<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from --------------------- to -----------------------
Commission file number 0-21390
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AFG Investment Trust B
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3157230
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 N. Washington St., Fifth Floor,
Boston, MA 02114
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617)854-5800
----------------------------
Securities registered pursuant to Section 12(b) of the Act NONE
---------------------
Title of each class Name of each exchange on which registered
- ----------------------------------- -----------------------------------------
- ----------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
665,494 Trust Beneficiary Interests
- -------------------------------------------------------------------------------
(Title of class)
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No
------ ------
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. Not applicable. Securities are nonvoting for
this purpose. Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1996 (Part I and II)
<PAGE>
AFG Investment Trust B
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Trust's Securities and Related Security
Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Trust 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners
and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 13-15
2
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PART I
Item 1. Business.
(a) General Development of Business
AFG Investment Trust B, (the "Trust") was organized as a Delaware
business trust in accordance with the Delaware Business Trust Act on May 28,
1992 for the purpose of acquiring and leasing to third parties a diversified
portfolio of capital equipment. Participants' capital initially consisted of
contributions of $1,000 from the Managing Trustee, AFG ASIT Corporation,
$1,000 from the Special Beneficiary, Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership, ("EFG" or the "Advisor") and $100 from the Initial Beneficiary,
AFG Assignor Corporation, a wholly-owned affiliate of EFG. The Trust issued
665,494 Beneficiary Interests to 803 investors on September 8, 1992. The
Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation and affiliate of EFG, and one Special Beneficiary, EFG. 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").
(b) 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. Industry segment data is not applicable.
(c) Narrative Description of Business
The Trust was organized to acquire a diversified portfolio of capital
equipment subject to various full-payout and operating leases and to lease
the equipment to third parties as income-producing investments. 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 for ultimate sale.
The Trust has the additional objective of providing certain federal
income tax benefits.
The Closing Date of the offering of Beneficiary 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 financial statements included in Item 14, herein. The
Trust is expected to terminate by December 31 of the eleventh year following
its Closing Date, or December 31, 2003.
The Trust has no employees; however, it entered into an Advisory
Agreement with EFG. EFG's role, among other things, is to (i) evaluate,
select, negotiate, and consummate the acquisition of equipment, (ii) manage
the leasing, re-leasing, financing, and refinancing of equipment, and (iii)
arrange the resale of equipment. The Advisor is compensated for such services
as described in the Trust Agreement, Item 13 herein, and in Note 4 to the
financial statements, included in Item 14, herein.
The Trust's investment in equipment is, and will continue to be, subject
to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing equipment is the possibility that aggregate lease revenues and
3
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equipment sale proceeds will be insufficient to provide an acceptable rate of
return on invested capital after payment of all debt service costs and
operating expenses. Consequently, the success of the Trust is 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.
In addition, the leasing industry is very competitive. Although
substantially all funds available for 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 business trusts and limited partnerships organized and managed
similarly to the Trust and including other EFG-sponsored partnerships and
trusts, which may seek to re-lease or sell equipment within their own
portfolios to the same customers as the Trust. Many competitors have greater
financial resources and more experience than the Trust, the Managing Trustee
and the Advisor.
The Trust Agreement provided for the reinvestment of Cash From Sales or
Refinancings in additional equipment until September 1996, a period of four
years following Closing. Upon the expiration of each primary lease term, the
Managing Trustee will determine whether to sell or re-lease the Trust's
equipment, depending on the economic advantages of each alternative. Over
time, the Trust will begin to liquidate its portfolio of equipment.
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
incorporated herein by reference to Note 2 to the financial statements in the
1996 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with
the Securities and Exchange Commission.
Default by a lessee under a lease agreement may cause equipment to be
returned to the Trust at a time when the Managing Trustee or the Advisor is
unable to arrange the sale or re-lease of such equipment. This could result
in the loss of a portion of potential lease revenues and weaken the Trust's
ability to repay related indebtedness.
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
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.
4
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(d) Financial Information About Foreign and Domestic Operations and Export
Not applicable.
Item 2. Properties.
Incorporated herein by reference to Note 3 to the financial statements in
the 1996 Annual Report.
Item 3. Legal Proceedings.
Incorporated herein by reference to Note 7 to the financial statements in
the 1996 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
Incorporated herein by reference to Note 8 to the financial statements in
the 1996 Annual Report.
5
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PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters.
(a) Market Information
There is no public market for the resale of the Interests and it is not
anticipated that a public market for resale of the Interests will develop.
(b) Approximate Number of Security Holders
At December 31, 1996, there were 784 Beneficiaries in the Trust.
(c) 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 Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings on a monthly basis.
Distributions in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Managing Special
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
-------------- -------------- ------------- -------------
$ 2,502,478 $ 25,025 $ 206,454 $ 2,270,999
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</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.
6
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"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 the first time when the aggregate amount of all
distributions to the 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 Closing Date) on their aggregate
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") must be distributed within 45 days after the
completion of each calendar month. Each Distribution is described in a
statement sent to the Beneficiaries.
Item 6. Selected Financial Data.
Incorporated herein by reference to the section entitled "Selected
Financial Data" in the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
7
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PART III
Item 10. Directors and Executive Officers of the Trust.
(a-b) Identification of Directors and Executive Officers
The Trust has no Directors or Officers. As indicated in Item 1 of this
report, AFG ASIT Corporation is the Managing Trustee of the Trust. Under the
Trust Agreement, the Managing Trustee is solely responsible for the operation
of the Trust's properties and the Beneficiaries have no right to participate
in the control of such operations. The names, titles and ages of the
Directors and Executive Officers of the Managing Trustee as of March 15, 1997
are as follows:
DIRECTORS AND EXECUTIVE OFFICERS
OF THE MANAGING TRUSTEE (See Item 13)
<TABLE>
<CAPTION>
Name Title Age Term
- -------------------- --------------------------- --- ---------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member Until a
of the Executive Committee successor is
of EFG and President and a duly elected
Director of the Managing and
Trustee 48 qualified
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG
and a Director of the
Managing Trustee 48
Gary M. Romano Executive Vice President and
Chief Operating Officer of
EFG and Clerk of the
Managing Trustee 37
Michael J. Butterfield Vice President, Finance and
Treasurer of EFG and
Treasurer of the Managing
Trustee 37
James A. Coyne Senior Vice President of
EFG and Vice President of
the Managing Trustee 36
James F. Livesey Vice President, Aircraft
and Vessels of EFG 47
Sandra L. Simonsen Senior Vice President,
Information Systems of EFG 46
Gail D. Ofgant Vice President, Lease
Operations of EFG 31
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Directors or
Executive Officers.
8
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(e) Business Experience
Mr. MacDonald, age 48, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the Managing
Trustee. Mr. MacDonald was also a co-founder, Director and Senior Vice
President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald
is Vice President of American Finance Group Securities Corp. and a limited
partner in Atlantic Acquisition Limited Partnership ("AALP"). 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 M.B.A. from Boston College and a B.A. degree from the
University of Massachusetts (Amherst).
Mr. Engle, age 48, is President and Chief Executive Officer and a member
of the Executive Committee of EFG and President of AFG Realty Corporation.
Mr. Engle is Vice President and a Director of certain of EFG's affiliates and
a Director of the Managing Trustee. On December 16, 1994, Mr. Engle acquired
control of the Managing Trustee, EFG and each of EFG's subsidiaries. Mr.
Engle controls the general partner of AALP and is also a limited partner in
AALP. From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb
Partners Development, Inc., a real estate and mortgage banking company. From
1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer
of Arvida Disney Company, a large scale community development company owned
by Walt Disney Company. Prior to 1980, Mr. Engle served in various management
consulting and institutional brokerage capacities. Mr. Engle has an M.B.A.
from Harvard University and a B.S. degree from the University of
Massachusetts (Amherst).
Mr. Romano, age 37, is Executive Vice President and Chief Operating
Officer of EFG and certain of its affiliates and Clerk of the Managing
Trustee. Mr. Romano joined EFG in November 1989 and was appointed Executive
Vice President and Chief Operating Officer in April 1996. 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 C.P.A. and holds a B.S. degree from Boston College.
Mr. Butterfield, age 37, joined EFG in June 1992 and was appointed Vice
President, Finance and Treasurer of EFG and certain affiliates in April 1996,
and is Treasurer of the Managing Trustee. 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
C.P.A. requirements in the United States. He holds a Bachelor of Commerce
degree from the University of Otago, Dunedin, New Zealand.
Mr. Coyne, age 36, 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.
Mr. Livesey, age 47, 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 M.B.A. from
Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 46, 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 B.A. degree from
Wilson College.
9
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Ms. Ofgant, age 31, 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.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
(a) Cash Compensation
Currently, the Trust has no employees. However, under the terms of the
Trust Agreement, the Trust is obligated to pay all costs of personnel
employed full or part-time by the Trust, including officers or employees of
the Managing Trustee or its Affiliates. There is no plan at the present time
to make any officers or employees of the Managing Trustee or its Affiliates
employees of the Trust. The Trust has not paid and does not propose to pay
any options, warrants or rights to the officers or employees of the Managing
Trustee or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Trust has no employees, as discussed in Item 11(a), pursuant
to section 10.4(c) of the Trust Agreement, the Trust incurs a monthly charge
for personnel costs of EFG for persons engaged in providing administrative
services to the Trust. A description of the remuneration paid by the Trust to
the Managing Trustee and its Affiliates for such services is included in Item
13 of this report and in Note 4 to the financial statements included in Item
14 herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the Managing
Trustee or its Affiliates which results or may result from their resignation,
retirement or any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
By virtue of its organization as a trust, the Trust has outstanding no
securities possessing traditional voting rights. However, as provided in
Section 11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a
majority interest of the Beneficiaries have voting rights with respect to:
1. Amendment of the Trust Agreement;
2. Termination of the Trust;
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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 Interests as of March 1, 1997.
The ownership and organization of EFG is described in Item 1 of this report.
Item 13. Certain Relationships and Related Transactions.
The Managing Trustee of the Trust is AFG ASIT Corporation, an affiliate
of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the years ended December 31, 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 Asset 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 revenue and 2% of gross full
payout lease rental revenue 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 or directly from external vendors.
The Trust's Purchase Price is determined by the method described in Note 2 to
the Trust's financial statements included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
11
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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.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Trust
None.
(d) Transactions with Promoters
See Item 13(a) above.
12
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS:
<S> <C> <C>
Report of Independent Auditors *
Statement of Financial Position
at December 31, 1996 and 1995 *
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994 *
Statement of Changes in Participants' Capital
for the years ended December 31, 1996, 1995 and 1994 *
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 *
Notes to the Financial Statements *
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set
forth in Item 601 of Regulation S-K, are not applicable.
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number
-----------
<S> <C>
4 Amended and Restated Declaration of Trust included as
Exhibit A to the Prospectus which is included in
Registration Statement on Form S-1 (No. 33-42946).
13 The 1996 Annual Report to security holders, a copy of which
is furnished for the information of the Securities and
Exchange Commission. Such Report, except for those portions
thereof which are incorporated herein by reference, is not
deemed "filed" with the Commission.
23 Consent of Independent Auditors.
99 (a) Lease agreement with OMI Corporation was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 as Exhibit 28 (d) and is incorporated
herein by reference.
</TABLE>
* Incorporated herein by reference to the appropriate portion of the 1996
Annual Report to security holders for the year ended December 31, 1996. (See
Part II)
13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-----------
<S> <C>
99 (b) Lease agreement with Alaska Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 as Exhibit 28 (e) and is incorporated
herein by reference.
99 (c) Lease agreement with Tarmac Mid-Atlantic, Incorporated was
filed in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 as Exhibit 28 (g) and is
incorporated herein by reference.
</TABLE>
(b) Reports on Form 8-K
None.
14
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AFG Investment Trust B of our report dated March 14, 1997, included
in the 1996 Annual Report to the Participants of AFG Investment Trust B.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity
and on the date indicated.
AFG Investment Trust B
By: AFG ASIT Corporation,
A Massachusetts corporation and the
Managing Trustee of the Registrant.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Geoffrey A. MacDonald By: /s/ Gary D. Engle
-------------------------- -------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG Officer and a member of the
and President and a Director of Executive Committee of EFG and a
the Managing Trustee Director of the Managing Trustee
(Principal Executive Officer)
Date: March 00,1997 Date: March 00, 1997
-------------------------- -----------------------------
By: /s/Gary M. Romano By: /s/ Michael J. Butterfield
-------------------------- -------------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EPG and Clerk Treasurer of EFG and Treasurer
of the Managing Trustee of the Managing Trustee
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 00,1997 Date: March 00, 1997
-------------------------- -----------------------------
</TABLE>
16
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report has been sent to the Beneficiaries. A report will be
furnished to the Beneficiaries subsequent to the date hereof.
No proxy statement has been or will be sent to the Beneficiaries.
17
<PAGE>
AFG INVESTMENT TRUST
AFG Investment Trust B
Annual Report to the Participants, December 31, 1996
<PAGE>
AFG INVESTMENT TRUST B
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1996 and 1995 9
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994 10
Statement of Changes in Participants' Capital
for the years ended December 31, 1996, 1995 and 1994 11
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 12
Notes to the Financial Statements 13-21
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 22
Statement of Cash and Distributable Cash From
Operations, Sales and Refinancings 23
Schedule of Costs Reimbursed to the
Managing Trustee and its Affiliates as
Required by Section 10.4 of the Amended and
Restated Declaration of Trust 24
</TABLE>
2
<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>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION 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 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
3
<PAGE>
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.
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.
4
<PAGE>
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's Prospectus 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.
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.
5
<PAGE>
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.
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
6
<PAGE>
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.
7
<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.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Participants is
presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
8
<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
Organization costs, net of 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 (30,38) (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.
9
<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.
10
<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
TRUSTEE BENEFICIARY BENEFICIARIES
----------------------------
AMOUNT AMOUNT INTERESTS AMOUNT TOTAL
---------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at $ (17,948) $ (155,318) 665,494 $ 13,342,218 $ 13,168,952
December 31, 1993
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.
11
<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
- 12 -
<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
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
- 13 -
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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:
For the year ending December 31, 1997 $5,019,911
1998 1,485,583
1999 297,408
2000 249,076
2001 159,480
Thereafter 159,480
---------
Total $7,370,938
----------
----------
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>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<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>
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.
- 14 -
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
USE OF ESTIMATES
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
- ------------------
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment cost represents Asset Base Price plus
acquisition fees and was determined in accordance with the Trust Agreement
and certain regulatory guidelines. Asset Base Price is affected by the
relationship of the seller to the Trust as summarized herein. Where the
seller of the equipment was EFG or an Affiliate, Asset Base Price was the
lower of (i) the actual price paid for the equipment by EFG or the Affiliate
plus all actual costs accrued by EFG or the Affiliate while carrying the
equipment less the amount of all primary term rents earned by EFG or the
Affiliate prior to selling the equipment or (ii) fair market value as
determined by the Managing Trustee in its best judgment, including all liens
and encumbrances on the equipment and other actual expenses. Where the seller
of the equipment was a third party who did not manufacture the equipment,
Asset Base Price was the lower of (i) the price invoiced by the third party
or (ii) fair market value as determined by the Managing Trustee. Where the
seller of the equipment was a third party who also manufactured the
equipment, Asset Base Price was the manufacturer's invoice price, net of any
manufacturer rebates or incentives, which price was considered to be
representative of fair market value.
DEPRECIATION AND AMORTIZATION
- -----------------------------
The Trust's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each
asset's primary lease term, which term generally represents the period of
greatest revenue potential for each asset. Accordingly, to the extent that an
asset is held on primary lease term, the Trust depreciates the difference
between (i) the cost of the asset and (ii) the estimated residual value of
the asset on a straight-line basis over such term. For purposes of this
policy, estimated residual values represent estimates of equipment values at
the date of primary lease expiration. To the extent that an asset is held
beyond its primary lease term, the Trust continues to depreciate the
remaining net book value of the asset on a straight-line basis over the
asset's remaining economic life. Periodically, the Managing Trustee evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. For purposes of this comparison, net carrying value
represents, at a given date, the net book value (equipment cost less
accumulated depreciation for financial reporting purposes) of the Trust s
equipment and net realizable value represents, at the same date, the
aggregate undiscounted cash flows resulting from future contracted lease
payments plus the estimated residual value of the Trust s equipment. The
Managing Trustee evaluates significant equipment assets, such as aircraft and
vessels, individually. All other assets are evaluated collectively by
equipment type unless the Managing Trustee learns of specific circumstances,
such as a lessee default, technological obsolescence, or other market
developments, which could affect the net realizable value of particular
assets. Adjustments to reduce the net carrying value of equipment are
recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological
advances, and many other events can converge to enhance or detract from asset
values at any given time. 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.
- 15 -
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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
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.
- 16 -
<PAGE>
<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 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.
17
<PAGE>
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 release 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 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.
18
<PAGE>
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
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 for 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. 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:
For the year ending December 31, 1997 $2,721,044
1998 890,793
1999 109,537
2000 118,459
2001 128,106
Thereafter 384,872
----------
Total $4,352,811
----------
----------
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.
19
<PAGE>
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>
Participant's 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 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.
20
<PAGE>
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. 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.
21
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AFG Investment Trust B
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1996, 1995 and 1994
The Trust classifies all rents from leasing equipment as lease revenue.
Upon expiration of the primary lease terms, equipment may be sold, rented on
a month-to-month basis or re-leased for a defined period under a new or
extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the
total residual value realized for each item of equipment. Therefore, the
financial statement gain or loss, which reflects the difference between the
net book value of the equipment at the time of sale or disposition and the
proceeds realized upon sale or disposition, may not reflect the aggregate
residual proceeds realized by the Trust for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Rents earned prior to disposal of
equipment, net of interest charges $ 2,609,305 $ 2,619,020 $ 816,376
Sale proceeds including assumption of
debt and interest, realized upon
disposition disposition of equipment 2,025,783 3,859,698 4,929,247
----------- ----------- -----------
Total cash generated from rents
and equipment sale proceeds 4,635,088 6,478,718 5,745,623
Original acquisition cost of equipment
disposed 4,311,864 5,576,700 5,123,371
----------- ----------- -----------
Excess of total cash generated to cost
of equipment disposed $ 323,224 $ 902,018 $ 622,252
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
22
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
SALES AND
OPERATIONS REFINANCINGS TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ 1,032,434 $ (224,594) $ 807,840
Add:
Depreciation and amortization 4,284,049 - 4,284,049
Management fees 249,205 - 249,205
Book value of disposed equipment - 2,250,377 2,250,377
Less:
Principal reduction of notes payable (3,742,190) - (3,742,190)
------------ ------------ ------------
Cash from operations, sales and
refinancings 1,823,498 2,025,783 3,849,281
Less:
Management fees (249,205) - (249,205)
------------ ------------ ------------
Distributable cash from operations,
sales and refinancings 1,574,293 2,025,783 3,600,076
Other sources and uses of cash:
Cash at beginning of year 337,293 - 337,293
Proceeds from notes payable 997,888 - 997,888
Purchase of equipment (997,888) (443,908) (1,441,796)
Net change in receivables and
accruals 328,922 - 328,922
Less:
Cash distributions paid (993,290) - (993,290)
------------ ------------ ------------
Cash at end of year $ 1,247,218 $ 1,581,875 $ 2,829,093
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
23
<PAGE>
AFG Investment Trust B
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE AMENDED AND
RESTATED DECLARATION OF TRUST
December 31, 1996
For the year ended December 31, 1996, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses $ 126,499
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,829,093
<SECURITIES> 0
<RECEIVABLES> 493,688
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,323,448
<PP&E> 25,469,660
<DEPRECIATION> 12,161,949
<TOTAL-ASSETS> 16,631,159
<CURRENT-LIABILITIES> 352,748
<BONDS> 4,352,811
0
0
<COMMON> 0
<OTHER-SE> 11,925,600
<TOTAL-LIABILITY-AND-EQUITY> 16,631,159
<SALES> 5,809,086
<TOTAL-REVENUES> 5,890,128
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,674,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 408,153
<INCOME-PRETAX> 807,840
<INCOME-TAX> 0
<INCOME-CONTINUING> 807,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807,840
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
