purposes. Publicly traded partnerships include any
partnership if (i) interests in the partnership are traded on an established
securities market, or (ii) such interests are readily tradable on a secondary
market (or the substantial equivalent thereof). In Notice 88-75, the Service, in
advance of issuance of regulations on the subject, set forth certain "safe
harbors" which, if met, would prevent a partnership from being treated as a
publicly traded partnership. One such "safe harbor" provides that a partnership
will not be deemed to be publicly traded if (a) the sum of the percentage
interests in partnership profits or capital sold or exchanged or otherwise
disposed of during the partnership taxable year (excluding certain specified
transfers) does not exceed 5% of the total interests in partnership profits or
capital or (b) the sum of the percentage interests in partnership profits or
capital sold or exchanged or otherwise disposed of during the partnership
taxable year (excluding certain specified transfers, qualified redemptions from
an open-end partnership and transfers effected through a "matching service") do
not exceed 2% of the total interests in partnership profits or capital.
Transfers which are excluded for purposes of each of these tests include
transfers at death, gifts and other transfers where there is a carryover basis,
and transfers by a partner in one or more transactions during any thirty
calendar day period of partnership interests representing in the aggregate more
than 5% of the total interest in partnership capital or profits. A matching
service is a service that lists bid and/or ask prices in order to match partners
who want to dispose of their interests in a partnership with persons who want to
buy such interests, but subject to strict procedural limitations set forth in
Notice 88-75.
On December 4, 1995, the Service issued final Regulation Section 1.7704-1
which sets forth the circumstances in which a partnership will be treated as a
publicly traded partnership. The Regulation includes a definition of the term
"readily tradable on a secondary market or the substantial equivalent thereof"
which is similar to the definition included in Notice 88-75, but the "safe
harbors" in the Regulations are more restrictive than in Notice 88-75. However,
the Regulation is not effective until after December 31, 2005 for partnerships,
such as the Trust, that were engaged in an activity before December 4, 1995 and
that do not add a substantial new line of business. Such partnerships may
continue to rely upon Notice 88-75.
The Trust Agreement provides that the Trust shall not engage in any purchase
or redemption of Interests to the extent that such redemption or purchase would
cause the Trust to be treated as a publicly traded partnership. In addition, the
Managing Trustee has represented that it will act in accordance with the terms
of the Trust Agreement and that it will not consent to the transfer, disposition
or assignment of any Interests or cause the Trust to undertake any purchase or
redemption of Interests if any such disposition, assignment, transfer, purchase
or redemption would result in the Trust being treated as a publicly traded
partnership. Based upon such representation and assuming that the Managing
Trustee acts in accordance with such representation and the Trust Agreement, it
is the opinion of Peabody & Brown that the Trust will not be treated as a
publicly traded partnership within the meaning of Section 7704 or Section 469 of
the Code and that, while the outcome of litigation cannot be predicted with
certainty, if the issue were litigated, it is more likely than not that a court
would so hold.
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It should be noted that the opinion of Peabody & Brown that the Trust will
not be treated as a publicly traded partnership for federal income tax purposes
is based upon the representation of the Managing Trustee that it will not
consent to the transfer, disposition or assignment of any Interest or cause the
Trust to undertake a redemption of any Interests if such transfer, assignment,
disposition or redemption would cause the Trust to be treated as a publicly
traded partnership. If such representations were determined to be inaccurate or
the Managing Trustee acted in a manner which was not in accordance with such
representation, the Trust could be treated as a publicly traded partnership
taxable as a corporation for federal income tax purposes in which event
substantially all of the tax benefits (resulting from the pass-through to
investors of income and losses) from an investment in the Trust would be
eliminated. If the Trust were treated as a publicly traded partnership taxable
as a corporation, Profits and Losses would not pass through to Beneficiaries,
income of the Trust would be subject to income tax rates applicable to
corporations and Distributions would be taxable as dividend (portfolio) income
to the extent of current and accumulated earnings and profits.
TAX CONSEQUENCES OF SPECIAL DISTRIBUTION
Generally, cash distributions from a partnership to a partner are treated as
a tax free return of capital to the extent of the partner's adjusted basis in
its partnership interest. The special distribution of Offering proceeds to the
Class A Beneficiaries, however, differs from a typical distribution in that (a)
it will be paid from the proceeds of the Offering of the Class B Beneficiary
Interests and (b) the admission of Class B Beneficiaries will result in the
dilution of the interests of the Class A Beneficiaries in the Trust. Although
the Service has not yet issued Regulations addressing transactions of this
nature, it is likely that the special distribution will, as a result of this
corresponding dilution of the interests of the Class A Beneficiaries, be treated
for federal income tax purposes as a sale of a portion of the Class A
Beneficiary Interests to the Class B Beneficiaries resulting in taxable gain or
loss to each of the Class A Beneficiaries. (See "FEDERAL TAX
CONSIDERATIONS--Sale Or Other Disposition of Interests.") The amount of this
gain or loss may be reduced and possibly eliminated if a Class A Beneficiary
acquires Class B Beneficiary Interests pursuant to the Offering such that his
interest in the Trust is not diluted. CLASS A BENEFICIARIES ARE URGED TO CONSULT
WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE SPECIAL
DISTRIBUTION.
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION
The Trust must file annual partnership information income tax returns but
are not, as entities, subject to federal income taxation. Each Beneficiary must
report on his personal federal income tax return his distributive share of the
income, gains, losses, deductions or credits of the Trust for the taxable year,
whether or not actual distributions of cash or other property are made to him.
Each Participant's distributive share of such items is generally determined
in accordance with the Trust Agreement. (See "TRUST DISTRIBUTIONS AND
ALLOCATIONS.") The Trust will provide its Beneficiaries with income tax
information relevant to the Trust and his own income tax return, including each
Beneficiary's share of taxable income or loss and capital gain or loss for such
Trust's taxable year by March 15 of the following year. Beneficiaries whose
Interests are registered in the name of a nominee will receive this tax
information from their nominee.
Cash distributions from the Trust to the Managing Trustee, the Special
Beneficiary and the Beneficiaries are not generally the equivalent of Trust
income for income tax purposes, primarily because depreciation is an item which
affects taxable income but not Distributions, and debt amortization is an item
which affects Distributions but not taxable income. If the cash distributed by
the Trust for any year to a Beneficiary exceeds his share of the Trust's taxable
income for the year, the excess constitutes a return of capital which is applied
first to reduce the tax basis of the distributee's interest in the Trust, and
any amounts in excess of his tax basis are generally taxable to the distributee.
A Beneficiary's basis in the Trust initially includes the amount of his paid-in
Capital Contribution plus his allocable share of Trust liabilities
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as to which no Participant or related person bears the economic risk of loss (to
the extent that these liabilities do not exceed the fair market value of the
assets securing the liabilities). Such basis is increased by the Beneficiary's
share of taxable income and is decreased by the Beneficiary's share of taxable
losses and cash distributions. A Beneficiary will be subject to tax liability if
the Trust of which he is a Participant has net income, even though no cash
Distribution is made. (See "RISK FACTORS--Risk of Unanticipated Tax Liability.")
Each Beneficiary will also have an amount "at risk" in the Trust computed in
accordance with Section 465 of the Code. A limited partner's amount at risk in a
partnership includes his paid-in capital contributions (unless, in the case of
an individual or a closely-held corporation, the funds used for the capital
contribution were borrowed from a person having an interest in the Trust's
activities or from a related person to a person having such an interest or the
taxpayer is otherwise protected against the loss of such funds) but does not
include any share of partnership debt unless the limited partner is personally
liable for such debt. Since no Beneficiary will be personally liable for any
Trust debt, each Beneficiary's amount at risk in the Trust will initially
include only his paid-in Capital Contribution and will then increase by his
share of Trust Profits and decrease by his share of Trust Losses and
Distributions. A partner (other than a widely-held corporation which is not
subject to the at risk rules) cannot deduct partnership losses to the extent
that they exceed his amount at risk in the partnership, and, accordingly,
Beneficiaries will not be able to claim Losses in excess of the amount of their
Capital Contributions (as reduced by Distributions to them). For this reason,
the Trust Agreement provides that Losses will not be allocated to Beneficiaries
if the allocation would reduce their Capital Accounts (generally equivalent to
their amounts at risk) below zero.
ALLOCATION OF PROFITS AND LOSSES
Section 704(b) of the Code provides that each partner's allocable share of
the profits, losses and other items of a partnership is determined in accordance
with the partnership agreement unless (a) the partnership agreement does not
provide for such allocations or (b) the allocation to the partners under the
partnership agreement does not have "substantial economic effect," in which case
allocations will be made in accordance with the partners' interests in the
partnership (taking into account all facts and circumstances). Substantial
economic effect is generally recognized to exist where the allocation of taxable
profits and losses actually affects the partners' shares of economic income or
loss independent of tax consequences.
The Trust Agreement provides for the allocation of Trust's Profits and
Losses from normal operations and from sales and refinancings among the Managing
Trustee, the Special Beneficiary and the Beneficiaries in the manner set forth
in "Trust Distributions and Allocations."
The Regulations with respect to the determination of a partner's
distributive share of items within a partnership provide clarification of the
two-part test for substantial economic effect: all allocations must have
economic effect and the effect must be substantial. With respect to the
requirement of economic effect, the Regulations provide, in general, that
allocations have economic effect if (a) the partners' capital accounts are
maintained properly and allocations of items are reflected in adjustments to
capital accounts, (b) liquidation proceeds are required to be distributed in
accordance with the partners' capital account balances, and (c) following the
distribution of such proceeds, partners are required to restore any deficits in
their capital accounts. The determination of whether an allocation has economic
effect is made as of the end of the partnership's taxable year to which the
allocation relates. An allocation that does not satisfy requirement (c) may
nevertheless be deemed to have economic effect if the partnership agreement
contains a "qualified income offset" provision.
The Regulations state that a partnership agreement contains a "qualified
income offset" if and only if it provides that a partner who unexpectedly
receives certain types of adjustments, allocations or distributions in
connection with transfers of partnership interests and distributions of
partnership property which
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cause or increase a deficit balance in his capital account will be allocated
items of income and gain in an amount and manner sufficient to eliminate such
deficit balance as quickly as possible.
If an agreement satisfies requirements (a) and (b) above and has a
"qualified income offset" provision, then an allocation to a partner will have
economic effect to the extent such allocation (other than an allocation
attributable to non-recourse debt) does not cause or increase a deficit in such
partner's capital account to an amount which is greater than such partner's
obligations to contribute additional capital to the partnership. In making this
determination, the partner's capital account must first be reduced to take into
account certain allocations of loss or deduction and/or distributions which have
not yet occurred but which are reasonably expected to occur in the future. Under
this provision, assuming that a partnership agreement has a qualified income
offset provision, an allocation of loss not attributable to non-recourse debt
will be permitted if the deficit in the partner's capital account caused by such
allocation is not greater than the partner's obligation to contribute additional
capital to the partnership. With respect to the substantiality requirement, the
Regulations generally state that an allocation must have a reasonable
possibility of affecting the dollar amounts to be received by the partners
independent of tax consequences in order to be substantial. Furthermore, an
allocation is insubstantial if, as a result of the allocation, the after-tax
economic consequences of at least one partner may be enhanced while there is a
strong likelihood that the after-tax economic consequences of no partner will be
diminished. Finally, the Regulations provide that allocations are insubstantial
if they merely shift tax consequences within a partnership taxable year or are
likely to be offset by other allocations in subsequent taxable years.
The Regulations also include complex provisions for the allocation of
deductions attributable to non-recourse debt and partner non-recourse debt (debt
which is nominally non-recourse but which is guaranteed by a partner or related
person or has been loaned by a partner or related person), and for the charge
back of income corresponding to the offset of such deductions at the appropriate
times. In lieu of these complex provisions, the Trust Agreement merely provides
that all Losses in excess of the Capital Account balances of the Trust
Beneficiaries will be allocated to the Managing Trustee. This provision is not
expected to adversely impact the tax benefits available to any Trust
Beneficiaries (except perhaps widely-held corporations) because Losses in excess
of Capital Accounts would be suspended under the at risk rules (see "General
Principles of Partnership Taxation") for all Trust Beneficiaries other than
widely-held corporations.
In the case of the Trust, although Capital Accounts will be maintained for
the Trust Beneficiaries and all allocations result in adjustments in Capital
Accounts, the Trust Agreement does not require any Trust Beneficiary with a
deficit Capital Account balance at liquidation to restore such balance to the
Trust as required under the Section 704 Regulations. However, the Trust
Agreement does include a "qualified income offset" provision which is designed
to meet the alternative test under the Section 704 Regulations. In addition,
allocations of Losses to the Trust Beneficiaries are limited so that Losses will
not be allocated to the Trust Beneficiaries if such Losses would cause deficit
balances in their Capital Accounts. The Trust Agreement provides that
liquidation proceeds are distributed in accordance with each Participant's
Capital Account. Accordingly, it is the opinion of Peabody & Brown that the
allocations of Profits and Losses (attributable to Trust Beneficiaries Capital
Contributions) in the Trust Agreement have substantial economic effect and/or
are in accordance with the interests of the Participants in the Trust and that,
if the issue were litigated, it is more likely than not that a court would so
hold.
The Service could assert that deductions attributable to non-recourse
financing in Assets should be allocated to the Beneficiaries even if it causes
their Capital Accounts to be reduced below zero, but such allocation would not
have any adverse consequences to the Beneficiaries. The Service could assert
that certain fees and other amounts payable to the Managing Trustee, the Special
Beneficiary or their Affiliates constitute distributions to the Managing Trustee
or the Special Beneficiary which must be taken into account in allocating
Profits and Losses. (See "Tax Treatment of Certain Trust Expenses.") The Service
could then contend that, for federal income tax purposes, a Trust's Profits and
Losses should be reallocated from the Beneficiaries to the Managing Trustee or
the Special Beneficiary to reflect the Managing
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Trustee's or the Special Beneficiary's share of cash distributions as
"increased" by the inclusion of such fees and payments. If this approach were
successfully pursued by the Service, the federal income tax consequences to the
investors could be less favorable than anticipated because a portion of any
Profits and Losses would be re-allocated to the Managing Trustee or the Special
Beneficiary. The Trust Agreement includes a provision that requires a special
allocation of gross income to the Managing Trustee or the Special Beneficiary to
the extent that any fee payable to either of them or their Affiliates is
reclassified as a distribution.
ACTIVE/PASSIVE INCOME AND LOSS
Income and losses are divided into three categories for federal income tax
purposes: active, passive and portfolio. In the case of an individual, estate,
trust or personal service corporation, passive losses can only be applied, with
limited exceptions, to offset passive income. It is the opinion of Peabody &
Brown, subject to regulations which may be issued by the Service, that, for the
reasons outlined below, Profits and Losses generated by the Trust from the
business of leasing equipment will be treated as passive losses or passive
income to a Beneficiary, and that, while the outcome of litigation cannot be
predicted with certainty if the issue were litigated, it is more likely than not
that a court would so hold. Accordingly, profits related to equipment leasing
activities and allocable to a Beneficiary who is an individual, estate, trust or
personal service corporation may be offset by passive losses or credits from
other sources. However, it is possible that regulations will provide that income
from certain partnerships will be treated as portfolio income while losses will
be treated as passive losses.
In the case of a closely-held corporation, passive losses and credits can be
used to offset either passive or active income, but not portfolio income, while
a widely-held corporation can offset passive losses or credits against any
income. A widely-held corporation is a C corporation, which is not a personal
service company, where five or fewer persons do not own 50% or more of the value
of its capital stock after the application of certain attribution of ownership
rules at any time during the last half of the corporation's taxable year.
Passive income or loss is generated from participation in a passive activity
which is defined to include the conduct of any trade or business in which the
taxpayer does not materially participate throughout the year. By definition, a
limited partnership interest is generally treated as participation in a passive
activity and the activity of leasing property is treated as a passive activity.
Accordingly, subject to regulations to be issued, Profits and Losses from the
Trust will be treated as passive income or passive loss to the Beneficiaries.
Such regulations have not yet been issued in full and it is possible that
regulations will be issued later which will provide that income from certain
partnerships will be treated as portfolio income while losses will be treated as
passive losses.
Portfolio income is distinct from passive income, and passive losses cannot
be used to offset portfolio income except in the case of a widely held
corporation. Portfolio income generally includes interest, dividends, royalties,
gain, or loss attributable to disposition of property that is held for
investment (and that is not a passive activity), and gain from the sale of
property that normally produces interest, dividends or royalty income. If the
Trust earns interest income from the investment of funds pending the acquisition
of Assets or from the investment of funds held in reserves, this interest would
likely be treated as portfolio income allocable to each Beneficiary which could
not be offset by passive losses (except in the case of a widely-held
corporation), including deductions of the Trust generated by its equipment
leasing activity.
Classification of income from the Trust's leasing activities as portfolio
income rather than passive income could also have a substantial adverse effect
on the withholding obligations of the Trust with respect to, and the United
States tax liability of, any Foreign Beneficiaries. (See "Investment By Foreign
Beneficiaries.")
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INVESTMENT BY QUALIFIED PENSION, PROFIT-SHARING AND STOCK BONUS PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS AND BY OTHER TAX-EXEMPT ORGANIZATIONS
Qualified pension, profit-sharing, and stock bonus plans (including Keogh
plans) and IRAs (collectively, "Qualified Plans") and corporations, community
chests, funds or foundations that meet the requirements of Section 501(c)(3) of
the Code ("Exempt Organizations") are generally exempt from taxation except to
the extent that their "unrelated business taxable income" (determined in
accordance with Sections 511-514 of the Code) exceeds $1,000 during any taxable
year. The Trust's business of leasing personal property will likely constitute
an unrelated trade or business with respect to a Qualified Plan or an Exempt
Organization which invests in the Trust and will cause a Qualified Plan or
Exempt Organization to have unrelated business taxable income from the Plan's or
Organization's share of the Trust's taxable income from rents under the Leases
and, if the Assets are deemed to be held primarily for sale to customers in the
ordinary course of business (see "Sale or Other Disposition of Trust Property,"
below), the gain, if any, on disposition of the Assets. Furthermore, any gain on
the sale of Assets which represents recapture of depreciation deductions will be
treated as unrelated business taxable income. In calculating its unrelated
business taxable income, however, a Qualified Plan may also take into account
its share of the Trust's deductions, including depreciation, applicable to
leased Assets. Also, with respect to such unrelated business taxable income, the
Qualified Plan may carry forward for fifteen years any Losses to the extent they
constitute net operating losses relating to the Trust. Unrelated business
taxable income in excess of $1,000 in any taxable year will be taxable at income
tax rates applicable to trusts or corporations (whichever is applicable) and may
be subject to the alternative minimum tax. (See "Alternative Minimum Tax,"
below.)
Because Beneficiaries which are Exempt Organizations or Qualified Plans are
expected to be allocated unrelated business taxable income by the Trust, these
Beneficiaries will be required to file Form 990T to report their unrelated
business taxable income and pay any tax which is due as a result of this income.
The Managing Trustee has undertaken to identify the amount of the Trust's income
in any year that will be treated as unrelated business taxable income on the
annual tax forms provided to Qualified Plans and Exempt Organizations.
Investors which are Qualified Plans or Exempt Organizations should consult
with their own tax advisors with regard to the application of the unrelated
business taxable income rules.
As described in "Depreciation (Cost Recovery)," below, the Code places
limitations on cost recovery deductions with respect to tax-exempt use property.
In this regard, if any property which is not otherwise tax-exempt use property
is owned by a partnership which has both a tax-exempt entity and a person who is
not a tax-exempt entity as partners, the tax-exempt entity's proportionate share
of the property is treated as tax-exempt use property unless (i) all allocations
to the tax-exempt entity of partnership items are qualified or (ii) the income
derived from its share of the property is subject to the unrelated business
income tax. As described above, the leasing of tangible personal property is
treated for purposes of the Code as an unrelated trade or business. Therefore,
the limitations imposed as a result of these provisions of the Code will not
apply to the Trust.
TAX STATUS OF LEASES
The fact that the agreements between the Trust and its Lessees will each be
denominated as a "lease" will not be determinative of the character for federal
income tax purposes of the transactions which they reflect, and the Service may
assert that any such transaction constitutes a financing arrangement or an
installment or conditional sale for federal income tax purposes. The questions
of whether the Trust is the owner of Assets and whether a Lease is a true lease
are questions involving specific factual matters.
In Revenue Procedure 75-21, the Service set forth guidelines (regarding such
matters as the residual value of the equipment, the term of the lease, the
lessor's investment in the equipment and the terms of
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purchase options, if any) to provide assistance to taxpayers preparing ruling
requests with respect to whether certain leveraged lease transactions purporting
to be leases of personal property would qualify for an advance ruling. However,
the ruling guidelines do not define as a matter of law whether a transaction is
or is not a lease for federal income tax purposes, and existing judicial
authority has held that certain transactions which did not meet all of the
Revenue Procedure 75-21 guidelines nevertheless constituted leases for federal
income tax purposes.
The Managing Trustee has represented that, with respect to substantially all
of the Leases, the terms of the Leases, the residual value of Assets subject to
the Leases and the Trust's investment in the Assets subject to the Leases are
all in compliance with the guidelines of Revenue Procedure 75-21. In addition,
the Managing Trustee has represented that it will not cause the Trust to enter
into any future lease transaction unless it reasonably believes that the lease
will be treated as a true lease for federal income tax purposes and that the
Trust will be treated as the owner of the Asset subject to such lease. Based
solely upon the Managing Trustee's representation, without independent
verification of the accuracy thereof, it is the opinion of Peabody & Brown that
substantially all of the existing Leases will be treated as true leases for
federal income tax purposes and that, although the outcome of litigation cannot
be predicted with certainty, it is more likely than not that, if the issue were
litigated, a court would so hold.
Peabody & Brown has not reviewed any of the Leases and it has not obtained
or reviewed any appraisals regarding the current and residual values of the
Assets. Peabody & Brown's opinion is based entirely upon the representation of
the Managing Trustee without undertaking any independent verification of the
accuracy thereof. If it were determined that such representations were
inaccurate in any respect, the tax benefits expected to be available to
Beneficiaries could be substantially less than anticipated.
No assurance can be given that the Service may not successfully challenge
the status of any Lease as a true lease, asserting that the purchase of the
Assets by the Trust and the lease of the Assets to the Lessees merely constitute
steps in a secured financing transaction or installment sale in which the
Lessees are the owners of the Assets and the Trust merely a secured creditor. In
such event, the Trust would not be entitled to claim depreciation deductions or
deductions for interest on loans with respect to the Assets. Although a portion
of the rent payments (otherwise fully taxable) would be deemed to constitute
amortization of the principal of such loans which would not be taxable to the
Trust, it is anticipated that the net effect of a recharacterization of a Lease
as a financing arrangement would increase the amount of taxable income to be
reported by the Trust in the initial years of ownership of the Assets, and
probably result in a recharacterization of some passive income as portfolio
income (see "Active/Passive Income and Loss").
DEPRECIATION (COST RECOVERY)
MACRS SYSTEM. The modified accelerated cost recovery system (MACRS) under
the Code, which is applicable generally for property placed in service after
December 31, 1986, establishes categories of 3-, 5-, 7-, 10-, 15- and 20-year
recovery period property and permits use of the 200% declining balance method
(150% in the case of 15- or 20-year property) with a half year convention
switching to the straight-line method to maximize depreciation.
Taxpayers may elect, in lieu of the accelerated method described above, a
method of recovery based on the straight-line depreciation method over an
asset's ADR midpoint life. It is not anticipated that the Trusts will elect the
optional straight-line method. Accordingly, Beneficiaries will be allocated
amounts of cost recovery deductions which will be treated as adjustment items
for purposes of the alternative minimum tax. (See "Alternative Minimum Tax,"
below.)
MACRS makes no distinction between new and used Assets, and the deduction in
the initial year of ownership of the Assets is the same regardless of when the
Assets are acquired during the year, subject to the 40% rule set forth below.
However, if the Trust acquires Assets during a taxable year that is shorter
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than a full twelve months, the recovery percentage for the year of acquisition
is pro-rated according to the number of months in the short taxable year.
Proposed regulations provide, for purposes of computing cost recovery, that
a partnership's first taxable year begins on the first day of the month in which
it initially acquires a substantial amount of assets. Accordingly, the recovery
allowance with respect to any Assets acquired by the Trust during the year of
its initial acquisition of Assets may be reduced. Revenue Procedure 89-15
provides rules for computing the depreciation allowance when property is placed
in service in a short taxable year. In general, that Revenue Procedure provides
that if the Trust acquires Assets during a taxable year that is shorter than a
full twelve months, the depreciation allowance for the year of acquisition is
pro-rated based on the number of months, or in some instances the number of
days, in the short taxable year. The unrecovered portion of the first year
allowance will be recovered in the next taxable year and a portion of the second
taxable year's recovery allowance will be received in the third year, etc. until
the last portion of the recovery deduction is allowed in the year following the
last year of the recovery period (i.e., the fourth year for 3-year property and
the sixth year for 5-year property). Because the proposed regulations may be
revised before becoming final there is no assurance that this method of
providing for short taxable years will not be modified.
If more than 40% of all personal property of a taxpayer which is subject to
post-1981 cost recovery rules is placed in service during the last three months
of the taxable year, a special mid-quarter convention is applied which treats
all personal property placed in service during any quarter of such taxable year
as placed in service in the mid-point of such quarter for purposes of
calculating depreciation.
Under certain circumstances, a taxpayer is required to recover the cost of
an asset over a period longer than the period described above. The more relevant
restrictions include the use of property predominantly outside the United
States, the use of equipment for predominantly non-business purposes and the use
of equipment by a "tax-exempt entity." These three limitations are described
below.
APPLICATION OF ANTI-CHURNING RULES. The Trust may acquire Assets which the
Code requires, under the so-called "anti-churning rules", to be depreciated
under depreciation methods in effect prior to the MACRS System. These
anti-churning rules apply if any Assets purchased by the Trust have been (1)
previously owned or used by certain related persons, (2) acquired from a person
who previously owned the Assets if the user of the Assets does not change as
part of the transaction, or (3) leased by the Trust to a person who owned or
used the Assets previously.
Specifically, if any Assets acquired by the Trust were owned or used at any
time during 1980, and if the user of such Assets does not change as a result of
the acquisition or if any Assets are leased by the Trust to a person who owned
or used the Assets at any time during 1980, then the Assets must be depreciated
under the asset depreciation range ("ADR") system which would result in
depreciation using the 150% declining balance method switching to straight line
at a time that will maximize the remaining deductions, over a period equal to
the Assets' useful life. Also, similar to MACRS rules, depreciation deductions
during a taxable year of less than twelve months must be pro-rated based on the
number of months in the taxable year.
Additionally, depreciation deductions would not be calculated based on the
full purchase price of the Assets, but the depreciable basis would have to be
reduced by an estimated salvage value. This would result in less depreciation
being available to the Trust. There can be no assurance that the Service would
agree with the Trust's estimation of the salvage value of any Assets which could
further reduce depreciation to be claimed by the Trust. Additional anti-churning
rules prevent the use of MACRS and require the use of the accelerated cost
recovery system ("ACRS") if the lessee used the Assets during 1986 (but not
prior to 1981) and continues to use the Assets after such Assets are acquired by
the Trust and if the cost recovery deduction allowable for the first year the
Assets are placed in service by the Trust is less under ACRS than it would be
under MACRS. However, since the first year cost recovery deduction allowable
under ACRS would generally be greater than that allowed under MACRS, it is not
expected that the Trust will be required to use ACRS with respect to any Assets.
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PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED STATES. The Trust may
acquire Assets to be used predominantly outside the United States. However, the
Managing Trustee intends that no more than 25% of the Assets will be used
principally outside of the United States.
Section 168(g)(2) of the Code contains special rules for recovering the cost
of personal property used predominantly outside the United States. The cost of
such property must be recovered using the straight-line method over a period
corresponding to the property's ADR Class Life (the class life assigned to such
type of property under the depreciation system in effect prior to ACRS) using
the half-year convention, and salvage value is ignored. This will result in a
slower realization of depreciation deductions than if the property were used in
the United States.
PROPERTY NOT USED IN A TRADE OR BUSINESS. Section 280F of the Code limits
the tax benefits available to owners of certain types of equipment, including
any property used as a means of transportation, if the equipment is of a type
susceptible to personal use and is used 50% or more for non-business purposes.
However, Section 280F(c)(1) provides that the limitations of Section 280F will
not apply to property covered by the Section ("listed property") that is leased
or held for lease by any person regularly engaged in the business of leasing
such property.
The Regulations define a person as "regularly engaged in the business of
leasing `listed property"' only if such person enters into contracts to lease
listed property with some frequency over a continuous period of time. The
determination is made on the basis of the facts and circumstances of each case,
taking into account the nature of the person's business in its entirety. The
Trust should be deemed to be regularly engaged in the business of leasing listed
property under this standard, except with respect to any Assets which are leased
to a party related to either the lessor Trust or a Participant with a 5% or
greater interest in the Trust.
TAX-EXEMPT LEASING. Section 168(h) of the Code greatly reduces the tax
benefits available with respect to property leased to "tax-exempt entities."
The definition of a "tax-exempt entity" includes governmental bodies,
tax-exempt governmental instrumentalities, tax-exempt organizations, certain
foreign persons and entities and certain international organizations. The term
also generally includes organizations which were tax-exempt at any time during
the five-year period ending on the date the organization first uses the property
involved. Foreign persons or entities will not be treated as tax-exempt entities
with respect to property if more than 50% of the income for the taxable year
derived by them from the property is subject to U.S. income tax. Since more than
50% of the income derived from the Assets is expected to be treated as
effectively connected with the conduct of a United States trade or business in
the case of any foreign person admitted as a Beneficiary of the Trust (see
"Investment By Foreign Beneficiaries"), it is not expected that this provision
would adversely affect the Trust's depreciation of the Assets.
The Code requires use of the straight-line method of cost recovery under
ACRS with respect to property leased to tax-exempt entities. The recovery period
for tax-exempt use personal property is equal to the greater of the midpoint
life of the property under the ADR depreciation system (12 years if no ADR
class) or 125% of the lease term. The term of a lease will include all options
to renew as well as certain successive leases, determined under all the facts
and circumstances. Use of property by a tax-exempt entity at any point in a
chain of use results in its characterization as tax-exempt use property (e.g., a
sublease by a non-tax-exempt lessee to a tax-exempt sublessee). There are
several statutory exceptions from the tax-exempt use property status which are
applicable to personal property. First, the term "tax-exempt property" does not
include any portion of property used by a tax-exempt entity directly, or through
a partnership in which the tax-exempt entity is a partner, in an unrelated trade
or business, the income of which is subject to the unrelated business taxable
income tax. Second, property leased to a tax-exempt entity under a "short-term
lease" is not tax-exempt use property. "Short-term lease" means a lease which
has a term of less than the greater of one year or 30% of the property's ADR
midpoint life (to the extent
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the midpoint life does not exceed 10 years, i.e., no greater than three years).
Third, special rules apply for certain high technology equipment.
If any property which is not otherwise tax-exempt use property is owned by a
partnership which has both a tax-exempt entity and a person who is not a
tax-exempt entity as a partner, the tax-exempt entity's proportionate share of
the property is treated as tax-exempt use property unless (i) all allocations to
the tax-exempt entity of partnership items are qualified allocations or (ii) the
income derived from such share of the property is subject to the unrelated
business tax. For this purpose, an allocation to a tax-exempt entity is a
qualified allocation if (1) the entity is effectively allocated the same
percentage of each partnership item during the entire period in which the entity
is a partner and (2) the allocation has substantial economic effect under
Section 704(b)(2) of the Code. Income derived by tax-exempt entities other than
foreign entities from the Trust should be subject to the unrelated business tax
(see "Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations") and,
therefore, this provision of the tax-exempt property rule is not expected to
apply to such entities.
The Managing Trustee has represented that substantially all of the Trust's
Assets constitute 3-, 5- or 7-year recovery property depreciable under the
modified accelerated cost recovery system over a recovery period of 3, 5 or 7
years, respectively, using the 200% declining balance method in accordance with
Section 168(a) of the Code.
The Code sets standards to be used in determining whether an arrangement
purporting to be a service contract should be treated as a lease. However, the
Managing Trustee does not anticipate that the Trust will enter into any service
contracts involving Assets with tax-exempt entities.
BASIS. The Trust intends to include in the basis of its Assets for
depreciation purposes Acquisition Fees payable to the Special Beneficiary, which
is also the Advisor for the Trust, for arranging the acquisition of its Assets.
To the extent that an Acquisition Fee is based on the fair market value of such
services, or the then prevailing market rate customarily charged by third
parties for similar services, and to the extent that the Acquisition Fee, when
added to the other costs of the Assets, does not exceed the fair market value of
the Assets, it would appear that the Acquisition Fee should be treated by the
Trust as a cost of acquiring its Assets. This treatment appears to be consistent
with the position of the Service regarding such fees. However, no assurance can
be given that the Service would not assert that all or part of the Acquisition
Fee was in fact attributable to the initial Lease of the applicable Assets or
the formation of the Trust or that it should be treated as a distribution to the
Special Beneficiary. If the Service successfully challenged the inclusion of all
or any portion of an Acquisition Fee in the basis of the applicable Assets for
depreciation purposes, depreciation deductions attributable to the Assets would
be reduced and the non-depreciable portion of the Acquisition Fees would be
either amortized as a loan or lease negotiation fee or partnership organization
expense or capitalized as a non-depreciable and non-amortizable expenditure or
as a distribution to a Participant.
RECAPTURE OF DEPRECIATION
Pursuant to the provisions of Section 1245 of the Code, all depreciation
deductions previously claimed by the Trust (to the extent of gain) will be
taxable as ordinary income in the event of sale, foreclosure, casualty or other
disposition (other than a refinancing and certain like-kind exchanges) of the
Assets, and an allocable portion of such depreciation will be subject to
recapture to the extent of gain, if any, in the event of a sale or other
disposition of any of a Beneficiary's Interests. Additionally, depreciation
recapture is recognized in the year of sale, even in the case of an installment
sale. (See "Sale or Other Disposition of Trust Property" and "Sale or Other
Disposition of Interests," below.)
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SALE OR OTHER DISPOSITION OF TRUST PROPERTY
Upon a sale or other disposition of the Assets (including a sale or other
disposition resulting from destruction of the Assets or from foreclosure or
other enforcement of a security interest in the Assets), the selling Trust will
realize gain or loss equal to the difference between the basis of the Assets at
the time of sale or disposition and the amount realized upon sale or
disposition. Since the Assets constitute tangible personal property, all
depreciation deductions previously taken will, to the extent of any gain
realized on the disposition, be treated as ordinary income under Section 1245 of
the Code in the year of sale. Ordinary income treatment under Section 1245 of
the Code cannot be avoided by holding the Assets for any specified period of
time. In the case of individuals, the maximum rate applied to capital gains is
28% while the maximum rate applicable to ordinary income is 39.6%. (See "Tax
Rates and Capital Gains.") Gain on the sale of Assets is expected to be treated
as passive income, although interest received with respect to any deferred
payments is expected to be treated as portfolio income. (See "Active/Passive
Income and Loss.")
In addition, if the Trust were to sell Assets on an installment basis, the
original issue discount rules could apply to such sale. If the interest rate on
the installment note were less than the applicable federal rate as determined
under Section 1274 of the Code, the sale price would be reduced based on the
imputed rate. This would result in an increase in interest income which the
selling Trust would be required to recognize.
Any gain in excess of the amount of depreciation recapture will constitute
gain described in Section 1231 of the Code if the property sold or otherwise
disposed of was used in a trade or business and held for more than one year and
not held primarily for sale to customers. Under Section 1231 of the Code, if the
sum of the gains on sale or exchange of certain assets exceeds the losses from
the sale of such assets, all gains and losses will be treated as long-term
capital gains and losses. However, if losses exceed gains, all losses and gains
will be treated as ordinary gains and losses. Net Section 1231 gains must be
treated as ordinary income to the extent of unrecaptured Section 1231 losses for
the particular taxpayer (each separate Participant) for the five most recent
prior years.
If, at the time of sale, an Asset has been held by the Trust for less than
one year or the Trust is deemed to be a "dealer" in Assets, any gain (in excess
of depreciation recapture) or loss will be treated as short-term capital gain or
ordinary income, respectively.
Since the recapture of the depreciation portion of any gain on the sale of
Assets is required to be reported in the year of sale, it is likely that
substantially all gain reported by the Trust on the disposition of Assets will
be reported in the year of sale, even if receipt of payment is deferred until a
later year.
The Trust, at the election of the Managing Trustee, may reinvest any
insurance proceeds or other indemnity payments received by it as a result of a
casualty to its Assets generally so long as the substitute Assets will continue
under the Lease of the lost or damaged Assets. Under Section 1033 of the Code,
the Trust would not be required to report income from the receipt of proceeds to
the extent proceeds are reinvested in Assets similar or related in service or
use to the Assets destroyed. The Managing Trustee, however, will not normally
make the election to reinvest such proceeds unless it believes that
substantially all of the gain realized as a result of the receipt of such
proceeds would be deferred for tax purposes.
SALE OR OTHER DISPOSITION OF INTERESTS
As a general rule, gain or loss recognized by a Beneficiary (who is not a
"dealer" in Interests) on the sale of his Interests which have been held for
more than one year will be taxable as long-term capital gain or loss. However,
that portion of a selling Beneficiary's gain allocable to "unrealized
receivables" and "substantially appreciated inventory" (as defined in Section
751 of the Code) of the Trust in which he is a beneficiary would be treated as
ordinary income. The term "unrealized receivables" would encompass all Trust
assets subject to recapture of cost recovery deductions determined as if a
selling Beneficiary's
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proportionate share of all of the Trust's Assets had been sold at that time.
Thus, a substantial portion of a Beneficiary's gain or loss upon the sale of his
Interests will be taxed as ordinary income. Because the ordinary gain or loss
from a Beneficiary's share of unrealized receivables and substantially
appreciated inventory is computed separately from his gain or loss attributable
to other Trust assets, it is possible that a Beneficiary could have ordinary
income and a capital loss (which can be used only to a limited extent to offset
the ordinary income) on the sale of his Interests.
See "Sale or Other Disposition of Trust Property," above, for the difference
in tax treatment of capital gains and ordinary income.
A "seller" of a partnership interest is required to notify promptly the
partnership of the sale or exchange, and, once the partnership is notified, it
is required to inform the Service (and the seller and the buyer of the
partnership interest on or before January 31 following the calendar year of
sale) of the fair market value of the allocable share of unrealized receivables
and appreciated inventory attributable to the partnership interest sold or
exchanged. Failure of a "seller" of a partnership interest to notify the
partnership will result in a $50 penalty per failure.
TAX TREATMENT OF CERTAIN TRUST EXPENSES
The Trust will incur costs for which it will claim deductions for federal
income tax purposes. There is no assurance that the Service will not challenge
these deductions on various grounds. Accordingly, no representation or warranty
of any kind with respect to any deduction can be made. If it is ultimately
determined that any deduction of the Trust is not allowable, an adjustment of
the taxable income or loss of the Trust for the year of the deduction would be
necessitated. Such an adjustment would, in turn, cause an adjustment in the
federal income tax liabilities of the Trust and the Managing Trustee and each
Trust Beneficiary for that year.
The following paragraphs discuss certain risks in the tax treatment of
various fees, costs and expenses. If the proposed treatment by the Trust is
ultimately disallowed, the Trust's taxable income in a particular year or years
will be increased, and recognition of the tax benefits attributable to the
reduction may be deferred until later years or may be disallowed entirely. In
either event, benefits to the Beneficiaries would be adversely affected.
FEES TO MANAGING TRUSTEE AND ITS AFFILIATES. Many of the proposed
deductions relate to fees which will be paid to the Managing Trustee, the
Special Beneficiary and their Affiliates. (See "COMPENSATION AND FEES.") It is
possible that the Service may determine that some of the payments to be made by
the Trust to the Managing Trustee, the Special Beneficiary and their Affiliates,
as well as some other expenses, are (i) "syndication fees" or proceeds from the
sale of a capital asset (i.e., a portion of the pre-syndication interests of the
participants in the Trust), in which case they would not be allowed as
deductions by the Trust; (ii) "organization expenses," in which case they would
only be allowed as deductions ratably over a period of not less than sixty
months; (iii) capital in nature, in which case they would not be allowed as
deductions but would have to be capitalized and recovered over the term of the
Trust or the lives of certain assets; (iv) excessive, in which case the portion
of such payments or expenses determined to be excessive would not be allowed as
a deduction; or (v) constructive distributions to the Managing Trustee or the
Special Beneficiary rather than fees to the Managing Trustee, the Special
Beneficiary or their Affiliates.
In determining whether fees are in fact fees instead of constructive
distributions to a partner, the Code recognizes three types of payments which
may be made by a partnership to a partner: the first is a payment made to a
party when he is acting in a capacity other than that of a partner; the second
is a so-called "guaranteed payment"; and the third is a distribution of
partnership income.
Section 707(a) of the Code provides that if a partner engages in a
transaction with a partnership other than as a partner, the transaction is,
subject to certain exceptions, treated as occurring between the partnership and
one who is not a partner. Sections 162 and 263 of the Code would then apply to
determine
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whether the fee is deductible or must be capitalized. The Service appears to
look primarily to whether the activity giving rise to the payment is integral to
the operation of the partnership in determining whether a payment is subject to
Section 707(a); if it is, the Service has taken the position that the fee is
attributable to the performance of services within the normal scope of the
partner's duties so that Section 707(a) will not apply. See Edward T. Pratt, 64
T.C. 203 (1975), affirmed in part and reversed in part, 550 F.2d 1023 (5th Cir.
1977) and Kimmelman v. Commissioner, 72 T.C. 294 (1979).
Section 707(c) of the Code provides that guaranteed payments of fees or
interest are amounts "determined without regard to the income of the
partnership." The Section states that a "guaranteed payment" is considered as
made to one who is not a member of the partnership. However, a guaranteed
payment is not automatically deductible; Regulation 1.707-1(c) provides that it
must first meet the requirements of Sections 162(a) and 263 of the Code. See
Cagle v. Commissioner, 63 T.C. 86 (1974), affirmed, 539 F.2d 409 (5th Cir.
1976).
Payments by a partnership to a partner which are not within the scope of
Sections 707(a) or 707(c) are distributions to a partner which are not
deductible or capitalizable by a partnership.
To the extent that the fees described below are governed by Section 707(c)
of the Code, they will not be subject to the rule that deduction of expenses of
an accrual basis taxpayer, such as the Trust, owed to a related cash basis
taxpayer, will be allowable only on the day on which the amount is includable in
the gross income of the person to whom the payment is to be made. A partnership
and a partner are related persons for purposes of this provision. Depreciation
of fees which must be capitalized is permitted to the extent that the amount of
depreciation does not exceed the amount includable in the gross income of the
person to whom the payment is to be made.
In addition to these general issues concerning the income tax treatment of
fees and payments to the Managing Trustee, the Special Beneficiary and their
Affiliates, certain issues related to particular fees and payments are noted
below.
DEDUCTION OF ASSET MANAGEMENT FEES AND SUBORDINATED RESALE FEES. The
Advisor, which is also the Special Beneficiary, will be entitled to receive
Asset Management Fees based on the lower of 5% of the gross rental proceeds (2%
in the case of Full Payout Leases) or competitive fees, which the Trust intends
to deduct under Section 162 of the Code, and Subordinated Resale Fees based on
the lower of 3% of the gross sale proceeds from Assets sold or one-half of
competitive brokerage fees, which the Trust intends to add to the basis of the
related Asset or deduct from the sales price under Section 1016 of the Code. In
order to be deducted, the Asset Management Fees must be "ordinary and necessary
business expenses" incurred in connection with the Trust's business (and not a
capital expenditure) and, in order to be capitalizable, the Subordinated Resale
Fees must not be constructive distributions to a partner. Because the Advisor is
a Trust Beneficiary, the Service could contend that the Asset Management Fees
and/or the Subordinated Resale Fees, which are payable only when cash is
available with no interest payable in the event of such a deferral, and, in the
case of the Subordinated Resale Fees, are payable only after Payout, are in fact
distributions to the Special Beneficiary. If the Service successfully contended
that the Asset Management Fees and/or the Subordinated Resale Fees were
distributions to the Special Beneficiary, they would not be deductible or
capitalizable by the Trust. The Service could then make a corresponding increase
in the Special Beneficiary's share of Profits (or Losses) for such year.
CAPITALIZATION OF SYNDICATION FEES. The Code requires that fees paid in
connection with the syndication of a partnership must be capitalized and neither
amortized nor depreciated. The Trust intends to treat the fees and expenses
allocable to preparation of this Prospectus and otherwise to the offering of the
Class B Beneficiary Interests as syndication expenses. The Service may require
that other Trust expenses or payments be treated in the same manner.
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LIMITATIONS ON THE DEDUCTIBILITY OF INTEREST
CONSUMER AND INVESTMENT INTEREST. Consumer interest, other than certain
qualified housing interest on a taxpayer's principal and secondary residences,
is no longer deductible. Interest on underpayments of federal income taxes is
treated as consumer interest for this purpose.
Investment interest, which includes interest on debt not incurred in
connection with a taxpayer's trade or business (other than consumer debt or
qualified housing debt), is only deductible to the extent of net investment
income. Interest expense attributable to an activity that is subject to the
passive loss rules (such as a Beneficiary's interest in the Trust) will not also
be subject to the investment interest deduction limitations. Accordingly,
interest expense of the Trust (such as interest expense on borrowings used to
acquire Assets) will be subject to the passive loss limitations (see
"Active/Passive Income and Loss," above) but will not be subject to the
investment interest limitations.
Temporary Regulations under Section 163 of the Code provide that if the
Trust refinances debt secured by the Assets to provide Distributable Cash From
Sales or Refinancings, the ability of any Beneficiary to deduct his share of
Trust interest expenses in excess of those expenses attributable to the amount
of debt in place prior to the refinancing will depend upon a "tracing" of that
Beneficiary's use of his share of the Distributable Cash From Sales or
Refinancings. For example, if a Beneficiary used his share of the cash
distribution to purchase a consumer item, a portion of his allocable interest
expense would be treated as consumer interest; if a Beneficiary used his share
of the cash distribution to purchase an investment asset, a portion of his
allocable interest expense would be treated as investment interest, etc.
The Trust has incurred a significant amount of indebtedness (the
"Indebtedness") to finance the purchase of the Assets and expects that any
interest expense incurred with respect to the Indebtedness will be deductible
under Section 163 of the Code. Section 163 of the Code allows a deduction for
interest paid with respect to indebtedness. Indebtedness is generally defined to
mean an existing, unconditional and legally enforceable obligation for the
payment of money. The Managing Trustee has represented that the fair market
value of every Trust Asset which is encumbered by any Trust Indebtedness has
always and will continue to equal or exceed the amount of Indebtedness which
encumbers it. The Managing Trustee has also represented that each Indebtedness
is represented by a written unconditional obligation to pay a sum certain on
demand or at a fixed maturity date which is not later than 15 years after the
date the Indebtedness is incurred with a commercially reasonable interest rate
which is fixed or variable based upon established and recognized indices. Based
upon such representations, without undertaking independent verification of the
accuracy thereof, and assuming that each Indebtedness constitutes a valid and
enforceable indebtedness and creates a bona fide debtor/creditor relationship
between the Trust and the respective lender under applicable local law, it is
the opinion of Peabody & Brown that the Indebtedness will be treated as
indebtedness for federal income tax purposes and any interest paid with respect
thereto will be deductible under Section 163 of the Code and that, while the
outcome of litigation cannot be predicted with certainty, if the issue were
litigated, it is more likely than not that a court would so hold. This opinion
is based solely on the representations of the Managing Trustee without
independent verification of the accuracy thereof. Peabody & Brown has not
reviewed any of the documents evidencing the Indebtedness. If such Managing
Trustee representations were determined to be inaccurate or incorrect, or the
Service successfully contended that all or a portion of the Indebtedness
constituted an equity interest in the Trust, interest incurred with respect to
the Indebtedness may not be deductible under Section 163 of the Code and the tax
benefits expected to be available to Beneficiaries could be significantly less
than anticipated.
INTEREST RELATED TO TAX-EXEMPT OBLIGATIONS. Section 265(2) of the Code
disallows any deduction for interest paid by a taxpayer on indebtedness incurred
or continued for the purpose of purchasing or carrying tax-exempt obligations.
The Service announced in Revenue Procedure 72-18 that the proscribed purpose
will be deemed to exist with respect to indebtedness incurred to finance another
"portfolio investment" (which includes a limited partner interest such as an
Interest) where the taxpayer also owns tax-exempt obligations. Therefore, in the
case of an investor owning tax-exempt obligations, the Service
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might take the position that the allocable portion of any interest incurred by
the investor to purchase or carry his Interest in the Trust should be viewed as
incurred to enable him to continue carrying tax-exempt obligations, and that the
investor should not be allowed to deduct his full allocable share of that
Interest.
Accordingly, although it is dependent upon an individual investor's
particular circumstances, if an investor holds or acquires tax-exempt
obligations, unless his investment in tax-exempt obligations is insubstantial,
it is likely that a proportionate amount of any interest paid by the investor on
debt he may incur in connection with the purchase of an Interest in the Trust
will be disallowed as a deduction under Section 265(2).
PREPAID INTEREST. The Trust will not prepay any interest, but may be
required to pay certain amounts commonly referred to as "points" in order to
obtain financing. Interest prepayments, including points, must be capitalized
and amortized over the life of the loan with respect to which they were paid.
TRUST TAX ELECTIONS
The Trust may make various elections for federal income tax reporting
purposes which could result in items of income, gain, loss and deduction being
treated differently for tax purposes than for financial accounting purposes. For
example, the Trust, in conformity with generally accepted accounting principles,
will recognize gain on the sale of Assets in its entirety for accounting
purposes, but may elect to report the gain on the installment basis for tax
purposes.
The Code permits partnerships to elect to adjust the basis of partnership
property on the transfer of an interest in a partnership by sale or exchange or
on the death of a partner, and on the distribution of property by the
partnership to a partner (referred to as a "Section 754 election"). The general
effect of such an election by the Trust would be that assignees of Interests
would be treated, for purposes of depreciation and taxable gain on disposition
of Assets, as though they had newly acquired an interest in the Trust's assets
and therefore acquired a new cost basis for such assets equal to their basis in
their Interests. The Managing Trustee has the authority, under the Trust
Agreement, in its sole discretion, to make this election or to decline to make
this election. The Managing Trustee does not intend to cause the Trust to make
such an election unless the Interests are listed on a registered securities
exchange, which is not presently contemplated. If the election is not made, any
benefits which might be available to the Beneficiaries by reason of this
election will not be available. Moreover, a Beneficiary may have greater
difficulty in selling his Interests, as a purchaser will obtain no current tax
benefits from his investment to the extent that the cost of his investment
exceeds his allocable share of the Trust's basis in its assets.
USE OF NOMINEES
The Trust may be required or may find it appropriate in certain states or
other jurisdictions to utilize "nominee" trusts, corporations or other entities
to hold title to Assets. A nominee trust, corporation or other entity would be
used simply to hold bare legal title to Assets for the benefit of the Trust,
with the intention that the nominee will be disregarded and the Assets treated
as held directly by the Trust for federal income tax purposes. Nevertheless,
some recent court cases have held that in some circumstances entities purporting
to be mere nominees are taxable entities, resulting in the loss of depreciation,
interest and other deductions claimed by the purported equitable owners of the
property, although a Supreme Court decision on this issue was decided favorably
to the taxpayers. The Managing Trustee intends to use nominees, if at all, only
to hold legal title to Assets and will follow all favorable judicial precedents
with the advice of legal counsel, if appropriate, to avoid their treatment as
taxable entities. However, if any nominee used by the Trust were held to be a
taxable entity, such a holding would cause the tax treatment of income, gains,
losses, deductions, tax preferences and distributions of such trust, corporation
or other entity to be determined by trust or corporate, rather than partnership,
principles of taxation. (See "Trust Status," above.)
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SECTION 467
Code Section 467 defines a "Section 467 rental agreement" as any rental
agreement for the use of tangible property involving total payments in excess of
$250,000 if certain other conditions are met. Under Code Section 467, the amount
of rent that is deemed to accrue under a Section 467 rental agreement is the
amount that is actually payable during the taxable year under the lease
agreement, plus the present value of any rents that relate to the current year
that are to be paid after the close of the year. This rule does not apply if (i)
a Section 467 rental agreement is silent as to the allocation of rents, or (ii)
the rental arrangement is, among other things, a tax-motivated "leaseback" or
"long-term agreement" that provides for increasing rents. If either (i) or (ii)
applies, the amount of rent that is deemed to accrue for the year is the
"constant rental amount." The "constant rental amount" is the amount which, if
paid as of the close of each lease period under the agreement, would result in
an aggregate present value equal to the present value of the aggregate payments
required under the lease.
The Managing Trustee has represented that all Leases allocate rental
payments to the periods in which they are paid, none of the Leases provide for
increasing rents and none of the Assets will be leased to a related party.
Consequently, the constant rent accrual rules of Section 467 of the Code should
not be applicable to the Leases.
JOINT VENTURES WITH MANUFACTURERS
The Trust may enter into continuing relationships with manufacturers to
acquire Assets for lease to customers of the manufacturers. In these cases the
purchase price paid by the Trust may be treated by the Service as a contribution
to the capital of a joint venture consisting of the manufacturer and the Trust.
If the Service were successful in this contention, the amount of cost recovery
deductions and other deductions available to the Trust may be reduced to reflect
an allocation of a portion thereof to the manufacturer. The Trust will endeavor
to negotiate contracts with manufacturers which minimize the risks of creating a
joint venture for tax purposes, but there can be no assurance that it will be
successful in doing so. If the Service were to challenge successfully the
Trust's treatment of this issue, a portion of the deductions claimed would be
lost and re-allocated from the Trust to the manufacturer as a joint venturer.
TRANSFERABILITY-TERMINATION OF THE TRUST
The Code provides that if 50% or more of the capital and profit interests in
a partnership are sold or exchanged within a single twelve-month period, the
partnership will terminate for tax purposes. The Trust Agreement contains a
provision that prohibits a transfer of Interests without the written consent of
the Managing Trustee if the transfer could result in a termination of the Trust
for federal income tax purposes. If a termination occurs, the assets of the
Trust will be deemed to be constructively distributed pro rata to the
Beneficiaries and then recontributed by them to a new (for federal income tax
purposes only) Trust. Some of the possible adverse tax affects of a tax
termination are as follows:
1. The tax basis of Assets in the hands of the Trust after termination
may be greater or less than the Trust's basis in such Assets immediately
before the termination. Furthermore, to the extent that Section 1060 of the
Code applies, a portion of the Trust's basis in its assets may have to be
allocated to non-depreciable assets such as goodwill. Accordingly, a
Beneficiary's taxable income or loss of the Trust may be greater or less
than his taxable income or loss if the Trust did not terminate because of
the resulting change in the amount of cost recovery deductions. The
commencement of a new recovery period for the assets as a result of the
deemed placement in service by a "new" partnership will extend the overall
period for the recovery of the cost of assets through cost recovery
deductions.
2. If the allocable portion of Trust cash constructively distributed to
a Beneficiary exceeds the adjusted tax basis of his Interests, a Beneficiary
will be required to recognize gain to the extent of the excess which will be
treated as gain from the sale or exchange of Interests.
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3. The Trust's taxable year will end upon termination and, if a
Beneficiary's taxable year differs from the Trust's calendar taxable year,
the termination could result in the "bunching" of more than one year of
Trust income or loss in the Beneficiary's income tax return for the taxable
year in which the Trust terminates.
4. All existing Trust tax elections will terminate.
Based on the restrictions in the Trust Agreement and the representation of
the Managing Trustee that it will not consent to any transfer or redemption
which would result in the termination of the Trust, it is unlikely that the
Trust will terminate for federal income tax purposes.
TERMINATION AND LIQUIDATION OF THE TRUSTS
Upon termination of the Trust, any remaining assets of the Trust will be
sold, which may result in the realization of taxable gain to the Beneficiaries,
including recapture of depreciation. (See "Depreciation (Cost Recovery)" and
"Recapture of Depreciation," above.) Distributions of cash in complete
liquidation of the Trust will generally be treated in the same manner as
non-liquidating distributions of cash. (See "General Principles of Partnership
Taxation," above.)
ESTATE TAXES
A low basis, high value asset is included in a decedent's estate at its fair
market value, but the basis of the asset (such as the Interests) in an estate is
also "stepped up" to its fair market value. Investors should consult with their
estate planning advisors in connection with matters relating to the effect of
ownership of Interests on their personal estate planning.
ALTERNATIVE MINIMUM TAX
INDIVIDUALS. The Code provides that an alternative minimum tax is payable
by individuals if it exceeds their regularly calculated federal income tax
liability. The alternative minimum tax is imposed at the rate of 26% of
alternative minimum taxable income. The 26% rate is increased to 28% to the
extent that the excess of alternative minimum taxable income over the exempt
account (discussed below) exceeds $175,000 ($87,500 for married individuals
filing separate returns). Single taxpayers are entitled to a $33,750 exempt
amount under the alternative minimum tax, and married taxpayers filing a joint
return are entitled to a $45,000 exempt amount. The exempt amount, in either
case, is reduced by 25 cents for each dollar by which alternative taxable income
exceeds $112,500 in the case of single taxpayers and $150,000 in the case of
joint returns.
The computation of income for alternative minimum tax purposes differs
substantially from the computation of income for purposes of the regular tax.
Some of the principal differences between the calculations are as follows:
I. For minimum tax purposes, in the case of property placed in service
after December 31, 1986, depreciation on personal property is computed using
the 150% declining balance method over an asset's ADR midpoint life. This
creates, in essence, a tax preference item equal to the difference in
depreciation between the 200% declining balance method and the 150%
declining balance method using the ADR midpoint life. The excess of actual
depreciation for real estate in excess of depreciation calculated on the
straight-line method over 40 years is also a tax preference item. In the
case of any property placed in service before January 1, 1987, the excess of
accelerated depreciation over straight-line depreciation for real estate and
the excess of actual depreciation over straight-line depreciation using the
asset depreciation range useful life for leased personal property continues
to be an item of tax preference.
II. Interest on tax-exempt obligations which constitute private activity
bonds issued after August 7, 1986, is included in income for minimum tax
purposes.
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III. The excess of the fair market value of stock received on the
exercise of an incentive stock option over the exercise price is treated as
a tax preference item.
IV. Medical deductions are allowed only to the extent that they exceed
10% of adjusted gross income and miscellaneous itemized deductions and
itemized deductions for state and local taxes are not permitted.
To the extent that a taxpayer pays an alternative minimum tax in excess of
his regular tax liability for any year, then the excess (except to the extent
attributable to exclusion preferences such as tax-exempt interest rather than
deferral preferences) may be carried forward as a credit against the taxpayer's
regular tax liability if that tax liability exceeds his minimum tax liability in
a subsequent year. No carry-back is permitted for this minimum tax credit.
CORPORATIONS. The Code also provides for an alternative minimum tax to be
imposed on corporations which is substantially similar to the individual
alternative minimum tax described above.
In general, a corporation's alternative minimum taxable income will be equal
to its regular taxable income, increased by certain tax preference items for the
year and adjusted by computing certain items under special rules that eliminate
the acceleration of their benefit under the regular tax. The corporate
alternative minimum tax is imposed at the rate of 20% of alternative minimum
taxable income in excess of a $40,000 exempt amount. The $40,000 exempt amount
is reduced by 25% of the amount by which alternative minimum taxable income
exceeds $150,000 until the exempt amount is reduced to zero.
The tax preference items for corporations in computing their alternative
minimum taxable income are substantially similar to those set forth above for
the alternative minimum tax imposed on individuals. However, there is an
additional tax preference item for corporations which is defined as 75% of the
excess of the adjusted current earnings of the corporation over the alternative
minimum taxable income (determined without regard to this item and the
alternative minimum tax net operating loss deduction).
Only certain credits are allowable against the corporation's alternative
minimum tax liability, including refundable credits and the foreign tax credit.
Investment tax credits will be permitted to offset only a portion of minimum tax
liability. To the extent that a corporation pays a minimum tax during any
taxable year it will be allowed a credit against its regular tax liability in
subsequent taxable years which can be carried forward indefinitely, whether the
minimum tax liability is attributable to deferral items or to exclusionary
items.
It is anticipated that all investors will be allocated tax adjustment items
as a result of their investment in the Trust attributable to the difference
between more accelerated methods of depreciation which will be used for regular
tax purposes and less accelerated methods of depreciation which must be used for
alternative minimum tax purposes.
INTEREST AND PENALTIES ON UNDERPAYMENT OF TAXES; AUDIT
Several of the administrative and penalty provisions of the Code should be
considered by investors with respect to an investment in the Trust:
INTEREST RATE ADJUSTMENT. Interest rates on tax overpayments and
underpayments are set quarterly as of January 1, April 1, July 1 and October 1
of each year, based on the prevailing rate for short-term government
obligations. The interest rate payable by taxpayers on underpayments is set one
percentage point higher than the rate payable by the Service on overpayments.
The interest rate on deficiencies is currently 9% per annum (compounded daily)
which will remain in effect through March 31, 1997. The interest rate applicable
to tax deficiencies for C corporations in the case of an underpayment that
exceeds $100,000 for any taxable period to a rate two percentage points higher
than the otherwise applicable rate for periods following the earlier of (a) the
date of the IRS 30-day letter or (b) the date of the statutory notice of
deficiency.
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ACCURACY RELATED PENALTIES. Section 6662 of the Code consolidated many of
the penalty provisions of the Code into a single, more cohesive accuracy-related
penalty, imposed at the rate of 20%, to the portion of any underpayment of tax
that is attributable to (1) negligence, (2) any substantial understatement of
income tax or (3) any substantial valuation overstatement.
With respect to the penalty on any "substantial" understatement of income
tax, the amount of understatement is the excess of the amount of income tax
imposed on the taxpayer for the taxable year over the amount of tax shown on the
return, and a "substantial" understatement exists if the understatement for the
taxable year exceeds the greater of 10% of the actual tax or $5,000 ($10,000 in
the case of most corporations). The amount of the understatement may be reduced
by the portion of the understatement that is attributable to an item if (i) the
treatment of the item on the return is or was supported by substantial authority
or (ii) all the facts relevant to the tax treatment of the item were disclosed
on the return or a statement attached to the return and there was a reasonable
basis for the treatment of the item. However, in the case of tax shelter items,
the understatement may only be reduced if the taxpayer establishes that, in
addition to having substantial authority for its position, it reasonably
believed that the treatment claimed was "more likely than not" the proper
treatment of the item.
A tax shelter item is defined as an item that arises from a partnership or
other entity, plan or arrangement, the principle purpose of which is the
avoidance or evasion of Federal income tax. The Managing Trustee has indicated
that (1) the objectives of the Trust include the provision to investors of cash
distributions throughout the operating life of the Trust and (2) it is not
anticipated that the Trust will generate any significant tax losses. On this
basis, the Managing Trustee has been advised by counsel that the Trust should
not be considered to be "tax shelters" within the meaning of this provision.
With respect to the penalty on any valuation overstatement, a "valuation
overstatement" exists if the value of any property or the adjusted basis of any
property claimed on any return exceeds 200% of the amount determined to be the
correct amount of the valuation or adjusted basis for such property. If the
valuation is 200% or more of the correct value, but not more than 400%, the
applicable penalty is 20%. If the valuation is more than 400% of the correct
value, the applicable penalty is 40%. This provision is not applicable unless
the underpayment for the particular taxpayer for the taxable year attributable
to the valuation overstatement is at least $5,000 ($10,000 in the case of most
corporations).
The Service is engaged in an intensified audit program for partnerships and
entities treated as partnerships for federal income tax purposes. As a
consequence, audits of the Trust's information returns are more likely to occur
than they were prior to the commencement of such audit program. A federal income
tax audit of the Trust's tax information return may result in an audit of the
returns of its Beneficiaries, and such an examination could result in
adjustments both to items that are related to such Trust and to unrelated items.
The cost of contesting an audit could be substantial. In the event adjustments
are made, Beneficiaries could be required to pay substantial amounts of interest
on any income tax deficiencies. This interest is no longer deductible. (See
"Limitations on the Deductibility of Interest.")
Audits are conducted at the partnership level in a single proceeding rather
than in separate proceedings with each partner. Notice of commencement of an
audit is provided only to the designated "Tax Matters Participant" and to
partners owning greater than a 1% interest in the partnership and to partners
who form a group representing at least a 5% interest in the partnership. The
Managing Trustee has been designated the Tax Matters Participant for the Trust.
The Managing Trustee will advise all Beneficiaries of the Trust of the
commencement and status of any audit. The Service will generally discuss matters
with the Tax Matters Participant who will be authorized to enter into
settlements which may bind Beneficiaries owning less than a 1% interest in the
Trust unless the Beneficiary files a statement with the Service providing that
the Tax Matters Participant does not have such authority. All Beneficiaries are
entitled to participate in the audit proceeding. Each Participant will be
offered the same settlement terms as every other Participant. In the event that
the results of an audit are disputed by the Tax Matters Participant, the Tax
Matters Participant has the right to file for judicial review of the
administrative
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determination, and, if he files, no other Managing Trustee or Beneficiary may
file, but any may join in the suit. If the Tax Matters Participant does not file
suit, any other Managing Trustee or Beneficiary owning more than a 1% interest
in the Trust may do so or a 5% ownership group may do so, but only the first
suit filed will be allowed to proceed (except that a suit in the Tax Court takes
precedence over suits in other courts), and all Managing Trustees and
Beneficiaries may participate in such suit.
TAX SHELTER REGISTRATION
"Tax shelters" must be registered with the Service. Each tax shelter is
given a registration number and any limited partner claiming any deduction or
other tax benefit attributable to the tax shelter must include a tax shelter
registration number on his tax return. Monetary penalties are imposed for
failure to register a tax shelter or to disclose the registration number on a
tax return. For purposes of this registration requirement, a tax shelter is an
offering where, among other things, the aggregate amount of deductions plus 350%
of the amount of tax credits exceed twice the amount of the cash invested. The
Managing Trustee believes that the Trust will not generate aggregate gross
deductions plus 350% of the amount of tax credits in an amount which will exceed
twice the amount of cash invested during the relevant period. Accordingly, the
Trust will not be deemed to be a tax shelter for this purpose and will not be
registered with the Service as a tax shelter.
TRUSTS AS INVESTORS
In general, a grantor trust (a trust with respect to which the settlor is
treated as the owner because of certain retained rights such as the right to
revoke the trust or to receive or direct receipt of its income) or other trust
established for personal planning purposes will be treated for tax purposes as
if the grantor were the owner of the trust's assets, while a trust with multiple
beneficiaries which operates in the manner of an active business enterprise or
which engages in several activities is likely to be treated as a corporation.
Since limited partners are generally held to be engaged in the trade or business
in which a partnership is engaged, an investment in the Trust by this type of
trust may result in the trust being treated as a corporation.
Any trust which is considering purchasing Interests should consider the
issue of whether the investment would cause the trust to be treated as an
association taxable as a corporation. According to the Regulations, the
determination of whether an entity formed as a trust will be treated as a trust
or as an association depends on whether there are associates and an objective to
carry on business and divide the gains therefrom. Treatment as a corporation
would mean that the trust will be taxed at corporate rates at the trust level,
whether or not income is distributed to beneficiaries, and cash distributions to
beneficiaries would be treated as dividends.
Because of the complex tax issues involved, the resolution of which is
likely to depend on the specific characteristics of the trust, potential
investors considering investment through a trust are urged to consult with their
own tax advisors prior to investing in the Interests.
INVESTMENT BY FOREIGN BENEFICIARIES
The United States income tax treatment applicable to a Foreign Beneficiary
that invests in the Trust is complex and will vary based on the particular
circumstances applicable to such Foreign Beneficiary. Foreign Beneficiaries are
urged to consult with their own tax counsel regarding the United States and
foreign tax effects of an investment in the Trust.
TAXATION OF FOREIGN BENEFICIARIES-GENERAL. Non-resident aliens are defined
in Section 7701(b)(1)(B) of the Code to mean individuals that are neither
citizens nor residents of the United States. Non-resident aliens and foreign
corporations are generally subject to United States taxation to the following
extent: (1) at the rate of 30% of the amount received as interest, dividends,
rents, annuities and other fixed or determinable gains, profits and income
(other than capital gains of non-resident aliens) to
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the extent that the amount received is not effectively connected with the
conduct of a trade or business in the United States; (2) in the case of
non-resident aliens physically present in the United States for 183 days or more
during the taxable year only, at the rate of 30% on net capital gains to the
extent such gains would be recognized and taken into account if they were
effectively connected with the conduct of a trade or business in the United
States; and (3) at the graduated rates applicable to United States citizens or
corporations under the regular tax or alternative minimum tax to the extent of
taxable income which is effectively connected with the conduct of a trade or
business within the United States.
Section 864(c) of the Code sets forth the rules for determining whether
income is effectively connected with the conduct of a trade or business in the
United States. In the case of a non-resident alien or foreign corporation
engaged in a trade or business in the United States (and, assuming that the
Trust was engaged in a trade or business, each Foreign Beneficiary would be
deemed to be so engaged by virtue of being a Participant of the Trust, see
Section 875(a) of the Code), the general rules provide that the factors to be
taken into account are whether (1) the income is derived from assets used in the
conduct of a trade or business or (2) the activities of a trade or business were
a material factor in the realization of the income. Since the Trust is a United
States business trust with a principal place of business in the United States,
and since the Assets will be used predominantly in the United States, it is
expected that substantially all the income and loss of the Trust will be treated
as effectively connected with the conduct of a trade or business in the United
States.
In the event that the Trust were deemed not to be engaged in a trade or
business, a Foreign Beneficiary would be subject to United States tax at the
rate of 30% on such Foreign Beneficiary's proportionate share of gross lease
payments received by the Trust without obtaining any benefit from deductions
available to the Trust, including cost recovery deductions. This 30% gross
income tax would be enforced by a withholding requirement at that rate (unless
reduced by tax treaty with the Foreign Beneficiary's country of residence)
imposed on the Trust. Such a tax imposed on Foreign Beneficiaries would have a
substantial adverse effect on their investment. It is believed that the
activities of the Trust will be substantial enough such that the Trust will be
treated as engaged in a trade or business, and the activity of leasing personal
property has generally been treated by the Service as constituting a trade or
business. See Revenue Ruling 69-278 and Revenue Ruling 78-144. However, it is
possible that the Service could contend that, because the Leases are generally
net leases, the activities of the Trust constitute mere investment rather than a
trade or business.
The Trust will admit Foreign Beneficiaries as Beneficiaries only if the
Managing Trustee receives satisfactory assurances (in the form of a legal
opinion, Service ruling or otherwise), that the Trust will be deemed to be
engaged in a trade or business. If Foreign Beneficiaries are admitted, the Trust
Agreement will contain special provisions relating to the withholding
requirements that will be imposed as a result of having foreign participants as
described under "Withholding on Effectively Connected Income" below. Each
Foreign Beneficiary will be required to indemnify the Managing Trustee and the
Trust for any costs or expenses incurred by the Trust or the Managing Trustee in
connection with the withholding obligations applicable to such Foreign
Beneficiary. In addition, the Managing Trustee has agreed to indemnify the Trust
for any unrecovered costs or expenses the Trust may incur in connection with
such withholding obligations.
WITHHOLDING ON EFFECTIVELY CONNECTED INCOME. Section 1446 of the Code
imposes a requirement on partnerships with foreign partners to withhold and pay
over to the Internal Revenue Service federal income tax on partnership income
which is effectively connected with a United States trade or business which is
allocable to the foreign partner at the highest federal tax rate applicable to
that character of partner. The withholding requirement applies with respect to
taxable income, rather than cash distributions. The Trust will be subject to
this withholding requirement if Foreign Beneficiaries are admitted as
Beneficiaries.
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Under these circumstances, it is anticipated that the Trust will withhold,
with respect to each Foreign Beneficiary, at the rate of 39.6% in the case of
individuals and 35% in the case of corporations, with respect to the taxable
income (subject to certain adjustments) of the Trust allocable to each such
Participant. It is anticipated that the Trust will have sufficient cash
available to effect such withholding and amounts withheld will be treated as
Distributions to the Foreign Beneficiaries, reducing the amount of cash which
will otherwise be distributed directly to them and reducing their Capital
Accounts. In addition, the Trust Agreement specially allocates the costs and
expenses of complying with these withholding requirements to the Foreign
Beneficiaries.
REFUND OF WITHHOLDING. A Foreign Beneficiary on whose behalf funds are paid
over to the Internal Revenue Service under the Section 1446 withholding
requirement is allowed a credit for taxes paid in such amount. In order to
recover any amounts withheld in excess of his or its actual United States tax
liability for the year, the Foreign Beneficiary must file a claim for refund.
However, the Foreign Beneficiary may not claim an early refund under the
estimated tax rules; the refund can only be claimed in connection with the
filing of an annual United States tax return. In order to claim a refund or the
credit against its United States tax liability, the Foreign Beneficiary must
attach the Form 8805 (Foreign Beneficiary's Information Statement of Section
1446 Withholding Tax) it receives from the Trust as proof of withholding by the
Trust.
The withholding provisions of Section 1446 do not eliminate the need for
Foreign Beneficiaries to file United States income tax returns.
BRANCH PROFITS TAX. In addition to the tax liabilities discussed above,
foreign corporations that invest in the Trust will be liable for the "branch
profits tax" imposed by Section 884 of the Code. This tax is imposed at the rate
of 30% of a foreign corporation's "dividend equivalent amount" for the taxable
year. The dividend equivalent amount means, in general, the earnings and profits
of the corporation which are effectively connected with the conduct of a trade
or business in the United States, subject to certain adjustments made for
increases or decreases in "U.S. net equity," the effect of which is to tax the
foreign corporation on United States connected earnings which are not reinvested
in assets connected with a United States trade or business.
SALE OF INTERESTS. Foreign Beneficiaries who sell their Interests will be
subject to United States tax on gain realized on the sale because Section 864(c)
of the Code provides that income and capital gains are treated as effectively
connected with the conduct of a United States trade or business if the
activities of a United States business are a material factor in the realization
of the income, gain or loss. The treatment of gain as ordinary or capital and
the application of Section 751 of the Code is the same for Foreign Beneficiaries
as for United States investors.
Because the sale of Interests by a Foreign Beneficiary creates gain for the
Foreign Investor outside of the Trust (that is, it is not the result of
effectively connected taxable income earned by the Trust and allocated to the
Foreign Beneficiary), the withholding requirements of Section 1446 are not
applicable to such gain.
State and Local Taxes; Foreign Taxes and Treaties. Foreign Beneficiaries may
be subject to tax in various states of the United States in a manner similar to
United States investors.
Additionally, Foreign Beneficiaries may be subject to tax in their country
of residency and possibly other foreign countries. Tax treaties between the
United States and various foreign countries, or foreign countries among
themselves, may affect the tax treatment of Foreign Beneficiaries. It is
possible that tax treaties between the United States and certain foreign
countries could affect some of the matters discussed above. Foreign
Beneficiaries are urged to consult with their international tax advisors with
regard to the international tax aspects of an investment in the Trust.
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POSSIBLE CHANGES IN TAX LAW
Passage of recent tax legislation does not preclude the enactment of further
amendments to the Code (including amendments having a retroactive effect) which
could adversely affect an investment in the Trust. In recent years, there have
been a number of proposals made in Congress, by government agencies and by the
executive branch of the federal government for changes in the federal income tax
laws, and additional proposals may be made in future years. In addition, the
Service has proposed, and may still be considering, many changes in regulations
and procedures. There can be no assurance that future tax legislation would not
adversely affect an investment in the Trust.
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STATE, LOCAL AND FOREIGN TAXES
The Trust may operate in states and localities which impose a tax on the
Trust's assets or income, or on the Managing Trustee, the Special Beneficiary or
each Beneficiary based upon his share of any income derived from the Trusts'
activities in the jurisdiction, and as a result the Trust's operations may
require filing of state or local tax returns in several jurisdictions. This
section makes no attempt to summarize the state tax consequences of owning an
Interest.
ALTHOUGH THE TRUST WILL BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES, THERE CAN BE NO ASSURANCE THAT IT WILL BE TREATED AS A PARTNERSHIP FOR
STATE AND LOCAL TAX PURPOSES. PEABODY & BROWN HAS NOT REVIEWED THE LAWS OF THE
INDIVIDUAL STATES AND CRITERIA FOR PARTNERSHIP CLASSIFICATION FOR STATE AND
LOCAL TAX PURPOSES CAN BE SUBSTANTIALLY DIFFERENT FROM THE CRITERIA EMPLOYED FOR
FEDERAL INCOME TAX PURPOSES. CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE
TRUST WILL NOT BE TREATED AND TAXED AS A CORPORATION OR TRUST FOR STATE AND
LOCAL TAX PURPOSES. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS TAX
ADVISOR WITH RESPECT TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
THE TRUST.
Beneficiaries may incur tax obligations and be subject to filing
requirements in foreign countries due to the operation of Assets in foreign
countries and/or the leasing of Assets to foreign lessees. If Assets are leased
for use outside the United States, a foreign jurisdiction may impose a
withholding or other tax on rental income. Incidence of any foreign taxes will
depend upon the specific tax laws of any foreign jurisdiction where Assets are
used and upon the possible interaction of tax treaties between the United States
and the foreign jurisdiction. A Beneficiary may be entitled to a credit against
his U.S. tax liability for his share of the amount of tax paid to the foreign
jurisdiction. Generally, the credit is limited to the U.S. tax that would be
imposed on the foreign income and the excess of credits over the U.S. tax will
not be credited against income allocable to the United States. This limit may
apply since the effective foreign tax rate on rental income may exceed the
Beneficiary's effective U.S. tax rate on the same income. A Beneficiary may, in
lieu of electing the tax credit, choose to deduct any foreign taxes, but a
Beneficiary must either deduct or credit all foreign taxes accrued within the
taxable year. Any Beneficiary with potential foreign tax liability on income
from other sources should contact his tax advisor regarding the effect of these
rules.
THIS ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
ACCORDINGLY, PROSPECTIVE BENEFICIARIES ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THEIR OWN TAX SITUATION AND THE STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THIS INVESTMENT.
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SUMMARY OF THE TRUST AGREEMENT
The Declaration of Trust for the Trust will be amended and restated as of
the Closing (as so amended and restated, the "Trust Agreement") and will be
executed by the Special Beneficiary and the Delaware Trustee and by the Managing
Trustee on behalf of itself and its attorney-in-fact for the Class A
Beneficiaries and Class B Beneficiaries (collectively, the "Beneficiaries").
The Trust Agreement, as so restated, provides for the issuance of the Class
B Subordinated Interests (see "Additional Class of Interest") and permits the
Trust to offer to redeem outstanding Interests at such times, in such amounts,
in such manner and such prices as the Managing Trustee of the Trust may
determine from time to time (see "Special Redemption Provisions"). These
amendments were recently approved by majority interest of the Class A Investors.
The rights and obligations of the Trustees, the Class A Beneficiaries, the
Class B Beneficiaries and the Special Beneficiary in the Trust will be governed
by the Trust Agreement. The following statements and other statements in this
Prospectus concerning the Trust Agreement do not purport to be complete and
merely outline, and in no way modify or amend, the Trust Agreement. This
description is qualified in its entirety by specific reference to the Trust
Agreement which is included as an exhibit to the Registration Statement. (A copy
of the Trust Agreement will be given to all prospective investors upon request.)
SPECIAL REDEMPTION PROVISIONS
The Trust shall have the right to purchase and redeem Interests at such
times, in such amounts, in such manner and at such prices as the Managing
Trustee may determine from time to time in its sole discretion; provided,
however, that any such purchase and redemption shall not be in violation of any
applicable legal requirements, shall not result in the termination under the
Code of the Trust or of its status as an entity taxable as a partnership, shall
not result in the Trust being treated as a publicly traded partnership, shall
not cause the Trust to be deemed an "investment company" pursuant to the
provisions of the Investment Company Act of 1940 and shall not cause the Assets
of the Trust to be considered "plan assets" under ERISA and the regulations
thereunder. Subject to the foregoing, the Managing Trustee intends to use a
portion of the proceeds of the Offering to Redeem a portion of the Class A
Interests. The Class B Subordinated Interests are not expected to be redeemed.
ADDITIONAL CLASS OF INTEREST
The Trust Agreement was recently amended to give the Managing Trustee the
right to authorize the Trust to issue an additional class of interest (or other
securities) with any designations, preferences and relative, participating
optional or other special rights, including special voting rights as shall be
fixed by the Managing Trustee. The Class B Subordinated Interests are being
issued in accordance with this authority.
THE TRUSTEES
The number of Trustees of the Trust shall not be less than two nor more than
four and shall be fixed from time to time by the Managing Trustee. Initially,
there will be two Trustees. One Trustee shall be designated the Managing Trustee
and one Trustee shall be designated the Delaware Trustee. The Managing Trustee
is AFG ASIT Corporation and the Delaware Trustee is Wilmington Trust Company.
The Managing Trustee shall devote so much of its time as may be necessary to
carry out the purposes and conduct the business of the Trust in accordance with
the Trust Agreement and carry out its duties as Managing Trustee under the Trust
Agreement.
RESPONSIBILITIES AND LIABILITIES OF THE MANAGING TRUSTEE
Except as expressly limited by the Trust Agreement, the Managing Trustee
shall have complete and exclusive discretion in the management and control of
the affairs and business of the Trust and all powers
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necessary, convenient or appropriate to carry out the business and exercise the
powers of the Trust. In the course of management of the Trust, the Managing
Trustee may, in its discretion, buy, sell, lease, exchange and otherwise deal in
the Assets and interests in the Assets when and upon such terms as it determines
to be in the best interests of the Trust, and shall employ other Persons (such
as the Advisor) to perform equipment management, legal, accounting, appraisal
and other advisory services for the Trust. The Managing Trustee, when acting in
such capacity, shall be personally liable for the acts, omissions or obligations
of the Trust, except as may be provided to the contrary in any contractual
agreement of the Trust.
RESIGNATION OF THE MANAGING TRUSTEE
During the term of the Trust, the Managing Trustee may not Resign from the
Trust unless:
(1) the Trust Beneficiaries have received 60 days' advance written
notice of the Managing Trustee's intention to Resign;
(2) the Trust has received an opinion of Trust Counsel to the effect
that such Resignation will not constitute a termination of the Trust or
otherwise materially adversely affect the status of the Trust as an entity
taxable as a partnership for federal income tax purposes; and
(3) a new Managing Trustee has been selected who or which (a) shall have
expressed a willingness to become (and shall in fact duly become) the
Substitute Managing Trustee, (b) shall satisfy the then applicable
provisions of the Code and any applicable procedures, regulations, rules and
rulings thereunder, so that the Trust shall be classified as a partnership
for federal income tax purposes, and (c) shall have received the specific
written Consent to such admission of a Majority in Interest of the
Beneficiaries.
If the Managing Trustee dissolves, terminates, is adjudicated bankrupt, or
otherwise becomes incapable of performing the duties or exercising the
responsibilities of the Managing Trustee, or is removed pursuant to a vote of
the Beneficiaries in accordance with Article XI of the Trust Agreement, the
Managing Trustee shall be deemed to have been removed as a Trustee upon the date
of such occurrence. In the event of the Managing Trustee's removal or
resignation from any one or more of the Trusts, it will transfer its Managing
Trustee Interest to any Substitute Managing Trustee for consideration equal to
86.5% of the fair market value of that portion of its Managing Trustee Interest
transferred.
INDEMNIFICATION OF MANAGING TRUSTEE
The Trust is required to indemnify the Managing Trustee and its Affiliates
for any expenses reasonably incurred by them in any action, suit or proceeding
to which they are a party by reason of the fact that they are or were performing
their duties under the Trust Agreement, provided such persons were acting on
behalf of, or in the course of performing services for, the Trust, such persons
determined, in good faith, that such course of conduct was in the best interests
of the Trust, such conduct did not constitute misconduct or negligence and any
amounts payable are recoverable only out of the assets of the Trust. The Trust
may not indemnify the Managing Trustee or such other persons for any action
arising from a violation of the federal or state securities laws, rules or
regulations, unless certain conditions are satisfied, as set forth in the Trust
Agreement. In addition, each Trust Agreement contains provisions limiting the
personal liability of the Delaware Trustee and Affiliates of the Managing
Trustee. (See "FIDUCIARY RESPONSIBILITY--Indemnification of Trustees and Their
Affiliates.")
CERTAIN RIGHTS OF MANAGING TRUSTEE WITH RESPECT TO THE INTERESTS
The Managing Trustee, without the Consent of any Beneficiary, may impose
restrictions on the transferability of Interests and may take other actions with
respect to the manner in which Interests are transferred as it deems necessary
or appropriate in order to preserve the status of the Trust as an entity
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taxable as a partnership for federal income tax purposes, to prevent the Trust
from being terminated for federal income tax purposes, or to prevent the Trust
from being treated as a publicly traded partnership. In purchasing the
Interests, each Beneficiary grants to the Managing Trustee a power of attorney
to amend the Trust Agreement to accomplish the foregoing.
LIABILITY OF THE BENEFICIARIES
Under the Trust Agreement and the Delaware Business Trust Act (the "Business
Trust Act"), the Beneficiaries and the Special Beneficiary shall be entitled to
the same limitation on personal liability extended to corporate stockholders of
Delaware corporations. Accordingly, except to the extent of their Capital
Contributions and that Foreign Beneficiaries may have liability to the Managing
Trustee and the Trusts as described below, the Beneficiaries are not responsible
for a Trust's obligations. However, a Trust Beneficiary may be liable to the
Trust for an amount equal to any Distribution made to such Trust Beneficiary if,
after the Distribution is made, the then fair market value of the remaining
assets of the Trust is not sufficient to pay its then outstanding liabilities.
The principles of law governing the limitation of liability of beneficiaries
of a business trust have not been authoritatively established as to business
trusts organized under the law of one jurisdiction but operating or owning
property, incurring obligations or having beneficiaries resident in other
jurisdictions. Accordingly, there is the risk that the limited liability of the
Trust Beneficiaries will not be respected in certain jurisdictions. (See "RISK
FACTORS--Limited Liability of Beneficiaries is Not Clearly Established.")
Under the Trust Agreement, each Beneficiary who is a Foreign Beneficiary
will be required to indemnify the Trust and the Managing Trustee for any costs
or expenses incurred by the Trust or the Managing Trustee in connection with the
withholding requirements applicable to Foreign Beneficiaries under Sections
1441, 1442 and 1446 of the Code. (See "FEDERAL TAX CONSIDERATIONS -- Investment
by Foreign Beneficiaries".)
VOTING RIGHTS
Beneficiaries and the Special Beneficiary have no right to participate in
the management or control of a Trust's business. However, the Trust Agreement
does grant limited voting rights to the Beneficiaries. Each Class A Beneficiary
and Class B Beneficiary is entitled to cast one vote for each Interest owned by
him. The Managing Trustee and its Affiliates, including the Special Beneficiary,
will have voting rights with respect to any Interests owned by them; provided
that the Managing Trustee and its Affiliates may not vote their Class A
Interests with respect to their compensation pursuant to the Trust Agreement or
regarding any transaction between the Trust and the Managing Trustee or its
Affiliates. The Special Beneficiary, however, will have the right to vote any
Class B Subordinated Interests acquired by it with respect to any matter
regarding the Trust, including voting on the withdrawal or removal of the
Managing Trustee.
Under the Trust Agreement, a Majority in Interest of the Beneficiaries (as
such term is defined below) may (1) amend the Trust Agreement, subject to
certain limitations described below under "Amendment of the Trust Agreement",
(2) remove the Managing Trustee and elect a replacement therefor, (3) terminate
the Trust, or (4) approve or disapprove the sale of all or substantially all the
Assets and other assets of the Trust in a single sale or in multiple sales in
the same 12-month period except in the orderly liquidation and winding up of the
business of the Trust upon its termination and dissolution. (See "RISK FACTORS
- -- Limited Liability of Beneficiaries is Not Clearly Established.")
The term "Majority Consent" means the Consent of Beneficiaries holding more
than 50% in the aggregate of the Class A Interests and the Class B Subordinated
Interests held by all Beneficiaries; provided, however, that in cases where a
Class A Beneficiary who is also a Managing Trustee or an Affiliate thereof is
not entitled to participate in the Consents or votes of the Beneficiaries, the
foregoing calculation shall exclude the Interests owned by such Beneficiary.
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MEETINGS
The Managing Trustee may at any time call a meeting of the Beneficiaries and
is required to call such a meeting following receipt of a written request signed
by Beneficiaries owning 10% or more of the Interests in the aggregate held by
all Beneficiaries as of the date of the written request. The Trust does not
intend to hold annual or other periodic meetings of Beneficiaries. The Managing
Trustee may call for a vote without a meeting.
AMENDMENT OF THE TRUST AGREEMENT
If an amendment to the Trust Agreement is proposed by the Managing Trustee
or by a Majority in Interest of the Beneficiaries as explained above under
"Voting Rights", the Managing Trustee is required to submit to the Beneficiaries
a statement of the proposed amendment and its purpose. The Managing Trustee may
also include in such submission its recommendations as to the proposed
amendment. Upon obtaining Majority Consent, such amendments shall take effect,
except that no such amendment shall increase the liability of any Participant or
adversely affect any Participant's share of Distributions or allocations of
Profits or Losses without, in each case, the approval of the Participant
involved.
A Majority in Interest of the Beneficiaries, without the concurrence of the
Trustees, may (a) amend the Trust Agreement, subject to the provisions of the
Trust Agreement governing voting rights and to the conditions that such
amendment (i) may not cause the Beneficiaries to lose the limited liability
accorded them by the Business Trust Act and (ii) may not, without the specific
written consent of the Managing Trustee (which may not be unreasonably
withheld), add to the duties or diminish the rights of the Managing Trustee or
its Affiliates as set forth in the Trust Agreement or reduce the compensation to
which the Managing Trustee and its Affiliates are entitled for services to be
provided under the Trust Agreement, (b) terminate the Trust, (c) remove the
Managing Trustee and elect a replacement therefor, and (d) approve or disapprove
the sale of all or substantially all of the Assets of the Trust in a single sale
or in multiple sales in the same 12-month period, except in the orderly
liquidation and winding up of the business of the Trust upon its termination and
dissolution.
The Managing Trustee has the right, without prior notice to, or the Consent
of, any Beneficiary, to (i) add to the representations, duties and obligations
of the Managing Trustee or surrender any rights or powers granted to it under
the Trust Agreement for the benefit of the Beneficiaries; (ii) preserve the
status of the Trust as an entity taxable as a partnership for federal income tax
purposes; (iii) correct any mistake, omission or inconsistency or cure
ambiguities or make any other provisions in the Trust Agreement for the benefit
of the Beneficiaries; (iv) delete or add provisions to the Trust Agreement
required by the Securities and Exchange Commission or other federal agencies,
the National Association of Securities Dealers, Inc., or any state "Blue Sky
Commission" or other state agency or any judicial authority or similar such
official; (v) permit the Interests to fall within an exemption from the
definition of "plan assets" contained in Section 2510.3-101 of Title 29 of the
Code of Federal Regulations; (vi) effect amendments contemplated under Sections
4.2(a)(viii), 4.2(a)(x) or 8.5(b) of the Trust Agreement or as may be necessary
to effect the provisions of Section 9.5 of the Trust Agreement; and (vii) make
any other amendments which do not adversely affect the rights of the
Beneficiaries. The Managing Trustee may not amend the Trust Agreement to change
the voting rights of the Beneficiaries without Majority Consent, unless such a
change is necessary to preserve the status of the Trust as a partnership for
federal income tax purposes or to conform to any operative case law that
establishes in the opinion of Trust Counsel that such change is necessary to
maintain limited liability of the Beneficiaries for purposes of the Business
Trust Act.
TRANSFERABILITY OF INTERESTS
Subject to significant restrictions on transferability of Interests
contained in each Trust Agreement (summarized below) to prevent treatment of the
Trust as a "publicly traded partnership" taxable as a corporation and the right
of the Managing Trustee to place certain additional restrictions on the
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transferability of Interests as described above under "Certain Rights of
Managing Trustee with Respect to the Interests", each Beneficiary may transfer
all or a portion of his Class B Subordinated Interests (but not fewer than the
Minimum Investment Amount) to another Person (the "Transferee"), upon
satisfaction of the following conditions: (i) the Managing Trustee consents to
the transfer; (ii) the Transferee delivers to the Managing Trustee at least 15
days in advance of the effective date of the transfer a duly executed and
completed transfer application, in a form satisfactory to the Managing Trustee,
in which the Transferee agrees to be bound by the Trust Agreement and makes
various representations, including whether or not he is an Eligible Citizen;
(iii) the Transferee satisfies the investor suitability standards applicable to
the original offering; (iv) the transfer complies with all applicable laws and
regulations; (v) the Transferee executes a power of attorney described below;
and (vi) the Transferee pays a transfer fee not to exceed $100 per transfer to
cover the expenses incurred in connection therewith. The Trust Agreement
provides that Class B Subordinated Interests may not be transferred under a
number of circumstances, including unless the Managing Trustee shall give its
express written consent, if the transfer would cause the assets of the Trust to
be considered "plan assets" under ERISA and the regulations thereunder, the
transfer would cause the Trust to fail to qualify under the "safe harbor" tests
for treatment as other than a "publicly traded partnership" or the transfer
would adversely affect the registration of any aircraft registered with the FAA
or the documentation of any vessel documented under the laws of the United
States. (See "INVESTORS SUITABILITY STANDARDS," "FEDERAL TAX
CONSIDERATIONS--Trust Status: Free Transferability of Interests" and "ERISA AND
OTHER CONSIDERATIONS.")
The transfer of Class B Subordinated Interests does not require the consent
of any other Beneficiary. Transferees of Interests will be recognized monthly as
of the first day of the calendar month following the month in which Interests
are transferred to them for purposes of prospective Distributions and
allocations of Profits and Losses. Since Distributions are made on a monthly
basis, any Beneficiary who transfers his Interests prior to the end of the
fiscal month in which the transfer is recognized must take into account in
establishing the sale price for his Interests that the transferor (not the
transferee) will receive such Distributions when made by the Trust prior to the
recognition of the transfer. The rights of a Transferee who does not become a
Substitute Beneficiary (as provided below) will be limited to the receipt of his
share of Profits, Losses and Distributions, as determined under each Trust
Agreement.
Until the transfer of the Interests has been registered on the books of the
Trust, the Trust will continue to treat the owner of record of the Interests as
the absolute owner for all purposes. The transfer of Interests may result in
adverse federal income tax consequences, including the recognition of income in
excess of cash received. Beneficiaries are advised to consult their tax advisors
prior to requesting a transfer of Interests.
Pursuant to the terms of the Subscription Agreement or transfer application,
each Beneficiary or Transferee will be required to appoint the Managing Trustee
as his attorney-in-fact to make, execute, file and/or record: (i) documents
relating to the Trust and its business operations required by or appropriate
under the laws of any jurisdiction; (ii) any amendments to the Trust Agreement
which the Managing Trustee is authorized to make as described under "SUMMARY OF
TRUST AGREEMENT--Amendment of the Trust Agreement;" and (iii) all other
instruments deemed necessary or appropriate by the Managing Trustee to carry out
the provisions of the Trust Agreement.
A Transferee may become a Substitute Class B Beneficiary if all of the
following conditions are met: (i) the Interests were transferred in accordance
with the provisions outlined above; (ii) the Managing Trustee consents in
writing to such substitution (which consent may be withheld for any reason in
the sole discretion of the Managing Trustee); (iii) the Transferee executes an
instrument reasonably satisfactory to the Managing Trustee accepting and
adopting the terms and provisions of the Trust Agreement; and (iv) in the case
of transfers other than by operation of law, the transferor states his intention
in writing to have his Transferee become a Substitute Beneficiary. If such
conditions are met, a Transferee will become a Substitute Beneficiary within 30
days after the Managing Trustee consents to the admission of the Substitute
Beneficiary (the "Recording Date"). The records of the Trusts shall be amended
to reflect any
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such substitution on or prior to the Recording Date; provided, however, that the
records of the Trust shall be amended at least once each calendar quarter to
reflect the admission of Substitute Beneficiaries. "ATTENTION CALIFORNIA
RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
CHANGE OF STATUS OF BENEFICIARY
In the event that (i) the Managing Trustee determines that a Beneficiary or
a Person for whom a Beneficiary is acting as nominee who has previously
represented to the Trust that he is an Eligible Citizen is no longer an Eligible
Citizen or (ii) the Beneficiary fails to certify his citizenship to the Managing
Trustee at the time that he acquires his Interests, the Managing Trustee may
require that the status of the Beneficiary be changed to that of a "Non-Eligible
Beneficiary". In the event that the number of Non-Eligible Beneficiaries exceeds
80% of the maximum number of non-eligible Persons permitted to be Trust
Beneficiaries pursuant to applicable laws and regulations governing the
registration of any Asset owned by the Trust, the Managing Trustee may, in its
sole discretion, expend Trust assets to redeem the Interests of the Non-Eligible
Beneficiaries. Any such Interests redeemed shall be redeemed by the Trust at a
price equal to 80% of the Non-Eligible Beneficiary's original Capital
Contribution as reduced by any amounts returned to the Non-Eligible Beneficiary
as uninvested Capital Contributions, minus all Distributions made to the
Non-Eligible Beneficiary, pro-rated by the number of Interests redeemed.
DISTRIBUTIONS AND ALLOCATIONS
A summary of the Trust Agreement provisions relating to cash distributions
and allocations of Profits and Losses is contained in the section entitled
"Trust Distributions and Allocations."
OTHER TRANSACTIONS INVOLVING THE MANAGING TRUSTEE AND ITS AFFILIATES
Except as specifically permitted by the Trust Agreement, the Managing
Trustee is prohibited from entering into any agreements, contracts or
arrangements on behalf of a Trust with the Advisor or any of its Affiliates
(including the Managing Trustee itself). Further, in connection with any
agreement entered into by a Trust with the Advisor or any Affiliate, no rebates
or "give-ups" may be received by the Advisor or any such Affiliate, nor may the
Advisor or any such Affiliate participate in any reciprocal business
arrangements which would have the effect of circumventing any of the provisions
of the Trust Agreement.
NO WITHDRAWAL OF CAPITAL
No Trust Beneficiary has the right to request withdrawal of his capital from
a Trust. No Trust Beneficiary is entitled to demand or receive any return of his
capital. No Trust Beneficiary has any priority over any other Beneficiary as to
the return of his capital.
ROLL-UP
The Trusts may not participate in any proposed Roll-Up (generally defined as
a transaction involving the acquisition, merger, conversion or consolidation of
the Trust and the issuance of securities in a new entity (the "Roll-Up Entity"))
if any of the following conditions are present: (i) the proposed Roll-Up would
result in the Beneficiaries having voting rights in the Roll-Up Entity which are
less than those contained in the Trust Agreement; (ii) the proposed Roll-Up
includes provisions which would materially impede or frustrate the accumulation
of shares by any purchaser of the securities in the Roll-Up Entity (except to
the minimum extent necessary to preserve the tax status of the Roll-Up Entity);
(iii) the proposed Roll-Up would limit the ability of a Beneficiary to exercise
the voting rights of his securities of
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the Roll-Up Entity on the basis of the number of Interests held by the
Beneficiary; (iv) the Beneficiaries' rights of access to the records of the
Roll-Up Entity will be less than those provided in the Trust Agreement; (v) any
costs of the proposed Roll-Up would be borne by the Trust if the proposed
Roll-Up is not approved by the Beneficiaries; or (vi) the Person sponsoring the
Roll-Up fails to offer the Beneficiaries who vote "no" the choice of (a)
accepting the securities of the Roll-Up Entity; or (b) one of the following: (i)
remaining as Beneficiaries in the Trusts on the same terms and conditions as
previously existed; or (ii) receiving cash in an amount equal to the
Beneficiaries' pro-rata share of the appraised value of the net assets of the
Trust. If the Trust may participate in a proposed Roll-Up, an appraisal of all
assets of the Trust must be obtained from an independent expert. A Roll-Up does
not include a transaction involving the conversion to corporate, trust,
partnership or association form of any single Trust if, as a consequence of the
transaction, there will be no significant change in (a) Beneficiary's voting
rights, (b) the term of the Trust, (c) Sponsor compensation and (d) the
investment objectives of the Trust.
DISSOLUTION
The Trust will continue until December 31 of the eleventh year following its
Closing (i.e., until December 31, 2003). The Trust may be dissolved, and its
affairs wound up at an earlier date if any of the following events occurs: (1)
the withdrawal of the sole Managing Trustee (see "Resignation of the Managing
Trustee", above) unless a Substitute Managing Trustee admitted with Majority
Consent agrees to continue the Trust business; (2) an election to dissolve the
Trust made in writing by the Managing Trustee with Majority Consent, or by vote
of a Majority in Interest of the Beneficiaries without action by the Managing
Trustee; (3) the sale or other disposition of all or substantially all of the
Assets of the Trust unless the Managing Trustee elects to continue the Trust
business for the purpose of the receipt and collection of any other
consideration to be received in exchange for the Assets of the Trust; (4) the
entry of a final decree of dissolution of the Trust by a court of competent
jurisdiction; or (5) any other event which causes the dissolution or winding up
of the Trust under the Business Trust Act.
Upon dissolution of the Trust, the Managing Trustee (or its trustees,
receivers or successors) will proceed with the liquidation of the Trust Assets
(including, without limitation, the sale or other disposition of any remaining
Assets and cancellation of the Certificate of Trust). The net proceeds of
liquidation will first be applied to the payment of all debts and other
obligations of the Trust, and all remaining net proceeds, if any, will be
distributed to the Managing Trustee, the Special Beneficiary and the
Beneficiaries as described under "TRUST DISTRIBUTIONS AND ALLOCATIONS--General."
FISCAL YEAR
Unless the Managing Trustee otherwise determines in the future, the fiscal
year of the Trust will end on December 31 of each year. Should the Managing
Trustee decide to change the fiscal year of any Trust, it will seek to obtain
any required approvals from the Service. If such approval is obtained (or not
then required), the Managing Trustee will give prompt notice to the
Beneficiaries of the change in fiscal year.
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REPORTS TO BENEFICIARIES
The Managing Trustee will furnish to each Class B Beneficiary of record as
of a date specified in each Trust Agreement the following reports pertaining to
Trust operations during each fiscal year:
<TABLE>
<CAPTION>
NAME OF REPORT BASIC CONTENTS WHEN FURNISHED
- --------------------- ------------------------------------------------ ---------------------------------
<S> <C> <C>
Annual Report Audited balance sheet as of the end of such Within 120 days after the end of
fiscal year and statements of operations, each fiscal year
Beneficiaries' equity and cash flows for such
fiscal year, all prepared in accordance with
generally accepted accounting principles and
accompanied by an auditor's report and
statements (which need not be audited) of Cash
From Operations, Distributable Cash From
Operation, Cash From Sales or Refinancings and
Distributable Cash From Sales or Refinancings
and Distributions per Class B Subordinated
Interest.
Quarterly Report Unaudited condensed balance sheet and statements Within 60 days after the end of
of cash flows and operations each of the first three fiscal
quarters of each fiscal year
Tax Information Information reflecting Trust operations for use By March 15 of each year
by Beneficiaries in preparation of federal
income tax returns
</TABLE>
Financial information contained in all reports to Class B Beneficiaries will
be prepared on an accrual basis of accounting in accordance with generally
accepted accounting principles and will include, where applicable, a
reconciliation to the information furnished to Class B Beneficiaries for federal
income tax purposes. The audited financial statements contained in the annual
report will be accompanied by a report of the Accountants.
Each annual and quarterly report will also contain a narrative description
of the Trust's Assets and operations including a description of any material
events with respect to the Trust's revenues, expenses, contractual obligations
or contingent liabilities, the amount of all fees and other compensation paid or
accrued by the Trust to the Managing Trustee and its Affiliates (and a
description of the services rendered or to be rendered by the Managing Trustee
and its Affiliates for such fees), and a description of any new agreements
entered into by the Trust with the Managing Trustee and its Affiliates during
the fiscal period covered in the report.
Beneficiaries are entitled to receive a Form K-1 from EFG on or before April
1 of each year describing Trust activity during the year and setting forth
financial and tax information with respect to the Assets and the Leases.
The Class B Subordinated Interests will be registered under and subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended.
Periodic reports containing financial and other information will be filed with
the Securities and Exchange Commission as required.
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ERISA AND OTHER CONSIDERATIONS
The following discussion summarizes certain material investment concerns
under the Employee Retirement Income Securities Act of 1974, as amended
("ERISA"), which may be relevant to an investment in the Class B Subordinated
Interests by any qualified pension, profit-sharing or stock bonus plan
(including a Keogh Plan) and an IRA (a "Qualified Plan"). These considerations
include, but are not limited to, (i) the impact of fiduciary obligations on an
investment in the Interests, (ii) the risk that the assets of the Trusts might
be deemed "plan assets" under ERISA, (iii) the limitations on transactions
between entities or individuals and Qualified Plans for which they serve as
fiduciaries and (iv) the impact of an investment in the Interests on the
obligation of fiduciaries of certain types of Qualified Plans to determine
annually the "current value" of the assets of such plan. An investment by a
Qualified Plan or other tax-exempt organization will cause such tax-exempt
investor to have "unrelated business taxable income" to the extent the Trust has
taxable income. Because of the complexity of the ERISA regulations and related
considerations, investors which are Qualified Plans are urged to consult with
their tax advisor with regard to an investment in the Interests.
GENERAL
QUALIFIED PLANS OTHER THAN IRA'S. Generally, the fiduciary provisions of
Sections 404, 405 and 406 of ERISA apply to investments made by Qualified Plans.
These sections generally do not prohibit Qualified Plans from investing in any
specific type of investment. ERISA fiduciary requirements can be described in
three basic categories. First, ERISA requires that a fiduciary carry out his
duties solely in the interests of the Qualified Plan participants and
beneficiaries. Accordingly, in considering an investment in the Interests of the
Trust, fiduciaries of a Qualified Plan should consider whether (i) the
investment is in accordance with the documents and instruments governing the
Plan; (ii) the investment provides sufficient diversification and liquidity and
is otherwise prudent; (iii) the investment can be valued annually, if required;
(iv) the investment would result in any prohibited transactions; (v) the Trust
would hold plan assets under ERISA and the Department of Labor regulations; and
(vi) the investment is advisable in view of the unrelated business taxable
income which the Trust expects to generate. (See "FEDERAL TAX
CONSIDERATIONS--Investment by Qualified Pension, Profit-Sharing and Stock Bonus
Plans and Individual Retirement Accounts and by Other Tax-Exempt
Organizations.") An investment may be prudent notwithstanding the existence of
unrelated business taxable income.
Second, ERISA requires that all plan assets be held in trust. Regulations
promulgated by the Department of Labor provide that even if the underlying
assets of an entity in which a plan invests are treated as "plan assets," the
trust requirements will be satisfied if the indicia of ownership in the entity
(the Interests) are held in trust on behalf of the plan by one or more
trustees/custodians. Accordingly, the trustee/custodian of a Qualified Plan
which purchases Interests should retain and hold in trust all indicia of
ownership by such Qualified Plan of its Interests, including the copy of the
Subscription Agreement, the canceled check used to make the purchase and
correspondence from the Managing Trustee confirming the admission of such
Qualified Plan as a Beneficiary.
Third, ERISA imposes strict limitations on the nature of allowed
transactions between a Qualified Plan and its Fiduciaries and other Parties in
Interest. Specifically, ERISA prohibits certain sales and other transactions
between a Qualified Plan and a Party in Interest. Fiduciaries,
trustees/custodians and others acting on behalf of a Qualified Plan should be
aware of the final regulations regarding the prohibition under ERISA with
respect to certain transactions involving "plan assets" and Parties in Interest
including Fiduciaries. (29 C.F.R. Section 2510.3-101.) For equity investments,
the final regulations create the presumption that the underlying assets of an
entity are "plan assets" of the Qualified Plans holding interests therein. This
presumption is termed the "look through" rule. The regulations, however, create
certain exceptions to such presumption. The assets of a partnership will not be
deemed to be "plan assets" if the investment in such partnership satisfies one
of the exemptions provided in the final regulations. The effective dates of the
final regulations are contained in Section 2510.3-101(k)(1), which provides that
the
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final regulations shall generally apply to all "plan asset" determinations made
after March 13, 1987 with respect to plan investments regardless of when those
investments are made. One of the effects of the final regulations is to impose
fiduciary status on certain parties and entities who engage in transactions with
a Qualified Plan.
The final regulations provide an exemption for entities in which the "equity
participation in the entity by benefit plan investors is not significant" Equity
participation is considered to be significant if, immediately after the most
recent acquisition of any equity interest in the entity, 25% or more of the
value of any class of equity interests in the entity is held by benefit plan
investors. This exemption may be applicable to the Trusts because the Managing
Trustee will require that at any time fewer than 25% of the Interests actually
acquired in the Trust will be held by benefit plan investors.
Accordingly, based upon the foregoing and, in particular, assuming that
fewer than 25% of the Interests will be held by benefit plan investors at any
time, under current law the assets of the Trust will not be considered to be
"plan assets" under ERISA.
Nonetheless, in the event that, in the future, whether because of changes in
the law or regulations transfers to Qualified Plans, misrepresentations by
investors or otherwise, either (x) the assets of the Trust would constitute
"plan assets" for purposes of ERISA or (y) the transactions contemplated under
the Trust Agreement would constitute prohibited transactions under ERISA or the
Code and an exemption for such transactions is not obtainable or not sought by
the Managing Trustee from the Department of Labor, Section 4.2(a)(x) of the
Trust Agreement authorizes the Managing Trustee to restructure the Trust's
activities to the extent necessary to comply with any exemption in any final
plan asset regulation adopted by the Department of Labor or any condition which
the Department of Labor might impose as a condition to granting a prohibited
transaction exemption, including, but not limited to, establishing a fixed
percentage of Interests permitted to be held by Qualified Plans or other
tax-exempt Beneficiaries and/or discontinuing sales to such entities after a
given date. It should be noted that the Managing Trustee is not obligated to
seek an exemption from the Department of Labor. The Managing Trustee is
empowered to amend Section 4.2(a)(x) of each Trust Agreement to the extent it
deems necessary or appropriate in order to comply with any applicable federal or
state legislation, rules or regulations enacted or promulgated or administrative
pronouncements or interpretations and/or judicial interpretations thereof after
the date of the Trust Agreement. Any amendment(s) made by the Managing Trustee
under the circumstances described above shall be deemed to be made pursuant to
the fiduciary obligation of the Managing Trustee to the Trust and the
Beneficiaries. In addition, Section 4.2(c)(i) of each Trust Agreement provides
that the Managing Trustee shall have the right, without the Consent of any
Beneficiary, to acquire Interests to the extent required to prevent the assets
of any Trust from being deemed "plan assets" with respect to Beneficiaries which
are Qualified Plans and to prevent a prohibited transaction from occurring under
ERISA, provided that such Interests shall be acquired at fair market value (as
determined by an independent appraiser retained by the Managing Trustee).
Furthermore, each Trust Agreement prohibits the transfer of Interests to any
Person, without the express written consent of the Managing Trustee, if such
transfer would cause the assets of the Trust to be considered "plan assets"
under ERISA and the regulations thereunder.
ERISA and the Code generally prohibit Fiduciaries of a Qualified Plan from
engaging in transactions involving the assets of such Qualified Plan. Under
ERISA and the Code, any person who exercises any authority or control respecting
the management or disposition of the assets of a plan is considered to be a
Fiduciary of such plan (subject to certain exceptions not here relevant). In
order to prevent the Managing Trustee and the Soliciting Dealers from engaging
in a prohibited transaction as a result of being a Fiduciary with respect to any
Qualified Plan which invests in the Trust, the Managing Trustee, the Soliciting
Dealers and their Affiliates are not permitted under applicable law to allow the
purchase of Interests with assets of any Qualified Plan (including a Keogh Plan
or an IRA) if they (i) have investment discretion with respect to such assets or
(ii) regularly give individualized investment advice which is understood will
serve as the primary basis for the investment decisions made with respect to
such assets.
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The purchase of Interests by a Qualified Plan from a Soliciting Dealer who
provides services to the Qualified Plan or who is otherwise a Party in Interest
or "disqualified person" with respect to the Qualified Plan would be a
prohibited transaction under ERISA and the Code unless the conditions of the
Department of Labor Prohibited Transaction Exemption 86-128 ("PTE 86-128") are
met. PTE 86-128 provides that the prohibited transaction restrictions of Section
406(a) of ERISA and the taxes imposed on prohibited transactions by Section 4975
of the Code will not apply to the purchase or sale of a security between an
employee benefit plan (including a Keogh Plan or an IRA) and a broker-dealer
registered under the Securities Exchange Act of 1934 ("Exchange Act") if certain
conditions are satisfied.
Although it is expected that the sale of Interests will comply with the
requirements of PTE 86-128 if the Plan complies with the record-keeping
requirements of the exemption, no assurance can be given that the conditions of
the exemption will be satisfied or that the transactions will not violate
Section 406(b) of ERISA or Section 4975(c)(1)(E) or (f) of the Code.
IRA'S AND EMPLOYER-SPONSORED IRA'S. Although many IRA's are not subject to
Title I of ERISA, IRA's are subject to the prohibited transaction rules of
Section 4975 of the Code which created limitations on transactions between
entities or individuals and Qualified Plans for which they serve as Fiduciaries
as described above. The tax-exempt status of an IRA could be lost if the
investment by the IRA constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Trust engaging in a prohibited
transaction with the individual who established the IRA or his beneficiary.
IRA's are subject to the final "plan asset" regulations discussed above. Thus,
in the event that the assets of the Trusts were to be deemed to be "plan
assets", IRA investors should be cognizant of the fact that the Managing Trustee
would be deemed to be a Fiduciary with regard to the investing IRA and the
limitations such status would impose on any transactions between the investing
IRA and the Managing Trustee.
For IRA's that are not generally subject to Title I of ERISA, the general
fiduciary standards of Sections 404, 405 and 406 of ERISA do not apply. However,
if an individual who is making an investment on behalf of an IRA is considered
to be a trustee/custodian or investment manager, such individual should consider
the general fiduciary requirements or standards to which the fiduciary may be
held under applicable securities laws and common law. If, however, the person
making an investment for the IRA is a custodian, the investment will be
considered to be directed by the IRA owner and thus such fiduciary requirements
will be relieved. Notwithstanding the above, if an IRA is deemed to be part of
an employer-sponsored plan, the IRA will be deemed to be subject to Title I of
ERISA, thus subjecting fiduciaries of such a plan to both the requirements of
Title I of ERISA and Code Section 4975. (See "General-- Qualified Plans Other
Than IRA's" above.)
UNRELATED BUSINESS TAXABLE INCOME
Qualified Plans are generally exempt from taxation except to the extent that
their "unrelated business taxable income" (defined as taxable income
attributable to any trade or business the conduct of which is not substantially
related to the exercise or performance of the Qualified Plan's exempt purpose)
exceeds $1,000 during any taxable year. A Trust's business of leasing personal
property will constitute an unrelated trade or business with respect to a
Qualified Plan and will cause a Qualified Plan to have unrelated business
taxable income to the extent of the Plan's share of the taxable income from
rents under the Leases. (See "FEDERAL TAX CONSIDERATIONS--Investment by
Qualified Pension, Profit-Sharing and Stock Bonus Plans and Individual
Retirement Accounts and by Other Tax Exempt Organizations.") Furthermore, if the
Assets are deemed to be held primarily for sale to customers in the ordinary
course of business (see "FEDERAL TAX CONSIDERATIONS--Sale or Disposition of
Trust Property"), the gain, if any, on disposition of the Assets, as well as any
gain on the sale of Assets which represents recapture of depreciation
deductions, is treated as unrelated business taxable income.
Because Beneficiaries which are Qualified Plans are expected to be allocated
unrelated business taxable income by the Trusts, these Beneficiaries will be
required to file Form 990T to report their
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unrelated business taxable income and pay any tax which is due as a result of
this income. The Managing Trustee has undertaken to identify the amount of the
Trust's income in any year that will be treated as unrelated business taxable
income on the annual tax forms provided to Qualified Plans.
Investors which are Qualified Plans should consult with their own tax
advisors with regard to the application of the unrelated business taxable income
rules.
SUPPLEMENTAL LITERATURE
The Offering is made only by means of this Prospectus. The Trust has not
authorized the use of any supplemental literature in connection with this
Offering. No other written or oral information from any source is authorized for
use in this Offering.
INVESTOR SUITABILITY STANDARDS
GENERAL
Investors subscribing for Interests should give careful consideration to
certain risk factors and other special considerations described under "RISK
FACTORS," including the lack of a public market for Interests and the resulting
long-term nature of an investment in the Interests. The only persons who should
subscribe for Class B Subordinated Interests are those who have adequate
financial means to assume such risks and to provide for their current needs and
personal contingencies and who can afford to bear the full loss of, and who have
no need of short-term liquidity with respect to, their investment. The Managing
Trustee may reject any subscription for Interests for any reason.
TAX-EXEMPT INVESTORS
A Fiduciary or investment manager (as such terms are defined in Section
3(28) of ERISA) of a Qualified Plan or other tax-exempt organization should
consider all risks and investment concerns, including those unrelated to tax
considerations, in deciding whether an investment in Class B Subordinated
Interests is appropriate and economically advantageous for a Qualified Plan or
other tax-exempt organization. An investment by a Qualified Plan or other
tax-exempt organization will cause such tax-exempt investor to have "unrelated
business taxable income" to the extent that a Trust has taxable income. (See
"RISK FACTORS," "FEDERAL TAX CONSIDERATIONS--Investment by Qualified Pension,
Profit-Sharing and Stock Bonus Plans and Individual Retirement Accounts and by
Other Tax-Exempt Organizations" and "ERISA AND OTHER CONSIDERATIONS.")
REPRESENTATIONS AND WARRANTIES
Submission of a Subscription Certificate executed by the subscriber will
constitute the subscriber's agreement to the terms and conditions of the
Subscription Certificate, including all representations and warranties contained
therein. In the Subscription Certificate, a subscriber: (i) represents that he
has received this Prospectus; (ii) represents that he meets the applicable
suitability standards; and any amendments thereto. The Trust and each Trustee
will rely upon such representations and warranties in offering the Class B
Subordinated Interests and administering the Trust.
LEGAL MATTERS
The legality of the Class B Subordinated Interests being offered will be
passed upon for the Trust by Peabody & Brown, Boston, Massachusetts, counsel to
the Trust and the Managing Trustee. As to matters of Delaware law, Peabody &
Brown will rely upon an opinion of counsel from Richards, Layton & Finger,
Wilmington, Delaware.
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EXPERTS
The financial statements of the AFG Investment Trust B at December 31, 1996
and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The summary of federal income tax consequences to the Class B Beneficiaries
appearing herein under "RISK FACTORS--Federal Income Tax Risks," "FEDERAL TAX
CONSIDERATIONS" and "ERISA AND OTHER CONSIDERATIONS," has been reviewed by
Peabody & Brown, Boston, Massachusetts, counsel to the Trust the Managing
Trustee and the Special Beneficiary, and has been included herein, to the extent
such summary involves matters of law, in reliance upon the authority of said
firm as expert thereon.
ADDITIONAL INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by the
Trust can be inspected and copied at the public reference facilities maintained
by the Commission at Judiciary Plaza, 450 Fifth Street NW, Room 1024,
Washington, D.C. 20549, and at the Regional Offices of the Commission at Room
1400, 75 Park Place, New York, New York 10007, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, and copies of such materials can be
obtained from the Public Reference Section of the Commission at the above
address in Washington, D.C. at prescribed rates. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the commission.
The address of such Web site is http://www.sec.gov.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which have been filed
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, Washington, D.C., and to which reference is hereby made for further
information relating to the Offering. Copies of the Registration Statement and
exhibits may be obtained from the Securities and Exchange Commission,
Washington, D.C., upon payment of the fee prescribed by the Commission or may be
examined without charge at the offices of the Commission's public reference
section.
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GLOSSARY
As used in this Prospectus, the following terms have the following meanings:
"Accountants" means Ernst & Young LLP, Boston, Massachusetts, or another
nationally recognized firm of independent accountants selected for the Trust by
the Managing Trustee.
"Acquisition Expenses" means expenses (other than Acquisition Fees) incurred
by any party attributable to selection and acquisition of Assets, whether or not
acquired, including but not limited to legal fees and expenses, travel and
communication expenses, costs of credit reports and appraisals, non-refundable
option payments and accounting fees and expenses; provided, however, that
Acquisition Expenses will not include any expenses described in the Trust
Agreement that relate to the operation of the Trust rather than the selection
and acquisition of Assets; and provided, further, that Acquisition Expenses will
not include any expenses paid by an Affiliate of the Managing Trustee for which
such Affiliate does not receive any reimbursement from the Trust.
"Acquisition Fee" means any fee or commission paid by any party in
connection with the selection, purchase, evaluation, construction, acquisition,
initial leasing or operation, and initial arrangement for leasing or placing in
service of any Asset by the Trust, however designated and however treated for
tax or accounting purposes, but not including any Acquisition Expenses.
"Adjusted Class A Investment" means, on an aggregate basis for all Class A
Interests, an amount equal to (a) the sum of (i) $25 per Class A Interest owned
by all Class A Beneficiaries and (ii) the amount by which all Distributions made
to the Class A Beneficiaries in the aggregate until Class A Payout are less than
the Cumulative Annual Distribution minus (b) the sum of (i) the amount by which
all Distributions made to the Class A Beneficiaries in the aggregate until Class
A Payout exceed the Cumulative Annual Distribution and (ii) all uninvested
Capital Contributions which have been returned to the Class A Beneficiaries
pursuant to the Trust Agreement.
"Advisor" means EFG, together with its successor and assigns as advisor
under the Advisory Agreement.
"Advisory Agreement" means the agreement between the Advisor and the Trust
pursuant to which the Advisor will provide certain management and advisory
services for the Trust.
"Affiliate" means, when used with reference to a specific Person, (i) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is an officer, director, or partner in, the specified Person or
of which the specified Person is an officer, director or partner, (iii) any
Person that is the beneficial owner of, or controls, 10% or more of any class of
voting securities of, the specified Person.
"AFG Investment Trusts" means, collectively, AFG Investment Trust A, AFG
Investment Trust B, AFG Investment Trust C and AFG Investment Trust D.
"Asset" means, collectively, any real or personal property, including
equipment and related tangible property, acquired by the Trust and any interest
of the Trust therein, whether directly or indirectly through a nominee, Joint
Venture or otherwise.
"Asset Base Price" means the amount paid by the Trust to the seller of an
Asset for such Asset, which shall be (i) the manufacturer's invoice cost to the
Trust if the Asset is acquired directly from the manufacturer, (ii) if the Asset
is acquired from a seller who is not the manufacturer and not the Managing
Trustee or an Affiliate thereof, the lower of (a) the price invoiced by such
seller or (b) fair market value as determined by the Managing Trustee in its
best judgment, or (iii) if acquired from the Managing Trustee or an Affiliate
thereof, the lower of (a) the price paid by such seller plus all reasonable,
necessary and actual costs accrued in maintaining the Asset (including, without
limitation, the cost of storage, carrying, warehousing, interest cost, repair,
marketing, financing, and taxes from the date of acquisition thereof) less
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the amount of primary term lease rentals accrued from the date of acquisition
thereof and retained by the Managing Trustee or an Affiliate thereof from
leasing the Asset or (b) fair market value as determined by the Managing Trustee
in its best judgment, including in each case described in (i), (ii) and (iii)
the amounts of all liens and encumbrances on the Asset and all reasonable,
necessary, and actual expenses of the seller incurred in connection with
acquiring and transferring the Asset to the Trust (including but not limited to
all financing expenses, sales taxes, delivery charges and attorneys' fees paid
to or on behalf of third parties) but not including any Acquisition Fees or
Acquisition Expenses. In no event, however, shall any of the expense items
described herein be included in the Asset Base Price for any Asset (i) which
cannot be included consistent with generally accepted accounting principles or
(ii) which is not actually acquired by the Trust.
"Asset Management Fee" means the fee payable to the Advisor for managing the
leasing, financing and re-financing of Assets.
"Assign" means, with respect to any Interest or any part thereof, to sell,
assign, transfer, give, or otherwise dispose of, whether voluntarily or by
operation of law, except that in the case of a bona fide pledge or other
hypothecation, no Assignment shall be deemed to have occurred unless and until
the secured party has exercised his right of foreclosure with respect thereto.
"Assignment" means any transaction in which an Interest or any part thereof
is Assigned.
"Asset Management" means personnel and services necessary to the leasing
activities of the Trusts, including but not limited to, leasing and re-leasing
of Assets, collecting revenues, paying operating expenses, determining that the
Assets are used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of the
Assets.
"Beneficiary" means the owner of a Beneficiary Interest and shall include
the Class A Beneficiaries and the Class B Beneficiaries. As used in this
Prospectus, the term "Beneficiary" does not include the Special Beneficiary.
"Beneficiary Interest" means the beneficial interest of a Beneficiary in the
Trust created pursuant to the Trust Agreement.
"Business Trust Act" means the Delaware Business Trust Act, as amended from
time to time.
"Capital Account" means the capital account of the Managing Trustee, the
Special Beneficiary and each Beneficiary established and maintained in
accordance with the Trust Agreement.
"Capital Contribution" means the total amount of money actually contributed
to the Trust by each Participant (or any prior Participant) prior to the
deduction of any organization and offering expenses or selling commissions.
"Cash from Operations" means the cash provided by the Trust's normal
operations (including Lease renewals and without deduction for depreciation or
other non-cash charges) after the general expenses and current liabilities of
the Trust (other than any portion of the Asset Management Fee which is required
to be accrued and the Subordinated Resale Fee) are paid and discharged, as
reduced by any reserves funded from such cash for working capital and contingent
liabilities to the extent deemed reasonable by the Managing Trustee and as
increased by any portion of such reserves deemed by the Managing Trustee not to
be required for Trust operations. Cash from Operations does not include any Cash
from Sales or Refinancings.
"Cash From Sales or Refinancings" means the cash received by the Trust as a
result of Sale or Refinancing transactions (including insurance proceeds or
Lessee indemnity payments arising from the loss or destruction of Assets), as
(i) reduced by (a) all debts and liabilities of the Trust required to be paid as
a result of Sale or Refinancing transactions, whether or not then payable,
(including without limitation, any liabilities on an Asset sold which are not
assumed by the buyer and any remarketing fees required to be
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paid to Persons not affiliated with the Managing Trustee but not including any
Subordinated Resale Fee whether or not then due and payable) and (b) general
expenses and current liabilities of the Trust (other than any portion of the
Asset Management Fee which is required to be accrued and the Subordinated Resale
Fee) and (c) any reserves for working capital and contingent liabilities funded
from such cash to the extent deemed reasonable by the Managing Trustee, and (ii)
increased by any portion of such reserves then deemed by the Managing Trustee
not to be required for Trust operations. In the event the Trust takes back a
note in connection with any Sale or Refinancing transaction, all payments
subsequently received in cash by the Trust with respect to such note shall be
included in Cash From Sales or Refinancings, irrespective of the treatment of
such payments by the Trust for tax or accounting purposes. If, in payment for
Assets sold, the Trust receives purchase money obligations secured by liens on
such Assets, the amount of such obligations shall not be included in Cash From
Sales or Refinancings until and to the extent the obligations are realized in
cash, sold, or otherwise disposed of.
"Certificate of Trust" means the certificate of trust for the Trust filed
with the Filing Office in accordance with the Business Trust Act, as amended or
restated from time to time.
"Class A Interests" means the interests owned by Class A Beneficiaries in
the Trust created pursuant to the Trust Agreement.
"Class B Subordinated Interests" or "Class B Interests" means the beneficial
interests owned by Class B Beneficiaries in the Trust created pursuant to the
Trust Agreement.
"Class A Payout" means the first time where the aggregate amount of
Distributions actually made to the Beneficiaries equals $25 per Interest, minus
all uninvested Capital Contributions which have been returned to the
Beneficiaries, plus the Cumulative Class A Annual Distribution.
"Class B Capital Distributions" means the aggregate amount of any cash
payments to the Class B Beneficiaries made by the Trust as a return of their
Capital Contributions from excess Offering proceeds.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 8% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and 10%
per annum, compounded quarterly, with respect to the balance of their capital
contributions.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator which is the Class B Capital Distributions (on a per
Class B Subordinated Interest basis), discounted at 8% annum from the
Distribution Commencement Date, and the denominator of which is $5.00.
"Closing" means the date designated by the Managing Trustee on, or as of
which, subscribers acquire Class B Subordinated Interests and become Class B
Beneficiaries of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of subsequent laws.
"Consent" means either the consent given by vote at a meeting called and
held in accordance with the provisions of the Trust Agreement or the written
consent of a Person to do the act or thing for which the consent is solicited,
or the act of granting such consent, as the context may require.
"Controlling Person" means, with respect to the Managing Trustee or any
Affiliate, any of its chairman, directors, president, secretary or clerk,
treasurer, vice presidents, and holders of a 5% or larger equity interest in the
Managing Trustee or Affiliate, or any Person having the power to direct or cause
the direction of the Managing Trustee or Affiliate, whether through the
ownership of voting securities, by contract or otherwise.
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"Cumulative Class A Annual Distribution" means an aggregate annual
Distribution to the Beneficiaries of 10% per annum, compounded quarterly, on
Adjusted Class A Investment commencing from the last day of the month of the
Closing until Payout.
"Distribution Commencement Date" means the first day of the month following
Closing.
"Delaware Trustee" means the Trustee designated as such in accordance with
the Trust Agreement which maintains its principal place of business in the
State.
"Dissolution Event" means a sale, condemnation, eminent domain taking,
casualty, or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust.
"Distributable Cash From Operations" means Cash from Operations, as reduced
by (i) any accrued and unpaid Asset Management Fee and (ii) after Payout, any
accrued and unpaid Subordinated Resale Fee.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings, as reduced by (i)(a) any amounts reinvested in additional Assets,
or (b) the proceeds of the sale of an interest in a Joint Venture which are
reinvested in additional Assets, (ii) any accrued and unpaid Asset Management
Fee and Acquisition Fees and Acquisition Expenses paid with respect to
additional Assets acquired through reinvestment of Cash from Sales or
Refinancings and (iii) after Payout, any accrued and unpaid Subordinated Resale
Fee.
"Distributions" means Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings.
"Eligible Citizen" means (i) an individual who is a citizen of the United
States or one of its possessions (a "U.S. Citizen") or a citizen of a foreign
country lawfully admitted for permanent residence in the United States as an
immigrant in conformity with the regulations of the Immigration and
Naturalization Service of the Department of Justice (a "Resident Alien"); (ii) a
partnership of which each member is a U.S. Citizen (a "U.S. Partnership"); (iii)
a corporation created or organized under the laws of the United States or of any
state, territory, or possession of the United States of which the president and
two-thirds or more of the board of directors and other managing officers thereof
are U.S. Citizens and of which at least 75% of the voting interests are owned or
controlled by U.S. Citizens (a "U.S. Corporation"); (iv) an association of which
each member is a U.S. Citizen; or (v) a trust of which each trustee is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association, but only if each beneficiary under the related trust is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the interest-bearing escrow account (in which
subscriptions of up to $100,000 per subscriber are insured by the Federal
Deposit Insurance Corporation ("FDIC")), including any savings account, bank
money market account, or account investing in short-term securities issued or
guaranteed by the Interested States government, which complies with Rule 15c-4
under the Securities Exchange Act of 1934, held by the Escrow Agent into which
subscription payments from subscribers for Interests are to be deposited prior
to a Closing.
"Escrow Agent" means the escrow agent selected by the Managing Trustee to
administer the Escrow Account, initially Trust Company of America.
"Escrow Interest" means the interest actually earned on monies paid by each
subscriber into the Escrow Account during the period that such monies are held
in the Escrow Account prior to the Closing (net of certain fees and expenses of
the Escrow Agent).
"Executive Committee" means the executive committee of EFG.
98
<PAGE>
"Fiduciary" means a person who (i) exercises any discretionary authority or
control respecting the management of a Qualified Plan, or exercises any
authority or control respecting the disposition of its assets, (ii) renders
investment advice to a Qualified Plan for a fee or other compensation paid and
has the authority or responsibility with regard to a Qualified Plan to do so,
or, (iii) has any discretionary authority or responsibility in the
administration of a Qualified Plan.
"Filing Office" means the Office of the Secretary of State of the State.
"Full Payout Lease" means a lease under which the aggregate rental payments
during the original term are at least sufficient to permit the Trust to recover
the Purchase Price of the Assets leased thereby.
"Gross Proceeds" means the aggregate Capital Contributions of all Class B
Beneficiaries.
"Immediate Family Member" means, with respect to any Person, his spouse,
parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law, or
child-in-law.
"Indebtedness" means the indebtedness incurred by the Trust to finance the
acquisition of the Assets.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Trust and who is qualified to perform such work.
"Initial Redemption Period" is the period of time commencing with Closing
through 24 months thereafter during which the Class A Interests may be redeemed
by the Trust with the proceeds of the Offering.
"Interest" means a Class B Beneficiary Interest representing a Capital
Contribution of $5 and shall also include, as the context shall permit or
require, any Class A Interest in the Trust.
"IRA" means an Individual Retirement Account.
"Joint Venture" means a general partnership, joint venture, trust or other
business arrangement (other than a corporation).
"Lease" means a Full Payout Lease or Operating Lease.
"Lessee" means any lessee under any Lease.
"Lessor" means the lessor under any Lease.
"Majority Consent" means the Consent of Beneficiaries representing a
Majority in Interest of the Beneficiaries.
"Majority in Interest of the Beneficiaries" means the Class A Beneficiaries
and the Class B Beneficiaries holding more than 50% in the aggregate of the
Beneficiary Interests held by all Beneficiaries; provided, however, that in
cases where a Beneficiary who is also a Managing Trustee or Affiliate thereof is
not entitled to participate in the Consents or votes of the Beneficiaries, the
calculation of "Majority in Interest of the Beneficiaries" shall exclude the
Class A Interests owned by such Beneficiary.
"Managing Trustee" means AFG ASIT Corporation, a Massachusetts corporation.
"Managing Trustee Interest" means the interest of the Managing Trustee in
the Trust pursuant to this Agreement.
"Maximum Offering" means the sale of all 1,000,961 Class B Subordinated
Interests in the Trust which are being offered pursuant to the Offering.
"Minimum Investment Amount" means the minimum number of Interests which a
Class B Beneficiary is required to purchase in the Offering.
99
<PAGE>
"Minimum Offering" means the sale of at least 459,191 Class B Subordinated
Interests in the Trust (included for this purpose any Class B Subordinated
Interests which are purchased by the Managing Trustee and any Affiliate,
including the Special Beneficiary).
"Net Proceeds" means Gross Proceeds minus all offering expenses of the Trust
payable or reimbursable pursuant to the Trust Agreement.
"Offering" means the offering of Class B Subordinated Interests by the Trust
pursuant to this Prospectus.
"Operating Lease" means a lease under which the aggregate rental payments
during the original term are not sufficient to permit the Trust to recover the
Purchase Price of the Assets leased thereby.
"Over-Subscription Privilege" means the right of exercising the rights
holders to subscribe for all or a portion of the Class B Subordinated Interests
that were not otherwise subscribed for by other rights holders.
"Participant" means the Managing Trustee, the Special Beneficiary or any
Beneficiary.
"Party in Interest" means, as to any Qualified Plan, a "party in interest"
as defined in Section 3(14) of ERISA including a Person who is (i) a Fiduciary,
administrator, officer, trustee, custodian, counsel or employee of such
Qualified Plan, (ii) providing services to such Qualified Plan, (iii) the
employer sponsoring such Qualified Plan, (iv) a 50% or more owner of the
employer sponsoring the Qualified Plan, (v) a corporation, partnership, trust or
estate of which 50% or more is owned by a Person described in (i), (ii), (iii)
or (iv), or (vi) an employee, officer, director, 10% or more shareholder or a
10% or more partner or joint venturer of a Person described in (ii), (iii), (iv)
or (v). Any reference to a Party in Interest shall include a "disqualified
person" as such term is defined more narrowly in Section 4975(e) of the Code.
"Person" means any individual, partnership, corporation, trust, association,
governmental official, body or agency, or other legal entity of any type.
"Profits" and "Losses" means income and losses, and each item of income,
gain, loss, deduction, or credit entering into the computation thereof, as
determined in accordance with the accounting methods followed by the Trust and
consistent with Treasury Regulation Section 1.704-(1)(b)(2)(iv). Profits and
Losses for federal income tax purposes shall be determined in the same manner
except as otherwise provided in the Trust Agreement.
"Prospectus" means the prospectus contained in the registration statement
filed with the Securities and Exchange Commission for the registration of Class
B Subordinated Interests under the Securities Act of 1933, as amended, in the
final form in which said prospectus is filed with said Commission and as
thereafter amended or supplemented pursuant to Rule 424 under said Act.
"Qualified Income Offset Item" means (1) an allocation of loss or deduction
that, as of the end of each year, reasonably is expected to be made (a) pursuant
to Section 704(e)(2) of the Code to a donee of an interest in the Trust, (b)
pursuant to Section 706(d) of the Code as the result of a change in a
Participant's interest in the Trust, and (c) pursuant to Treasury Regulation
Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of
unrealized receivables or inventory items, and (2) a distribution that, as of
the end of such year, reasonably is expected to be made to a Participant to the
extent it exceeds offsetting increases to the Participant's Capital Account
which reasonably are expected to occur during or prior to the Trust taxable year
in which such distribution reasonably is expected to occur.
"Qualified Plan" means any qualified pension, profit-sharing, or stock bonus
plan (including a Keogh Plan) and an IRA.
"Record Date Holders" means holders of record as of the close of business on
April 1, 1997, of Class A Interests and Special Beneficiary Interests.
100
<PAGE>
"Reserve Account" means the account maintained by the Trust as reserves for
working capital and contingent liabilities, including repairs, replacements,
contingencies, accruals required by lenders for insurance, compensating balances
required by lenders to the Trust and other appropriate items.
"Resignation" means the resignation of a Trustee or the voluntary Assignment
of all of the Managing Trustee's Interest pursuant to the Trust Agreement.
"Resigned Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Resignation.
"Right" means non-transferable subscription rights to record rate holders
determining the record rate holders to acquire Class B Subordinated Interest.
"Roll-Up" means a transaction involving the acquisition, merger, conversion
or consolidation either directly or indirectly of the Trust and the issuance of
securities of a Roll-Up Entity. Such term does not include: (a) a transaction
involving the securities of the Trust that have been for at least 12 months
listed on a national securities exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust, partnership or
association form of only the Trust if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (i)
Beneficiary's voting rights; (ii) the term of existence of the Trust; (iii)
Sponsor compensation; and (iv) the investment objectives of the Trust.
"Roll-Up Entity" means a partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Sale or Refinancing" means the sale, refinancing, exchange, condemnation,
eminent domain taking, casualty or other disposition of any Asset or any
interest in any Joint Venture.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Special Beneficiary" means EFG in its capacity as the Special Beneficiary
pursuant to the Trust Agreement, together with its successors and assigns in
such capacity.
"Special Beneficiary Interest" means the interest of the Special Beneficiary
in the Trust created pursuant to the Trust Agreement and representing the
capital contribution set forth in Schedule A to the Trust Agreement.
"State" means the State of Delaware.
"Subscription Price" means $5.00 per Class B Subordinated Interest.
"Subordinated Resale Fee" means the fee to be paid by the Trust to the
Advisor for services rendered by the Advisor in connection with the sale or
other disposition of the Assets.
"Subscription Agent" means Gemisys Corporation.
"Subscription Certificates" means the subscription and certificate
evidencing the Rights and set forth an Appendix A hereto.
"Substitute Beneficiary" means an assignee of a Beneficiary Interest who
becomes a Beneficiary pursuant to the terms of the Trust Agreement.
"Substitute Trustee" means an assignee of the Trustee's Interest who is
admitted to the Trust as a Trustee pursuant to the terms of the Trust Agreement.
"Trust" means AFG Investment Trust B, as the same may be constituted from
time to time.
"Trust Agreement" means the Declaration of Trust of the Trust, as restated
as of Closing.
"Trust Beneficiaries" means the Beneficiaries and the Special Beneficiary.
101
<PAGE>
"Trust Beneficiary Interests" means the Beneficiary Interests and the
Special Beneficiary Interest.
"Trust Counsel" means Peabody & Brown, Boston, Massachusetts, or other
counsel for the Trust selected by the Managing Trustee.
"Trustees" means the Managing Trustee, the Delaware Trustee and any Person
or Persons who subsequently become additional or substitute Trustees, in each
such Person's capacity as a Trustee of the Trust. At all times when there is
only one Trustee so acting, the terms "Trustees" and "Managing Trustee" shall
refer to such Trustee.
"UBTI" means unrelated business taxable income determined in accordance with
Sections 511-514 of the Code.
102
<PAGE>
FINANCIAL STATEMENTS
TRUST B
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS:...................................................................................... F-1
Report of Independent Auditors............................................................................. F-2
Statement of Financial Position at December 31, 1996 and 1995.............................................. F-3
Statement of Operations for the years ended December 31, 1996, 1995 and 1994............................... F-4
Statement of Changes in Participants' Capital for the years ended December 31, 1996,
1995 and 1994............................................................................................ F-5
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
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, 1996 and 1995, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AFG Investment Trust B at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
F-2
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 2,829,093 $ 337,293
Rents receivable................................................................... 339,293 729,555
Accounts receivable--affiliate..................................................... 154,395 105,494
Equipment at cost, net of accumulated depreciation of $12,161,949 and $9,940,387 at
December 31, 1996 and 1995, respectively......................................... 13,307,711 18,399,341
Accumulated amortization of $4,333 and $3,333 at December 31, 1996 and 1995,
respectively..................................................................... 667 1,667
------------- -------------
Total assets................................................................. $ 16,631,159 $ 19,573,350
------------- -------------
------------- -------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable...................................................................... $ 4,352,811 $ 7,097,113
Accrued interest................................................................... 36,571 124,186
Accrued liabilities................................................................ 23,250 20,000
Accrued liabilities--affiliate..................................................... 47,178 --
Deferred rental income............................................................. 45,550 20,802
Cash distributions payable to participants......................................... 200,199 153,998
------------- -------------
Total liabilities............................................................ 4,705,559 7,416,099
------------- -------------
Participants' capital (deficit):
Managing Trustee................................................................. (30,382) (28,065)
Special Beneficiary.............................................................. (257,894) (238,783)
Beneficiary Interests (665,494 Interests; initial purchase price of $25 each).... 12,213,876 12,424,099
------------- -------------
Total participants' capital.................................................. 11,925,600 12,157,251
------------- -------------
Total liabilities and participants' capital.................................. $ 16,631,159 $ 19,573,350
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Lease revenue......................................................... $ 5,809,086 $ 6,173,972 $ 5,507,765
Interest income....................................................... 106,186 45,156 77,799
Other income.......................................................... 199,450 -- --
Gain (loss) on sale of equipment...................................... (224,594) (225,037) 638,594
------------ ------------ ------------
Total income...................................................... 5,890,128 5,994,091 6,224,158
------------ ------------ ------------
Expenses:
Depreciation and amortization......................................... 4,284,049 4,176,540 3,559,119
Write-down of equipment............................................... -- 384,782 --
Interest expense...................................................... 408,153 539,047 634,716
Interest expense--affiliate........................................... -- -- 441
Equipment management fees--affiliate.................................. 249,205 244,800 188,998
Operating expenses--affiliate......................................... 140,881 121,358 69,179
------------ ------------ ------------
Total expenses.................................................... 5,082,288 5,466,527 4,452,453
------------ ------------ ------------
Net income............................................................ $ 807,840 $ 527,564 $ 1,771,705
------------ ------------ ------------
------------ ------------ ------------
Net income
per Beneficiary Interest............................................ $ 1.10 $ 0.72 $ 2.42
------------ ------------ ------------
------------ ------------ ------------
Cash distributions declared
per Beneficiary Interest............................................ $ 1.42 $ 2.00 $ 2.52
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
MANAGING SPECIAL BENEFICIARIES
TRUSTEE BENEFICIARY -------------------------
AMOUNT AMOUNT INTERESTS AMOUNT TOTAL
---------- --------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............. $ (17,948) $ (155,318) 665,494 $ 13,342,218 $ 13,168,952
Net income--1994......................... 17,717 146,166 -- 1,607,822 1,771,705
Cash distributions declared.............. (18,480) (152,459) -- (1,677,044) (1,847,983)
---------- --------------- ---------- ------------- -------------
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
---------- --------------- ---------- ------------- -------------
---------- --------------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income............................................................... $ 807,840 $ 527,564 $ 1,771,705
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization.......................................... 4,284,049 4,176,540 3,559,119
Write-down of equipment................................................ -- 384,782 --
(Gain) loss on sale of equipment....................................... 224,594 225,037 (638,594)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable..................................................... 390,262 (329,882) 67,264
Accounts receivable--affiliate....................................... (48,901) (66,857) 30,399
Increase (decrease) in:
Accrued interest..................................................... (102,023) 80,950 (68,579)
Deferred interest.................................................... 14,408 -- --
Accrued liabilities.................................................. 3,250 4,500 --
Accrued liabilities--affiliate....................................... 47,178 (83,863) 83,863
Deferred rental income............................................... 24,748 (40,850) (37,366)
----------- ----------- -----------
Net cash from operating activities................................. 5,645,405 4,877,921 4,767,811
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment.................................................. (1,441,796) (5,605,829) (5,427,991)
Proceeds from equipment sales.......................................... 2,025,783 3,588,941 1,482,488
----------- ----------- -----------
Net cash from (used in) investing activities....................... 583,987 (2,016,888) (3,945,503)
----------- ----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable............................................ 997,888 2,296,728 3,982,078
Proceeds from notes payable--affiliate................................. -- -- 41,440
Principal payments--notes payable...................................... (3,742,190) (3,643,601) (3,793,572)
Principal payments--notes payable--affiliate........................... -- -- (41,440)
Distributions paid..................................................... (993,290) (1,618,196) (1,847,983)
----------- ----------- -----------
Net cash used in financing activities.............................. (3,737,592) (2,965,069) (1,659,477)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 2,491,800 (104,036) (837,169)
Cash and cash equivalents at beginning of year........................... 337,293 441,329 1,278,498
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 2,829,093 $ 337,293 $ 441,329
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................................. $ 495,768 $ 458,097 $ 703,736
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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.
During 1994, the Trust sold equipment to a third party which assumed
related debt of $3,446,759.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--ORGANIZATION AND TRUST MATTERS
The Trust was organized as a Delaware business trust in accordance with the
Delaware Business Trust Act on 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"), and $100 from the Initial
Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate of EFG. The
Trust issued 665,494 Beneficiary Interests to 803 investors on September 8,
1992. The Trust's Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation and an Affiliate of EFG, is responsible for the general management
and business affairs of the Trust. EFG, is the sole Special Beneficiary of the
Trust and also acts as Advisor to the Trust. As Advisor, EFG provides services
in connection with the acquisition and remarketing of the Trust's assets. The
Managing Trustee and the Special Beneficiary are not required to make any other
capital contributions except as may be required under the Amended and Restated
Declaration of Trust (the "Trust Agreement").
Significant operations commenced 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 (the "Buyer"). AFG changed its name to
Equis Financial Group Limited Partnership after the sale was concluded. Pursuant
to terms of the sale agreements, EFG agreed not to compete with the Buyer's
lease origination business for a period of five years; however, EFG is permitted
to originate certain equipment leases, principally those involving
non-investment grade lessees and ocean-going vessels, which are not in
competition with the Buyer. In addition, the sale agreements specifically
reserved to EFG the rights to continue using the name American Finance Group and
its acronym in connection with the Trust and the
F-7
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--ORGANIZATION AND TRUST MATTERS (CONTINUED)
Other Investment Programs and to continue managing all assets owned by the Trust
and the Other Investment Programs, including the right to satisfy all required
equipment acquisitions utilizing either brokers or the Buyer. Geoffrey A.
MacDonald, Chairman of Equis Corporation and Gary D. Engle agreed not to compete
with the sold business on terms and conditions similar to those for the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
The Trust considers liquid investment instruments purchased with a maturity
of three months or less to be cash equivalents. From time to time, the Trust
invests excess cash with large institutional banks in reverse repurchase
agreements with overnight maturities. Under the terms of the agreements, title
to the underlying securities passes to the Trust. The securities underlying the
agreements are book entry securities. At December 31, 1996, the Trust had
$2,725,000 invested in reverse repurchase agreements secured by U.S. Treasury
Bills or interests in U.S. Government securities.
REVENUE RECOGNITION
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $7,370,938 are due as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 5,019,911
1998............................................................................ 1,485,583
1999............................................................................ 297,408
2000............................................................................ 249,076
2001............................................................................ 159,480
Thereafter...................................................................... 159,480
------------
Total....................................................................... $ 7,370,938
------------
------------
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<S> <C> <C> <C>
Alaska Airlines, Inc..................... $1,004,770 $1,004,770 $1,004,770
OMI Corporation.......................... -- $ 623,598 $1,184,759
Tarmac Mid-Atlantic, Incorporated........ -- -- $ 591,040
</TABLE>
F-8
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During March 1996, the Trust acquired an 8.86% proportionate ownership
interest in an MD-87 jet aircraft leased by Reno Air, Inc. (the "Reno
Aircraft")--See Note 3 herein. The Trust will receive approximately $159,000 of
rental revenue in each of the years in the period ending December 31, 2002.
Rents from the Reno Aircraft, as provided for in the lease agreement, are
adjusted monthly for changes of the London Inter-Bank Offered Rate ("LIBOR").
Future rents from the Reno Aircraft included above reflect the most recent LIBOR
effected rental payment.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment cost represents Asset Base Price plus acquisition
fees and was determined in accordance with the Trust Agreement and certain
regulatory guidelines. Asset Base Price is affected by the relationship of the
seller to the Trust as summarized herein. Where the seller of the equipment was
EFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid
for the equipment by EFG or the Affiliate plus all actual costs accrued by EFG
or the Affiliate while carrying the equipment less the amount of all primary
term rents earned by EFG or the Affiliate prior to selling the equipment or (ii)
fair market value as determined by the Managing Trustee in its best judgment,
including all liens and encumbrances on the equipment and other actual expenses.
Where the seller of the equipment was a third party who did not manufacture the
equipment, Asset Base Price was the lower of (i) the price invoiced by the third
party or (ii) fair market value as determined by the Managing Trustee. Where the
seller of the equipment was a third party who also manufactured the equipment,
Asset Base Price was the manufacturer's invoice price, net of any manufacturer
rebates or incentives, which price was considered to be representative of fair
market value.
DEPRECIATION AND AMORTIZATION
The Trust's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Trust depreciates the difference between (i) the
cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Trust continues to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
Periodically, the Managing Trustee evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. For purposes of
this comparison, "net carrying value" represents, at a given date, the net book
value (equipment cost less accumulated depreciation for financial reporting
purposes) of the Trust's equipment and "net realizable value" represents, at the
same date, the aggregate undiscounted cash flows resulting from future
contracted lease payments plus the estimated residual value of the Trust's
equipment. The
F-9
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Managing Trustee evaluates significant equipment assets, such as aircraft and
vessels, individually. All other assets are evaluated collectively by equipment
type unless the Managing Trustee learns of specific circumstances, such as a
lessee default, technological obsolescence, or other market developments, which
could affect the net realizable value of particular assets. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
Such adjustments are reflected separately on the accompanying Statement of
Operations as Write-Down of Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
Organization costs are amortized using the straight-line method over a
period of five years.
ACCRUED LIABILITIES--AFFILIATE
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges are reported as Accrued
Liabilities--Affiliate. (See Note 4.)
ALLOCATION OF PROFITS AND LOSSES
For financial statement purposes, net income or loss is allocated to each
Participant according to their respective ownership percentages (90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee).
See Note 6 for allocation of income or loss for income tax purposes.
NET INCOME AND CASH DISTRIBUTIONS PER BENEFICIARY INTEREST
Net income and cash distributions per Beneficiary Interest are based on
665,494 Beneficiary Interests outstanding during each of the three years in the
period ended December 31, 1996 and computed after allocation of the Managing
Trustee's and Special Beneficiary's shares of net income and cash distributions.
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts. Statement 121 also addresses the
accounting for long-lived assets that are
F-10
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expected to be disposed of. The Trust adopted Statement 121 in the first quarter
of 1996. The adoption of Statement 121 did not have a material effect on the
financial statements of the Trust.
NOTE 3--EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1996. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1996 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. In the opinion of EFG, the acquisition cost of the
equipment did not exceed its fair market value.
<TABLE>
<CAPTION>
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- --------------------------------------- ------------- -------------- --------------------------------------------
<S> <C> <C> <C>
Aircraft............................... 12-74 $ 8,018,105 NV/WA
Computers and peripherals.............. 1-24 4,512,362 AL/AZ/CA/CO/FL/GA/IL/IN/KS/KY/
LAMA/MD/MI/MN/NC/NJ/NM/NY/ OH/
OK/OR/PA/SC/TN/TX/VA/WI/ WV
Materials handling..................... 1-46 4,466,295 AR/CA/FL/GA/IL/IN/MI/NC/NY/OH/ PA/TX/VA/WV
Communications......................... 15-24 3,039,531 AL/AR/AZ/CA/CO/FL/GA/IA/ID/IL/
IN/KS/KY/LA/MA/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............ 12 1,576,077 VA
Construction and mining................ 1-49 1,200,577 MI/NV/VA
Retail store fixtures.................. 9-15 1,126,872 CO/FL/GA/LA/TX
Tractors and heavy duty trucks......... 11-33 605,644 CO/FL/KY/MI/VA
Manufacturing.......................... 8-12 449,902 IL/VA
Furniture and fixtures................. 10 284,019 PA
Trailers/intermodal containers......... 12-18 128,443 OH/VA
Photocopying........................... 1-11 61,833 CT/IN
--------------
Total equipment cost.............................. 25,469,660
Accumulated depreciation.......................... (12,161,949)
--------------
Equipment, net of accumulated depreciation........ 13,307,711
$
--------------
--------------
</TABLE>
On September 29, 1995, the Trust entered into an agreement with United Air
Lines, Inc. ("United") to sell the Trust's proportionate ownership interest in a
Boeing 747-SP aircraft (the "United Aircraft"), to United for cash consideration
of $1,946,849 including unpaid rents through the date of sale, which event
concluded in February 1996. In March 1996, the Trust acquired an 8.86% ownership
interest in a
F-11
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3--EQUIPMENT (CONTINUED)
replacement aircraft (the "Reno Aircraft"), pursuant to the reinvestment
provisions of the Trust's prospectus, at a cost of $1,239,741. To acquire its
interest in the Reno Aircraft, the Trust obtained leveraging of $997,888 from a
third-party lender and utilized cash proceeds of $241,853 from the sale of the
United Aircraft.
In certain cases, the cost of the Trust's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. The Trust and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Trust to further diversify its equipment portfolio by participating
in the ownership of selected assets, thereby reducing the general levels of risk
which could result from a concentration in any single equipment type, industry
or lessee. At December 31, 1996 the Trust's equipment portfolio included
equipment having a proportionate original cost of $11,023,146, representing
approximately 43% 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
$15,448,000 and a net book value of approximately $9,643,000 at December 31,
1996. (See Note 5.)
Generally, the costs associated with maintaining, insuring and operating the
Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust.
As equipment is sold to third parties, or otherwise disposed of, the Trust
will recognize a gain or loss equal to the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition. The ultimate realization of estimated residual value
in the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment upon the expiration
of the primary lease terms. At December 31, 1996, the Trust held equipment for
sale or re-lease with an original cost and net book value of approximately
$451,000 and $119,000, respectively. The Managing Trustee is actively seeking
the sale or re-lease of this equipment.
NOTE 4--RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended
F-12
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
December 31, 1996, 1995 and 1994, which were paid or accrued by the Trust to EFG
or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Equipment acquisition fees............................... $ 36,673 $ 107,415 $ 147,800
Equipment management fees................................ 249,205 244,800 188,998
Administrative charges................................... 42,123 21,000 12,000
Reimbursable operating expenses due to third parties..... 98,758 100,358 57,179
Interest on notes payable--affiliate..................... -- -- 441
---------- ---------- ----------
Total.................................................... $ 426,759 $ 473,573 $ 406,418
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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. 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, 1996, the Trust was owed $154,395 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1997.
NOTE 5--NOTES PAYABLE
Notes payable at December 31, 1996 consisted of installment notes of
$4,352,811 payable to banks and institutional lenders. The notes bear interest
rates ranging between 5.7% and 7.7%, except -or one note which bears a
fluctuating interest rate based on LIBOR plus a margin (5.5% at December 31,
1996). All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents.
F-13
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--NOTES PAYABLE (CONTINUED)
However, the Trust has a balloon payment obligation of $282,421 at the
expiration of the primary lease term related to the Reno Aircraft. The carrying
amount of notes payable approximates fair value at December 31, 1996.
The annual maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 2,721,044
1998............................................................................ 890,793
1999............................................................................ 109,537
2000............................................................................ 118,459
2001............................................................................ 128,106
Thereafter...................................................................... 384,872
------------
Total $ 4,352,811
------------
------------
</TABLE>
The weighted average interest rate on short-term borrowings from EFG for the
purchase of equipment was 9.25% during the year ended December 31, 1994.
NOTE 6--INCOME TAXES
The Trust is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Trust.
For financial statement purposes, the Trust allocates net income or loss to
each class of participant according to their respective ownership percentages
(90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the
Managing Trustee). This convention differs from the income or loss allocation
requirements for income tax and Dissolution Event purposes as delineated in the
Trust Agreement. Pursuant to the Trust Agreement, for income tax purposes, the
Trust allocates net income, to the extent available, pro-rata to any Participant
with a negative capital account balance so as to eliminate any such balance. In
accordance with the Trust Agreement, upon dissolution of the Trust, the Managing
Trustee will be required to contribute to the Trust an amount equal to any
negative balance which may exist in the Managing Trustee's tax capital account.
At December 31, 1996, the Managing Trustee had a positive tax capital account
balance.
F-14
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--INCOME TAXES (CONTINUED)
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ------------
<S> <C> <C> <C>
Net income............................................ $ 807,840 $ 527,564 $ 1,771,705
Tax depreciation in excess of financial statement
depreciation...................................... (279,916) (830,733) (2,249,966)
Tax gain in excess of book gain (loss).............. 619,935 865,755 728,516
Prepaid rental income............................... 24,748 (40,850) (37,366)
Other............................................... 21,123 -- --
------------ ---------- ------------
Net income for federal income tax reporting
purposes............................................ $ 1,193,730 $ 521,736 $ 212,889
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The following is a reconciliation between participants' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Participants' capital.......................................... $ 11,925,600 $ 12,157,251
Add back selling commissions and organization and offering
costs...................................................... 1,575,644 1,575,644
Financial statement distributions in excess of tax
distributions.............................................. 18,518 14,245
Cumulative difference between federal income tax and
financial statement income (loss).......................... (5,881,402) (6,267,292)
------------- -------------
Participants' capital for federal income tax reporting
purposes..................................................... $ 7,638,360 $ 7,479,848
------------- -------------
------------- -------------
</TABLE>
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 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
F-15
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7--LEGAL PROCEEDINGS (CONTINUED)
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--SOLICITATION STATEMENT
On October 26, 1996, the Managing Trustee, on behalf of the Trust, filed a
Solicitation Statement with the Securities and Exchange Commission which was
subsequently sent to the Beneficiaries pursuant to Regulation 14A of Section 14
of the Securities Exchange Act. The Solicitation Statement sought to solicit the
consent of the Beneficiaries to a proposed amendment ("the Amendment") to the
Trust Agreement.
The Amendment would (i) amend the provisions of the Trust Agreement
governing the redemption of Interests to permit the Trust to offer to redeem
outstanding interests at such times, in such amounts, in such manner and at such
prices as the Managing Trustee may determine from time to time, in accordance
with applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an additional class of
security with such designations, preferences and relative, participating,
optional or other special rights, powers and duties as the Managing Trustee may
fix. Such a security, if it were to be offered and sold, would provide the Trust
with the funds to (a) implement more expansive Interest redemption opportunities
for Beneficiaries without using Trust funds which may otherwise be available for
current cash distributions; and (b) make a special one-time distribution to the
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required the
consent of the Beneficiaries holding more than fifty percent in the aggregate of
the Interests held by all Beneficiaries. To be valid, consent forms were to be
received by the Managing Trustee by December 6, 1996. A majority of Beneficiary
Interests, representing 369,960 or 55.6% of all Beneficiary Interests, voted in
favor of the Amendment; 69,792 or 10.5% of all Beneficiary Interests voted
against the Amendment; and 24,444 or 3.7% of all Beneficiary Interests
abstained. Approximately 69.8% of all Beneficiary Interests participated in the
vote. Accordingly, the Amendment was adopted.
NOTE 9--SUBSEQUENT EVENT
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the United States Securities and Exchange Commission which covers, among
other things, the creation and sale of a new class of beneficiary interest in
the Trust (the "Class B Interests"). A portion of the proceeds from the offering
of the Class B Interests would be used to make a one-time special cash
distribution to existing Beneficiaries (the "Class A Beneficiaries") of the
Trust and to enable the Trust to redeem a portion of the existing Beneficiary
Interests (the "Class A Interests"). The characteristics of the Class B
Interests, associated risk factors, and other matters of importance to the
Beneficiaries and prospective purchasers of the Class B Interests are contained
in the Registration Statement. Presently, the Registration Statement is
undergoing regulatory review and has not been declared effective.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE TRUST OR THE MANAGING TRUSTEE OR ITS
AFFILIATES SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of the Offering............... 6
The Offering.......................... 13
Risk Factors.......................... 18
Estimated Use of Proceeds............. 23
Compensation and Fees................. 24
Conflicts of Interest................. 24
Fiduciary Responsibility.............. 26
Business of the Trust................. 29
Market for the Trust's Securities and
Related Security Holder Matters..... 30
Pro Forma Financial Statements........ 33
Selected Financial Data............... 36
Management's Discussion and Analysis
of Financial Conditions and Results
of Operations....................... 37
Management of the Trust............... 42
Executive Compensation................ 44
Security Ownership of Certain
Beneficial Owners and Management.... 45
Certain Relationships and Related
Transactions........................ 45
Trust Distributions and Allocations... 47
Federal Tax Considerations............ 52
State, Local and Foreign Taxes........ 81
Summary of the Trust Agreement........ 82
Reports to Beneficiaries.............. 89
ERISA and Other Considerations........ 90
Supplemental Literature............... 93
Investor Suitability Standards........ 93
Legal Matters......................... 93
Experts............................... 94
Additional Information................ 94
Glossary.............................. 95
Index to Financial Statements......... F-1
</TABLE>
AFG INVESTMENT TRUST B
PROSPECTUS
1,000,961
CLASS B SUBORDINATED BENEFICIARY INTERESTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the Trusts in connection with the Offering,
assuming 1,000,961 Class B Subordinated Interests are issued:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 1,517
Blue Sky Fees and Expenses......................................... $ 3,827
Legal Fees and Expenses............................................ $ 21,918
Printing and Graphic Design Expenses............................... $ 19,309
Non-Accountable Expense Reimbursement.............................. $ 50,048
Mailing and Delivery Expenses...................................... $ 3,218
Other Reimbursable Offering Expenses of the Managing Trustee....... $ 7,723
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.1 Second Amended and Restated Declaration of Trust.
4.2 Form of Subscription Certificate. (incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form 5-1 (NO. 333-21683) filed by the registrant on February 12, 1997)
5 Opinion of Peabody & Brown with respect to the securities being registered. (Included in their Opinion
filed as Exhibit 8)
8 Opinion of Peabody & Brown with respect to certain federal income tax matters.
23.1 Consent of Independent Auditors.
23.2 Consent of Peabody & Brown. (Included in their Opinion filed as Exhibit 8)
24 Power of Attorney. the (Incorporated by reference to Exhibit 24 to Registration Statement on Form S-1
(No. 333-21697) filed by the registrant on February 12, 1997))
</TABLE>
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on April 11, 1997.
By: AFG ASIT Corporation,
The Managing Trustee of the registrant
By: /s/ GEOFFREY A. MACDONALD
------------------------------------------
Geoffrey A. MacDonald,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed by the following persons in the capacities indicated on
April 11, 1997.
<TABLE>
<CAPTION>
SIGNATURE(S) TITLE(S)
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ GEOFFREY A. MACDONALD President (principal executive officer) and a Director of
------------------------------------------- AFG ASIT Corporation (the Managing Trustee of the
Geoffrey A. MacDonald registrant)
/s/ GARY M. ROMANO Principal Financial Officer of AFG ASIT Corporation
-------------------------------------------
Gary M. Romano
/s/ MICHAEL J. BUTTERFIELD Principal Accounting Officer of AFG ASIT Corporation
-------------------------------------------
Michael J. Butterfield
/s/ GARY D. ENGLE Director of AFG ASIT Corporation
-------------------------------------------
Gary D. Engle
</TABLE>
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
4.1 Second Amended and Restated Declaration of Trust.
5 Opinion of Peabody & Brown with respect to the securities being registered. (Included in their
Opinion filed as Exhibit 8)
8 Opinion of Peabody & Brown with respect to certain federal income tax matters.
23.1 Consent of Independent Auditors.
23.2 Consent of Peabody & Brown. (Included in their Opinion filed as Exhibit 8)
</TABLE>
<PAGE>
Exhibit 4.1
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
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Second Amended and Restated
Declaration of Trust
RECITALS.....................................................................1
DECLARATION..................................................................1
ARTICLE I -THE TRUST.........................................................2
1.1 NAME.....................................................................2
1.2 LOCATION.................................................................2
1.3 NATURE OF TRUST..........................................................2
1.4 PURPOSES.................................................................2
1.6 TERM AND DISSOLUTION.....................................................3
ARTICLE II - DEFINITIONS.....................................................4
ARTICLE III - CAPITAL.......................................................17
3.1 CAPITAL CONTRIBUTION OF THE SPECIAL BENEFICIARY AND MANAGING TRUSTEE....17
3.2 CLASS A BENEFICIARIES; OFFERING OF CLASS B INTERESTS; BENEFICIARY
INTERESTS...............................................................17
3.3 CAPITAL ACCOUNTS........................................................18
3.4 ADDITIONAL CAPITAL CONTRIBUTIONS........................................18
ARTICLE IV - TRUSTEES.......................................................18
4.1 THE TRUSTEES; LIABILITY FOR TRUST OBLIGATIONS...........................19
4.2 EXTENT OF MANAGING TRUSTEE POWERS AND DUTIES............................19
4.3 DELEGATION OF POWERS....................................................26
4.4 RELIANCE BY THIRD PARTIES...............................................26
4.5 LIMITATIONS ON THE EXERCISE OF POWERS OF MANAGING TRUSTEE...............26
4.6 LIABILITY FOR ACTS OR OMISSIONS AND INDEMNIFICATION.....................27
4.7 COMPENSATION OF TRUSTEES................................................29
4.8 RESIGNATION OF TRUSTEES.................................................30
4.9 REMOVAL OF TRUSTEES.....................................................30
4.10 CONSEQUENCES OF RESIGNATION OR REMOVAL.................................30
4.11 LIABILITY OF RESIGNED OR REMOVED TRUSTEE...............................31
4.12 CONTINUATION OF TRUST BUSINESS.........................................32
4.13 POWERS AND LIMITATIONS OF DELAWARE TRUSTEE.............................32
ARTICLE V - ADVISOR SERVICES AND COMPENSATION...............................33
5.1 COMPENSATION TO ADVISOR AND CERTAIN AFFILIATES..........................33
5.2 OTHER INTERESTS OF THE ADVISOR AND ITS AFFILIATES.......................35
5.3 OTHER TRANSACTIONS INVOLVING THE ADVISOR AND ITS AFFILIATES.............36
ARTICLE VI - TRUST BENEFICIARIES............................................37
6.1 ABSENCE OF CONTROL OVER TRUST BUSINESS..................................37
6.2 LIMITED LIABILITY.......................................................37
6.3 FIDUCIARY DUTY OF MANAGING TRUSTEE TO TRUST BENEFICIARIES...............37
ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES............................38
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7.1 INVESTMENT OBJECTIVES AND POLICIES......................................38
7.2 ASSETS AND LESSEES......................................................38
7.3 SALES AND LEASES OF ASSETS FROM OR TO THE MANAGING TRUSTEE AND ITS
AFFILIATES..............................................................38
7.4 LOANS TO OR FROM THE MANAGING TRUSTEE AND ITS AFFILIATES................39
7.5 JOINT INVESTMENTS.......................................................39
7.6 RESALES.................................................................41
7.7 IN-KIND DISTRIBUTIONS...................................................41
7.8 ROLL-UPS................................................................41
7.9 CHANGE IN INVESTMENT OBJECTIVE AND POLICIES.............................42
ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS................................42
8.1 DISTRIBUTION OF DISTRIBUTABLE CASH......................................42
8.2 ALLOCATION OF PROFITS AND LOSSES........................................44
8.3 RECOURSE TO TRUST ASSETS ONLY...........................................45
8.5 SPECIAL PROVISIONS......................................................45
ARTICLE IX - TRANSFER OF INTERESTS..........................................50
9.1 WITHDRAWAL OF A BENEFICIARY.............................................50
9.2 ASSIGNMENT..............................................................50
9.3 SUBSTITUTION............................................................50
9.4 PROHIBITED ASSIGNMENT...................................................51
9.5 CHANGE OF STATUS OF BENEFICIARY.........................................52
9.6 RIGHT TO TENDER INTERESTS FOR REDEMPTION................................52
9.7 STATUS OF AN ASSIGNING BENEFICIARY......................................54
9.8 WITHDRAWAL OF SPECIAL BENEFICIARY; SUBSTITUTION.........................54
ARTICLE X - FISCAL MATTERS..................................................55
10.1 TITLE TO PROPERTY AND BANK ACCOUNTS....................................55
10.2 MAINTENANCE OF, AND ACCESS TO, BASIC TRUST DOCUMENTS...................55
10.3 FINANCIAL BOOKS AND ACCOUNTING.........................................56
10.4 TRUST EXPENSES.........................................................56
10.5 FISCAL YEAR............................................................58
10.6 REPORTS AND ACCOUNTING DECISIONS.......................................58
10.7 PARTNERSHIP CLASSIFICATION; FEDERAL TAX ELECTIONS......................61
ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES....................61
11.1 MEETINGS...............................................................61
11.2 VOTING PROCEDURES; VOTING RIGHTS OF BENEFICIARIES......................63
11.3 VALUATION OF INTERESTS OF THE MANAGING TRUSTEE.........................63
ARTICLE XII - AMENDMENTS....................................................63
12.1 CERTAIN AMENDMENTS REQUIRING MAJORITY CONSENT..........................64
12.2 OTHER AMENDMENTS.......................................................64
ARTICLE XIII - POWER OF ATTORNEY............................................64
13.1 APPOINTMENT............................................................64
13.2 AMENDMENTS TO AGREEMENT................................................65
13.3 POWER COUPLED WITH AN INTEREST.........................................66
13.4 POWER OF ATTORNEY BY SUBSTITUTE BENEFICIARIES..........................66
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ARTICLE XIV - GENERAL PROVISIONS............................................66
14.1 NOTICES, APPROVALS AND CONSENTS........................................66
14.2 FURTHER ASSURANCES.....................................................67
14.3 CAPTIONS...............................................................67
14.4 BINDING EFFECT.........................................................67
14.5 SEPARABILITY...........................................................67
14.6 INTEGRATION............................................................67
14.7 APPLICABLE LAW.........................................................67
14.8 COUNTERPARTS...........................................................68
14.9 CREDITORS..............................................................68
14.10 INTERPRETATION........................................................68
14.11 ARBITRATION; VENUE....................................................68
SCHEDULE A..................................................................70
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SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
AFG INVESTMENT TRUST B
THE AMENDED AND RESTATED DECLARATION OF TRUST OF AFG INVESTMENT TRUST B
made and agreed to by the Trustees and the Trust Beneficiaries as of May 29,
1992, as amended through the date hereof, is hereby amended and restated
pursuant to this Second Amended and Restated Declaration of Trust dated as of
April 15, 1997 to read in its entirety as follows (certain capitalized terms
used and not otherwise defined herein shall have the respective meanings
specified in Article II):
RECITALS
A. A Certificate of Trust for the Trust has been filed in the Filing
Office in accordance with the Business Trust Act. The Trust has been created as
a Delaware business trust to acquire a diversified portfolio of new and used
capital equipment (the "Assets"). The business of the Trust will be controlled
by the Managing Trustee for the benefit of the Trust Beneficiaries.
B. The Managing Trustee may acquire, hold, invest and dispose of Trust
Assets on behalf of the Trust in the manner provided in this Agreement.
C. The beneficial interest in the Trust Assets shall be divided into units
of beneficial interest (the "Interests"), as provided in this Agreement.
DECLARATION
NOW, THEREFORE, the Trustees hereby declare that they will hold all
property of every type and description which they may acquire as trustees,
together with the proceeds thereof, in trust, and carry on the business of the
Trust for the benefit of the Trust Beneficiaries, in the manner and subject to
the provisions of this Agreement.
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ARTICLE I -THE TRUST
1.1 Name.
The name of the Trust shall be "AFG INVESTMENT TRUST B" and so far as may
be practicable, the Managing Trustee shall conduct the Trust's activities,
execute all documents and sue or be sued under that name, which name (and the
word "Trust" whenever used in this Agreement, except where the context otherwise
requires) shall refer to the Trustees in their capacity as Trustees, and not
individually or personally, and shall not refer to the Trust Beneficiaries or to
the agents or employees of the Trust or of such Trustees. Should the Managing
Trustee determine that the use of such name is not practicable, legal, or
convenient in any jurisdiction, the Managing Trustee may use such other
designation or adopt such other name for the Trust in such jurisdiction as the
Managing Trustee deems proper and the Trust may hold property and conduct its
activities under such designation or name, subject, however, to the limitations
contained in Section 1.3.
1.2 Location.
The Trust shall maintain an office 98 North Washington Street, Boston,
Massachusetts 02114, and may have such other offices or places of business as
the Managing Trustee may from time to time determine as necessary or expedient.
1.3 Nature of Trust.
The Trust shall be of the type commonly termed a Delaware business trust.
The Trust is not intended to be, shall not be deemed to be, and shall not be
treated as, a general partnership, limited partnership, joint venture,
corporation or joint stock company (provided, however, that the Trust shall be
classified as a partnership for tax purposes, as provided in Section 10.7(a)).
The Trust Beneficiaries shall be beneficiaries and their relationship to the
Trustees shall be solely in that capacity in accordance with the rights
conferred upon them hereunder.
1.4 Purposes.
The purposes of the Trust are to acquire, invest in, maintain, operate,
lease, re-lease, finance, refinance, hold, encumber, manage, sell, exchange and
otherwise in any manner deal with the Assets and to engage in the business
contemplated by this Agreement. The Trust shall not engage in any other business
or activity.
1.5 Powers.
In furtherance of its purposes, the Trust shall have the power:
(a) to acquire, invest in, maintain, operate, lease, re-lease, finance,
refinance, hold, encumber, sell, manage, exchange and otherwise deal in Assets
situated in any location and to enter into Joint Ventures, and to make any
Permitted Investments, in each case as deemed appropriate by the Managing
Trustee;
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(b) subject to any applicable statutes and regulations, to borrow money
from any lender to further the purposes of the Trust, to issue evidences of
indebtedness in respect thereof and to secure the same by mortgage, pledge,
grant of lien on, or other security interest in any Assets; and
(c) to do all other things, carry on any activities and enter into,
perform, modify, supplement or terminate any contracts necessary to, in
connection with, or incidental to the furtherance of the purposes of the Trust,
all so long as such things, activities and contracts may be lawfully done,
carried on or entered into by the Trust under the laws of the State and the
United States of America and any other jurisdictions whose laws may apply and
under the terms of this Agreement.
1.6 Term and Dissolution.
The Trust shall continue in full force and effect until December 31, 2003,
except that the Trust shall be dissolved, its affairs wound up, and its assets
liquidated prior to such date upon:
(a) the sale or other disposition of all or substantially all Assets
unless the Managing Trustee elects to continue the Trust business for the
purpose of the receipt and collection of any consideration to be received in
exchange for Assets (which activities shall be deemed to be a part of such sale
or other disposition and the winding-up of the affairs of the Trust);
(b) the occurrence of any event as a result of which no Managing Trustee
remains if the Trust is not reconstituted pursuant to Section 4.12;
(c) the election to dissolve the Trust made in writing by the Managing
Trustee with Majority Consent or, subject to compliance with Article XI, made by
a Majority in Interest of the Beneficiaries without any action by the Managing
Trustee;
(d) the entry of a final decree of dissolution of the Trust by a court of
competent jurisdiction; or
(e) any other event which causes the dissolution or winding-up of the
Trust under the Business Trust Act to the extent not otherwise provided for
herein.
In such event, the Managing Trustee shall liquidate the Assets and apply
and distribute the proceeds thereof in accordance with Section 8.1(b).
Notwithstanding the foregoing, if during liquidation the Managing Trustee shall
determine that an immediate sale of all of the Assets would be impermissible,
impractical or would cause undue loss to the Participants, the Managing Trustee
may defer liquidation of, and withhold from distribution for a reasonable time,
any Assets except those necessary to satisfy Trust debts and obligations. Upon
completion of the winding-up of the Trust, the Managing Trustee (or its
trustees, receivers or successors) shall cause the cancellation of the
Certificate of Trust.
During the period of dissolution and winding-up of the Trust, the Managing
Trustee,
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or any other Person performing such actions, may exercise all of the powers
granted to the Managing Trustee herein, and may adopt such plan, method or
procedure as may be deemed reasonable in order to effectuate an orderly
winding-up. If such functions shall be performed by a Person other than the
Managing Trustee or an Affiliate, such Person shall be entitled to reasonable
compensation from the Trust for his services.
The Managing Trustee shall use its best efforts to cause the Trust to sell
all of the Assets not later than the end of the tenth year following Final
Closing, provided that market conditions existing at the time permit sale of the
Assets on terms deemed reasonable by the Managing Trustee.
ARTICLE II - DEFINITIONS
Whenever used in this Agreement, unless the context otherwise requires,
the terms defined in this Article II shall have the following respective
meanings:
"Accountants" mean Ernst & Young, Boston, LLP, Massachusetts, or another
nationally recognized firm of independent accountants selected for the Trust by
the Managing Trustee.
"Acquisition Expenses" means expenses (other than Acquisition Fees)
incurred by any party attributable to selection and acquisition of Assets,
whether or not acquired, including but not limited to legal fees and expenses,
travel and communication expenses, costs of credit reports and appraisals,
non-refundable option payments and accounting fees and expenses; provided,
however, that Acquisition Expenses will not include any expenses described in
Section 10.4 that relate to the operation of the Trust rather than the selection
and acquisition of Assets; and provided, further, that Acquisition Expenses will
not include any expenses paid by an Affiliate of the Managing Trustee for which
such Affiliate does not receive any reimbursement from the Trust.
"Acquisition Fee" means any fee or commission paid by any party in
connection with the selection, purchase, evaluation, construction, acquisition,
initial leasing or operation, and initial arrangement for leasing or placing in
service of any Asset by the Trust, however designated and however treated for
tax or accounting purposes, but not including any Acquisition Expenses.
"Adjusted Class A Investment" means, on an aggregate basis for all Class A
Interests, an amount equal to (a) the sum of (i) $25 per Class A Interest owned
by all Class A Beneficiaries and (ii) the amount by which all Distributions made
to the Class A Beneficiaries in the aggregate until Class A Payout are less than
the Cumulative Class A Annual Distribution minus (b) the sum of (i) the amount
by which all Distributions made to the Class A Beneficiaries in the aggregate
until Class A Payout exceed the Cumulative Annual Distribution and (ii) all
uninvested Capital Contributions which have been returned to the Class A
Beneficiaries pursuant to this Agreement.
"Advisor" means EFG, together with its successor and assigns as advisor
under the Advisory Agreement.
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"Advisory Agreement" means the agreement between the Advisor and the Trust
pursuant to which the Advisor will provide certain management and advisory
services for the Trust.
"Affiliate" means, when used with reference to a specific Person, (i) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is an officer, director or partner in, the specified Person or
of which the specified Person is an officer, director or partner, or (iii) any
Person that is the beneficial owner of, or controls, 10% or more of any class of
voting securities of the specified Person.
"AFG Investment Trusts" means, collectively, AFG Investment Trust A, AFG
Investment Trust B, AFG Investment Trust C and AFG Investment Trust D.
"Agreement" means this Second Amended and Restated Declaration of Trust,
as amended from time to time.
"Asset" means, collectively, any real or personal property, including
equipment and related tangible property, acquired by the Trust and any interest
of the Trust therein, whether directly or indirectly through a nominee, Joint
Venture or otherwise.
"Asset Base Price" means the amount paid by the Trust to the seller of an
Asset for such Asset, which shall be (i) the manufacturer's invoice cost to the
Trust if the Asset is acquired directly from the manufacturer, (ii) if the Asset
is acquired from a seller who is not the manufacturer and not the Managing
Trustee or an Affiliate thereof, the lower of (a) the price invoiced by such
seller or (b) fair market value as determined by the Managing Trustee in its
best judgment, or (iii) if acquired from the Managing Trustee or an Affiliate
thereof, the lower of (a) the price paid by such seller plus all reasonable,
necessary and actual costs accrued in maintaining the Asset (including, without
limitation, the cost of storage, carrying, warehousing, interest cost, repair,
marketing, financing and taxes from the date of acquisition thereof) less the
amount of primary term lease rentals accrued from the date of acquisition
thereof and retained by the Managing Trustee or an Affiliate thereof from
leasing the Asset or (b) fair market value as determined by the Managing Trustee
in its best judgment, including in each case described in (i), (ii) and (iii)
the amounts of all liens and encumbrances on the Asset and all reasonable,
necessary and actual expenses of the seller incurred in connection with
acquiring and transferring the Asset to the Trust (including but not limited to
all financing expenses, sales taxes, delivery charges and attorneys' fees paid
to or on behalf of third parties) but not including any Acquisition Fees or
Acquisition Expenses. In no event, however, shall any of the expense items
described herein be included in the Asset Base Price for any Asset (i) which
cannot be included consistent with generally accepted accounting principles or
(ii) which is not actually acquired by the Trust.
"Asset Management" means personnel and services necessary to the leasing
activities of the Trust, including but not limited to, leasing and re-leasing of
Assets, collecting revenues, paying operating expenses, determining that the
Assets are used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of the
Assets.
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"Asset Management Fee" means the fee payable to the Advisor for managing
the leasing, financing and re-financing of Assets pursuant to Section 5.1(c).
"Assign" means, with respect to any Interest or any part thereof, to sell,
assign, transfer, give or otherwise dispose of, whether voluntarily or by
operation of law, except that in the case of a bona fide pledge or other
hypothecation; no Assignment shall be deemed to have occurred unless and until
the secured party has exercised his right of foreclosure with respect thereto.
"Assignment" means any transaction in which an Interest or any part
thereof is Assigned.
"B" and "Baa" mean bond ratings assigned by Moody's Investors Service,
Inc. to the senior debt obligations of prospective initial Lessees which are in
the middle of the Moody's rating scale of "Aaa" (highly unlikely to default) to
"D" (in default). Specifically, according to Moody's, bonds rated "Baa" are
considered as medium grade obligations, i.e., they are neither highly protected
nor poorly secured; interest payments and principal security appear to be
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; and such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Also, according to Moody's, bonds rated "B" generally
lack characteristics of a desirable investment and assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
"Beneficiary" means the owner of a Beneficiary Interest and shall include
each Class A Beneficiary and Class B Beneficiary. The term "Beneficiary" does
not include the Special Beneficiary.
"Beneficiary Interest" means the beneficial interest of a Beneficiary in
this Trust created pursuant to this Agreement and shall include each Class A
Interest and Class B Interest.
"Business Trust Act" means the Delaware Business Trust Act, 12 Del. C.
ss.3801, et. seq., as amended from time to time.
"Capital Account" means the capital account of the Managing Trustee, the
Special Beneficiary and each Beneficiary established and maintained in
accordance with Section 3.3.
"Capital Contribution" means the total amount of money actually
contributed to the Trust by each Participant (or any prior Participant) prior to
the deduction of any organization and offering expenses or selling commissions.
"Cash from Operations" means the cash provided by the Trust's normal
operations (including Lease renewals and without deduction for depreciation or
other non-cash charges) after the general expenses and current liabilities of
the Trust (other than any portion of the Asset Management Fee which is required
to be accrued and the Subordinated Resale Fee) are paid and discharged, as
reduced by any reserves funded from such cash for working capital
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and contingent liabilities to the extent deemed reasonable by the Managing
Trustee and as increased by any portion of such reserves deemed by the Managing
Trustee not to be required for Trust operations. Cash from Operations does not
include any Cash from Sales or Refinancings.
"Cash From Sales or Refinancings" means the cash received by the Trust as
a result of Sale or Refinancing transactions (including insurance proceeds or
Lessee indemnity payments arising from the loss or destruction of Assets), as
(i) reduced by (a) all debts and liabilities of the Trust required to be paid as
a result of Sale or Refinancing transactions, whether or not then payable,
(including without limitation, any liabilities on an Asset sold which are not
assumed by the buyer and any remarketing fees required to be paid to Persons not
affiliated with the Managing Trustee but not including any Subordinated Resale
Fee whether or not then due and payable) and (b) general expenses and current
liabilities of the Trust (other than any portion of the Asset Management Fee
which is required to be accrued and the Subordinated Resale Fee) and (c) any
reserves for working capital and contingent liabilities funded from such cash to
the extent deemed reasonable by the Managing Trustee, and (ii) increased by any
portion of such reserves then deemed by the Managing Trustee not to be required
for Trust operations. In the event the Trust takes back a note in connection
with any Sale or Refinancing transaction, all payments subsequently received in
cash by the Trust with respect to such note shall be included in Cash From Sales
or Refinancings, irrespective of the treatment of such payments by the Trust for
tax or accounting purposes. If, in payment for Assets sold, the Trust receives
purchase money obligations secured by liens on such Assets, the amount of such
obligations shall not be included in Cash From Sales or Refinancings until and
to the extent the obligations are realized in cash, sold, or otherwise disposed
of.
"Certificate of Trust" means the certificate of trust filed with the
Filing Office for the Trust in accordance with the Business Trust Act, as
amended or restated from time to time.
"Class A Beneficiary" means any Beneficiary who owns a Class A Interest.
"Class A Closings" means the dates designated by the Managing Trustee on,
or as of which, subscribers acquired Class A Interests and became Class A
Beneficiaries of the Trust.
"Class A Interests" means the interests owned by Class A Beneficiaries in
the Trust created pursuant to this Agreement.
"Class A Offering" means the offering of Class A Interests pursuant to the
Class A Prospectus.
"Class A Payout" means the first time where the aggregate amount of
Distributions actually made to the Class A Beneficiaries equals $25 per Class A
Interest, minus all uninvested Capital Contributions which have been returned to
the Class A Beneficiaries, plus the Cumulative Class A Annual Distribution.
"Class A Prospectus" means the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of the Class A Interests under the Securities Act of 1933, as amended, in the
final form in which said
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prospectus was filed with said Commission and as thereafter amended or
supplemented pursuant to Rule 424 under said Act.
"Class B Beneficiary" means any Beneficiary who owns a Class B
Subordinated Interest.
"Class B Capital Distributions" means the aggregate amount of any cash
payments to the Class B Beneficiaries made by the Trust as a return of their
Capital Contributions from excess Class B Offering proceeds.
"Class B Closing" means the date designated by the Managing Trustee on, or
as of which, subscribers acquire Class B Subordinated Interests and become Class
B Beneficiaries.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator which is the Class B Capital Distributions (on a per
Class B Subordinated Interest basis), discounted at 8% annum from the
Distribution Commencement Date, and the denominator of which is $5.00.
"Class B Offering" means the offering of Class B Subordinated Interests by
the Trust pursuant to the Class B Prospectus.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 8% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and of
10% per annum, compounded quarterly, with respect to the balance of their
capital contributions.
"Class B Prospectus" means the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of Class B Subordinated Interests under the Securities Act of 1933, as amended,
in the final form in which said prospectus is filed with said Commission and as
thereafter amended or supplemented pursuant to Rule 424 under said Act.
"Class B Subordinated Interests" or "Class B Interests" means the
beneficial interests created pursuant to this Agreement owned by Class B
Beneficiaries.
"Closings" means, collectively, the Class A Closings and the Class B
Closing.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of subsequent laws.
"Competitive Asset Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase and sale of equipment which is
reasonable, customary and competitive in light of the size, type and location of
equipment.
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"Consent" means either the consent given by vote at a meeting called and
held in accordance with Section 11.1 or the written consent of a Person to do
the act or thing for which the consent is solicited, or the act of granting such
consent, as the context may require.
"Controlling Person" means, with respect to the Managing Trustee or any
Affiliate, any of its chairman, directors, president, secretary or clerk,
treasurer, vice presidents, and holders of a 5% or larger equity interest in the
Managing Trustee or Affiliate, or any Person having the power to direct or cause
the direction of the Managing Trustee or Affiliate, whether through the
ownership of voting securities, by contract or otherwise.
"Cumulative Class A Annual Distribution" means an aggregate annual
Distribution to the Class A Beneficiaries of 10% per annum, compounded
quarterly, on Adjusted Class A Investment commencing from the last day of the
month of the initial Class A Closing until Class A Payout.
"Dealer-Manager" means American Finance Group Securities Corp., a
Massachusetts corporation which is an Affiliate of the Managing Trustee and the
Advisor.
"Dealer-Manager Agreement" means the agreement of the Dealer-Manager
and the Managing Trustee, on their own behalf and on behalf of the Trust,
designating American Finance Group Securities Corp. as Dealer-Manager.
"Delaware Trustee" means the Trustee designated as such in accordance with
Section 4.1(a) which maintains its principal place of business in the State.
"Dissolution Event" means a sale, condemnation, eminent domain taking,
casualty, or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust pursuant to
Section 1.6.
"Distributable Cash From Operations" means Cash from Operations, as
reduced by (i) any accrued and unpaid Asset Management Fee and (ii) after
Payout, any accrued and unpaid Subordinated Resale Fee.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings, as reduced by (i)(a) any amounts reinvested in additional Assets
in accordance with Sections 4.2(b)(v) and 4.2(b)(vi), or (b) the proceeds of the
sale of an interest in a Joint Venture which are reinvested in additional
Assets, (ii) any accrued and unpaid Asset Management Fee and Acquisition Fees
and Acquisition Expenses paid with respect to additional Assets acquired through
reinvestment of Cash From Sales or Refinancings in accordance with Section
4.2(b)(v) and (iii) after Payout, any accrued and unpaid Subordinated Resale
Fee.
"Distribution Commencement Date" means the first day of the month
following Class B Closing.
"Distributions" means Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
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"D-M Commission" means the commission payable to the Dealer-Manager of 7%
of Gross Class A Proceeds.
"EFG" means Equis Financial Group, a Massachusetts partnership.
"Eligible Citizen" means (i) an individual who is a citizen of the United
States or one of its possessions (a "U.S. Citizen") or a citizen of a foreign
country lawfully admitted for permanent residence in the United States as an
immigrant in conformity with the regulations of the Immigration and
Naturalization Service of the Department of Justice (a "Resident Alien"); (ii) a
partnership of which each member is a U.S. Citizen (a "U.S. Partnership"); (iii)
a corporation created or organized under the laws of the United States or of any
state, territory, or possession of the United States of which the president and
two-thirds or more of the board of directors and other managing officers thereof
are U.S. Citizens and of which at least 75% of the voting interests are owned or
controlled by U.S. Citizens (a "U.S. Corporation"); (iv) an association of which
each member is a U.S. Citizen; or (v) a trust of which each trustee is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association, but only if each beneficiary under the related trust is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the interest-bearing escrow account (in which
subscriptions of up to $100,000 per subscriber are insured by the Federal
Deposit Insurance Corporation ("FDIC")), including any savings account, bank
money market account, or account investing in short-term securities issued or
guaranteed by the United States government, which complies with Rule 15c-4 under
the Securities Exchange Act of 1934, held by the Escrow Agent into which
subscription payments from subscribers for Class B Interests are to be deposited
prior to the Class B Closing.
"Escrow Agent" means the escrow agent selected by the Managing Trustee to
administer the Escrow Account, initially Trust Company of America.
"Escrow Interest" means the interest actually earned on monies paid by
each subscriber into the Escrow Account during the period that such monies are
held in the Escrow Account prior to the Class B Closing (net of certain fees and
expenses of the Escrow Agent).
"FAA" means the Federal Aviation Administration.
"Filing Office" means the Office of the Secretary of State of the State.
"Final Closing" means the last date, or as of which, subscribers acquired
Class A Interests and became Class A Beneficiaries of the Trust.
"Foreign Beneficiary" means any Person who is a "non-resident alien
individual" or "foreign partnership" within the meaning of Section 1441 of the
Code, a "foreign corporation" within the meaning of Section 1442 of the Code or
any Person "who is not a United States person" within the meaning of Section
1446 of the Code.
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"Foreign Investor" means any Person who is not an Eligible Citizen.
"Front-End Fees and Expenses" means fees and expenses, however designated,
paid by any Person for any services rendered during the Trust's organizational
or acquisition phase, including without limitation Sales and Distribution
Expenses borne by the Trust, Acquisition Fees and Acquisition Expenses and
similar fees and expenses, but not including: (i) Organizational and Offering
Expenses paid by the Managing Trustee for which the Managing Trustee may not be
reimbursed by the Trust pursuant to Section 10.4; (ii) reserves for working
capital and contingent liabilities included in Investment in Assets; and (iii)
any Acquisition Fees or Acquisition Expenses paid by a manufacturer of an Asset
to any of its employees unless such Persons are Affiliates of a Sponsor. Any
Acquisition Fees and Acquisition Expenses from the reinvestment of Cash From
Sales or Refinancings permitted under this Agreement are considered Front-End
Fees and Expenses. If the Trust's Leverage Level is equal to the Minimum
Leverage Level, total Front-End Fees and Expenses will not exceed 10% of Gross
Proceeds. However, if the Trust's Leverage Level is greater than the Minimum
Leverage Level, the maximum amount of Front-End Fees and Expenses which a Trust
may incur will increase .0625% for each 1% that the Leverage Level is greater
than the Minimum Leverage Level. In no event, however, will total Front-End Fees
and Expenses paid by the Trust exceed 13% of Gross Proceeds.
"Full Payout Lease" means a lease under which the aggregate rental
payments during the original term are at least sufficient to permit the Trust to
recover the Purchase Price of the Assets leased thereby.
"Gross Class A Proceeds" means the aggregate Capital Contributions of
all Class A Beneficiaries.
"Gross Class B Proceeds" means the aggregate Capital Contributions of all
Class B Beneficiaries.
"Gross Proceeds" means, collectively, Gross Class A Proceeds and Gross
Class B Proceeds.
"Immediate Family Member" means, with respect to any Person, his spouse,
parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law or
child-in-law.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Trust and who is qualified to perform such work.
"Initial Redemption Period" is the period of time commencing with the
Class B Closing through 24 months thereafter during which the Class A Interests
may be redeemed by the Trust with the proceeds of the Class B Offering, as
provided in the Class B Prospectus.
"Interest" means any Class A Interest or Class B Interest in the Trust.
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"Investment in Assets" means the aggregate amount of Capital Contributions
of the Class A Beneficiaries actually paid for or allocated to the purchase and
refurbishment of Assets acquired by the Trust, including the Trust's equity
investment in Assets and reserves for working capital and contingent liabilities
(but excluding any such reserves in excess of 3% of the aggregate Capital
Contributions of the Class A Beneficiaries) and other capitalizable cash
payments such as interest and taxes, but excluding all Front-End Fees and
Expenses.
"IRA" means an Individual Retirement Account.
"Joint Venture" has the meaning given it in Section 7.5.
"Lease" means a Full Payout Lease or Operating Lease.
"Lease Commitment" means either (i) an executed binding lease agreement
under which either the Trust or an Affiliate of the Managing Trustee is the
lessor, which agreement is assignable by such Affiliate to the Trust, or (ii)
such other agreement or commitment to lease equipment which constitutes an
enforceable obligation against the Lessee.
"Lessee" means any lessee under any Lease.
"Leverage Level" means the amount of indebtedness encumbering the Assets
acquired from the Gross Proceeds.
"Losses" has the meaning given it in Section 8.2(d).
"Majority Consent" means the Consent of Beneficiaries representing a
Majority in Interest of the Beneficiaries.
"Majority Vote" means the vote of a majority in interest of the Trust
Beneficiaries.
"Majority in Interest of the Beneficiaries" means the Class A
Beneficiaries and the Class B Beneficiaries holding more than 50% in the
aggregate of the Beneficiary Interests held by all Beneficiaries; provided,
however, that in cases where a Beneficiary who is also a Managing Trustee or
Affiliate thereof is not entitled to participate in the Consents or votes of the
Beneficiaries, the calculation of "Majority in Interest of the Beneficiaries"
shall exclude the Class A Interests owned by such Beneficiary.
"Managing Trustee" has the meaning given it in Section 4.1.
"Maximum Class B Offering" means the sale of all 826,072 Class B
Subordinated Interests in the Trust which are being offered pursuant to the
Class B Offering.
"Managing Trustee Interest" means the interest of the Managing Trustee in
the Trust pursuant to this Agreement.
"Minimum Investment Amount" means the minimum number of Interests which a
Beneficiary was or is required to purchase in the Class A Offering or Class B
Offering, or, if the Beneficiary does not acquire his Interests in either such
Offering, the minimum number
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of Class A Interests or Class B Interests which a Beneficiary is required to
acquire from his transferor in accordance with this Agreement.
"Minimum Class B Investment Amount" means the minimum number of Interests
which a Class B Beneficiary is required to purchase in the Offering.
"Minimum Class B Offering" means the sale of at least 413,036 Class B
Subordinated Interests in the Trust (included for this purpose any Class B
Subordinated Interests which are purchased by the Managing Trustee and any
Affiliate, including the Special Beneficiary).
"Minimum Leverage Level" means at least 12% of the Total Purchase Price of
the Assets acquired from Gross Class A Proceeds.
"NASAA Guidelines" means the Statement of Policy for Equipment Programs,
as amended April 22, 1988 and October 24, 1991, by the North American Securities
Administrators Association, Inc., as in effect on the date of the Class A
Prospectus.
"Net Class A Proceeds" means Gross Class A Proceeds minus all sales
commissions (including the D-M Commissions) and Organizational and Offering
Expenses of the Trust relating to the Class A Offering reimbursable pursuant to
Section 10.4.
"Net Class B Proceeds" means Gross Class B Proceeds minus all offering
expenses of the Trust relating to the Class B Offering payable or reimbursable
pursuant to this Agreement.
"Non-Eligible Beneficiary" means a Beneficiary who (i) has represented to
the Trust that he is an Eligible Citizen but is no longer an Eligible Citizen,
or (ii) fails at the time he acquires his Interests to certify his citizenship
to the Managing Trustee pursuant to Section 9.5.
"Operating Lease" means a lease under which the aggregate rental payments
during the original term are not sufficient to permit the Trust to recover the
Purchase Price of the Assets leased thereby.
"Organizational and Offering Expenses" shall have the meaning set forth
in Section 10.4(a).
"Over-Subscription Privilege" means the right of exercising rights holders
to subscribe for all or a portion of the Class B Subordinated Interests that
were not otherwise subscribed for by other rights holders.
"Participant" means the Managing Trustee, the Special Beneficiary or
any Beneficiary.
"Permitted Investments" means securities issued or guaranteed by the
United States government or any agency or instrumentality thereof, certificates
of deposit of United States banks having a net worth of at least $50,000,000,
bankers' acceptances, bank repurchase
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agreements covering securities issued or guaranteed by the United States
government or any agency or instrumentality thereof, money market funds having a
net worth of at least $100,000,000 or similar highly liquid investments (other
than tax exempt securities or obligations). No funds of the Trust will be
invested in any money market fund, savings and loan, bank or other financial
institution which is affiliated with any Managing Trustee or its Affiliates.
"Person" means any individual, partnership, corporation, trust,
association, governmental official, body or agency, or other legal entity of any
type.
"Profits" has the meaning given it in Section 8.2(d).
"Prospectuses" means, collectively, the Class A Prospectus and the
Class B Prospectus.
"Purchase Price" means the price paid by the Trust, whether directly or
indirectly through a Joint Venture, for an Asset, including the amount of
Acquisition Fees and Acquisition Expenses and the amounts of all liens and
mortgages on such Asset, but excluding points and prepaid interest.
"Qualified Income Offset Item" means (1) an allocation of loss or
deduction that, as of the end of each year, reasonably is expected to be made
(a) pursuant to Section 704(e)(2) of the Code to a donee of an interest in the
Trust, (b) pursuant to Section 706(d) of the Code as the result of a change in a
Participant's interest in the Trust, and (c) pursuant to Treasury Regulation
Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of
unrealized receivables or inventory items, and (2) a distribution that, as of
the end of such year, reasonably is expected to be made to a Participant to the
extent it exceeds offsetting increases to the Participant's Capital Account
which reasonably are expected to occur during or prior to the Trust taxable year
in which such distribution reasonably is expected to occur.
"Qualified Plan" means any qualified pension, profit-sharing, or stock
bonus plan (including a Keogh Plan) and an IRA.
"Record Date" has the meaning given it in Section 11.1(c).
"Record Date Holders" means holders of record as of the close of business
on ____________, 1997, of Class A Interests and Special Beneficiary Interests.
"Recording Date" has the meaning given it in Section 9.3.
"Redemption Date" means the date selected by the Managing Trustee, in its
sole discretion, on which Interests tendered for redemption will be redeemed by
the Trust in accordance with Section 9.6.
"Removal" has the meaning specified in Section 4.9.
"Removed Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Removal.
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"Reserve Account" means the account maintained by the Trust as reserves
for working capital and contingent liabilities, including repairs, replacements,
contingencies, accruals required by lenders for insurance, compensating balances
required by lenders to the Trust and other appropriate items.
"Resignation" means the resignation of a Trustee or the voluntary
Assignment of all of the Managing Trustee's Interest pursuant to Section 4.8.
"Resigned Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Resignation.
"Right" means non-transferable subscription rights to Record Date Holders
to acquire Class B Subordinated Interests.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion or consolidation either directly or indirectly of the Trust and the
issuance of securities of a Roll-Up Entity. Such term does not include: (a) a
transaction involving the securities of the Trust that have been for at least 12
months listed on a national securities exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust, partnership or
association form of only the Trust if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (i)
Beneficiary's voting rights; (ii) the term of existence of the Trust; (iii)
Sponsor compensation; and (iv) the investment objectives of the Trust.
"Roll-Up Entity" means a partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Sale or Refinancing" means the sale, refinancing, exchange, condemnation,
eminent domain taking, casualty or other disposition of any Asset or any
interest in any Joint Venture.
"Sales and Distribution Expenses" means expenses incurred in connection
with preparing the Trust for registration and subsequently offering and
distributing the Interests to the public, including sales commissions paid to
the Dealer-Manager in connection with the distribution of the Interests and all
advertising expenses relating to the leasing of the Assets.
"Schedule A" means Schedule A to this Agreement, as amended from time to
time.
"S-D Commissions" means the commissions of 7% of Gross Proceeds payable to
the Soliciting Dealers by the Dealer-Manager or such other amount to be paid to
the Soliciting Dealers as the S-D Commission as specified in Section 5.1(a).
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
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"Soliciting Dealers" means those member firms of the National
Association of Securities Dealers, Inc. (including the Dealer-Manager) that
offer Interests.
"Special Beneficiary" means Equis Financial Group in its capacity as
Special Beneficiary pursuant to this Agreement, together with its successors and
assigns in such capacity.
"Special Beneficiary Interest" means the interest of the Special
Beneficiary in the Trust created pursuant to this Agreement and representing the
capital contribution set forth in Schedule A to this Agreement.
"Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, the Trust, or any Person who will manage or
participate in the management of the Trust and any Affiliate of any such Person.
Sponsor does not include the Delaware Trustee or a Person whose only relation
with the Trust is that of an independent equipment manager or whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services rendered in connection with the Class A Offering or
Class B Offering.
"State" means the State of Delaware.
"Subordinated Resale Fee" means the fee to be paid by the Trust to the
Advisor for services rendered by the Advisor in connection with the sale or
other disposition of the Assets, as described in Section 5.1(e).
"Subscription Agent" means Gemisys Corporation.
"Subscription Agreement" means the Subscription Agreement, the form of
which was attached as Exhibit B to the Class A Prospectus, containing, among
other things, representations made by each Class A Beneficiary.
"Subscription Certificates" means the subscription certificate evidencing
the Rights and set forth as Appendix A to the Class B Prospectus.
"Substitute Trustee" means an assignee of the Trustee's Interest who is
admitted to the Trust as a Trustee pursuant to Section 4.12 or 11.2.
"Substitute Beneficiary" means an assignee of a Beneficiary Interest who
becomes a Beneficiary pursuant to Section 9.3.
"Substitute Special Beneficiary" means an assignee of the Special
Beneficiary Interest who becomes a Special Beneficiary pursuant to Section 9.8.
"Trust" means AFG Investment Trust B, a Delaware business trust, as the
same may be constituted from time to time.
"Trust Beneficiaries" means the Beneficiaries and the Special Beneficiary.
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"Trust Beneficiary Interests" means the Beneficiary Interests and the
Special Beneficiary Interest.
"Trust Counsel" means Peabody & Brown, Boston, Massachusetts, or other
counsel for the Trust selected by the Managing Trustee.
"Trustees" means the Managing Trustee, the Delaware Trustee and any Person
or Persons who subsequently become additional or substitute Trustees as provided
in Section 4.1(a), in each such Person's capacity as a Trustee of the Trust. At
all times when there is only one Trustee so acting, the terms "Trustees" and
"Managing Trustee" shall refer to such Trustee.
"UBTI" means unrelated business taxable income determined in accordance
with Sections 511-514 of the Code.
ARTICLE III - CAPITAL
3.1 Capital Contribution of the Special Beneficiary and Managing Trustee.
The Managing Trustee and the Special Beneficiary have each contributed as
its Capital Contribution in its capacity as Managing Trustee and Special
Beneficiary cash in the amount set forth opposite its name in Schedule A. No
other Trustee shall have the right or obligation to make any Capital
Contribution to the Trust.
3.2 Class A Beneficiaries; Offering of Class B Interests; Beneficiary
Interests.
(a) The Trust has accepted Class A Beneficiaries who own 665,494 Class A
Interests for a Purchase Price of $25 per Interest. Such Purchase Price
constituted the Capital Contributions of the Class A Beneficiaries for all
purposes of this Agreement. Each Class A Beneficiary acquired not less than the
Minimum Class A Investment Amount and no Class A Beneficiary acquired or shall
thereafter own a fractional Class A Interest.
(b) A subscriber for Class B Interests shall become a Class B Beneficiary
in accordance with his Subscription Certificate and the subscription procedures
described in the Class B Prospectus. All subscriptions for Class B Interests
shall be received by the Escrow Agent in trust and deposited in the Escrow
Account. Any Escrow Interest shall be paid to the subscribers who become Class B
Beneficiaries by the Escrow Agent within fifteen (15) days after the Class B
Closing; provided, however, that no Escrow Interest shall be paid with respect
to subscription payments received fewer than three days prior to such Closing.
If the Escrow Agent does not receive subscriptions for at least Class B
Interests on or before _____________ (or such earlier date as of which the
Managing Trustee shall have terminated the Offering), the subscribers shall not
acquire any Class B Interests and the Escrow Agent shall return all monies
deposited by subscribers for Class B Interests to such subscribers, together
with any Escrow Interest, within fifteen (15) business days after such date. All
subscriptions shall be accepted or rejected by the Managing Trustee within
thirty (30) days of their receipt. Subscription payments which are rejected
shall be promptly returned to the subscriber without Escrow Interest. Upon
receipt of subscriptions for not less than the Minimum Offering acceptable to
the Managing Trustee and the determination of the
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Managing Trustee to proceed to the Class B Closing, the Escrow Agent shall
release the proceeds of such subscriptions to the Trust.
(c) The Managing Trustee is hereby authorized to do all things necessary
and desirable to allow subscribers to subscribe for Class B Interests and become
Class B Beneficiaries in accordance with this Agreement and the Class B
Prospectus, including registering the Class B Interests under the Securities Act
of 1933, as amended, pursuant to the rules and regulations of the Securities and
Exchange Commission and qualifying the Class B Interests for sale with state
securities regulatory authorities or perfecting exemptions from qualification.
3.3 Capital Accounts.
A Capital Account shall be established and maintained for each
Participant. Subject to such other adjustments as may be required under the
Code, the Capital Account of each Participant shall consist of (i) the sum of
(a) the amount of cash actually contributed to the Trust by such Participant,
(b) the fair market value of any property contributed to the Trust by or on
behalf of such Participant net of any liabilities assumed by the Trust or to
which such property is subject, and (c) the amount of Profits or gain or
tax-exempt income of the Trust allocated to such Participant, minus (ii) the sum
of (a) the amount of Losses and deductions of the Trust allocated to such
Participant, (b) the amount of Distributions made by the Trust to such
Participant, (c) any amount distributed by the Trust to such Participant
pursuant to Section 8.4, and (d) the fair market value of any property
distributed by the Trust to such Participant net of any liabilities assumed by
such Participant or to which such property is subject. Any special basis
adjustments resulting from Section 743 of the Code shall not be taken into
account for any purpose in establishing and maintaining Capital Accounts for
such Participant pursuant to this Section 3.3. The Capital Account of each
Beneficiary shall be reduced by the actual sales commissions and other
non-deductible, non-capitalizable expenses paid by the Trust with respect to
Interests acquired by such Beneficiary.
Except where this Agreement otherwise requires, a Substitute Beneficiary
or Substitute Special Beneficiary shall be deemed to have received the Capital
Account and made the Capital Contributions to the Trust which were made by the
Beneficiary or Special Beneficiary whom such Substitute Beneficiary or
Substitute Special Beneficiary succeeds, and to have received from the Trust the
Distributions and allocations received from the Trust by such former Beneficiary
or Special Beneficiary.
3.4 Additional Capital Contributions.
No Participant shall be required to make any Capital Contribution or be
entitled to bring an action for partition against the Trust, or to demand or
receive any distribution of or with respect to his Capital Contribution, except
as specifically provided under this Agreement. No loan made by a Participant to
the Trust as permitted by this Agreement shall constitute a Capital Contribution
for any purpose.
ARTICLE IV - TRUSTEES
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4.1 The Trustees; Liability for Trust Obligations.
(a) The number of Trustees shall not be less than two nor more than four
and shall be fixed from time to time by the Managing Trustee. One Trustee shall
be designated as the Managing Trustee and one Trustee shall be designated as the
Delaware Trustee. The Managing Trustee is AFG ASIT Corporation and the Delaware
Trustee is Wilmington Trust Company. Each Person designated as a Trustee shall
serve as Trustee hereunder until such Trustee's Removal or Resignation, as
provided in this Article IV. In the event of the Removal or Resignation of the
Delaware Trustee, the Managing Trustee shall designate a Substitute Delaware
Trustee.
(b) The Managing Trustee shall have complete exclusive discretion in the
management and control of the affairs and business of the Trust, as more
particularly provided in Section 4.2. Any action required or permitted to be
taken by a corporate Managing Trustee hereunder may be taken by such of its
officers or agents as it shall validly designate for such purposes. The Managing
Trustee shall devote so much of its time as may be necessary to carry out the
purposes and conduct the business of the Trust in accordance with this Agreement
and to carry out its duties as Managing Trustee hereunder. The Delaware Trustee
shall have only the rights and obligations of the Delaware Trustee specifically
provided in this Agreement and shall have no Interest, make no Capital
Contribution and have no right to Consent to any matters affecting the Trust
except as otherwise specifically provided herein. In the event that the Managing
Trustee shall designate additional Trustees pursuant to Section 4.1(a), such
Trustees shall have such rights and obligations as shall be delegated to them by
the Managing Trustee but any such delegation shall not relieve the Managing
Trustee of its primary responsibility for the affairs of the Trust hereunder.
(c) If any Managing Trustee shall become unable to serve in such capacity
or shall Resign or be Removed as Trustee and the Beneficiaries shall not have
designated a successor Managing Trustee pursuant to Section 4.12, the Persons
acting as Trustees may from time to time designate from among themselves by
mutual consent a successor Managing Trustee. If for any reason no designation is
in effect, the powers of the Managing Trustee shall be exercised by majority
consent of the remaining Persons acting as Trustees (including, without
limitation, the Delaware Trustee).
(d) The Managing Trustee, when acting in such capacity, shall be
personally liable for the acts, omissions or obligations of the Trust, except as
may be provided to the contrary in any contractual agreement of the Trust.
Neither the Delaware Trustee nor any other Trustee, other than the Managing
Trustee, shall have any personal liability to any other Person for any act,
omission or obligation of the Trust or any other Trustee.
4.2 Extent of Managing Trustee Powers and Duties.
Except as expressly limited by this Agreement, the Managing Trustee shall
have complete and exclusive discretion in the management and control of the
affairs and business of the Trust and all power necessary, convenient or
appropriate to carry out the purposes, conduct the business and exercise the
powers of the Trust.
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(a) General Powers and Duties. The Managing Trustee shall use its best
efforts during so much of its time as may be necessary to carry out its duties
in accordance with this Agreement and in the best interest of the Trust and so
as to protect the interests of the Trust Beneficiaries as a group. The Managing
Trustee shall be accountable as a fiduciary for the safekeeping and use of all
funds and Assets of the Trust and shall not employ or permit another Person to
employ such funds or Assets in any manner except for the benefit of the Trust.
In particular, the Managing Trustee, solely, shall be responsible for and shall
use its best efforts and exercise discretion to the best of its ability:
(i) to cause Assets to be acquired, held, leased, re-leased,
financed and refinanced, sold, exchanged or otherwise disposed of (except
as limited by Section 1.6 and Article VII);
(ii) to lease, maintain and operate the Assets so as to comply with
the provisions of any indebtedness relating thereto;
(iii) to select and supervise the activities of the Advisor (which
may be an Affiliate);
(iv) to ensure the proper application of revenues of the Trust;
(v) to maintain proper books of account for the Trust and to prepare
all reports of operations and tax returns which are to be furnished to the
Trust Beneficiaries pursuant to this Agreement or which are required by
taxing bodies or other governmental agencies;
(vi) in general to supervise the redemption of Class A Interests
pursuant to Section 9.6;
(vii) in particular to cause the Trust to purchase and redeem Class
A Interests pursuant to the last paragraph of Section 9.6.
(viii) to maintain or cause to be maintained, to the extent it deems
necessary or appropriate, adequate insurance with respect to all insurable
Assets of the Trust pursuant to policies of insurance in form and coverage
customary to property similar to the Assets;
(ix) to supervise the offer and sale of Class A Interests and Class
B Interests;
(x) to establish reasonable procedures for the transfer of Interests
(including actions which may impose restrictions on the transferability of
Interests as set forth in Section 9.2, provided such restrictions on
transfers do not cause the assets of the Trust to be deemed to be plan
assets with respect to Beneficiaries which are Qualified Plans) and to
take such other actions with respect to the manner in which Interests are
transferred as it, in its sole discretion, deems necessary or appropriate
in order to preserve the status of the Trust as an entity taxable as a
partnership for federal income tax purposes, to prevent the Trust from
being deemed a publicly
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traded partnership under the Code, to prevent the Trust from being
terminated for federal income tax purposes, to prevent the deregistration
of any FAA-registered aircraft or vessels documented under the laws of the
United States and to assure that the Beneficiaries will be treated as
owners of the Interests for federal income tax purposes under the Code
(and to amend this Agreement without the Consent of any Beneficiary in
order to effect the foregoing); provided, however, that any transfer
restrictions imposed without the Majority Consent to prevent adverse tax
consequences to the Beneficiaries will only be imposed to the extent
necessary to prevent such adverse tax consequences and will be modified or
eliminated to the extent that such restrictions become unnecessary in the
future;
(xi) to execute and file with any state tax authority, if necessary
or appropriate to comply with or minimize withholding obligations under
the laws of that state, a statement on behalf of the Trust Beneficiaries
acknowledging and confirming their obligations to file tax returns with
such state;
(xii) in the event that either (y) the Assets would constitute plan
assets for purposes of ERISA or (z) the transactions contemplated under
this Agreement would constitute prohibited transactions under ERISA or the
Code and an exemption for such transactions is not obtainable or not
sought by the Managing Trustee from the Department of Labor, to
restructure the Trust's activities to the extent necessary to comply with
any exemption in any final plan asset regulation adopted by the Department
of Labor or any condition which the Department of Labor might impose as a
condition to granting a prohibited transaction exemption, including, but
not limited to, establishing a fixed percentage of Interests permitted to
be held by Qualified Plans or other tax-exempt Beneficiaries and/or
discontinuing sales to such Entities after a given date. The Managing
Trustee is empowered to amend this Section 4.2(a)(x) to the extent it
deems necessary or appropriate in order to comply with any applicable
federal or state legislation, rules or regulations enacted or promulgated
or administrative pronouncements or interpretations and/or judicial
interpretations thereof after the date of this Agreement; provided,
however, that any amendments imposed without Majority Consent to prevent
adverse consequences to the Trust Beneficiaries under ERISA or the Code
shall only be imposed to the extent necessary to prevent such adverse tax
consequences and will be modified or eliminated to the extent that such
restrictions become unnecessary in the future. Any amendments made by the
Managing Trustee under the circumstances described above shall be deemed
to be made pursuant to the fiduciary duty of the Managing Trustee to the
Trust and the Trust Beneficiaries;
(xii) to determine whether any Foreign Investors may be admitted as
Beneficiaries and establish requirements for the admission of Foreign
Investors;
(xiii) to establish a fixed percentage of Interests permitted to be
held by or discontinue sales to Foreign Investors after a given date and
take any additional actions as the Managing Trustee deems necessary or
appropriate in order to maintain the registration with the FAA of any
FAA-registered aircraft and the documentation of any vessels documented
under the laws of the United States;
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(xiv) to take such actions as the Managing Trustee deems necessary
or appropriate, including, without limitation, borrowing funds on behalf
of the Trust, to comply with the requirements of Sections 1441, 1442 and
1446 of the Code or setting aside Distributions otherwise payable to
Foreign Beneficiaries in an escrow account to meet future requirements
under Sections 1441, 1442 and 1446 of the Code; and
(xv) to do all things and to execute all documents the Managing
Trustee shall deem necessary or advisable in connection with the
supervision of the affairs, business and assets of the Trust.
In establishing criteria for the resolution of conflicts of interest among
the Trust and the Managing Trustee and its Affiliates, the Managing Trustee will
act in conformity with its fiduciary duty to the Trust and the Beneficiaries.
(b) Amplification of Powers and Duties. As amplification of, and not by
way of limitation on, the powers expressed herein, the Managing Trustee shall
have, subject to the express provisions of this Agreement, full power and
authority on behalf of the Trust, in order to carry out and accomplish its
purposes and functions:
(i) to expend Trust capital and income;
(ii) to purchase, lease, sell, exchange, improve, repair, refurbish,
upgrade, divide, combine and otherwise transact business with respect to
interests in real and personal property, in each case on terms that the
Managing Trustee deems to be in the best interests of the Trust, and in
that connection to employ engineers, contractors, attorneys, accountants,
brokers, appraisers and such other consultants, advisors, artisans and
workmen as may be necessary or advisable for such purpose;
(iii) to borrow money or otherwise to procure extensions of credit
for the Trust in accordance with the borrowing policies set forth in the
Prospectus (as such policies may be altered in accordance with the Class A
Prospectus and Section 7.1), and in connection therewith to execute, seal,
acknowledge and deliver agreements, promissory notes, guarantees and other
written documents constituting obligations or evidences of indebtedness,
and as security therefor to pledge, hypothecate, mortgage, assign,
transfer or convey mortgages or security interests in the Assets;
(iv) for a period of four years from Final Class A Closing, to
reinvest Cash from Sales and Refinancings in additional Assets; provided,
however, that the Lease of any Asset so acquired shall have a term which
shall expire not later than ten years after Final Closing; and provided,
further, that sufficient Distributions are made to enable the
Beneficiaries to pay any state and federal income taxes arising from the
Sale or Refinancing transaction (assuming the Beneficiaries are in a
combined federal and state marginal tax bracket of 33%) or the rate
effective at the time of the Sale or Refinancing transaction;
(v) to invest any Sale or Refinancing proceeds resulting from the
loss or destruction of any Asset in replacement assets;
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(vi) to execute, deliver, amend, modify and cancel documents and
instruments relating to real and personal property of whatever kind and
description, including, but not limited to, mortgages, leases, and other
documents of title or conveyance, assumption agreements pertaining to such
agreements, powers of attorney and other contracts, instruments and
agreements of all kinds;
(vii) to hold all or any portion of the Assets in the name of one or
more trustees (including trustees which are Affiliates of the Managing
Trustee or the Advisor), nominees, or other agents of or for the Trust
(including the Managing Trustee) for the purpose of facilitating
transactions involving said Assets;
(viii) to establish reserves for normal repairs, replacements, and
contingencies and, in its discretion, for any other proper Trust purpose;
(ix) to amend this Agreement to reflect the addition or substitution
of Trustees or Trust Beneficiaries or the reduction of Capital Accounts
upon the return of Capital Contributions to Participants;
(x) to determine the time and amount of Distributions, if any, to
the Participants;
(xi) to designate depositories of the Trust's funds and the terms
and conditions of such deposits and drawings thereon;
(xii) to invest in one or more Joint Ventures in accordance with
Section 7.5;
(xiii) to utilize Cash from Operations and Cash From Sales or
Refinancings to redeem Class A Interests in accordance with the terms of
Section 9.6; and
(xiv) in general to do all things and execute all documents it shall
deem necessary or convenient to accomplish the purposes of the Trust or to
protect and preserve the Assets to the same extent as if it owned such
Assets individually.
(c) Right to Acquire Interests. The Managing Trustee shall have the right
in its sole discretion, without the Consent of any Beneficiary, the Special
Beneficiary or other Trustee:
(i) to acquire Interests to the extent required to prevent the
Assets of the Trust from being deemed plan assets with respect to
Beneficiaries which are Qualified Plans and to prevent a prohibited
transaction from occurring under ERISA; provided that such Interests shall
be acquired at fair market value (as determined by an independent
appraiser retained by the Managing Trustee); and
(ii) to become a Substitute Beneficiary with respect to Interests
held by a Non-Eligible Beneficiary in accordance with Section 9.5.
(d) Authority to Enter into Dealer-Manager Agreement. The Managing Trustee
shall cause the Trust to enter into the Dealer-Manager Agreement pursuant to
which the
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Dealer-Manager shall act as dealer-manager for the Class A Offering.
(e) Authority to Enter into Advisory Agreement. The Managing Trustee shall
cause the Trust to enter into the Advisory Agreement with the Advisor. The
Managing Trustee may not amend the Advisory Agreement in any manner which would
adversely affect the Beneficiaries without Majority Consent. The Advisory
Agreement shall provide that the Trust shall have the right to terminate the
Advisory Agreement effective immediately and without penalty in the event of the
Removal of the Managing Trustee.
(f) Reserves. The Managing Trustee shall endeavor to maintain an adequate
Reserve Account at all times. Such amount may be increased if necessary to
comply with the conditions of lenders requiring compensating balances or other
reserves. If used, cash reserves need not be restored, but, if restored, will be
restored from revenues derived from Trust operations including the proceeds from
the sale of Assets or from borrowings. Funds in the Reserve Account may be
distributed in accordance with Section 8.1(a) if and when deemed advisable by
the Managing Trustee. The Trust's reserves will not be reduced below a level
which the Managing Trustee deems necessary for Trust operations.
(g) Designation, Duties, and Expenses of Tax Matters Participant. The
Managing Trustee shall from time to time (but at least as frequently as required
by law) designate a Tax Matters Participant pursuant to Section 6231 of the Code
and hereby designates itself as the initial Tax Matters Participant. The Tax
Matters Participant shall have the following duties:
(i) to the extent and in the manner required by applicable law and
regulations, to furnish the name, address, profits, interest, and taxpayer
identification number of each Trust Beneficiary to the Secretary of the
Treasury or his delegate (the "Secretary"); and
(ii) to the extent and in the manner required by applicable law and
regulations, to keep each Trust Beneficiary informed of administrative and
judicial proceedings for the adjustment at the Trust level of any item
required to be taken into account by a Trust Beneficiary for federal
income tax purposes (such administrative and judicial proceedings referred
to hereinafter as judicial review).
The Trust shall indemnify and reimburse the Tax Matters Participant for
any and all expenses, including legal and accounting fees, claims, liabilities,
losses and damages incurred in connection with any judicial or administrative
review with respect to the tax liability of the Trust Beneficiaries, subject to
the provisions of Section 4.6. The payment of all such expenses shall be made
before any Distributions are made. Neither the Managing Trustee nor any
Affiliate nor any other Person shall have any obligation to provide funds for
such purpose. The taking of any action and the incurring of any expense by the
Tax Matters Participant in connection with any such proceeding, except to the
extent required by law, is a matter in the sole discretion of the Tax Matters
Participant; and the provisions on limitations of liability of the Managing
Trustee and indemnification set forth in Section 4.6 shall be fully applicable
to the Tax Matters Participant in its capacity as such.
The Tax Matters Participant is hereby authorized, but not required:
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(i) to enter into any settlement agreement with the Service with
respect to any tax audit or judicial review, in which agreement the Tax
Matters Participant may expressly state that such agreement shall bind the
Trustees and the Trust Beneficiaries, except that such settlement
agreement shall not bind any Person who is entitled to file and who
(within the time prescribed pursuant to the Code and regulations
thereunder) files a statement with the Service stating that the Tax
Matters Participant shall not have the authority to enter into a
settlement agreement on the behalf of such Person;
(ii) in the event that a notice of a final administrative adjustment
at the Trust level of any item required to be taken into account by a
Trustee or Trust Beneficiary for tax purposes (a final adjustment) is
mailed to the Tax Matters Participant, to seek judicial review of such
final adjustment, including the filing of a petition for readjustment with
the Tax Court, the District Court of the United States for the district in
which the Trust's principal place of business is located or the United
States Claims Court;
(iii) to intervene in any action brought by a Trustee or Trust
Beneficiary for judicial review of a final adjustment;
(iv) to file a request for an administrative adjustment with the
Service at any time and, if any part of such request is not allowed by the
Service, to file a petition for judicial review with respect to such
request;
(v) to enter into an agreement with the Service to extend the period
for assessing any tax which is attributable to any item required to be
taken into account by a Trustee or Trust Beneficiary for tax purposes, or
an item affected by such item; and
(vi) to take any other action on behalf of any other Trustee or
Trust Beneficiary in connection with any administrative or judicial tax
proceeding to the extent permitted by applicable law or regulations.
(h) Insurance Policies. The Managing Trustee shall cause the Trust to
purchase and maintain such insurance policies as the Managing Trustee deems
reasonably necessary to protect the interests of the Trust (to the extent that
such policies are not maintained by the Lessees or other parties for the benefit
of the Trust). The Trust shall not pay for any insurance covering liability of
the Managing Trustee, its Affiliates, agents or employees for actions or
omissions to act for which indemnification is not permitted hereunder. The Trust
may purchase and pay for such types of insurance, including extended coverage
liability and casualty and workmen's compensation, as would be customary for any
person owning comparable property and engaged in a similar business and may name
the Trustees and their Affiliates as additional insured parties thereunder,
provided that such addition does not add to the cost of premiums payable by the
Trust. The Trust may not incur the cost of any insurance which would insure the
Trustees or their Affiliates against liabilities to which they are prohibited
from being indemnified under Section 4.6; provided, however, that this
prohibition shall not preclude the addition of such parties as additional
insureds on any
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public liability insurance to the extent that such added parties do not increase
the cost of such insurance to the Trust or to the extent that any additional
cost is not borne by the Trust. Notwithstanding the foregoing, the Delaware
Trustee shall be named as an additional insured on any public liability
insurance policy at the expense of the Trust.
(i) Determination of Adjusted Basis in Connection with Section 754
Election. The Managing Trustee is authorized to make the election under Section
754 of the Code, but is not obligated and does not expect to make the Section
754 election. If a Section 754 election is made, in determining the adjustment
to any Beneficiary's proportionate share of the adjusted basis of Assets in
connection with the Section 754 election, the Managing Trustee, for purposes of
accounting simplicity, shall treat each Beneficiary who acquires one or more
Interests at any time during a calendar month as having acquired the same at a
price equal to the weighted average of the price paid for all Interests
transferred during such month, irrespective of the date on or price at which
such Interests actually were acquired by such Beneficiary during such month. The
Managing Trustee shall be authorized to alter these accounting conventions and
to conform such conventions with any regulations issued by the Treasury
Department or rulings or advice of the Service, as the Managing Trustee shall
determine necessary or appropriate, without Consent of any Beneficiary or the
Special Beneficiary. To the extent the Managing Trustee is required to determine
the adjusted basis of any Assets with respect to which the Code requires that
records of such adjusted basis be kept and maintained by the Trust
Beneficiaries, the Managing Trustee may request information regarding such
adjusted basis from such Trust Beneficiary, in writing, and such Trust
Beneficiary shall furnish such information to the Managing Trustee within 30
calendar days after such request is mailed by the Managing Trustee.
4.3 Delegation of Powers.
Except as otherwise provided under this Agreement or by law and subject to
the provisions of Section 5.3 and 10.4, the Managing Trustee may delegate all or
any of its duties under this Agreement to any of its officers, employees and
agents and in furtherance of such delegation may elect, employ, contract or deal
with any Person (including any Affiliate of the Managing Trustee).
4.4 Reliance by Third Parties.
No Person dealing with the Trust, or its assets, whether as mortgagee,
assignee, purchaser, lessee, grantee or otherwise, shall be required to
investigate the authority of the Managing Trustee in selling, assigning,
leasing, mortgaging, conveying or otherwise dealing with any Assets or any part
thereof, nor shall any such assignee, lessee, purchaser, mortgagee, grantee or
other Person entering into a contract with the Trust be required to inquire as
to whether the approval of the Trust Beneficiaries for any such sale,
assignment, lease, mortgage, transfer or other transaction has been first
obtained. Any such Person shall be conclusively protected in relying upon a
certificate of authority or any other material fact signed by the Managing
Trustee, or in accepting any instrument signed by the Managing Trustee in the
name and on behalf of the Trust or the Managing Trustee.
4.5 Limitations on the Exercise of Powers of Managing Trustee.
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The Managing Trustee shall not:
(i) do any act in contravention of this Agreement or any applicable
law or regulation;
(ii) possess Trust property or assign the Trust's rights in specific
Trust property for other than a Trust purpose;
(iii) permit any Person to become a Trust Beneficiary, except as
provided in or contemplated by this Agreement;
(iv) knowingly commit any act that would subject any Trust
Beneficiary to unlimited liability in any jurisdiction;
(v) change the Trust's purposes from those set forth in Section 1.4;
(vi) acquire any Assets in exchange for interests in the Trust;
(vii) invest in junior chattel mortgages or deeds of trust, except
that the Trust may acquire chattel mortgages or deeds of trust in
connection with the sale of Assets;
(viii) invest in or underwrite the securities of other issuers,
except as provided in Sections 7.1 and 7.5;
(ix) do any act required to be approved or ratified in writing by
some or all Trust Beneficiaries under the Business Trust Act without such
approval or ratification unless the right to do so is expressly otherwise
given in this Agreement;
(x) reinvest Distributable Cash From Operations in Assets; or
(xi) cause the Trust to engage in any purchase or redemption of
Interests if, and to the extent that, such purchase or redemption would
result in the Trust being treated as a publicly traded partnership for
purposes of Section 7704 of the Code.
4.6 Liability for Acts or Omissions and Indemnification.
Neither any Trustee nor its Affiliates shall have any liability to the
Trust or to any other Trustee or any Trust Beneficiary for any loss suffered by
the Trust which arises out of any action or inaction of the Trustee or its
Affiliates while acting on behalf of, or in the course of performing services
for, the Trust, if the Trustee, in good faith, determined that such course of
conduct was in the best interest of the Trust and such course of conduct did not
constitute negligence or misconduct of the Trustee or its Affiliates. Each
Trustee and its Affiliates shall be indemnified by the Trust against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by them in connection with the Trust, provided that the same were not
the result of negligence or misconduct on the part of the Trustee or its
Affiliates and the Trustee determined in good faith that the course of conduct
that caused the loss, judgment, liability or claim was in the best interest of
the Trust.
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Notwithstanding the above, the Managing Trustee and its Affiliates shall not be
indemnified for any losses, liabilities or expenses arising from or out of any
alleged violation of any obligations any such Person might have as ERISA
fiduciaries unless (i) there has been a successful adjudication on the merits of
each count involving alleged violations of such obligations as to the particular
indemnitee and such court approves the indemnification of litigation costs, (ii)
such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and such court approves
the indemnification of litigation costs, or (iii) a court of competent
jurisdiction approves the settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and related costs
should be made. Further, notwithstanding the above, the Managing Trustee and its
Affiliates and any Person acting as a broker-dealer shall not be indemnified for
any losses, liabilities, or expenses arising from or out of any alleged
violation of federal or state securities laws unless (i) there has been a
successful adjudication on the merits of each count involving alleged securities
law violations as to the particular indemnitee and a court of competent
jurisdiction approves the indemnification of litigation costs, (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and a court of competent
jurisdiction approves the indemnification of litigation costs, or (iii) a court
of competent jurisdiction approves a settlement of the claims against a
particular indemnitee and finds that indemnification of the settlement and
related costs should be made. In any claim for indemnification for federal or
state securities law violations, the party seeking indemnification shall place
before the court the position of the Securities and Exchange Commission, the
Massachusetts Securities Division, the Michigan Corporations & Securities
Bureau, the Pennsylvania Securities Commission, the Tennessee Securities
Commission and the Commissioner of Corporations of the State of California with
respect to the issue of indemnification for securities law violations. The Trust
shall not incur the cost of a portion of any insurance which insures any party
against any liability the indemnification of which is herein prohibited;
provided, however, that this prohibition shall not preclude the addition of such
parties as additional insureds on any public liability insurance to the extent
that such added parties do not increase the cost of such insurance to the Trust
or to the extent that any additional cost is not borne by the Trust.
Furthermore, any amount recoverable under this Section shall be recoverable only
out of the assets of the Trust and not from the assets of any Trust Beneficiary.
The Trust may make advances from Trust funds for legal expenses and other
costs incurred as a result of any legal action to any Person permitted
indemnification hereby (the "Indemnitee") provided (i) such suit, action or
proceeding relates to or arises out of, or is alleged to relate to or arise out
of, any action or inaction on the part of the Indemnitee in the performance of
its duties or provision of its services by the Managing Trustee or its
Affiliates on behalf of the Trust; (ii) the Indemnitee undertakes to repay any
funds advanced pursuant to this Section 4.6 in cases in which the indemnitee
would not be entitled to indemnification hereunder; and (iii) such suit, action
or proceeding is initiated by a third party who is not a holder of the
Interests; and (iv) such suit, action or proceeding is not initiated against the
Managing Trustee or its Affiliates. If advances are permissible under this
Section 4.6, the Indemnitee shall furnish the Trust with an undertaking as set
forth in the preceding sentence and shall thereafter bill the Trust from time to
time for such amounts as the indemnitee is obligated to make payment therefor.
The Trust shall pay any and all such bills and shall honor any and all such
requests for payment for which the Trust is liable
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hereunder. In the event that a final determination is made that the Trust is not
obligated hereunder for all or any portion of the amounts advanced to the
Indemnitee, such Indemnitee shall refund such amount, plus interest thereon at
the prevailing market rate of interest, within 45 days of such final
determination, and in the event that a final determination is made that the
Trust is so obligated in respect of any amount not paid by the Trust to a
particular Indemnitee, the Trust shall pay such amount to such Indemnitee within
45 days of such determination.
For purposes of this Section 4.6 only, the term "Affiliate" shall mean any
person performing services on behalf of the Trust and acting on behalf of the
Managing Trustee who (i) directly or indirectly controls, is controlled by, or
is under common control with the Managing Trustee; (ii) owns or controls 10% or
more of the outstanding voting securities of the Managing Trustee; (iii) is an
officer, director, partner or trustee of the Managing Trustee; or (iv) if the
Managing Trustee is an officer, director, partner or trustee, in any company for
which the Managing Trustee acts in any such capacity.
4.7 Compensation of Trustees.
(a) Managing Trustee. The Managing Trustee shall not, in its capacity as
Managing Trustee, receive any salary, fees, profits or Distributions except:
(i) the Managing Trustee shall be entitled to receive the
allocations and Distributions which are provided under Article VIII in
respect of its Managing Trustee Interest; and
(ii) the Managing Trustee and its Affiliates shall be entitled to
receive reimbursement for expenses incurred by them in connection with the
operation of the Trust, subject to the limitations set forth in Section
10.4.
(b) Delaware Trustee. The Delaware Trustee shall receive an annual fee of
$1,000, payable quarterly in advance, commencing with the first quarter
following Closing. The Delaware Trustee shall also receive an initial fee of
$1,000 payable at Closing. The Delaware Trustee shall also be entitled to
reimbursement for any expenses incurred by it in the performance of its
obligations hereunder. The Delaware Trustee, as such, shall not receive any
other salary, fees, allocations of Profits or Losses or any Distributions. The
fee of the Delaware Trustee may be modified from time to time as determined by
the Managing Trustee in its sole discretion to compensate the Delaware Trustee
appropriately for the performance of its duties hereunder.
(c) Specific Fees. Notwithstanding the foregoing, the Managing Trustee and
its Affiliates have the right to receive all fees and compensation specifically
provided for in this Agreement. If the Managing Trustee or an Affiliate
purchases Interests, it shall be entitled to the same benefits to which each
Beneficiary is entitled with respect to his Interests, except as otherwise
provided in Section 11.2(b).
(d) Liability of Managing Trustee. The Managing Trustee, when acting in
such capacity, shall be personally liable for the acts, omissions or obligations
of the Trust, except as may be expressly provided to the contrary in any
contractual agreement of the Trust. No
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other Trustee shall have any personal liability to any other Person for any act,
omission or obligation of the Trust or any other Trustee.
4.8 Resignation of Trustees.
(a) No Managing Trustee may Resign unless (i) the Trust Beneficiaries have
received 60 days' advance written notice of the Managing Trustee's intention to
Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the
effect that such Resignation will not constitute a termination of the Trust or
otherwise materially adversely affect the status of the Trust as an entity
taxable as a partnership for federal income tax purposes, and (iii) a new
Managing Trustee shall have been selected who, or which, (x) shall have
expressed a willingness to become (and shall in fact duly become) the Substitute
Managing Trustee, (y) shall satisfy the then applicable provisions of the Code
and any applicable procedures, regulations, rules and rulings (including
published private rulings) thereunder, including applicable net worth
requirements, so that the Trust shall be classified as an entity taxable as a
partnership for federal income tax purposes, and (z) shall have received the
specific written Consent to such admission of a Majority in Interest of the
Beneficiaries. In the event of the Resignation of a Managing Trustee, such
Resigned Managing Trustee shall be liable for any costs or expenses incurred by
the Trust as a result of such Resignation.
(b) No Delaware Trustee may Resign unless (i) the Managing Trustee has
received 60 days' advance written notice of the Delaware Trustee's intention to
Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the
effect that such Resignation will not constitute a termination of the Trust or
otherwise materially adversely affect the status of the Trust as an entity
taxable as a partnership for federal income tax purposes, and (iii) a new
Delaware Trustee shall have been admitted who, or which, shall satisfy the then
applicable provisions of the Business Trust Act. In the event of the Resignation
of a Delaware Trustee, such Resigned Delaware Trustee shall be liable for any
costs or expenses incurred by the Trust as a result of such Resignation unless
such resignation is at the request of the Managing Trustee.
4.9 Removal of Trustees.
A Trustee shall be deemed to have been removed (a "Removal") as a Trustee
from the Trust upon the occurrence of any of the following events: (a) the
Removal of the Trustee pursuant to a vote of the Beneficiaries made in
accordance with Article XI, (b) the making of an assignment for the benefit of
creditors, the filing of a voluntary petition in bankruptcy, or an adjudication
of bankruptcy, (c) the termination of the Trustee, or (d) any other involuntary
event which constitutes an event of removal under the Business Trust Act.
4.10 Consequences of Resignation or Removal.
(a) Any Resigned or Removed Trustee or its legal representatives shall be
entitled to receive from the Trust (i) (in the case of a Managing Trustee), any
positive balance in its Capital Account (as adjusted to the date of such
Resignation or Removal), provided, however, that in no event shall such amount
exceed the fair market value of the Resigned or Removed Trustee's Interest, (ii)
any amounts due and owing to it by the Trust less any amounts due and owing by
it to the Trust, and (iii) the remaining balance, if any, of fees payable as and
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when due pursuant to this Agreement or any other written agreements between the
Trust and such Trustee in its capacity as Trustee; provided, however, that the
Resigned or Removed Trustee shall not be entitled to any such fees which had not
yet been earned by it prior to its Resignation or Removal. The right of the
Resigned or Removed Trustee or its legal representatives to payment of said
amounts and fees shall be subject to any claim for damages which the Trust or
any other Trustee or Trust Beneficiary may have against such Trustee or its
legal representatives if such Resignation or Removal is in contravention of this
Agreement.
(b) The Managing Trustee hereby covenants and agrees, in the event of its
Resignation or Removal, to transfer to a Substitute Managing Trustee selected as
provided in Section 4.8 or Section 4.12 or to the Trust, such portion, if any,
of its Managing Trustee's Interest as the Substitute Managing Trustee or the
Trust shall elect to purchase. Any such transfer will be made in consideration
of the payment by the Substitute Managing Trustee to the Resigned or Removed
Managing Trustee or its legal representatives, of 86.5% of the fair market value
of such Interest less any amounts payable pursuant to Section 4.10(a) by the
Trust. The fair market value of the Trustee's Interest shall be as determined by
the parties to the transfer, or otherwise in accordance with Section 11.3. The
method of payment to the Resigned or Removed Managing Trustee must be fair and
must protect the solvency and liquidity of the Trust. In the event of the
Resignation of the Managing Trustee, payment may be made by means of a
non-interest-bearing unsecured promissory note with principal payable, if at
all, from Distributions which the Resigned Managing Trustee would have received
but for its Resignation. In the event of the Removal of the Managing Trustee,
the Substitute Managing Trustee or the Trust shall make such payment by means of
a promissory note bearing interest at a floating annual rate equal to the prime
rate of interest announced by Fleet Bank of Massachusetts, N.A., maturing in not
less than five years with equal installments of principal and interest payable
each year. Any portion of such Removed Managing Trustee's Interest which is not
required to be transferred as aforesaid may be retained by such Removed Managing
Trustee or its estate or legal representatives as appropriate. The Managing
Trustee acknowledges and agrees that the payment of 86.5% of the fair market
value of any portion of its Trustee's Interest which has been transferred shall
be full payment for such Trustee's Interest. To the extent of such retained
Trustee's Interest, if any, such Resigned or Removed Managing Trustee or its
estate or legal representatives shall be treated as Trust Beneficiaries.
(c) The Delaware Trustee hereby covenants and agrees, in the event of its
Resignation or Removal, to transfer to a Substitute Delaware Trustee selected as
provided in Sections 4.1 and 4.8, or to the Trust, such portion, if any, of its
Trustee's Interest as the Substitute Delaware Trustee or the Trust shall elect
to purchase. Any such transfer will be made in consideration of the payment by
the Trust of one dollar, plus any amounts payable pursuant to Section 4.10(a) by
the Trust.
(d) If the Removal of the Managing Trustee shall occur as part of a
removal and replacement of such Managing Trustee effected in accordance with
Article XI, the provisions of Article XI shall govern to the extent (if any)
that the provisions of said Article XI are inconsistent with the provisions of
this Section 4.10.
4.11 Liability of Resigned or Removed Trustee.
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If the business of the Trust is continued after Resignation or Removal of
the Trustee, the Resigned or Removed Trustee or its legal representatives shall
remain liable for all obligations and liabilities incurred by it while a Trustee
and for which it was liable as a Trustee, but shall be free of any obligation or
liability incurred on account of or arising from the activities of the Trust
from and after the time such Resignation or Removal shall have become effective.
4.12 Continuation of Trust Business.
Upon any Removal of the sole Managing Trustee, such Removed Managing
Trustee or its representatives shall promptly notify the Trust Beneficiaries. In
the event of a failure to give such notice, any Trust Beneficiary may notify the
other Trust Beneficiaries of such circumstances. Any Trust Beneficiary may then
propose for admission a Substitute Managing Trustee, unless a Substitute
Managing Trustee shall have already been proposed by the Trust Beneficiaries
pursuant to Article XI. If any remaining Managing Trustee is a sole Managing
Trustee at the time of its Removal, then that subsequent Removal will be
governed by the provisions of this Agreement relating to the Removal of a sole
Managing Trustee. Any Substitute Managing Trustee proposed pursuant to this
Section 4.12 or Section 11.2 shall, with Majority Vote, become a Substitute
Managing Trustee upon his or its execution of this Agreement and may thereupon
elect to continue the Trust business. If no Substitute Managing Trustee has
received such Majority Vote and executed this Agreement within one hundred
eighty (180) days from the date of the Managing Trustee's Removal, then the
Trust shall dissolve and its affairs shall be wound up.
4.13 Powers and Limitations of Delaware Trustee.
(a) Notwithstanding any other provision of this Agreement, unless
specifically authorized in writing by the Managing Trustee and consented to by
the Delaware Trustee, the Delaware Trustee shall not participate in any
decisions or possess any authority or approval right with respect to the
operation of any business of the Trust, the investment of Trust property or the
payment of Distributions to the Beneficiaries. No amendment to this Agreement
shall require the approval or signature of the Delaware Trustee. The Delaware
Trustee shall have the power and authority to execute, deliver, acknowledge and
file all necessary documents and to maintain all necessary records of the Trust
as required by the Business Trust Act. The Delaware Trustee shall provide prompt
notice to the Managing Trustee of its performance of the foregoing acts.
(b) The Delaware Trustee shall not be liable for acts or omissions of the
Managing Trustee and shall owe no other fiduciary duties to the Beneficiaries
other than as expressly provided for in this Section 4.13.
(c) The Delaware Trustee accepts the Trust hereby created and agrees to
perform its duties hereunder with respect to the same but only upon the terms of
this Agreement. The Delaware Trustee shall not be personally liable under any
circumstances except (x) for its own misconduct or negligence or (y) for taxes,
fees or other charges on, based on or measured by any fees, commissions or
compensation received by the Delaware Trustee in connection with the provision
of its services hereunder. In particular, but not by way of limitation:
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(i) No provision of this Agreement shall require the Delaware
Trustee to expend or risk its personal funds, or otherwise incur any
financial liability in the performance of its rights or powers hereunder,
if the Delaware Trustee shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured or provided to it;
(ii) Under no circumstances shall the Delaware Trustee be personally
liable for any indebtedness or obligation of the Trust;
(iii) In the exercise or administration of its duties hereunder, the
Delaware Trustee may, at the expense of the Trust, consult with counsel
and it shall not be liable for anything done, suffered or omitted in good
faith by it in accordance with the advice or opinion of such counsel; and
(iv) The Delaware Trustee shall not be liable for the default or
misconduct of the Managing Trustee and shall not be liable for any act or
omission taken at the discretion of the Managing Trustee.
(d) Notwithstanding anything in this Section 4.13, the Delaware Trustee
shall be subject to the indemnification provisions contained in Section 4.6 of
this Agreement.
ARTICLE V - ADVISOR SERVICES AND COMPENSATION
5.1 Compensation to Advisor and Certain Affiliates.
The Advisor and other Affiliates of the Managing Trustee shall receive
fees and compensation as follows:
(a) For services rendered in connection with the sale of Class A
Interests, the Trust will pay the Dealer-Manager a D-M Commission of 7% of
the Gross Proceeds. The Dealer-Manager will reallow to each Soliciting
Dealer a commission of 7% of the Gross Class A Proceeds per Class A
Interest sold by such Soliciting Dealer. In addition, the Dealer-Manager,
in its sole discretion, may reallow to a Soliciting Dealer all or a
portion of the non-accountable expense allowance of 1.5% of Gross Class A
Proceeds per Class A Interest and the accountable due diligence expense
allowance of 0.5% of Gross Proceeds per Class A Interest under the
Dealer-Manager Agreement payable with respect to the Interests sold by
such Soliciting Dealer. The Dealer-Manager may retain the entire D-M
Commission earned with respect to sales of Interests to the Managing
Trustee or its Affiliates. Total payments, including commissions, expense
allowances, any sales incentives, wholesaling fees and any and all other
underwriting compensation made to the Dealer-Manager and the Soliciting
Dealers in connection with the Class A Offering from all sources,
including the Trust and the Dealer-Manager, will never exceed ten percent
(10%) of Gross Class A Proceeds, except that up to an additional one-half
of one percent (0.5%) of Gross Class A Proceeds may be paid for
reimbursement of bona fide due diligence expenses.
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(b) For rendering services in connection with the initial
acquisition of Assets by the Trust, the Trust shall pay to the Advisor
Acquisition Fees and Acquisition Expenses equal to the lesser of (A) 0.28%
of the Asset Base Price paid by the Trust for each Asset acquired or (B) a
fee, which in conjunction with all other fees paid by or on behalf of the
Trust to all Persons in connection with the acquisition of an Asset, the
Managing Trustee believes to be competitive with that charged by
non-Affiliated Persons for rendering comparable services. For rendering
services in connection with the acquisition of additional Assets by the
Trust through the reinvestment of Cash From Sales or Refinancings, the
Trust shall pay to the Advisor Acquisition Fees and Acquisition Expenses
equal to the lesser of (A) 3% of the Asset Base Price paid by the Trust
for each Asset acquired or (B) a fee, which in conjunction with all other
fees paid by or on behalf of the Trust to all Persons in connection with
the acquisition of an Asset, the Managing Trustee believes to be
competitive with that charged by non-Affiliated Persons for rendering
comparable services. Notwithstanding the foregoing, the Trust's Investment
in Assets shall not be less than the greater of (A) 80% of the Gross
Proceeds, reduced by .0625% for each 1% of leverage encumbering Trust
Assets, or (B) 75% of Gross Class A Proceeds. In no event, however, will
the Trust's Investment in Assets be less than 90% of the Gross Class A
Proceeds (including 1% of Gross Class A Proceeds for working capital
reserves). To the extent that such limitation is not otherwise satisfied,
Acquisition Fees and Acquisition Expenses payable or paid by the Trust to
the Advisor will be reduced or refunded to the extent necessary to comply
with such limitation. In addition, if Acquisition Fees or Acquisition
Expenses are paid to the Advisor or an Affiliate thereof in connection
with the reinvestment of Cash From Sales or Refinancings, such fees and
expenses shall be limited so that the Trust's Investment in Assets, after
taking into account the Front-End Fees and Expenses incurred in connection
with the initial acquisition of the Trust's Assets, shall be equal to at
least 90% of Gross Class A Proceeds (including up to 3% of Gross Class A
Proceeds for working capital reserves) reduced by .0625% for each 1% of
leverage encumbering the Trust's Assets, but not less than 85% of Gross
Class A Proceeds (including up to 3% of Gross Class A Proceeds for working
capital reserves). The total of all fees paid to all Persons in connection
with the acquisition of Assets, when aggregated with all travel,
communication and overhead reimbursements paid to the Managing Trustee or
its Affiliates, shall not exceed a fee competitive with that charged by
non-Affiliated Persons for rendering comparable services. No Acquisition
Fees and Acquisition Expenses are payable with respect to Assets acquired
with insurance proceeds or other indemnity payments to be leased under the
original leases of lost or destroyed Assets except to the extent that
insurance proceeds or indemnity payments are sufficient to pay such
Acquisition Fees and Acquisition Expenses after deducting the Asset Base
Price of the replacement Asset and payment of all existing indebtedness
secured by the lost or destroyed Asset.
(c) For Asset Management, the Trust shall pay the Advisor an Asset
Management Fee, payable monthly, equal to the lesser of (A) the fees which
the Managing Trustee reasonably believes to be competitive for similar
services for similar assets or (B) 5% of gross lease rental revenues of
the Trust from Operating Leases and 2% of gross lease rental revenues of
the Trust from Full Payout Leases for the month for which such payment is
being made. To the extent that the Trust does not have sufficient cash to
pay the Asset Management Fee in full when due, any
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unpaid amount will be accrued and paid in the next succeeding month or
months. No interest shall accrue on unpaid amounts of Asset Management
Fee. The Advisory Agreement shall provide that it may be terminated by the
Trust without penalty on no more than sixty (60) days' written notice to
the Advisor. The Advisory Agreement shall also provide that it may be
terminated by the Trust effective immediately and without penalty in the
event of the Removal of the Managing Trustee.
(d) For rendering services in connection with the sale of any
Assets, the Trust shall pay to the Advisor a Subordinated Resale Fee in an
amount equal to the lesser of (A) 3% of the gross sales proceeds of the
Asset, or (B) one-half of a Competitive Asset Sale Commission; provided
that in no event shall any such Subordinated Resale Fee be paid prior to
Payout; and provided, further, that the Advisor shall not be entitled to
receive any amount of Subordinated Resale Fee to the extent that such
amount would cause the total compensation paid to all Persons, in
connection with the sale of such Asset, to exceed a Competitive Asset Sale
Commission. No interest shall accrue on unpaid amounts of the Subordinated
Resale Fee. After Payout any and all Subordinated Resale Fees previously
earned by the Advisor shall be paid by the Trust prior to any
Distributions to the Participants.
(e) The Trust shall pay the Managing Trustee and its Affiliates an
amount equal to 1% of the Gross Class B Proceeds as a non-accountable
expense allowance in connection with the Class B Offering.
5.2 Other Interests of the Advisor and its Affiliates.
The Advisor, the Managing Trustee and any other Affiliate of the Advisor
may engage in or possess an interest in other business ventures (unconnected
with the Trust) of every kind and description, independently or with others,
including, but not limited to, serving as general partner of partnerships or
trustees of trusts and participating in the equipment leasing business in all of
its phases, which shall include, without limitation, ownership, operation,
leasing, re-leasing, financing, refinancing, management and syndication of
equipment and which may involve equipment competitive with any Asset. The
officers and directors of the Managing Trustee and the Advisor will devote only
such time to the affairs of the Trust as they, in their sole discretion,
determine in good faith to be necessary for the business and operations of the
Trust. Neither the Trust nor the Trust Beneficiaries shall have any rights in
and to such independent ventures or the income or profits therefrom by reason of
the Advisor's or Managing Trustee's position with the Trust. Notwithstanding the
foregoing, the Managing Trustee will act at all times in a manner consistent
with its fiduciary duties to the Trust.
In the event the Managing Trustee is presented by the Advisor with a
potential investment which might be made by the Managing Trustee, EFG or its
Affiliates, including investment entities advised, managed, controlled or to be
formed by the Managing Trustee, the Advisor and/or its Affiliates (collectively,
the "Investment Entities"), the Managing Trustee will analyze the assets already
purchased and investment objectives of each Investment Entity involved and will
make the decision as to which Investment Entity will purchase the assets based
upon such factors, among others, as (i) the amount of cash available in each
Investment Entity for such acquisition and the length of time such funds
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have been available, (ii) the current and long-term liabilities of each
Investment Entity, (iii) the effect of such acquisition on the diversification
of each Investment Entity's equipment portfolio by type of equipment, (iv) the
credit diversification (geographically and/or by industry) of each Investment
Entity's equipment portfolio, (v) the estimated income tax consequences from
such acquisition to the investors in each Investment Entity, (vi) the cash
distribution objectives of each Investment Entity, (vii) the policy of each
Investment Entity relating to leverage, and (viii) any specialized investment
purpose of an Investment Entity (which may, in the discretion of the Advisor,
entitle such entity to priority as to certain types of assets). If, after
analyzing the foregoing and any other appropriate factors, the Managing Trustee
determines that an acquisition would be equally suitable for more than one
Investment Entity, then the Managing Trustee will purchase assets for the
Investment Entities based on the length of time such funds have been available.
In the event that two or more of AFG Investment Trust B, AFG Investment Trust B,
AFG Investment Trust C and AFG Investment Trust D have a substantial portion of
their uninvested Net Proceeds available at the same time for purchase of Assets,
the Managing Trustee will allocate available Assets among them on a pro-rata
basis, determined by the cash balances in each in excess of funds designated for
its Reserve Account and for distribution to its Participants.
In the event of a conflict between two or more Investment Entities advised
or managed or controlled (or in the process of being formed) by the Managing
Trustee, EFG or its Affiliates, for the financing of the acquisition of Assets
contemporaneously, the Managing Trustee and EFG will seek to cause the available
financing to be obtained by the Investment Entity that has been seeking
financing the longest.
In the event of a conflict between two or more Investment Entities,
advised, managed or controlled by the Managing Trustee, EFG or an Affiliate, to
re-lease or sell similar assets contemporaneously, the first opportunity to
re-lease or sell equipment will generally be allocated to the Investment Entity
attempting to re-lease or sell equipment which has been subject to the lease
which expired first, or, if the leases expire simultaneously, the lease which
was first to take effect. However, the Managing Trustee and EFG, in their
discretion, may make exceptions to this general policy where Assets are subject
to remarketing commitments or where there are other circumstances which, in
their judgment, make the application of such policy inequitable for a particular
Entity. In addition, exceptions to this general policy will be made when a buyer
or new lessee indicates a preference for a specific item or items of equipment.
5.3 Other Transactions Involving the Advisor and its Affiliates.
Except as specifically permitted by this Agreement, the Managing Trustee
is prohibited from entering into any agreements, contracts or arrangements on
behalf of the Trust with the Advisor or any Affiliate (including the Managing
Trustee itself). Such prohibition shall include, without limitation, that
neither the Advisor nor any such Affiliate shall receive directly or indirectly
a commission or fee in connection with the reinvestment of the proceeds of the
sale or refinancing of any Equipment or in connection with any insurance
obtained by the Trust except as provided in Section 5.1. In addition, in
connection with any agreement entered into by the Trust with the Advisor or any
Affiliate, no rebates or give-ups may be received by the Advisor or any such
Affiliate, nor may the Advisor or any such Affiliate participate in any
reciprocal business arrangements which would have the effect of
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circumventing any of the provisions of this Agreement.
The Advisor and its Affiliates shall not receive any fees or compensation
other than as provided for in Sections 4.7, 5.1, 7.4, 10.4(a) and 10.4(b). If
the Advisor or an Affiliate purchases Interests, it shall be entitled to the
same benefits to which each other Beneficiary is entitled, except as otherwise
provided in Section 11.2(b).
ARTICLE VI - TRUST BENEFICIARIES
6.1 Absence of Control over Trust Business.
The Trust Beneficiaries hereby consent to the exercise by the Managing
Trustee of the power conferred on the Managing Trustee by this Agreement. No
Trust Beneficiary (except one who is also the Managing Trustee and then only in
its capacity as the Managing Trustee) shall participate in or have any control
over the Trust's business or have any right or authority to act for or to bind
the Trust. No Trust Beneficiary shall have the right to have the Trust dissolved
and liquidated or have his Capital Contributions returned except as provided in
this Agreement.
6.2 Limited Liability.
Except as set forth below, each Trust Beneficiary in his capacity as a
Trust Beneficiary shall be entitled, pursuant to ss. 3803 (a) of the Business
Trust Act, to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. Except (i) as may otherwise be required by law, (ii)
to the extent that a Trust Beneficiary may be liable to the Trust for an amount
equal to any Distributions made to him if, after such Distribution is made, the
then fair market value of the remaining Assets of the Trust is not sufficient to
pay its then outstanding liabilities and (iii) as set forth below with respect
to Foreign Beneficiaries, the liability of each Trust Beneficiary in his
capacity as a Trust Beneficiary shall be limited to the amount of his Capital
Contribution as described in Sections 3.2 and 3.4 and no Trust Beneficiary
shall, in his capacity as Trust Beneficiary, have any further obligations to the
Trust or be required to contribute any additional capital or loan any funds to
the Trust.
Notwithstanding the foregoing, each Foreign Beneficiary shall indemnify
the Trust and the Trustees for any costs or expenses incurred by the Trust or
the Trustees in connection with the withholding requirements applicable to
Foreign Beneficiaries under the Code, including, without limitation, Sections
1441, 1442 and 1446.
Upon issuance of the Class B Interests as provided in this Agreement, the
Class B Interests so issued shall be deemed to be validly issued, fully paid and
non-assessable.
6.3 Fiduciary Duty of Managing Trustee to Trust Beneficiaries.
No Trust Beneficiary shall forgo by means of contract the fiduciary duty
owed to the Trust Beneficiary by the Managing Trustee under the Business Trust
Act or the common law of the State.
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ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES
7.1 Investment Objectives and Policies.
The Managing Trustee shall use its best efforts to cause the Trust to
follow the investment objectives and policies set forth in the Class A
Prospectus. The Managing Trustee may not make substantial or material
modifications in such investment objectives without Majority Consent. However,
the Managing Trustee, in its sole discretion and as permitted by this Agreement
but subject to any and all limitations on its exercise of such discretion
contained in this Article VII, may alter the investment, borrowing or other
policies of the Trust as set forth in the Class A Prospectus without the consent
of any Trust Beneficiary to the extent the Managing Trustee deems such
alterations to be necessary or appropriate to enable the Trust better to meet
its investment objectives; provided, however, that in no event may the Managing
Trustee alter the investment, borrowing or other policies of the Trust as set
forth in the Class A Prospectus if such alteration would cause the investment,
borrowing or other policies of the Trust to violate the NASAA Guidelines. In
addition, the Managing Trustee may not alter the investment policies of the
Trust to increase the amount of leverage which may be incurred by the Trust or
to decrease the standards for determining a Creditworthy Lease Portfolio. All
funds held by the Trust which are not invested in Assets (including subscription
payments upon their release to the Trust) may be invested by the Trust in
Permitted Investments. The Trust shall not make loans except in connection with
the purchase, sale or other disposition of Assets. The Trust shall not redeem or
repurchase Interests except to the extent that such Interests are forfeited in
order to (a) prevent the assets of the Trust from being deemed plan assets or
(b) prevent Foreign Beneficiaries from remaining Trust Beneficiaries under
certain circumstances provided herein or (c) as permitted by Section 9.6. The
Managing Trustee shall use its best efforts to ensure that the Trust shall not
be deemed an investment company, as such term is defined in the Investment
Company Act of 1940.
7.2 Assets and Lessees.
The Trust shall acquire various types of Assets as provided in the Class A
Prospectus.
7.3 Sales and Leases of Assets from or to the Managing Trustee and its
Affiliates.
The Trust may not purchase Assets in which the Managing Trustee or any of
its Affiliates (the "Interested Parties") has an interest except for Assets
acquired on an interim basis (generally not in excess of six months) by one of
the Interested Parties for the purpose of facilitating the acquisition by the
Trust of the Asset or obtaining financing for the Trust or in connection with a
Joint Venture. The Trust may not purchase Assets from any program in which the
Managing Trustee or any of its Affiliates has an interest; provided that such
restriction shall not prohibit the Trust from being a participant in a Joint
Venture. The Trust may acquire any such Assets from the Interested Parties only
if: (i) such acquisition is in the best interests of the Trust; (ii) such Asset
is purchased by the Trust for a price no greater than the Asset Base Price;
(iii) there is no difference in interest terms of the loans secured by such
Asset at the time acquired by one of the Interested Parties and the time
acquired by the Trust, unless any such difference is favorable to the Trust; and
(iv) no other benefit arises out
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of such transaction to the Interested Parties apart from compensation otherwise
permitted by this Agreement. Assets shall not be acquired from an Interested
Party if such transaction would involve the payment of duplicative Asset
Management Fees or other fees or would have the effect of circumventing any of
the restrictions on and prohibitions of transactions involving conflicts of
interest contained herein. The aggregate primary term rental payments received
or accrued to the Interested Parties with respect to Assets prior to the time
that the Trust purchases the Asset from the Interested Parties shall reduce the
purchase price paid by the Trust for such Asset by such amounts unless such
primary term rental payments are assigned to the Trust.
If one of the Interested Parties purchases an Asset in its own name in
order to facilitate the ultimate purchase by the Trust, the Trust may purchase
such Asset and such Interested Party will be entitled to receive interest on the
funds expended for such purchase on behalf of the Trust. Interest on such
temporary purchases will be charged at a floating rate equal to the rate of
interest charged by third party financing institutions on comparable loans for
the same purpose (but not in excess of 2% per annum over the base rate from time
to time announced by Fleet Bank of Massachusetts, N.A. Interest shall accrue and
be payable at the above-determined rate from the date of the Managing Trustee's
or Affiliate's acquisition of the Asset until such Asset is sold to the Trust.
The Trust shall not lease Assets from or to the Interested Parties. The
Trust shall not sell Assets to the Interested Parties, except as provided in
this Section.
7.4 Loans to or from the Managing Trustee and its Affiliates.
No loans may be made by the Trust to the Managing Trustee or its
Affiliates. The Managing Trustee or its Affiliates may loan funds on a
short-term basis to the Trust but only with interest rates equal to the amounts
that are charged (without reference to the Managing Trustee's or any Affiliate's
financial abilities or guarantees) by unrelated banks on comparable loans for
the same purpose (but not in excess of 2% per annum over the base rate from time
to time announced by Fleet Bank of Massachusetts, N.A.). Interest on such loans
will begin to accrue on the date the loan is funded. Neither the Managing
Trustee nor any Affiliate shall provide permanent financing for the Trust, and
all payments of principal and interest on any financing provided by the Managing
Trustee or any of its Affiliates shall be due and payable within 12 months after
the date of the loan. Neither the Managing Trustee nor any Affiliate may receive
points or other financial charges or fees (excluding interest charges) in
respect of any loans to the Trust, although the Managing Trustee's or an
Affiliate's compensation (specifically, Acquisition Fees and Asset Management
Fees) may be increased as an indirect result of such loans.
Any borrowings from the Managing Trustee or its Affiliates incurred for
organization and offering expenses will be non-interest-bearing and will be
repaid out of offering proceeds (subject to the limitations of Section 10.4).
The Trust shall not enter into any borrowing arrangement with the Managing
Trustee or its Affiliates which calls for a prepayment charge or penalty to be
paid to the Managing Trustee or its Affiliates.
7.5 Joint Investments.
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The Trust shall not make investments in the limited partnership interests
or other equity interests of any other program. The Trust may enter into a
general partnership, joint venture, trust or other business arrangement (other
than a corporation) (collectively, a "Joint Venture") with an Unaffiliated
Person if all of the following conditions are satisfied. First, the Trust shall
acquire a controlling interest in any such Joint Venture. For purposes hereof,
the Trust shall be deemed to have a controlling interest in such Joint Venture
if (i) the Trust holds or is contractually entitled to acquire an interest of
not less than 50% in the capital and profits of the Joint Venture and the Joint
Venture agreement or related documents grant to the Trust and its Affiliates the
joint right to make basic management decisions concerning the leasing,
financing, refinancing, sale or other disposition of the Assets or (ii) the
Trust holds a less than 50% interest in the capital and profits of the Joint
Venture, but the Joint Venture Agreement or related documents grant to the Trust
and its Affiliates the exclusive right to make all basic management decisions
concerning the leasing, financing, refinancing, sale or other disposition of the
Asset. Second, no such Joint Venture shall be entered into by the Trust which
involves the payment of duplicative equipment management or other fees or which
would have the effect of circumventing any of the restrictions on and
prohibitions against transactions involving conflicts of interest contained in
this Agreement. Third, such Joint Venture must either own specific Assets or be
in the process of acquiring specific Assets (i.e., a commitment for the purchase
of the specific Asset has been executed, but the Joint Venture has not yet
acquired title to or paid for the Asset). The Trust may enter into Joint
Ventures which satisfy the preceding requirements with respect to any Asset at
any time during the life of the Trust; provided, however, that Offering Proceeds
received directly by the Trust from Beneficiaries are invested within 24 months
after commencement of the Offering. In no event may a Trust enter into a Joint
Venture if by means of the Joint Venture the Trust will acquire Assets from a
program in which the Managing Trustee or any of its Affiliates has an interest
in contravention of the provisions of Section 7.3 of this Agreement.
The Trust may enter into Joint Ventures with Affiliates of the Managing
Trustee or EFG or programs sponsored by the Managing Trustee or its Affiliates
(including Joint Ventures organized after the Closing) (collectively,
"Affiliated Venturers") but only if (i) such Affiliated Venturers are limited or
general partnerships, trusts, joint ventures, unincorporated associations or
similar organizations other than a corporation formed for the primary purpose of
investment in and operation of or gain from an interest in equipment, (ii) such
Affiliated Venturers have substantially identical investment objectives and
management compensation provisions to those of the Trust, (iii) no such Joint
Venture shall be entered into by the Trust which involves the payment of
duplicative equipment management or other fees or which would have the effect of
circumventing any of the restrictions on and prohibitions of transactions
involving conflicts of interest contained in this Agreement, (iv) the
compensation to the Managing Trustee and its Affiliates with respect to such
Joint Ventures shall be substantially identical to the compensation described in
this Agreement, (v) in the event of a proposed sale of the Asset or interest
therein initiated by another Joint Venture partner, the Trust must have a right
of first refusal, pro rata with the other remaining parties, to purchase the
other party's or parties' interest, (vi) the Joint Venture is done either for
the purpose of effecting appropriate diversification for such programs or for
the purpose of relieving the Managing Trustee from a commitment entered into in
connection with the acquisition of an Asset which was acquired for subsequent
transfer to the Trust, and (vii) the investment by each party must be on
substantially the same terms and conditions except as a result from varying
percentage interests in the Joint
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Venture. The Trust will not acquire any Asset through a Joint Venture with EFG
or any non-corporate Affiliate unless it is intended that such Joint Venture
will be temporary in nature and will not last more than six months. Further, no
lender to a Joint Venturer may have a security or other interest in the Trust's
interest in the Joint Venture except to the extent of funds loaned directly to
or for the benefit of the Trust. The Trust may cease to be a party to a Joint
Venture by sale of its interest to another Joint Venturer or to a third-party
purchaser. The Trust will not acquire Assets through a Joint Venture with the
Managing Trustee or any other corporate Affiliate of EFG.
The Trust may also enter into a Joint Venture with one or more
unaffiliated Persons and one or more Affiliated Venturers provided that (i) the
Trust and its Affiliated Venturers acquire collectively a controlling interest
(as such term is described above) in such Joint Venture; (ii) the conditions set
forth in subsections (i)-(iii) and (vi) above are satisfied; (iii) the Joint
Venture Agreement or related documents grant to the Trust and its Affiliated
Venturers the joint right to make basic management decisions concerning the
leasing, financing, refinancing, sale or other disposition of the Asset; and
(iv) in the event of a proposed sale of the Asset or interest therein initiated
by another Affiliated Joint Venture partner, the Trust has a right of first
refusal, pro rata with the other Affiliated Venturers only, to purchase all
other Affiliated Venturers' interests therein. Notwithstanding anything
contained in this Section 7.5 to the contrary, the Trust may enter into Joint
Ventures only where such investments will further the investment objectives of
the Trust and where such Joint Ventures do not involve the payment to the
Managing Trustee, the Advisor or any Affiliate of the foregoing, equipment
management or other fees that would not be permitted under this Agreement.
7.6 Resales.
No exclusive listing for the sale of Assets shall be granted to the
Managing Trustee or any of its Affiliates.
7.7 In-Kind Distributions.
The Trust shall not make in-kind distributions to the Participants.
7.8 Roll-Ups.
The Trust shall not participate in any proposed Roll-Up if any of the
following conditions are present:
(i) the proposed Roll-Up would result in the Beneficiaries having
voting rights in the Roll-Up Entity which are less than those contained in
this Agreement. If the Roll-Up Entity is a corporation, the voting rights
of the Beneficiaries shall correspond to the voting rights provided for in
this Agreement to the greatest extent possible;
(ii) the proposed Roll-Up includes provisions which would operate to
materially impede or frustrate the accumulation of shares by any purchaser
of the securities in the Roll-Up Entity (except to the minimum extent
necessary to preserve
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the tax status of the Roll-Up Entity);
(iii) the proposed Roll-Up would limit the ability of a Beneficiary
to exercise the voting rights of his securities of the Roll-Up Entity on
the basis of the number of Interests held by the Beneficiary;
(iv) the Beneficiaries' rights of access to the records of the
Roll-Up Entity will be less than those provided in this Agreement;
(v) any of the costs of the proposed Roll-Up would be borne by the
Trust if the Roll-Up is not approved by the Beneficiaries; or
(vi) the Person sponsoring the Roll-Up fails to offer the
Beneficiaries who vote on the proposal the choice of (a) accepting the
securities of the Roll-Up Entity offered in the proposed Roll-Up; or (b)
one of the following: (i) remaining as Beneficiaries in the Trust and
preserving their interests therein on the same terms and conditions as
existed previously; or (ii) receiving cash in an amount equal to the
Beneficiaries' pro-rata share of the appraised value of the net assets of
the Trust.
(b) If the Trust may participate in a Roll-Up pursuant to this Section, an
appraisal of all assets of the Trust shall be obtained from a competent,
Independent Expert. The assets of the Trust shall be appraised on a consistent
basis. The appraisal shall be based upon an evaluation of all relevant
information and shall indicate the value of the Trust's assets as of a date no
earlier than 30 days prior to the announcement of the proposed Roll-Up. The
appraisal shall assume an orderly liquidation of the Trust's assets over a 12
month period. If the appraisal will be included in a Prospectus used to offer
the securities of the Roll-Up Entity, the appraisal shall be filed with the
Securities and Exchange Commission and the states as an exhibit to the
registration statement for the offering. The terms of the engagement of the
Independent Expert shall clearly state that the engagement is for the benefit of
the Trust and the Beneficiaries. A summary of the independent appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to the Beneficiaries in connection with the proposed Roll-Up.
7.9 Change in Investment Objective and Policies.
The Managing Trustee shall be subject to the limitations provided in this
Article VII in its administration of the Trust unless Majority Consent is
obtained.
ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS
8.1 Distribution of Distributable Cash.
(a) In General. Distributions prior to dissolution shall be made to the
Participants within 45 days after completion of each month of each fiscal year.
However, a Beneficiary may elect to have such Distributions made to him on a
quarterly basis. Such election must accompany the Beneficiary's Subscription
Agreement or be delivered to the Managing Trustee in writing on the anniversary
of the Trust's Closing. Notwithstanding the foregoing, the Managing Trustee may,
in its sole discretion, restrict or suspend Distributions if it
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believes such action to be in the best interests of the Trust. Commencing as of
the Distribution Commencement Date, each Distribution shall be made (i) 90.75%
to the Beneficiaries, (ii) 8.25% to the Special Beneficiary and (iii) 1% to the
Managing Trustee.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
first, 100% to the Class A Beneficiaries up to $0.41 per Class A
Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per Class B
Subordinated Interest, reduced by the Class B Distribution Reduction
Factor;
third, 100% to the Class A Beneficiaries up to an additional $0.215
per Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries
and the Class B Beneficiaries in amounts so that each Class A Beneficiary
receives with respect to each Class A Interest an amount equal to ___%,
divided by the difference between 100% and the Class B Capital Reduction
Factor, of the amount so distributed with respect to each Class B
Interest.
(b) Liquidation Distributions. Upon dissolution and termination of the
Trust, after payment of, or adequate provision for, the debts and obligations of
the Trust, the remaining assets of the Trust (or the proceeds of sales or other
dispositions in liquidation of Trust assets, as may be determined by the
remaining or surviving Trustees) shall be distributed to the Participants in
accordance with the positive balances in their Capital Accounts after taking
into account all Capital Account adjustments for the Trust's taxable year,
including adjustments to Capital Accounts pursuant to Section 8.2(a). In the
event that the Managing Trustee has a deficit balance in its Capital Account
following the liquidation of the Trust or its interest in the Trust as
determined after taking into account all Capital Account adjustments for the
Trust taxable year in which such liquidation occurs, the Managing Trustee shall
pay to the Trust in cash an amount equal to the deficit balance in its Capital
Account by the end of such taxable year (or, if later, within ninety (90) days
after the date of such liquidation) which amount shall, upon liquidation of the
Trust, be paid to recourse creditors of the Trust or distributed to the Trust
Beneficiaries in accordance with their positive Capital Account balances.
(c) Notwithstanding the provisions of Sections 8.1(a) and 8.1(b), the
Managing Trustee shall have the right to withhold funds from Distributions to be
made to Beneficiaries who are Foreign Beneficiaries or deduct certain amounts
from such Distributions under the
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circumstances set forth in Section 8.4(h). Any such withholdings or repayments
or deductions shall be deemed to have been Distributions made to such Foreign
Beneficiaries for all purposes of this Agreement.
(d) Promptly after the Class B Closing, the Trust will make the Special
Class A Distribution to the Class A Beneficiaries.
(e) The Trust will make Class B Capital Distributions not later than the
expiration of the Initial Redemption Period provided that there are proceeds
remaining from the Class B Offering after paying Class B Offering expenses
making the Special Class A Distribution and redeeming Class A Interests pursuant
to the last paragraph of Section 9.6.
8.2 Allocation of Profits and Losses.
(a) Profits from the normal operations of the Trust or from Sales or
Refinancings or a Dissolution Event for each fiscal year or portion thereof will
be allocated:
First, to the extent that the Managing Trustee or any Trust
Beneficiary has a negative balance in its or his Capital Account (after
taking into account the reduction in Capital Accounts resulting from
Distributions during such fiscal year), to such Person(s) until such
Capital Account balance(s) are increased to zero; and if profits are
insufficient to bring all such Capital Accounts up to zero, then pro rata
according to the negative balances in their respective Capital Accounts;
and
Second, any remaining Profit shall be allocated among the Managing
Trustee, the Beneficiaries and the Special Beneficiary in such a manner
that, as of the end of such fiscal year the Capital Account of each shall
be equal (without taking into account the reduction in such Capital
Account resulting from any Distributions made during the fiscal year) to
the respective net amounts which would be distributed to each under this
Agreement if the Trust were to (i) sell its assets for an amount equal to
their adjusted basis determined under Regulation Section
1.704-1(b)(2)(iv)(g) and (ii) distribute all Trust cash pursuant to
Section 8.1(a).
Notwithstanding the foregoing, no Profit shall be allocated under
Section 8.2(a) Clause Second to the extent that an allocation of Profit
has been made under Section 8.2(a) Clause First to offset a reduction in
Capital Account(s) resulting from a Distribution made to the Managing
Trustee or a Trust Beneficiary during such fiscal year.
Losses from the normal operations of the Trust or from Sales or
Refinancings or a Dissolution Event for each fiscal year or portion thereof will
be allocated:
First, to the extent that the Managing Trustee or any Class B
Beneficiary has a positive balance in his Capital Account, to such
Person(s) until such Capital Account balance(s) are decreased to zero, and
if Losses are insufficient to reduce all such Capital Accounts to zero,
then pro rata according to the positive balances in each Capital Account;
and
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Second, to the extent that any Class A Beneficiary has a positive
balance in his Capital Account, to such Class A Beneficiary(ies) until
such Capital Account balance(s) are decreased to zero, and if Losses are
insufficient to reduce all such Capital Accounts to zero, then pro rata
according to the positive balances in each Capital Account; and
Third, the remainder to the Managing Trustee.
(b) Notwithstanding Section 8.2(a), in no event shall there be allocated
to the Managing Trustee less than 1% of the Profits or Losses of the Trust
unless such allocation is mandated by Section 704(b) or Section 704(c) of the
Code. In the event that the amount of Profits and Losses allocable to the
Managing Trustee under Section 8.2(a) is less than 1% of the aggregate amount,
then the amounts otherwise allocable first to the Special Beneficiary and then
to the Beneficiaries shall be reduced in order to provide the Managing Trustee
with its 1% share.
(c) All Profits, Losses and Distributions made or allocated to the
Participants shall be credited or charged, as the case may be, to their
respective Capital Accounts.
(d) The terms "Profits" and "Losses" used in this Agreement shall mean
income and losses, and each item of income, gain, loss, deduction or credit
entering into the computation thereof, as determined in accordance with the
accounting methods followed by the Trust and consistent with Treasury Regulation
Section 1.704-(1)(b)(2)(iv). Profits and losses for federal income tax purposes
shall be determined in the same manner as Profits and Losses except as otherwise
provided in Section 8.4(a).
8.3 Recourse to Trust Assets Only.
The Participants shall look solely to the assets of the Trust for the
return of their respective Capital Contributions or any other Distributions with
respect to their Interests. If the assets remaining after payment or discharge,
or provision for payment or discharge, of Trust debts and liabilities are
insufficient to return the Capital Contributions or to make any other
Distribution to the Participants, no such person shall have any recourse against
personal assets of any other Participant for that purpose, except to the limited
extent set forth in Sections 4.6 and 8.1(b).
8.4 Special Provisions.
Notwithstanding anything contained in this Article VIII to the contrary:
(a) Income, gain, loss, and deduction with respect to Trust property which
has a variation between its basis computed in accordance with Treasury
Regulation Section 1.704(1)(b) and its basis computed for federal income tax
purposes shall be shared among the Participants for federal income tax purposes
so as to take account of such variation in a manner consistent with the
principles of Section 704(c) of the Code and Treasury Regulation Section
1.704-3.
(b) (i) All Distributions or allocations to the Class A Beneficiaries,
other than
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those based on the Capital Account balances, shall be shared by the Class
A Beneficiaries in the ratio of the aggregate number of Class A Interests
held by each of them to the total number of Class A Interests held by all
of them.
(ii) Except as otherwise provided pursuant to this Agreement, for
each taxable year (i) Profits and Losses from normal operations and any
special allocations of items thereof shall be allocated by determining the
Profits and Losses from normal operations and any special allocations of
items thereof attributable to each fiscal quarter on the basis of interim
closings of the books of the Trust as of the close of business on the last
day of each such fiscal quarter and by allocating the amount of such
Profits and Losses from normal operations and special allocations of items
thereof, among the Persons that are Beneficiaries as of the close of
business on the last day of each month during such fiscal quarter in
proportion to the aggregate number of Interests owned by each such Person
as of the close of business on the last day of each such month, and (ii)
Profits and Losses from Sales or Refinancings and any special allocations
of items thereof allocable with respect to the Interests that have been
transferred shall be allocated to the Persons that are Beneficiaries as of
the close of business on the last day of the month that includes the date
of the Sale or Refinancing to which such Profit or Loss from Sales or
Refinancings is attributable, except that any such Profit from Sales or
Refinancings that is recognized by the Trust upon the receipt of a
deferred payment after the close of the month that includes the date of
the Sale or Refinancing relating to such deferred payment shall be
allocated to the Persons that are Beneficiaries as of the close of
business on the last day of the month in which the Trust receives such
deferred payment; provided, however, that notwithstanding anything to the
contrary contained herein, the Managing Trustee may, after sixty days'
prior notice to the Beneficiaries, allocate Profits and Losses from normal
operations and from Sales or Refinancings and special allocations among
the Beneficiaries during the taxable year in any other manner that the
Managing Trustee, in its sole discretion, determines will satisfy Sections
704 and 706 of the Code and the taking of any such action by the Managing
Trustee shall be deemed to effect an amendment to this Agreement and shall
not require the Consent of any Beneficiary.
(iii) Distributable Cash from Operations distributable to the
Beneficiaries with respect to each month shall be distributed among the
Persons that are Beneficiaries as of the close of business on the last day
of the month with respect to which such Distribution is made and
Distributable Cash from Sales or Refinancings distributable to the
Beneficiaries shall be distributed to the Persons that are Beneficiaries
as of the close of business on the last day of the month that includes the
date of the Sale or Refinancing to which any such Distributable Cash from
Sales or Refinancings is attributable; provided, however, Distributable
Cash from Sales or Refinancings that is attributable to deferred payments
and interest thereon received by the Trust after the close of the month
that includes the date of the Sale or Refinancing relating to any such
deferred payment shall be distributed to the Persons that are
Beneficiaries as of the close of business on the last day of the month
that includes the date such Distributable Cash from Sales or Refinancings
is paid to the Trust; and provided, further, that, notwithstanding
anything contained herein to the contrary, the Managing Trustee may, after
giving sixty days' prior notice to the
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Beneficiaries, adopt any other method for determining the distributions of
Distributable Cash from Operations or Distributable Cash from Sales or
Refinancings to which the Beneficiaries are entitled, that the Managing
Trustee, in its sole discretion, determines is reasonable, and the taking
of any such action by the Managing Trustee shall be deemed to effect an
amendment to this Agreement and shall not require the Consent of any
Beneficiary.
(iv) All Distributions or allocations to the Class B Beneficiaries,
other than those based on the Capital Account balances, shall be shared by
the Class B Beneficiaries in the ratio of the aggregate number of Class B
Interests held by each of them to the total number of Class B Interests
held by all of them.
(c) To the extent that interest on loans made by the Managing Trustee or
its Affiliates is determined to be deductible by the Trust in excess of the
amount of interest actually payable, such additional interest deduction shall be
allocated solely to the Managing Trustee.
(d) If any Trust expenditure treated as a deduction on its federal income
tax return is disallowed as a deduction and treated as a distribution to the
Managing Trustee or the Special Beneficiary pursuant to Section 731(a) of the
Code, there shall be a special allocation of gross income to the Managing
Trustee or the Special Beneficiary equal to the amount of such distribution.
(e) If a Trust Beneficiary unexpectedly receives (1) an allocation of loss
or deduction made (a) pursuant to Section 704(e)(2) of the Code to a donee of an
interest in the Trust, (b) pursuant to Section 706(d) of the Code as the result
of a change in any Trust Beneficiary's interest in the Trust, or (c) pursuant to
Treasury Regulation Section 1.751-1(b)(2)(ii) as the result of a distribution by
the Trust of unrealized receivables or inventory items or (2) a Distribution,
and such allocation and/or Distribution would cause a deficit in a Trust
Beneficiary's Capital Account, then such Trust Beneficiary shall be allocated
items of income and gain in an amount and manner sufficient to eliminate such
deficit balance as quickly as possible. For purposes of this Article, a Trust
Beneficiary's Capital Account shall be treated as reduced by Qualified Income
Offset Items.
(f) Except as otherwise provided herein, each Beneficiary shall be
allocated Profits and Losses in accordance with this Section 8.4 from the first
day of the calendar month in which he becomes a Beneficiary.
(g) The Trustees shall have the right, from time to time and at such times
as they shall determine, to request each Beneficiary to certify to the Trust, in
form acceptable to the Trustees, that such Beneficiary is not a nonresident
alien individual or foreign partnership within the meaning of Section 1441 of
the Code, a foreign corporation within the meaning of Section 1442 of the Code
or a Person who is not a United States person within the meaning of Section 1446
of the Code. Any Beneficiary who fails to deliver this certification shall be
treated for all purposes of this Agreement as a Foreign Beneficiary until such
time as such Beneficiary delivers an acceptable certification to the Trust.
(h) The Trustees shall have the right, with respect to any Beneficiary who
is
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determined to be a Foreign Beneficiary, to (i) pay over to the Service on behalf
of such Foreign Beneficiary such amounts as they may determine may be required
to comply with the Code, including without limitation Sections 1441, 1442 and
1446 and (ii) to deduct and maintain in a non-interest bearing escrow account
for the benefit of such Foreign Beneficiary all or a portion of Distributions to
be made to such Foreign Beneficiary to the extent that the Managing Trustee
determines that such distributions may be needed by the Trust to comply at a
later date with the Code, including without limitation Sections 1441, 1442 and
1446, or to repay principal, interest and other borrowing costs on any
borrowings made by the Trust to comply with the requirements of the Code,
including without limitation Sections 1441, 1442 or 1446. To the extent that the
Managing Trustee determines that any amounts deducted from the Distributions of
any Foreign Beneficiaries under clause (ii) above are not needed to enable the
Trust to comply with the Code, including without limitation Sections 1441, 1442
and 1446, or (iii) to pay principal, interest or other borrowing costs on any
borrowings made by the Trust in connection therewith, such amounts shall be paid
over to the Foreign Beneficiaries with respect to whom the amounts were
deducted. Any Foreign Beneficiary shall on demand reimburse the Trust for any
amounts received by such Foreign Beneficiary as Distributions which are
necessary to satisfy the Trust's obligations under the Code, including, without
limitation, Sections 1441, 1442 and 1446. Each Foreign Beneficiary hereby grants
to the Trust a first lien and security interest in and to the Interests of such
Foreign Beneficiary and all proceeds thereof to secure the obligations of such
Foreign Beneficiary under this Section 8.4(h) and the indemnification by each
Foreign Beneficiary described in Section 6.2.
(i) To the extent that the Trust incurs any costs or expenses in
connection with the withholding obligation described in Section 8.4(h), such
costs or expenses shall be allocated solely to the Foreign Beneficiaries (and
shall not enter into the computation of Profits and Losses allocated under
Section 8.2) and shall reduce their Capital Accounts accordingly.
(j) If the Managing Trustee determines, after consultation with tax
counsel, that the allocation of any item of Trust income, gain, loss, deduction
or credit will not be recognized for federal income tax purposes, the Managing
Trustee is authorized to amend this Agreement to cure such defect without the
consent of Trust Beneficiaries.
(k) If any profit arises from the disposition of any Trust asset which
shall be treated as ordinary income under the depreciation recapture provisions
of the Code, then the full amount of such gain shall be allocated among the
Managing Trustee and Trust Beneficiaries in the proportions that the Trust
deductions from the depreciation giving rise to such recapture were actually
allocated. In the event that subsequently enacted provisions of the Code result
in other recapture income, no allocation of such recapture income shall be made
to any Managing Trustee or Trust Beneficiary who has not received the benefit of
those items giving rise to such other recapture income.
(l) With respect to assets distributed in kind to the Managing Trustee and
Trust Beneficiaries in liquidation or otherwise, (i) any unrealized appreciation
or unrealized depreciation in the values of such assets shall be deemed to be
profits and losses realized by the Trust immediately prior to the liquidation or
other distribution event; and (ii) such profits and losses shall be allocated to
the Managing Trustee and Trust Beneficiaries in accordance
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with Section 8.2(a), and any property so distributed shall be treated as a
distribution of an amount in cash equal to the excess of such fair market value
over the outstanding principal balance of and accrued interest on any debt by
which the property is encumbered. For the purposes of this Section 8.4(l),
"unrealized appreciation" or "unrealized depreciation" shall mean the difference
between the fair market value of such assets, taking into account the fair
market value of the associated financing (but subject to Section 7701(g) of the
Code) and the Trust's adjusted basis for such assets as determined under Section
1.704-1(b). This Section 8.4(l) is merely intended to provide a rule for
allocating unrealized gains and losses upon liquidation or other distribution
event, and nothing contained in this Section 8.4(l) or elsewhere herein is
intended to treat or cause such distributions to be treated as sales for value.
The fair market value of such assets shall be determined by an appraiser to be
selected by the Managing Trustee.
(m) If the Managing Trustee determines that it is in the best interests of
the Trust and it is permitted under Treasury Regulation Section
1.704-1(b)(2)(iv)(f), the Managing Trustee may re-value the assets of the Trust
to reflect their fair market value and adjust the Capital Accounts of the
Managing Trustee and the Trust Beneficiaries to reflect the difference between
such fair market value (referred to herein as the "Book Value") and the Trust's
tax basis in such assets (or, in the case of a prior revaluation, the Trust's
prior Book Value). The Managing Trustee is authorized to take whatever actions
it deems necessary or appropriate to effect this revaluation of assets and the
equitable adjustment of Capital Accounts on behalf of the Trust. In the event of
a revaluation of Trust assets pursuant to this Section 8.4(m), subsequent
allocations of gain, income, loss and deduction (including, without limitation,
cost recovery and amortization deductions) with respect to such assets for the
purpose of computing Profits or Losses shall be determined based on the Book
Value of such assets and shall be computed consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). Allocations of gain, income, loss and deduction
(including, without limitation, cost recovery and amortization deductions) with
respect to such assets for the purpose of computing profits, losses and gains
for tax purposes shall be allocated among the Managing Trustee and the Trust
Beneficiaries in accordance with the principles of Section 704(c) of the Code
and Treasury Regulation Section 1.704-3.
(n) Section 704 of the Code and the Regulations issued thereunder,
including but not limited to the provisions of such regulations addressing
minimum gain chargeback requirements and allocations of deductions attributable
to nonrecourse debt and partner nonrecourse debt, are hereby incorporated by
reference.
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ARTICLE IX - TRANSFER OF INTERESTS
9.1 Withdrawal of a Beneficiary.
Subject to compliance with this Agreement, a Beneficiary may withdraw from
the Trust only by assigning or otherwise transferring his Beneficiary Interest
specified in this Article IX. The withdrawal of Beneficiaries shall not dissolve
or terminate the Trust. In the event of the withdrawal of a Beneficiary because
of death, legal incompetence, dissolution or other termination, the estate,
legal representative or successor of such withdrawn Beneficiary shall be deemed
to be the assignee of such withdrawn Beneficiary's Interest and may become a
Substitute Beneficiary upon compliance with the provisions of Section 9.3.
9.2 Assignment.
Subject to Section 4.2(a)(viii) and Section 9.4, each Beneficiary may
Assign all or a portion of his Beneficiary Interest (but not less than the
Minimum Investment Amount) to another Person (the "Transferee") without the
Consent of any Beneficiary, provided that the following conditions are met: (i)
the Transferee delivers to the Managing Trustee a duly executed and completed
assignment form in form satisfactory to the Managing Trustee (which is available
upon request from the Managing Trustee) not less than 30 days in advance of such
Assignment in which the Transferee agrees to be bound by the Agreement and which
will contain various representations, including whether or not he is an Eligible
Citizen; (ii) the Transferee satisfies the investor suitability standards
applicable to the original Offering; (iii) the Assignment complies with all
applicable laws and regulations, including, without limitation, such minimum
investment and investor suitability requirements as may then be applicable under
state or foreign securities laws; (iv) the Transferee executes a power of
attorney which provides the Managing Trustee with authority to execute certain
documents on his behalf; (v) the Transferee (or the Beneficiary) pays a transfer
fee, not to exceed $100 per Assignment, to cover the expenses incurred in
connection therewith; and (vi) the Managing Trustee consents to the Assignment
(which consent may be withheld if the conditions to such Assignment are not met
or if such Assignment would constitute a prohibited assignment described in
paragraphs (a) through (g) of Section 9.4). A Transferee who desires to make a
further Assignment of his Beneficiary Interest shall be subject to the
provisions of this Section 9.2 to the same extent and in the same manner as the
prior assignor. No Assignment shall be deemed to constitute an Assignment of a
Beneficiary's entire Beneficiary Interest unless the provisions of Section 9.3
are satisfied in full. The rights of a Transferee who does not become a
Substitute Beneficiary shall be limited to the receipt of his share of Profits,
Losses and Distributions, as determined under Article VIII. Transferees shall be
recognized as Assignees monthly, as of the first day of the calendar month in
which the notice of assignment and other required documentation are received and
accepted by the Managing Trustee; provided, however, that if an Assignee makes a
subsequent Assignment of his Beneficiary Interest in the same calendar month, he
shall not be recognized as an Assignee with respect to such Beneficiary Interest
for any purpose.
9.3 Substitution.
No Person shall have the right to become a Substitute Beneficiary in place
of his assignor unless all of the following conditions are met:
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(a) the Beneficiary Interest was assigned in accordance with Sections 9.1
and 9.2;
(b) the Managing Trustee shall consent in writing to such substitution
(which consent may be withheld for any reason in the sole discretion of the
Managing Trustee);
(c) such Transferee executes an instrument reasonably satisfactory to the
Managing Trustee accepting and adopting the terms and provisions of this
Agreement; and
(d) in the case of Assignments other than by operation of law, the
assignor states his intention in writing to have his Transferee become a
Substitute Beneficiary.
If all of the conditions of Sections 9.2 and 9.3 shall have been met, the
Transferee shall become a Substitute Beneficiary within 30 days after the
Managing Trustee consents to the admission of the Substitute Beneficiary (the
"Recording Date"). The records of the Trust and this Agreement shall be amended
to reflect any such substitution on or prior to the Recording Date; provided,
however, that the records of the Trust and this Agreement shall be amended at
least once each calendar quarter to reflect the admission of Substitute
Beneficiaries. Failure or refusal of the Managing Trustee to admit a Transferee
as a Substitute Beneficiary shall in no way affect the right of such Transferee
to receive Distributions and allocations of Profits or Losses to which his
predecessor in interest would have been entitled in accordance with Article
VIII.
9.4 Prohibited Assignment.
No Trust Beneficiary Interests may be assigned or otherwise transferred
under the following circumstances unless the Managing Trustee shall give its
express written consent:
(a) to a minor or incompetent (unless a guardian, custodian, or
conservator has been appointed to handle the affairs of such Person);
(b) to any Person not permitted to be a transferee under applicable law,
including, in particular but without limitation, applicable federal, state or
foreign securities laws, which generally provide that, except in the case of a
transfer by gift, inheritance, intrafamily transfer or family dissolution, each
transferee of a Beneficiary Interest must acquire no fewer than the Minimum
Investment Amount and must satisfy investor suitability standards similar to
those which were applicable to the original Offering, and that each transferor
must transfer the number of Interests equal to the Minimum Investment Amount;
(c) to any assignee if such assignee would hold after such Assignment a
fraction of an Interest;
(d) to any Person if, in the opinion of Trust Counsel, such transfer would
result in the termination under the Code of the Trust's taxable year or of its
status as an entity taxable as a partnership;
(e) to a Person who is a Foreign Beneficiary if, in the Managing Trustee's
best judgment, such assignment or transfer would adversely affect the
registration of any aircraft
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registered with the FAA or the documentation of any vessel documented under
the laws of the United States;
(f) to any Person if such transfer would cause the assets of the Trust to
be considered plan assets under ERISA and the regulations thereunder; or
(g) to any Person, if such Assignment, would cause the Trust to be treated
as a publicly traded partnership for purposes of Section 7704 of the Code.
Any such attempted Assignment without the express written consent of the
Managing Trustee shall be void and shall not bind the Trust. In the case of a
proposed Assignment which is prohibited solely under clause (d) above, however,
the Trust shall be obligated to permit such Assignment to become effective if
and when, in the opinion of Trust Counsel, such Assignment would no longer have
either of the adverse consequences under the Code which are specified in that
clause.
9.5 Change of Status of Beneficiary.
In the event that (i) the Managing Trustee determines that a Beneficiary
or a Person for whom a Beneficiary is acting as nominee who has previously
represented to the Trust that he is an Eligible Citizen is no longer an Eligible
Citizen or (ii) the Beneficiary fails to certify his citizenship to the Managing
Trustee at the time that he acquires his Interests, the Managing Trustee may
require that the status of the Beneficiary be changed to that of a Non-Eligible
Beneficiary. In the event that the number of Non-Eligible Beneficiaries exceeds
80% of the maximum number of non-eligible Persons permitted to be Trust
Beneficiaries pursuant to applicable laws or regulations governing the
registration of any Asset owned by the Trust, the Managing Trustee may, in its
sole discretion, expend Trust assets to redeem the Interests of Non-Eligible
Beneficiaries. Any such Interests redeemed shall be redeemed by the Trust at a
price equal to (i) 80% of the Non-Eligible Beneficiary's original Capital
Contribution as reduced by any amounts returned to the Non-Eligible Beneficiary
as uninvested Capital Contributions pursuant to Section 8.4, minus (ii) all
Distributions made to the Non-Eligible Beneficiary.
9.6 Right to Tender Interests for Redemption.
A Beneficiary shall have the right to tender Class A Interests for
redemption by the Trust subject to all of the following conditions:
(a) no Interests may be tendered within 24 months of Closing;
(b) Interests may be tendered by Beneficiaries for redemption by the Trust
only on a date selected by the Managing Trustee, in its sole discretion, on
which Interests tendered for redemption may be redeemed (the "Redemption Date"),
which shall be declared not more than once in each calendar year of the Trust;
(c) the Beneficiary must tender all Interests owned if he tenders any
Interests owned;
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(d) at least 120 days' prior written notice of the Redemption Date shall
be provided to the Beneficiaries;
(e) a redemption agreement fully executed by the Beneficiary on a form
provided by the Trust and a redemption fee payable to the Trust, not to exceed
$100, to cover the expenses incurred in connection therewith, must be received
by the Trust at least 60 calendar days prior to the Redemption Date;
(f) not more than 10% of the total interests in Trust capital or Profits,
when aggregated with all other Trust Beneficiary Interests sold or otherwise
disposed of (other than the Permitted Transfers defined in clauses (i) through
(vi) of Section 9.4(g)), may be redeemed pursuant to Section 9.5 and Section 9.6
or otherwise sold or disposed of in any taxable year of the Trust;
(g) the Trust must have sufficient cash, as determined in the sole
discretion of the Managing Trustee, to redeem the Interests tendered; provided
that the Trust may not redeem Interests in any fiscal quarter in which the
Distribution paid in that quarter is less than 2.5% of Adjusted Investment;
(h) Interests tendered shall be redeemed in the order in which completed
redemption agreements and redemption fees, are received by the Trust;
(i) the price at which Interests shall be redeemed by the Trust shall
equal (i) 90% of a Beneficiary's original Capital Contribution as reduced by any
amounts returned to the Beneficiary as uninvested Capital Contributions pursuant
to Section 8.4, minus (ii) all Distributions made to the Beneficiary; and
(j) redemption of the Interests shall not be in violation of any
applicable legal requirements, shall not cause the Trust to be deemed an
investment company pursuant to the provisions of the Investment Company Act of
1940, shall not cause the Assets of the Trust to be considered plan assets under
ERISA and the regulations thereunder, and shall not subject the Trust to
taxation as an association taxable as a corporation.
In addition to the foregoing, the Trust shall have the right to purchase
and redeem Interests at such times, in such amounts, in such manner and at such
prices as the Managing Trustee may determine from time to time in its sole
discretion; provided, however, that any such purchase and redemption shall not
be in violation of any applicable legal requirements, shall not result in the
termination under the Code of the Trust or of its status as an entity taxable as
a partnership, shall not result in the Trust being treated as a publicly traded
partnership, shall not cause the Trust to be deemed an "investment company"
pursuant to the provisions of the Investment Company Act of 1940 and shall not
cause the Assets of the Trust to be considered "plan assets" under ERISA and the
regulations thereunder.
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9.7 Status of an Assigning Beneficiary.
Any Beneficiary who shall assign all of his Interests shall cease to be a
Beneficiary and shall no longer have any of the rights or privileges of a
Beneficiary, except that unless and until a Substitute Beneficiary is admitted
in his place such assigning Beneficiary shall retain any statutory rights of an
assignor of a Beneficiary Interest under the Business Trust Act. Any Beneficiary
who shall have his Interests redeemed by the Trust shall cease to be a
Beneficiary, and no Person shall have any of the rights or privileges of a
Beneficiary with respect to the Interests which were redeemed.
9.8 Withdrawal of Special Beneficiary; Substitution.
Subject to compliance with this Agreement, the Special Beneficiary may
withdraw from the Trust by assigning or otherwise transferring its Special
Beneficiary Interest upon the express written consent of the Managing Trustee.
Once the Special Beneficiary shall assign all of its Special Beneficiary
Interest, the Special Beneficiary shall cease to be a Trust Beneficiary and
shall no longer have any of the rights or privileges of a Trust Beneficiary,
except that unless and until a Substitute Special Beneficiary is admitted in its
place such assigning Special Beneficiary shall retain any statutory rights of an
assignor of a Special Beneficiary Interest under the Business Trust Act.
The Special Beneficiary hereby covenants and agrees, in the event of the
Resignation or Removal of the Managing Trustee pursuant to Section 4.8 or 11.3,
to transfer to a Substitute Managing Trustee selected as provided in Section 4.8
or Section 4.12 or to the Trust, such portion, if any, of its Special
Beneficiary Interest as the Substitute Managing Trustee or the Trust shall elect
to purchase. The Substitute Managing Trustee shall become a substitute Special
Beneficiary. Any such transfer will be made in consideration of the payment by
the Substitute Managing Trustee or the Trust to the Special Beneficiary or its
legal representatives, of 86.5% of the fair market value of such Interest. The
fair market value of the Special Beneficiary's Interest shall be as determined
by the parties to the transfer, or otherwise in accordance with Section 11.3.
The method of payment to the Special Beneficiary must be fair and must protect
the solvency and liquidity of the Trust. In the event of the Resignation of the
Managing Trustee, payment to the Special Beneficiary, if any, may be made by
means of a non-interest-bearing unsecured promissory note with principal
payable, if at all, from Distributions which the Special Beneficiary would have
received but for its resignation. In the event of the Removal of the Managing
Trustee, the Substitute Managing Trustee or the Trust shall make such payment to
the Special Beneficiary by means of a promissory note bearing interest at a
floating annual rate equal to the prime rate of interest announced by Fleet Bank
of Massachusetts, N.A., maturing in not less than five years with equal
installments of principal and interest payable each year. Any portion of such
Special Beneficiary's Interest which is not required to be transferred as
aforesaid may be retained by such Special Beneficiary or its estate or legal
representatives as appropriate. The Special Beneficiary acknowledges and agrees
that the payment of 86.5% of the fair market value of any portion of its Special
Beneficiary Interest which has been transferred shall be full payment for such
Special Beneficiary Interest. To the extent of such retained Special Beneficiary
Interest, if any, such Special Beneficiary or its estate or legal
representatives shall be treated as a Trust Beneficiary.
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Notwithstanding the foregoing, the resigned Special Beneficiary or its
legal representatives shall be entitled to receive from the Trust (i) any
positive balance in its Capital Account (as adjusted to the date of such
resignation), provided, however, that in no event shall such amount exceed the
fair market value of the Special Beneficiary's Interest, (ii) any amounts due
and owing to it by the Trust less any amounts due and owing by it to the Trust.
The right of the Special Beneficiary or its legal representatives to payment of
said amounts shall be subject to any claim for damages which the Trust or any
Trustee or any other Trust Beneficiary may have against such Special Beneficiary
or its legal representatives if such resignation is in contravention of this
Agreement.
ARTICLE X - FISCAL MATTERS
10.1 Title to Property and Bank Accounts.
Except to the extent that trustees, nominees or other agents are used as
specified in Section 4.2(b)(viii), the Assets shall be held in the name of the
Trust. The funds of the Trust shall be deposited in the name of the Trust in
such bank account or accounts as shall be designated by the Managing Trustee,
and withdrawals therefrom shall be made upon the signature of the Managing
Trustee or such Person or Persons as shall be designated in writing by the
Managing Trustee. The funds of the Trust shall not be commingled with those of
any other Person or entity except that the use of a zero balance or clearing
account shall not constitute a commingling of Trust funds; and the funds of the
Trust and funds of other entities sponsored by the Advisor or its Affiliates may
be held in an account or accounts established and maintained for the purpose of
making computerized disbursements and/or short-term investments provided the
Trust's funds are protected from claims of such other entities and creditors of
such other entities.
10.2 Maintenance of, and Access to, Basic Trust Documents.
The Managing Trustee shall maintain at the Trust's principal office the
following documents: (i) an alphabetical list of the names, addresses, and
business telephone numbers of the Trust Beneficiaries along with the number of
Interests held by each of them (the "Trust Beneficiary List"); (ii) a copy of
the Certificate of Trust and all amendments thereto; (iii) copies of the Trust's
federal, state and local income tax returns and reports, if any, for the three
most recent years; and (iv) copies of this Agreement as then in effect and of
any financial statements of the Trust for the three most recent years. Such
documents and all other Trust records are subject to inspection and copying by
any Trust Beneficiary or his designated representatives at the reasonable
request, and at the expense of such Trust Beneficiary during ordinary business
hours. The Trust Beneficiary List shall be updated at least quarterly to reflect
changes in the information contained therein. A copy of the Trust Beneficiary
List shall be mailed to any Beneficiary requesting the Trust Beneficiary List
within ten days of the request. The copy of the Trust Beneficiary List shall be
printed in alphabetical order, on white paper, and in readily readable type (in
no event smaller than 10-point type). A reasonable charge for copy work may be
charged by the Trust. The purposes for which a Beneficiary may request a copy of
the Trust Beneficiary List include, without limitation, matters relating to
Beneficiaries' voting rights under this Agreement and the exercise of
Beneficiaries' rights under federal proxy laws. If the Sponsor neglects or
refuses to exhibit, produce or mail a copy of the Trust Beneficiary List as
requested, the Sponsor shall
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be liable to any Beneficiary requesting the List for costs, including attorney's
fees, incurred by that Beneficiary for compelling the production of the Trust
Beneficiary List, and for actual damages suffered by any Beneficiary by reason
of such refusal or neglect. It shall be a defense that the actual purpose and
reason for the requests for inspection or for a copy of the Trust Beneficiary
List is to secure such list of Beneficiaries or other information for the
purpose of selling such list or copies thereof, or of using the same for a
commercial purpose other than in the interest of the applicant as a Beneficiary
relative to the affairs of the Trust. The Sponsor may require the Beneficiary
requesting the Trust Beneficiary List to represent that the list is not
requested for a commercial purpose unrelated to the Beneficiary's interest in
the Trust. The remedies provided hereunder to Beneficiaries requesting copies of
the Trust Beneficiary List are in addition to, and shall not in any way limit,
other remedies available to Beneficiaries under federal law, or the laws of any
state. Except to the extent requested by any Trust Beneficiary, the Managing
Trustee shall have no obligation to deliver or mail a copy of the Certificate of
Trust or any amendment thereto to the Trust Beneficiaries. Each Trust
Beneficiary shall also have the right to obtain from the Managing Trustee from
time to time upon reasonable demand: (i) true and full information regarding the
status of the business and financial condition of the Trust; (ii) promptly after
becoming available, a copy of the Trust's federal, state and local income tax
returns for each year; and (iii) such other information regarding the affairs of
the Trust as may reasonably be produced by the Trust.
10.3 Financial Books and Accounting.
The Managing Trustee shall keep or cause to be kept complete and accurate
financial books with respect to the Trust's business. Except to the extent
otherwise required by the accounting methods adopted by the Trust for federal
income tax purposes, such books shall be kept on an accrual basis. Profits and
Losses shall be determined for each fiscal year in accordance with Article VIII.
Except as otherwise provided herein, whenever a proportionate part of Profits or
Losses is credited or charged to a Trust Beneficiary's Capital Account, every
item of income, gain, loss or deduction entering into the computation of such
Profits or Losses shall be considered either credited or charged, as the case
may be, and every item of credit or tax preference related to such Profits or
Losses and applicable to the period during which such Profits or Losses were
realized shall be allocated to such Capital Account in the same proportion.
10.4 Trust Expenses.
No reimbursement shall be permitted to the Managing Trustee or any of its
Affiliates for services for which the Managing Trustee or any such Affiliate is
entitled to compensation by way of a separate fee.
(a) Organizational and Offering Expenses. The Trust shall reimburse the
Managing Trustee and any Affiliate thereof for Organizational and Offering
Expenses incurred by the Managing Trustee and its Affiliates with respect to the
Class A Offering provided that in no event shall the amount of Organizational
and Offering Expenses paid directly or indirectly by the four AFG Investment
Trusts exceed 2.5% of Gross Class A Proceeds in all four AFG Investment Trusts.
Such expenses shall be allocated among the six AFG Investment Trusts based on
the number of Interests sold in each such Trust as compared to the total
Interests sold in all four AFG Investment Trusts, without regard to the
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actual expenses incurred by each Trust. However, the Trust shall not pay
Organizational and Offering Expenses in an amount in excess of 2.5% of the Gross
Class A Proceeds. For purposes hereof, "Organizational and Offering Expenses"
shall mean (i) those expenses (including the non-accountable expense allowance
payable to the Dealer-Manager) incurred in connection with, and in preparing the
Trust for, qualification under federal and state securities laws and
subsequently offering and distributing the Interests to the public, except for
sales commissions paid by the Trust in connection with the offering of
Interests, (ii) expenses for salaries and direct expenses of officers, directors
and members of the executive committee of any Affiliate of the Managing Trustee
while engaged in registering and marketing the Interests, and (iii) any due
diligence expenses attributable to the Offering. The Managing Trustee or its
Affiliates will bear all Sales and Distribution Expenses in excess of nine and
one-half percent (9.5%) of Gross Proceeds without recourse to or reimbursement
from the Trust.
(b) Other Reimbursable Costs. Except for Organizational and Offering
Expenses for the Class A Offering and with respect to organizational and
offering expenses with respect to the Class B Offering provided for in Section
5.1(e) and Section 8.2(e), the Trust shall not reimburse the Managing Trustee or
its Affiliates except for (i) the actual cost to the Managing Trustee or its
Affiliates of goods and materials used for or by the Trust and obtained from
Persons unaffiliated with the Managing Trustee and its Affiliates provided that
such goods or materials are necessary to the prudent operation of the Trust and
that the actual cost thereof includes only the price of goods and materials paid
to independent third parties and direct costs incurred by the Managing Trustee
or Affiliates in the transaction excluding general or administrative overhead
and costs of personnel who are Controlling Persons of the Managing Trustee or
its Affiliates and (ii) Acquisition Expenses, including but not limited to
expenses related to the purchase, operation and financing of Assets. In no
event, however, shall the Trust reimburse the Managing Trustee or its Affiliates
for rent, depreciation, utilities, capital equipment and other administrative
items. The Trust's annual report to the Beneficiaries will include a schedule
itemizing costs reimbursed to the Managing Trustee and its Affiliates.
(c) Other Trust Expenses. Subject to the provisions of Sections 10.4(a)
and (b), the Trust shall pay all expenses of the Trust (which expenses shall be
billed directly to the Trust) which are necessary or appropriate for the prudent
operation of the Trust and which may include but are not limited to: (i) all
costs of personnel providing administrative services (excluding rent or
depreciation, utilities, capital equipment, and other administrative items)
employed full or part-time by the Trust and involved in the business of the
Trust and allocated pro rata to their services performed on behalf of the Trust,
and such personnel may include Persons who may also be officers or employees of
the Managing Trustee or its Affiliates (other than Controlling Persons of the
Managing Trustee or its Affiliates); (ii) all costs of borrowed money, taxes and
assessments on Assets and other taxes applicable to the Trust; (iii) legal,
audit, accounting, brokerage, and other fees; (iv) printing, engraving, and
other expenses and taxes incurred in connection with the issuance, distribution,
transfer, registration, and recording of documents evidencing ownership of an
interest in the Trust or in connection with the business of the Trust; (v) fees
and expenses paid to bankers, brokers, and services, consultants and other
equipment management personnel, insurance brokers and other agents; (vi)
expenses in connection with the disposition, replacement, alteration, repair,
leasing, re-leasing, financing, and operation of Assets (including the costs and
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expenses of insurance premiums and of maintenance of such Assets); (vii)
expenses of organizing, revising, amending, converting, modifying or terminating
the Trust; (viii) expenses in connection with distributions made by the Trust
to, and communications and bookkeeping and clerical work necessary in
maintaining relations with, its Beneficiaries, including the costs of printing
and mailing to such Persons evidences of ownership of Interests and reports of
meetings of the Trust, and of preparation of proxy statements and solicitations
of proxies in connection therewith; (ix) expenses in connection with preparing
and mailing reports required to be furnished to Beneficiaries for investor tax
reporting or other purposes, and reports which the Managing Trustee deems to be
in the best interests of the Trust to furnish to the Beneficiaries; (x) any
accounting, computer, statistical or bookkeeping costs necessary for the
maintenance of the books and records of the Trust; and (xi) the cost of
preparation and dissemination of informational material and documentation
relating to potential sale, refinancing or other disposition of Assets.
Reimbursement to the Managing Trustee or its Affiliates of the cost of services
rendered to the Trust shall be limited to the lesser of the costs of those
services or a rate equivalent to ninety percent (90%) of the rate which would be
charged by an unaffiliated party to perform such services. As part of their
annual audit of the Managing Trustee and its Affiliates, the Managing Trustee
shall cause the Accountants to verify the allocation of costs of the Managing
Trustee and its Affiliates to the Trust. The additional cost of the Accountants'
verification of this reimbursement for services shall not be paid by the Trust
unless the aggregate sum of the cost of the services and the cost of the
Accountants' verification do not exceed ninety percent (90%) of the rate which
would be charged by an unaffiliated party to perform the services performed by
the Managing Trustee and its Affiliates.
(d) Other Limitations. Other than as specifically described above in this
Section 10.4 and in Section 4.6 and Article V, the Trust shall not pay the
Managing Trustee for any other items, including rent, travel expenses or
salaries of the Managing Trustee or its Affiliates or Controlling Persons of the
Managing Trustee or its Affiliates, generally considered to be the Managing
Trustee's overhead and expenses. The Managing Trustee and its Affiliates will
not be compensated for services provided to the Trust unless such parties or
their predecessors were engaged in rendering those services as an ongoing
business for Persons other than the Trust. The Managing Trustee shall not
provide services to the Trust other than as provided in, or permitted by, this
Agreement.
10.5 Fiscal Year.
Except as may otherwise be determined from time to time by the Managing
Trustee, the Trust's fiscal year for federal income tax and financial reporting
purposes shall end on December 31 of each year.
10.6 Reports and Accounting Decisions.
(a) Reports to Beneficiaries.
(i) Quarterly Reports. Within 60 days after the end of each of the
first three quarters of each fiscal year, the Managing Trustee shall send
to each Person who was a Beneficiary on the last day of the quarter then
ended (1) a condensed balance sheet, (2) statements of cash flows and
operations including a description of
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any material events with respect to the Trust's revenues, assets,
liabilities, expenses, contractual obligations or contingent liabilities,
(3) a statement describing (A) any new agreement, contract or arrangement
required to be reported by any section hereof and (B) the amount of all
fees and other compensation and distributions paid by the Trust for such
quarter to the Managing Trustee or any Affiliate of the Managing Trustee
and a description of the services rendered or to be rendered by the
Managing Trustee or such Affiliate for such fees and compensation (which
requirement may not be circumvented by lump-sum payments to entities which
disburse funds to others), (4) until the Capital Contributions derived
from the Offering shall be fully invested except for reserves, a special
report of Asset acquisitions including (A) a general description of Asset
purchased, (B) a description of the Lease arrangements made with respect
thereto and identification of the Lessee, (C) the actual purchase price,
(D) the amount of cash expended from Capital Contributions to acquire such
Asset, and (E) the amount of Capital Contributions which then remains
unexpended, if any, stated in terms of both dollar amounts and percentage
of the total amount of Capital Contributions, and (5) other pertinent
material regarding the activities of the Trust during such fiscal quarter.
Distribution to the Beneficiaries of the financial information contained
in the Trust's quarterly report on Form 10-Q under the Securities Exchange
Act of 1934 will satisfy the financial statement distribution requirements
contained herein. No such statement or reports need be audited.
(ii) Annual Reports. Within 120 days after the end of each fiscal
year, the Managing Trustee shall send to each Person who was a Beneficiary
on the last day of the fiscal year then ended a report in narrative form
summarizing the status of the Trust's investments and containing (1) a
balance sheet as of the end of such fiscal year and statements of
operations, Beneficiaries' equity and cash flows for such fiscal year, all
of which shall be prepared in accordance with generally accepted
accounting principles and accompanied by an auditor's report (containing
an opinion of the Accountants), (2) a report (which need not be audited)
summarizing the fees and other remuneration paid by the Trust for such
fiscal year to the Managing Trustee or any Affiliate of the Managing
Trustee or to the Delaware Trustee and a statement describing any new
agreement, contract or arrangement required to be reported by any section
hereof, and (3) a statement (which need not be audited) showing the
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings distributed per Interest to the Beneficiaries during such
fiscal year. Such report shall separately identify (to the extent then
applicable) Distributions from (a) Cash From Operations during the period,
(b) Cash From Operations during a prior period which had been held in the
Reserve Account, (c) Cash From Sales or Refinancings during the period,
(d) Cash From Sales or Refinancings during a prior period which had been
held in the Reserve Account, and (e) Reserve Account amounts from Gross
Proceeds. Until the Capital Contributions of the Trust derived from the
Offering shall be fully invested except for reserves, the annual report
shall also contain a special report of Asset acquisitions containing the
information specified above for quarterly reports. If any Asset acquired
by the Trust individually represents at least 10% of the Trust's total
Investment in Assets, the Managing Trustee shall include a status report
as part of the annual report, which status report shall indicate: (1) the
condition of the Asset, (2) how the Asset is being utilized as of the end
of the year, (3) the remaining term of the Lease, (4) the projected use of
the Asset for the
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next year, and (5) such other information relevant to the value or
utilization of the Asset as the Managing Trustee deems appropriate.
Distribution to the Beneficiaries of the financial information contained
in the Trust's annual report on Form 10-K under the Securities Exchange
Act of 1934 will satisfy the financial statement distribution requirements
contained herein.
The Managing Trustee shall cause the Accountants, as part of their annual
audit of the Managing Trustee and its Affiliates, to issue to the Trust a
special report prepared in accordance with the standards of the American
Institute of Certified Public Accountants on the allocation of costs incurred by
the Managing Trustee and its Affiliates and reimbursed to them by the Trust. In
preparing this special report, the Accountants shall, at a minimum, review (1)
the time records of individual employees, the costs of whose services were
reimbursed by the Trust, and (2) the specific nature of the work performed by
such employees.
Each annual report will also include the fair market value of the
Interests at the end of the preceding fiscal year. For each of the first two
years after Closing, the Managing Trustee will value the Interests at the public
offering price. Thereafter, the Managing Trustee will secure each year an
independent appraisal of the fair market value of the Trust's assets as of the
next annual valuation date and will prepare a per Interest valuation. The
Managing Trustee will seek to provide such annual valuation to trustees and
custodians of IRAs no later than January 15 of each year, based on valuation
information as of the preceding October 31, updated for any material changes
occurring between October 31 and December 31 of the preceding year. Qualified
Plans will be furnished such annual valuation within 75 days after the close of
the Trust's fiscal year. The Managing Trustee will revise the valuation
procedures described above to conform to any relevant guidelines issued by the
Department of Labor or the Service.
(b) Tax Returns and Tax Information.
The Managing Trustee shall:
(i) prepare or cause the Accountants to prepare the tax returns
(federal, state and local, if any) of the Trust for each fiscal year
within 75 days after the end of each calendar year in which such fiscal
year was completed; and
(ii) deliver to each Person who was a Beneficiary during a calendar
year within 75 days after the end of such calendar year the information
necessary to prepare his federal income tax return for the calendar year
during which such fiscal year was completed, including information
regarding unrelated business taxable income for the use of tax-exempt
Beneficiaries.
(c) Accounting Decisions. All decisions as to accounting matters, except
as specifically provided to the contrary herein, shall be made by the Managing
Trustee in accordance with the accounting methods adopted by the Trust for
federal income tax purposes or otherwise in accordance with generally accepted
accounting principles and procedures applied in a consistent manner. The
Managing Trustee may rely upon the advice of the Accountants as to whether such
decisions are in accordance with the methods adopted
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by the Trust for federal income tax purposes or generally accepted accounting
principles.
(d) Reports to Appropriate State Authorities. The Managing Trustee shall
prepare and file with appropriate state authorities all reports required to be
so filed by state securities or Blue Sky authorities.
(e) General. No cause of action shall accrue to any Beneficiary if the
Managing Trustee shall have acted in good faith in attempting to satisfy the
requirements of this Section 10.6, and the Managing Trustee's actions or
inactions did not constitute negligence, misconduct or material breach of
fiduciary duty so as to subject the Managing Trustee to liability under Section
4.6.
10.7 Partnership Classification; Federal Tax Elections.
(a) Partnership Classification. The Trust is intended to be classified as
a partnership under the Code and the regulations thereunder and in accordance
with the tax laws of the State and other jurisdictions in a manner consistent
with such objective.
(b) Federal Tax Elections. The Trust, in the sole discretion of the
Managing Trustee, may make elections for federal tax purposes as follows:
(i) in case of transfer of all or part of the Interest of the
Managing Trustee, the Special Beneficiary or any Beneficiary, the Trust,
in the absolute discretion of the Managing Trustee, may elect pursuant to
Section 754 of the Code (or corresponding provisions of future law) and
pursuant to similar provisions of applicable state or local income tax
laws, to adjust the basis of the assets of the Trust and in such event,
any basis adjustment attributable to such election shall be allocated
solely to the transferee; and
(ii) all other elections, including but not limited to the adoption
of accelerated or straight-line depreciation cost recovery methods,
required or permitted to be made by the Trust under the Code shall be made
by the Managing Trustee in such manner as will, in the opinion of the
Managing Trustee, be in the best interest of the Trust. (In reaching such
opinion the Managing Trustee shall not be required to poll or survey the
Beneficiaries.) The Trust shall, to the extent permitted by applicable law
and regulations, elect to treat as an expense for federal income tax
purposes all amounts incurred by it for state and local taxes, interest
and other charges which may, in accordance with applicable law and
regulations, be considered as expenses.
ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES
11.1 Meetings.
(a) Meetings of the Beneficiaries for any purpose may be called by the
Managing Trustee and shall be called by the Managing Trustee upon receipt of a
request in writing signed by Beneficiaries owning 10% or more of the Interests
in the aggregate held by all Beneficiaries as of the date of such written
request. Notice of any such meeting shall be sent
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in accordance with the requirements of Section 11.1(b) within ten days after
receipt of such request. Such request shall state the purpose of the proposed
meeting and the matters proposed to be acted upon at the meeting. Such meeting
shall be held at the principal office of the Trust or at such other place as may
be designated by the Managing Trustee or, if called upon the request of
Beneficiaries, as designated by such Beneficiaries. In addition, the Managing
Trustee may submit, and upon request in writing signed by 10% or more in
interest of the Beneficiaries, shall submit, any matter upon which the
Beneficiaries are entitled to act to the Beneficiaries for a vote by written
Consent without a meeting.
(b) The Managing Trustee shall provide, within 10 days of receipt of such
request, written notice personally or by certified mail of such meeting to be
held not less than 15 days nor more than 60 days after the distribution of such
notice, to each Beneficiary at his record address, or at such other address
which he may have furnished in writing to the Managing Trustee; provided,
however, that any notice of any meeting at which a vote will be taken to (i)
amend this Agreement, (ii) dissolve the Trust, (iii) remove any Managing Trustee
and elect a new Managing Trustee, or (iv) approve or disapprove the sale of all
or substantially all the assets of the Trust, or any notice of any meeting to be
held pursuant to a written request signed by 10% or more in interest of the
Beneficiaries, shall be given by certified mail. Such notice shall be in
writing, and shall state the place, date, and hour of the meeting, and shall
indicate that it is being issued at or by the direction of the Managing Trustee
or Beneficiary calling the meeting. The notice shall state the purpose of the
meeting. If a meeting is adjourned to another time or place, and if any
announcement of the adjournment of time or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting. The presence in
person or by proxy of a Majority in Interest of the Beneficiaries shall
constitute a quorum at all meetings of the Beneficiaries; provided, however,
that if there be no such quorum, holders of a Majority in Interest of such
Beneficiary Interests so present or so represented may adjourn the meeting from
time to time without further notice, until a quorum shall have been obtained. No
notice of the time, place or purpose of any meeting of Beneficiaries need be
given to any Beneficiary who attends in person or is represented by proxy
(except when a Beneficiary attends a meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business on
the ground that the meeting is not lawfully called or convened), or to any
Beneficiary otherwise entitled to such notice who, in writing, has executed and
filed with the records of the meeting, either before or after the time thereof,
waiver of such notice.
(c) For the purpose of determining the Beneficiaries entitled to vote on
any matter on which a vote is to be taken or to vote at any meeting of the Trust
or any adjournment thereof pursuant to this Article XI, the Trustees or the
Beneficiaries requesting such meeting may fix, in advance, a date as the record
date (the "Record Date") for any such determination. Such date shall not be more
than 50 days nor less than 20 days before any such meeting.
(d) Each Beneficiary may authorize any Person or Persons to act for him by
proxy in all matters in which a Beneficiary is entitled to participate, whether
by waiving notice of any meeting, or voting or participating at a meeting. Every
proxy must be signed by the Beneficiary or his attorney-in-fact. No proxy shall
be valid after the expiration of 11 months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the Beneficiary executing it.
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(e) At each meeting of Beneficiaries, the Beneficiaries present or
represented by proxy may adopt such rules for the conduct of such meeting as
they shall deem appropriate, provided that such rules shall not be inconsistent
with the provisions of this Agreement.
11.2 Voting Procedures; Voting Rights of Beneficiaries.
(a) A Majority in Interest of the Beneficiaries, without the concurrence
of the Trustees, may (i) amend this Agreement, subject to the provisions of
Article XII and to the conditions that such amendment (A) may not cause the
Beneficiaries to lose the limited liability accorded them by the Business Trust
Act and (B) may not, without the specific written consent of the Managing
Trustee (which may not be unreasonably withheld), add to the duties or diminish
the rights of the Managing Trustee or its Affiliates as set forth herein or
reduce the compensation to which the Managing Trustee and its Affiliates are
entitled for services to be provided hereunder, (ii) terminate the Trust, (iii)
remove the Managing Trustee and elect a replacement therefor, (iv) approve or
disapprove the sale of all or substantially all of the Assets of the Trust in a
single sale or in multiple sales in the same 12-month period, except in the
orderly liquidation and winding up of the business of the Trust upon its
termination and dissolution.
(b) A Beneficiary shall be entitled to cast one vote for each Interest
that he owns. Only the votes of Beneficiaries of record on the Record Date,
whether at a meeting or otherwise, shall be counted. The Managing Trustee and
its Affiliates shall be entitled to vote with respect to any Interests which
they own; provided that the Managing Trustee and its Affiliates may not vote
their Interests with respect to the compensation or the withdrawal or removal of
the Managing Trustee pursuant to this Agreement or regarding any transaction
between the Trust and the Managing Trustee or its Affiliates.
11.3 Valuation of Interests of the Managing Trustee.
In the event of removal of the Managing Trustee pursuant to Section 11.2,
its Interest shall be appraised by two independent appraisers, one selected by
the removed Managing Trustee and one by the Beneficiaries. In the event that
such two appraisers are unable to agree on the value of the removed Managing
Trustee's Interest within 90 days, they shall within 20 days thereafter jointly
appoint a third independent appraiser whose determination shall be final and
binding; provided, however, that if the two appraisers are unable to agree
within such 20 days on a third appraiser, the third appraiser shall be selected
by the American Arbitration Association. If either the removed Managing Trustee
or the Beneficiaries fails to appoint an appraiser, the value of the removed
Managing Trustee's Interest shall be determined by arbitration in accordance
with the then applicable rules of the American Arbitration Association. The
costs of appraisal shall be borne equally between the Trust and the removed
Managing Trustee. The Trust may elect to pay the removed Managing Trustee for
the value of its Interest as so determined by delivery of a promissory note
bearing interest at a floating annual rate equal to the prime rate of interest
announced by Fleet Bank of Massachusetts, N.A., maturing in not less than five
years with equal installments of interest and principal payable annually.
ARTICLE XII - AMENDMENTS
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12.1 Certain Amendments Requiring Majority Consent.
The Managing Trustee shall not amend this Agreement without Majority
Consent in order to (i) Resign as Managing Trustee, (ii) appoint a new Managing
Trustee, (iii) sell all or substantially all of the Assets of the Trust in a
single sale or multiple sales in the same 12-month period, except in the
ordinary liquidation and winding up of the Trust upon its termination and
dissolution or (iv) permit the taking of any of the actions described in Section
7.8. The Managing Trustee may not amend this Agreement to change the voting
rights of the Beneficiaries without Majority Consent, unless the Business Trust
Act requires the change or such a change is necessary to preserve the status of
the Trust as an entity taxable as a partnership for federal tax purposes or to
conform to any operative legal precedent providing that trust beneficiaries will
be entitled to limited liability for the purposes of the Business Trust Act. A
written consent may not be withdrawn or voided once it is filed with the
Managing Trustee.
12.2 Other Amendments.
In addition to any amendments otherwise authorized herein, this Agreement
may be amended from time to time by the Managing Trustee without the Consent of
any Trust Beneficiary: (i) to add to the representations, duties or obligations
of the Managing Trustee or surrender any right or power granted to the Managing
Trustee herein, for the benefit of the Trust Beneficiaries; (ii) to correct any
mistake, omission or inconsistency or cure any ambiguity, to correct or
supplement any provision herein which may be inconsistent with any other
provision herein, or to make any other provisions for the benefit of the Trust
Beneficiaries with respect to matters or questions arising under this Agreement
which will not be inconsistent with the provisions of this Agreement; (iii) to
preserve the status of the Trust as an entity taxable as a partnership for
federal income tax purposes, including amendments to prevent the Trust from
being treated as a publicly traded partnership; (iv) to delete or add any
provision of this Agreement required to be so deleted or added by the staff of
the Securities and Exchange Commission or other federal agency, the National
Association of Securities Dealers, Inc., or by a state Blue Sky commission or
other state agency or any judicial authority or similar such official, (v) to
permit the Interests to fall within any exemption from the definition of plan
assets contained in Section 2510.3-101 of Title 29 of the Code of Federal
Regulations; (vi) to effect an amendment to this Agreement as (a) contemplated
under Section 4.2(a)(viii), Section 4.2(a)(x) or 8.5(b) or (b) necessary in
order to effect the provisions of Section 9.5; (vii) to make any other
amendments which do not adversely affect the rights of the Trust Beneficiaries;
and (viii) to authorize the Trust to issue an additional class of Interests (or
other securities), with any designations, preferences and relative,
participating, optional and other special rights, including special voting
rights, as shall be fixed by the Managing Trustee.
ARTICLE XIII - POWER OF ATTORNEY
13.1 Appointment.
Each of the Beneficiaries (through acceptance of their Interests) agrees
to be bound by this Agreement and hereby makes, constitutes and appoints the
Managing Trustee, the president and each vice president of the Managing Trustee,
and each Person who shall
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thereafter become an additional or Substitute Managing Trustee during the term
of the Trust and any continuation of the Trust pursuant to Section 4.12 and
Article XI, with full power of substitution, the true and lawful
attorney-in-fact of, to act in the name, place and stead of such Beneficiary,
with the power from time to time to execute, acknowledge, make, verify, swear
to, certify, deliver, record, file and/or publish:
(a) this Agreement under the laws of the State or any other jurisdiction,
any subsequent amendment to this Agreement, the Certificate of Trust and any
amendments thereto or restatement thereof;
(b) any other document required to reflect any action of the Managing
Trustee or Beneficiaries duly taken in the manner provided for in this
Agreement, whether or not the Beneficiary voted in favor of or otherwise
Consented to such action;
(c) any other application, certificate, affidavit, instrument and document
as may be required or appropriate in connection with documentation and
registration of Assets with the FAA and any other governmental authority having
jurisdiction;
(d) any other instrument, certificate or document which may be required by
any regulatory agency, laws of the United States, any state or any other
jurisdiction in which the Trust is doing or intends to do business or which the
Managing Trustee deems advisable to file or record, provided such instrument,
certificate or document is not inconsistent with the terms of this Agreement as
then in effect;
(e) any certificate of dissolution or cancellation of the Certificate of
Trust that may be necessary upon the termination of the Trust;
(f) any instrument or papers required to continue or terminate the
business of the Trust pursuant to Sections 4.12 and 1.6;
(g) any amendment to this Agreement permitted hereunder; and
(h) any and all instruments which the Managing Trustee deems appropriate
to reflect a change or modification of the Trust in accordance with the terms of
this Agreement.
13.2 Amendments to Agreement.
The terms of this Agreement permit certain amendments of this Agreement to
be effected and certain other actions to be taken or omitted by, or with respect
to, the Trust, in each case with the approval of less than all the Beneficiaries
if a specified percentage of the Beneficiaries shall have voted in favor of, or
otherwise Consented to, such action. This power of attorney shall permit the
Managing Trustee and the Trust to act on behalf of the Beneficiary, in
accordance with the terms of this Agreement, whether or not the Beneficiary
shall have Consented to such action, in order to effect the orderly
administration of the Trust's affairs.
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13.3 Power Coupled With an Interest.
The foregoing grant of authority:
(a) is a special power of attorney coupled with an interest in favor of
such attorneys-in-fact and as such shall be irrevocable and shall survive the
death, incapacity, insolvency, dissolution or termination of each Beneficiary;
(b) may be exercised for each Beneficiary by a signature of any one of
such attorneys-in-fact or by listing the names of all of the Beneficiaries,
including such Beneficiary, and executing any instrument with a single signature
of any one of such attorneys-in-fact acting as attorney-in-fact for all of them;
and
(c) shall survive the Assignment by any Beneficiary of the whole or any
portion of his Beneficiary Interest, as applicable, except that, where the
assignee of the whole thereof has furnished a power of attorney and has been
approved by the Managing Trustee for admission to the Trust as a Substitute
Beneficiary this power of attorney shall survive such Assignment with respect to
the assignor for the sole purpose of enabling such attorneys-in-fact to execute,
acknowledge and file any instrument necessary to effect such substitution and
shall thereafter terminate with respect to any Beneficiary who assigns all of
his Beneficiary Interest.
13.4 Power of Attorney by Substitute Beneficiaries.
A similar power of attorney shall be one of the instruments which the
Managing Trustee shall require an assignee of a Beneficiary to execute as a
condition to the admission of such assignee as a Substitute Beneficiary.
ARTICLE XIV - GENERAL PROVISIONS
14.1 Notices, Approvals and Consents.
All notices, approvals, Consents or other communications hereunder shall
be in writing and signed by the party giving the same, and shall be deemed to
have been given when the same are (a) deposited in the United States mail and
sent by first class mail (or certified if so required under Section 11.1(b)),
postage prepaid, or (b) delivered in hand. In each case, said mailing or
delivering shall be made to the parties at the addresses set forth below or at
such other addresses as such parties may designate by notice to the Trust:
(a) If to the Trust or the Managing Trustee, at the principal office of
the Trust;
(b) If to the Delaware Trustee at its principal office in the State as set
forth in the records of the Trust and in Schedule A;
(c) If to any other Trustee at its principal office as set forth in the
records of the Trust;
(d) If to the Special Beneficiary, at its principal office as set forth in
the records of
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the Trust; and
(e) If to a Beneficiary, at the address set forth in the records of the
Trust (as provided to the Trust by such Beneficiary), or to such other address
as may be designated by notice from such Beneficiary given in the manner hereby
specified.
14.2 Further Assurances.
The Trustees and Trust Beneficiaries will execute, acknowledge and deliver
such further instruments and do such further acts and things as may be required
to carry out the intent and purpose of this Agreement.
14.3 Captions.
Captions contained in this Agreement are inserted only as a matter of
convenience and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any of the provisions thereof.
14.4 Binding Effect.
Except to the extent required under the Business Trust Act, as provided in
Section 4.1(d) with respect to the Managing Trustee, and for fees, rights to
reimbursement, and other compensation provided as such, none of the provisions
of this Agreement shall be for the benefit of or be enforceable by any creditor
of the Trust.
14.5 Separability.
If one or more of the provisions of this Agreement or any application
thereof shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and any
other application thereof shall not in any way be affected or impaired thereby,
and such remaining provisions shall be interpreted consistently with the
omission of such invalid, illegal or unenforceable provisions.
14.6 Integration.
This Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings of the parties in connection
therewith which conflict with the express terms of this Agreement. No covenant,
representation or condition not expressed in this Agreement shall affect or be
effective to interpret, change or restrict the express provisions of this
Agreement.
14.7 Applicable Law.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State.
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14.8 Counterparts.
This Agreement may be signed by each party hereto upon a separate copy,
and all counterparts so executed shall constitute one agreement binding on all
parties hereto, notwithstanding that all parties are not signatory to the
original or same counterpart.
14.9 Creditors.
No creditor who makes a non-recourse loan to the Trust shall have or
acquire at any time, as a result of making such loan, any direct or indirect
interest in the profits, capital or property of the Trust other than as a
secured creditor.
14.10 Interpretation.
Unless the context in which words are used in this Agreement otherwise
indicates that such is the intent, words in the singular shall include the
plural and in the masculine shall include the feminine and neuter and vice
versa.
14.11 Arbitration; Venue.
This Agreement does not impose mandatory arbitration or venue in
connection with the settlement of disputes involving any Beneficiary; provided,
however, that this provision shall not affect or supersede any other agreement
which does provide for mandatory arbitration or venue, including any agreement
between any Beneficiary and any Soliciting Dealer.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Second Amended and Restated Declaration of Trust as of April 11, 1997.
MANAGING TRUSTEE BENEFICIARIES
AFG ASIT CORPORATION Each Person named as a Beneficiary on
Schedule A attached hereto
By: AFG ASIT Corporation as
Attorney-in-Fact for each such
Person
By:__________________________________ By:_______________________________
Authorized Officer Authorized Officer
DELAWARE TRUST
WILMINGTON TRUST COMPANY
By:___________________________________
Authorized Officer
SPECIAL BENEFICIARY
EQUIS FINANCIAL GROUP
By:____________________________________
Authorized Officer
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SCHEDULE A
NAMES, BUSINESS ADDRESSES AND CAPITAL CONTRIBUTIONS OF TRUSTEES AND
BENEFICIARIES
I. Managing Trustee
AFG ASIT Corporation $1,000
98 North Washington Street
Boston, MA 02114
II. Delaware Trustee
Wilmington Trust Company N/A
Rodney Square North
Wilmington, DE 19890
III. Special Beneficiary
Equis Financial Group $1,000
98 North Washington Street
Boston, MA 02114
Class A and Class B
IV. Class A and B Beneficiaries
(attached hereto
as Exhibit A)
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Exhibit 8
PEABODY & BROWN
A LAW PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110-1832
(617) 345-1000
FAX: (617) 345-1300
April 11, 1997
Equis Financial Group
98 North Washington Street
Boston, MA 02114
Ladies and Gentlemen:
We have acted as counsel to Equis Financial Group, a Massachusetts
partnership ("EFG"), in connection with the offering of Class B Subordinated
Interests (as hereinafter defined) in AFG Investment Trust B (the "Trust"), a
Delaware business trust formed pursuant to a Declaration of Trust (the "Original
Agreement") and a Certificate of Trust (the "Original Certificate") which has
been filed with the Secretary of State of the State of Delaware (the "Filing
Office").
We have participated in the preparation and filing on February 12, 1997 of
Registration Statement No. 333-21697 with the Securities and Exchange Commission
on Form S-1, as amended by Amendment No. 1 to the Registration Statement filed
or to be filed with the Commission on or about the date hereof (as so amended,
the "Registration Statement"), providing for the issuance of up to an aggregate
of 1,000,961 units (the "Interests") of beneficiary interests (the "Class B
Beneficiary Interests") in the Trust. Each purchaser of Class B Interests (a
"Purchaser" or a "Class B Beneficiary") will become a Class B Beneficiary
pursuant to the Second Amended and Restated Declaration of Trust of a Trust (the
"Amended Trust Agreement"), the form of which is included as an Exhibit
contained in Part II of the Registration Statement.
We have examined the Amended Trust Agreement for the Trust, the
Registration Statement and such other documents pertaining to the Trusts as we
have deemed necessary or appropriate for purposes of rendering this opinion.
Capitalized terms used and not otherwise defined herein have the respective
meanings provided in Article II of the Amended Trust Agreement.
<PAGE>
Equis Financial Group
Page 2
April 11, 1997
We are members of the Bar of the Commonwealth of Massachusetts and with
respect to matters of Delaware law we have relied, without independent
investigation, solely upon an opinion of Richards, Layton & Finger, a copy of
which is attached as Exhibit A hereto.
Based upon the foregoing, we are of the opinion that:
1. The Trust has been duly created and is validly existing as a business
trust under the Delaware Business Trust Act (12 Del.C. ss. 3801, et seq.) (the
"Act").
2. When issued and sold, the Class B Interests will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable beneficial interests in the assets of the Trust.
3. The Class B Beneficiaries, as beneficial owners of the Trust, will be
entitled to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. We note that the Class B Beneficiaries may be
obligated to make payments as set forth in the Amended Trust Agreement.
4. A summary of federal income tax consequences to the Class B
Beneficiaries set forth under the heading "FEDERAL TAX CONSIDERATIONS" in the
Prospectus has been reviewed by us and as to matters of law and legal
conclusions is correct under the Internal Revenue Code of 1986, as amended (the
"Code"), the rules and regulations promulgated thereunder and the existing
interpretations thereof as of the date of this opinion, and we hereby confirm to
you the opinions attributed therein to us. While the discussion under "FEDERAL
TAX CONSIDERATIONS" covers issues upon which we are not rendering an opinion, on
those issues upon which we are rendering an opinion, such opinion represents,
subject to the limitations, assumptions and representations contained under
"FEDERAL TAX CONSIDERATIONS" and to the accuracy of the facts set forth in the
Registration Statement, our best judgment of the outcome of such issues if
challenged and litigated. Our opinions are based upon present provisions of the
Code, regulations promulgated thereunder and interpretations by the Internal
Revenue Service (the "Service"), and judicial decisions, all of which are
subject to change and may affect our opinions stated herein. It should be noted
that the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987,
the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget
Reconciliation Acts of 1989 and 1990 and the Omnibus Budget Reconciliation Act
of 1993 effected significant amendments to the Code, and neither the Service nor
the courts have interpreted many of the provisions thereof. In the absence of
controlling precedent, there can be no assurance that the Service might not
successfully contest in the courts any opinion expressed herein or in the
Prospectus. No assurance can be given that future administrative and legislative
changes, court decisions or Service interpretations will not significantly
modify the statements and opinions expressed herein.
<PAGE>
Equis Financial Group
Page 3
April 11, 1997
This opinion is furnished to you solely for use in connection with the
Amendment No. 1. We hereby consent to the filing of this opinion as an
exhibit to the Amendment No. 1.
Very truly yours,
/s/ Peabody & Brown
Peabody & Brown
<PAGE>
EXHIBIT A
RICHARDS, LAYTON & FINGER
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
TELEPHONE (302) 658-6541
TELECOPIER (302) 658-6548
April 11, 1997
Peabody & Brown
101 Federal Street
Boston, MA 02110
Re: AFG Investment Trust B
Ladies and Gentlemen:
We have acted as special Delaware counsel for AFG Investment Trust B, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of executed or conformed
counterparts, or copies otherwise proved to our satisfaction, of the following:
I. The Certificate of Trust of the Trust, dated as of May 28, 1992 (the
"Trust Certificate"), as filed in the office of the Secretary of State of the
State of Delaware (the "Secretary of State") on May 28, 1992;
II. The Declaration of Trust of the Trust, dated May 28, 1992, by and
among AFG Assignor Corporation, as settlor, American Finance Group, as settlor,
AFG ASIT Corporation, as trustee (the "Managing Trustee"), and Wilmington Trust
Company, as trustee (the "Delaware Trustee");
III. The Amended and Restated Declaration of Trust of the Trust, dated as
of September 1, 1992, by and among the Managing Trustee and the Delaware
Trustee, as trustees, and the Trust Beneficiaries (as defined therein);
IV. The registration statement (the "Initial Registration Statement") on
Form S-1 (Registration No. 333-21697), filed by the Trust with the Securities
and Exchange Commission (the "SEC") on February 12, 1997, as amended by
Pre-Effective Amendment No. 1 to the Initial Registration Statement, including a
related preliminary prospectus (the "Prospectus"), relating to the Class B
Subordinated Interests in the assets of the Trust (the
<PAGE>
Peabody & Brown
Page 2
April 11, 1997
"Class B Interests"), as proposed to be filed by the Trust with the SEC on or
about April 9, 1997 ("Amendment No. 1") (the Initial Registration Statement, as
amended by Amendment No. 1, is hereinafter referred to as the "Registration
Statement");
V. The Second Amended and Restated Declaration of Trust of the Trust,
dated as of April 15, 1997 (the "Trust Agreement"), by and among the Managing
Trustee and the Delaware Trustee, as trustees, and the Trust Beneficiaries (as
defined therein); and
VI. A Certificate of Good Standing for the Trust, dated April 11, 1997,
obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed above, and we have assumed that there exists no
provision in any document that we have not reviewed that bears upon or is
inconsistent with the opinions stated herein. We have conducted no independent
factual investigation of our own but rather have relied solely upon the
foregoing documents, the statements and information set forth therein and the
additional matters recited or assumed herein, all of which we have assumed to be
true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed that (i) all
signatures on documents examined by us are genuine, (ii) all documents submitted
to us as originals are authentic, and (iii) all documents submitted to us as
copies conform with the original copies of those documents.
For purposes of this opinion, we have assumed (i) that the Trust Agreement
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Trust Agreement and the Trust Certificate
are in full force and effect and have not been amended and no amendment of the
Trust Agreement or the Trust Certificate is pending or has been proposed, (ii)
except to the extent provided in paragraph 1 below, the due creation or due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the legal
capacity of natural persons who are parties to the documents examined by us,
(iv) that each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the payment, in accordance with
the Trust Agreement and the Registration Statement, by each Person to whom a
Class B Interest is to be issued by the Trust (collectively, the "Class B
Beneficiaries") for the Class B Interest acquired by it, (vii) that the Class B
Interests are issued and sold to the Class B Beneficiaries in accordance with
the Trust Agreement and the Registration Statement and (viii) that any amendment
or restatement of any document reviewed by us has been accomplished in
accordance with, and was permitted by, the relevant provisions of said document
prior to its amendment or
<PAGE>
Peabody & Brown
Page 3
April 11, 1997
restatement from time to time. We have not participated in the preparation of
the Registration Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
A. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act, 12 Del. C.
ss. 3801, et seq.
B. When issued and sold, the Class B Interests will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable beneficial interests in the assets of the Trust.
C. The Class B Beneficiaries, as beneficial owners of the Trust, will be
entitled to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. We note that the Class B Beneficiaries may be
obligated to make payments as set forth in the Trust Agreement.
We hereby consent to Peabody & Brown's relying as to matters of Delaware
law upon this opinion in connection with an opinion to be rendered by it on the
date hereof relating to the formation of the Trust and other matters. In
addition, we consent to the use of our name under the heading "Legal Matters" in
the Prospectus. In giving the foregoing consents, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
SEC thereunder. Except as stated above, without our prior written consent, this
opinion may not be furnished or quoted to, or relied upon by, any other Person
for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger
Richards, Layton & Finger
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 14, 1997, in Amendment No. 1 to the
Registration Statement (Form S-1 Registration No. 333-21697) and related
Prospectus of AFG Investment Trust B filed April 11, 1997 for the registration
of 1,000,961 rights to acquire Class B Subordinated Interests and 1,000,961
Class B Subordinated Interests.
ERNST & YOUNG LLP
Boston, Massachusetts
April 11, 1997
