<PAGE>
As filed with the Securities and Exchange Commission on February 12 , 1997
Registration No. 33-_________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------
AFG INVESTMENT TRUST B
(Name of Registrant)
DELAWARE
(State or other Jurisdiction of Organization)
7394
(Primary Standard Industrial Classification Code Number)
04-3157230
(IRS Employer Identification Number of Registrant)
C/O EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP
98 NORTH WASHINGTON STREET, BOSTON, MASSACHUSETTS 02114 (617) 854-5800
(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
JAMES A. COYNE
c/o EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP
98 NORTH WASHINGTON STREET, BOSTON, MASSACHUSETTS 02114 (617) 854-5800
(Address, including Zip Code, and Telephone Number, including Area Code, of
Agent for Service)
---------------
The Commission is requested to send copies of all communications to:
THOMAS F. GLOSTER III, P.C.
Peabody & Brown
101 Federal Street, Boston, MA 02110 (617) 345-1000
(Counsel for Registrant)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following
box. |_|
---------------
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
Proposed Maximum Amount of
Title of Each Class of Amount to be Maximum Aggregate Registration
Securities to be Registered Offering Offering Fee
Registered Price Per Price
Interest
- --------------------------------------------------------------------------------
Class B Subordinated
Beneficiary Interests 1,000,961 $5.00 $5,004,805 $1,517
================================================================================
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(c) of
the Securities Act of 1933, as amended, or on such date as the Commission,
acting pursuant to said Section 8(c), may determine.
================================================================================
<PAGE>
P R O S P E C T U S AFG INVESTMENT TRUST B
|_| 1,000,961 Class B Subordinated Interests ($5,004,805)
|_| $5 Per Interest
AFG INVESTMENT TRUST B (the "Trust") is a Delaware business trust which
was organized on May 28, 1992, to engage in the business of leasing equipment
("Assets"). The Managing Trustee of the Trust (the "Managing Trustee") is AFG
ASIT Corporation, a Massachusetts corporation organized for the express purpose
of managing the Trust and three other Delaware business trusts (collectively,
the "AFG Investment Trusts" or the "Trusts"). The Trust issued 665,494
beneficiary interests (the "Class A Interests") in 1992 which are currently held
by 784 investors (the "Class A Beneficiaries"). Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), is the Special Beneficiary of, and Advisor to, the Trust.
The proceeds of the offering (the "Offering") of the Class B Subordinated
Beneficiary Interests (the "Class B Subordinated Interests" or the "Interests")
will be applied to make a special distribution to the Class A Beneficiaries and
thereafter are intended by the Managing Trustee to be applied to enable the
Trust to redeem a portion of the Class A Interests. The Class B Subordinated
Interests are being offered exclusively to the Class A Beneficiaries and the
Special Beneficiary.
INVESTMENT IN THE CLASS B SUBORDINATED INTERESTS INVOLVES SIGNIFICANT RISKS.
THESE RISKS INCLUDE:
*Distributions with respect to the Class B Subordinated Interests will be
subordinated to certain Distributions with respect to the Class A Interests.
*A special distribution will be made from a portion of the Offering proceeds
exclusively to the Class A Beneficiaries. The Class B Beneficiaries will not
participate therein.
*There is no assurance that proceeds of the Offering remaining after the special
distribution to the Class A Beneficiaries will be successfully applied by the
Trust to redeem a significant portion of the Class A Interests, nor is there any
assurance as to the amount of the purchase price for the Class A Interests.
*Any portion of the Offering proceeds not applied to redemption of the Class A
Interests will be returned to the Class B Beneficiaries with a return thereon of
only 7% per annum and with a corresponding reduction in certain Distributions
thereafter to be made to the Class B Beneficiaries.
*Purchasers of Class B Subordinated Interests are not expected to be permitted
to have the Trust redeem their Class A Interests.
*No resale market or redemption program exists for the Class B Subordinated
Interests and, accordingly, Investors may not be able to dispose of their Class
B Subordinated Interests.
*Distributions to the Beneficiaries depend primarily on the proceeds from the
Assets currently held and leased by the Trust.
*Future demand for Assets is uncertain.
*A substantial portion of the Trust's leases are operating leases under which
rental payments are insufficient to recover the purchase price of the Assets
leased thereby.
3
<PAGE>
*Lessee defaults may result in lower Distributions.
*Conflicts of interest may arise out of transactions between the Trust and the
Managing Trustee and its affiliates and between the Class A Beneficiaries and
the Class B Beneficiaries, particularly as to the level and timing of
Distributions and as to the exercise of voting rights.
*Investors must rely on the management abilities of the Managing Trustee and its
affiliates, which receive substantial fees from the Trust.
*A material portion of Distributions will constitute a return of capital.
*Federal income tax benefits may not be realized.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
*THE TRUST IS NOT A MUTUAL FUND OR OTHER TYPE OF INVESTMENT COMPANY WITHIN
THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940 AND IS NOT SUBJECT TO
REGULATION THEREUNDER.
Price to Beneficiaries(1) Proceeds to Trust(2)(3)
------------------------- -----------------------
Per Interest $ 5 $ 5
Total Minimum $ 2,295,955 $ 2,295,955
Total Maximum $ 5,004,805 $ 5,004,805
- --------------------------------------------------------------------------------
ANY SUPPLEMENTS AND/OR STICKERS WHICH UPDATE THIS PROSPECTUS ARE
CONTAINED INSIDE THE BACK COVER.
The date of this Prospectus is _____________, 1997.
(See "RISK FACTORS" and "CONFLICTS OF INTEREST" for a discussion of the
risk factors and conflicts of interest associated with an investment in the
Class B Subordinated Interests.) The Trust will use 20% of the proceeds of the
Offering (after deduction for offering expenses) to make a special distribution
to the Class A Beneficiaries and the balance of the proceeds is intended by the
Managing Trustee to be applied from time to time to the redemption of a portion
of the Class A Interests. Any portion of such net proceeds which are not so
applied to redeem the Class A Interests within 24 months of the Closing (the
"Initial Redemption Period") will be returned to the Class B Beneficiaries as a
return of their capital and Distributions with respect to the Class B
Subordinated Interests will be correspondingly reduced. (See "ESTIMATED USE OF
PROCEEDS.")
4
<PAGE>
(footnotes to table on previous page)
- ----------
(1) The Trust will offer exclusively to the Class A Beneficiaries and the
Special Beneficiary a minimum of 459,191 Class B Subordinated Interests (the
"Minimum Offering") and a maximum of 1,000,961 Class B Subordinated Interests
(the "Maximum Offering"). The Trust is offering the Class B Subordinated
Interests on a reasonable "best efforts" basis, which means that no one is
guaranteeing the amount of capital which will be raised. (See "THE OFFERING"
for additional information concerning the method of offering.)
(2) Proceeds to the Trust are calculated after deducting offering expenses
payable by the Trust, which expenses are estimated to be $80,643 if the Minimum
Offering is attained and $107,732 if the Maximum Offering is attained. (See "the
Offering" for additional information concerning the method of offering the Class
B Subordinated Interests, the method of allocating the Class B Subordinated
Interests among the Class A Beneficiaries and the Special Beneficiary and the
minimum purchase requirements.)
(3) Payments made by investors will be deposited in an interest-bearing
escrow account (the "Escrow Account") at Fleet Bank of Massachusetts, N.A. (the
"Escrow Agent"). If the Trust does not raise the Minimum Offering, the
investors' funds, and escrow interest earned thereon, will be returned to
investors within seven (7) days of the termination of the Offering. If the
Closing occurs, escrow interest (net of certain fees and expenses of the Escrow
Agent) earned on subscriptions accepted by the Managing Trustee will be
distributed to all Class B Beneficiaries within 30 days after the Closing, pro
rata based on the length of time that the investors' funds have been held in the
Escrow Account. Subscriptions are absolutely irrevocable and may not be
terminated or withdrawn by Investors for any reason.
The Trust is intended to be classified as a partnership for federal income
tax purposes. (See "FEDERAL TAX CONSIDERATIONS" and "STATE, LOCAL AND FOREIGN
TAXES" for a description of the tax consequences of an investment in the Class B
Subordinated Interests.) The Trust will furnish tax information and other
reports to investors on a periodic basis as described in "REPORTS TO
BENEFICIARIES."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATION TO
THE CONTRARY AND ANY PREDICTION, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THE TRUST IS NOT PERMITTED.
5
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF THE OFFERING 10
Introduction 10
Estimated Use of Proceeds 11
Compensation and Fees 11
Conflicts of Interest 11
Fiduciary Responsibility 12
Risk Factors 12
Investment and Business Risks 12
Federal Income Tax Risks 13
Business of Trust 13
Management 14
Trust Distributions and Allocations 14
Certain Distribution Policies 15
Federal Tax Considerations 15
Summary of the Trust Agreement 15
The Offering 16
Over-Subscription Privilege 16
Exercising Rights 17
Foreign Restrictions 17
Investor Suitability Standards 17
ESTIMATED USE OF PROCEEDS 18
COMPENSATION AND FEES 19
CONFLICTS OF INTEREST 20
FIDUCIARY RESPONSIBILITY 22
Conflicts 22
Indemnification of Trustees and
their Affiliates 23
RISK FACTORS 24
Investment and Business Risks 24
Federal Income Tax Risks 27
BUSINESS OF THE TRUST 30
In General 30
Financial Information About
Industry Segments 30
Description of Business 31
Properties 32
Legal Proceedings 32
MARKET FOR THE TRUST'S SECURITIES
AND RELATED SECURITY HOLDER
MATTERS 32
Market Information 32
Approximate Number of
Security Holders 32
Dividend History and Restrictions 32
SELECTED FINANCIAL DATA 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 35
Overview 35
Operations 35
Liquidity and Capital Resources and
Discussion of Cash Flows 38
MANAGEMENT OF THE TRUST 40
EXECUTIVE COMPENSATION 43
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT 43
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 44
Transactions with Management
and Others 44
TRUST DISTRIBUTIONS AND
ALLOCATIONS 45
General 45
Certain Distribution Policies 46
Distributions and Allocations 46
Allocation of Profits and Losses 49
FEDERAL TAX CONSIDERATIONS 49
Brief Overview of Federal Tax
Considerations 49
General; Opinions of Peabody & Brown 53
Tax Rates and Capital Gains 55
Trust Status 55
General Principles of Partnership
Taxation 57
Allocation of Profits and Losses 58
Active/Passive Income and Loss 60
Investment by Qualified Pension,
Profit-Sharing and Stock Bonus
Plans and Individual Retirement
Accounts and by Other Tax-Exempt
Organizations 60
Tax Status of Leases 61
Depreciation (Cost Recovery) 62
Recapture of Depreciation 65
Sale or Other Disposition of
Trust Property 66
Sale or Other Disposition of Interests 67
Tax Treatment of Certain Trust Expenses 67
Limitations on the Deductibility of
Interest 79
Trust Tax Elections 70
Use of Nominees 71
Section 467 71
Joint Ventures with Manufacturers 71
Transferability-Termination of the Trusts 71
Termination and Liquidation of the Trusts 72
Estate Taxes 72
Alternative Minimum Tax 72
Interest and Penalties on Under-payment
of Taxes: Audit 74
Tax Shelter Registration 75
Trusts as Investors 76
Investment by Foreign Beneficiaries 76
Possible Changes in Tax Law 78
8
<PAGE>
TABLE OF CONTENTS
Page
----
STATE, LOCAL AND FOREIGN TAXES 78
SUMMARY OF THE TRUST AGREEMENT 79
Special Redemption Provisions 80
Additional Class of Interest 80
The Trustees 80
Responsibilities and Liabilities of the
Managing Trustee 80
Resignation of the Managing Trustee 81
Indemnification of the Managing Trustee 81
Certain Rights of Managing Trustee with
Respect to the Interests 81
Liability of the Beneficiaries 82
Voting Rights 82
Meetings 83
Amendment of Trust Agreement 83
Transferability of Interests 83
Change in Status of Beneficiary 85
Distributions and Allocations 85
Other Transactions Involving the Managing
Trustee and its Affiliates 85
No Withdrawal of Capital 85
Roll-Up 86
Term and Termination 86
Fiscal Year 87
REPORTS TO BENEFICIARIES 88
THE OFFERING 88
Terms of the Offer 88
Subscription Price 88
Expiration of Offering 89
Subscription Agent 89
Over-Subscription Privilege 89
Exercise of Rights 90
Exercise of Over Subscription Privilege 90
Examples of Exercise of Rights and the
Over-Subscription Privilege 91
Payment for Securities 91
Foreign Record Date Unitholders 93
ERISA AND OTHER CONSIDERATIONS 93
General 93
Unrelated Business Taxable Income 96
SUPPLEMENTAL LITERATURE 96
INVESTOR SUITABILITY STANDARDS 96
General 96
Tax-Exempt Investors 97
Representations and Warranties 97
LEGAL MATTERS 97
EXPERTS 97
ADDITIONAL INFORMATION 98
GLOSSARY 98
INDEX TO FINANCIAL STATEMENTS F-1
9
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF THE OFFERING
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The more detailed
information in the rest of this Prospectus follows in the same order as the
topics appear in this Summary after the "Introduction." See "GLOSSARY" for
definitions of certain terms used in this summary and throughout this
Prospectus.
Introduction
AFG Investment Trust B is a Delaware business trust organized on May 28,
1992, to engage in the business of leasing equipment. The Managing Trustee of
the Trust and three other Delaware business trusts (collectively, the "AFG
Investment Trusts" or the "Trusts") is AFG ASIT Corporation, a Massachusetts
corporation which was organized on August 13, 1991, and is an affiliate of Equis
Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG" or the "Advisor"). EFG is the Special
Beneficiary of, and Advisor to, the Trust. (See "MANAGEMENT OF THE TRUST.") The
Trust issued 665,494 beneficiary interests in 1992 (the "Class A Interests")
which are currently held by 784 investors (the "Class A Beneficiaries"). The net
proceeds of the offering (the "Offering") of the Class B Subordinated
Beneficiary Interests (the "Class B Subordinated Interests" or the "Interests")
will be applied to make the Special Class A Distribution to the Class A
Beneficiaries and thereafter are intended by the Managing Trustee to be applied
to enable the Trust for a period of 24 months after the Closing ( the "Initial
Redemption Period") to redeem a portion of the Class A Interests.
THE PURPOSES OF THE OFFERING ARE TO PROVIDE FUNDS TO ENABLE THE TRUST TO
MAKE A SPECIAL DISTRIBUTION TO THE CLASS A BENEFICIARIES AND TO PURCHASE CLASS A
INTERESTS AT A PRICE THAT WILL ENABLE THE TRUST TO MAKE DISTRIBUTIONS TO THE
NON-REDEEMING CLASS A BENEFICIARIES IN AN AMOUNT GREATER THAN THE TRUST WOULD
OTHERWISE BE ABLE TO MAKE AND TO PROVIDE DISTRIBUTIONS TO THE CLASS B PARTNERS
TO ENABLE THEM TO RECEIVE FROM THE TRUST THEIR CAPITAL, PLUS A RETURN THEREON.
TO THE EXTENT THAT THE TRUST CANNOT PURCHASE SUFFICIENT CLASS A INTERESTS AT A
PRICE DEEMED APPROPRIATE BY THE MANAGING TRUSTEE, THE TRUST WILL RETURN TO THE
CLASS B BENEFICIARIES THE REMAINING PORTION OF THE PROCEEDS OF THE OFFERING,
WITH ONLY A 7% RETURN THEREON. FURTHER, INVESTORS THAT PURCHASE CLASS B
SUBORDINATED INTERESTS ARE EXPECTED TO BE PRECLUDED FROM HAVING THEIR CLASS A
INTERESTS REDEEMED BY THE TRUST BECAUSE SUCH REDEMPTION COULD CAUSE THE TRUST TO
BE TAXED AS A PUBLICLY TRADED PARTNERSHIP. ACCORDINGLY, THE MANAGING TRUSTEE
DOES NOT RECOMMEND THAT INVESTORS PURCHASE CLASS B SUBORDINATED INTERESTS WHO
DESIRE TO HAVE THEIR CLASS A INTERESTS REDEEMED. THERE IS NO ASSURANCE THAT THE
PURPOSES OF THE OFFERING WILL BE ACHIEVED.
The Class B Subordinated Interests are being offered exclusively to the
Class A Beneficiaries and the Special Beneficiary. (See "Terms of the Offer" in
this Summary.) The Trust will hold one closing (the "Closing"). The Closing has
been scheduled for __________, 1997 [30 days after the effective date of this
Prospectus], provided that the Minimum Offering of 459,191 Interests has been
attained. However, the Managing Trustee may extend the date of Closing but in no
event to later than December 31, 1997.
10
<PAGE>
Securities Offered Class B Subordinated Beneficiary Interests
Minimum Offering 459,191 Interests ($2,295,955)
Maximum Offering 1,000,961 Interests ($5,004,805)
Price Per Interest $5.00
Minimum Purchase Each Class A Beneficiary desiring to purchase
Class B Subordinated Interests will be required
to make a minimum purchase (the "Minimum
Purchase Amount") equal to the lesser of
(a) the amount of the Class B Subordinated
Interests which he is permitted to purchase, as
described under "Terms of Offering" in this
Summary, or (b) 400 Class B Subordinated
Interests ($2,000) for IRAs or other Qualified
Plans or 1,000 Class B Subordinated Interests
($5,000) for all other Investors (with a higher
minimum purchase in certain states).
Offering Termination Date The Offering will terminate at
Closing, which in no event will be later than
December 31, 1997.
Escrow Arrangement Subscription payments will be held in an
interest bearing escrow account with Fleet Bank
of Massachusetts, N.A. until Closing. Each
subscription will generally earn interest from
the time deposited with the Escrow Agent until
Closing; provided, however, that no Escrow
Interest will be paid to a Subscriber whose
subscription payment is received fewer than
three days prior to Closing.
Estimated Use of Proceeds
The Trust will use 20% of the proceeds of the Offering after payment of
Offering expenses to make a special distribution to the Class A Investors (the
"Special Class A Distribution") and the balance of such net proceeds are
intended to be applied from time to time to enable the Trust to redeem Class A
Interests during the Initial Redemption Period. Any net proceeds not so to be
applied will be used from time to time throughout the Initial Redemption Period
to make the Class B Capital Distributions. (See "ESTIMATED USE OF PROCEEDS.")
Compensation and Fees
The Managing Trustee, the Advisor and their Affiliates will not receive
additional compensation or fees from the Trust as a result of the Offering.
However, the Managing Trustee, the Advisor and certain of their Affiliates have
received, and will continue to receive, substantial compensation and fees in
connection with the organization, management and operation of the Trust. Also,
the Trust has reimbursed, and will reimburse, the Managing Trustee and its
Affiliates for certain expenses in connection with the Offering. (See
"COMPENSATION AND FEES.")
Conflicts of Interest
The Managing Trustee, the Advisor and certain of their Affiliates will
have various conflicts of interest with respect to the Trust. These conflicts
include, but are not limited to:
*determination of the amount and timing of the Distributions, in
particular Distributions with respect to any Class B Subordinated
Interests in the event such Interests are acquired, as expected, by the
Special Beneficiary;
11
<PAGE>
*competition with other equipment leasing programs sponsored by the
Managing Trustee or its Affiliates for the re-leasing and sale of
equipment and with respect to the allocation of management time, services
or functions to be provided by officers, directors and employees of the
Managing Trustee and its Affiliates;
*exercise of voting rights, particularly with respect to the rights,
obligations and removal of the Managing Trustee; and
*the lack of arm's length negotiations between the Trust, on the one hand,
and the Managing Trustee and its Affiliates, on the other hand, in the
determination of compensation..
The Trust Agreement contains provisions intended to reduce conflicts
between the Managing Trustee and its Affiliates and the Beneficiaries. (See
"SUMMARY OF THE TRUST AGREEMENT" and "CONFLICTS OF INTEREST.")
Fiduciary Responsibility
The Managing Trustee is accountable to the Trust and the Beneficiaries as
a fiduciary and, consequently, must exercise good faith and act with integrity
in Trust affairs. However, the Trust will be required to provide certain
indemnities to the Managing Trustee and its Affiliates. Further, the Managing
Trustee and its Affiliates will be permitted to engage in certain activities
which will involve conflicts of interest with the Trust.
Risk Factors
An investment in the Trust involves certain risks. The "RISK FACTORS"
Section of this Prospectus contains a discussion of the most important risks
associated with an investment in Interests. Please refer to those subsections of
the Prospectus for a discussion of the following specific risk factors as well
as other relevant risk factors.
Investment and Business Risks
*Distributions with respect to the Class B Subordinated Interests will be
subordinated to certain Distributions with respect to the Class A
Interests.
*A special distribution will be made from a portion of the Offering
proceeds exclusively to the Class A Investors. The Class B Investors
will not participate therein.
*There is no assurance that the proceeds of the Offering remaining after
the special distribution to the Class A Investors will be successfully
applied by the Trust to redeem a significant portion of the Class A
Interests.
*Any portion of the Offering proceeds not applied to the redemption of the
Class A units will be returned to the Class B Beneficiaries with a return
thereon of only 7% per annum and with a corresponding reduction in certain
Distributions thereafter to be made to the Class B Beneficiaries.
* Purchasers of Class B Subordinated Interests are not expected to be
permitted to have the Trust redeem their Class A Interests.
*No resale market or redemption program will exist for the Class B
Subordinated Interests and, accordingly, investors may not be able to
dispose of their Class B Subordinated
12
<PAGE>
Interests.
* A material portion of Distributions will constitute a return of
capital
* Distributions to the investors depend primarily on the proceeds from the
Assets currently held and leased by the Trust.
*A substantial portion of the Trust's Leases are operating leases under
which rental payments due during the initial Lease term are insufficient
to recover the purchase price of the Assets, making recovery of the
Asset's purchase price dependent upon the re-lease or sale of such Assets.
*All aspects of the management of the Assets and the Trust will be
entrusted to the Managing Trustee and its Affiliates, who will receive
substantial fees from the Trust.
*Defaults by Lessees, including defaults occasioned by financial
difficulties, may result in loss of revenues and possible foreclosure on
related debt which, in turn, may result in the loss of the investor's
capital in the Asset.
*There is a risk that the liability of the Class B Beneficiaries will not
be limited to their capital contributions, particularly in jurisdictions
which have not adopted legislation similar to the Delaware Business Trust
Act.
*The Trust has acquired Assets jointly with other joint venture partners
which leads to additional risks not present where the Assets are owned
solely by the Trust.
*The equipment leasing business, in general, involves numerous special
risks, including cost of maintenance and repair and economic and
technological obsolescence of equipment.
Federal Income Tax Risks
*No ruling has been requested from the Internal Revenue Service (the
"Service") with respect to any of the tax considerations associated with
an investment in the Trust.
*Opinions of counsel are not binding on the Service.
*It is possible that the Trust may be classified as a corporation, rather
than a partnership, for federal income tax purposes which would cause
Distributions to be taxed on both a corporate and individual level.
*The Service may successfully challenge certain of the Trust's leasing
transactions as sales or financings for tax purposes, resulting in a loss
of tax benefits.
*Disposition of Trust property may result in tax liability in excess of
cash available from the related transaction, for which investors will be
personally responsible.
*Investment in the Class B Subordinated Interests by an IRA or other
Qualified Plan is expected to result in unrelated business taxable income.
Business of Trust
The Trust was organized as a Delaware business trust on May 28, 1992 for
the purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment (the "Assets"). For a
13
<PAGE>
description of the Trust and its business, see "BUSINESS OF THE TRUST" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Management
The Managing Trustee of the Trust will continue to be AFG ASIT
Corporation, an affiliate of EFG. The Managing Trustee will manage and control
the affairs of the Trust and will have general responsibility and ultimate
authority over matters affecting the Trust. The Managing Trustee has contracted
on behalf of the Trust with EFG for certain management services relating to the
Leases and Assets. The business address of the Managing Trustee, EFG and the
Trust is 98 North Washington Street, Boston, Massachusetts 02114 (telephone
(617) 854-5800). (See "MANAGEMENT OF THE TRUST" for further information
concerning EFG and its Affiliates.)
Trust Distributions and Allocations
Distributions of all Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings will be made monthly to the Managing Trustee,
the Special Beneficiary and the Beneficiaries as set forth below.
Promptly after the Closing, the Class A Beneficiaries will receive the
Special Class A Distribution in an amount equal to 20% of the net proceeds of
the Offering. From time to time and in any event not later than the expiration
of the Initial Redemption Period, the Class B Beneficiaries will receive Class B
Capital Distributions from any proceeds of the Offering remaining after paying
Offering expenses, making the Special Class A Distribution and redeeming Class A
Interests.
Class B Capital Distributions, if any, would have no effect on the
voting rights of the Class B Beneficiaries. The Class A Beneficiaries and the
Class B Beneficiaries will have one vote for each Interest held in all
matters on which their Interests are entitled to be voted under the Trust
Agreement. See "SUMMARY OF THE TRUST AGREEMENT -- Voting Rights."
Commencing as of the first day of the month following Closing (the
"Distribution Commencement Date"), Distributions will be made (a) 1% to the
Managing Trustee, (b) 8.25% to the Special Beneficiary and (c) 90.75% to Class A
Beneficiaries and the Class B Beneficiaries.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
first, 100% to the Class A Beneficiaries up to $0.41 per Class A
Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per Class B
Subordinated Interest, reduced by the Class B Distribution Reduction Factor;
third, 100% to the Class A Beneficiaries up to an additional $0.215 per
Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries and
the Class B Beneficiaries in amounts so that each Class A Beneficiary receives
with respect to each Class A Interest an amount equal to _____ divided by the
difference between 100% and the Class B Capital Reduction Factor, of the amount
so distributed with respect to each Class B Subordinated Interest.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return
14
<PAGE>
from the Distribution Commencement Date of 7% per annum, compounded quarterly,
with respect to the portion of their capital contributions returned to them as
Class B Capital Distributions and 10% per annum, compounded quarterly, with
respect to the balance of their capital contributions.. The term "Class B
Distribution Reduction Factor" means aggregate Class B Capital Distributions,
discounted at 7% to the Distribution Commencement Date, as a percentage of the
$5.00 per Class B Subordinated Interest capital contribution.
The provisions of the Trust Agreement relating to Distributions are
complex and prospective Investors should review carefully the examples provided
under the section "TRUST DISTRIBUTIONS AND ALLOCATIONS."
Certain Distribution Policies
The Managing Trustee intends to cause the Trust to make Distributions to
the Class A Beneficiaries and the Class B Beneficiaries generally in level
quarterly amounts prior to Class B Payout. If in any fiscal quarter
Distributions are not made of at least $0.41 per Class A Interest no
Distributions will be made with respect to the Class B Subordinated Interests.
However, the Managing Trustee expects that the Trust will have sufficient cash
available to make, and will make, Distributions each quarter of at least $0.41
per Class A Interest and $0.164 per Class B Subordinated Interest(as such amount
may be reduced by the Class B Distribution Reduction Factor). From time to time
and at least annually, the Managing Trustee will review the available cash of
the Trust to determine whether additional Distributions should be made. It will
be the policy of the Managing Trustee to cause the Trust to make annual
Distributions of all available Cash from Sales or Refinancings and Cash from
Operations, subject to the establishment and maintenance of reasonable reserves
and, to the extent deemed appropriate by the Managing Trustee, to the prepayment
of Trust debt.
Federal Tax Considerations
The section of this Prospectus entitled "FEDERAL TAX CONSIDERATIONS"
includes a discussion of the most significant federal income tax issues which
may be important to investors and the opinion of tax counsel to the Trust as to
material tax issues.
Summary of the Trust Agreement
The Declaration of Trust of the Trust will be restated in its entirety at
Closing (as so restated, the "Trust Agreement"). A copy of the Trust Agreement
will be given to investors of certain states with the Prospectus or to other
prospective investors upon request. The Trust Agreement is a complex instrument
which will govern the relationship between the Trustees and the Beneficiaries
after Closing. The principal provisions of the Trust Agreement have been
summarized in this Prospectus under various headings, including "SUMMARY OF THE
TRUST AGREEMENT" and "TRUST DISTRIBUTIONS AND ALLOCATIONS."
Prospective Class B Investors should be particularly aware that under the
Trust Agreement:
*they will have limited voting rights; and
*their Interests will not be freely transferable.
15
<PAGE>
The Offering
The Trust is issuing non-transferable subscription rights (each, a
"Right") to holders of record (the "Record Date Holders") as of the close of
business on _______________, 1997 (the "Record Date") of Class A Interests and
Special Beneficiary Interests, in proportion to the relative economic interest
in the Trust of such holders. The issuance by the Trust of each Right to Record
Date Holders is subject to compliance with applicable state securities laws and,
accordingly, there is no assurance that such Rights may be issued in all the
jurisdictions in which the Class A Beneficiaries reside. The Class A
Beneficiaries have a 90.75% economic interest and the Special Beneficiary has an
8.25% economic interest in the Trust. Each Class A Beneficiary will receive 1.38
Rights for each Class A Interest held, for a total of 918,382 Rights for all the
Class A Beneficiaries, and the Special Beneficiary will receive 82,579 Rights,
representing its economic interest in the Trust relative to that of the Class A
Beneficiaries. Each Right entitles the holder thereof (the "Rights Holder") to
purchase, at any time prior to 5:00 p.m., Boston time, on the date of Closing,
one Class B Subordinated Interest at a subscription price of $ per Interest (the
"Subscription Price").
Each Rights Holder will be required to make a minimum purchase (the
"Minimum Purchase Amount") equal to the lesser of (a) the amount of Class B
Subordinated Interests which he is permitted to purchase pursuant to the Rights
granted to him or (b) 400 Class B Subordinated Interests ($2,000) for IRA's or
other Qualified Plans or 1,000 Class B Subordinated Interests ($5,000) for all
other Investors (with a higher minimum purchase in certain states).
The subscription period will commence on ___________, 1997 and will end on
the date of Closing. The Rights are evidenced by subscription certificates (the
"Subscription Certificates") that are being mailed with this Prospectus to
Record Date Holders, except as discussed below under "Foreign Restrictions." The
right of a Rights Holder to acquire Class B Subordinated Interests at the
Subscription Price during the subscription period is hereinafter referred to as
a "Basic Subscription Right." All Rights may be exercised immediately upon
receipt and until 5:00 p.m., Boston time, on the date of Closing. Rights Holders
exercising any of their Basic Subscription Rights are hereinafter referred to as
"Exercising Rights Holders."
Over-Subscription Privilege
If less than all of the Basic Subscription Rights are exercised, each
Exercising Rights Holder will be entitled to subscribe for all or any portion of
the Class B Subordinated Interests that were not otherwise subscribed for by
other Rights Holders (the "Over-Subscription Privilege"). The available Class B
Subordinated Interests will be allocated pro rata (according to the aggregate
number of Basic Subscription Rights exercised) among those Exercising Rights
Holders who exercise the Over-Subscription Privilege. In the event a Rights
Holder exercising the Over-Subscription Privilege is allocated less than the
number of Class B Subordinated Interests that such Rights Holder subscribed for,
excess subscription payments will be promptly refunded. See "THE OFFERING --
Payment for Securities." If all Basic Subscription Rights are exercised in full,
the Over-Subscription Privilege will not be available. The Special Beneficiary
and its Affiliates who will become Rights Holders by virtue of their ownership
interest in the Trust on the Record Date currently intend to subscribe for and
purchase the amount of Class B Subordinated Interests to which they are entitled
through the exercise their Basic Subscription Rights. In addition, the Special
Beneficiary currently intends to subscribe for a substantial number of Class B
Subordinated Interests pursuant to the Over-Subscription Privilege, and, subject
to proration as described above, to purchase such additional Class B
Subordinated Interests. There can be no assurance, however, that the Special
Beneficiary or such Affiliates will in fact carry out such current intentions.
If no Rights are exercised by Rights Holders other than the Special Beneficiary
and its Affiliates, following the Offering such entities will beneficially own
in the aggregate all the Class B Subordinated Interests that are issued.
16
<PAGE>
Exercising Rights
Rights are evidenced by Subscription Certificates and may be exercised by
completing a Subscription Certificate in the form enclosed and delivering it,
together with full payment, by means of a money order or check, to
__________________ (the "Subscription Agent") at the address set forth under
"The Offering -- Subscription Agent." An example demonstrating the exercise of
Rights, including the Over-Subscription Privilege, is set forth under "THE
OFFERING -- Example of Exercise of Rights and the Over-Subscription Privilege."
All Exercising Rights Holders must remit payment in full with their completed
Subscription Certificate for all Class B Subordinated Interests subscribed for
through the exercise of Basic Subscription Rights and the Over-Subscription
Privilege. See "THE OFFERING -- Payment for Securities." Exercising Rights
Holders will have no right to modify or rescind a purchase after the
Subscription Agent has received a completed Subscription Certificate.
Foreign Restrictions
Subscription Certificates are not being mailed to Record Date Holders with
record addresses outside the United States (for these purposes, the United
States includes its territories and possessions and the District of Columbia)
("Foreign Record Date Holders"). The Rights to which such Subscription
Certificates relate will be held by the Subscription Agent for such Foreign
Record Date Holders' accounts until instructions are received to exercise or not
exercise the Rights. If no instructions have been received by 12:00 noon, Boston
time, three business days prior to the date of Closing, they will be deemed
unexercised.
Investor Suitability Standards
The Trust established certain minimum suitability standards which the
Class A Investors represented that they met at the time of acquisition of the
Class A Interests. Class B Subordinated Interests will be sold only to the
Special Beneficiary and to current Class A Beneficiaries, some of whom may be
required to satisfy special suitability standards required by their states as
set forth in their Subscription Certificates..
17
<PAGE>
- ------------------------------------------------------------------------------
ESTIMATED USE OF PROCEEDS
- ------------------------------------------------------------------------------
The following table sets forth information concerning the Estimated Use of
Proceeds of the Offering of the Trust. The Trust will use 20% of the proceeds of
the Offering, after deduction of offering expenses estimated to be approximately
$80,643 if the Minimum Offering is attained and $107,732 if the Maximum Offering
is attained, to make a Special Distribution to the Class A Investors (the "Class
A Special Distribution") and the balance of such proceeds are intended by the
Managing Trustee to be applied from time to time during the Initial Redemption
Period to enable the Trust to redeem Class A Interests. Any net proceeds not so
applied will be used from time to time during and after the expiration of the
Initial Redemption Period to make a special return of capital to the Class B
Investors (the "Class B Capital Distributions").
The Gross Proceeds of the Offering will be held in trust for the benefit
of the Class B Beneficiaries and used solely for the purposes set forth in this
Section.
Estimated Use of Proceeds
-------------------------
Minimum Proceeds Maximum Proceeds
% of % of
Gross Gross
Amount Proceeds Amount Proceeds
------ -------- ------ --------
Gross Proceeds $2,295,955 100.00% $5,004,805 100.00%
Less
Offering Expenses (1)
$ 80,643 3.51% $ 107,732 2.15%
Special Class A $ 443,062 19.30% $ 979,415 19.57%
Distribution
Cash for Redemption of $1,772,250 77.19% $3,917,659 78.28%
Class A Interests (2)
- ----------
(1) The amounts given include estimated expenses incurred in connection with
registration and qualification fees, legal and accounting fees, printing
costs and reimbursement for non-accountable and accountable offering
expenses made in connection with the sale and distribution of the Class B
Subordinated Interests. (See "COMPENSATION AND FEES" and "PLAN OF
DISTRIBUTION.")
(2) The Managing Trustee will seek during the Initial Redemption Period to
redeem Class A Interests at a price to be determined by the Managing
Trustee in its sole discretion with the objective of enabling the Class A
Investors desiring to do so to liquidate their Class A Interests at a
price which will enable the Trust to be able to increase Distributions to
the non-tendering Class A Investors and Class B Investors. There is no
assurance that the Managing Trustee will be successful in so redeeming
Class A Interests. Any portion of the net proceeds not applied so to
redeem Class A Interests will be returned from time to time to the Class B
Investors during the Initial Redemption Period as Class B Capital
Distributions.
18
<PAGE>
- --------------------------------------------------------------------------------
COMPENSATION AND FEES
- --------------------------------------------------------------------------------
The Managing Trustee, EFG and their Affiliates will not receive additional
compensation and fees as a result of the Offering. However, the Managing
Trustee, EFG and certain other Affiliates have received, and will continue to
receive, substantial compensation and fees in connection with the organization
management and operation of the Trust. In particular, the Managing Trustee and
the Advisor have received Acquisition Fees and reimbursement for Acquisition
Expenses in connection with the acquisition of Assets from the proceeds of the
offering of the Class A Interests and receive the Asset Management Fee for
services rendered in connection with the management of Leases and Assets equal
to the lesser of (i) 5% of gross Operating Lease rental revenues and 2% of gross
Full-Payout Lease rental revenues for the month in which such payment is being
made or (ii) fees which the Managing Trustee reasonably believes to be
competitive for similar services for similar assets. Further, the Managing
Trustee and the Special Beneficiary receive Distributions from the Trust, as
described under "TRUST DISTRIBUTIONS AND ALLOCATIONS." The Special Beneficiary
intends to subscribe for Class B Subordinated Interests pursuant to the Offering
and will receive Distributions in connection with any Interests so acquired.
The Managing Trustee and its Affiliates will receive an amount equal to 1%
of the Gross Proceeds ($22,960 in the case of the Minimum Offering and $50,048
in the case of the Maximum Offering) as a non-accountable expense allowance in
connection with the Offering. Otherwise, the Managing Trustee and its Affiliates
will not receive, directly or indirectly, any other compensation or expense
reimbursements from the Trust in connection with the Offering.
19
<PAGE>
- --------------------------------------------------------------------------------
CONFLICTS OF INTEREST
- --------------------------------------------------------------------------------
The Managing Trustee and its Affiliates will have various conflicts of
interest with the Trust. See "MANAGEMENT OF TRUST" for descriptions of the
Managing Trustee and its Affiliates. Also see "FIDUCIARY RESPONSIBILITY" for a
discussion of the Managing Trustee's fiduciary duties to the Beneficiaries
which, in general, require the Managing Trustee to act in the best interest of
the Beneficiaries in managing the Trust.
The conflicts of interest include the following:
1. Determination of the Timing and Amount of Distributions to be made to
the Beneficiaries. The Managing Trustee will have a conflict of interest in
determining the amount and timing of Distributions to be made by the Trust to
the Beneficiaries. There are various priorities with respect to the
Distributions so to be made and, in particular, the Class A Beneficiaries are
required to receive an amount equal to $0.41 per Class A Interest before any
Distributions are made with respect to Class B Interests. Various other
Distributions to the Class B Beneficiaries are subordinated to certain
Distributions with respect to the Class A Interests and Distribution to the
Class B. This conflict will be more significant if the Special Beneficiary, as
is currently intended, acquires a substantial number of the Class B Subordinated
Interests. In order to reduce the conflict both as to the amount and the timing
of Distributions, the Managing Trustee has adopted certain distribution
policies. (See `TRUST DISTRIBUTIONS AND ALLOCATIONS -- Distribution Policies.")
2. Exercise of voting rights by the Managing Trustee and the Special
Beneficiary with respect to Class B Subordinated Interests purchased. The
Special Beneficiary intends to exercise complete voting rights with respect to
Class B Subordinated Interests acquired by it along with all other Beneficiaries
in all matters voted upon under the Trust Agreement, in particular with respect
to the rights, duties and removal of its Affiliate, the Managing Trustee. The
exercise of these voting rights in situations involving the duties or rights of
the Managing Trustee could involve the Managing Trustee in a conflict of
interest between its best interest and the best interest of the Class A
Beneficiaries and the Class B Beneficiaries. Further, the Special Beneficiary
intends to acquire a substantial number of Class B Subordinated Interests and it
is possible that it could acquire voting control over all matters on which
Beneficiaries may vote.
3. Competition for the Purchase, Financing, Lease and Sale of Assets. The
Managing Trustee expects will re-lease or sell Assets upon termination of the
related Lease terms. In addition to the Investment Trusts, the Managing Trustee,
EFG and their Affiliates are Affiliates of the general partners of ten general
equipment public limited partnerships, all of which have investment objectives
similar to those of the Trusts. The Managing Trustee, EFG and their Affiliates
are also Affiliates of the general partner of two aircraft public limited
partnerships with certain different investment objectives from the Trusts, whose
offerings have concluded.
EFG and its Affiliates currently provide management services to these
public limited partnerships and other private investment programs. The Trust
Agreement will not prohibit the Managing Trustee and its Affiliates from
competing on their own behalf with the Trust.
(a) Sale or Re-lease of Assets. If the Managing Trustee, EFG or an
Affiliate or any of the investment entities (including the Trusts)
advised, managed or controlled by EFG have at the same time available for
sale or re-lease assets of a particular class or type and the supply of
equipment of the class or type exceeds the demand, the Managing Trustee
and EFG will try to
20
<PAGE>
arrange for the sale or re-lease of assets of the class or type to be made
in the order in which the items came off lease and became available for
sale or re-lease, or, if the leases expire simultaneously, the reverse
chronological order of the date on which the leases took effect. However,
the Managing Trustee and EFG in their discretion may make exceptions to
this general policy where equipment is subject to remarketing commitments
or where there are other circumstances which, in their judgment, make the
application of such a policy inequitable for a particular entity.
Disposition of equipment is almost exclusively governed by the preferences
of third parties buying or leasing the equipment and the Managing Trustee
and its Affiliates will be required to take into account such preferences.
A conflict of interest may arise because certain investment entities may
pay EFG or its Affiliates greater compensation for services rendered in
connection with the sale or re-lease of assets than those fees payable by
the Trusts.
(b) General Considerations. In attempting to prevent or minimize
conflicts of interest among investment entities advised, managed or
controlled by EFG and its Affiliates, good business practice and the bona
fide preferences or expectations of other parties to transactions will
also be considered. In establishing criteria for the resolution of
conflicts of interest among the Trusts and the Managing Trustee and its
Affiliates, the Managing Trustee will act in accordance with its fiduciary
duty to the Trust. (See "FIDUCIARY RESPONSIBILITY.")
4. Competition for Management Services. The Managing Trustee is an
Affiliate of EFG. Affiliates of the Managing Trustee performing services for the
Trust pursuant to agreements with the Managing Trustee and the Trust are
performing similar services for EFG and its Affiliates. Conflicts of interest
may arise in allocating management time, services or functions among the
businesses of the Trust and the other entities for which officers, directors,
employees and Affiliates of the Managing Trustee are performing services. The
Managing Trustee, which intends to operate from its principal business office in
Boston, Massachusetts, is only required to devote such time to the affairs of
the Trusts as it in its sole discretion shall deem necessary for the business
and operations of the Trust.
5. Determination of Reserves and Liability of Managing Trustee for Trust
Obligations. The amount of Distributions from the Trust to the Beneficiaries is
subject, among other things, to the discretion of the Managing Trustee in
establishing and maintaining Trust reserves for working capital and contingent
liabilities. Since the amount of reserves will affect the potential liability of
the Managing Trustee to creditors of the Trust, the Managing Trustee may be
considered to have a conflict of interest in determining the amount of such
reserves.
6. Lack of Separate Representation and Participation in Negotiations. The
Class B Beneficiaries, as a group, have not been represented by counsel. The
attorneys and other experts who perform services for the Trusts will perform
additional services for the Managing Trustee, its Affiliates and for other
trusts or entities sponsored by the Managing Trustee or its Affiliates. However,
should a dispute arise between the Trust and the Managing Trustee, the Managing
Trustee will cause the Trust to retain separate legal counsel, at the Trust's
expense, to represent the Trust in connection with such dispute.
7. Non-Arm's Length Agreements. None of the arrangements and agreements
relating to compensation between the Trust and the Managing Trustee or its
Affiliates has been negotiated on an arm's length basis nor have the
Beneficiaries, as a group, been a party to the determination of compensation
payable to the Managing Trustee and its Affiliates.
8. Managing Trustee to Act as Tax Matters Participant. The Managing
Trustee has been designated as the Tax Matters Participant for the purposes of
dealing with the Service on any audit or other proceeding. As Tax Matters
Participant, the Managing Trustee is empowered to enter into
21
<PAGE>
negotiations with the Service, to settle tax disputes and thereby bind the Trust
and the Beneficiaries by such settlement. While the Managing Trustee will take
into consideration the interests of the Beneficiaries generally in agreeing to
any settlement, there is no assurance that such settlement will be in the best
interests of any specific Beneficiary.
- --------------------------------------------------------------------------------
FIDUCIARY RESPONSIBILITY
- --------------------------------------------------------------------------------
The Managing Trustee is accountable to the Trust as a fiduciary and
consequently is under a fiduciary duty to exercise good faith and act with
integrity in handling Trust affairs in the best interests of the Trust. Although
the Trust Agreement permits the Managing Trustee and its Affiliates to
participate in other business ventures, including equipment leasing ventures,
for their own accounts, the Managing Trustee is required to act at all times in
a manner consistent with its fiduciary duty to the Trust. Under the Business
Trust Act, a beneficiary may bring a legal action (1) on behalf of himself and
all other similarly situated beneficiaries (a class action) to recover damages
for a breach by a trustee of its fiduciary duty or (2) on behalf of a business
trust (a trust derivative action) to recover damages in the trust's favor if the
trustees with authority to do so have refused to bring the action or if an
effort to cause those trustees to bring an action is not likely to succeed. In
order to bring a derivative action, the beneficiary must (a) be a beneficial
owner at the time of bringing the action and (b) either: (i) was a beneficial
owner at the time of the transaction of which he complains; or (ii) his status
as beneficiary has devolved upon him by operation of law or pursuant to the
terms of the governing instrument of the business trust from a person who was a
beneficiary at the time of the transaction.
Based upon the present state of the law, it appears that: (1)
Beneficiaries have the right, subject to applicable procedural rules and
statutes, to (a) bring Trust class actions, (b) enforce the rights of all
Beneficiaries similarly situated, and (c) bring Trust derivative actions to
enforce the rights of the Trust; and (2) Beneficiaries who have suffered losses
in connection with the purchase and sale of their Interests, including
misapplication by the Managing Trustee of the proceeds from the sale of the
Interests, may have a right to recover such losses from the Managing Trustee
based upon Rule 10b-5 under the Securities Exchange Act of 1934. The Managing
Trustee will provide quarterly and annual reports of operations and must, on
demand, give any Beneficiary and/or his legal representative true and full
information concerning the Trust's affairs. Further, the Trust's books and
records may be inspected or copied by its Beneficiaries or their legal
representatives at any time during normal business hours.
Since any action would involve a rapidly developing and changing area of
the law, Beneficiaries who believe that a breach of fiduciary duty by the
Managing Trustee has occurred should consult with their own counsel. If the
Managing Trustee fails to perform its obligations as a fiduciary, there can be
no assurance that adequate remedies will in all instances be available.
Conflicts
The Trust Agreement provides that, subject to certain restrictions,
neither the Managing Trustee nor its Affiliates will be obligated to present to
the Trust investment opportunities that come to their attention, regardless of
whether the opportunity would be suitable for investment by the Trust. To the
extent that the foregoing provisions do limit such obligations, they may serve
to relieve the Managing Trustee from the common law fiduciary duty, to which it
might otherwise be subject, to refrain from competing on its own behalf or on
behalf of its Affiliates with the Trusts for investment opportunities. The Trust
Agreement permits the Managing Trustee and its Affiliates to act as a sponsor of
more than one similar investment program and for the Trust to benefit from their
experience
22
<PAGE>
resulting therefrom but relieves the Managing Trustee and its Affiliates of the
strict fiduciary duty of a sponsor acting as such for only one investment
program. The Trust Agreement contains provisions intended to resolve possible
conflicts of interest arising from the fact that Affiliates of the Managing
Trustee are currently managing, and will continue to manage during the terms of
the Trusts, a number of other equipment leasing programs. These provisions are
intended to reconcile the applicable requirements of the Business Trust Act, the
Managing Trustee's fiduciary duty to the Beneficiaries and the expectations of
the investors of all such programs as to the resolution of such conflicts. (See
"CONFLICTS OF INTEREST -- Competition for the Purchase, Financing, Lease and
Sale of Assets.")
Indemnification of Trustees and their Affiliates
The Trust Agreement provides that each Trustee and its Affiliates shall
have no liability to the Trust or to any Beneficiary for any loss suffered by a
Trust which arises out of any action or inaction of the Trustee or its
Affiliates if the Trustee or its Affiliates upon a reasonable basis determined
in good faith that such course of conduct was in the best interest of the Trust,
and such course of conduct did not constitute negligence or misconduct of the
Trustee or its Affiliates. Accordingly, Beneficiaries may have a more limited
right of action than they would have absent such limitations in the Trust
Agreements because such provisions could be asserted by a Trustee as a defense
to suit by a Beneficiary for alleged breach by the Trustee of its fiduciary duty
in conducting the affairs of the Trust. Each Trustee and its Affiliates shall be
indemnified by the Trusts against any losses, judgments, liabilities, expenses
and amounts paid in settlement of any claims sustained by them in connection
with the Trusts, provided that the same were not the result of negligence or
misconduct on the part of the Trustee or its Affiliates. A successful claim for
indemnification would deplete a Trust's assets by the amount paid and could
reduce the amount of Distributions subsequently paid to the Beneficiaries.
Notwithstanding the above, a Trustee and its Affiliates shall not be
indemnified by the Trust for any losses, liabilities or expenses arising from or
out of any alleged violation of any obligations any such Persons might have as
ERISA fiduciaries unless (i) there has been a successful adjudication on the
merits of each count involving alleged violations of such obligations as to the
particular indemnitee, and a court of competent jurisdiction approves the
indemnification of litigation costs, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee, and such court approves the indemnification of litigation
costs, or (iii) a court of competent jurisdiction approves the settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made. Further, notwithstanding the above,
a Trustee and its Affiliates and any Person acting as a broker-dealer shall not
be indemnified for any losses, liabilities or expenses arising from or out of
any alleged violation of federal or state securities laws unless (i) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee, and a court of
competent jurisdiction approves the indemnification of litigation costs, (ii)
such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee, and such court approves
the indemnification of litigation costs, or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made. In any claim for indemnification for federal or state securities law
violations, the parties seeking indemnification shall place before the court the
position of the Securities and Exchange Commission, the Massachusetts Securities
Division, the Michigan Corporation & Securities Bureau, the Pennsylvania
Securities Commission, the Tennessee Securities Commission, the Commissioner of
Corporations of the State of California, and other applicable state securities
commissions with respect to the issue of indemnification for securities law
violations. Any indemnity shall be provided out of and to the extent of Trust
assets only, and no Participant shall have or incur any personal liability on
account thereof. To the extent that indemnification is provided against
liabilities arising under the Securities Act of 1933, it should be noted: IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, INDEMNIFICATION OF
LIABILITIES ARISING OUT OF THE SECURITIES ACT IS CONTRARY TO PUBLIC POLICY AND
IS, THEREFORE,
23
<PAGE>
UNENFORCEABLE.
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
Investment in the Trust involves various risks. In addition to matters set
forth elsewhere in this Prospectus, prospective investors should consider the
following:
Investment and Business Risks
1. Distributions on the Class B Subordinated Interests will be
subordinated. No Distributions will be made with respect to the Class B
Subordinated Units in any fiscal quarter unless $.041 is distributed for each
Class A Unit outstanding and subsequent Distributions are subordinated and may
be reduced. See "TRUST DISTRIBUTIONS AND ALLOCATIONS - Distributions and
Allocations." There is no assurance, therefore, that the Trust will generate
sufficient cash from its Assets and Leases to enable the Managing Trustee to
cause the Trust to make Distributions which will permit the Class B
Beneficiaries to receive a return of their capital, together with a satisfactory
return thereon.
2. A portion of the Offering proceeds will be distributed exclusively to
Class A Investors. This special distribution will be made from the capital
contributions made to the Trust by the Class B Investors. The Class B Investors
will not participate in such distribution.
3. There is no assurance that the purpose of the Offering to redeem Class
A Interests will be achieved. In the event that a sufficient number of Class A
Interests are not redeemed by the Trust, then the Class B Beneficiaries will
receive a partial return of their capital, together with a return thereon at a
rate of only 7% per annum.
4. Class B Investors are not expected to be permitted to have the Trust
redeem their Class A Interests . The Managing Trustee does not recommend that
Investors purchase the Class B Subordinated Interests who desire to have their
Class A Interests redeemed by the Trust. Permitting the Class A Investors who so
purchased Class B Subordinated Interests to have their Class A Interests
redeemed could cause the Trust to be treated as a "publicly traded partnership."
See "Federal Income Tax Risks - Risk of Tax Classification as a Corporation
Resulting in Possible Taxation."
5. Class B Subordinated Interests Are Illiquid and Transfers Are
Restricted. There is no public market, and it is not anticipated that a public
market will develop, for the Interests. Further, the Trust will not redeem Class
B Subordinated Interests. Therefore, Class B Beneficiaries may not be able to
liquidate their investment in the Class B Subordinated Interests in the event of
an emergency or for any other reason. The Trust Agreement imposes restrictions
on transfer of Interests. Therefore, Class B Subordinated Interests should only
be considered as a long-term investment. (See "SUMMARY OF THE TRUST AGREEMENT --
Transferability of Interests" for a description of the significant restrictions
on transferability.)
6. Greater Remarketing Risks From Operating Leases. The Trust has entered
into Operating Leases for a substantial portion of its Asset portfolio.
Operating Leases are leases under which the aggregate rental payments during the
initial Lease term are in an amount less than the Purchase Price of the Assets,
including related Acquisition Fees and Acquisition Expenses. Therefore, the
Trust will, on termination of an Operating Lease, either have to obtain a
renewal from the original
24
<PAGE>
Lessee, find a new Lessee or sell the Assets in order to recover the Trust's
investment in such Assets and earn a return thereon. There can be no assurance
that this will occur.
7. Investors Must Rely Solely on Management. All decisions with respect to
the management of the Trust, will be made by the Managing Trustee and the
Advisor, and the success of the Trust will depend to a large extent on the
management of the Trust. The interests of investors may be inconsistent in some
respects with the interests of the Managing Trustee, the Advisor and their
Affiliates. No Persons should purchase Interests unless they are willing to
entrust all aspects of the management of the Assets and the Trust to the
Managing Trustee, the Advisor and their Affiliates.
8. Most Prior Programs with Investment Objectives Similar to the Trusts
Sponsored by Affiliates of the Managing Trustee Have Experienced Adverse
Developments. Certain prior investment programs sponsored by Affiliates of the
Managing Trustee have experienced lessee bankruptcies which have adversely
affected, or may in the future adversely affect, possibly significantly, the
economic results of those prior investment programs. Most prior investment
programs sponsored by Affiliates of the Managing Trustee have experienced
financial losses on the sale of some equipment. These losses will adversely
affect, and possibly materially, the financial results of such programs.
9. Financing May Cause Additional Risks. The Trust has incurred
significant borrowing in order to acquire Assets. An Asset purchased on a
leveraged basis generally can be expected to be profitable only if it generates
sufficient cash revenues to pay interest on and to amortize the related debt, to
recover the equity investment and to cover operating expenses. The use of
leverage will cause the risk to the Beneficiaries to be greater than if the
Trust purchased its Assets for all cash, because fixed payment obligations must
be met on certain specified dates regardless of the amount of revenues derived
by the Trust from such Assets. Default on any debt financing obtained by the
Trust could result in foreclosure of Assets and possible tax liability to the
Beneficiaries which could exceed the amount of cash available from the
foreclosure sale.
10. Return of Investors' Capital is Dependent Upon Uncertain Residual
Value of Assets. Since, in general, capital equipment is a depreciating Asset,
Distributions generated from lease rental payments and Asset sale proceeds will
include a return of the investors' capital as well as a return on investment in
the Interests. Therefore, the full return of the Class B Beneficiaries' Capital
Contributions is subject to all of the risks associated with the realization of
the residual value of the Assets. The residual values ultimately realized, in
turn, will depend on, among other factors, the condition of the Assets, the cost
of new assets comparable to the Assets, rates of inflation, the ability to
remarket the Assets and demand for used assets. Most of these factors are not
within the control of the Managing Trustee.
11. Defaults by Lessees Could Jeopardize Investor Returns. There can be no
assurance as to the ability of any Lessee to perform its financial and other
obligations under its Lease. The default by a Lessee under its Lease, including
a default occasioned by the Lessee's bankruptcy, insolvency or other serious
financial difficulty, may cause Assets to be returned to the Trust at a time
when the Managing Trustee or the Advisor may be unable to arrange for the
re-leasing or sale of such Assets, thus resulting in the loss of anticipated
revenues and the inability to repay the related debt and recover the Trust's
investment in such Assets. Moreover, the lender may foreclose on such debt and
acquire ownership of the Assets securing the debt. If a Lessee were to be the
subject of a proceeding under the Federal Bankruptcy Code, the debtor or
Lessee's trustee in bankruptcy has the power to affirm or reject the Lease.
Generally, if the debtor or Lessee's trustee rejects its Lease, the Asset will
be returned to the Trust and the Trust will not receive any additional rental
payments from the Lessee. The decision to affirm or reject the Lease, the cure
of any payment defaults or the return of the related Asset may involve
substantial delays. In the event that the Trust re-leases Assets at the time of
the expiration of an initial Lease term, such new Lessee may have a lower credit
rating than that of the original Lessee, increasing the possibility of a default
by such new Lessee.
25
<PAGE>
12. Risk of Inability to Maintain Assets Under Leases. There is no
assurance that the Trust will be able to maintain the Assets under Leases
yielding revenues which, after servicing the related debt and payment of
operating expenses, provide, together with any sale proceeds or residual value,
a satisfactory return to the Class B Beneficiaries.
13. Limited Liability of Beneficiaries is Not Clearly Established. The
Trust is governed by the Delaware Business Trust Act and under such law and the
Trust Agreement the Beneficiaries have liability limited to that of shareholders
of a business corporation. However, the principles of law governing the
limitation of liability of beneficiaries of a business trust have not been
authoritatively established as to business trusts organized under the laws of
one jurisdiction but operating or owning property in other jurisdictions. A
number of states have adopted legislation containing provisions comparable to
the Delaware Business Trust Act. Accordingly, in such states, the limitation of
liability of Beneficiaries to the Trust provided by Delaware law should be
respected. However, in those jurisdictions which have not adopted similar
legislative provisions, since there is no authoritative precedent on this issue,
it is possible that a court in such a jurisdiction might hold that the
Beneficiaries are not entitled to the limitation of liability set forth in the
Trust Agreement. In some states, the courts have held that the beneficiaries of
a business trust are personally liable for the obligations of the trust even
though by the terms of the trust they have no control over the conduct of the
trustee. However, there is no case law where a beneficiary of a Delaware
business trust has been held liable for the obligation of the trust. Any
Trustee, and possibly, the Beneficiaries (if their limited liability were
successfully challenged) may incur general liability by virtue of the Trust's
ownership of Assets and the use thereof.
In addition, under the Trust Agreement, each Beneficiary who is a Foreign
Beneficiary will be required to indemnify his Trust and the Managing Trustee for
any costs or expenses or liabilities incurred by the Trust or the Managing
Trustee in connection with the withholding requirements applicable to Foreign
Beneficiaries under Sections 1441, 1442 and 1446 of the Internal Revenue Code of
1986, as amended (the "Code"). (See "SUMMARY OF THE TRUST AGREEMENT -- Liability
of the Beneficiaries" and "FEDERAL TAX CONSIDERATIONS -- Investment by Foreign
Beneficiaries.")
14. Joint Investments May Reduce Trust Control Over Assets. Some of the
Trust's Assets are owned jointly by the Trust and affiliated joint venture
partners. The indirect ownership of Assets through a joint venture may involve
risks not present in direct ownership. Among other things, actions by a
co-venturer might have the result of subjecting Assets owned by the joint
venture to liabilities in excess of those contemplated by the terms of the joint
venture. In the event that none of the co-investors control the venture, there
will be a potential risk of impasse on decisions. If a co-investor became
insolvent, the Trust could be liable for the insolvent venturer's share of any
joint venture liabilities, thereby causing the Trust to bear liabilities
disproportionate to its ownership interest in the joint venture. Further, such
insolvency might result in the court ordered sale of jointly owned Assets. In
addition, any joint venture would be subject to the various tax risks applicable
to the Trust, including the possible treatment of the joint venture as an
association taxable as a corporation rather than as a partnership and the
possible reallocation of the joint venture's profits and losses. (See
"Investment Objectives and Policies--Joint Ventures" and "FEDERAL TAX
CONSIDERATIONS -- Joint Ventures with Manufacturers.")
15. Casualty Losses May Not Be Fully Insured. The Lessees generally are
obligated to maintain casualty insurance on the Assets in such amounts and
covering such risks as the Managing Trustee deems advisable and liability
insurance in amounts which are customary in the applicable industry. The Trust
will be responsible for insuring any Assets not on lease. However, there is no
assurance in either case that sufficient coverage will continue to be available,
that any specific casualty will be insured or that, if insured, the insurance
proceeds will be sufficient to cover the loss fully. There are certain
categories of risk of loss which may be or may become either uninsurable or not
26
<PAGE>
economically insurable, such as war, air piracy, earthquakes and floods. Should
an uninsured loss, or an insured loss for which the insurance proceeds are
inadequate, occur, the affected Trust could suffer a loss of invested capital
and any profits which may have been anticipated from such Assets.
If an Asset is destroyed, rentals and other fees under any Lease to which
the Asset is subject would normally terminate. The Trust may be entitled to seek
reimbursement for its loss of the Asset from the Person responsible for the
destruction or from available insurance proceeds, but the Leases will generally
provide that, in the event of a casualty, the Lessee must pay to the Trust a
stipulated amount (calculated to be sufficient to repay any outstanding
indebtedness and to repay to the Trust any capital invested in the Asset).
However, there can be no assurance that the Lessee will be able to meet such
obligations.
16. Risks Associated With Equipment Leasing Business in General. The
equipment leasing business is subject to various risks, including delays in the
delivery of equipment, physical deterioration and increasing maintenance and
operating costs of equipment, economic and technological equipment obsolescence,
defaults by lessees and numerous other risks relating to operation of a
business. General economic conditions such as inflation and the availability of
financing will affect the demand for leasing (as opposed to purchase) of
equipment. The success of the Trust will in large part depend upon the quality
of the Assets, the ability of the Managing Trustee and its Affiliates to
forecast technological advances concerning such Assets and the ability of its
Lessees to satisfy their obligations under the Leases.
17. The Equipment Leasing Industry is Highly Competitive. The equipment
leasing industry is highly competitive and the Trust will be facing competition
for acquisition, leasing, re-leasing and sale of Assets from various industry
sources, many of which have significantly greater financial resources and
greater experience than the Trust.
18. Compliance With Government Regulation May Increase Trust Expenses. The
use, maintenance and ownership of certain types of equipment is regulated by
federal, state and local authorities. Such regulation may adversely affect the
profitability of the Trust. Changes in government regulations, industry
standards, or deregulation may also adversely affect the Trust. Certain types of
Assets are subject to extensive safety and operating regulations imposed by
governmental agencies and industry organizations. Such regulations and standards
may adversely affect the operations of the Trust. Compliance with any new
regulations or standards may require modifications of, or capital improvements
to, the Assets. Such modifications or improvements may require the removal from
service of such Assets for a period of time, resulting in lost revenues to the
Trust. If making such modifications is not economically feasible, the Trust may
be required to sell the Assets and may sustain a loss, depending upon market
conditions. Finally, the Beneficiaries might incur an unanticipated tax
liability as a result of any such sale.
Federal Income Tax Risks
Although certain federal income tax aspects may be important in analyzing
the attractiveness of an investment in the Interests, prospective investors
should make an investment primarily based on economic rather than tax factors.
While the Trust has obtained an opinion of Peabody & Brown, tax counsel for the
Trust ("Tax Counsel"), as to various tax matters, such tax opinion is subject to
certain assumptions concerning the future operations of the Trust (which may
vary from such assumptions) and is not binding upon the Service. In addition, no
ruling has been or will be sought from the Service on any federal income tax
issue. Resulting from such facts and because each investor's other income and
expenses may materially affect the tax consequences of an investment in the
Interests, there can be no assurance that the tax consequences described in this
Prospectus will be obtained by every investor. Prospective investors and their
advisors should, therefore, carefully review the "FEDERAL TAX CONSIDERATIONS"
Section of this Prospectus.
27
<PAGE>
19. Federal Income Tax Risks in General. No ruling has been obtained from
the Service with respect to any of the tax considerations associated with an
investment in, or the proposed operations of, the Trust. Availability of the tax
benefits described under "FEDERAL TAX CONSIDERATIONS" may be challenged by the
Service upon audit of the Trust's information tax return. Many of the tax
consequences are unclear because of the recent passage of major tax legislation,
and many of the anticipated tax consequences could be changed by future
legislation. Any adjustment to the tax return of the Trust as a result of an
audit would also result in adjustments to the tax returns of the individual
Beneficiaries, and may result in an examination of other items in such returns
unrelated to the Trust, or an examination of tax returns filed in prior years.
Moreover, the Beneficiaries could incur substantial legal and accounting costs
in contesting any Service challenge, regardless of the outcome.
20. Risk of Tax Classification as a Corporation Resulting in Double
Taxation. The Trust Agreement provides that the Trust is intended to be
classified as a partnership for federal income tax purposes. However, the
Service may successfully contend that the Trust should be treated as a
corporation or trust or as a "publicly traded partnership" taxable as a
corporation for federal income tax purposes rather than as a partnership, in
which event substantially all of the possible tax benefits (resulting from the
pass-through to investors of all income and losses) from an investment in the
Trust would be eliminated.
It should be noted that the opinion of Peabody & Brown that the Trust will
not be treated as a "publicly traded partnership" for federal income tax
purposes is based upon the representation of the Managing Trustee that it will
not allow the transfer, disposition or redemption of any Interest if such
transfer, disposition or redemption would cause the Trust to be treated as a
"publicly traded partnership." If such representation were determined to be
inaccurate or the Managing Trustee acted in a manner which was not in accordance
with such representation, the Trust could be treated as a "publicly traded
partnership" taxable as a corporation for federal income tax purposes. (See
"FEDERAL TAX CONSIDERATIONS -- Trust Status.") If the Trust were treated as a
corporation or "publicly traded partnership," Profits and Losses would not pass
through to Beneficiaries, income of the Trust would be subject to the income tax
rates applicable to corporations and Distributions would be taxable as dividend
(portfolio) income to the extent of current and accumulated earnings and
profits..
21. Possible Tax Treatment of Leases as Sales or Financings. It is
possible that the Service may challenge certain of the Trust's leasing
transactions and assert that they are properly characterized as deferred payment
sales or financings for federal tax purposes. Such treatment would result in the
loss of cost recovery deductions by the Trust with respect to the Assets
involved and a recharacterization of Trust income from passive to portfolio. The
opinion of Peabody & Brown that the existing Leases will be treated as true
leases for federal income tax purposes is based entirely upon the representation
of the Managing Trustee regarding the characteristics of the Leases without
undertaking any independent verification of the accuracy thereof. If such
representation were determined to be incorrect, the tax benefits associated with
an investment in the Trust could be significantly reduced. (See "FEDERAL TAX
CONSIDERATIONS -- Tax Status of Leases.")
22. Risk of Tax Liability in Excess of Cash Received. A sale or other
disposition of Trust property, including a foreclosure, or the disposition of an
Interest, may result in a substantial tax liability to the Beneficiaries which
could exceed the amount of cash available from the sale. (See "FEDERAL TAX
CONSIDERATIONS -- Sale or Other Disposition of Trust Property.")
23. Risk of Unrelated Business Income for IRA or Other Qualified Plan. An
investment in the Trust by an IRA or other Qualified Plan or Exempt Organization
is expected to generate income subject to the unrelated business income tax.
Investors who are fiduciaries of Qualified Plans or Exempt Organization should
consider the effect of unrelated business income taxation on such entities
28
<PAGE>
and the impact of the fiduciary responsibility provisions of ERISA before making
an investment. (See "ERISA AND OTHER CONSIDERATIONS" and "FEDERAL TAX
CONSIDERATIONS -- Investment by Qualified Pension, Profit-Sharing and Stock
Bonus Plans and Individual Retirement Accounts and by Other Tax-Exempt
Organizations.")
24. Risk of Unanticipated Tax Liability. For any year in which the Trust
has income in excess of deductions, each Beneficiary will be required to report
his share of such income on his federal, state and local income tax returns and
will be responsible for the payment of taxes attributable to this income. A
Beneficiary's annual tax liability may exceed the amount of his annual
Distributions if funds otherwise available as Distributions are required to be
expended on non-deductible items, such as principal payments on indebtedness.
Upon a disposition of his Interests, a Beneficiary could have ordinary income
and a capital loss because ordinary income or loss from his share of the Trust's
unrealized receivables and substantially appreciated assets is computed
separately from his share of gain or loss attributable to other Trust assets.
There are substantial limitations on the ability of a Beneficiary to use capital
losses to offset ordinary income. (See "FEDERAL TAX CONSIDERATIONS -- Tax Rates
and Capital Gains.")
25. Alternative Minimum Tax and Other Additional Taxes and Reporting
Obligations. A Beneficiary may be required to pay various taxes in connection
with an investment in the Trust, such as the alternative minimum tax. Since the
Trust is expected to elect to use an accelerated method of cost recovery, each
Beneficiary will be allocated a ratable share of excess depreciation which is a
tax preference item added to income for purposes of determining the alternative
minimum tax. (See "FEDERAL TAX CONSIDERATIONS -- Depreciation (Cost Recovery)
and Alternative Minimum Tax.") The alternative minimum tax is treated in the
same manner as the regular income tax for purposes of payment of estimated
taxes. Beneficiaries will also be subject to state or local taxation, such as
income, franchise or personal property taxes, as a result of an investment in
the Trust, and any use of the Assets outside the United States may subject
Beneficiaries to income taxation in foreign countries. (See "STATE, LOCAL AND
FOREIGN TAXES.")
26. Passive Activity Income and Loss. It is expected that the Trust's
leasing activities will generate passive income or loss to the Beneficiaries.
Passive losses can be used by investors, other than corporate investors, to
offset only passive income in calculating tax liability. It is possible,
however, that regulations will be issued which will provide that income from
entities treated as partnerships for federal income tax purposes, like the
Trust, will be treated as portfolio income while losses will be treated as
passive losses. (See "FEDERAL TAX CONSIDERATIONS -- Active/Passive Income and
Loss.")
27. Risks of Sales of Interests to Foreign Beneficiaries. If the Trust
admits Foreign Beneficiaries, the proper withholding and tax liability imposed
with respect to such Participants will depend on whether or not the Trust is
engaged in a trade or business. If the Service contests the conclusion that the
Trust is engaged in a trade or business for federal income tax purposes, Foreign
Beneficiaries will be subject to substantially higher United States taxes and
Trust assets could be required to be used to satisfy unmet withholding
requirements. (See "FEDERAL TAX CONSIDERATIONS -- Investment By Foreign
Beneficiaries.")
28. Risk of Adverse Changes in Tax Laws and Regulations and in
Interpretations Thereof. Tax benefits associated with an investment in Interests
could be lost and substantial tax liabilities could be incurred by reason of
changes in the tax laws. (See "FEDERAL TAX CONSIDERATIONS -- General; Opinions
of Peabody & Brown and Possible Changes in Tax Law.") Therefore, the discussion
of the tax considerations relevant to an investment in the Trust could be
modified as the result of future laws which could apply to Trust investments
made prior to the adoption of such changes.
29. Tax Status of Indebtedness. The opinion of Peabody & Brown that
interest paid with
29
<PAGE>
respect to Trust indebtedness will be deductible for federal income tax purposes
is based entirely upon the representations of the Managing Trustee regarding the
characteristics of the indebtedness without independent verification of the
accuracy. If such representation were determined to be inaccurate in any
respect, the tax benefits associated with an investment in the Trust could be
significantly reduced. (See "FEDERAL TAX CONSIDERATIONS -- Limitations on the
Deductibility of Interest.")
30. Other Tax Risks. Investors should also consider certain other tax
consequences, including: (1) the possible reallocation by the Service of Profits
or Losses among the Managing Trustee, the Special Beneficiary and the
Beneficiaries in the event that the allocation provisions provided for in the
Trust Agreement are found to lack economic substance; (2) the possibility that
an audit by the Service of the Trust's information tax return could result in
the disallowance of certain deductions and the imposition of certain penalties
and could result in an audit of the Beneficiaries' individual returns (which
could result in adjustments to items which are unrelated to the Trust); and (3)
the possibility that the Trust could be determined to lack a profit objective in
the conduct of its operations, resulting in a denial of certain deductions. (See
"FEDERAL TAX CONSIDERATIONS.")
31. State Tax Risks. Although Peabody & Brown will render its opinion that
the Trust will be treated as a partnership for federal income tax purposes,
there can be no assurance that the Trust will be treated as a partnership for
state and local tax purposes. The criteria for partnership classification for
state and local tax purposes can be substantially different from the criteria
employed for federal income tax purposes. (See "STATE, LOCAL AND FOREIGN
TAXES.")
32. ERISA Risks. Under certain circumstances, ERISA and the Code, as
interpreted by the Department of Labor, will apply a "look-through" rule under
which the assets of an entity in which an IRA or other Qualified Plan has made
an equity investment may generally constitute "plan assets." For this reason,
the Trust is limiting sales to IRAs or other Qualified Plans to less than 25% of
the total Interests sold in any Trust. In the event that IRAs or other Qualified
Plans acquire 25% or more of the Interests either because the investors have
misrepresented the status of their investment or because of transfers made to
IRAs or other Qualified Plans, the Assets of the Trust might be treated as "plan
assets." In the event assets of the Trust were considered "plan assets" of a
Qualified Plan investing in the Trust, the Trust or Qualified Plan could become
liable for penalties resulting from violations of ERISA. (See "ERISA AND OTHER
CONSIDERATIONS.")
- --------------------------------------------------------------------------------
BUSINESS OF THE TRUST
- --------------------------------------------------------------------------------
In General
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, $1,000 from the Special Beneficiary and $100 from the Initial
Beneficiary. The Trust issued 665,494 Class A Interests to 803 investors on
September 8, 1992. The Trust has one Managing Trustee, AFG ASIT Corporation, an
Affiliate of EFG, and one Special Beneficiary, EFG. The Managing Trustee and the
Special Beneficiary are not required to make any other capital contributions.
(See "Management of the Trust.")
Financial Information About Industry Segments
The Trust is engaged in only one industry segment: the business of
acquiring capital
30
<PAGE>
equipment and leasing the equipment to creditworthy lessees on a full-payout or
operating lease basis. Full-payout leases are those in which aggregate
noncancellable rents equal or exceed the purchase price of the leased equipment.
Operating leases are those in which the aggregate noncancellable rental payments
are less than the purchase price of the leased equipment.
Description of Business
The Trust was organized to acquire a diversified portfolio of capital
equipment subject to various full-payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Trust's primary investment objectives are to acquire and lease equipment
which will:
1. generate monthly cash distributions;
2. preserve and protect Trust capital; and
3. maximize residual value.
The Trust has the additional objective of providing certain federal income
tax benefits.
The closing date of the offering of Class A Interests was September 8,
1992. Significant operations commenced coincident with the Trust's initial
purchase of equipment and associated lease commitments on September 8, 1992. The
acquisition of the equipment and its associated leases is described in detail in
Note 3 to the Trust's Financial Statements for 1995 and in Note 4 to the Trust's
Financial Statements for the nine months ended September 30, 1996. The Trust
will terminate no later than December 31, 2003, although the Managing Trustee
anticipates the Trust will be fully liquidated within approximately seven years
of the September 1992 closing.
The Trust has no employees. However, it entered into an Advisory Agreement
with EFG (the "Advisor"). The Advisor's role, among other things, is to (i)
evaluate, select, negotiate, and consummate the acquisition of equipment, (ii)
manage the leasing, re-leasing, financing, and refinancing of equipment, and
(iii) arrange the resale of equipment. The Advisor is compensated for such
services in accordance with the Trust Agreement. See "Certain Relationships and
Related Transactions," Note 4 to the Trust's Financial Statements for 1995 and
Note 5 to the Trust's Financial Statements for the nine months ended September
30, 1996.
The Trust's investment in equipment is, and will continue to be, subject
to various risks, including physical deterioration, technological obsolescence
and defaults by lessees. A principal business risk of owning and leasing
equipment is the possibility that aggregate lease revenues and equipment sale
proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of debt service and operating expenses.
Consequently, the success of the Trust will be largely dependent upon the
ability of the Managing Trustee and its Affiliates to forecast technological
advances, the ability of the lessees to fulfill their lease obligations and the
quality and marketability of the equipment at the time of sale.
In addition, the leasing industry is very competitive. Although
substantially all funds available for equipment acquisitions have been invested
in equipment, subject to noncancellable lease agreements, the Trust will
encounter considerable competition when equipment is re-leased or sold at the
expiration of primary lease terms. The Trust will compete with lease programs
offered directly by manufacturers and other equipment leasing companies,
including limited partnerships organized and managed similarly to the Trust and
including other EFG-sponsored partnerships and trusts, which may seek to
re-lease or sell equipment within their own portfolios to the same customers as
the Trust. Many competitors have greater financial resources and more experience
31
<PAGE>
than the Trust, the Managing Trustee and the Advisor.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the year ended December 31, 1995, 1994 and 1993 is
described in Note 2 to the Trust's 1995 Financial Statements.
Default by a lessee under a lease agreement may cause equipment to be
returned to the Trust at a time when the Managing Trustee or the Advisor is
unable to arrange the sale or re-lease of such equipment. This could result in
the loss of lease revenues and weaken the Trust's ability to repay related debt.
Properties
See Note 3 to the Trust's 1995 Financial Statements.
Legal Proceedings
See Note 7 to the Trust's 1995 Financial Statements.
MARKET FOR THE TRUST'S SECURITIES
AND RELATED SECURITY HOLDER MATTERS
Market Information
Currently, there is no public market for the resale of the Class A
Interests. It is not anticipated that a public market for resale of either the
Class A Interests or the Class B Subordinated Interests will develop.
Approximate Number of Security Holders
At January 31, 1997, there were 784 Class A Beneficiaries in the Trust and
one Special Beneficiary.
Dividend History and Restrictions
Pursuant to Article VIII of the Trust Agreement, the Trust's Distributable
Cash From Operations and Distributable Cash From Sales or Refinancings (each as
defined below) are determined and distributed to the Trust's participants
monthly. Each monthly distribution may vary in amount. Currently, there are no
restrictions that materially limit the Trust's ability to distribute
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings or that the Trust believes are likely to materially limit the
future distribution of Distributable Cash From Operations and Distributable Cash
From Sales or Refinancings. The Trust expects to continue to distribute all
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings on a monthly basis.
32
<PAGE>
Distributions for each of the three years ended December 31, 1996, 1995
and 1994 were as follows:
Managing Special Class A
Total Trustee Beneficiary Beneficiaries
----------- ------- --------- ----------
Total 1996 distributions $ 1,039,491 $10,395 $ 85,758 $ 943,338
Total 1995 distributions 1,462,987 14,630 120,696 1,327,661
Total 1994 distributions 1,847,983 18,480 152,459 1,677,044
----------- ------- --------- ----------
Total $ 4,350,461 $43,505 $ 358,913 $3,948,043
=========== ======= ========= ==========
Distributions payable at December 31, 1996 and 1995 were $200,199 and
$153,998, respectively.
"Distributable Cash From Operations" means the net cash provided by the
Trust's normal operations after general expenses and current liabilities of the
Trust are paid, reduced by any reserves for working capital and contingent
liabilities to be funded from such cash, to the extent deemed reasonable by the
Managing Trustee, and increased by any portion of such reserves deemed by the
Managing Trustee not to be required for Trust operations and reduced by all
accrued and unpaid Equipment Management Fees and, after Payout, further reduced
by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From
Operations does not include any Distributable Cash From Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) amounts reinvested in additional equipment in
accordance with Sections 4.2(b)(v) and 4.2(b)(vi) of the Trust Agreement, or (b)
the proceeds from the sale of an interest in a joint venture which are
reinvested in additional equipment, (ii) any accrued and unpaid Equipment
Management Fee and Acquisition Fees and Acquisition Expenses paid with respect
to additional equipment acquired through reinvestment of Cash From Sales or
Refinancings in accordance with Section 4.2(b)(v) of the Trust Agreement and
(iii) after Payout, any accrued and unpaid Subordinated Resale Fees.
"Cash From Sales or Refinancings" means cash received by the Trust from
sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities
of the Trust required to be paid as a result of sale or refinancing
transactions, whether or not then due and payable (including any liabilities on
an item of equipment sold which are not assumed by the buyer and any remarketing
fees required to be paid to persons not affiliated with the Managing Trustee,
but not including any Subordinated Resale Fees whether or not then due and
payable) and (b) general expenses and current liabilities of the Trust and (c)
any reserves for working capital and contingent liabilities funded from such
cash to the extent deemed reasonable by the Managing Trustee and (ii) increased
by any portion of such reserves deemed by the Managing Trustee not to be
required for Trust operations. In the event the Trust accepts a note in
connection with any sale or refinancing transaction, all payments subsequently
received in cash by the Trust with respect to such note shall be included in
Cash From Sales or Refinancings, regardless of the treatment of such payments by
the Trust for tax or accounting purposes. If the Trust receives purchase money
obligations in payment for equipment sold, which are secured by liens on such
equipment, the amount of such obligations shall not be included in Cash From
Sales or Refinancings until the obligations are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Trust shall be made 90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee.
33
<PAGE>
"Payout" is defined as Class A Payout and Class B Payout collectively. For
a description of Class B Payout, see "Trust Distributions and Allocations."
"Class A Payout" is defined as the first time when the aggregate amount of all
distributions to the Class A Beneficiaries of Distributable Cash From Operations
and Distributable Cash From Sales or Refinancings equals the aggregate amount of
the Beneficiaries' original capital contributions plus a cumulative annual
distribution of 10% (compounded quarterly and calculated beginning with the
last day of the month of the Trust's original closing date) on their aggregate
unreturned capital contributions. For purposes of this definition, capital
contributions shall be deemed to have been returned only to the extent that
distributions of cash to the Beneficiaries exceed the amount required to satisfy
the cumulative annual distribution of 10% (compounded quarterly) on the
Beneficiaries' aggregate unreturned capital contributions, such calculation to
be based on the aggregate unreturned capital contributions outstanding on the
first day of each month.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are made within 45 days after the completion of
each calendar month. Each Distribution is described in a statement sent to the
Beneficiaries.
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
Trust's Financial Statements for 1995 and for the nine months ended September
30, 1996.
For the nine months ended September 30, 1996 and 1995 and for the years
ended December 31, 1995, 1994 and 1993 and for the period September 8, 1992
(commencement of operations) to December 31, 1992:
<TABLE>
<CAPTION>
Summay
of September 30,
Operations 1996 1995 1995 1994 1993 1992
---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Lease revenue $ 4,434,013 $ 4,598,135 $ 6,173,972 $ 5,507,765 $ 5,611,138 $ 450,996
Net income (loss) $ 356,044 $ 287,062 $ 527,564 $ 1,771,705 $ 710,004 $ (140,780)
Per Beneficiary Interest:
Net income $ 0.49 $ 0.39 $ 0.72 $ 2.42 $ 0.97 $ (0.19)
(loss)
Cash distributions $ 1.01 $ 1.79 $ 2.00 $ 2.52 $ 2.52 $ 0.84
Financial Position
Total assets $17,509,702 $20,388,958 $19,573,350 $22,320,875 $25,677,488 $ 28,928,691
Total long-term obligations $ 5,291,093 $ 7,887,499 $ 7,097,113 $ 8,713,009 $11,971,262 $ 13,155,157
Partners' capital $11,774,102 $12,070,748 $12,157,251 $13,092,674 $13,168,952 $ 14,306,931
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will begin to
fluctuate. Ultimately, all equipment will be sold and the Trust will be
dissolved. The Trust's operations commenced in 1992.
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 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 such equipment.
Three and nine months ended September 30, 1996 compared to the three and nine
months ended September 30, 1995: Results of Operations
For the three and nine months ended September 30, 1996, the Trust
recognized lease revenue of $1,549,287 and $4,434,013, respectively, compared to
$1,534,181 and $4,598,135 for the same periods in 1995. The overall decrease in
lease revenue from 1995 to 1996 is due primarily to the Trust's sale of its
interest in an aircraft (the "United Aircraft") in February 1996, as discussed
below. The increase in revenue for the three months ended September 30, 1996
compared to the same period in 1995 reflects the recognition of revenue for the
full nine months in 1996 related to reinvestment equipment purchased during
1995. Future lease revenue is expected to increase, due to reinvestment of the
proceeds from the sale of the United Aircraft in other equipment. Over time, the
level of lease revenue will decline due to the expiration of the Trust's primary
lease term agreements. The Trust also earned interest income from temporary
investments of rental receipts and equipment sales proceeds in short-term
instruments.
On February 5, 1996, the Trust concluded the sale of its interest in a
Boeing 747-SP to the lessee, United Air Lines, Inc., as reported in Note 3 to
the Trust's 1995 Financial Statements. 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
nine months ended September 30, 1996. In addition to lease termination rents,
the Trust received net sale proceeds of $1,684,292 from United for the aircraft.
The Trust plans to reinvest all of such proceeds in other equipment, a portion
of which was completed in March 1996 through the acquisition of an 8.86%
ownership interest in an aircraft leased to Reno Air, Inc. (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
35
<PAGE>
Aircraft. During the three and nine months ended September 30, 1996, the Trust
sold other equipment having a net book value of $71,017 and $261,511,
respectively, to existing lessees and third parties. These sales resulted in net
losses, for financial statement purposes, of $1,063 and $99,688, respectively.
During the three and nine months ended September 30, 1995, the Trust sold
equipment having a net book value of $7,675 and $4,060,145, respectively, to
existing lessees and third parties. These sales resulted in net losses, for
financial statement purposes, of $3,167 and $205,129, respectively. Equipment
sales during the nine months ended September 30, 1995 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 were fully reinvested in other equipment
during 1995.
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 for the three and nine months ended
September 30, 1996 was $1,058,070 and $3,289,919, respectively, compared to
$1,088,360 and $3,061,671 for the same periods in 1995. 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 overall increase in depreciation expense
from 1995 to 1996 reflects the acquisition of equipment subsequent to September
30, 1995.
Interest expense was $86,503 and $309,697 or 5.6% and 7% of lease revenue
for the three and nine months ended September 30, 1996, respectively, compared
to $135,425 and $410,718 or 8.8% and 8.9% of lease revenue for the same periods
in 1995. Future interest expense is expected to increase due to leveraging
anticipated to be obtained to finance the acquisition of reinvestment equipment.
Thereafter, interest expense will decline in amount and as a percentage of lease
revenue
36
<PAGE>
as the principal balance of notes payable is reduced through the application of
rent receipts to outstanding debt.
Management fees were approximately 4.3% and 4.2% of lease revenue for the
three and nine months ended September 30, 1996, respectively, compared to 4.3%
and 3.9% of lease revenue for the same periods in 1995. Management fees are
based on 5% of gross lease revenue generated by operating leases and 2% of gross
lease revenue generated by full-payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 2.4% and 1.9% of lease revenue for the three and nine months ended
September 30, 1996, respectively, compared to 1% and 2.1% of lease revenue for
the same periods in 1995. 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.
Year ended December 31, 1995 compared to the year ended December 31, 1994 and
the year ended December 31, 1994 compared to the year ended December 31,
1993: Results of Operations
For the year ended December 31, 1995, the Trust recognized lease revenue
of $6,173,972 compared to $5,507,765 for the year ended December 31, 1994 and
$5,611,138 for the year ended December 31, 1993. The increase in lease revenue
from 1994 to 1995 was due to the acquisition of additional equipment in 1995,
including the effects of reinvestment. The decrease in lease revenue from 1993
to 1994 was attributable to the sale of equipment in 1994. The Trust also earned
interest income from temporary investments of rental receipts and equipment
sales proceeds in short-term instruments.
During the year ended December 31, 1995, the Trust sold equipment having a
net book value of $4,084,735 to existing lessees and third parties. These sales
resulted in a net loss, for financial statement purposes, of $225,037. These
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 were fully reinvested in
other equipment in 1995.
In September 1995, the Trust entered into an agreement to sell the Trust's
proportionate ownership interest in a commercial jet aircraft, to an existing
lessee for cash consideration of $1,946,849. This transaction closed in February
1996. At September 30, 1995, the net carrying value of this aircraft to the
Trust was $2,331,631. As such, the anticipated loss on this transaction of
$384,782, representing the difference between the gross cash proceeds and the
net carrying value at September 30, 1995, was recorded by the Trust in September
1995. It is reflected on the accompanying Statement of Operations for the year
ended December 31, 1995 as Write-down of Equipment. The Managing Trustee
reinvested the net cash proceeds in other equipment in 1996.
During the year ended December 31, 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. These
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
37
<PAGE>
related lease term. The sale proceeds were fully reinvested in other equipment
in 1994. During the year ended December 31, 1993, the Trust sold equipment
having a net book value of $107,215 to an existing lessee. This sale resulted in
a net gain, for financial statement purposes, of $20,150.
Depreciation and amortization expense was $4,176,540, $3,559,119 and
$3,628,973 for the years ended December 31, 1995, 1994 and 1993, 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. (See Note 2 to the
Trust's 1995 Financial Statements.) The fluctuation in depreciation expense from
1993 to 1995 is due to the timing of equipment purchases and disposals and the
corresponding length of ownership during the respective years.
Interest expense was $539,047 or 8.7% of lease revenue in 1995, $635,157
or 11.5% of lease revenue in 1994 and $995,319 or 17.7% of lease revenue in
1993. The decrease from 1994 to 1995 was attributable primarily to the
disposition of the vessel and the purchaser's assumption of the related debt and
interest, discussed above. The decrease from 1993 to 1994 was attributable
primarily to the disposition of the above-referenced rail equipment and the
purchaser's assumption of the related indebtedness.
Management fees were approximately 4%, 3.4% and 3.2% of lease revenue
during the years ended December 31, 1995, 1994 and 1993, respectively, and are
based on 5% of gross lease revenue generated by operating leases and 2% of gross
lease revenue generated by full-payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
and distribution expenses. Collectively, operating expenses represented 2%,
1.3%, and 2.7% of lease revenue during the years ended December 31, 1995, 1994
and 1993, respectively. The increase in operating expenses from 1994 to 1995 was
primarily attributable to an increase in professional service costs and to
expenses incurred in connection with the sale of the Trust's interest in the
vessel, discussed above. Operating expenses in 1993 included significant
expenses incurred in connection with the equipment acquisition and leveraging
process.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview." As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $4,254,327 and $3,654,719 for each of the nine-month periods ended
September 30, 1996 and 1995, respectively, and $4,877,921, $4,767,811 and
$3,080,855 for each of the years ended December 31, 1995, 1994 and 1993,
respectively. In the near-term, net cash inflows generated from operating
activities are expected to increase due to the receipt of additional lease
revenue from acquisitions of reinvestment equipment. Subsequently, future
renewal, re-lease and equipment sale activities will cause a gradual decline in
the Trust's 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.
38
<PAGE>
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 equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the Statement
of Cash Flows in the accompanying Financial Statements. During the nine month
periods ended September 30, 1996 and 1995, the Trust expended $1,441,796 and
$4,498,137, respectively, to acquire equipment, including reinvestment
equipment. During the nine months ended September 30, 1996, the Trust realized
net cash proceeds of $1,846,115 compared to $3,584,259 for the same period in
1995. At December 31, 1995, the Trust had completed its initial equipment
acquisition and leveraging processes. The Trust expended $5,605,829, $5,427,991
and $725,376 to acquire equipment during the years ended December 31, 1995, 1994
and 1993, respectively, including reinvestment equipment of approximately
$3,500,000 and $5,000,000 in 1995 and 1994, respectively. Reinvestment equipment
was financed through a combination of sale proceeds available from the vessel
and rail transactions, discussed above, and indebtedness. During 1995, the Trust
realized $3,588,941 in equipment sale proceeds, including proceeds from the
vessel transaction, compared to $1,482,488 realized in 1994, including the
proceeds from the rail transaction. In 1993, the Trust realized $127,365 in
equipment sales proceeds. 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 for the nine months ended September 30, 1996 and $2,296,728,
$3,982,078 and $2,683,235 for each of the years ended December 31, 1995, 1994
and 1993, respectively, resulted from leveraging a portion of the Trust's
equipment portfolio with third-party lenders. EFG also provided interim
financing to the Trust during 1995, 1994 and 1993, until third-party financing
was finalized. In 1993, proceeds and repayments of notes payable to third-party
lending institutions included $1,396,150 that was refinanced with a new lender.
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 the near-term, the amount of
cash used to repay debt obligations will increase due to leveraging obtained
during the nine months ended September 30, 1996 and leveraging expected to be
obtained to finance the acquisition of additional reinvestment equipment.
Subsequently, 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 of $377,751 at
the expiration of the primary lease term related to the Reno Aircraft.
Cash distributions to the Managing Trustee, the Special Beneficiary and
the Beneficiaries are declared and generally paid within 45 days following the
end of each calendar month. The payment of such distributions is presented as a
component of financing activities. For the year ended December 31, 1996, the
Trust declared total cash distributions of Distributable Cash From Operations
and Distributable Cash From Sales and Refinancings of $1,039,491. In accordance
with the Trust Agreement, the Class A 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
39
<PAGE>
allocated 1%, or $10,395. For the year ended December 31, 1995, the Trust
declared total cash distributions of Distributable Cash From Operations of
$1,462,987, of which the Class A Beneficiaries were allocated $1,327,661; the
Special Beneficiary was allocated $120,696; and the Managing Trustee was
allocated $14,630.
Cash distributions paid to the Trust's 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.
The future liquidity of the Trust will be influenced by the foregoing and
will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The Managing Trustee anticipates that cash
proceeds resulting from these sources will satisfy the Trust's future expense
obligations. However, the amount of cash available for distribution in future
periods will fluctuate. Equipment lease expirations and asset disposals will
cause the Trust's net cash from operating activities to diminish over time; and
equipment sale proceeds will vary in amount and period of realization.
Accordingly, fluctuations in the level of monthly cash distributions will occur
during the life of the Trust.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
- --------------------------------------------------------------------------------
The Managing Trustee of the Trust is AFG ASIT Corporation, an Affiliate of
EFG, a Massachusetts partnership engaged in various aspects of the equipment
leasing business since 1980. The Managing Trustee is a Massachusetts corporation
which was formed in 1991. EFG is the Advisor to and Special Beneficiary of the
Trust.
The business address of the Managing Trustee, EFG and the Trust is 98
North Washington Street, Boston, MA 02114 (telephone: (617) 854-5800).
EFG is a Massachusetts partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Trust and several
other direct-participation equipment leasing programs sponsored or co-sponsored
by AFG. The company arranges to broker or originate equipment leases, acts as
remarketing agent and asset manager and provides leasing support services, such
as billing, collecting and asset tracking.
The general partner of EFG, which has a one percent controlling interest,
is Equis Corporation, a Massachusetts corporation owned and controlled entirely
by Gary D. Engle, its President and Chief Executive Officer. Equis Corporation
also owns a controlling one percent general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG. In January 1996, the Company sold
certain assets of AFG, including the name "American Finance Group," to a third
party.
40
<PAGE>
As of January 1, 1996, EFG (under its former name AFG) sold to an
equipment leasing company certain of its assets, primarily relating to the
origination of new leases, and agreed at that time not to compete with the sold
business for a period of five years thereafter. The assets purchased included
the name "American Finance Group" and its acronym. EFG was permitted, however,
to continue using the name and its acronym in connection with its existing
programs, including the Trust. It was at this time that AFG changed its name to
Equis Financial Group. The sale specifically reserved to EFG the right to
continue managing all Assets owned by the Trust, including enforcing all rights
of the Trust under all Leases and all acquisition requirements (if done through
brokers or the buyer of the business). EFG was also permitted to originate
non-investment grade equipment leases if they are not of a type originated by
the buyer of the business and vessel leases.
Certain principals of EFG, including Gary D. Engle and Geoffrey A.
MacDonald, agreed to not compete with the sold business on similar terms and
conditions.
The executive officers and directors of the Managing Trustee are:
Name Position
- --------------------------------------------------------------------------------
Geoffrey A. MacDonald President and Director
James F. Livesey Vice President
Gail D. Ofgant Vice President, Lease Operations
Michael J. Butterfield Treasurer
Gary M. Romano Clerk
Gary D. Engle Director
The following table and management summary outlines the key management of
EFG and its general partner Equis Corporation:
Name Age Position
- --------------------------------------------------------------------------------
Gary D. Engle 48 President and Chief Executive Officer
Geoffrey A. MacDonald 48 Chairman
Gary M. Romano 37 Executive Vice President and Chief Operating
Officer
James A. Coyne 36 Senior Vice President
Sandra L. Simonsen 46 Senior Vice President, Information Systems
James F. Livesey 47 Vice President, Aircraft and Vessels
Gail D. Ofgant 31 Vice President of Lease Operations
Michael J. Butterfield 36 Vice President, Finance and Treasurer
41
<PAGE>
Gary D. Engle is President and Chief Executive Officer of EFG. Mr. Engle owns
the controlling interest of EFG which he acquired in December, 1994. From 1987
to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development,
Inc., a real estate and mortgage banking company, with principal offices in
Florida. From 1980 to 1987, Mr. Engle served in various capacities with Arvida
Disney Company, a large scale community real estate development company owned by
the Walt Disney Company. Mr. Engle has an MBA from Harvard University and a BS
Degree from the University of Massachusetts (Amherst).
Geoffrey A. MacDonald is a co-founder and Chairman of EFG. Mr. MacDonald was
also a co-founder, director and Senior Vice President of EFG's predecessor
corporation from 1980 to 1988. Prior to co-founding EFG's predecessors, Mr.
MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds an MBA from Boston College and a
BA Degree from the University of Massachusetts (Amherst).
Gary M. Romano became Executive Vice President and Chief Operating Officer and
Clerk of EFG in April 1996. Mr. Romano joined EFG in November 1989 and was
appointed Vice President and Controller in April 1993. Prior to joining EFG, Mr.
Romano was Assistant Controller for a privately held real estate company which
he joined in 1987. Mr. Romano held audit staff and manager positions at Ernst &
Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a CPA and holds
a BS Degree from Boston College.
James A. Coyne is Senior Vice President of EFG. Mr. Coyne joined EFG in 1989,
remained until May 1993, and rejoined EFG in November 1994. From May 1993
through November 1994, he was with the Raymond Company, a private investment
firm, where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he was
with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS
in Business Administration from John Carroll University, a Masters Degree in
Accounting from Case Western Reserve University and is a Certified Public
Accountant.
Sandra L. Simonsen joined EFG in February 1990. She became Senior Vice
President, Information Systems in April 1996. Prior to joining EFG, Ms. Simonsen
was Vice President, Information Systems with Investors Mortgage Insurance
Company which she joined in 1973. Ms. Simonsen provided systems consulting for a
subsidiary of American International Group and authored a software program
published by IBM. Ms. Simonsen holds a BA Degree from Wilson College.
James F. Livesey is Vice President, Aircraft and Vessels. Mr. Livesey joined EFG
in October, 1989 and was promoted to Vice President in January, 1992. Prior to
joining EFG, Mr. Livesey held sales and marketing positions with two
privately-held leasing firms. Mr. Livesey holds an MBA from Boston College and
BA Degree from Stonehill College.
Michael J. Butterfield joined EFG in June 1992 and was appointed Vice President,
Finance and Treasurer of EFG and certain affiliates in April 1996. Prior to
joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which
he joined in 1987. Mr. Butterfield was employed in public accounting and
industry positions in New Zealand and London (U.K.) prior to coming to the
United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has completed
his CPA requirements in the United States. Mr. Butterfield holds a Bachelor of
Commerce degree from the University of Otago, Dunedin, New Zealand.
Gail D. Ofgant joined EFG in July 1989, and is currently Vice President, Lease
Operations. Ms. Ofgant held the position of Manager, Lease Operations at EFG
through March, 1996. Prior to
42
<PAGE>
joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company.
Ms. Ofgant holds a BS Degree in Finance from Providence College.
The Managing Trustee has retained EFG to serve as Advisor to the Trust and
EFG and the Managing Trustee, acting jointly, will make all decisions regarding
acquisition, leasing, re-leasing and sale of Assets. The Advisor itself will be
managed by its Executive Committee, officers and employees. In carrying out its
responsibilities, the Advisor will also engage other Affiliates of EFG in
connection with the operations of the Trust. The officers, directors and members
of the Executive Committee of the Managing Trustee, the Advisor and other
Affiliates have substantial experience in evaluating, structuring, negotiating
and financing of equipment lease transactions. The officers, directors and
members of the Executive Committee of the Managing Trustee, the Advisor and
other Affiliates also have significant experience in the remarketing of capital
equipment.
The services and obligations of the Advisor include advice and assistance
in locating, evaluating and negotiating the acquisition of Assets; negotiating
the terms of Leases; negotiating and administering any debt obligations of the
Trusts; negotiating re-leases or sales of Assets upon the expiration of the
Leases; collecting lease revenues from Lessees; inspecting the Assets;
maintaining liaison with and general supervision of Lessees to ensure that
Assets are being properly operated and maintained; supervising maintenance to be
performed by third parties; monitoring performance by the Trusts and by Lessees
of their obligations under the Leases; and performing various administrative
tasks associated with the operations of the Trusts.
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Currently, the Trust has no employees. However, under the terms of the
Trust Agreement, the Trust is obligated to pay all costs of personnel employed
full or part-time by the Trust, including officers or employees of the Managing
Trustee or its Affiliates. There is no plan at the present time to make any
officers or employees of the Managing Trustee or its Affiliates employees of the
Trust. The Trust has not paid and does not propose to pay any options, warrants
or rights to the officers or employees of the Managing Trustee or its
Affiliates.
Although the Trust has no employees, pursuant to 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. For a
description of the remuneration paid by the Trust to the Managing Trustee and
its Affiliates for such services see "Certain Relationships and Related
Transactions," Note 4 to the Trust's Financial Statements for 1995 and Note 5 to
the Trust's Financial Statements for the nine months ended September 30, 1996.
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 Class A Beneficiaries and Class B Beneficiaries will have voting rights
with respect to:
1. amendment of the Trust Agreement;
2. termination of the Trust;
43
<PAGE>
3. removal of the Managing Trustee; and
4. approval or disapproval of the sale of all or substantially all of
the assets of the Trust (except in the orderly liquidation of the
Trust upon its termination and dissolution).
No person or group is known by the Managing Trustee to own beneficially
more than 5% of the Trust's 665,494 outstanding Class A Interests as of January
31, 1997.
For a description of the ownership and organization of EFG, see
"MANAGEMENT OF THE TRUST."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing Trustee of the Trust is AFG ASIT Corporation, an Affiliate of
EFG.
Transactions with Management and Others
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred for the nine months ended September 30, 1996 and 1995
and for the years ended December 31, 1995, 1994 and 1993, which were paid or
accrued by the Trust to EFG or its Affiliates, are as follows:
September 30,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
Equipment acquisition $ 52,786 $104,322 $107,415 $147,800 $ 2,025
fees
Equipment management
fees 187,687 177,162 224,800 188,998 176,852
Administrative charges 15,750 15,750 21,000 12,000 12,530
Reimbursable operating
expenses due to third
parties 70,461 81,251 100,358 57,179 139,672
Interest on notes
payable - affiliate -- 41 -- 441 15,235
-------- -------- -------- -------- --------
Total $326,684 $378,526 $473,573 $406,418 $346,314
======== ======== ======== ======== ========
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.
44
<PAGE>
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at cost.
All equipment was purchased from EFG or directly from external vendors.
The purchase price of equipment is determined by the method described in Note 2
to the Trust's 1995 Financial Statements.
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, 1995, the Trust was owed $105,494 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January, 1996.
- --------------------------------------------------------------------------------
TRUST DISTRIBUTIONS AND ALLOCATIONS
- --------------------------------------------------------------------------------
General
The Trust will make Distributions to the Managing Trustee, the Special
Beneficiary, the Class A Beneficiaries and the Class B Beneficiaries of (1)
Distributable Cash From Operations and (2) Distributable Cash From Sales or
Refinancings (collectively, "Distributions"). Distributable Cash From Operations
means, in general, the cash from normal operations of the Trust after payment of
all expenses of the Trust, establishment of appropriate reserves and after
payment of any accrued and unpaid Asset Management Fee, and, after Payout, any
Subordinated Resale Fee. Distributable Cash From Sales or Refinancings means, in
general, proceeds resulting from a sale of any Assets or any refinancing of any
debt thereon after payment of all expenses of the Trust, less amounts under
certain circumstances to be reinvested in replacement Assets and any accrued and
unpaid Asset Management Fees and Acquisition Fees and Acquisition Expenses paid
with respect to additional Assets acquired through reinvestment of Cash From
Sales or Refinancings, and, after Payout, payment of any accrued and unpaid
Subordinated Resale Fee. "Payout" means, collectively, Class A Payout and Class
B Payout. Class A Payout basically means the first time when all the
Distributions to the Class A Beneficiaries equal $25 per Interest, plus the
Cumulative Class A Annual Distribution. Cumulative Class A Annual Distribution
basically means an annual, aggregate distribution of 10% per annum on the Class
A Beneficiaries' net investment in the Trust. "Class B Payout" means the first
time that the Class B Beneficiaries have received cash from the Trust in an
aggregate amount equal to $5 per Class B Subordinated Interest, together with a
return from the Distribution Commencement Date of 7% per annum, compounded
quarterly, with respect to the portion of their capital contributions returned
to them as Class B Capital Distributions and 10% per annum, compounded
quarterly, with respect to the balance of their capital contributions.
Profits and Losses from normal operations of the Trust will be allocated
by determining the Profits and Losses from normal operations attributable to
each fiscal quarter on the basis of an interim closing of the books of the Trust
as of the close of business on the last day of such fiscal quarter and by
allocating the amount of such Profits and Losses allocable with respect to the
Interests among the Persons that are Beneficiaries as of the close of business
on the last day of such fiscal quarter. . Profits and Losses from Sales or
Refinancings allocable with respect to the Interests that have been transferred
during any year will be allocated to Persons that are Beneficiaries as of the
close of business on the last day of the quarter that includes the date of the
Sale or Refinancing to which such Profit or Loss is attributable; provided,
however, that any Profits from Sales or Refinancings that are recognized by the
45
<PAGE>
Trust upon the receipt of a deferred payment after the close of the quarter that
includes the date of the Sale or Refinancing relating to such deferred payment
will be allocated to the Persons who are Beneficiaries as of the close of
business on the last day of the quarter in which the Trust receives such
deferred payment. The Managing Trustee may, without the Consent of any
Beneficiary, make allocations in any other manner that it determines will
satisfy the requirements of Sections 704 and 706 of the Code. Profits and Losses
will be allocated in the manner described under "Allocations of Profits and
Losses" below.
All Distributions or allocations to the Class B Beneficiaries, other than
those based on Capital Account balances (as such term is defined in the
"GLOSSARY") will be shared by the Class B Beneficiaries in the ratio of the
number of Class B Subordinated Interests held by each of them to the total
number of Interests held by all of the Class B Beneficiaries. Distributions will
be described in statements of Cash From Operations, Cash From Sales or
Refinancings, Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings required to be sent to the Class B Beneficiaries under
each Trust Agreement. (See "REPORTS TO BENEFICIARIES.")
Certain Distribution Policies
The Managing Trustee intends to make Distributions to the Class A
Beneficiaries and the Class B Beneficiaries generally in level quarterly amounts
prior to Class B Payout. If in any fiscal quarter Distributions are not made of
at least $0.41 per Class Interest, no Distributions will be made with respect to
the Class B Subordinated Interests. However, the Managing Trustee expects that
the Trust will have sufficient cash available to make, and will make,
Distributions each quarter of at least $0.41 per Class A Interest and $0.164 per
Class B Subordinated Interest (as such amount may be reduced by the Class B
Distribution Reduction Factor). From time to time and at least annually, the
Managing Trustee will review the available cash of the Trust to determine
whether additional Distributions should be made. It will be the policy of the
Managing Trustee to cause the Trust to make as annual Distributions of all
available Cash from Sales or Refinancing and Cash from Operations, subject only
to the establishment and maintenance of reasonable reserves and, the extent
deemed appropriate by the Managing Trustee, to the prepayment of Trust debt.
Distributions and Allocations
Distributions of all Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings (collectively, "Distributions") will be made to
the Managing Trustee, the Special Beneficiary and the Beneficiaries as set forth
below.
Promptly after the Closing, the Class A Beneficiaries will receive the
Special Class A Distribution in an amount equal to 20% of the net proceeds of
the Offering. The Class B Beneficiaries will receive any Class B Capital
Distributions to be made to them not later than the expiration of the Initial
Redemption Period provided that there are Offering proceeds remaining after
paying Offering expenses, making the Special Class A Distribution and redeeming
Class A Interests.
Class B Capital Distributions, if any, would have no effect on the
voting rights of the Class B Beneficiaries. The Class A Beneficiaries and the
Class B Beneficiaries will have one vote for each Interest held in all
matters on which their Interests are entitled to be voted under the Trust
Agreement. See "SUMMARY OF THE TRUST AGREEMENT -- Voting Rights."
Non-liquidating Distributions. Commencing as of the first day of the month
following Closing (the "Distribution Commencement Date"), non-liquidating
Distributions will be made (a) 1% to the Managing Trustee, (b) 8.25% to the
Special Beneficiary and (c) 90.75% to Class A Beneficiaries and the Class B
Beneficiaries.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
46
<PAGE>
first, 100% to the Class A Beneficiaries up to $0.41 per Class A
Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per Class B
Subordinated Interest, reduced by the Class B Distribution Reduction Factor;
third, 100% to the Class A Beneficiaries up to an additional $0.215 per
Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries and
the Class B Beneficiaries in amounts so that each Class A Beneficiary receives
with respect to each Class A Interest an amount equal to _____, divided by the
difference between 100% and the Class B Capital Reduction Factor, of the amount
so distributed with respect to each Class B Interest.
As used herein:
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 7% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and 10%
per annum, compounded quarterly, with respect to the balance of their capital
contributions.
"Class B Capital Distributions" means the aggregate amount of any cash
payments made by the Trust to the Class B Beneficiaries as a return of their
capital contributions from excess Offering proceeds.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator of which is the Class B Capital Distributions (on a
per Class B Subordinated Interest basis), discounted at 7% per annum from the
Distribution Commencement Date, and the denominator of which is $5.
The following are two examples intended to illustrate how the foregoing
provisions will apply:
Example 1: Assuming 300,000 Class A Interests and 300,000 Class B
Subordinated Interests are outstanding and no Class B Capital Distributions have
been made, Distributions prior to Class B Payout would be made as follows:
first, $123,000 ($0.41 x 300,000 Class A Interests) to the Class A
Beneficiaries;
second, $49,200 ($0.164 x 300,000 Class B Subordinated Interests) to
the Class B Beneficiaries;
third, $64,500 ($0.215 x 300,000 Class A Interests) to the Class A
Beneficiaries.;
fourth, until Class B Payout, any remaining Distributions 80% to the Class
B Beneficiaries and 20% to the Class A Beneficiaries. Assuming an
additional $200,000 is distributed, $160,000 would be paid to the Class A
Beneficiaries and $40,000 would be paid to the Class B Beneficiaries.
All Distributions after Class B Payout will be made such that the Class A
Interests each
47
<PAGE>
receive _____ of the amount received per Class B Subordinated Interest. Assuming
$________ is distributed after Class B Payout, the Class A Beneficiaries receive
$_____ per Class A Interest (for a total of $________) and the Class B
Beneficiaries would receive $______ per Class B Subordinated Interest (for a
total of $_________).
Example 2: Assuming 300,000 Class A Interests and 300,000 Class B
Subordinated Interests are outstanding, and Class B Capital Distributions have
been made such that the Class B Distribution Reduction Factor is 25%,
Distributions would be made as follows;
first, $123,000 ($0.41 x 300,000 Class A Interests) to the Class A
Beneficiaries;
second, $36,900 (($0.164 - (.25 x $0.164)) x 300,000 Class B
Subordinated Interests) to the Class B Beneficiaries;
third, $64,500 ($0.215 x 300,000 Class A Interests) to the Class A
Beneficiaries;
fourth, until Class B Payout, any remaining Distributions 80% to the Class
B Beneficiaries and 20% to the Class A Beneficiaries. Assuming an
additional $200,000 is distributed, $160,000 would be distributed to the
Class B Beneficiaries and $40,000 would be paid to the Class A
Beneficiaries.
All Distributions after Class B Payout will be made such that the Class A
Interests each receive ______ (____%/ (100%-25%)) of the amount received per
Class B Interest. Assuming $_______ is distributed after Class B Payout, the
Class A Beneficiaries would receive $_____ per Class A Interest (for a total of
$_______) and the Class B Beneficiaries would receive $_______ per Class B
Subordinated Interest (for a total of $__________).
Liquidating Distributions. Upon the occurrence of a Dissolution Event,
after payment of, or adequate provision for, the debts and obligations of the
Trust, the remaining assets of the Trust (or the proceeds of sales or other
dispositions in liquidation of Trust assets, as may be determined by the
Managing Trustee) will be distributed to the Managing Trustee, the Special
Beneficiary and the Beneficiaries to the extent of the positive balances in
their Capital Accounts. The term "Dissolution Event" is defined in the Trust
Agreement to mean, generally, a sale, condemnation, eminent domain taking,
casualty or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust. The Trust
will not make in-kind Distributions to the Beneficiaries or the Special
Beneficiary.
Distributions to Foreign Beneficiaries. The Managing Trustee has the right
to request, from time to time, each Beneficiary to certify, in form acceptable
to the Managing Trustee, that such Beneficiary is not a Foreign Beneficiary. Any
Beneficiary who fails to deliver such certification will be treated as a Foreign
Beneficiary until such time as such Beneficiary delivers an acceptable
certification to the Trust.
The Managing Trustee has the right, with respect to any Beneficiary who is
so determined to be a Foreign Beneficiary, to (i) pay to the Service on behalf
of such Foreign Beneficiary such amounts as it may determine may be required to
comply with Sections 1441, 1442 and 1446 of the Code and (ii) to deduct and
maintain in a non-interest bearing escrow account for the benefit of a Foreign
Beneficiary all or a portion of Distributions to be made to a Foreign
Beneficiary to the extent that the Managing Trustee determines that such
Distributions may be needed by the Trust to comply at a later date with Sections
1441, 1442 and 1446 of the Code or to repay principal, interest and other
borrowing costs on any borrowings made by the Trust to comply with the
requirements of Sections 1441, 1442 or 1446 of the Code. To the extent that the
Managing Trustee determines that any amounts deducted from the Distributions of
any Foreign Beneficiaries under clause (ii) above are not needed to enable the
Trust to
48
<PAGE>
comply with Sections 1441, 1442 and 1446 of the Code or to pay principal,
interest or other borrowing costs on any borrowings made by the Trust in
connection therewith, such amounts shall be paid over to the Foreign
Beneficiaries with respect to whom the amounts were deducted. Any Foreign
Beneficiary shall on demand reimburse the Trust for any amounts received by such
Foreign Beneficiary as Distributions which are necessary to satisfy the Trust's
obligations under Section 1441, 1442 and 1446 of the Code. Each Foreign
Beneficiary grants to the Trust a first lien and security interest in and to the
Interests of such Foreign Beneficiary and all proceeds thereof to secure the
obligations of such Foreign Beneficiary under the Trust Agreement. A pledge of
any Interests by a Foreign Beneficiary must include an acknowledgment of the
Trust's lien on his interest in Distributions.
Allocation of Profits and Losses
Profits from the normal operations of the Trust, from Sales or
Refinancings or from a Dissolution Event for each fiscal year or portion thereof
will be allocated:
First, to the extent that any Participant has a negative balance in his
Capital Account, to such Participant until such Capital Account balance is
increased to zero; and if Profits are insufficient to bring all such Capital
Accounts up to zero, then pro rata according to the negative balances in the
respective Capital Accounts; and
Second, the remainder, 90.75% to the Beneficiaries, 8.25% to the Special
Beneficiary and 1% to the Managing Trustee.
Profits shall be allocated among the Class A Beneficiaries and the Class B
Beneficiaries in the same manner as Distributions.
Losses from the normal operations of the Trust, from Sales or Refinancings
or from a Dissolution Event for each fiscal year or portion thereof will be
allocated:
First, to the extent that any Participant has a positive balance in his
Capital Account, to such Participant until such Capital Account balance(s) are
decreased to zero; and if Losses are insufficient to reduce all such Capital
Accounts to zero, then pro rata according to the positive balances in the
respective Capital Accounts; and
Second, the remainder to the Managing Trustee.
A special provision requires that at least 1% of all Profits and Losses of
the Trust be allocated to the Managing Trustee unless Section 704(b) or Section
704(c) of the Code mandates otherwise.
To the extent that a Trust incurs any costs or expenses in connection with
the withholding obligations applicable to Foreign Beneficiaries, such costs or
expenses shall be allocated solely to the Foreign Beneficiaries (and shall not
enter into the computation of Profits and Losses allocated under other
provisions of the Trust Agreements) and shall reduce their Capital Accounts
accordingly.
- --------------------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
Brief Overview of Federal Tax Considerations
This summary briefly outlines certain of the material federal income tax
considerations
49
<PAGE>
associated with an investment in the Class B Subordinated Interests. All
material federal income tax considerations associated with an investment in the
Trust are discussed in "FEDERAL TAX CONSIDERATIONS" in its entirety. Investors
should read the sections following this summary for a more detailed discussion
of these federal income tax considerations.
Opinions of Peabody & Brown. Peabody & Brown is of the opinion that,
subject to the assumptions and other considerations discussed in "Federal Tax
Considerations" and based upon the Managing Trustee representations discussed in
"Federal Tax Considerations," it is more likely than not that (a) the Trust will
be treated as a partnership for federal income tax purposes, (b) the Trust will
be not be treated as a publicly traded partnership, (c) the Trust Agreement's
allocations of Profits and Losses will be respected for tax purposes, (d) the
Trust's Profits and Losses from the business of leasing Assets will be treated
as passive income and losses to the Beneficiaries, (e) substantially all of the
existing Leases will be treated as true leases for federal income tax purposes,
(f) Trust Indebtedness will constitute indebtedness for federal income tax
purposes and any interest paid with respect thereto will be deductible under
Section 163 of the Code, and (g) substantially more than half of the material
tax benefits from an investment in the Trust will be realized. No other opinions
of counsel are being obtained with respect to any other tax issues raised in
connection with an investment in the Trust.
Tax Rates and Capital Gains. The maximum individual tax rate is now
39.6% for ordinary income and 28% for capital gains. The maximum corporate
tax rate is 35%.
Trust Status. The ability of the Trust to pass through Profits and Losses
to the Beneficiaries is dependent upon its being classified as a partnership for
tax purposes. The Trust will receive an opinion of Peabody & Brown that it will
be treated as a partnership for federal income tax purposes.
General Principles of Partnership Taxation. The Trust will file annual
partnership tax returns, but is not subject to federal income taxation. Each
Beneficiary must report on his federal income tax return his distributive share
of income, gain, losses, deductions or credits of the Trust for the taxable year
whether or not actual distributions of cash or other property are made to him.
A cash distribution from the Trust to a Beneficiary is taxable to the
extent it exceeds the Beneficiary's tax basis in the Trust. A Beneficiary's tax
basis is equal to his paid-in Capital Contribution plus his allocable share of
Trust liabilities as to which no Participant bears the economic risk of loss,
increased by his allocable share of Profits and decreased by (a) his allocable
share of Losses and (b) cash and other distributions.
For each year, a Beneficiary (other than a widely held corporation) may
not deduct its share of Losses to the extent they exceed the Beneficiary's
amount at risk at the end of the year. A Beneficiary will generally have an
initial at risk amount equal to paid-in Capital Contributions. This initial at
risk amount will increase by such Beneficiary's share of the Trust's Profits and
decrease by (a) such Beneficiary's share of Losses, and (b) the amount of cash
and other distributions made to such Beneficiary.
Allocation of Profits and Losses. Allocations of a partnership's income,
gain, loss, deduction or credit under a partnership agreement will be given
effect for federal income tax purposes if the allocations have "substantial
economic effect" or are otherwise in accordance with the partners' interests in
the partnership, taking into account all facts and circumstances. The Trust
Agreement has been drafted in an effort to satisfy the requirements of
"substantial economic effect," and, therefore, it is the opinion of Peabody &
Brown that all Trust allocations will be respected for tax purposes. There can,
however, be no assurance that the Service will not challenge the allocations of
Profits and Losses under the Trust Agreement. (See "Allocations of Profits and
Losses" below for a more complete discussion.)
Active/Passive Income and Loss. The Code divides income and loss into
three categories:
50
<PAGE>
active, passive and portfolio. Passive losses can be applied to offset a
taxpayer's passive income, but cannot be used to offset portfolio or active
income. These passive loss limitations apply to taxpayers who are individuals,
personal service corporations, estates and trusts. Regular "C" corporations
which are not personal service corporations are not subject to these rules,
although closely-held corporations (defined as corporations in which 50% or more
of the stock is held, directly or indirectly, by five or fewer individuals) may
use passive losses to offset passive or active trade or business income, but may
not use passive losses to offset portfolio income.
Peabody & Brown will render its opinion that, subject to regulations which
may be issued by the Service, Trust Profits and Losses from the business of
leasing the Assets will be treated as passive income and losses to
Beneficiaries. See "FEDERAL TAX CONSIDERATIONS -- Active/Passive Income and
Loss" below for a more complete discussion.
Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations. The
Trust's business of leasing personal property will likely constitute an
unrelated trade or business with respect to a Qualified Plan or an Exempt
Organization which invests in the Trust and will cause a Qualified Plan or
Exempt Organization to have unrelated business taxable income. Unrelated
business taxable income in excess of $1,000 in any taxable year will be taxable
at income tax rates applicable to trusts or corporations (whichever is
applicable) and may be subject to alternative minimum tax. Investors which are
Qualified Plans or Exempt Organizations should consult with their own tax
advisors with regard to the application of the unrelated business taxable income
rules.
Tax Status of Leases. The Trust's status as owner of the Assets for tax
purposes is dependent upon whether a Lease is recognized as a true lease, rather
than a financing arrangement or installment sale, for federal income tax
purposes. Based solely upon the representation of the Managing Trustee, without
verification of the accuracy thereof, regarding the characteristics of the
Leases, Peabody & Brown will render its opinion that substantially of the Leases
will be treated as true leases for federal income tax purposes. (See "Tax Status
of Leases" below, for a more complete discussion.)
Depreciation (Cost Recovery) and Recapture. The modified accelerated cost
recovery system (MACRS) under the Code establishes categories of 3-, 5-, 7-, 10-
and 20-year recovery period property and permits the use of the 200% declining
balance method (150% in the case of 15- or 20-year property) with half year
convention switching to the straight-line method to maximize depreciation.
Because the Trust will utilize this accelerated method of depreciation with
respect to its Assets, Beneficiaries will be allocated cost recovery deductions
which will be treated as adjustment items for alternative minimum tax purposes.
Depending upon facts and circumstances, limitations on the use of accelerated
depreciation and the amount of depreciation deductions which can be claimed in
the year property is placed in service may apply to the Trust or its Assets.
All depreciation deductions previously claimed by the Trust (to the extent
of gain) will be taxable as ordinary income in the event of sale, foreclosure,
casualty or other disposition (other than a refinancing and certain like-kind
exchanges) of Assets, and an allocable portion of such depreciation will be
subject to recapture to the extent of gain, if any, in the event of a sale or
other disposition of any of a Beneficiary's Interests.
Sale or Other Disposition of Trust Property. Upon a sale or other
disposition of Assets, the selling Trust will realize gain or loss equal to the
difference between the basis of the Assets at the time of sale or disposition
and the amount realized upon sale or disposition. All depreciation previously
taken will, to the extent of any gain realized on the disposition, be treated as
ordinary income. The characterization of gain in excess of the amount of
depreciation will depend upon specific facts and circumstances.
51
<PAGE>
Sale of Other Disposition of Interests. As a general rule, gain or loss
recognized by a Beneficiary (who is not a "dealer" in Interests) on the sale of
his Interests which have been held for more than one year will be taxable as
long-term capital gain or loss. However, that portion of a selling Beneficiary's
gain allocable to "unrealized receivables" (such as depreciation recapture) and
"substantially appreciated inventory" (as defined in Section 751 of the Code) of
the Trust in which he is a Beneficiary would be treated as ordinary income.
Tax Treatment of Certain Trust Expenses. The Trust will incur costs for
which it will claim deductions for federal income tax purposes. There is no
assurance that the Service will not challenge these deductions on various
grounds. Accordingly, no representation or warranty of any kind with respect to
any deduction can be made. If it is ultimately determined that any deduction of
the Trust is not allowable, an adjustment of the taxable income or loss of the
Trust for the year of the deduction would be necessitated. Such an adjustment
would, in turn, cause an adjustment in the federal income tax liabilities of the
Trust and the Managing Trustee, the Special Beneficiary and each Beneficiary for
that year.
Limitations on the Deductibility of Interest. Investment interest is only
deductible to the extent of net investment income. Interest expense attributable
to a passive activity (such as the Trust) will not be treated as investment
interest. Consequently, interest expense of the Trust will be subject to passive
loss limitations, but not investment interest limitations.
Trust Tax Elections. The Trust does not intend to make an election under
Section 754 of the Code to adjust the basis of its assets upon the transfer of
any Interests unless the Interests are listed on a registered securities
exchange, which is not presently contemplated.
Tax Shelter Registration. The Code imposes certain requirements, including
registration, upon offerings which constitute "tax shelters." The Trusts are not
expected to be treated as "tax shelters" for this purpose.
Nominee Corporations. If the Trust uses a nominee corporation to hold
title to Assets, such corporation may, under certain circumstances, be treated
as a separate entity for tax purposes.
Transferability and Termination of the Trust. The Code provides that if
50% or more of the capital and profit interests in a partnership are sold or
exchanged within a single twelve month period, such partnership generally will
terminate for federal income tax purposes. Consequently, the Trust Agreement
provides that Interests cannot be transferred without the consent of the
Managing Trustee if the transfer would result in the termination of the Trust.
Alternative Minimum Tax. Both corporate and non-corporate taxpayers are
subject to an alternative minimum tax imposed at the rate of 26% or 28%
(depending upon the amount of alternative minimum taxable income) of alternative
minimum taxable income in the case of individuals and 20% of alternative minimum
taxable income in the case of corporations. It is expected that all
Beneficiaries will be allocated tax adjustment items for purposes of the
alternative minimum tax attributable to the use of accelerated depreciation
methods.
Interest and Penalties on Underpayment of Taxes; Audit. Interest rates on
tax overpayments and underpayments are set quarterly. The interest rate on
deficiencies is currently 9% per annum (compounded daily) which will remain in
effect through March 31, 1997. Many of the penalty provisions of the Code have
been consolidated into a single, more cohesive accuracy-related penalty, imposed
at the rate of 20%, to the portion of any underpayment of tax that is
attributable to (1) negligence, (2) any substantial understatement of income tax
or (3) any substantial valuation overstatement.
The Service is engaged in an intensified audit program for partnerships.
As a consequence,
52
<PAGE>
audits of the Trust's information returns are more likely to occur than they
were prior to the commencement of such audit program. A federal income tax audit
of the Trust's tax information return may result in an audit of the returns of
its Beneficiaries, and such an examination could result in adjustments both to
items that are related to such Trust and to unrelated items.
Trusts as Investors. Any trust which is considering purchasing Interests
should consider the issue of whether the investment would cause the trust to be
treated as an association taxable as a corporation. According to the
Regulations, the determination of whether an entity formed as a trust will be
treated as a trust or as an association depends on whether there are associates
and an objective to carry on business and divide the gains therefrom. Treatment
as a corporation would mean that the trust will be taxed at corporate rates at
the trust level, whether or not income is distributed to beneficiaries, and cash
distributions to beneficiaries would be treated as dividends only to the extent
of earnings and profit.
Investment by Foreign Beneficiaries. The United States income tax
treatment applicable to a Foreign Beneficiary is complex and will vary depending
on the particular circumstances applicable to such Foreign Beneficiary. Foreign
Beneficiaries are urged to consult with their tax counsel regarding the United
States and foreign tax consequences of an investment in the Trust. Generally, it
is anticipated that the Trust will withhold income tax with respect to taxable
income allocable to Foreign Beneficiaries at the rate of 39.6% in the case of
individuals and 35% in the case of corporations. However, in the event that the
Trust were deemed not to be engaged in a trade or business, a Foreign
Beneficiary could be subject to a U.S. tax at a rate of 30% of such
Beneficiary's share of gross lease payments. The Trust will admit Foreign
Beneficiaries only if the Managing Trustee receives satisfactory assurances that
it will be deemed to be engaged in a trade or business.
Changes in Tax Law. There may be changes to the Code in future years
(including amendments having a retroactive effect) which could adversely affect
an investment in the Trust.
General; Opinions of Peabody & Brown
The following discussion provides a summary of the material federal income
tax considerations which may be relevant to an investment in the Class B
Subordinated Interests. The discussion is based upon the existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and by Treasury
Regulations, published rulings and judicial decisions in effect as of the date
of this Prospectus, any of which could be changed at any time. (See "Possible
Changes in Tax Law", below.) Any such changes may be retroactive and could
modify the statements expressed herein.
Although the Trust will be formed as a business trust under the Delaware
Business Trust Act, it will be treated as a partnership for federal income tax
purposes. Consequently, the following discussion of federal income tax
considerations has been drafted in the context of an investment in a partnership
by the Beneficiaries.
Each prospective investor should be aware that the following discussion is
merely a summary, as it is impractical to set forth all aspects of federal
income tax law that may be relevant to an investment in the Trust. In addition,
additional considerations may apply to certain types of investors because of
peculiar tax considerations which are not specifically discussed herein. FOR THE
FOREGOING REASONS, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES ARISING FROM AN INVESTMENT IN THE
TRUST WITH REGARD TO HIS PARTICULAR TAX SITUATION.
It is the opinion of Peabody & Brown that the Trust will be treated as a
partnership for federal income tax purposes and that, if the issue were
litigated, a court would so hold. In addition, the following numbered paragraphs
state the opinions of Peabody & Brown concerning other specific
53
<PAGE>
federal income tax issues raised in connection with an investment in the Trust
with respect to which Peabody & Brown is able to render an opinion. Reference is
made to "FEDERAL TAX CONSIDERATIONS" in its entirety for a more complete
discussion of these issues. It is the opinion of Peabody & Brown that, based on
current law as of the date of this Prospectus, if the following issues were
litigated, although the outcome of litigation cannot be predicted with
certainty, it is more likely than not that a court would hold for federal income
tax purposes that:
I. Based upon the representation of the Managing Trustee that it will
not consent to the transfer, assignment or disposition of any
Interest or cause the Trust to undertake the redemption of any
Interest, if such transfer, assignment, disposition or redemption
would cause the Trust to be treated as a publicly traded partnership
for federal income tax purposes and assuming that the Managing
Trustee acts in accordance with such representation and the Trust
Agreement the Trust will not be treated as a publicly traded
partnership;
II. The allocations set forth in the Trust Agreement have "substantial
economic effect" and/or are in accordance with the interests of the
Participants in the Trust (however, because of various fees payable
to the Managing Trustee and its Affiliates (including the Special
Beneficiary), the Service could require a reallocation of interests
in the Trust);
III. Profits and Losses generated by the Trust from the business of
leasing of Assets will be treated as passive losses or passive
income to a Beneficiary (however, the Service has been broadly
authorized to prepare regulations to prevent the conversion of
portfolio income into passive income which might be drafted to
include investments such as the Trust);
IV. Based solely upon the representation of the Managing Trustee,
without independent verification of the accuracy thereof, regarding
the terms of the Leases and the valuation of the Assets,
substantially all of the existing Leases will be treated as true
leases for federal income tax purposes; and
V. Based solely upon the representation of the Managing Trustee
regarding the characteristics of the Trust Indebtedness, the Trust
Indebtedness will constitute indebtedness for federal income tax
purposes and any interest paid with respect thereto will be
deductible under Section 163 of the Code.
In addition, assuming that the Trust operates in the manner described in
the Prospectus, Peabody & Brown is of the opinion that substantially more than
half of the material tax benefits described herein, in the aggregate, will more
likely than not be realized. Investors should note that such opinion assumes
that each agreement between the Trust and a Lessee will constitute a "true
lease" for federal income tax purposes. However, the determination of whether a
particular agreement constitutes a true lease depends on the facts of the
specific transaction. Peabody & Brown's opinion regarding the status of the
Leases as true leases is based solely upon the representations of the Managing
Trustee regarding the terms of the Leases and valuation of the Assets. If such
representations were determined to be inaccurate, the Leases may not be treated
as true leases for federal income tax purposes.
No other opinions of counsel are being obtained with respect to any other
federal income tax issues raised in connection with an investment in the Trust,
including the proper federal income tax treatment of any fees or other expenses
or the availability and amounts of cost recovery deductions. Each of these and
all other material federal income tax issues are discussed in other sections of
"FEDERAL TAX CONSIDERATIONS."
54
<PAGE>
Tax Rates and Capital Gains
The Omnibus Budget Reconciliation Act of 1993 (the "1993 OBRA")
restructured federal tax rates applicable to individual taxpayers. There are
five tax brackets for individuals: the first at a 15% marginal tax rate, the
second at a 28% marginal tax rate, the third at a 31% marginal tax rate, the
fourth at a 36% marginal tax rate and the fifth at a 39.6% marginal tax rate.
The effective maximum marginal tax rate may exceed 39.6% as a result of the
phase out of the personal exemption deduction and the limitation on itemized
deductions. The levels of income to which the various marginal tax rates apply
and the base amounts for computing the personal exemption phase out and the
itemized deduction reduction will be adjusted for inflation.
The maximum rate of tax on capital gains for individuals is now 28% and
there are other differences between ordinary income and capital gains. To the
extent that a taxpayer shows a net capital loss for a taxable year, the amount
used to offset ordinary income is limited to $3,000 ($1,500 in the case of a
married individual filing a separate return) for the taxable year. The remainder
is carried forward to be utilized against income earned in succeeding taxable
years.
The top corporate tax rate is 35%. The 35% rate commences at a taxable
income in excess of $10 million. The graduated rate structure is not available
to personal service corporations; all income of a personal service corporation
is taxed at 35%. The maximum rate of tax on net corporate capital gains is 35%.
Corporations and individuals are subject to an alternative minimum tax
(see "Alternative Minimum Tax" below) which has broad application.
Trust Status
The federal income tax treatment of an investment in the Trust will depend
upon, among other things, the classification of the Trust as a partnership for
federal income tax purposes rather than as an "association" taxable as a
corporation or as a trust. The Trust will not request a ruling from the Service
that it will be treated as a partnership, but the Trust will instead rely upon
the opinion of Peabody & Brown that it will be treated as a partnership for
federal income tax purposes.
The opinion of Peabody & Brown is not binding on the Service. The opinion
of Peabody & Brown as to partnership status assumes compliance from the date of
formation of the Trust throughout the term of its existence with the following
conditions: (1) that the Trust's activities will be conducted in accordance with
the provisions of the Trust Agreement; and (2) that the Trust and its
Participants will have the objective of carrying on business for profit and
dividing the gains therefrom.
Classification as a Trust. Although the Trust will be formed as a business
trust under the Delaware Business Trust Act, it will not be treated as a trust
for federal income tax purposes. Regulation Section 301.7701-4 provides that an
arrangement will not be treated as a trust for tax purposes merely because it is
cast in the form of a trust. Regardless of its form, it will be treated as a
trust only if its purpose is to vest in the trustees the responsibility for the
protection and conservation of property for beneficiaries who cannot share in
the discharge of this responsibility and, therefore, are not associates in a
joint enterprise for the conduct of business for profit. Under the Trust
Agreement, the purpose of the Trust and the responsibility of the Managing
Trustee is not the protection and conservation of property. The Trust Agreement
provides that the purpose of the Trust is to engage in all activities associated
with the business of leasing the Assets and the Trust and the Trustees are
granted all of the powers necessary to carry out that purpose. Consequently, the
Trust Beneficiaries should be treated as "associates in a joint enterprise for
the conduct of business for profit" and the Trust will not be treated as a trust
for federal income tax purposes.
55
<PAGE>
Determination of Partnership Status. On December 17, 1996, the Service
issued Treasury Regulation Sections 301.7701-1 through 301.7701-3, the so-called
"check the box" regulations regarding classification of entities for federal
income tax purposes. These regulations replace the existing rules for
classification of an entity as a partnership for federal income tax purposes,
including the guidelines of Revenue Ruling 89-12 and Revenue Procedure 92-88,
and replace them with a "check the box" system pursuant to which an entity, such
as the Trust, which is not formed under a state corporate statute or similar
law, can elect to be taxed as a partnership or an association taxable as a
corporation by filing a form with the Service. Furthermore, under a default rule
which is operative if no such election is made., such an entity will be treated
as a partnership. In addition, under these regulations, each existing entity
which claimed to be a partnership will be treated as a partnership for prior
years if it had a reasonable basis (determined under Section 6662 of the Code)
for claiming partnership classification. The regulations apply to periods
beginning on or after January 1, 1997.
The Trust was not formed under a state corporate statute or similar law
and the Managing Trustee has represented that it will not elect to have the
Trust treated as a corporation for federal income tax purposes. Accordingly, it
is the opinion of Peabody & Brown that the Trust will be treated as a
partnership for federal income tax purposes and that, although the outcome of
litigation cannot be predicted with certainty, it is more likely than not that,
if the issue were litigated, a court would so hold.
The Code provides that publicly traded partnerships engaged in the
business of leasing personal property, such as the Trust, will be treated as
corporations for federal income tax purposes. Publicly traded partnerships
include any partnership if (i) interests in the partnership are traded on an
established securities market, or (ii) such interests are readily tradable on a
secondary market (or the substantial equivalent thereof). In Notice 88-75, the
Service, in advance of issuance of regulations on the subject, set forth certain
"safe harbors" which, if met, would prevent a partnership from being treated as
a publicly traded partnership. One such "safe harbor" provides that a
partnership will not be deemed to be publicly traded if (a) the sum of the
percentage interests in partnership profits or capital sold or exchanged or
otherwise disposed of during the partnership taxable year (excluding certain
specified transfers) does not exceed 5% of the total interests in partnership
profits or capital or (b) the sum of the percentage interests in partnership
profits or capital sold or exchanged or otherwise disposed of during the
partnership taxable year (excluding certain specified transfers, qualified
redemptions from an open-end partnership and transfers effected through a
"matching service") do not exceed 2% of the total interests in partnership
profits or capital. Transfers which are excluded for purposes of each of these
tests include transfers at death, gifts and other transfers where there is a
carryover basis, and transfers by a partner in one or more transactions during
any thirty calendar day period of partnership interests representing in the
aggregate more than 5% of the total interest in partnership capital or profits.
A matching service is a service that lists bid and/or ask prices in order to
match partners who want to dispose of their interests in a partnership with
persons who want to buy such interests, but subject to strict procedural
limitations set forth in Notice 88-75.
On December 4, 1995, the Service issued final Regulation Section 1.7704-1
which sets forth the circumstances in which a partnership will be treated as a
publicly traded partnership. The Regulation includes a definition of the term
"readily tradable on a secondary market or the substantial equivalent thereof"
which is similar to the definition included in Notice 88-75, but the "safe
harbors" in the Regulations are more restrictive than in Notice 88-75. However,
the Regulation is not effective until after December 31, 2005 for partnerships,
such as the Trust, that were engaged in an activity before December 4, 1995 and
that do not add a substantial new line of business. Such partnerships may
continue to rely upon Notice 88-75.
The Trust Agreement provides that the Trust shall not engage in any
purchase or redemption of Interests to the extent that such redemption or
purchase would cause the Trust to be treated as a
56
<PAGE>
publicly traded partnership. In addition, the Managing Trustee has represented
that it will act in accordance with the terms of the Trust Agreement and that it
will not consent to the transfer, disposition or assignment of any Interests or
cause the Trust to undertake any purchase or redemption of Interests if any such
disposition, assignment, transfer, purchase or redemption would result in the
Trust being treated as a publicly traded partnership. Based upon such
representation and assuming that the Managing Trustee acts in accordance with
such representation and the Trust Agreement, it is the opinion of Peabody &
Brown that the Trust will not be treated as a publicly traded partnership within
the meaning of Section 7704 or Section 469 of the Code and that, while the
outcome of litigation cannot be predicted with certainty, if the issue were
litigated, it is more likely than not that a court would so hold.
It should be noted that the opinion of Peabody & Brown that the Trust will
not be treated as a publicly traded partnership for federal income tax purposes
is based upon the representation of the Managing Trustee that it will not
consent to the transfer, disposition or assignment of any Interest or cause the
Trust to undertake a redemption of any Interests if such transfer, assignment,
disposition or redemption would cause the Trust to be treated as a publicly
traded partnership. If such representations were determined to be inaccurate or
the Managing Trustee acted in a manner which was not in accordance with such
representation, the Trust could be treated as a publicly traded partnership
taxable as a corporation for federal income tax purposes in which event
substantially all of the tax benefits (resulting from the pass-through to
investors of income and losses) from an investment in the Trust would be
eliminated. If the Trust were treated as a publicly traded partnership taxable
as a corporation, Profits and Losses would not pass through to Beneficiaries,
income of the Trust would be subject to income tax rates applicable to
corporations and Distributions would be taxable as dividend (portfolio) income
to the extent of current and accumulated earnings and profits.
General Principles of Partnership Taxation
The Trust must file annual partnership information income tax returns but
are not, as entities, subject to federal income taxation. Each Beneficiary must
report on his personal federal income tax return his distributive share of the
income, gains, losses, deductions or credits of the Trust for the taxable year,
whether or not actual distributions of cash or other property are made to him.
Each Participant's distributive share of such items is generally determined in
accordance with the Trust Agreement. (See "TRUST DISTRIBUTIONS AND
ALLOCATIONS.") The Trust will provide its Beneficiaries with income tax
information relevant to the Trust and his own income tax return, including each
Beneficiary's share of taxable income or loss and capital gain or loss for such
Trust's taxable year by March 15 of the following year. Beneficiaries whose
Interests are registered in the name of a nominee will receive this tax
information from their nominee.
Cash distributions from the Trust to the Managing Trustee, the Special
Beneficiary and the Beneficiaries are not generally the equivalent of Trust
income for income tax purposes, primarily because depreciation is an item which
affects taxable income but not Distributions, and debt amortization is an item
which affects Distributions but not taxable income. If the cash distributed by
the Trust for any year to a Beneficiary exceeds his share of the Trust's taxable
income for the year, the excess constitutes a return of capital which is applied
first to reduce the tax basis of the distributee's interest in the Trust, and
any amounts in excess of his tax basis are generally taxable to the distributee.
A Beneficiary's basis in the Trust initially includes the amount of his paid-in
Capital Contribution plus his allocable share of Trust liabilities as to which
no Participant or related person bears the economic risk of loss (to the extent
that these liabilities do not exceed the fair market value of the assets
securing the liabilities). Such basis is increased by the Beneficiary's share of
taxable income and is decreased by the Beneficiary's share of taxable losses and
cash distributions. A Beneficiary will be subject to tax liability if the Trust
of which he is a Participant has net income, even though no cash Distribution is
made. (See "RISK FACTORS -- Risk of Unanticipated Tax Liability.")
57
<PAGE>
Each Beneficiary will also have an amount "at risk" in the Trust computed
in accordance with Section 465 of the Code. A limited partner's amount at risk
in a partnership includes his paid-in capital contributions (unless, in the case
of an individual or a closely-held corporation, the funds used for the capital
contribution were borrowed from a person having an interest in the Trust's
activities or from a related person to a person having such an interest or the
taxpayer is otherwise protected against the loss of such funds) but does not
include any share of partnership debt unless the limited partner is personally
liable for such debt. Since no Beneficiary will be personally liable for any
Trust debt, each Beneficiary's amount at risk in the Trust will initially
include only his paid-in Capital Contribution and will then increase by his
share of Trust Profits and decrease by his share of Trust Losses and
Distributions. A partner (other than a widely-held corporation which is not
subject to the at risk rules) cannot deduct partnership losses to the extent
that they exceed his amount at risk in the partnership, and, accordingly,
Beneficiaries will not be able to claim Losses in excess of the amount of their
Capital Contributions (as reduced by Distributions to them). For this reason,
the Trust Agreement provides that Losses will not be allocated to Beneficiaries
if the allocation would reduce their Capital Accounts (generally equivalent to
their amounts at risk) below zero.
Allocation of Profits and Losses
Section 704(b) of the Code provides that each partner's allocable share of
the profits, losses and other items of a partnership is determined in accordance
with the partnership agreement unless (a) the partnership agreement does not
provide for such allocations or (b) the allocation to the partners under the
partnership agreement does not have "substantial economic effect," in which case
allocations will be made in accordance with the partners' interests in the
partnership (taking into account all facts and circumstances). Substantial
economic effect is generally recognized to exist where the allocation of taxable
profits and losses actually affects the partners' shares of economic income or
loss independent of tax consequences.
The Trust Agreement provides for the allocation of Trust's Profits and
Losses from normal operations and from sales and refinancings among the Managing
Trustee, the Special Beneficiary and the Beneficiaries in the manner set forth
in "Trust Distributions and Allocations."
The Regulations with respect to the determination of a partner's
distributive share of items within a partnership provide clarification of the
two-part test for substantial economic effect: all allocations must have
economic effect and the effect must be substantial. With respect to the
requirement of economic effect, the Regulations provide, in general, that
allocations have economic effect if (a) the partners' capital accounts are
maintained properly and allocations of items are reflected in adjustments to
capital accounts, (b) liquidation proceeds are required to be distributed in
accordance with the partners' capital account balances, and (c) following the
distribution of such proceeds, partners are required to restore any deficits in
their capital accounts. The determination of whether an allocation has economic
effect is made as of the end of the partnership's taxable year to which the
allocation relates. An allocation that does not satisfy requirement (c) may
nevertheless be deemed to have economic effect if the partnership agreement
contains a "qualified income offset" provision.
The Regulations state that a partnership agreement contains a "qualified
income offset" if and only if it provides that a partner who unexpectedly
receives certain types of adjustments, allocations or distributions in
connection with transfers of partnership interests and distributions of
partnership property which cause or increase a deficit balance in his capital
account will be allocated items of income and gain in an amount and manner
sufficient to eliminate such deficit balance as quickly as possible.
If an agreement satisfies requirements (a) and (b) above and has a
"qualified income offset" provision, then an allocation to a partner will have
economic effect to the extent such allocation (other
58
<PAGE>
than an allocation attributable to non-recourse debt) does not cause or increase
a deficit in such partner's capital account to an amount which is greater than
such partner's obligations to contribute additional capital to the partnership.
In making this determination, the partner's capital account must first be
reduced to take into account certain allocations of loss or deduction and/or
distributions which have not yet occurred but which are reasonably expected to
occur in the future. Under this provision, assuming that a partnership agreement
has a qualified income offset provision, an allocation of loss not attributable
to non-recourse debt will be permitted if the deficit in the partner's capital
account caused by such allocation is not greater than the partner's obligation
to contribute additional capital to the partnership. With respect to the
substantiality requirement, the Regulations generally state that an allocation
must have a reasonable possibility of affecting the dollar amounts to be
received by the partners independent of tax consequences in order to be
substantial. Furthermore, an allocation is insubstantial if, as a result of the
allocation, the after-tax economic consequences of at least one partner may be
enhanced while there is a strong likelihood that the after-tax economic
consequences of no partner will be diminished. Finally, the Regulations provide
that allocations are insubstantial if they merely shift tax consequences within
a partnership taxable year or are likely to be offset by other allocations in
subsequent taxable years.
The Regulations also include complex provisions for the allocation of
deductions attributable to non-recourse debt and partner non-recourse debt (debt
which is nominally non-recourse but which is guaranteed by a partner or related
person or has been loaned by a partner or related person), and for the charge
back of income corresponding to the offset of such deductions at the appropriate
times. In lieu of these complex provisions, the Trust Agreement merely provides
that all Losses in excess of the Capital Account balances of the Trust
Beneficiaries will be allocated to the Managing Trustee. This provision is not
expected to adversely impact the tax benefits available to any Trust
Beneficiaries (except perhaps widely-held corporations) because Losses in excess
of Capital Accounts would be suspended under the at risk rules (see "General
Principles of Partnership Taxation") for all Trust Beneficiaries other than
widely-held corporations.
In the case of the Trust, although Capital Accounts will be maintained for
the Trust Beneficiaries and all allocations result in adjustments in Capital
Accounts, the Trust Agreement does not require any Trust Beneficiary with a
deficit Capital Account balance at liquidation to restore such balance to the
Trust as required under the Section 704 Regulations. However, the Trust
Agreement does include a "qualified income offset" provision which is designed
to meet the alternative test under the Section 704 Regulations. In addition,
allocations of Losses to the Trust Beneficiaries are limited so that Losses will
not be allocated to the Trust Beneficiaries if such Losses would cause deficit
balances in their Capital Accounts. The Trust Agreement provides that
liquidation proceeds are distributed in accordance with each Participant's
Capital Account. Accordingly, it is the opinion of Peabody & Brown that the
allocations in the Trust Agreement have substantial economic effect and/or are
in accordance with the interests of the Participants in the Trust and that, if
the issue were litigated, it is more likely than not that a court would so hold.
The Service could assert that deductions attributable to non-recourse
financing in Assets should be allocated to the Beneficiaries even if it causes
their Capital Accounts to be reduced below zero, but such allocation would not
have any adverse consequences to the Beneficiaries. The Service could assert
that certain fees and other amounts payable to the Managing Trustee, the Special
Beneficiary or their Affiliates constitute distributions to the Managing Trustee
or the Special Beneficiary which must be taken into account in allocating
Profits and Losses. (See "Tax Treatment of Certain Trust Expenses.") The Service
could then contend that, for federal income tax purposes, a Trust's Profits and
Losses should be reallocated from the Beneficiaries to the Managing Trustee or
the Special Beneficiary to reflect the Managing Trustee's or the Special
Beneficiary's share of cash distributions as "increased" by the inclusion of
such fees and payments. If this approach were successfully pursued by the
Service, the federal income tax consequences to the investors could be less
favorable than anticipated because a portion of any Profits and Losses would be
re-allocated to the Managing Trustee or the Special
59
<PAGE>
Beneficiary. The Trust Agreement includes a provision that requires a special
allocation of gross income to the Managing Trustee or the Special Beneficiary to
the extent that any fee payable to either of them or their Affiliates is
reclassified as a distribution.
Active/Passive Income and Loss
Income and losses are divided into three categories for federal income tax
purposes: active, passive and portfolio. In the case of an individual, estate,
trust or personal service corporation, passive losses can only be applied, with
limited exceptions, to offset passive income. It is the opinion of Peabody &
Brown, subject to regulations which may be issued by the Service, that, for the
reasons outlined below, Profits and Losses generated by the Trust from the
business of leasing equipment will be treated as passive losses or passive
income to a Beneficiary, and that, while the outcome of litigation cannot be
predicted with certainty if the issue were litigated, it is more likely than not
that a court would so hold. Accordingly, profits related to equipment leasing
activities and allocable to a Beneficiary who is an individual, estate, trust or
personal service corporation may be offset by passive losses or credits from
other sources. However, it is possible that regulations will provide that income
from certain partnerships will be treated as portfolio income while losses will
be treated as passive losses.
In the case of a closely-held corporation, passive losses and credits can
be used to offset either passive or active income, but not portfolio income,
while a widely-held corporation can offset passive losses or credits against any
income. A widely-held corporation is a C corporation, which is not a personal
service company, where five or fewer persons do not own 50% or more of the value
of its capital stock after the application of certain attribution of ownership
rules at any time during the last half of the corporation's taxable year.
Passive income or loss is generated from participation in a passive
activity which is defined to include the conduct of any trade or business in
which the taxpayer does not materially participate throughout the year. By
definition, a limited partnership interest is generally treated as participation
in a passive activity and the activity of leasing property is treated as a
passive activity. Accordingly, subject to regulations to be issued, Profits and
Losses from the Trust will be treated as passive income or passive loss to the
Beneficiaries. Such regulations have not yet been issued in full and it is
possible that regulations will be issued later which will provide that income
from certain partnerships will be treated as portfolio income while losses will
be treated as passive losses.
Portfolio income is distinct from passive income, and passive losses
cannot be used to offset portfolio income except in the case of a widely held
corporation. Portfolio income generally includes interest, dividends, royalties,
gain, or loss attributable to disposition of property that is held for
investment (and that is not a passive activity), and gain from the sale of
property that normally produces interest, dividends or royalty income. If the
Trust earns interest income from the investment of funds pending the acquisition
of Assets or from the investment of funds held in reserves, this interest would
likely be treated as portfolio income allocable to each Beneficiary which could
not be offset by passive losses (except in the case of a widely-held
corporation), including deductions of the Trust generated by its equipment
leasing activity.
Classification of income from the Trust's leasing activities as portfolio
income rather than passive income could also have a substantial adverse effect
on the withholding obligations of the Trust with respect to, and the United
States tax liability of, any Foreign Beneficiaries. (See "Investment By Foreign
Beneficiaries."
Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations
Qualified pension, profit-sharing, and stock bonus plans (including Keogh
plans) and IRAs
60
<PAGE>
(collectively, "Qualified Plans") and corporations, community chests, funds or
foundations that meet the requirements of Section 501(c)(3) of the Code ("Exempt
Organizations") are generally exempt from taxation except to the extent that
their "unrelated business taxable income" (determined in accordance with
Sections 511-514 of the Code) exceeds $1,000 during any taxable year. The
Trust's business of leasing personal property will likely constitute an
unrelated trade or business with respect to a Qualified Plan or an Exempt
Organization which invests in the Trust and will cause a Qualified Plan or
Exempt Organization to have unrelated business taxable income from the Plan's or
Organization's share of the Trust's taxable income from rents under the Leases
and, if the Assets are deemed to be held primarily for sale to customers in the
ordinary course of business (see "Sale or Other Disposition of Trust Property,"
below), the gain, if any, on disposition of the Assets. Furthermore, any gain on
the sale of Assets which represents recapture of depreciation deductions will be
treated as unrelated business taxable income. In calculating its unrelated
business taxable income, however, a Qualified Plan may also take into account
its share of the Trust's deductions, including depreciation, applicable to
leased Assets. Also, with respect to such unrelated business taxable income, the
Qualified Plan may carry forward for fifteen years any Losses to the extent they
constitute net operating losses relating to the Trust. Unrelated business
taxable income in excess of $1,000 in any taxable year will be taxable at income
tax rates applicable to trusts or corporations (whichever is applicable) and may
be subject to the alternative minimum tax. (See "Alternative Minimum Tax,"
below.)
Because Beneficiaries which are Exempt Organizations or Qualified Plans
are expected to be allocated unrelated business taxable income by the Trust,
these Beneficiaries will be required to file Form 990T to report their unrelated
business taxable income and pay any tax which is due as a result of this income.
The Managing Trustee has undertaken to identify the amount of the Trust's income
in any year that will be treated as unrelated business taxable income on the
annual tax forms provided to Qualified Plans and Exempt Organizations.
Investors which are Qualified Plans or Exempt Organizations should consult
with their own tax advisors with regard to the application of the unrelated
business taxable income rules.
As described in "Depreciation (Cost Recovery)," below, the Code places
limitations on cost recovery deductions with respect to tax-exempt use property.
In this regard, if any property which is not otherwise tax-exempt use property
is owned by a partnership which has both a tax-exempt entity and a person who is
not a tax-exempt entity as partners, the tax-exempt entity's proportionate share
of the property is treated as tax-exempt use property unless (i) all allocations
to the tax-exempt entity of partnership items are qualified or (ii) the income
derived from its share of the property is subject to the unrelated business
income tax. As described above, the leasing of tangible personal property is
treated for purposes of the Code as an unrelated trade or business. Therefore,
the limitations imposed as a result of these provisions of the Code will not
apply to the Trust.
Tax Status of Leases
The fact that the agreements between the Trust and its Lessees will each
be denominated as a "lease" will not be determinative of the character for
federal income tax purposes of the transactions which they reflect, and the
Service may assert that any such transaction constitutes a financing arrangement
or an installment or conditional sale for federal income tax purposes. The
questions of whether the Trust is the owner of Assets and whether a Lease is a
true lease are questions involving specific factual matters.
In Revenue Procedure 75-21, the Service set forth guidelines (regarding
such matters as the residual value of the equipment, the term of the lease, the
lessor's investment in the equipment and the terms of purchase options, if any)
to provide assistance to taxpayers preparing ruling requests with respect to
whether certain leveraged lease transactions purporting to be leases of personal
property
61
<PAGE>
would qualify for an advance ruling. However, the ruling guidelines do not
define as a matter of law whether a transaction is or is not a lease for federal
income tax purposes, and existing judicial authority has held that certain
transactions which did not meet all of the Revenue Procedure 75-21 guidelines
nevertheless constituted leases for federal income tax purposes.
The Managing Trustee has represented that, with respect to substantially
all of the Leases, the terms of the Leases, the residual value of Assets subject
to the Leases and the Trust's investment in the Assets subject to the Leases are
all in compliance with the guidelines of Revenue Procedure 75-21. In addition,
the Managing Trustee has represented that it will not cause the Trust to enter
into any future lease transaction unless it reasonably believes that the lease
will be treated as a true lease for federal income tax purposes and that the
Trust will be treated as the owner of the Asset subject to such lease. Based
solely upon the Managing Trustee's representation, without independent
verification of the accuracy thereof, it is the opinion of Peabody & Brown that
substantially all of the existing Leases will be treated as true leases for
federal income tax purposes and that, although the outcome of litigation cannot
be predicted with certainty, it is more likely than not that, if the issue were
litigated, a court would so hold.
Peabody & Brown has not reviewed any of the Leases and it has not obtained
or reviewed any appraisals regarding the current and residual values of the
Assets. Peabody & Brown's opinion is based entirely upon the representation of
the Managing Trustee without undertaking any independent verification of the
accuracy thereof. If it were determined that such representations were
inaccurate in any respect, the tax benefits expected to be available to
Beneficiaries could be substantially less than anticipated.
No assurance can be given that the Service may not successfully challenge
the status of any Lease as a true lease, asserting that the purchase of the
Assets by the Trust and the lease of the Assets to the Lessees merely constitute
steps in a secured financing transaction or installment sale in which the
Lessees are the owners of the Assets and the Trust merely a secured creditor. In
such event, the Trust would not be entitled to claim depreciation deductions or
deductions for interest on loans with respect to the Assets. Although a portion
of the rent payments (otherwise fully taxable) would be deemed to constitute
amortization of the principal of such loans which would not be taxable to the
Trust, it is anticipated that the net effect of a recharacterization of a Lease
as a financing arrangement would increase the amount of taxable income to be
reported by the Trust in the initial years of ownership of the Assets, and
probably result in a recharacterization of some passive income as portfolio
income (see "Active/Passive Income and Loss").
Depreciation (Cost Recovery)
MACRS System. The modified accelerated cost recovery system (MACRS) under
the Code, which is applicable generally for property placed in service after
December 31, 1986, establishes categories of 3-, 5-, 7-, 10-, 15- and 20-year
recovery period property and permits use of the 200% declining balance method
(150% in the case of 15- or 20-year property) with a half year convention
switching to the straight-line method to maximize depreciation.
Taxpayers may elect, in lieu of the accelerated method described above, a
method of recovery based on the straight-line depreciation method over an
asset's ADR midpoint life. It is not anticipated that the Trusts will elect the
optional straight-line method. Accordingly, Beneficiaries will be allocated
amounts of cost recovery deductions which will be treated as adjustment items
for purposes of the alternative minimum tax. (See "Alternative Minimum Tax,"
below.)
MACRS makes no distinction between new and used Assets, and the deduction
in the initial year of ownership of the Assets is the same regardless of when
the Assets are acquired during the year, subject to the 40% rule set forth
below. However, if the Trust acquires Assets during a taxable year
62
<PAGE>
that is shorter than a full twelve months, the recovery percentage for the year
of acquisition is pro-rated according to the number of months in the short
taxable year.
Proposed regulations provide, for purposes of computing cost recovery,
that a partnership's first taxable year begins on the first day of the month in
which it initially acquires a substantial amount of assets. Accordingly, the
recovery allowance with respect to any Assets acquired by the Trust during the
year of its initial acquisition of Assets may be reduced. Revenue Procedure
89-15 provides rules for computing the depreciation allowance when property is
placed in service in a short taxable year. In general, that Revenue Procedure
provides that if the Trust acquires Assets during a taxable year that is shorter
than a full twelve months, the depreciation allowance for the year of
acquisition is pro-rated based on the number of months, or in some instances the
number of days, in the short taxable year. The unrecovered portion of the first
year allowance will be recovered in the next taxable year and a portion of the
second taxable year's recovery allowance will be received in the third year,
etc. until the last portion of the recovery deduction is allowed in the year
following the last year of the recovery period (i.e., the fourth year for 3-year
property and the sixth year for 5-year property). Because the proposed
regulations may be revised before becoming final there is no assurance that this
method of providing for short taxable years will not be modified.
If more than 40% of all personal property of a taxpayer which is subject
to post-1981 cost recovery rules is placed in service during the last three
months of the taxable year, a special mid-quarter convention is applied which
treats all personal property placed in service during any quarter of such
taxable year as placed in service in the mid-point of such quarter for purposes
of calculating depreciation.
Under certain circumstances, a taxpayer is required to recover the cost of
an asset over a period longer than the period described above. The more relevant
restrictions include the use of property predominantly outside the United
States, the use of equipment for predominantly non-business purposes and the use
of equipment by a "tax-exempt entity." These three limitations are described
below.
Application of Anti-Churning Rules. The Trust may acquire Assets which the
Code requires, under the so-called "anti-churning rules", to be depreciated
under depreciation methods in effect prior to the MACRS System. These
anti-churning rules apply if any Assets purchased by the Trust have been (1)
previously owned or used by certain related persons, (2) acquired from a person
who previously owned the Assets if the user of the Assets does not change as
part of the transaction, or (3) leased by the Trust to a person who owned or
used the Assets previously.
Specifically, if any Assets acquired by the Trust were owned or used at
any time during 1980, and if the user of such Assets does not change as a result
of the acquisition or if any Assets are leased by the Trust to a person who
owned or used the Assets at any time during 1980, then the Assets must be
depreciated under the asset depreciation range ("ADR") system which would result
in depreciation using the 150% declining balance method switching to straight
line at a time that will maximize the remaining deductions, over a period equal
to the Assets' useful life. Also, similar to MACRS rules, depreciation
deductions during a taxable year of less than twelve months must be pro-rated
based on the number of months in the taxable year.
Additionally, depreciation deductions would not be calculated based on the
full purchase price of the Assets, but the depreciable basis would have to be
reduced by an estimated salvage value. This would result in less depreciation
being available to the Trust. There can be no assurance that the Service would
agree with the Trust's estimation of the salvage value of any Assets which could
further reduce depreciation to be claimed by the Trust. Additional anti-churning
rules prevent the use of MACRS and require the use of the accelerated cost
recovery system ("ACRS") if the lessee used the Assets during 1986 (but not
prior to 1981) and continues to use the Assets after such Assets are
63
<PAGE>
acquired by the Trust and if the cost recovery deduction allowable for the first
year the Assets are placed in service by the Trust is less under ACRS than it
would be under MACRS. However, since the first year cost recovery deduction
allowable under ACRS would generally be greater than that allowed under MACRS,
it is not expected that the Trust will be required to use ACRS with respect to
any Assets.
Property Used Predominantly Outside the United States. The Trust may
acquire Assets to be used predominantly outside the United States. However, the
Managing Trustee intends that no more than 25% of the Assets will be used
principally outside of the United States.
Section 168(g)(2) of the Code contains special rules for recovering the
cost of personal property used predominantly outside the United States. The cost
of such property must be recovered using the straight-line method over a period
corresponding to the property's ADR Class Life (the class life assigned to such
type of property under the depreciation system in effect prior to ACRS) using
the half-year convention, and salvage value is ignored. This will result in a
slower realization of depreciation deductions than if the property were used in
the United States.
Property Not Used in a Trade or Business. Section 280F of the Code limits
the tax benefits available to owners of certain types of equipment, including
any property used as a means of transportation, if the equipment is of a type
susceptible to personal use and is used 50% or more for non-business purposes.
However, Section 280F(c)(1) provides that the limitations of Section 280F will
not apply to property covered by the Section ("listed property") that is leased
or held for lease by any person regularly engaged in the business of leasing
such property.
The Regulations define a person as "regularly engaged in the business of
leasing `listed property'" only if such person enters into contracts to lease
listed property with some frequency over a continuous period of time. The
determination is made on the basis of the facts and circumstances of each case,
taking into account the nature of the person's business in its entirety. The
Trust should be deemed to be regularly engaged in the business of leasing listed
property under this standard, except with respect to any Assets which are leased
to a party related to either the lessor Trust or a Participant with a 5% or
greater interest in the Trust.
Tax-Exempt Leasing. Section 168(h) of the Code greatly reduces the tax
benefits available with respect to property leased to "tax-exempt entities."
The definition of a "tax-exempt entity" includes governmental bodies,
tax-exempt governmental instrumentalities, tax-exempt organizations, certain
foreign persons and entities and certain international organizations. The term
also generally includes organizations which were tax-exempt at any time during
the five-year period ending on the date the organization first uses the property
involved. Foreign persons or entities will not be treated as tax-exempt entities
with respect to property if more than 50% of the income for the taxable year
derived by them from the property is subject to U.S. income tax. Since more than
50% of the income derived from the Assets is expected to be treated as
effectively connected with the conduct of a United States trade or business in
the case of any foreign person admitted as a Beneficiary of the Trust (see
"Investment By Foreign Beneficiaries"), it is not expected that this provision
would adversely affect the Trust's depreciation of the Assets.
The Code requires use of the straight-line method of cost recovery under
ACRS with respect to property leased to tax-exempt entities. The recovery period
for tax-exempt use personal property is equal to the greater of the midpoint
life of the property under the ADR depreciation system (12 years if no ADR
class) or 125% of the lease term. The term of a lease will include all options
to renew as well as certain successive leases, determined under all the facts
and circumstances. Use of property by a tax-exempt entity at any point in a
chain of use results in its characterization as tax-exempt use property (e.g., a
sublease by a non-tax-exempt lessee to a tax-exempt sublessee). There are
several statutory
64
<PAGE>
exceptions from the tax-exempt use property status which are applicable to
personal property. First, the term "tax-exempt property" does not include any
portion of property used by a tax-exempt entity directly, or through a
partnership in which the tax-exempt entity is a partner, in an unrelated trade
or business, the income of which is subject to the unrelated business taxable
income tax. Second, property leased to a tax-exempt entity under a "short-term
lease" is not tax-exempt use property. "Short-term lease" means a lease which
has a term of less than the greater of one year or 30% of the property's ADR
midpoint life (to the extent the midpoint life does not exceed 10 years, i.e.,
no greater than three years). Third, special rules apply for certain high
technology equipment.
If any property which is not otherwise tax-exempt use property is owned by
a partnership which has both a tax-exempt entity and a person who is not a
tax-exempt entity as a partner, the tax-exempt entity's proportionate share of
the property is treated as tax-exempt use property unless (i) all allocations to
the tax-exempt entity of partnership items are qualified allocations or (ii) the
income derived from such share of the property is subject to the unrelated
business tax. For this purpose, an allocation to a tax-exempt entity is a
qualified allocation if (1) the entity is effectively allocated the same
percentage of each partnership item during the entire period in which the entity
is a partner and (2) the allocation has substantial economic effect under
Section 704(b)(2) of the Code. Income derived by tax-exempt entities other than
foreign entities from the Trust should be subject to the unrelated business tax
(see "Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations") and,
therefore, this provision of the tax-exempt property rule is not expected to
apply to such entities.
The Managing Trustee has represented that substantially all of the Trust's
Assets constitute 3-, 5- or 7- year recovery property depreciable under the
modified accelerated cost recovery system over a recovery period of 3, 5 or 7
years, respectively, using the 200% declining balance method in accordance with
Section 168(a) of the Code.
The Code sets standards to be used in determining whether an arrangement
purporting to be a service contract should be treated as a lease. However, the
Managing Trustee does not anticipate that the Trust will enter into any service
contracts involving Assets with tax-exempt entities.
Basis. The Trust intends to include in the basis of its Assets for
depreciation purposes Acquisition Fees payable to the Special Beneficiary, which
is also the Advisor for the Trust, for arranging the acquisition of its Assets.
To the extent that an Acquisition Fee is based on the fair market value of such
services, or the then prevailing market rate customarily charged by third
parties for similar services, and to the extent that the Acquisition Fee, when
added to the other costs of the Assets, does not exceed the fair market value of
the Assets, it would appear that the Acquisition Fee should be treated by the
Trust as a cost of acquiring its Assets. This treatment appears to be consistent
with the position of the Service regarding such fees. However, no assurance can
be given that the Service would not assert that all or part of the Acquisition
Fee was in fact attributable to the initial Lease of the applicable Assets or
the formation of the Trust or that it should be treated as a distribution to the
Special Beneficiary. If the Service successfully challenged the inclusion of all
or any portion of an Acquisition Fee in the basis of the applicable Assets for
depreciation purposes, depreciation deductions attributable to the Assets would
be reduced and the non-depreciable portion of the Acquisition Fees would be
either amortized as a loan or lease negotiation fee or partnership organization
expense or capitalized as a non-depreciable and non-amortizable expenditure or
as a distribution to a Participant.
Recapture of Depreciation
Pursuant to the provisions of Section 1245 of the Code, all depreciation
deductions previously claimed by the Trust (to the extent of gain) will be
taxable as ordinary income in the event of sale, foreclosure, casualty or other
disposition (other than a refinancing and certain like-kind exchanges) of the
Assets, and an allocable portion of such depreciation will be subject to
recapture to the extent of
65
<PAGE>
gain, if any, in the event of a sale or other disposition of any of a
Beneficiary's Interests. Additionally, depreciation recapture is recognized in
the year of sale, even in the case of an installment sale. (See "Sale or Other
Disposition of Trust Property" and "Sale or Other Disposition of Interests,"
below.)
Sale or Other Disposition of Trust Property
Upon a sale or other disposition of the Assets (including a sale or other
disposition resulting from destruction of the Assets or from foreclosure or
other enforcement of a security interest in the Assets), the selling Trust will
realize gain or loss equal to the difference between the basis of the Assets at
the time of sale or disposition and the amount realized upon sale or
disposition. Since the Assets constitute tangible personal property, all
depreciation deductions previously taken will, to the extent of any gain
realized on the disposition, be treated as ordinary income under Section 1245 of
the Code in the year of sale. Ordinary income treatment under Section 1245 of
the Code cannot be avoided by holding the Assets for any specified period of
time. In the case of individuals, the maximum rate applied to capital gains is
28% while the maximum rate applicable to ordinary income is 39.6%. (See "Tax
Rates and Capital Gains.") Gain on the sale of Assets is expected to be treated
as passive income, although interest received with respect to any deferred
payments is expected to be treated as portfolio income. (See "Active/Passive
Income and Loss.")
In addition, if the Trust were to sell Assets on an installment basis, the
original issue discount rules could apply to such sale. If the interest rate on
the installment note were less than the applicable federal rate as determined
under Section 1274 of the Code, the sale price would be reduced based on the
imputed rate. This would result in an increase in interest income which the
selling Trust would be required to recognize.
Any gain in excess of the amount of depreciation recapture will constitute
gain described in Section 1231 of the Code if the property sold or otherwise
disposed of was used in a trade or business and held for more than one year and
not held primarily for sale to customers. Under Section 1231 of the Code, if the
sum of the gains on sale or exchange of certain assets exceeds the losses from
the sale of such assets, all gains and losses will be treated as long-term
capital gains and losses. However, if losses exceed gains, all losses and gains
will be treated as ordinary gains and losses. Net Section 1231 gains must be
treated as ordinary income to the extent of unrecaptured Section 1231 losses for
the particular taxpayer (each separate Participant) for the five most recent
prior years.
If, at the time of sale, an Asset has been held by the Trust for less than
one year or the Trust is deemed to be a "dealer" in Assets, any gain (in excess
of depreciation recapture) or loss will be treated as short-term capital gain or
ordinary income, respectively.
Since the recapture of the depreciation portion of any gain on the sale of
Assets is required to be reported in the year of sale, it is likely that
substantially all gain reported by the Trust on the disposition of Assets will
be reported in the year of sale, even if receipt of payment is deferred until a
later year.
The Trust, at the election of the Managing Trustee, may reinvest any
insurance proceeds or other indemnity payments received by it as a result of a
casualty to its Assets generally so long as the substitute Assets will continue
under the Lease of the lost or damaged Assets. Under Section 1033 of the Code,
the Trust would not be required to report income from the receipt of proceeds to
the extent proceeds are reinvested in Assets similar or related in service or
use to the Assets destroyed. The Managing Trustee, however, will not normally
make the election to reinvest such proceeds unless it believes that
substantially all of the gain realized as a result of the receipt of such
proceeds would be deferred for tax purposes.
66
<PAGE>
Sale or Other Disposition of Interests
As a general rule, gain or loss recognized by a Beneficiary (who is not a
"dealer" in Interests) on the sale of his Interests which have been held for
more than one year will be taxable as long-term capital gain or loss. However,
that portion of a selling Beneficiary's gain allocable to "unrealized
receivables" and "substantially appreciated inventory" (as defined in Section
751 of the Code) of the Trust in which he is a beneficiary would be treated as
ordinary income. The term "unrealized receivables" would encompass all Trust
assets subject to recapture of cost recovery deductions determined as if a
selling Beneficiary's proportionate share of all of the Trust's Assets had been
sold at that time. Thus, a substantial portion of a Beneficiary's gain or loss
upon the sale of his Interests will be taxed as ordinary income. Because the
ordinary gain or loss from a Beneficiary's share of unrealized receivables and
substantially appreciated inventory is computed separately from his gain or loss
attributable to other Trust assets, it is possible that a Beneficiary could have
ordinary income and a capital loss (which can be used only to a limited extent
to offset the ordinary income) on the sale of his Interests.
See "Sale or Other Disposition of Trust Property," above, for the
difference in tax treatment of capital gains and ordinary income.
A "seller" of a partnership interest is required to notify promptly the
partnership of the sale or exchange, and, once the partnership is notified, it
is required to inform the Service (and the seller and the buyer of the
partnership interest on or before January 31 following the calendar year of
sale) of the fair market value of the allocable share of unrealized receivables
and appreciated inventory attributable to the partnership interest sold or
exchanged. Failure of a "seller" of a partnership interest to notify the
partnership will result in a $50 penalty per failure.
Tax Treatment of Certain Trust Expenses
The Trust will incur costs for which it will claim deductions for federal
income tax purposes. There is no assurance that the Service will not challenge
these deductions on various grounds. Accordingly, no representation or warranty
of any kind with respect to any deduction can be made. If it is ultimately
determined that any deduction of the Trust is not allowable, an adjustment of
the taxable income or loss of the Trust for the year of the deduction would be
necessitated. Such an adjustment would, in turn, cause an adjustment in the
federal income tax liabilities of the Trust and the Managing Trustee and each
Trust Beneficiary for that year.
The following paragraphs discuss certain risks in the tax treatment of
various fees, costs and expenses. If the proposed treatment by the Trust is
ultimately disallowed, the Trust's taxable income in a particular year or years
will be increased, and recognition of the tax benefits attributable to the
reduction may be deferred until later years or may be disallowed entirely. In
either event, benefits to the Beneficiaries would be adversely affected.
Fees to Managing Trustee and its Affiliates. Many of the proposed
deductions relate to fees which will be paid to the Managing Trustee, the
Special Beneficiary and their Affiliates. (See "COMPENSATION AND FEES.") It is
possible that the Service may determine that some of the payments to be made by
the Trust to the Managing Trustee, the Special Beneficiary and their Affiliates,
as well as some other expenses, are (i) "syndication fees" or proceeds from the
sale of a capital asset (i.e., a portion of the pre-syndication interests of the
participants in the Trust), in which case they would not be allowed as
deductions by the Trust; (ii) "organization expenses," in which case they would
only be allowed as deductions ratably over a period of not less than sixty
months; (iii) capital in nature, in which case they would not be allowed as
deductions but would have to be capitalized and recovered over the term of the
Trust or the lives of certain assets; (iv) excessive, in which case the portion
of such payments or expenses determined to be excessive would not be allowed as
a deduction; or (v)
67
<PAGE>
constructive distributions to the Managing Trustee or the Special Beneficiary
rather than fees to the Managing Trustee, the Special Beneficiary or their
Affiliates.
In determining whether fees are in fact fees instead of constructive
distributions to a partner, the Code recognizes three types of payments which
may be made by a partnership to a partner: the first is a payment made to a
party when he is acting in a capacity other than that of a partner; the second
is a so-called "guaranteed payment"; and the third is a distribution of
partnership income.
Section 707(a) of the Code provides that if a partner engages in a
transaction with a partnership other than as a partner, the transaction is,
subject to certain exceptions, treated as occurring between the partnership and
one who is not a partner. Sections 162 and 263 of the Code would then apply to
determine whether the fee is deductible or must be capitalized. The Service
appears to look primarily to whether the activity giving rise to the payment is
integral to the operation of the partnership in determining whether a payment is
subject to Section 707(a); if it is, the Service has taken the position that the
fee is attributable to the performance of services within the normal scope of
the partner's duties so that Section 707(a) will not apply. See Edward T. Pratt,
64 T.C. 203 (1975), affirmed in part and reversed in part, 550 F.2d 1023 (5th
Cir. 1977) and Kimmelman v. Commissioner, 72 T.C. 294 (1979).
Section 707(c) of the Code provides that guaranteed payments of fees or
interest are amounts "determined without regard to the income of the
partnership." The Section states that a "guaranteed payment" is considered as
made to one who is not a member of the partnership. However, a guaranteed
payment is not automatically deductible; Regulation 1.707-1(c) provides that it
must first meet the requirements of Sections 162(a) and 263 of the Code. See
Cagle v. Commissioner, 63 T.C. 86 (1974), affirmed, 539 F.2d 409 (5th Cir.
1976).
Payments by a partnership to a partner which are not within the scope of
Sections 707(a) or 707(c) are distributions to a partner which are not
deductible or capitalizable by a partnership.
To the extent that the fees described below are governed by Section 707(c)
of the Code, they will not be subject to the rule that deduction of expenses of
an accrual basis taxpayer, such as the Trust, owed to a related cash basis
taxpayer, will be allowable only on the day on which the amount is includable in
the gross income of the person to whom the payment is to be made. A partnership
and a partner are related persons for purposes of this provision. Depreciation
of fees which must be capitalized is permitted to the extent that the amount of
depreciation does not exceed the amount includable in the gross income of the
person to whom the payment is to be made.
In addition to these general issues concerning the income tax treatment of
fees and payments to the Managing Trustee, the Special Beneficiary and their
Affiliates, certain issues related to particular fees and payments are noted
below.
Deduction of Asset Management Fees and Subordinated Resale Fees. The
Advisor, which is also the Special Beneficiary, will be entitled to receive
Asset Management Fees based on the lower of 5% of the gross rental proceeds (2%
in the case of Full Payout Leases) or competitive fees, which the Trust intends
to deduct under Section 162 of the Code, and Subordinated Resale Fees based on
the lower of 3% of the gross sale proceeds from Assets sold or one-half of
competitive brokerage fees, which the Trust intends to add to the basis of the
related Asset or deduct from the sales price under Section 1016 of the Code. In
order to be deducted, the Asset Management Fees must be "ordinary and necessary
business expenses" incurred in connection with the Trust's business (and not a
capital expenditure) and, in order to be capitalizable, the Subordinated Resale
Fees must not be constructive distributions to a partner. Because the Advisor is
a Trust Beneficiary, the Service could contend that the Asset Management Fees
and/or the Subordinated Resale Fees, which are payable only when cash is
available with no interest payable in the event of such a deferral, and, in the
case of the Subordinated Resale
68
<PAGE>
Fees, are payable only after Payout, are in fact distributions to the Special
Beneficiary. If the Service successfully contended that the Asset Management
Fees and/or the Subordinated Resale Fees were distributions to the Special
Beneficiary, they would not be deductible or capitalizable by the Trust. The
Service could then make a corresponding increase in the Special Beneficiary's
share of Profits (or Losses) for such year.
Capitalization of Syndication Fees. The Code requires that fees paid in
connection with the syndication of a partnership must be capitalized and neither
amortized nor depreciated. The Trust intends to treat the fees and expenses
allocable to preparation of this Prospectus and otherwise to the offering of the
Class B Beneficiary Interests as syndication expenses. The Service may require
that other Trust expenses or payments be treated in the same manner.
Limitations on the Deductibility of Interest
Consumer and Investment Interest. Consumer interest, other than certain
qualified housing interest on a taxpayer's principal and secondary residences,
is no longer deductible. Interest on underpayments of federal income taxes is
treated as consumer interest for this purpose.
Investment interest, which includes interest on debt not incurred in
connection with a taxpayer's trade or business (other than consumer debt or
qualified housing debt), is only deductible to the extent of net investment
income. Interest expense attributable to an activity that is subject to the
passive loss rules (such as a Beneficiary's interest in the Trust) will not also
be subject to the investment interest deduction limitations. Accordingly,
interest expense of the Trust (such as interest expense on borrowings used to
acquire Assets) will be subject to the passive loss limitations (see
"Active/Passive Income and Loss," above) but will not be subject to the
investment interest limitations.
Temporary Regulations under Section 163 of the Code provide that if the
Trust refinances debt secured by the Assets to provide Distributable Cash From
Sales or Refinancings, the ability of any Beneficiary to deduct his share of
Trust interest expenses in excess of those expenses attributable to the amount
of debt in place prior to the refinancing will depend upon a "tracing" of that
Beneficiary's use of his share of the Distributable Cash From Sales or
Refinancings. For example, if a Beneficiary used his share of the cash
distribution to purchase a consumer item, a portion of his allocable interest
expense would be treated as consumer interest; if a Beneficiary used his share
of the cash distribution to purchase an investment asset, a portion of his
allocable interest expense would be treated as investment interest, etc.
The Trust has incurred a significant amount of indebtedness (the
"Indebtedness") to finance the purchase of the Assets and expects that any
interest expense incurred with respect to the Indebtedness will be deductible
under Section 163 of the Code. Section 163 of the Code allows a deduction for
interest paid with respect to indebtedness. Indebtedness is generally defined to
mean an existing, unconditional and legally enforceable obligation for the
payment of money. The Managing Trustee has represented that the fair market
value of every Trust Asset which is encumbered by any Trust Indebtedness has
always and will continue to equal or exceed the amount of Indebtedness which
encumbers it. The Managing Trustee has also represented that each Indebtedness
is represented by a written unconditional obligation to pay a sum certain on
demand or at a fixed maturity date which is not later than 15 years after the
date the Indebtedness is incurred with a commercially reasonable interest rate
which is fixed or variable based upon established and recognized indices. Based
upon such representations, without undertaking independent verification of the
accuracy thereof, and assuming that each Indebtedness constitutes a valid and
enforceable indebtedness and creates a bona fide debtor/creditor relationship
between the Trust and the respective lender under applicable local law, it is
the opinion of Peabody & Brown that the Indebtedness will be treated as
indebtedness for federal income tax purposes and any interest paid with respect
thereto will be deductible under Section 163 of the Code and that, while the
outcome of litigation cannot be predicted with certainty, if the issue were
69
<PAGE>
litigated, it is more likely than not that a court would so hold. This opinion
is based solely on the representations of the Managing Trustee without
independent verification of the accuracy thereof. Peabody & Brown has not
reviewed any of the documents evidencing the Indebtedness. If such Managing
Trustee representations were determined to be inaccurate or incorrect, or the
Service successfully contended that all or a portion of the Indebtedness
constituted an equity interest in the Trust, interest incurred with respect to
the Indebtedness may not be deductible under Section 163 of the Code and the tax
benefits expected to be available to Beneficiaries could be significantly less
than anticipated.
Interest Related to Tax-Exempt Obligations. Section 265(2) of the Code
disallows any deduction for interest paid by a taxpayer on indebtedness incurred
or continued for the purpose of purchasing or carrying tax-exempt obligations.
The Service announced in Revenue Procedure 72-18 that the proscribed purpose
will be deemed to exist with respect to indebtedness incurred to finance another
"portfolio investment" (which includes a limited partner interest such as an
Interest) where the taxpayer also owns tax-exempt obligations. Therefore, in the
case of an investor owning tax-exempt obligations, the Service might take the
position that the allocable portion of any interest incurred by the investor to
purchase or carry his Interest in the Trust should be viewed as incurred to
enable him to continue carrying tax-exempt obligations, and that the investor
should not be allowed to deduct his full allocable share of that Interest.
Accordingly, although it is dependent upon an individual investor's
particular circumstances, if an investor holds or acquires tax-exempt
obligations, unless his investment in tax-exempt obligations is insubstantial,
it is likely that a proportionate amount of any interest paid by the investor on
debt he may incur in connection with the purchase of an Interest in the Trust
will be disallowed as a deduction under Section 265(2).
Prepaid Interest. The Trust will not prepay any interest, but may be
required to pay certain amounts commonly referred to as "points" in order to
obtain financing. Interest prepayments, including points, must be capitalized
and amortized over the life of the loan with respect to which they were paid.
Trust Tax Elections
The Trust may make various elections for federal income tax reporting
purposes which could result in items of income, gain, loss and deduction being
treated differently for tax purposes than for financial accounting purposes. For
example, the Trust, in conformity with generally accepted accounting principles,
will recognize gain on the sale of Assets in its entirety for accounting
purposes, but may elect to report the gain on the installment basis for tax
purposes.
The Code permits partnerships to elect to adjust the basis of partnership
property on the transfer of an interest in a partnership by sale or exchange or
on the death of a partner, and on the distribution of property by the
partnership to a partner (referred to as a "Section 754 election"). The general
effect of such an election by the Trust would be that assignees of Interests
would be treated, for purposes of depreciation and taxable gain on disposition
of Assets, as though they had newly acquired an interest in the Trust's assets
and therefore acquired a new cost basis for such assets equal to their basis in
their Interests. The Managing Trustee has the authority, under the Trust
Agreement, in its sole discretion, to make this election or to decline to make
this election. The Managing Trustee does not intend to cause the Trust to make
such an election unless the Interests are listed on a registered securities
exchange, which is not presently contemplated. If the election is not made, any
benefits which might be available to the Beneficiaries by reason of this
election will not be available. Moreover, a Beneficiary may have greater
difficulty in selling his Interests, as a purchaser will obtain no current tax
benefits from his investment to the extent that the cost of his investment
exceeds his allocable share of the Trust's basis in its assets.
70
<PAGE>
Use of Nominees
The Trust may be required or may find it appropriate in certain states or
other jurisdictions to utilize "nominee" trusts, corporations or other entities
to hold title to Assets. A nominee trust, corporation or other entity would be
used simply to hold bare legal title to Assets for the benefit of the Trust,
with the intention that the nominee will be disregarded and the Assets treated
as held directly by the Trust for federal income tax purposes. Nevertheless,
some recent court cases have held that in some circumstances entities purporting
to be mere nominees are taxable entities, resulting in the loss of depreciation,
interest and other deductions claimed by the purported equitable owners of the
property, although a Supreme Court decision on this issue was decided favorably
to the taxpayers. The Managing Trustee intends to use nominees, if at all, only
to hold legal title to Assets and will follow all favorable judicial precedents
with the advice of legal counsel, if appropriate, to avoid their treatment as
taxable entities. However, if any nominee used by the Trust were held to be a
taxable entity, such a holding would cause the tax treatment of income, gains,
losses, deductions, tax preferences and distributions of such trust, corporation
or other entity to be determined by trust or corporate, rather than partnership,
principles of taxation. (See "Trust Status," above.)
Section 467
Code Section 467 defines a "Section 467 rental agreement" as any rental
agreement for the use of tangible property involving total payments in excess of
$250,000 if certain other conditions are met. Under Code Section 467, the amount
of rent that is deemed to accrue under a Section 467 rental agreement is the
amount that is actually payable during the taxable year under the lease
agreement, plus the present value of any rents that relate to the current year
that are to be paid after the close of the year. This rule does not apply if (i)
a Section 467 rental agreement is silent as to the allocation of rents, or (ii)
the rental arrangement is, among other things, a tax-motivated "leaseback" or
"long-term agreement" that provides for increasing rents. If either (i) or (ii)
applies, the amount of rent that is deemed to accrue for the year is the
"constant rental amount." The "constant rental amount" is the amount which, if
paid as of the close of each lease period under the agreement, would result in
an aggregate present value equal to the present value of the aggregate payments
required under the lease.
The Managing Trustee has represented that all Leases allocate rental
payments to the periods in which they are paid, none of the Leases provide for
increasing rents and none of the Assets will be leased to a related party.
Consequently, the constant rent accrual rules of Section 467 of the Code should
not be applicable to the Leases.
Joint Ventures with Manufacturers
The Trust may enter into continuing relationships with manufacturers to
acquire Assets for lease to customers of the manufacturers. In these cases the
purchase price paid by the Trust may be treated by the Service as a contribution
to the capital of a joint venture consisting of the manufacturer and the Trust.
If the Service were successful in this contention, the amount of cost recovery
deductions and other deductions available to the Trust may be reduced to reflect
an allocation of a portion thereof to the manufacturer. The Trust will endeavor
to negotiate contracts with manufacturers which minimize the risks of creating a
joint venture for tax purposes, but there can be no assurance that it will be
successful in doing so. If the Service were to challenge successfully the
Trust's treatment of this issue, a portion of the deductions claimed would be
lost and re-allocated from the Trust to the manufacturer as a joint venturer.
Transferability-Termination of the Trust
The Code provides that if 50% or more of the capital and profit interests
in a partnership are sold or exchanged within a single twelve-month period, the
partnership will terminate for tax purposes.
71
<PAGE>
The Trust Agreement contains a provision that prohibits a transfer of Interests
without the written consent of the Managing Trustee if the transfer could result
in a termination of the Trust for federal income tax purposes. If a termination
occurs, the assets of the Trust will be deemed to be constructively distributed
pro rata to the Beneficiaries and then recontributed by them to a new (for
federal income tax purposes only) Trust. Some of the possible adverse tax
affects of a tax termination are as follows:
1. The tax basis of Assets in the hands of the Trust after
termination may be greater or less than the Trust's basis in such Assets
immediately before the termination. Furthermore, to the extent that
Section 1060 of the Code applies, a portion of the Trust's basis in its
assets may have to be allocated to non-depreciable assets such as
goodwill. Accordingly, a Beneficiary's taxable income or loss of the Trust
may be greater or less than his taxable income or loss if the Trust did
not terminate because of the resulting change in the amount of cost
recovery deductions. The commencement of a new recovery period for the
assets as a result of the deemed placement in service by a "new"
partnership will extend the overall period for the recovery of the cost of
assets through cost recovery deductions.
2. If the allocable portion of Trust cash constructively distributed
to a Beneficiary exceeds the adjusted tax basis of his Interests, a
Beneficiary will be required to recognize gain to the extent of the excess
which will be treated as gain from the sale or exchange of Interests.
3. The Trust's taxable year will end upon termination and, if a
Beneficiary's taxable year differs from the Trust's calendar taxable year,
the termination could result in the "bunching" of more than one year of
Trust income or loss in the Beneficiary's income tax return for the
taxable year in which the Trust terminates.
4. All existing Trust tax elections will terminate.
Based on the restrictions in the Trust Agreement and the representation of
the Managing Trustee that it will not consent to any transfer or redemption
which would result in the termination of the Trust, it is unlikely that the
Trust will terminate for federal income tax purposes.
Termination and Liquidation of the Trusts
Upon termination of the Trust, any remaining assets of the Trust will be
sold, which may result in the realization of taxable gain to the Beneficiaries,
including recapture of depreciation. (See "Depreciation (Cost Recovery)"and
"Recapture of Depreciation," above.) Distributions of cash in complete
liquidation of the Trust will generally be treated in the same manner as
non-liquidating distributions of cash. (See "General Principles of Partnership
Taxation," above.)
Estate Taxes
A low basis, high value asset is included in a decedent's estate at its
fair market value, but the basis of the asset (such as the Interests) in an
estate is also "stepped up" to its fair market value. Investors should consult
with their estate planning advisors in connection with matters relating to the
effect of ownership of Interests on their personal estate planning.
Alternative Minimum Tax
Individuals. The Code provides that an alternative minimum tax is payable
by individuals if it exceeds their regularly calculated federal income tax
liability. The alternative minimum tax is imposed at the rate of 26% of
alternative minimum taxable income. The 26% rate is increased to 28% to the
extent that the excess of alternative minimum taxable income over the exempt
account (discussed below) exceeds $175,000 ($87,500 for married individuals
filing separate returns). Single taxpayers are
72
<PAGE>
entitled to a $33,750 exempt amount under the alternative minimum tax, and
married taxpayers filing a joint return are entitled to a $45,000 exempt amount.
The exempt amount, in either case, is reduced by 25 cents for each dollar by
which alternative taxable income exceeds $112,500 in the case of single
taxpayers and $150,000 in the case of joint returns.
The computation of income for alternative minimum tax purposes differs
substantially from the computation of income for purposes of the regular tax.
Some of the principal differences between the calculations are as follows:
I. For minimum tax purposes, in the case of property placed in service
after December 31, 1986, depreciation on personal property is computed using the
150% declining balance method over an asset's ADR midpoint life. This creates,
in essence, a tax preference item equal to the difference in depreciation
between the 200% declining balance method and the 150% declining balance method
using the ADR midpoint life. The excess of actual depreciation for real estate
in excess of depreciation calculated on the straight-line method over 40 years
is also a tax preference item. In the case of any property placed in service
before January 1, 1987, the excess of accelerated depreciation over
straight-line depreciation for real estate and the excess of actual depreciation
over straight-line depreciation using the asset depreciation range useful life
for leased personal property continues to be an item of tax preference.
II. Interest on tax-exempt obligations which constitute private activity
bonds issued after August 7, 1986, is included in income for minimum tax
purposes.
III. The excess of the fair market value of stock received on the exercise
of an incentive stock option over the exercise price is treated as a tax
preference item.
IV. Medical deductions are allowed only to the extent that they exceed 10%
of adjusted gross income and miscellaneous itemized deductions and itemized
deductions for state and local taxes are not permitted.
To the extent that a taxpayer pays an alternative minimum tax in excess of
his regular tax liability for any year, then the excess (except to the extent
attributable to exclusion preferences such as tax-exempt interest rather than
deferral preferences) may be carried forward as a credit against the taxpayer's
regular tax liability if that tax liability exceeds his minimum tax liability in
a subsequent year. No carry-back is permitted for this minimum tax credit.
Corporations. The Code also provides for an alternative minimum tax to
be imposed on corporations which is substantially similar to the individual
alternative minimum tax described above.
In general, a corporation's alternative minimum taxable income will be
equal to its regular taxable income, increased by certain tax preference items
for the year and adjusted by computing certain items under special rules that
eliminate the acceleration of their benefit under the regular tax. The corporate
alternative minimum tax is imposed at the rate of 20% of alternative minimum
taxable income in excess of a $40,000 exempt amount. The $40,000 exempt amount
is reduced by 25% of the amount by which alternative minimum taxable income
exceeds $150,000 until the exempt amount is reduced to zero.
The tax preference items for corporations in computing their alternative
minimum taxable income are substantially similar to those set forth above for
the alternative minimum tax imposed on individuals. However, there is an
additional tax preference item for corporations which is defined as 75% of the
excess of the adjusted current earnings of the corporation over the alternative
minimum taxable income (determined without regard to this item and the
alternative minimum tax net operating loss deduction).
73
<PAGE>
Only certain credits are allowable against the corporation's alternative
minimum tax liability, including refundable credits and the foreign tax credit.
Investment tax credits will be permitted to offset only a portion of minimum tax
liability. To the extent that a corporation pays a minimum tax during any
taxable year it will be allowed a credit against its regular tax liability in
subsequent taxable years which can be carried forward indefinitely, whether the
minimum tax liability is attributable to deferral items or to exclusionary
items.
It is anticipated that all investors will be allocated tax adjustment
items as a result of their investment in the Trust attributable to the
difference between more accelerated methods of depreciation which will be used
for regular tax purposes and less accelerated methods of depreciation which must
be used for alternative minimum tax purposes.
Interest and Penalties on Underpayment of Taxes; Audit
Several of the administrative and penalty provisions of the Code should be
considered by investors with respect to an investment in the Trust:
Interest Rate Adjustment. Interest rates on tax overpayments and
underpayments are set quarterly as of January 1, April 1, July 1 and October 1
of each year, based on the prevailing rate for short-term government
obligations. The interest rate payable by taxpayers on underpayments is set one
percentage point higher than the rate payable by the Service on overpayments.
The interest rate on deficiencies is currently 9% per annum (compounded daily)
which will remain in effect through March 31, 1997. The interest rate applicable
to tax deficiencies for C corporations in the case of an underpayment that
exceeds $100,000 for any taxable period to a rate two percentage points higher
than the otherwise applicable rate for periods following the earlier of (a) the
date of the IRS 30-day letter or (b) the date of the statutory notice of
deficiency.
Accuracy Related Penalties. Section 6662 of the Code consolidated many of
the penalty provisions of the Code into a single, more cohesive accuracy-related
penalty, imposed at the rate of 20%, to the portion of any underpayment of tax
that is attributable to (1) negligence, (2) any substantial understatement of
income tax or (3) any substantial valuation overstatement.
With respect to the penalty on any "substantial" understatement of income
tax, the amount of understatement is the excess of the amount of income tax
imposed on the taxpayer for the taxable year over the amount of tax shown on the
return, and a "substantial" understatement exists if the understatement for the
taxable year exceeds the greater of 10% of the actual tax or $5,000 ($10,000 in
the case of most corporations). The amount of the understatement may be reduced
by the portion of the understatement that is attributable to an item if (i) the
treatment of the item on the return is or was supported by substantial authority
or (ii) all the facts relevant to the tax treatment of the item were disclosed
on the return or a statement attached to the return and there was a reasonable
basis for the treatment of the item. However, in the case of tax shelter items,
the understatement may only be reduced if the taxpayer establishes that, in
addition to having substantial authority for its position, it reasonably
believed that the treatment claimed was "more likely than not" the proper
treatment of the item.
A tax shelter item is defined as an item that arises from a partnership or
other entity, plan or arrangement, the principle purpose of which is the
avoidance or evasion of Federal income tax. The Managing Trustee has indicated
that (1) the objectives of the Trust include the provision to investors of cash
distributions throughout the operating life of the Trust and (2) it is not
anticipated that the Trust will generate any significant tax losses. On this
basis, the Managing Trustee has been advised by counsel that the Trust should
not be considered to be "tax shelters" within the meaning of this provision.
74
<PAGE>
With respect to the penalty on any valuation overstatement, a "valuation
overstatement" exists if the value of any property or the adjusted basis of any
property claimed on any return exceeds 200% of the amount determined to be the
correct amount of the valuation or adjusted basis for such property. If the
valuation is 200% or more of the correct value, but not more than 400%, the
applicable penalty is 20%. If the valuation is more than 400% of the correct
value, the applicable penalty is 40%. This provision is not applicable unless
the underpayment for the particular taxpayer for the taxable year attributable
to the valuation overstatement is at least $5,000 ($10,000 in the case of most
corporations).
The Service is engaged in an intensified audit program for partnerships
and entities treated as partnerships for federal income tax purposes. As a
consequence, audits of the Trust's information returns are more likely to occur
than they were prior to the commencement of such audit program. A federal income
tax audit of the Trust's tax information return may result in an audit of the
returns of its Beneficiaries, and such an examination could result in
adjustments both to items that are related to such Trust and to unrelated items.
The cost of contesting an audit could be substantial. In the event adjustments
are made, Beneficiaries could be required to pay substantial amounts of interest
on any income tax deficiencies. This interest is no longer deductible. (See
"Limitations on the Deductibility of Interest.")
Audits are conducted at the partnership level in a single proceeding
rather than in separate proceedings with each partner. Notice of commencement of
an audit is provided only to the designated "Tax Matters Participant" and to
partners owning greater than a 1% interest in the partnership and to partners
who form a group representing at least a 5% interest in the partnership. The
Managing Trustee has been designated the Tax Matters Participant for the Trust.
The Managing Trustee will advise all Beneficiaries of the Trust of the
commencement and status of any audit. The Service will generally discuss matters
with the Tax Matters Participant who will be authorized to enter into
settlements which may bind Beneficiaries owning less than a 1% interest in the
Trust unless the Beneficiary files a statement with the Service providing that
the Tax Matters Participant does not have such authority. All Beneficiaries are
entitled to participate in the audit proceeding. Each Participant will be
offered the same settlement terms as every other Participant. In the event that
the results of an audit are disputed by the Tax Matters Participant, the Tax
Matters Participant has the right to file for judicial review of the
administrative determination, and, if he files, no other Managing Trustee or
Beneficiary may file, but any may join in the suit. If the Tax Matters
Participant does not file suit, any other Managing Trustee or Beneficiary owning
more than a 1% interest in the Trust may do so or a 5% ownership group may do
so, but only the first suit filed will be allowed to proceed (except that a suit
in the Tax Court takes precedence over suits in other courts), and all Managing
Trustees and Beneficiaries may participate in such suit.
Tax Shelter Registration
"Tax shelters" must be registered with the Service. Each tax shelter is
given a registration number and any limited partner claiming any deduction or
other tax benefit attributable to the tax shelter must include a tax shelter
registration number on his tax return. Monetary penalties are imposed for
failure to register a tax shelter or to disclose the registration number on a
tax return. For purposes of this registration requirement, a tax shelter is an
offering where, among other things, the aggregate amount of deductions plus 350%
of the amount of tax credits exceed twice the amount of the cash invested. The
Managing Trustee believes that the Trust will not generate aggregate gross
deductions plus 350% of the amount of tax credits in an amount which will exceed
twice the amount of cash invested during the relevant period. Accordingly, the
Trust will not be deemed to be a tax shelter for this purpose and will not be
registered with the Service as a tax shelter.
75
<PAGE>
Trusts as Investors
In general, a grantor trust (a trust with respect to which the settlor is
treated as the owner because of certain retained rights such as the right to
revoke the trust or to receive or direct receipt of its income) or other trust
established for personal planning purposes will be treated for tax purposes as
if the grantor were the owner of the trust's assets, while a trust with multiple
beneficiaries which operates in the manner of an active business enterprise or
which engages in several activities is likely to be treated as a corporation.
Since limited partners are generally held to be engaged in the trade or business
in which a partnership is engaged, an investment in the Trust by this type of
trust may result in the trust being treated as a corporation.
Any trust which is considering purchasing Interests should consider the
issue of whether the investment would cause the trust to be treated as an
association taxable as a corporation. According to the Regulations, the
determination of whether an entity formed as a trust will be treated as a trust
or as an association depends on whether there are associates and an objective to
carry on business and divide the gains therefrom. Treatment as a corporation
would mean that the trust will be taxed at corporate rates at the trust level,
whether or not income is distributed to beneficiaries, and cash distributions to
beneficiaries would be treated as dividends.
Because of the complex tax issues involved, the resolution of which is
likely to depend on the specific characteristics of the trust, potential
investors considering investment through a trust are urged to consult with their
own tax advisors prior to investing in the Interests.
Investment By Foreign Beneficiaries
The United States income tax treatment applicable to a Foreign Beneficiary
that invests in the Trust is complex and will vary based on the particular
circumstances applicable to such Foreign Beneficiary. Foreign Beneficiaries are
urged to consult with their own tax counsel regarding the United States and
foreign tax effects of an investment in the Trust.
Taxation of Foreign Beneficiaries-General. Non-resident aliens are defined
in Section 7701(b)(1)(B) of the Code to mean individuals that are neither
citizens nor residents of the United States. Non-resident aliens and foreign
corporations are generally subject to United States taxation to the following
extent: (1) at the rate of 30% of the amount received as interest, dividends,
rents, annuities and other fixed or determinable gains, profits and income
(other than capital gains of non-resident aliens) to the extent that the amount
received is not effectively connected with the conduct of a trade or business in
the United States; (2) in the case of non-resident aliens physically present in
the United States for 183 days or more during the taxable year only, at the rate
of 30% on net capital gains to the extent such gains would be recognized and
taken into account if they were effectively connected with the conduct of a
trade or business in the United States; and (3) at the graduated rates
applicable to United States citizens or corporations under the regular tax or
alternative minimum tax to the extent of taxable income which is effectively
connected with the conduct of a trade or business within the United States.
Section 864(c) of the Code sets forth the rules for determining whether
income is effectively connected with the conduct of a trade or business in the
United States. In the case of a non-resident alien or foreign corporation
engaged in a trade or business in the United States (and, assuming that the
Trust was engaged in a trade or business, each Foreign Beneficiary would be
deemed to be so engaged by virtue of being a Participant of the Trust, see
Section 875(a) of the Code), the general rules provide that the factors to be
taken into account are whether (1) the income is derived from assets used in the
conduct of a trade or business or (2) the activities of a trade or business were
a material factor in the realization of the income. Since the Trust is a United
States business trust with a principal place of business in the United States,
and since the Assets will be used predominantly in the United States, it
76
<PAGE>
is expected that substantially all the income and loss of the Trust will be
treated as effectively connected with the conduct of a trade or business in the
United States.
In the event that the Trust were deemed not to be engaged in a trade or
business, a Foreign Beneficiary would be subject to United States tax at the
rate of 30% on such Foreign Beneficiary's proportionate share of gross lease
payments received by the Trust without obtaining any benefit from deductions
available to the Trust, including cost recovery deductions. This 30% gross
income tax would be enforced by a withholding requirement at that rate (unless
reduced by tax treaty with the Foreign Beneficiary's country of residence)
imposed on the Trust. Such a tax imposed on Foreign Beneficiaries would have a
substantial adverse effect on their investment. It is believed that the
activities of the Trust will be substantial enough such that the Trust will be
treated as engaged in a trade or business, and the activity of leasing personal
property has generally been treated by the Service as constituting a trade or
business. See Revenue Ruling 69-278 and Revenue Ruling 78-144. However, it is
possible that the Service could contend that, because the Leases are generally
net leases, the activities of the Trust constitute mere investment rather than a
trade or business.
The Trust will admit Foreign Beneficiaries as Beneficiaries only if the
Managing Trustee receives satisfactory assurances (in the form of a legal
opinion, Service ruling or otherwise), that the Trust will be deemed to be
engaged in a trade or business. If Foreign Beneficiaries are admitted, the
Trust Agreement will contain special provisions relating to the withholding
requirements that will be imposed as a result of having foreign participants
as described under "Withholding on Effectively Connected Income" below. Each
Foreign Beneficiary will be required to indemnify the Managing Trustee and
the Trust for any costs or expenses incurred by the Trust or the Managing
Trustee in connection with the withholding obligations applicable to such
Foreign Beneficiary. In addition, the Managing Trustee has agreed to
indemnify the Trust for any unrecovered costs or expenses the Trust may incur
in connection with such withholding obligations.
Withholding on Effectively Connected Income. Section 1446 of the Code
imposes a requirement on partnerships with foreign partners to withhold and pay
over to the Internal Revenue Service federal income tax on partnership income
which is effectively connected with a United States trade or business which is
allocable to the foreign partner at the highest federal tax rate applicable to
that character of partner. The withholding requirement applies with respect to
taxable income, rather than cash distributions. The Trust will be subject to
this withholding requirement if Foreign Beneficiaries are admitted as
Beneficiaries.
Under these circumstances, it is anticipated that the Trust will withhold,
with respect to each Foreign Beneficiary, at the rate of 39.6% in the case of
individuals and 35% in the case of corporations, with respect to the taxable
income (subject to certain adjustments) of the Trust allocable to each such
Participant. It is anticipated that the Trust will have sufficient cash
available to effect such withholding and amounts withheld will be treated as
Distributions to the Foreign Beneficiaries, reducing the amount of cash which
will otherwise be distributed directly to them and reducing their Capital
Accounts. In addition, the Trust Agreement specially allocates the costs and
expenses of complying with these withholding requirements to the Foreign
Beneficiaries.
Refund of Withholding. A Foreign Beneficiary on whose behalf funds are
paid over to the Internal Revenue Service under the Section 1446 withholding
requirement is allowed a credit for taxes paid in such amount. In order to
recover any amounts withheld in excess of his or its actual United States tax
liability for the year, the Foreign Beneficiary must file a claim for refund.
However, the Foreign Beneficiary may not claim an early refund under the
estimated tax rules; the refund can only be claimed in connection with the
filing of an annual United States tax return. In order to claim a refund or the
credit against its United States tax liability, the Foreign Beneficiary must
attach the Form 8805 (Foreign Beneficiary's Information Statement of Section
1446 Withholding Tax) it receives
77
<PAGE>
from the Trust as proof of withholding by the Trust.
The withholding provisions of Section 1446 do not eliminate the need for
Foreign Beneficiaries to file United States income tax returns.
Branch Profits Tax. In addition to the tax liabilities discussed above,
foreign corporations that invest in the Trust will be liable for the "branch
profits tax" imposed by Section 884 of the Code. This tax is imposed at the rate
of 30% of a foreign corporation's "dividend equivalent amount" for the taxable
year. The dividend equivalent amount means, in general, the earnings and profits
of the corporation which are effectively connected with the conduct of a trade
or business in the United States, subject to certain adjustments made for
increases or decreases in "U.S. net equity," the effect of which is to tax the
foreign corporation on United States connected earnings which are not reinvested
in assets connected with a United States trade or business.
Sale of Interests. Foreign Beneficiaries who sell their Interests will be
subject to United States tax on gain realized on the sale because Section 864(c)
of the Code provides that income and capital gains are treated as effectively
connected with the conduct of a United States trade or business if the
activities of a United States business are a material factor in the realization
of the income, gain or loss. The treatment of gain as ordinary or capital and
the application of Section 751 of the Code is the same for Foreign Beneficiaries
as for United States investors.
Because the sale of Interests by a Foreign Beneficiary creates gain for
the Foreign Investor outside of the Trust (that is, it is not the result of
effectively connected taxable income earned by the Trust and allocated to the
Foreign Beneficiary), the withholding requirements of Section 1446 are not
applicable to such gain.
State and Local Taxes; Foreign Taxes and Treaties. Foreign Beneficiaries
may be subject to tax in various states of the United States in a manner similar
to United States investors.
Additionally, Foreign Beneficiaries may be subject to tax in their country
of residency and possibly other foreign countries. Tax treaties between the
United States and various foreign countries, or foreign countries among
themselves, may affect the tax treatment of Foreign Beneficiaries. It is
possible that tax treaties between the United States and certain foreign
countries could affect some of the matters discussed above. Foreign
Beneficiaries are urged to consult with their international tax advisors with
regard to the international tax aspects of an investment in the Trust.
Possible Changes in Tax Law
Passage of recent tax legislation does not preclude the enactment of
further amendments to the Code (including amendments having a retroactive
effect) which could adversely affect an investment in the Trust. In recent
years, there have been a number of proposals made in Congress, by government
agencies and by the executive branch of the federal government for changes in
the federal income tax laws, and additional proposals may be made in future
years. In addition, the Service has proposed, and may still be considering, many
changes in regulations and procedures. There can be no assurance that future tax
legislation would not adversely affect an investment in the Trust.
- --------------------------------------------------------------------------------
STATE, LOCAL AND FOREIGN TAXES
- --------------------------------------------------------------------------------
The Trust may operate in states and localities which impose a tax on the
Trust's assets or
78
<PAGE>
income, or on the Managing Trustee, the Special Beneficiary or each Beneficiary
based upon his share of any income derived from the Trusts' activities in the
jurisdiction, and as a result the Trust's operations may require filing of state
or local tax returns in several jurisdictions. This section makes no attempt to
summarize the state tax consequences of owning an Interest.
ALTHOUGH THE TRUST WILL BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES, THERE CAN BE NO ASSURANCE THAT IT WILL BE TREATED AS A PARTNERSHIP FOR
STATE AND LOCAL TAX PURPOSES. PEABODY & BROWN HAS NOT REVIEWED THE LAWS OF THE
INDIVIDUAL STATES AND CRITERIA FOR PARTNERSHIP CLASSIFICATION FOR STATE AND
LOCAL TAX PURPOSES CAN BE SUBSTANTIALLY DIFFERENT FROM THE CRITERIA EMPLOYED FOR
FEDERAL INCOME TAX PURPOSES. CONSEQUENTLY, THERE CAN BE NO ASSURANCE THAT THE
TRUST WILL NOT BE TREATED AND TAXED AS A CORPORATION OR TRUST FOR STATE AND
LOCAL TAX PURPOSES. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS TAX
ADVISOR WITH RESPECT TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
THE TRUST.
Beneficiaries may incur tax obligations and be subject to filing
requirements in foreign countries due to the operation of Assets in foreign
countries and/or the leasing of Assets to foreign lessees. If Assets are leased
for use outside the United States, a foreign jurisdiction may impose a
withholding or other tax on rental income. Incidence of any foreign taxes will
depend upon the specific tax laws of any foreign jurisdiction where Assets are
used and upon the possible interaction of tax treaties between the United States
and the foreign jurisdiction. A Beneficiary may be entitled to a credit against
his U.S. tax liability for his share of the amount of tax paid to the foreign
jurisdiction. Generally, the credit is limited to the U.S. tax that would be
imposed on the foreign income and the excess of credits over the U.S. tax will
not be credited against income allocable to the United States. This limit may
apply since the effective foreign tax rate on rental income may exceed the
Beneficiary's effective U.S. tax rate on the same income. A Beneficiary may, in
lieu of electing the tax credit, choose to deduct any foreign taxes, but a
Beneficiary must either deduct or credit all foreign taxes accrued within the
taxable year. Any Beneficiary with potential foreign tax liability on income
from other sources should contact his tax advisor regarding the effect of these
rules.
THIS ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
ACCORDINGLY, PROSPECTIVE BENEFICIARIES ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THEIR OWN TAX SITUATION AND THE STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THIS INVESTMENT.
- --------------------------------------------------------------------------------
SUMMARY OF THE TRUST AGREEMENT
- --------------------------------------------------------------------------------
The Declaration of Trust for the Trust will be amended and restated as of
the Closing (as so amended and restated, the "Trust Agreement") and will be
executed by the Special Beneficiary and the Delaware Trustee and by the Managing
Trustee on behalf of itself and its attorney-in-fact for the Class A
Beneficiaries and Class B Beneficiaries (collectively, the "Beneficiaries").
The Trust Agreement, as so restated, provides for the issuance of the
Class B Subordinated Interests (see "Additional Class of Interest") and permits
the Trust to offer to redeem outstanding Interests at such times, in such
amounts, in such manner and such prices as the Managing Trustee of the Trust may
determine from time to time (see "Special Redemption Provisions"). These
amendments were recently approved by majority interest of the Class A Investors.
79
<PAGE>
The rights and obligations of the Trustees, the Class A Beneficiaries, the
Class B Beneficiaries and the Special Beneficiary in the Trust will be governed
by the Trust Agreement. The following statements and other statements in this
Prospectus concerning the Trust Agreement do not purport to be complete and
merely outline, and in no way modify or amend, the Trust Agreement. This
description is qualified in its entirety by specific reference to the Trust
Agreement which is included as an exhibit to the Registration Statement. (A copy
of the Trust Agreement will be given to all prospective investors upon request.)
Special Redemption Provisions
The Trust shall have the right to purchase and redeem Interests at such
times, in such amounts, in such manner and at such prices as the Managing
Trustee may determine from time to time in its sole discretion; provided,
however, that any such purchase and redemption shall not be in violation of any
applicable legal requirements, shall not result in the termination under the
Code of the Trust or of its status as an entity taxable as a partnership, shall
not result in the Trust being treated as a publicly traded partnership, shall
not cause the Trust to be deemed an "investment company" pursuant to the
provisions of the Investment Company Act of 1940 and shall not cause the Assets
of the Trust to be considered "plan assets" under ERISA and the regulations
thereunder. Subject to the foregoing, the Managing Trustee intends to use a
portion of the proceeds of the Offering to Redeem a portion of the Class A
Interests. The Class B Subordinated Interests are not expected to be redeemed.
Additional Class of Interest
The Trust Agreement was recently amended to give the Managing Trustee the
right to authorize the Trust to issue an additional class of interest (or other
securities) with any designations, preferences and relative, participating
optional or other special rights, including special voting rights as shall be
fixed by the Managing Trustee. The Class B Subordination Interests are being
issued in accordance with this authority.
The Trustees
The number of Trustees of the Trust shall not be less than two nor more
than four and shall be fixed from time to time by the Managing Trustee.
Initially, there will be two Trustees. One Trustee shall be designated the
Managing Trustee and one Trustee shall be designated the Delaware Trustee. The
Managing Trustee is AFG ASIT Corporation and the Delaware Trustee is Wilmington
Trust Company. The Managing Trustee shall devote so much of its time as may be
necessary to carry out the purposes and conduct the business of the Trust in
accordance with the Trust Agreement and carry out its duties as Managing Trustee
under the Trust Agreement.
Responsibilities and Liabilities of the Managing Trustee
Except as expressly limited by the Trust Agreement, the Managing Trustee
shall have complete and exclusive discretion in the management and control of
the affairs and business of the Trust and all powers necessary, convenient or
appropriate to carry out the business and exercise the powers of the Trust. In
the course of management of the Trust, the Managing Trustee may, in its
discretion, buy, sell, lease, exchange and otherwise deal in the Assets and
interests in the Assets when and upon such terms as it determines to be in the
best interests of the Trust, and shall employ other Persons (such as the
Advisor) to perform equipment management, legal, accounting, appraisal and other
advisory services for the Trust. The Managing Trustee, when acting in such
capacity, shall be personally liable for the acts, omissions or obligations of
the Trust, except as may be provided to the contrary in any contractual
agreement of the Trust.
80
<PAGE>
Resignation of the Managing Trustee
During the term of the Trust, the Managing Trustee may not Resign from the
Trust unless:
(1) the Trust Beneficiaries have received 60 days' advance written notice
of the Managing Trustee's intention to Resign;
(2) the Trust has received an opinion of Trust Counsel to the effect that
such Resignation will not constitute a termination of the Trust or otherwise
materially adversely affect the status of the Trust as an entity taxable as a
partnership for federal income tax purposes; and
(3) a new Managing Trustee has been selected who or which (a) shall have
expressed a willingness to become (and shall in fact duly become) the Substitute
Managing Trustee, (b) shall satisfy the then applicable provisions of the Code
and any applicable procedures, regulations, rules and rulings thereunder, so
that the Trust shall be classified as a partnership for federal income tax
purposes, and (c) shall have received the specific written Consent to such
admission of a Majority in Interest of the Beneficiaries.
If the Managing Trustee dissolves, terminates, is adjudicated bankrupt, or
otherwise becomes incapable of performing the duties or exercising the
responsibilities of the Managing Trustee, or is removed pursuant to a vote of
the Beneficiaries in accordance with Article XI of the Trust Agreement, the
Managing Trustee shall be deemed to have been removed as a Trustee upon the date
of such occurrence. In the event of the Managing Trustee's removal or
resignation from any one or more of the Trusts, it will transfer its Managing
Trustee Interest to any Substitute Managing Trustee for consideration equal to
86.5% of the fair market value of that portion of its Managing Trustee Interest
transferred.
Indemnification of Managing Trustee
The Trust is required to indemnify the Managing Trustee and its Affiliates
for any expenses reasonably incurred by them in any action, suit or proceeding
to which they are a party by reason of the fact that they are or were performing
their duties under the Trust Agreement, provided such persons were acting on
behalf of, or in the course of performing services for, the Trust, such persons
determined, in good faith, that such course of conduct was in the best interests
of the Trust, such conduct did not constitute misconduct or negligence and any
amounts payable are recoverable only out of the assets of the Trust. The Trust
may not indemnify the Managing Trustee or such other persons for any action
arising from a violation of the federal or state securities laws, rules or
regulations, unless certain conditions are satisfied, as set forth in the Trust
Agreement. In addition, each Trust Agreement contains provisions limiting the
personal liability of the Delaware Trustee and Affiliates of the Managing
Trustee. (See "FIDUCIARY RESPONSIBILITY -- Indemnification of Trustees and Their
Affiliates.")
Certain Rights of Managing Trustee With Respect to the Interests
The Managing Trustee, without the Consent of any Beneficiary, may impose
restrictions on the transferability of Interests and may take other actions with
respect to the manner in which Interests are transferred as it deems necessary
or appropriate in order to preserve the status of the Trust as an entity taxable
as a partnership for federal income tax purposes, to prevent the Trust from
being terminated for federal income tax purposes, or to prevent the Trust from
being treated as a publicly traded partnership. In purchasing the Interests,
each Beneficiary grants to the Managing Trustee a power of attorney to amend the
Trust Agreement to accomplish the foregoing.
81
<PAGE>
Liability of the Beneficiaries
Under the Trust Agreement and the Delaware Business Trust Act (the
"Business Trust Act"), the Beneficiaries and the Special Beneficiary shall be
entitled to the same limitation on personal liability extended to corporate
stockholders of Delaware corporations. Accordingly, except to the extent of
their Capital Contributions and that Foreign Beneficiaries may have liability to
the Managing Trustee and the Trusts as described below, the Beneficiaries are
not responsible for a Trust's obligations. (See "RISK FACTORS -- Liability of
Beneficiaries.") However, a Trust Beneficiary may be liable to the Trust for an
amount equal to any Distribution made to such Trust Beneficiary if, after the
Distribution is made, the then fair market value of the remaining assets of the
Trust is not sufficient to pay its then outstanding liabilities.
The principles of law governing the limitation of liability of
beneficiaries of a business trust have not been authoritatively established as
to business trusts organized under the law of one jurisdiction but operating or
owning property, incurring obligations or having beneficiaries resident in other
jurisdictions. Accordingly, there is the risk that the limited liability of the
Trust Beneficiaries will not be respected in certain jurisdictions. (See "RISK
FACTORS -- Limited Liability of Beneficiaries is Not Clearly Established.")
Under the Trust Agreement, each Beneficiary who is a Foreign Beneficiary
will be required to indemnify the Trust and the Managing Trustee for any costs
or expenses incurred by the Trust or the Managing Trustee in connection with the
withholding requirements applicable to Foreign Beneficiaries under Sections
1441, 1442 and 1446 of the Code. (See "FEDERAL TAX CONSIDERATIONS -- Investment
by Foreign Beneficiaries".)
Voting Rights
Beneficiaries and the Special Beneficiary have no right to participate in
the management or control of a Trust's business. However, the Trust Agreement
does grant limited voting rights to the Beneficiaries. Each Class A Beneficiary
and Class B Beneficiary is entitled to cast one vote for each Interest owned by
him. The Managing Trustee and its Affiliates, including the Special Beneficiary,
will have voting rights with respect to any Interests owned by them; provided
that the Managing Trustee and its Affiliates may not vote their Class A
Interests with respect to their compensation pursuant to the Trust Agreement or
regarding any transaction between the Trust and the Managing Trustee or its
Affiliates. The Special Beneficiary, however, will have the right to vote any
Class B Subordinated Interests acquired by it with respect to any matter
regarding the Trust, including voting on the withdrawal or removal of the
Managing Trustee.
Under the Trust Agreement, a Majority in Interest of the Beneficiaries (as
such term is defined below) may (1) amend the Trust Agreement, subject to
certain limitations described below under "Amendment of the Trust Agreement",
(2) remove the Managing Trustee and elect a replacement therefor, (3) terminate
the Trust, or (4) approve or disapprove the sale of all or substantially all the
Assets and other assets of the Trust in a single sale or in multiple sales in
the same 12-month period except in the orderly liquidation and winding up of the
business of the Trust upon its termination and dissolution. (See "RISK FACTORS
- -- Limited Liability of Beneficiaries is Not Clearly Established.")
The term "Majority Consent" means the Consent of Beneficiaries holding
more than 50% in the aggregate of the Class A Interests and the Class B
Subordinated Interests held by all Beneficiaries; provided, however, that in
cases where a Class A Beneficiary who is also a Managing Trustee or an Affiliate
thereof is not entitled to participate in the Consents or votes of the
Beneficiaries, the foregoing calculation shall exclude the Interests owned by
such Beneficiary.
82
<PAGE>
Meetings
The Managing Trustee may at any time call a meeting of the Beneficiaries
and is required to call such a meeting following receipt of a written request
signed by Beneficiaries owning 10% or more of the Interests in the aggregate
held by all Beneficiaries as of the date of the written request. The Trust does
not intend to hold annual or other periodic meetings of Beneficiaries. The
Managing Trustee may call for a vote without a meeting.
Amendment of the Trust Agreement
If an amendment to the Trust Agreement is proposed by the Managing Trustee
or by a Majority in Interest of the Beneficiaries as explained above under
"Voting Rights", the Managing Trustee is required to submit to the Beneficiaries
a statement of the proposed amendment and its purpose. The Managing Trustee may
also include in such submission its recommendations as to the proposed
amendment. Upon obtaining Majority Consent, such amendments shall take effect,
except that no such amendment shall increase the liability of any Participant or
adversely affect any Participant's share of Distributions or allocations of
Profits or Losses without, in each case, the approval of the Participant
involved.
A Majority in Interest of the Beneficiaries, without the concurrence of
the Trustees, may (a) amend the Trust Agreement, subject to the provisions of
the Trust Agreement governing voting rights and to the conditions that such
amendment (i) may not cause the Beneficiaries to lose the limited liability
accorded them by the Business Trust Act and (ii) may not, without the specific
written consent of the Managing Trustee (which may not be unreasonably
withheld), add to the duties or diminish the rights of the Managing Trustee or
its Affiliates as set forth in the Trust Agreement or reduce the compensation to
which the Managing Trustee and its Affiliates are entitled for services to be
provided under the Trust Agreement, (b) terminate the Trust, (c) remove the
Managing Trustee and elect a replacement therefor, and (d) approve or disapprove
the sale of all or substantially all of the Assets of the Trust in a single sale
or in multiple sales in the same 12-month period, except in the orderly
liquidation and winding up of the business of the Trust upon its termination and
dissolution.
The Managing Trustee has the right, without prior notice to, or the
Consent of, any Beneficiary, to (i) add to the representations, duties and
obligations of the Managing Trustee or surrender any rights or powers granted to
it under the Trust Agreement for the benefit of the Beneficiaries; (ii) preserve
the status of the Trust as an entity taxable as a partnership for federal income
tax purposes; (iii) correct any mistake, omission or inconsistency or cure
ambiguities or make any other provisions in the Trust Agreement for the benefit
of the Beneficiaries; (iv) delete or add provisions to the Trust Agreement
required by the Securities and Exchange Commission or other federal agencies,
the National Association of Securities Dealers, Inc., or any state "Blue Sky
Commission" or other state agency or any judicial authority or similar such
official; (v) permit the Interests to fall within an exemption from the
definition of "plan assets" contained in Section 2510.3-101 of Title 29 of the
Code of Federal Regulations; (vi) effect amendments contemplated under Sections
4.2(a)(viii), 4.2(a)(x) or 8.5(b) of the Trust Agreement or as may be necessary
to effect the provisions of Section 9.5 of the Trust Agreement; and (vii) make
any other amendments which do not adversely affect the rights of the
Beneficiaries. The Managing Trustee may not amend the Trust Agreement to change
the voting rights of the Beneficiaries without Majority Consent, unless such a
change is necessary to preserve the status of the Trust as a partnership for
federal income tax purposes or to conform to any operative case law that
establishes in the opinion of Trust Counsel that such change is necessary to
maintain limited liability of the Beneficiaries for purposes of the Business
Trust Act.
Transferability of Interests
Subject to significant restrictions on transferability of Interests
contained in each Trust
83
<PAGE>
Agreement (summarized below) to prevent treatment of the Trust as a "publicly
traded partnership" taxable as a corporation and the right of the Managing
Trustee to place certain additional restrictions on the transferability of
Interests as described above under "Certain Rights of Managing Trustee with
Respect to the Interests", each Beneficiary may transfer all or a portion of his
Class B Subordinated Interests (but not fewer than the Minimum Investment
Amount)* to another Person (the "Transferee"), upon satisfaction of the
following conditions: (i) the Managing Trustee consents to the transfer; (ii)
the Transferee delivers to the Managing Trustee at least 15 days in advance of
the effective date of the transfer a duly executed and completed transfer
application, in a form satisfactory to the Managing Trustee, in which the
Transferee agrees to be bound by the Trust Agreement and makes various
representations, including whether or not he is an Eligible Citizen; (iii) the
Transferee satisfies the investor suitability standards applicable to the
original offering*; (iv) the transfer complies with all applicable laws and
regulations; (v) the Transferee executes a power of attorney described below;
and (vi) the Transferee pays a transfer fee not to exceed $100 per transfer to
cover the expenses incurred in connection therewith. The Trust Agreement
provides that Class B Subordinated Interests may not be transferred under a
number of circumstances, including unless the Managing Trustee shall give its
express written consent, if the transfer would cause the assets of the Trust to
be considered "plan assets" under ERISA and the regulations thereunder, the
transfer would cause the Trust to fail to qualify under the "safe harbor" tests
for treatment as other than a "publicly traded partnership" or the transfer
would adversely affect the registration of any aircraft registered with the FAA
or the documentation of any vessel documented under the laws of the United
States. (See "INVESTORS SUITABILITY STANDARDS," "FEDERAL TAX CONSIDERATIONS --
Trust Status: Free Transferability of Interests" and "ERISA AND OTHER
CONSIDERATIONS.")
The transfer of Class B Subordinated Interests does not require the
consent of any other Beneficiary. Transferees of Interests will be recognized
monthly as of the first day of the calendar month following the month in which
Interests are transferred to them for purposes of prospective Distributions and
allocations of Profits and Losses. Since Distributions are made on a monthly
basis, any Beneficiary who transfers his Interests prior to the end of the
fiscal month in which the transfer is recognized must take into account in
establishing the sale price for his Interests that the transferor (not the
transferee) will receive such Distributions when made by the Trust prior to the
recognition of the transfer. The rights of a Transferee who does not become a
Substitute Beneficiary (as provided below) will be limited to the receipt of his
share of Profits, Losses and Distributions, as determined under each Trust
Agreement.
Until the transfer of the Interests has been registered on the books of
the Trust, the Trust will continue to treat the owner of record of the Interests
as the absolute owner for all purposes. The transfer of Interests may result in
adverse federal income tax consequences, including the recognition of income in
excess of cash received. Beneficiaries are advised to consult their tax advisors
prior to requesting a transfer of Interests.
Pursuant to the terms of the Subscription Agreement or transfer
application, each Beneficiary or Transferee will be required to appoint the
Managing Trustee as his attorney-in-fact to make, execute, file and/or record:
(i) documents relating to the Trust and its business operations required by or
appropriate under the laws of any jurisdiction; (ii) any amendments to the Trust
Agreement which the Managing Trustee is authorized to make as described under
"SUMMARY OF TRUST AGREEMENT -- Amendment of the Trust Agreement;" and (iii) all
other instruments deemed necessary or appropriate by the Managing Trustee to
carry out the provisions of the Trust Agreement.*
A Transferee may become a Substitute Class B Beneficiary if all of the
following conditions are met: (i) the Interests were transferred in accordance
with the provisions outlined above; (ii) the Managing Trustee consents in
writing to such substitution (which consent may be withheld for any reason in
the sole discretion of the Managing Trustee); (iii) the Transferee executes an
instrument reasonably satisfactory to the Managing Trustee accepting and
adopting the terms and provisions of the
84
<PAGE>
Trust Agreement; and (iv) in the case of transfers other than by operation of
law, the transferor states his intention in writing to have his Transferee
become a Substitute Beneficiary. If such conditions are met, a Transferee will
become a Substitute Beneficiary within 30 days after the Managing Trustee
consents to the admission of the Substitute Beneficiary (the "Recording Date").
The records of the Trusts shall be amended to reflect any such substitution on
or prior to the Recording Date; provided, however, that the records of the Trust
shall be amended at least once each calendar quarter to reflect the admission of
Substitute Beneficiaries.
"ATTENTION CALIFORNIA RESIDENTS: IT IS UNLAWFUL TO CONSUMMATE A SALE OR
TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES."
Change of Status of Beneficiary
In the event that (i) the Managing Trustee determines that a Beneficiary
or a Person for whom a Beneficiary is acting as nominee who has previously
represented to the Trust that he is an Eligible Citizen is no longer an Eligible
Citizen or (ii) the Beneficiary fails to certify his citizenship to the Managing
Trustee at the time that he acquires his Interests, the Managing Trustee may
require that the status of the Beneficiary be changed to that of a "Non-Eligible
Beneficiary". In the event that the number of Non-Eligible Beneficiaries exceeds
80% of the maximum number of non-eligible Persons permitted to be Trust
Beneficiaries pursuant to applicable laws and regulations governing the
registration of any Asset owned by the Trust, the Managing Trustee may, in its
sole discretion, expend Trust assets to redeem the Interests of the Non-Eligible
Beneficiaries. Any such Interests redeemed shall be redeemed by the Trust at a
price equal to 80% of the Non-Eligible Beneficiary's original Capital
Contribution as reduced by any amounts returned to the Non-Eligible Beneficiary
as uninvested Capital Contributions, minus all Distributions made to the
Non-Eligible Beneficiary, pro-rated by the number of Interests redeemed.
Distributions and Allocations
A summary of the Trust Agreement provisions relating to cash distributions
and allocations of Profits and Losses is contained in the section entitled
"Trust Distributions and Allocations."
Other Transactions Involving the Managing Trustee and its Affiliates
Except as specifically permitted by the Trust Agreement, the Managing
Trustee is prohibited from entering into any agreements, contracts or
arrangements on behalf of a Trust with the Advisor or any of its Affiliates
(including the Managing Trustee itself). Further, in connection with any
agreement entered into by a Trust with the Advisor or any Affiliate, no rebates
or "give-ups" may be received by the Advisor or any such Affiliate, nor may the
Advisor or any such Affiliate participate in any reciprocal business
arrangements which would have the effect of circumventing any of the provisions
of the Trust Agreement.
No Withdrawal of Capital
No Trust Beneficiary has the right to request withdrawal of his capital
from a Trust. No Trust Beneficiary is entitled to demand or receive any return
of his capital. No Trust Beneficiary has any priority over any other Beneficiary
as to the return of his capital.
85
<PAGE>
Roll-Up
The Trusts may not participate in any proposed Roll-Up (generally defined
as a transaction involving the acquisition, merger, conversion or consolidation
of the Trust and the issuance of securities in a new entity (the "Roll-Up
Entity")) if any of the following conditions are present: (i) the proposed
Roll-Up would result in the Beneficiaries having voting rights in the Roll-Up
Entity which are less than those contained in the Trust Agreement; (ii) the
proposed Roll-Up includes provisions which would materially impede or frustrate
the accumulation of shares by any purchaser of the securities in the Roll-Up
Entity (except to the minimum extent necessary to preserve the tax status of the
Roll-Up Entity); (iii) the proposed Roll-Up would limit the ability of a
Beneficiary to exercise the voting rights of his securities of the Roll-Up
Entity on the basis of the number of Interests held by the Beneficiary; (iv) the
Beneficiaries' rights of access to the records of the Roll-Up Entity will be
less than those provided in the Trust Agreement; (v) any costs of the proposed
Roll-Up would be borne by the Trust if the proposed Roll-Up is not approved by
the Beneficiaries; or (vi) the Person sponsoring the Roll-Up fails to offer the
Beneficiaries who vote "no" the choice of (a) accepting the securities of the
Roll-Up Entity; or (b) one of the following: (I) remaining as Beneficiaries in
the Trusts on the same terms and conditions as previously existed; or (II)
receiving cash in an amount equal to the Beneficiaries' pro-rata share of the
appraised value of the net assets of the Trust. If the Trust may participate in
a proposed Roll-Up, an appraisal of all assets of the Trust must be obtained
from an independent expert. A Roll-Up does not include a transaction involving
the conversion to corporate, trust, partnership or association form of any
single Trust if, as a consequence of the transaction, there will be no
significant change in (A) Beneficiary's voting rights, (B) the term of the
Trust, (C) Sponsor compensation and (D) the investment objectives of the Trust.
Term and Termination
The Trust will continue until December 31 of the eleventh year following
its Closing (i.e. until December 31, 2003). The Trust may be terminated at an
earlier date if any of the following events occurs: (1) the withdrawal of the
sole Managing Trustee (see "Resignation of the Managing Trustee", above) unless
a Substitute Managing Trustee admitted with Majority Consent agrees to continue
the Trust business; (2) an election to dissolve the Trust made in writing by the
Managing Trustee with Majority Consent, or by vote of a Majority in Interest of
the Beneficiaries without action by the Managing Trustee; (3) the sale or other
disposition of all or substantially all of the Assets of the Trust unless the
Managing Trustee elects to continue the Trust business for the purpose of the
receipt and collection of any other consideration to be received in exchange for
the Assets of the Trust; (4) the entry of a final decree of dissolution of the
Trust by a court of competent jurisdiction; or (5) any other event which causes
the dissolution or winding up of the Trust under the Business Trust Act.
Upon dissolution of the Trust, the Managing Trustee (or its trustees,
receivers or successors) will proceed with the liquidation of the Trust Assets
(including, without limitation, the sale or other disposition of any remaining
Assets and cancellation of the Certificate of Trust). The net proceeds of
liquidation will first be applied to the payment of all debts and other
obligations of the Trust, and all remaining net proceeds, if any, will be
distributed to the Managing Trustee, the Special Beneficiary and the
Beneficiaries as described under "TRUST DISTRIBUTIONS AND ALLOCATIONS --
General."
Fiscal Year
Unless the Managing Trustee otherwise determines in the future, the fiscal
year of the Trust will end on December 31 of each year. Should the Managing
Trustee decide to change the fiscal year of any Trust, it will seek to obtain
any required approvals from the Service. If such approval is obtained (or not
then required), the Managing Trustee will give prompt notice to the
Beneficiaries of the change in fiscal year.
86
<PAGE>
- --------------------------------------------------------------------------------
REPORTS TO BENEFICIARIES
- --------------------------------------------------------------------------------
The Managing Trustee will furnish to each Class B Beneficiary of record as
of a date specified in each Trust Agreement the following reports pertaining to
Trust operations during each fiscal year:
Name of Report Basic Contents When Furnished
-------------- -------------- --------------
Annual Report Audited balance sheet as Within 120 days after
of the end of such fiscal the end of each fiscal
year and statements of year
operations,
Beneficiaries' equity and
cash flows for such
fiscal year, all prepared
in accordance with
generally accepted
accounting principles and
accompanied by an
auditor's report and
statements (which need
not be audited) of Cash
From Operations,
Distributable Cash From
Operation, Cash From
Sales or Refinancings and
Distributable Cash From
Sales or Refinancings and
Distributions per Class B
Subordinated Interest.
Quarterly Report Unaudited condensed Within 60 days after the
balance sheet and end of each of the first
statements of cash flows three fiscal quarters of
and operations each fiscal year
Tax Information Information reflecting By March 15 of each year
Trust operations for use
by Beneficiaries in
preparation of federal
income tax returns
Financial information contained in all reports to Class B Beneficiaries
will be prepared on an accrual basis of accounting in accordance with generally
accepted accounting principles and will include, where applicable, a
reconciliation to the information furnished to Class B Beneficiaries for federal
income tax purposes. The audited financial statements contained in the annual
report will be accompanied by a report of the Accountants.
Each annual and quarterly report will also contain a narrative description
of the Trust's Assets and operations including a description of any material
events with respect to the Trust's revenues, expenses, contractual obligations
or contingent liabilities, the amount of all fees and other compensation paid or
accrued by the Trust to the Managing Trustee and its Affiliates (and a
description of the services rendered or to be rendered by the Managing Trustee
and its Affiliates for such fees), and a description of any new agreements
entered into by the Trust with the Managing Trustee and its Affiliates during
the fiscal period covered in the report.
87
<PAGE>
Beneficiaries are entitled to receive a Form K-1 from EFG on or before
April 1 of each year describing Trust activity during the year and setting forth
financial and tax information with respect to the Assets and the Leases.
The Class B Subordinated Interests will be registered under and subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended.
Periodic reports containing financial and other information will be filed with
the Securities and Exchange Commission as required.
- --------------------------------------------------------------------------------
THE OFFERING
- --------------------------------------------------------------------------------
Terms of the Offer
Each Record Date Holder is being issued 1.38 Rights for each Class A
Interest (or, in the case of the Special Beneficiary, for each relative economic
equivalent of a Class A Interest) owned on the Record Date. No fractional Rights
will be issued in the Offering. The number of Rights issued to a Record Date
Holder of other than a whole number of Class A Interests (or their relative
economic equivalents) will be determined by rounding up to the nearest whole
number if the fractional amount owned is greater than or equal to .5 and
rounding down to the nearest whole number if the fractional amount owned is less
than .5. The Rights entitle the holders thereof to acquire at the Subscription
Price one Class B Subordinated Interest for each Right held. The Rights are
evidenced by Subscription Certificates that are being mailed with this
Prospectus to Record Date Holders other than Foreign Record Date Holders.
Each Rights Holder will be required to make a minimum purchase (the
"Minimum Purchase Amount") equal to the lesser of (a) the amount of Class B
Subordinated Interests which he is permitted to purchase pursuant to the Rights
granted to him or (b) 400 Class B Subordinated Interests ($2,000) for IRA's or
other Qualified Plans or 1,000 Class B Subordinated Interests ($5,000) for all
other Investors (with a higher minimum purchase in certain states).
Completed Subscription Certificates may be delivered to the Subscription
Agent (described below) at any time during the Subscription Period, which
commences __________, 1997 and ends at 5:00 p.m., Boston time, at Closing,
unless extended by the Trust. All Rights may be exercised immediately upon
receipt and until 5:00 p.m., Boston time, on the date of Closing .
Rights may be executed by completing a Subscription Certificate in the
form enclosed and delivering it, together with payment in full, by means of a
money order or check, to the Subscription Agent. If a Rights Holder chooses to
send a Subscription Certificate, such Certificate must be accompanied by payment
in full. The method by which Rights may be exercised and Class B Subordinated
Interests paid for is set forth under "Exercise of Rights" and "Payment for
Securities" below. An example demonstrating the exercise of Rights, including
the Over-Subscription Privilege, is set forth under "Example of Exercise of
Rights and the Over-Subscription Privilege."
The Trust does not have the right to withdraw this Offering after the
Rights have been distributed.
Subscription Price
The Subscription Price for Class B Subordinated Interests subscribed for
through the exercise of Basic Subscription Rights and the Over-Subscription
Privilege is $5.
88
<PAGE>
No Modification or Revocation
ONCE A HOLDER OF RIGHTS HAS PROPERLY EXERCISED HIS OR HER BASIC
SUBSCRIPTION RIGHTS AND THE OVER-SUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY
NOT BE MODIFIED OR REVOKED.
Expiration of Offering
This Offering will expire at 5:00 p.m., Boston time, on the date of
Closing. Rights will expire on the date of Closing and thereafter may not be
exercised.
Subscription Agent
The Subscription Agent is ________________, a _________ corporation. The
Subscription Agent is not affiliated with either the Trust or EFG. The
Subscription Agent will receive, for its administration, processing, invoicing
and other services as subscription agent, a fee estimated to be approximately
$1,280, including reimbursement for all out-of-pocket expenses related to this
Offering. Questions regarding the Subscription Certificates should be directed
to the Subscription Agent at (800) ____________, ext.______; Rights Holders may
also consult their financial advisors. Signed Subscription Certificates should
be sent by mail, hand, express mail or overnight courier, together with payment
of the Subscription Price in full to _____________________________________,
Attn: ___________. See "Payment for Securities."
Any questions or requests for assistance may be directed to the
Subscription Agent at (800)_________, ext. _____ or the Trust at (617)_______.
Over-Subscription Privilege
If less than all of the Basic Subscription Rights are exercised, Class B
Subordinated Interests not subscribed for by Exercising Rights Holders will be
offered, by means of the Over-Subscription Privilege, to Exercising Rights
Holders who wish to acquire additional Class B Subordinated Interests. The
Over-Subscription Privilege may be exercised by any Rights Holder who exercised
any of his or her Basic Subscription Rights. Rights Holders should indicate, on
the Subscription Certificate which they submit with respect to the exercise of
their Basic Subscription Rights, how many additional Class B Subordinated
Interests they are willing to acquire pursuant to the Over-Subscription
Privilege. If all Basic Subscription Rights are exercised, the Over-Subscription
Privilege will not be granted.
The available Class B Subordinated Interests will be allocated pro rata
among those who over-subscribed according to the aggregate number of Basic
Subscription Rights exercised. The percentage of remaining Class B Subordinated
Interests each Rights Holder may acquire may be rounded up or down to result in
delivery of whole Class B Subordinated Interests. The allocation process may
involve a series of allocations in order to assure that the total number of
Class B Subordinated Interests available pursuant to the Over-Subscription
Privilege is distributed on a pro rata basis. In the event a Rights Holder
exercising the Over-Subscription Privilege is allocated less than the number of
Class B Subordinated Interests that such Holder subscribed for, excess
subscription payments will be promptly refunded. See "Payment for Securities"
below. An example demonstrating the exercise of Rights, including the
Over-Subscription Privilege, is set forth under "Example of Exercise of Rights
and the Over-Subscription Privilege."
The Special Beneficiary and its Affiliates who will become Rights Holders
by virtue of their ownership interest in the Trust on the Record Date currently
intend to subscribe for and purchase
89
<PAGE>
the amount of Class B Subordinated Interests to which they are entitled through
the exercise of their Basic Subscription Rights. In addition, the Special
Beneficiary currently intends to subscribe for a substantial number of Class B
Subordinated Interests pursuant to the Over-Subscription Privilege, and, subject
to proration as described above, to purchase such additional Class B
Subordinated Interests. There can be no assurance, however, that the Special
Beneficiary or such Affiliates will in fact carry out such current intentions.
If no Rights are exercised by Rights Holders other than the Special Beneficiary
and its Affiliates, following the Offering such entities will beneficially own
in the aggregate all of the Class B Subordinated Interests that are issued.
The Trust has been advised by the Special Beneficiary and its Affiliates
who will become Rights Holders that such entities intend to acquire any Class B
Subordinated Interests that they acquire in connection with the Offering solely
for investment purposes. The Special Beneficiary has further advised the Trust
that in the event it purchases a substantial number of Class B Subordinated
Interests pursuant to the Over-Subscription Privilege, it will have to borrow
funds to do so, and that it anticipates that in connection with such a borrowing
it will have to pledge its Class B Subordinated Interests as collateral. If the
Special Beneficiary's Class B Subordinated Interests are used as collateral and
the Special Beneficiary is unable to repay such borrowing, the Special
Beneficiary or the lender may be forced to attempt to sell such Class B
Subordinated Interests to repay the borrowing. No prediction can be made as to
the effect, if any, that such sales of Class B Subordinated Interests or the
availability of Class B Subordinated Interests for sale will have on the market
price of the Class B Subordinated Interests prevailing from time to time.
Nevertheless, attempts to sell substantial amounts of the Class B Subordinated
Interests could adversely affect prevailing prices. As noted above, it is not
anticipated that a public market for the resale of the Class B Subordinated
Interests will develop.
Exercise of Rights
Rights may be exercised by filling in and signing the Subscription
Certificate which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with full payment of the
Subscription Price for the Class B Subordinated Interests as described below
under "Payment for Securities." Completed Subscription Certificates must be
received by the Subscription Agent at the address set forth above. An example
demonstrating the exercise of Rights, including the Over-Subscription Privilege,
is set forth under "Example of Exercise of Rights and the Over-Subscription
Privilege."
Nominees who hold Class A Interests for the account of others, such as
brokers or trustees should notify the respective beneficial owners of such Class
A Interests as soon as possible to ascertain such beneficial owners' intentions
and to obtain instructions with respect to the Rights. If the beneficial owner
so instructs, the nominee should complete the Subscription Certificate and
submit it to the Subscription Agent with the proper payment. In addition,
beneficial owners of Class A Interests or Rights held through such a nominee
should contact the nominee and request the nominee to effect transactions in
accordance with the beneficial owner's instructions.
Exercise of Over-Subscription Privilege
Any Exercising Rights Holder may participate in the Over-Subscription
Privilege, if it is granted, by indicating on his or her Subscription
Certificate the number of Class B Subordinated Interests he or she is willing to
acquire pursuant thereto. There is no limit on the number of Class B
Subordinated Interests that Exercising Rights Holders may seek to subscribe for
pursuant to the Over-Subscription Privilege. The number of Class B Subordinated
Interests issued to each Rights Holder participating in the Over-Subscription
Privilege will be allocated as described above under "Over-Subscription
Privilege." An example demonstrating the exercise of Rights, including the
90
<PAGE>
Over-Subscription Privilege, is set forth under "Example of Exercise of Rights
and the Over-Subscription Privilege."
Example of Exercise of Rights and the Over-Subscription Privilege
If you owned 200 Class A Interests you would receive 276 Rights entitling
you to subscribe for up to 276 Class B Subordinated Interests. If you exercised
any or all of your 276 Rights, you would be entitled to participate in the
Over-Subscription Privilege.
Assume, for example, that you decided to exercise all of the Rights
granted to you and also purchase an additional 50 Class B Subordinated Interests
pursuant to exercise of your Over-Subscription Privilege. You would indicate on
your Subscription Certificate which is enclosed with this Prospectus, in Section
I, Item A "Basic Subscription Rights," that you were exercising 276 Rights to
acquire 276 Class B Subordinated Interests and in Item B "Over-Subscription
Privilege" that you were requesting an additional 50 Class B Subordinated
Interests.
In calculating the amount of the payment to be tendered along with the
executed Subscription Certificate, as per Item C, include the total Subscription
Price payable for both the number of Class B Subordinated Interests subscribed
for through the exercise of Basic Subscription Rights and the number of Class B
Subordinated Interests subscribed for through the exercise of the
Over-Subscription Privilege. In the above example this would equal 276 Class B
Subordinated Interests times the Subscription Price for the Basic Subscription
Rights exercised plus 50 Class B Subordinated Interests times the Subscription
Price for the exercise of the Over-Subscription Privilege for a total payment of
$1,630.00. You will receive a pro rata allocation of such amount determined by
the number of Basic Subscription Rights you exercised. Any excess funds paid by
you will be returned to you promptly. Notification of the number of Class B
Subordinated Interests purchased by you will be mailed promptly following the
Closing of the Offering. See "Payment for Securities" below.
The foregoing example is for illustrative purposes only. Exercising Rights
Holders participating in the Over-Subscription Privilege are entitled to
purchase as many additional Class B Subordinated Interests as they desire
(subject to proration), which may be more or less than the number of Class B
Subordinated Interests such Exercising Rights Holder acquired pursuant to
exercise of his or her Basic Subscription Rights.
Payment for Securities
Payment for Class B Subordinated Interests subscribed for pursuant to the
exercise of Basic Subscription Rights and the Over-Subscription Privilege by
Exercising Rights Holders must be tendered to the Subscription Agent along with
a properly executed Subscription Certificate on or prior to the date of Closing.
Each Exercising Rights Holder should send the Subscription Certificate
together with payment in full for the Class B Subordinated Interests subscribed
for through exercise of his or her Basic Subscription Rights and the maximum
number of Class B Subordinated Interests the Exercising Rights Holder wishes to
subscribe for pursuant to the Over-Subscription Privilege to the Subscription
Agent based upon the Subscription Price of $5.00. Subscriptions will be accepted
when payment, together with the executed Subscription Certificate, is received
by the Subscription Agent at _____________, Attn: __________; such payment and
Subscription Certificate must be received by the Subscription Agent no later
than 5:00 p.m., Boston time, on the date of Closing. The Subscription Agent will
deposit all checks received by it for the purchase of Class B Subordinated
Interests into a segregated interest-bearing account of the Trust pending
proration and distribution of the Class B Subordinated Interests. ALL PAYMENTS
MUST BE IN U.S. DOLLARS BY MONEY
91
<PAGE>
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
______________, AS SUBSCRIPTION AGENT FOR AFG INVESTMENT TRUST A, AND MUST
ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE
TO BE ACCEPTED AND BE RECEIVED BY 5:00 P.M., BOSTON TIME, ON THE EXPIRATION
DATE.
Within 15 business days following the Closing, the Subscription Agent will
send to each Exercising Rights Holder (or, if the Class A Interests are held by
a nominee, to such nominee) a notice as to the number of Class B Subordinated
Interests purchased pursuant to exercise of the Basic Subscription Rights and,
if applicable, the Over-Subscription Privilege along with a letter explaining
the allocation of Class B Subordinated Interests pursuant to the
Over-Subscription Privilege. Any excess payment to be refunded by the Trust to a
Rights Holder who is not allocated the full amount of Class B Subordinated
Interests subscribed for pursuant to the Over-Subscription Privilege will be
mailed by the Subscription Agent as promptly as practicable. All payments by a
Rights Holder must be in United States dollars by money order or check drawn on
a bank located in the United States and payable to ____________, as Subscription
Agent for AFG Investment Trust A.
Issuance of Class B Subordinated Interests purchased is subject to
collection of checks and actual payment.
If an Exercising Rights Holder who acquires Class B Subordinated Interests
through the exercise of his or her Basic Subscription Rights or pursuant to the
Over-Subscription Privilege does not make payment of any amounts due, the Trust
and the Subscription Agent reserve the right to take any or all of the following
actions: (i) find other holders of Class A Interests for such subscribed and
unpaid for Class B Subordinated Interests; (ii) apply any payment actually
received by it toward the purchase of the greatest whole number of Class B
Subordinated Interests which could be acquired by such Holder upon exercise of
his or her Basic Subscription Rights and/or pursuant to the Over-Subscription
Privilege; and/or (iii) exercise any and all other rights or remedies to which
it may be entitled, including, without limitation, the right to set-off against
payments actually received by it with respect to such subscribed Class B
Subordinated Interests.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE TRUST WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., BOSTON TIME,
ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST
FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Trust, whose determinations
will be final and binding. The Trust in its sole discretion may waive any defect
or irregularity or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Trust
determines in its sole discretion. The Trust will not be under any duty to give
notification of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification.
92
<PAGE>
Foreign Record Date Unitholders
Subscription Certificates will not be mailed to Foreign Record Date
Holders. The Rights to which such Subscription Certificates relate will be held
by the Subscription Agent for such Foreign Record Date Holders' accounts until
instructions are received to exercise or not exercise the Rights. If no
instructions have been received by 12:00 noon, Boston time, three business days
prior to the date of Closing, they will be deemed unexercised.
- --------------------------------------------------------------------------------
ERISA AND OTHER CONSIDERATIONS
- --------------------------------------------------------------------------------
The following discussion summarizes certain material investment concerns
under the Employee Retirement Income Securities Act of 1974, as amended
("ERISA"), which may be relevant to an investment in the Class B Subordinated
Interests by any qualified pension, profit-sharing or stock bonus plan
(including a Keogh Plan) and an IRA (a "Qualified Plan"). These considerations
include, but are not limited to, (i) the impact of fiduciary obligations on an
investment in the Interests, (ii) the risk that the assets of the Trusts might
be deemed "plan assets" under ERISA, (iii) the limitations on transactions
between entities or individuals and Qualified Plans for which they serve as
fiduciaries and (iv) the impact of an investment in the Interests on the
obligation of fiduciaries of certain types of Qualified Plans to determine
annually the "current value" of the assets of such plan. An investment by a
Qualified Plan or other tax-exempt organization will cause such tax-exempt
investor to have "unrelated business taxable income" to the extent the Trust has
taxable income. Because of the complexity of the ERISA regulations and related
considerations, investors which are Qualified Plans are urged to consult with
their tax advisor with regard to an investment in the Interests.
General
Qualified Plans Other Than IRA's. Generally, the fiduciary provisions of
Sections 404, 405 and 406 of ERISA apply to investments made by Qualified Plans.
These sections generally do not prohibit Qualified Plans from investing in any
specific type of investment. ERISA fiduciary requirements can be described in
three basic categories. First, ERISA requires that a fiduciary carry out his
duties solely in the interests of the Qualified Plan participants and
beneficiaries. Accordingly, in considering an investment in the Interests of the
Trust, fiduciaries of a Qualified Plan should consider whether (i) the
investment is in accordance with the documents and instruments governing the
Plan; (ii) the investment provides sufficient diversification and liquidity and
is otherwise prudent; (iii) the investment can be valued annually, if required;
(iv) the investment would result in any prohibited transactions; (v) the Trust
would hold plan assets under ERISA and the Department of Labor regulations; and
(vi) the investment is advisable in view of the unrelated business taxable
income which the Trust expects to generate. (See "FEDERAL TAX CONSIDERATIONS --
Investment by Qualified Pension, Profit-Sharing and Stock Bonus Plans and
Individual Retirement Accounts and by Other Tax-Exempt Organizations.") An
investment may be prudent notwithstanding the existence of unrelated business
taxable income.
Second, ERISA requires that all plan assets be held in trust. Regulations
promulgated by the Department of Labor provide that even if the underlying
assets of an entity in which a plan invests are treated as "plan assets," the
trust requirements will be satisfied if the indicia of ownership in the entity
(the Interests) are held in trust on behalf of the plan by one or more
trustees/custodians. Accordingly, the trustee/custodian of a Qualified Plan
which purchases Interests should retain and hold in trust all indicia of
ownership by such Qualified Plan of its Interests, including the copy of the
Subscription Agreement, the cancelled check used to make the purchase and
correspondence from the Managing
93
<PAGE>
Trustee confirming the admission of such Qualified Plan as a Beneficiary.
Third, ERISA imposes strict limitations on the nature of allowed
transactions between a Qualified Plan and its Fiduciaries and other Parties in
Interest. Specifically, ERISA prohibits certain sales and other transactions
between a Qualified Plan and a Party in Interest. Fiduciaries,
trustees/custodians and others acting on behalf of a Qualified Plan should be
aware of the final regulations regarding the prohibition under ERISA with
respect to certain transactions involving "plan assets" and Parties in Interest
including Fiduciaries. (29 C.F.R. Section 2510.3-101.) For equity investments,
the final regulations create the presumption that the underlying assets of an
entity are "plan assets" of the Qualified Plans holding interests therein. This
presumption is termed the "look through" rule. The regulations, however, create
certain exceptions to such presumption. The assets of a partnership will not be
deemed to be "plan assets" if the investment in such partnership satisfies one
of the exemptions provided in the final regulations. The effective dates of the
final regulations are contained in Section 2510.3-101(k)(1), which provides that
the final regulations shall generally apply to all "plan asset" determinations
made after March 13, 1987 with respect to plan investments regardless of when
those investments are made. One of the effects of the final regulations is to
impose fiduciary status on certain parties and entities who engage in
transactions with a Qualified Plan.
The final regulations provide an exemption for entities in which the
"equity participation in the entity by benefit plan investors is not
significant" Equity participation is considered to be significant if,
immediately after the most recent acquisition of any equity interest in the
entity, 25% or more of the value of any class of equity interests in the entity
is held by benefit plan investors. This exemption may be applicable to the
Trusts because the Managing Trustee will require that at any time fewer than 25%
of the Interests actually acquired in the Trust will be held by benefit plan
investors.
Accordingly, based upon the foregoing and, in particular, assuming that
fewer than 25% of the Interests will be held by benefit plan investors at any
time, under current law the assets of the Trust will not be considered to be
"plan assets" under ERISA.
Nonetheless, in the event that, in the future, whether because of changes
in the law or regulations transfers to Qualified Plans, misrepresentations by
investors or otherwise, either (x) the assets of the Trust would constitute
"plan assets" for purposes of ERISA or (y) the transactions contemplated under
the Trust Agreement would constitute prohibited transactions under ERISA or the
Code and an exemption for such transactions is not obtainable or not sought by
the Managing Trustee from the Department of Labor, Section 4.2(a)(x) of the
Trust Agreement authorizes the Managing Trustee to restructure the Trust's
activities to the extent necessary to comply with any exemption in any final
plan asset regulation adopted by the Department of Labor or any condition which
the Department of Labor might impose as a condition to granting a prohibited
transaction exemption, including, but not limited to, establishing a fixed
percentage of Interests permitted to be held by Qualified Plans or other
tax-exempt Beneficiaries and/or discontinuing sales to such entities after a
given date. It should be noted that the Managing Trustee is not obligated to
seek an exemption from the Department of Labor. The Managing Trustee is
empowered to amend Section 4.2(a)(x) of each Trust Agreement to the extent it
deems necessary or appropriate in order to comply with any applicable federal or
state legislation, rules or regulations enacted or promulgated or administrative
pronouncements or interpretations and/or judicial interpretations thereof after
the date of the Trust Agreement. Any amendment(s) made by the Managing Trustee
under the circumstances described above shall be deemed to be made pursuant to
the fiduciary obligation of the Managing Trustee to the Trust and the
Beneficiaries. In addition, Section 4.2(c)(i) of each Trust Agreement provides
that the Managing Trustee shall have the right, without the Consent of any
Beneficiary, to acquire Interests to the extent required to prevent the assets
of any Trust from being deemed "plan assets" with respect to Beneficiaries which
are Qualified Plans and to prevent a prohibited transaction from occurring under
ERISA, provided that such Interests shall be acquired at fair market value (as
determined by an independent appraiser retained by the Managing Trustee).
Furthermore, each Trust Agreement
94
<PAGE>
prohibits the transfer of Interests to any Person, without the express written
consent of the Managing Trustee, if such transfer would cause the assets of the
Trust to be considered "plan assets" under ERISA and the regulations thereunder.
ERISA and the Code generally prohibit Fiduciaries of a Qualified Plan from
engaging in transactions involving the assets of such Qualified Plan. Under
ERISA and the Code, any person who exercises any authority or control respecting
the management or disposition of the assets of a plan is considered to be a
Fiduciary of such plan (subject to certain exceptions not here relevant). In
order to prevent the Managing Trustee and the Soliciting Dealers from engaging
in a prohibited transaction as a result of being a Fiduciary with respect to any
Qualified Plan which invests in the Trust, the Managing Trustee, the Soliciting
Dealers and their Affiliates are not permitted under applicable law to allow the
purchase of Interests with assets of any Qualified Plan (including a Keogh Plan
or an IRA) if they (i) have investment discretion with respect to such assets or
(ii) regularly give individualized investment advice which is understood will
serve as the primary basis for the investment decisions made with respect to
such assets.
The purchase of Interests by a Qualified Plan from a Soliciting Dealer who
provides services to the Qualified Plan or who is otherwise a Party in Interest
or "disqualified person" with respect to the Qualified Plan would be a
prohibited transaction under ERISA and the Code unless the conditions of the
Department of Labor Prohibited Transaction Exemption 86-128 ("PTE 86-128") are
met. PTE 86-128 provides that the prohibited transaction restrictions of Section
406(a) of ERISA and the taxes imposed on prohibited transactions by Section 4975
of the Code will not apply to the purchase or sale of a security between an
employee benefit plan (including a Keogh Plan or an IRA) and a broker-dealer
registered under the Securities Exchange Act of 1934 ("Exchange Act") if certain
conditions are satisfied.
Although it is expected that the sale of Interests will comply with the
requirements of PTE 86-128 if the Plan complies with the record-keeping
requirements of the exemption, no assurance can be given that the conditions of
the exemption will be satisfied or that the transactions will not violate
Section 406(b) of ERISA or Section 4975(c)(1)(E) or (F) of the Code.
IRA's and Employer-Sponsored IRA's. Although many IRA's are not subject to
Title I of ERISA, IRA's are subject to the prohibited transaction rules of
Section 4975 of the Code which created limitations on transactions between
entities or individuals and Qualified Plans for which they serve as Fiduciaries
as described above. The tax-exempt status of an IRA could be lost if the
investment by the IRA constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Trust engaging in a prohibited
transaction with the individual who established the IRA or his beneficiary.
IRA's are subject to the final "plan asset" regulations discussed above. Thus,
in the event that the assets of the Trusts were to be deemed to be "plan
assets", IRA investors should be cognizant of the fact that the Managing Trustee
would be deemed to be a Fiduciary with regard to the investing IRA and the
limitations such status would impose on any transactions between the investing
IRA and the Managing Trustee.
For IRA's that are not generally subject to Title I of ERISA, the general
fiduciary standards of Sections 404, 405 and 406 of ERISA do not apply. However,
if an individual who is making an investment on behalf of an IRA is considered
to be a trustee/custodian or investment manager, such individual should consider
the general fiduciary requirements or standards to which the fiduciary may be
held under applicable securities laws and common law. If, however, the person
making an investment for the IRA is a custodian, the investment will be
considered to be directed by the IRA owner and thus such fiduciary requirements
will be relieved. Notwithstanding the above, if an IRA is deemed to be part of
an employer-sponsored plan, the IRA will be deemed to be subject to Title I of
ERISA, thus subjecting fiduciaries of such a plan to both the requirements of
Title I of ERISA and Code Section 4975. (See "General -- Qualified Plans Other
Than IRA's" above.)
95
<PAGE>
Unrelated Business Taxable Income
Qualified Plans are generally exempt from taxation except to the extent
that their "unrelated business taxable income" (defined as taxable income
attributable to any trade or business the conduct of which is not substantially
related to the exercise or performance of the Qualified Plan's exempt purpose)
exceeds $1,000 during any taxable year. A Trust's business of leasing personal
property will constitute an unrelated trade or business with respect to a
Qualified Plan and will cause a Qualified Plan to have unrelated business
taxable income to the extent of the Plan's share of the taxable income from
rents under the Leases. (See "FEDERAL TAX CONSIDERATIONS -- Investment by
Qualified Pension, Profit-Sharing and Stock Bonus Plans and Individual
Retirement Accounts and by Other Tax Exempt Organizations.") Furthermore, if the
Assets are deemed to be held primarily for sale to customers in the ordinary
course of business (see "FEDERAL TAX CONSIDERATIONS -- Sale or Disposition of
Trust Property"), the gain, if any, on disposition of the Assets, as well as any
gain on the sale of Assets which represents recapture of depreciation
deductions, is treated as unrelated business taxable income.
Because Beneficiaries which are Qualified Plans are expected to be
allocated unrelated business taxable income by the Trusts, these Beneficiaries
will be required to file Form 990T to report their unrelated business taxable
income and pay any tax which is due as a result of this income. The Managing
Trustee has undertaken to identify the amount of the Trust's income in any year
that will be treated as unrelated business taxable income on the annual tax
forms provided to Qualified Plans.
Investors which are Qualified Plans should consult with their own tax
advisors with regard to the application of the unrelated business taxable income
rules.
- --------------------------------------------------------------------------------
SUPPLEMENTAL LITERATURE
- --------------------------------------------------------------------------------
The Offering is made only by means of this Prospectus. The Trust has not
authorized the use of any supplemental literature in connection with this
Offering. No other written or oral information from any source is authorized for
use in this Offering.
- --------------------------------------------------------------------------------
INVESTOR SUITABILITY STANDARDS
- --------------------------------------------------------------------------------
General
Investors subscribing for Interests should give careful consideration to
certain risk factors and other special considerations described under "RISK
FACTORS," including the lack of a public market for Interests and the resulting
long-term nature of an investment in the Interests. The only persons who should
subscribe for Class B Subordinated Interests are those who have adequate
financial means to assume such risks and to provide for their current needs and
personal contingencies and who can afford to bear the full loss of, and who have
no need of short-term liquidity with respect to, their investment. The Managing
Trustee may reject any subscription for Interests for any reason.
96
<PAGE>
Tax-Exempt Investors
A Fiduciary or investment manager (as such terms are defined in Section
3(28) of ERISA) of a Qualified Plan or other tax-exempt organization should
consider all risks and investment concerns, including those unrelated to tax
considerations, in deciding whether an investment in Class B Subordinated
Interests is appropriate and economically advantageous for a Qualified Plan or
other tax-exempt organization. An investment by a Qualified Plan or other
tax-exempt organization will cause such tax-exempt investor to have "unrelated
business taxable income" to the extent that a Trust has taxable income. (See
"RISK FACTORS," "FEDERAL TAX CONSIDERATIONS -- Investment by Qualified Pension,
Profit-Sharing and Stock Bonus Plans and Individual Retirement Accounts and by
Other Tax-Exempt Organizations" and "ERISA AND OTHER CONSIDERATIONS.")
Representations and Warranties
Submission of a Subscription Certificate executed by the subscriber will
constitute the subscriber's agreement to the terms and conditions of the
Subscription Certificate, including all representations and warranties contained
therein. In the Subscription Certificate, a subscriber: (i) represents that he
has received this Prospectus; (ii) represents that he meets the applicable
suitability standards; and any amendments thereto. The Trust and each Trustee
will rely upon such representations and warranties in offering the Class B
Subordinated Interests and administering the Trust.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The legality of the Class B Subordinated Interests being offered will be
passed upon for the Trust by Peabody & Brown, Boston, Massachusetts, counsel to
the Trust and the Managing Trustee. As to matters of Delaware law, Peabody &
Brown will rely upon an opinion of counsel from ________________________.(1)*
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of AFG Investment Trust B at December 31,
1995 and 1994 and for each of the three years in the period ended December
31, 1995 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The summary of federal income tax consequences to the Class B
Beneficiaries appearing herein under "RISK FACTORS -- Federal Income Tax Risks,"
"FEDERAL TAX CONSIDERATIONS" and "ERISA AND OTHER CONSIDERATIONS," has been
reviewed by Peabody & Brown, Boston, Massachusetts, counsel to the Trust the
Managing Trustee and the Special Beneficiary, and has been included herein, to
the extent such summary involves matters of law, in reliance upon the authority
of said firm as expert thereon.
- ----------
(1)* To be provided by amendment.
97
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Trust can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street NW, Room 1024, Washington, D.C. 20549, and at the Regional
Offices of the Commission at Room 1400, 75 Park Place, New York, New York
10007, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511,
and copies of such materials can be obtained from the Public Reference
Section of the Commission at the above address in Washington, D.C. at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the commission. The address of such Web site is
http://www.sec.gov.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which have been filed
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, Washington, D.C., and to which reference is hereby made for further
information relating to the Offering. Copies of the Registration Statement and
exhibits may be obtained from the Securities and Exchange Commission,
Washington, D.C., upon payment of the fee prescribed by the Commission or may be
examined without charge at the offices of the Commission's public reference
section.
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
As used in this Prospectus, the following terms have the following
meanings.
"Accountants" means Ernst & Young LLP, Boston, Massachusetts, or another
nationally recognized firm of independent accountants selected for the Trust by
the Managing Trustee.
"Acquisition Expenses" means expenses (other than Acquisition Fees)
incurred by any party attributable to selection and acquisition of Assets,
whether or not acquired, including but not limited to legal fees and expenses,
travel and communication expenses, costs of credit reports and appraisals,
non-refundable option payments and accounting fees and expenses; provided,
however, that Acquisition Expenses will not include any expenses described in
the Trust Agreement that relate to the operation of the Trust rather than the
selection and acquisition of Assets; and provided, further, that Acquisition
Expenses will not include any expenses paid by an Affiliate of the Managing
Trustee for which such Affiliate does not receive any reimbursement from the
Trust.
"Acquisition Fee" means any fee or commission paid by any party in
connection with the selection, purchase, evaluation, construction, acquisition,
initial leasing or operation, and initial arrangement for leasing or placing in
service of any Asset by the Trust, however designated and however treated for
tax or accounting purposes, but not including any Acquisition Expenses.
"Adjusted Class A Investment" means, on an aggregate basis for all Class A
Interests, an amount equal to (a) the sum of (i) $25 per Class A Interest owned
by all Class A Beneficiaries and (ii) the amount by which all Distributions made
to the Class A Beneficiaries in the aggregate until Class A Payout are less than
the Cumulative Annual Distribution minus (b) the sum of (i) the amount by which
all Distributions made to the Class A Beneficiaries in the aggregate until Class
A Payout exceed the Cumulative Annual Distribution and (ii) all uninvested
Capital Contributions which have been returned to the Class A Beneficiaries
pursuant to the Trust Agreement.
"Advisor" means EFG, together with its successor and assigns as advisor
under the Advisory Agreement.
"Advisory Agreement" means the agreement between the Advisor and the Trust
pursuant to which the Advisor will provide certain management and advisory
services for the Trust.
"Affiliate" means, when used with reference to a specific Person, (i) any
Person that directly or
98
<PAGE>
indirectly through one or more intermediaries controls or is controlled by or is
under common control with the specified Person, (ii) any Person that is an
officer, director, or partner in, the specified Person or of which the specified
Person is an officer, director or partner, (iii) any Person that is the
beneficial owner of, or controls, 10% or more of any class of voting securities
of, the specified Person.
"AFG Investment Trusts" means, collectively, AFG Investment Trust A, AFG
Investment Trust B, AFG Investment Trust C and AFG Investment Trust D.
"Asset" means, collectively, any real or personal property, including
equipment and related tangible property, acquired by the Trust and any interest
of the Trust therein, whether directly or indirectly through a nominee, Joint
Venture or otherwise.
"Asset Base Price" means the amount paid by the Trust to the seller of an
Asset for such Asset, which shall be (i) the manufacturer's invoice cost to the
Trust if the Asset is acquired directly from the manufacturer, (ii) if the Asset
is acquired from a seller who is not the manufacturer and not the Managing
Trustee or an Affiliate thereof, the lower of (a) the price invoiced by such
seller or (b) fair market value as determined by the Managing Trustee in its
best judgment, or (iii) if acquired from the Managing Trustee or an Affiliate
thereof, the lower of (a) the price paid by such seller plus all reasonable,
necessary and actual costs accrued in maintaining the Asset (including, without
limitation, the cost of storage, carrying, warehousing, interest cost, repair,
marketing, financing, and taxes from the date of acquisition thereof) less the
amount of primary term lease rentals accrued from the date of acquisition
thereof and retained by the Managing Trustee or an Affiliate thereof from
leasing the Asset or (b) fair market value as determined by the Managing Trustee
in its best judgment, including in each case described in (i), (ii) and (iii)
the amounts of all liens and encumbrances on the Asset and all reasonable,
necessary, and actual expenses of the seller incurred in connection with
acquiring and transferring the Asset to the Trust (including but not limited to
all financing expenses, sales taxes, delivery charges and attorneys' fees paid
to or on behalf of third parties) but not including any Acquisition Fees or
Acquisition Expenses. In no event, however, shall any of the expense items
described herein be included in the Asset Base Price for any Asset (i) which
cannot be included consistent with generally accepted accounting principles or
(ii) which is not actually acquired by the Trust.
"Asset Management Fee" means the fee payable to the Advisor for managing
the leasing, financing and re-financing of Assets.
"Assign" means, with respect to any Interest or any part thereof, to sell,
assign, transfer, give, or otherwise dispose of, whether voluntarily or by
operation of law, except that in the case of a bona fide pledge or other
hypothecation, no Assignment shall be deemed to have occurred unless and until
the secured party has exercised his right of foreclosure with respect thereto.
"Assignment" means any transaction in which an Interest or any part
thereof is Assigned.
"Asset Management" means personnel and services necessary to the leasing
activities of the Trusts, including but not limited to, leasing and re-leasing
of Assets, collecting revenues, paying operating expenses, determining that the
Assets are used in accordance with all operative contractual arrangements and
providing clerical and bookkeeping services necessary to the operation of the
Assets.
"Beneficiary" means the owner of a Beneficiary Interest and shall include
the Class A Beneficiaries and the Class B Beneficiaries. As used in this
Prospectus, the term "Beneficiary" does not include the Special Beneficiary.
"Beneficiary Interest" means the beneficial interest of a Beneficiary in
the Trust created pursuant to the Trust Agreement.
99
<PAGE>
"Business Trust Act" means the Delaware Business Trust Act, as amended
from time to time.
"Capital Account" means the capital account of the Managing Trustee, the
Special Beneficiary and each Beneficiary established and maintained in
accordance with the Trust Agreement.
"Capital Contribution" means the total amount of money actually
contributed to the Trust by each Participant (or any prior Participant) prior to
the deduction of any organization and offering expenses or selling commissions.
"Cash from Operations" means the cash provided by the Trust's normal
operations (including Lease renewals and without deduction for depreciation or
other non-cash charges) after the general expenses and current liabilities of
the Trust (other than any portion of the Asset Management Fee which is required
to be accrued and the Subordinated Resale Fee) are paid and discharged, as
reduced by any reserves funded from such cash for working capital and contingent
liabilities to the extent deemed reasonable by the Managing Trustee and as
increased by any portion of such reserves deemed by the Managing Trustee not to
be required for Trust operations. Cash from Operations does not include any Cash
from Sales or Refinancings.
"Cash From Sales or Refinancings" means the cash received by the Trust as
a result of Sale or Refinancing transactions (including insurance proceeds or
Lessee indemnity payments arising from the loss or destruction of Assets), as
(i) reduced by (a) all debts and liabilities of the Trust required to be paid as
a result of Sale or Refinancing transactions, whether or not then payable,
(including without limitation, any liabilities on an Asset sold which are not
assumed by the buyer and any remarketing fees required to be paid to Persons not
affiliated with the Managing Trustee but not including any Subordinated Resale
Fee whether or not then due and payable) and (b) general expenses and current
liabilities of the Trust (other than any portion of the Asset Management Fee
which is required to be accrued and the Subordinated Resale Fee) and (c) any
reserves for working capital and contingent liabilities funded from such cash to
the extent deemed reasonable by the Managing Trustee, and (ii) increased by any
portion of such reserves then deemed by the Managing Trustee not to be required
for Trust operations. In the event the Trust takes back a note in connection
with any Sale or Refinancing transaction, all payments subsequently received in
cash by the Trust with respect to such note shall be included in Cash From Sales
or Refinancings, irrespective of the treatment of such payments by the Trust for
tax or accounting purposes. If, in payment for Assets sold, the Trust receives
purchase money obligations secured by liens on such Assets, the amount of such
obligations shall not be included in Cash From Sales or Refinancings until and
to the extent the obligations are realized in cash, sold, or otherwise disposed
of.
"Certificate of Trust" means the certificate of trust for the Trust filed
with the Filing Office in accordance with the Business Trust Act, as amended or
restated from time to time.
"Class A Interests" means the interests owned by Class A Beneficiaries in
the Trust created pursuant to the Trust Agreement.
"Class B Subordinated Interests" or "Class B Interests" means the
beneficial interests owned by Class B Beneficiaries in the Trust created
pursuant to the Trust Agreement.
"Class A Payout" means the first time where the aggregate amount of
Distributions actually made to the Beneficiaries equals $25 per Interest, minus
all uninvested Capital Contributions which have been returned to the
Beneficiaries, plus the Cumulative Class A Annual Distribution.
"Class B Capital Distributions" means the aggregate amount of any cash
payments to the Class B Beneficiaries made by the Trust as a return of their
Capital Contributions from excess Offering
100
<PAGE>
proceeds.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 7% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and 10%
per annum, compounded quarterly, with respect to the balance of their capital
contributions.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator which is the Class B Capital Distributions (on a per
Class B Subordinated Interest basis), discounted at 7% annum from the
Distribution Commencement Date, and the denominator of which is $5.00.
"Closing" means the date designated by the Managing Trustee on, or as of
which, subscribers acquire Class B Subordinated Interests and become Class B
Beneficiaries of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of subsequent laws.
"Consent" means either the consent given by vote at a meeting called and
held in accordance with the provisions of the Trust Agreement or the written
consent of a Person to do the act or thing for which the consent is solicited,
or the act of granting such consent, as the context may require.
"Controlling Person" means, with respect to the Managing Trustee or any
Affiliate, any of its chairman, directors, president, secretary or clerk,
treasurer, vice presidents, and holders of a 5% or larger equity interest in the
Managing Trustee or Affiliate, or any Person having the power to direct or cause
the direction of the Managing Trustee or Affiliate, whether through the
ownership of voting securities, by contract or otherwise.
"Cumulative Class A Annual Distribution" means an aggregate annual
Distribution to the Beneficiaries of 10% per annum, compounded quarterly, on
Adjusted Class A Investment commencing from the last day of the month of the
Closing until Payout.
"Distribution Commencement Date" means the first day of the month
following Closing.
"Delaware Trustee" means the Trustee designated as such in accordance with
the Trust Agreement which maintains its principal place of business in the
State.
"Dissolution Event" means a sale, condemnation, eminent domain taking,
casualty, or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust.
"Distributable Cash From Operations" means Cash from Operations, as
reduced by (i) any accrued and unpaid Asset Management Fee and (ii) after
Payout, any accrued and unpaid Subordinated Resale Fee.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings, as reduced by (i)(a) any amounts reinvested in additional Assets,
or (b) the proceeds of the sale of an interest in a Joint Venture which are
reinvested in additional Assets, (ii) any accrued and unpaid Asset Management
Fee and Acquisition Fees and Acquisition Expenses paid with respect to
additional Assets acquired through reinvestment of Cash from Sales or
Refinancings and (iii) after Payout, any accrued and unpaid Subordinated Resale
Fee.
101
<PAGE>
"Distributions" means Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"Eligible Citizen" means (i) an individual who is a citizen of the United
States or one of its possessions (a "U.S. Citizen") or a citizen of a foreign
country lawfully admitted for permanent residence in the United States as an
immigrant in conformity with the regulations of the Immigration and
Naturalization Service of the Department of Justice (a "Resident Alien"); (ii) a
partnership of which each member is a U.S. Citizen (a "U.S. Partnership"); (iii)
a corporation created or organized under the laws of the United States or of any
state, territory, or possession of the United States of which the president and
two-thirds or more of the board of directors and other managing officers thereof
are U.S. Citizens and of which at least 75% of the voting interests are owned or
controlled by U.S. Citizens (a "U.S. Corporation"); (iv) an association of which
each member is a U.S. Citizen; or (v) a trust of which each trustee is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association, but only if each beneficiary under the related trust is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the interest-bearing escrow account (in which
subscriptions of up to $100,000 per subscriber are insured by the Federal
Deposit Insurance Corporation ("FDIC")), including any savings account, bank
money market account, or account investing in short-term securities issued or
guaranteed by the Interested States government, which complies with Rule 15c-4
under the Securities Exchange Act of 1934, held by the Escrow Agent into which
subscription payments from subscribers for Interests are to be deposited prior
to a Closing.
"Escrow Agent" means the escrow agent selected by the Managing Trustee to
administer the Escrow Account, initially Fleet Bank of Massachusetts, N.A.
"Escrow Interest" means the interest actually earned on monies paid by
each subscriber into the Escrow Account during the period that such monies are
held in the Escrow Account prior to the Closing (net of certain fees and
expenses of the Escrow Agent).
"Executive Committee" means the executive committee of EFG.
"Fiduciary" means a person who (i) exercises any discretionary authority
or control respecting the management of a Qualified Plan, or exercises any
authority or control respecting the disposition of its assets, (ii) renders
investment advice to a Qualified Plan for a fee or other compensation paid and
has the authority or responsibility with regard to a Qualified Plan to do so,
or, (iii) has any discretionary authority or responsibility in the
administration of a Qualified Plan.
"Filing Office" means the Office of the Secretary of State.
"Full Payout Lease" means a lease under which the aggregate rental
payments during the original term are at least sufficient to permit the Trust to
recover the Purchase Price of the Assets leased thereby.
"Gross Proceeds" means the aggregate Capital Contributions of all
Class B Beneficiaries.
"Immediate Family Member" means, with respect to any Person, his spouse,
parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law, or
child-in-law.
"Indebtedness" means the indebtedness incurred by the Trust to finance
the acquisition of the Assets.
102
<PAGE>
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Trust and who is qualified to perform such work.
"Initial Redemption Period" is the period of time commencing with Closing
through 24 months thereafter during which the Class A Interests may be redeemed
by the Trust with the proceeds of the Offering.
"Interest" means a Class B Beneficiary Interest representing a Capital
Contribution of $5 and shall also include, as the context shall permit or
require, any Class A Interest in the Trust.
"IRA" means an Individual Retirement Account.
"Joint Venture" means a general partnership, joint venture, trust or other
business arrangement (other than a corporation).
"Lease" means a Full Payout Lease or Operating Lease.
"Lessee" means any lessee under any Lease.
"Lessor" means the lessor under any Lease.
"Majority Consent" means the Consent of Beneficiaries representing a
Majority in Interest of the Beneficiaries.
"Majority in Interest of the Beneficiaries" means the Class A
Beneficiaries and the Class B Beneficiaries holding more than 50% in the
aggregate of the Beneficiary Interests held by all Beneficiaries; provided,
however, that in cases where a Beneficiary who is also a Managing Trustee or
Affiliate thereof is not entitled to participate in the Consents or votes of the
Beneficiaries, the calculation of "Majority in Interest of the Beneficiaries"
shall exclude the Class A Interests owned by such Beneficiary.
"Managing Trustee" means AFG ASIT Corporation, a Massachusetts
corporation.
"Managing Trustee Interest" means the interest of the Managing Trustee in
the Trust pursuant to this Agreement.
"Maximum Offering" means the sale of all 1,000,961 Class B Subordinated
Interests in the Trust which are being offered pursuant to the Offering.
"Minimum Investment Amount" means the minimum number of Interests which a
Class B Beneficiary is required to purchase in the Offering.
"Minimum Offering" means the sale of at least 459,191 Class B Subordinated
Interests in the Trust (included for this purpose any Class B Subordinated
Interests which are purchased by the Managing Trustee and any Affiliate,
including the Special Beneficiary).
"Net Proceeds" means Gross Proceeds minus all offering expenses of the
Trust payable or reimbursable pursuant to the Trust Agreement.
"Offering" means the offering of Class B Subordinated Interests by the
Trust pursuant to this
103
<PAGE>
Prospectus.
"Operating Lease" means a lease under which the aggregate rental payments
during the original term are not sufficient to permit the Trust to recover the
Purchase Price of the Assets leased thereby.
"Over-Subscription Privilege" means the right of exercising the rights
holders to subscribe for all or a portion of the Class B Subordinated
Interests that were not otherwise subscribed for by other rights holders.
"Participant" means the Managing Trustee, the Special Beneficiary or
any Beneficiary.
"Party in Interest" means, as to any Qualified Plan, a "party in interest"
as defined in Section 3(14) of ERISA including a Person who is (i) a Fiduciary,
administrator, officer, trustee, custodian, counsel or employee of such
Qualified Plan, (ii) providing services to such Qualified Plan, (iii) the
employer sponsoring such Qualified Plan, (iv) a 50% or more owner of the
employer sponsoring the Qualified Plan, (v) a corporation, partnership, trust or
estate of which 50% or more is owned by a Person described in (i), (ii), (iii)
or (iv), or (vi) an employee, officer, director, 10% or more shareholder or a
10% or more partner or joint venturer of a Person described in (ii), (iii), (iv)
or (v). Any reference to a Party in Interest shall include a "disqualified
person" as such term is defined more narrowly in Section 4975(e) of the Code.
"Person" means any individual, partnership, corporation, trust,
association, governmental official, body or agency, or other legal entity of any
type.
"Profits" and "Losses" means income and losses, and each item of income,
gain, loss, deduction, or credit entering into the computation thereof, as
determined in accordance with the accounting methods followed by the Trust and
consistent with Treasury Regulation Section 1.704-(1)(b)(2)(iv). Profits and
Losses for federal income tax purposes shall be determined in the same manner
except as otherwise provided in the Trust Agreement.
"Prospectus" means the prospectus contained in the registration statement
filed with the Securities and Exchange Commission for the registration of Class
B Subordinated Interests under the Securities Act of 1933, as amended, in the
final form in which said prospectus is filed with said Commission and as
thereafter amended or supplemented pursuant to Rule 424 under said Act.
"Qualified Income Offset Item" means (1) an allocation of loss or
deduction that, as of the end of each year, reasonably is expected to be made
(a) pursuant to Section 704(e)(2) of the Code to a donee of an interest in the
Trust, (b) pursuant to Section 706(d) of the Code as the result of a change in a
Participant's interest in the Trust, and (c) pursuant to Treasury Regulation
Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of
unrealized receivables or inventory items, and (2) a distribution that, as of
the end of such year, reasonably is expected to be made to a Participant to the
extent it exceeds offsetting increases to the Participant's Capital Account
which reasonably are expected to occur during or prior to the Trust taxable year
in which such distribution reasonably is expected to occur.
"Qualified Plan" means any qualified pension, profit-sharing, or stock
bonus plan (including a Keogh Plan) and an IRA.
"Record Date Holders" means holders of record as of the close of business
on ____________, 1997, of Class A Interests and Special Beneficiary Interests.
"Reserve Account" means the account maintained by the Trust as reserves
for working capital
104
<PAGE>
and contingent liabilities, including repairs, replacements, contingencies,
accruals required by lenders for insurance, compensating balances required by
lenders to the Trust and other appropriate items.
"Resignation" means the resignation of a Trustee or the voluntary
Assignment of all of the Managing Trustee's Interest pursuant to the Trust
Agreement.
"Resigned Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Resignation.
"Right" means non-transferable subscription rights to record rate holders
determining the record rate holders to acquire Class B Subordinated Interest.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion or consolidation either directly or indirectly of the Trust and the
issuance of securities of a Roll-Up Entity. Such term does not include: (a) a
transaction involving the securities of the Trust that have been for at least 12
months listed on a national securities exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust, partnership or
association form of only the Trust if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (i)
Beneficiary's voting rights; (ii) the term of existence of the Trust; (iii)
Sponsor compensation; and (iv) the investment objectives of the Trust.
"Roll-Up Entity" means a partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Sale or Refinancing" means the sale, refinancing, exchange, condemnation,
eminent domain taking, casualty or other disposition of any Asset or any
interest in any Joint Venture.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Special Beneficiary" means EFG in its capacity as the Special Beneficiary
pursuant to the Trust Agreement, together with its successors and assigns in
such capacity.
"Special Beneficiary Interest" means the interest of the Special
Beneficiary in the Trust created pursuant to the Trust Agreement and
representing the capital contribution set forth in Schedule A to the Trust
Agreement.
"State" means the State of Delaware.
"Subscription Price" means $5.00 per Class B Subordinated Interest.
"Subordinated Resale Fee" means the fee to be paid by the Trust to the
Advisor for services rendered by the Advisor in connection with the sale or
other disposition of the Assets.
"Subscription Agent" means ____________.
"Subscription Certificates" means the subscription and certificate
evidencing the Rights and set forth an Appendix A hereto.
"Substitute Beneficiary" means an assignee of a Beneficiary Interest who
becomes a Beneficiary pursuant to the terms of the Trust Agreement.
105
<PAGE>
"Substitute Trustee" means an assignee of the Trustee's Interest who is
admitted to the Trust as a Trustee pursuant to the terms of the Trust Agreement.
"Trust" means AFG Investment Trust B, as the same may be constituted from
time to time.
"Trust Agreement" means the Declaration of Trust of the Trust, as
restated as of Closing.
"Trust Beneficiaries" means the Beneficiaries and the Special
Beneficiary.
"Trust Beneficiary Interests" means the Beneficiary Interests and the
Special Beneficiary Interest.
"Trust Counsel" means Peabody & Brown, Boston, Massachusetts, or other
counsel for the Trust selected by the Managing Trustee.
"Trustees" means the Managing Trustee, the Delaware Trustee and any Person
or Persons who subsequently become additional or substitute Trustees, in each
such Person's capacity as a Trustee of the Trust. At all times when there is
only one Trustee so acting, the terms "Trustees" and "Managing Trustee" shall
refer to such Trustee.
"UBTI" means unrelated business taxable income determined in accordance
with Sections 511-514 of the Code.
106
<PAGE>
Financial Statements
Trust B
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS: Year Ended December 31, 1995 F-1
Report of Independent Auditors F-2
Statement of Financial Position
at December 31, 1995 and 1994 F-3
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 F-4
Statement of Changes in Participants' Capital
for the years ended December 31, 1995, 1994 and 1993 F-5
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 F-6
Notes to the Financial Statements F-7
FINANCIAL STATEMENTS: Nine Months Ended September 30, 1996 F-17
Statement of Financial Position
at September 30, 1996 and December 31, 1995 F-17
Statement of Operations
for the three and nine months ended September 30, 1996 and 1995 F-18
Statement of Cash Flows
for the nine months ended September 30, 1996 and 1995 F-19
Notes to the Financial Statements F-20
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Participants of AFG Investment Trust B:
We have audited the accompanying statements of financial position of AFG
Investment Trust B as of December 31, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 1996
F-2
<PAGE>
AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
1995 1994
------------ ------------
ASSETS
Cash and cash equivalents $ 337,293 $ 441,329
Rents receivable 729,555 399,673
Accounts receivable - affiliate 105,494 38,637
Equipment at cost, net of accumulated
depreciation of $9,940,387 and $6,872,030
at December 31, 1995 and 1994, respectively 18,399,341 21,438,569
Organization costs, net of accumulated
amortization of $3,333 and $2,333 at
December 31, 1995 and 1994, respectively 1,667 2,667
------------ ------------
Total assets $ 19,573,350 $ 22,320,875
============ ============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 7,097,113 $ 8,713,009
Accrued interest 124,186 44,970
Accrued liabilities 20,000 15,500
Accrued liabilities - affiliate -- 83,863
Deferred rental income 20,802 61,652
Cash distributions payable to participants 153,998 309,207
------------ ------------
Total liabilities 7,416,099 9,228,201
------------ ------------
Participants' capital (deficit):
Managing Trustee (28,065) (18,711)
Special Beneficiary (238,783) (161,611)
Beneficiary Interests (665,494 Interests;
initial purchase price of $25 each) 12,424,099 13,272,996
------------ ------------
Total participants' capital 12,157,251 13,092,674
------------ ------------
Total liabilities and participants' capital $ 19,573,350 $ 22,320,875
============ ============
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
----------- ----------- -----------
Income:
Lease revenue $ 6,173,972 $ 5,507,765 $ 5,611,138
Interest income 45,156 77,799 32,062
Gain (loss) on sale of equipment (225,037) 638,594 20,150
----------- ----------- -----------
Total income 5,994,091 6,224,158 5,663,350
----------- ----------- -----------
Expenses:
Depreciation and amortization 4,176,540 3,559,119 3,628,973
Write-down of equipment 384,782 -- --
Interest expense 539,047 634,716 980,084
Interest expense - affiliate -- 441 15,235
Equipment management fees - affiliate 244,800 188,998 176,852
Operating expenses - affiliate 121,358 69,179 152,202
----------- ----------- -----------
Total expenses 5,466,527 4,452,453 4,953,346
----------- ----------- -----------
Net income $ 527,564 $ 1,771,705 $ 710,004
=========== =========== ===========
Net income
per Beneficiary Interest $ 0.72 $ 2.42 $ 0.97
=========== =========== ===========
Cash distributions declared
per Beneficiary Interest $ 2.00 $ 2.52 $ 2.52
=========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
AFG Investment Trust B
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Managing Special Beneficiaries
Trustee Beneficiary -------------------
Amount Amount Interests Amount Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 $ (6,568) $ (61,434) 665,494 $ 14,374,933 $ 14,306,931
Net income - 1993 7,100 58,575 -- 644,329 710,004
Cash distributions
declared (18,480) (152,459) -- (1,677,044) (1,847,983)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1993 (17,948) (155,318) 665,494 13,342,218 13,168,952
Net income - 1994 17,717 146,166 -- 1,607,822 1,771,705
Cash distributions
declared (18,480) (152,459) -- (1,677,044) (1,847,983)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1994 (18,711) (161,611) 665,494 13,272,996 13,092,674
Net income - 1995 5,276 43,524 -- 478,764 527,564
Cash distributions
declared (14,630) (120,696) -- (1,327,661) (1,462,987)
------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1995 $ (28,065) $ (238,783) 665,494 $ 12,424,099 $ 12,157,251
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-5
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 527,564 $ 1,771,705 $ 710,004
Adjustments to reconcile net income
to net cash from operation activities:
Depreciation and amortization 4,176,540 3,559,119 3,628,973
Write-down of equipment 384,782 -- --
(Gain) loss on sale of equipment 225,037 (638,594) (20,150)
Changes in assets and liabilities:
Decrease (increase) in:
rents receivable (329,882) 67,264 (344,943)
accounts receivable - affiliate (66,857) 30,399 33,682
Increase (decrease) in:
accounts payable -- -- (938,363)
accrued interest 80,950 (68,579) 93,382
accrued liabilities 4,500 -- (11,000)
accrued liabilities - affiliate (83,863) 83,863 (88,962)
deferred rental income (40,850) (37,366) 18,232
----------- ----------- -----------
Net cash used in operating activities 4,877,921 4,767,811 3,080,855
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment (5,605,829) (5,427,991) (725,376)
Proceeds from equipment sales 3,588,941 1,482,488 127,365
----------- ----------- -----------
Net cash used in investing activities (2,016,888) (3,945,503) (598,011)
----------- ----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable 2,296,728 3,982,078 2,683,235
Proceeds from notes payable - affiliate -- 41,440 570,142
Principal payments - notes payable (3,643,601) (3,793,572) (3,867,130)
Principal payments - notes payable - affiliate -- (41,440) (572,928)
Distributions paid (1,618,196) (1,847,983) (1,847,815)
----------- ----------- -----------
Net cash used in financing activities (2,965,069) (1,659,477) (3,034,496)
----------- ----------- -----------
Net decrease in cash and cash equivalents (104,036) (837,169) (551,652)
Cash and cash equivalents at beginning of year 441,329 1,278,498 1,830,150
----------- ----------- -----------
Cash and cash equivalents at end of year $ 337,293 $ 441,329 $ 1,278,498
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 458,097 $ 703,736 $ 901,937
=========== =========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1995, the Trust sold equipment to a lessee which assumed related
debt and interest of $269,023 and $1,734, respectively.
During 1994, the Trust sold equipment to a third party which assumed
related debt of $3,446,759.
The accompanying notes are an integral part of
these financial statements.
F-6
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
December 31, 1995
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,
AFG, and $100 from the Initial Beneficiary, AFG Assignor Corporation, a
wholly-owned affiliate of American Finance Group ("AFG"). 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 AFG, is responsible for the general management and business affairs
of the Trust. AFG, a Massachusetts partnership, is the sole Special Beneficiary
of the Trust and also acts as Advisor to the Trust. As Advisor, AFG 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").
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various aspects
of the equipment leasing business. In 1990, certain members of AFG's management,
principally Geoffrey A. MacDonald, Chief Executive Officer and co-founder of
AFG, established AFG Holdings (Massachusetts) Limited Trust ("Holdings
Massachusetts") to acquire ownership and control of AFG. Holdings Massachusetts
effected this event by acquiring all of the equity interests of AFG's two
partners, AFG Holdings Illinois Limited Trust ("Holdings Illinois") and AFG
Corporation. Holdings Massachusetts incurred significant indebtedness to finance
this acquisition, a significant portion of which was scheduled to mature in
1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings Illinois
and AFG Corporation and sold all such interests to GDE Acquisitions Limited
Partnership, a Massachusetts limited partnership owned and controlled entirely
by Gary D. Engle, President and member of the Executive Committee of AFG. As a
result of this transaction, GDE Acquisitions Limited Partnership acquired all of
the assets, rights and obligations of AFG from the Senior Lender and assumed
control of AFG. Geoffrey A. MacDonald remains as Chief Executive Officer of AFG
and member of its Executive Committee.
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 AFG,
management services are provided by AFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also see Note 4.)
F-7
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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.
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. Future minimum rents of
$11,341,509 are due as follows:
For the year ending December 31, 1996 $ 5,304,502
1997 4,599,644
1998 1,288,831
1999 98,432
2000 50,100
-----------
Total $11,341,509
===========
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1995, 1994 and 1993 is as
follows:
1995 1994 1993
---------- ---------- ----------
Alaska Airlines, Inc. $1,004,770 $1,004,770 $1,003,377
OMI Corporation $ 623,598 $1,184,759 $1,133,018
Tarmac Mid-Atlantic, Incorporated -- $ 591,040 $ 591,040
Southern Pacific Transportation -- -- $ 832,699
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 AFG, 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
AFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid
for the equipment by AFG or the Affiliate plus all actual costs accrued by AFG
or the Affiliate while carrying the equipment less the amount of all primary
term rents earned by AFG or the Affiliate prior
F-8
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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, 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.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG'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. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
Organization costs are amortized using the straight-line method over a
period of five years.
Accounts Payable and Accrued Liabilities - Affiliate
The Trust reports the unpaid cost of equipment purchased from third-party
vendors as Accounts Payable. Unpaid fees and operating expenses paid by AFG on
behalf of the Trust 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 (loss) 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, 1995 and computed after allocation of the
Managing Trustee's and Special Beneficiary's shares of net income (loss) and
cash distributions.
Provision for Income Taxes
F-9
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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.
F-10
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Reclassification
Certain reclassifications have been made to prior year financial
statements to conform to the 1995 presentation.
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 amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The Trust
will adopt Statement 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the impact of adoption to be material to the
financial statements of the Trust.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1995. In the opinion of AFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Initial
Lease
Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------------ -------- ---------- ------------------------------
<S> <C> <C> <C>
Aircraft 60 $ 9,347,476 IL/WA
Computers & peripherals 10-62 5,557,375 AL/AZ/CA/CO/FL/GA/IL/IN/KS/ KY
LA/MA/MD/MI/MN/NC/NJ/NM/NY
OH/OK/OR/PA/SC/TN/TX/VA
WI/WV
Materials handling 4-60 4,896,235 AR/CA/FL/GA/IL/IN/MI/NC/NY/OH
PA/TX/VA/WV
Communications 12-60 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 & warehouse 60 1,576,077 VA
Retail store fixtures 36 1,152,506 CO/FL/GA/LA/TX
Construction and mining 36-60 1,200,579 MI/NV/VA
Tractors & heavy duty trucks 48-78 605,644 CO/FL/KY/MI/VA
Manufacturing 60 449,902 IL/VA
Furniture & fixtures 60 284,019 PA
Trailers/intermodal containers 36 128,442 OH
Photocopying 36-60 101,942 CT/IN
-----------
Total equipment cost 28,339,728
Accumulated depreciation (9,940,387)
-----------
Equipment, net of accumulated depreciation $18,399,341
===========
</TABLE>
F-11
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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, to United for cash consideration of $1,946,849. The
transaction closed in February 1996. At September 30, 1995, the net carrying
value of this aircraft to the Trust was $2,331,631. As such, the anticipated
loss on this transaction of $384,782, representing the difference between the
gross sales proceeds and the net carrying value at September 30, 1995, was
recorded by the Trust in September 1995. It is reflected on the accompanying
Statement of Operations for the year ended December 31, 1995 as Write-down of
Equipment. The Managing Trustee intends to reinvest the net cash proceeds
received in other equipment in 1996.
In certain cases, the cost of the Trust's equipment represents a
proportionate ownership interest. The remaining interests are owned by AFG or an
affiliated equipment leasing program sponsored by AFG. 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, 1995, the Trust's equipment portfolio included
equipment having a proportionate original cost of $14,334,863, representing
approximately 51% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately
$19,500,000 and a net book value of approximately $13,600,000 at December 31,
1995. (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, AFG's ability to
maximize proceeds from selling or re-leasing the equipment upon the expiration
of the primary lease terms. At December 31, 1995, the Trust held equipment for
sale or re-lease with an original cost and net book value of approximately
$2,587,000 and $1,950,000, respectively. This equipment includes the Trust's
proportionate ownership interest in the United aircraft having a cost and net
book value of $2,569,112 and $1,946,849, respectively (discussed above). The
Managing Trustee is actively seeking the sale or re-lease of all equipment not
on lease.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by AFG on behalf of
the Trust and AFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1995, 1994 and
1993, which were paid or accrued by the Trust to AFG or its Affiliates, are as
follows:
1995 1994 1993
-------- -------- --------
Equipment acquisition fees $107,415 $147,800 $ 2,025
Equipment management fees 244,800 188,998 176,852
Administrative charges 21,000 12,000 12,530
Reimbursable operating
expenses due to third parties 100,358 57,179 139,672
Interest on notes payable - affiliate -- 441 15,235
-------- -------- --------
Total $473,573 $406,418 $346,314
======== ======== ========
F-12
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
As provided under the terms of the Trust Agreement, AFG is compensated for
its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, AFG is compensated
by an amount equal to .28% of Asset Base Price paid by the Trust. For
acquisition services resulting from Reinvestment, AFG is compensated by an
amount equal to 3% of Equipment Base Price paid by the Trust. For management
services, AFG 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 AFG 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 AFG, pursuant to Section
10.4 of the Trust Agreement, for persons employed by AFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by AFG on behalf of the Trust which
are reimbursed to AFG.
All equipment was purchased from AFG, one of its Affiliates or from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either AFG or to a lender. AFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
December 31, 1995, the Trust was owed $105,494 by AFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1996.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1995 consisted of installment notes of
$7,097,113 payable to banks and institutional lenders. All of the installment
notes are non-recourse and are collateralized by the equipment and assignment of
the related lease payments. The installment notes carry interest rates ranging
between 5.7% and 7.7% and will be fully amortized by noncancellable rents. The
carrying amount of notes payable approximates fair value at December 31, 1995.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 1996 $ 3,727,561
1997 2,577,849
1998 791,703
------------
Total $ 7,097,113
============
The weighted average interest rate on short-term borrowings from AFG for
the purchase of equipment was 9.25% during the year ended December 31, 1994.
NOTE 6 - INCOME TAXES
F-13
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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, 1995, the Managing Trustee's tax capital account balance was
zero.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 , 1994 and 1993:
1995 1994 1993
----------- ----------- -----------
Net income $ 527,564 $ 1,771,705 $ 710,004
Tax depreciation in excess of
financial statement depreciation (830,733) (2,249,966) (4,466,331)
Prepaid rental income (40,850) (37,366) 18,232
Other 865,755 728,516 16,607
----------- ----------- -----------
Net income (loss) for federal
income tax reporting purposes $ 521,736 $ 212,889 $(3,721,488)
=========== =========== ===========
The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain (loss) on
disposals.
The following is a reconciliation between participants' capital reported
for financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 and 1994:
1995 1994
------------ ------------
Participants' capital $ 12,157,251 $ 13,092,674
Add back selling commissions and
organization and offering costs 1,575,644 1,575,644
Financial statement distributions in
excess of tax distributions 14,245 28,602
Cumulative difference between federal income
F-14
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
tax and financial statement income (loss) (6,267,292) (6,261,464)
------------ ------------
Participants' capital for federal income
tax reporting purposes $ 7,479,848 $ 8,435,456
============ ============
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, AFG, on behalf of the Trust and other AFG-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. AFG is seeking the reimbursement by National
Steel of certain sale 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 AFG'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. AFG filed its Answer to these counterclaims on
September 29, 1995. A settlement with respect to this matter has been reached
and the execution of the Settlement Agreement is currently pending. The Trust
has not experienced any material losses as a result of this action.
NOTE 8 - SUBSEQUENT EVENT
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase, in a multi-step
transaction, certain of AFG's assets and (ii) provide accounting, asset
management and investor services to AFG and certain of AFG's affiliates,
including the Trust and all other equipment leasing programs managed by AFG (the
"Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995
agreements whereby PLM purchased: (i) AFG's lease origination business and
associated contracts, (ii) the rights to the name "American Finance Group" and
associated logo, and (iii) certain furniture, fixtures and computer software.
PLM hired AFG's marketing force and certain other support personnel effective
January 1, 1996 in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing trustees of the Investment Programs; and AFG, as
Advisor, will continue to provide accounting, asset management and investor
services to the Trust.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain of
its affiliates agreed not to compete with the lease origination business sold to
PLM for a period of five years. AFG reserved the right to satisfy all equipment
needs of the Trust and all other Investment Programs and reserved certain other
rights not material to the Trust. AFG also agreed to change its name, except
where it is used in connection with the
F-15
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Investment Programs. AFG's management considers the amendment to the 1995
agreements to be in the best interest of AFG and the Trust.
F-16
<PAGE>
AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
September 30, 1996 and December 31, 1995
(Unaudited)
September 30, December 31,
1996 1995
------------ ------------
ASSETS
Cash and cash equivalents $ 2,496,927 $ 337,293
Rents receivable 384,339 729,555
Accounts receivable - affiliate 197,554 105,494
Equipment at cost, net of accumulated depreciation
of $11,826,952 and $9,940,387 at September 30,
1996 and December 31, 1995, respectively 14,429,965 18,399,341
Organization costs, net of accumulated
amortization of $4,083 and $3,333 at
September 30, 1996 and December 31,
1995, respectively 917 1,667
------------ ------------
Total assets $ 17,509,702 $ 19,573,350
============ ============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 5,291,093 $ 7,097,113
Accrued interest 51,717 124,186
Accrued liabilities 18,750 20,000
Accrued liabilities - affiliate 22,580 --
Deferred rental income 151,261 20,802
Cash distributions payable to participants 200,199 153,998
------------ ------------
Total liabilities 5,735,600 7,416,099
------------ ------------
Participants' capital (deficit):
Managing Trustee (31,897) (28,065)
Special Beneficiary (270,392) (238,783)
Beneficiary Interests (665,494 Interests;
initial purchase price of $25 each) 12,076,391 12,424,099
------------ ------------
Total participants' capital 11,774,102 12,157,251
------------ ------------
Total liabilities and participants' capital $ 17,509,702 $ 19,573,350
============ ============
The accompanying notes are an integral part
of these financial statements.
F-17
<PAGE>
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 1,549,287 $ 1,534,181 $ 4,434,013 $ 4,598,135
Interest income 29,423 17,190 71,433 25,390
Loss on sale of equipment (1,063) (3,167) (275,888) (205,129)
----------- ----------- ----------- -----------
Total income 1,577,647 1,548,204 4,229,558 4,418,396
----------- ----------- ----------- -----------
Expenses:
Depreciation and amortization 1,058,070 1,088,360 3,289,919 3,061,671
Write-down of equipment -- 384,782 -- 384,782
Interest expense 86,503 135,425 309,697 410,677
Interest expense - affiliate -- -- -- 41
Equipment management fees
- affiliate 66,192 65,320 187,687 177,162
Operating expenses - affiliate 37,921 14,942 86,211 97,001
----------- ----------- ----------- -----------
Total expenses 1,248,686 1,688,829 3,873,514 4,131,334
----------- ----------- ----------- -----------
Net income (loss) $ 328,961 $ (140,625) $ 356,044 $ 287,062
=========== =========== =========== ===========
Net income (loss)
per Beneficiary Interest $ 0.45 $ (0.19) $ 0.49 $ 0.39
=========== =========== =========== ===========
Cash distributions declared
per Beneficiary Interest $ 0.38 $ 0.53 $ 1.01 $ 1.79
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-18
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
----------- -----------
Cash flows from (used in) operating activities:
Net income $ 356,044 $ 287,062
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 3,289,919 3,061,671
Loss on sale of equipment 275,888 205,129
Write-down of equipment -- 384,782
Changes in assets and liabilities Decrease
(increase) in:
rents receivable 345,216 (119,055)
accounts receivable - affiliate (92,060) (154,158)
Increase (decrease) in:
accrued interest (72,469) 42,025
accrued liabilities (1,250) (1,750)
accrued liabilities - affiliate 22,580 (60,413)
deferred rental income 130,459 9,426
----------- -----------
Net cash from operating activities 4,254,327 3,654,719
----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment (1,441,796) (4,498,137)
Proceeds from equipment sales 1,846,115 3,584,259
----------- -----------
Net cash from (used in) investing activities 404,319 (913,878)
----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable 997,888 2,296,728
Proceeds from notes payable - affiliate -- 9,080
Principal payments - notes payable (2,803,908) (2,853,215)
Principal payments - notes payable - affiliate -- (2,905)
Distributions paid (692,992) (1,387,198)
----------- -----------
Net cash used in financing activities (2,499,012) (1,937,510)
----------- -----------
Net increase in cash and cash equivalents 2,159,634 803,331
Cash and cash equivalents at beginning of period 337,293 441,329
----------- -----------
Cash and cash equivalents at end of period $ 2,496,927 $ 1,244,660
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 382,166 $ 368,693
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
During 1995, the Trust sold equipment to a lessee which assumed related
debt and interest of $269,023 and $1,734, respectively.
The accompanying notes are an integral part
of these financial statements.
F-19
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
September 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not include
all information and footnote disclosures required under generally accepted
accounting principles for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 1995 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 1996 and December 31, 1995 and results of operations
for the three and nine month periods ended September 30, 1996 and 1995 have been
made and are reflected.
NOTE 2 - CASH
At September 30, 1996, the Trust had $2,394,000 invested in reverse
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$8,954,441 are due as follows:
For the year ending September 30, 1997 $ 5,199,694
1998 2,645,938
1999 477,378
2000 255,987
2001 179,109
Thereafter 196,335
-----------
Total $ 8,954,441
===========
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 4 herein. The Trust will receive approximately $157,000 of rental
revenue in each of the years in the period ending September 30, 2002 and $39,000
in the year ending September 30, 2003, pursuant to the Reno Aircraft lease
agreement. 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.
F-20
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Trust at September
30, 1996. In the opinion of American Finance Group ("AFG"), the acquisition cost
of the equipment did not exceed its fair market value.
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------------------ ---------- ---------
Aircraft 60-81 $ 8,018,105
Computers and peripherals 12-62 4,982,599
Materials handling 4-60 4,764,326
Communications 12-60 3,039,531
General plant and warehouse 60 1,576,077
Construction and mining 36-60 1,200,577
Retail store fixtures 36 1,145,861
Tractors and heavy duty trucks 48-78 605,644
Manufacturing 60 449,902
Furniture and fixtures 60 284,019
Trailers/intermodal containers 36-60 128,443
Photocopying 36-60 61,833
------------
Total equipment cost 26,256,917
Accumulated depreciation (11,826,952)
------------
Equipment, net of accumulated depreciation $ 14,429,965
============
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 the Reno Aircraft, pursuant to the reinvestment provisions of the
Trust's prospectus, at a cost of $1,239,741. To acquire the 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. The
Managing Trustee intends to reinvest the remaining proceeds from the sale of the
United Aircraft in other equipment in 1996.
At September 30, 1996, the Trust's equipment portfolio included equipment
having a proportionate original cost of $11,023,146, representing approximately
42% of total equipment cost.
At September 30, 1996, the cost and net book value of equipment held for
sale or re-lease was approximately $787,000 and $153,000, respectively. The
Managing Trustee is actively seeking the sale or re-lease of all equipment not
on lease.
F-21
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by AFG on behalf of
the Trust and AFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the nine month periods ended September 30, 1996
and 1995, which were paid or accrued by the Trust to AFG or its Affiliates, are
as follows:
1996 1995
--------- ---------
Equipment acquisition fees $ 52,786 $ 104,322
Interest on note payable - affiliate -- 41
Equipment management fees 187,687 177,162
Administrative charges 15,750 15,750
Reimbursable operating expenses
due to third parties 70,461 81,251
--------- ---------
Total $ 326,684 $ 378,526
========= =========
All rents and proceeds from the sale of equipment aredirectly to either
AFG or to a lender. AFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Trust. At September
30, 1996, the Trust was owed $197,554 by AFG for such funds and the interest
thereon. These funds were remitted to the Trust in October 1996.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30, 1996 consisted of installment notes of
$5,291,093 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 (5.4% at September 30,
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 at the expiration of the primary lease
term related to the Reno Aircraft. The carrying amount of notes payable
approximates fair value at September 30, 1996.
The annual maturities of the notes payable are as follows:
For the year ending September 30, 1997 $ 2,777,087
1998 1,575,655
1999 244,762
2000 111,206
2001 121.530
Thereafter 460,853
-----------
Total $ 5,291,093
===========
F-22
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 7 - SUBSEQUENT EVENT
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 seeks to solicit the
consent of the Beneficiaries to a proposed amendment ("the Amendment") to the
Amended and Restated Declaration of Trust (the "Trust Agreement").
The Amendment would (i) amend the provisions of the Trust Agreement
governing the redemption of Interests to permit the Trust to offer to redeem
outstanding interests at such times, in such amounts, in such manner and at such
prices as the Managing Trustee may determine from time to time, in accordance
with applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an additional class of
security with such designations, preferences and relative, participating,
optional or other special rights, powers and duties as the Managing Trustee may
fix. Such a security, if it were to be offered and sold, would provide the Trust
with the funds to a) implement more expansive Interest redemption opportunities
for Beneficiaries without using Trust funds which may otherwise be available for
current cash distributions; and b) make a special one-time distribution to the
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required
the consent of the Beneficiaries holding more than fifty percent in the
aggregate of the Interests held by all Beneficiaries. To be valid, consent
forms must have been received by the Managing Trustee by December 6, 1996
(subject to extension at the discretion of the Managing Trustee). 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 69.7% of all Beneficiary
Interests participated in the vote. Accordingly, the Amendment was adopted.
F-23
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus in connection with the offer
contained in this Prospectus, and, if given or made, such information or
representations must not be relied upon. This Prospectus does not constitute an
offer or solicitation in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of the Trust
or the Managing Trustee or its Affiliates since the date hereof.
AFG INVESTMENT TRUST B
PROSPECTUS
1,000,961 Class B Subordinated Beneficiary Interests
TABLE OF CONTENTS
SUMMARY OF THE OFFERING 10 CERTAIN RELATIONSHIPS AND RELATED
ESTIMATED USE OF PROCEEDS 18 TRANSACTIONS 44
COMPENSATION AND FEES 19 TRUST DISTRIBUTIONS
CONFLICTS OF INTEREST 20 AND ALLOCATIONS 45
FIDUCIARY RESPONSIBILITY 22 FEDERAL TAX CONSIDERATIONS 49
RISK FACTORS 24 STATE, LOCAL AND FOREIGN TAXES 78
BUSINESS OF THE TRUST 30 SUMMARY OF THE TRUST AGREEMENT 79
MARKET FOR THE TRUST'S SECURITIES REPORTS TO BENEFICIARIES 87
AND RELATED SECURITY THE OFFERING 88
HOLDER MATTERS 32 ERISA AND OTHER CONSIDERATIONS 93
SELECTED FINANCIAL DATA 34 SUPPLEMENTAL LITERATURE 96
MANAGEMENT'S DISCUSSION AND 35 INVESTOR SUITABILITY STANDARDS 96
ANALYSIS OF FINANCIAL CONDITIONS LEGAL MATTERS 97
AND RESULTS OF OPERATIONS EXPERTS 97
MANAGEMENT OF THE TRUST 40 ADDITIONAL INFORMATION 98
EXECUTIVE COMPENSATION 43 GLOSSARY 98
SECURITY OWNERSHIP OF CERTAIN INDEX TO FINANCIAL STATEMENTS F-1
BENEFICIAL OWNERS AND
MANAGEMENT 43
================================================================================
<PAGE>
Part II - Information Not Required in Prospectus - Trust B
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses of the Trusts in connection with the Offering,
assuming 1,000,961 Class B Subordinated Interests are sold, are as follows:
Securities and Exchange Commission Registration Fee............. $1,517.00
National Association of Securities Dealers, Inc.
Registration Fee.............................................. $ *
Blue Sky Fees and Expenses...................................... $ *
Legal Fees and Expenses......................................... $ *
Printing and Graphic Design Expenses............................ $ *
Advertising and Sales Literature................................ $ *
Accounting Fees and Expenses.................................... $ *
Non-Accountable Expense Reimbursement........................... $ *
Mailing and Delivery Expenses................................... $ *
Other Reimbursable Offering Expenses of the
Managing Trustee.............................................. $ *
---------
Total.................................................. $ *
=========
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Indemnification of the Managing Trustee and its Affiliates (as such term
is defined in Section 4.6 of the Second Amended and Restated Declaration of
Trust (the "Trust Agreement") by the registrant is provided for in Section 4.6
of the Trust Agreement, which Section is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Managing Trustee of the registrant and its
Affiliates pursuant to the foregoing provision, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities is asserted by such Managing Trustee or Affiliate in connection
with the securities being registered, the registrant will not indemnify the
Managing Trustee or its Affiliates or any person acting as a broker-dealer for
any losses, liabilities or expenses arising form or out of any alleged violation
of Federal or state securities laws unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee. In any claim for indemnification for federal or
state securities law violations, the party seeking indemnification shall place
before the court the position of the Securities and Exchange Commission, the
Massachusetts Securities Division, and the Commissioner of Corporations of the
State of California with respect to the issue of indemnification for securities
law violations. The Trust shall not incur the cost of a portion of any insurance
other than public liability insurance which insures any party against any
liability the indemnification of which is herein prohibited.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Not applicable.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit
Number Description
------------------------------------------------------------------------
4.1 Second Amended and Restated Declaration of Trust. (To
be filed by amendment)
4.2 Form of Subscription Certificate.
5 Opinion of Peabody & Brown with respect to the
securities being registered. (Included in their Opinion
filed as Exhibit 8)
8 Opinion of Peabody & Brown with respect to certain
federal income tax matters. (To be filed by amendment)
10 Escrow Agreement dated _______________, 1997,
between the Trust and ________________. (To be filed
by amendment)
23.1 Consent of Independent Auditors.
23.2 Consent of Peabody & Brown. (Included in their Opinion
filed as Exhibit 8)
24 Power of Attorney. (See the Signature Page to this
Registration Statement)
27 Financial Data Schedule
Item 17. Undertakings.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment may be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time may be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. See Item 14 above for an additional undertaking relating to the
enforceability of certain indemnification provisions contained in the Trust
Agreement for the registrant.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on February 12, 1997.
By: AFG ASIT Corporation, the
Managing Trustee of the registrant
By: /s/ Geoffrey A. MacDonald
--------------------------------
Geoffrey A. MacDonald, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Gary D. Engle and Gary M. Romano, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and all documents in connection, therewith, with the
Securities and Exchange Commission and all state securities commissions,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that is attorneys-in-fact and agents or any of them, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on February 12, 1997.
Signature(s) Title(s)
------------ --------
/s/ Geoffrey A. MacDonald President (principal executive officer) and a
- ----------------------------- Director of AFG ASIT Corporation (the
Geoffrey A. MacDonald Managing Trustee of the registrant)
/s/ Gary M. Romano Principal Financial Officer of AFG ASIT
- ----------------------------- Corporation
Gary M. Romano
/s/ Michael J. Butterfield Principal Accounting Officer of AFG ASIT
- ----------------------------- Corporation
Michael J. Butterfield
/s/ Gary D. Engle Director of AFG ASIT Corporation
- -----------------------------
Gary D. Engle
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
4.1 Second Amended and Restated Declaration of Trust. (To
be filed by amendment)
4.2 Form of Subscription Certificate.
5 Opinion of Peabody & Brown with respect to the
securities being registered. (Included in their Opinion
filed as Exhibit 8)
8 Opinion of Peabody & Brown with respect to certain
federal income tax matters. (To be filed by amendment)
10 Escrow Agreement dated _______________, 1997, between
the Trust and ________________. (To be filed by
amendment)
23.1 Consent of Independent Auditors.
23.2 Consent of Peabody & Brown. (Included in their Opinion
filed as Exhibit 8)
24 Power of Attorney. (See the Signature Page to this
Registration Statement)
27 Financial Data Schedule
<PAGE>
SUBSCRIPTION CERTIFICATE
NAME OF RIGHTS HOLDER: ______________________________
SUBSCRIPTION CERTIFICATE NUMBER: ______________________________
NUMBER OF RIGHTS: ______________________________
AFG INVESTMENT TRUST B
SUBSCRIPTION RIGHT FOR CLASS B SUBORDINATED BENEFICIARY INTERESTS
This Subscription Certificate represents the number of Rights set forth
above. The Rights Holder named above is entitled to acquire one Class B
Subordinated Beneficiary Interest (a "Class B Subordinated Interest") in AFG
Investment Trust B (the "Trust") for each Right held.
Please Note: Minimum subscription is the lesser of (a) the amount of Class
B Subordinated Interests which the Rights Holder is permitted to acquire, which
is equal to the number of Rights set forth above, or (b) 400 Class B
Subordinated Interests for IRAs or other Qualified Plans or (c) 1,000 Class B
Subordinated Interests for all other subscribers (with a higher minimum purchase
in certain states).
To subscribe for Class B Subordinated Interests, the Exercising Rights
Holder must present to __________________________ (the "Subscription Agent"),
prior to 5:00 p.m., Boston time, on ______________, 1997 unless extended by the
Trust (the "Expiration Date"), at the address set forth on the reverse side of
this Certificate:
a properly completed and executed Subscription Certificate and a money
order or check drawn on a bank located in the United States and payable to
_____________________________, as Subscription Agent for AFG Investment
Trust B, in the amount of the Subscription Price for the number of Class B
Subordinated Interests subscribed for under his or her Basic Subscription
Rights plus, if applicable, the Subscription Price for the number of Class
B Subordinated Interests for which the Over-Subscription Privilege is
being exercised.
If the Rights Holder subscribes for additional Class B Subordinated
Interests pursuant to the Over-Subscription Privilege, Part B of Section I of
this Subscription Certificate must be completed to indicate the maximum number
of Class B Subordinated Interests for which the Over-Subscription Privilege is
being exercised.
No later than 15 business days following the Expiration Date, the
Subscription Agent will send to each Exercising Rights Holder (or, if the
Trust's Class A Interests are held by a nominee, to such nominee), a notice as
to the number of Class B Subordinated Interests purchased pursuant to his or her
Basic Subscription Rights and, if applicable, pursuant to the Over-Subscription
Privilege, along with a letter explaining the allocation of Class B Subordinated
Interests pursuant to the Over-Subscription Privilege. Any excess payment to be
refunded by the Trust to an Exercising Rights Holder who is not allocated the
full amount of Class B Subordinated Interests subscribed for pursuant to the
Over-Subscription Privilege will be mailed by the Subscription Agent to him or
her as promptly as practicable. An Exercising Rights Holder will have no right
to modify or rescind a subscription after the Subscription Agent has received
payment.
If an Exercising Rights Holder does not make payment of any amounts due in
respect of Class B Subordinated Interests subscribed for, the Trust and the
Subscription Agent reserve the right to (i) find other Rights Holders for the
subscribed and unpaid for Class B Subordinated Interests; (ii) apply any payment
actually received by it toward the purchase of the greatest whole number of
Class B Subordinated Interests which could be acquired by such Holder upon
exercise of his or her Basic Subscription Rights and/or
1
<PAGE>
pursuant to the Over-Subscription Privilege, and/or (iii) exercise any and all
other rights and/or remedies to which it may be entitled, including, without
limitation, the right to set-off against payment actually received by it with
respect to such subscribed Class B Subordinated Interests.
Capitalized terms used but not defined in this Subscription Certificate
shall have the meanings assigned to them in the Prospectus dated
___________________________, 1997 relating to the Rights.
AFG INVESTMENT TRUST B
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Subscription Agent toll-free at (800) ______________, ext.
______ or to the Trust toll-free at (800) _____________.
2
<PAGE>
Expiration Date: _________________, 1997
PLEASE COMPLETE ALL APPLICABLE INFORMATION
BY MAIL OR OVERNIGHT COURIER: BY HAND:
___________________________ ___________________________
___________________________ ___________________________
___________________________ ___________________________
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar amount of
Class B Subordinated Interests indicated in A and B below upon the terms and
conditions specified in the Prospectus related hereto, receipt of which is
acknowledged. I enclose a check or money order for the Subscription Price for
the number of Class B Subordinated Interests indicated in A plus the
Subscription Price for the number of Class B Subordinated Interests indicated in
B. I hereby agree to be bound by the Trust Agreement, as from time to time in
effect.
Please Note: Minimum subscription is the lesser of (a) the amount of Class
B Subordinated Interests which the Rights Holder is permitted to acquire, which
is equal to the number of Rights set forth on the reverse side of this
Certificate, or (b) 400 Class B Subordinated Interests ($2,000) for IRAs or
other Qualified Plans or (c) 1,000 Class B Subordinated Interests ($5,000) for
all other subscribers (with a higher minimum purchase in certain states).
Please check |_| below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
|_| A. Basic ________________________ X $5.00 = $_______________
Subscription (Class B Subordinated (Subscription Price) (Amount Required)
Rights Interests Subscribed For)
|_| B. Over-Subscript ________________________ X $5.00 = $_______________
Privilege (Additional Class B (Subscription Price) (Amount Required)
Subordinated Interests
Requested)
|_| C. Amount of Check or Money Order Enclosed (Total of A and B). Make = $_______________
check payable to ______________________, as Subscription Agent for AFG
Investment Trust A.
</TABLE>
______________________________ Please provide your Day (___) __________________
Signature(s) of Subscriber telephone number Evening (___) _________________
______________________________
Signature(s) of Subscriber
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteration.
3
<PAGE>
Exhibit 23.1
Consent of Independent Auditor
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 12, 1996, in the Registration Statement
(Form S-1) and related Prospectus of AFG Investment Trust B filed
February 12, 1997 for the registration of 1,000,961 Class B Subordinated
Interests.
ERNST & YOUNG LLP
Boston, Massachusetts
February 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,496,927
<SECURITIES> 0
<RECEIVABLES> 581,893
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,078,820
<PP&E> 26,256,917
<DEPRECIATION> 11,826,952
<TOTAL-ASSETS> 17,509,702
<CURRENT-LIABILITIES> 444,507
<BONDS> 5,291,093
0
0
<COMMON> 0
<OTHER-SE> 11,774,102
<TOTAL-LIABILITY-AND-EQUITY> 17,509,702
<SALES> 4,434,013
<TOTAL-REVENUES> 4,229,558
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,563,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,697
<INCOME-PRETAX> 356,044
<INCOME-TAX> 0
<INCOME-CONTINUING> 356,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 356,044
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
