<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________________ to ___________
___________________________
For Quarter Ended March 31, 1998 Commission File No. 0-21390
AFG Investment Trust B
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3157230
- --------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
- ----------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes |_| No |_|
<PAGE>
AFG Investment Trust B
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1998 and December 31, 1997 3
Statement of Operations
for the three months ended March 31, 1998 and 1997 4
Statement of Cash Flows
for the three months ended March 31, 1998 and 1997 5
Notes to the Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II. OTHER INFORMATION:
Items 1 - 6 17
2
<PAGE>
AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
March 31, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,425,361 $ 3,893,242
Restricted cash 3,121,763 3,121,763
Rents receivable 63,829 675,629
Accounts receivable - affiliate 282,316 350,009
Equipment at cost, net of accumulated depreciation
of $15,152,924 and $14,796,020 at March 31, 1998
and December 31, 1997, respectively 8,350,350 9,173,514
-------------- --------------
Total assets $ 16,243,619 $ 17,214,157
-------------- --------------
-------------- --------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 1,298,523 $ 2,038,628
Accrued interest 4,847 27,395
Accrued liabilities 20,973 11,550
Accrued liabilities - affiliate 30,753 49,597
Deferred rental income 13,323 35,275
Cash distributions payable to participants 235,577 235,577
-------------- --------------
Total liabilities 1,603,996 2,398,022
-------------- --------------
Participants' capital:
Managing Trustee 2,589 3,535
Special Beneficiary 21,362 29,162
Class A Beneficiary Interests (582,017 Interests;
initial purchase price of $25 each) 10,764,762 10,864,150
Class B Beneficiary Interests (1,000,961 Interests;
initial purchase price of $5 each) 4,642,285 4,710,663
Treasury Interests (83,477 Interests at Cost) (791,375) (791,375)
-------------- --------------
Total participants' capital 14,639,623 14,816,135
-------------- --------------
Total liabilities and participants' capital $ 16,243,619 $ 17,214,157
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the three months ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Income:
Lease revenue $ 973,652 $ 1,348,618
Interest income 96,824 39,200
Gain (loss) on sale of equipment (16,711) 3,160
-------------- --------------
Total income 1,053,765 1,390,978
-------------- --------------
Expenses:
Depreciation and amortization 656,759 1,020,428
Interest expense 23,485 45,110
Equipment management fees - affiliate 47,618 57,259
Operating expenses - affiliate 58,610 41,637
-------------- --------------
Total expenses 786,472 1,164,434
-------------- --------------
Net income $ 267,293 $ 226,544
-------------- --------------
-------------- --------------
Net income
per Class A Beneficiary Interest $ 0.24 $ 0.31
-------------- --------------
-------------- --------------
per Class B Beneficiary Interest $ 0.10 $ --
-------------- --------------
-------------- --------------
Cash distributions declared
per Class A Beneficiary Interest $ 0.41 $ 0.41
-------------- --------------
-------------- --------------
per Class B Beneficiary Interest $ 0.16 $ --
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 267,293 $ 226,544
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 656,759 1,020,428
(Gain) loss on sale of equipment 16,711 (3,160)
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable 611,800 (27,645)
Accounts receivable - affiliate 67,693 (70,964)
Increase (decrease) in:
Accrued interest (22,548) 5,385
Accrued liabilities 9,423 (4,500)
Accrued liabilities - affiliate (18,844) 6,000
Deferred rental income (21,952) 79,210
-------------- --------------
Net cash from operating activities 1,566,335 1,231,298
-------------- --------------
Cash flows from investing activities:
Proceeds from equipment sales 149,694 14,714
-------------- --------------
Net cash from investing activities 149,694 14,714
-------------- --------------
Cash flows used in financing activities:
Principal payments - notes payable (740,105) (436,988)
Distributions paid (443,805) (300,297)
-------------- --------------
Net cash used in financing activities (1,183,910) (737,285)
-------------- --------------
Net increase in cash and cash equivalents 532,119 508,727
Cash and cash equivalents at beginning of period 3,893,242 2,829,093
-------------- --------------
Cash and cash equivalents at end of period $ 4,425,361 $ 3,337,820
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 46,033 $ 39,725
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
March 31, 1998
(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 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1998 and December 31, 1997 and results of operations for
the three month periods ended March 31, 1998 and 1997 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 1998, the Trust had $7,298,403 invested in federal agency
discount notes and reverse repurchase agreements secured by U.S. Treasury Bills
or interests in U.S. Government securities. Such cash includes $3,121,763 which
represents net proceeds realized from the offering of the Class B Interests less
the portion thereof used to pay a special distribution to the Class A
Beneficiaries and to redeem Class A Interests (see Note 9). These funds are
reserved for future purchases of Class A Interests pursuant to the Trust
Agreement and were classified as Restricted Cash on the Trust's Statement of
Financial Position at March 31, 1998 and December 31, 1997.
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. In certain instances , the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $1,896,134 are due as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending March 31, 1999 $ 1,065,639
2000 318,817
2001 232,588
2002 159,480
2003 119,610
----------
Total $1,896,134
----------
----------
</TABLE>
6
<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 March 31,
1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1998 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
-------------- -------- -------
<S> <C> <C>
Aircraft 0-57 $ 8,018,105
Materials handling 0-30 4,167,304
Computers and peripherals 0-9 4,153,537
Communications 0-9 2,908,263
General plant and warehouse 0 1,576,077
Construction and mining 0-33 836,390
Retail store fixtures 0 692,558
Manufacturing 0 449,902
Furniture and fixtures 7 284,019
Tractors and heavy duty trucks 0-18 245,851
Trailers/intermodal containers 0-3 128,443
Photocopying 0 42,825
------------
Total equipment cost 23,503,274
Accumulated depreciation (15,152,924)
------------
Equipment, net of accumulated depreciation $ 8,350,350
------------
------------
</TABLE>
At March 31, 1998, the Trust's equipment portfolio included equipment
having a proportionate original cost of $13,009,872, representing approximately
55% of total equipment cost.
At March 31, 1998, the cost and net book value of equipment held for sale
or re-lease was approximately $10,153,000 and $4,652,000, respectively. This
equipment includes the Trust's proportionate interest in a McDonnell Douglas
MD-82 aircraft formerly leased to Alaska Airlines, Inc. with a cost and net book
value of $6,778,365 and $4,430,642, respectively. The Managing Trustee is
currently holding discussions with a potential lessee regarding the re-lease of
this aircraft. The Managing Trustee is actively seeking the sale or re-lease of
all equipment not on lease. In addition, the summary above also includes
equipment being leased on a month-to-month basis.
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the three month periods ended March 31, 1998 and
1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
7
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Equipment management fees $ 47,618 $ 57,259
Administrative charges 17,631 10,530
Reimbursable operating expenses
due to third parties 40,979 31,107
--------- --------
Total $ 106,228 $ 98,896
--------- --------
--------- --------
</TABLE>
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
March 31, 1998, the Trust was owed $282,316 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in April 1998.
Refer to Note 8 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and the change in ownership of the Managing
Trustee.
NOTE 6 - NOTES PAYABLE
Notes payable at March 31, 1998 consisted of installment notes of
$1,298,523 payable to banks and institutional lenders. The notes bear interest
rates ranging between 5.69% and 6.84%, except for one note which bears a
fluctuating interest rate based on LIBOR (5.63% at March 31, 1998) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trust has a balloon payment obligation of $282,421 at the expiration of the
primary lease term related to the aircraft leased to Reno Air. The carrying
amount of notes payable approximates fair value at March 31, 1998.
The annual maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending March 31, 1999 $ 569,445
2000 111,702
2001 120,800
2002 130,639
2003 365,937
----------
Total $1,298,523
----------
----------
</TABLE>
NOTE 7 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed
a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal
8
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Defendants. The Defendants have denied, and continue to deny, that any of them
have committed or threatened to commit any violations of law or breached any
fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
beneficiaries (or partners, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants
(see Note 10). To the extent that the parties agree upon a Stipulation of
Settlement that is approved by the Court, the complete terms thereof will be
communicated to all of the beneficiaries (or partners) of the Nominal Defendants
to enable them to vote thereon.
There can be no assurance that the parties will agree on a Stipulation of
Settlement, or that it will be approved by the Court, or that the outcome of the
voting by the beneficiaries (or partners) of the Nominal Defendants, including
the Trust, will result in a settlement finally being effected or in the Trust
being included in any such settlement. The Managing Trustee and its affiliates,
in consultation with counsel, concur that there is a reasonable basis to believe
that a Stipulation of Settlement will be agreed upon by the parties and approved
by the Court. In the absence of a Stipulation of Settlement approved by the
Court, the Defendants intend to defend vigorously against the claims asserted in
the Class Action Lawsuit. The Managing Trustee and its affiliates cannot predict
with any degree of certainty the ultimate outcome of such litigation.
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Trust, National Steel
Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA")
for the lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and other
remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice
of Removal which removed the case to the United States District Court, District
of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's
Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory
relief and alleging breach of contract, implied covenant of good faith and fair
dealing and specific performance. EFG filed its Answer to these counterclaims on
September 29, 1995. Though the parties discussed settlement with respect to this
matter for some time, the negotiations were unsuccessful. Notwithstanding these
discussions, EFG recently filed an Amended and Supplemental Complaint alleging
further default under the MLA and EFG recently filed a motion for Summary
Judgment on all claims and counterclaims. The Court held a hearing on EFG's
motion in December 1997 and the Court recently entered a decision dismissing
certain of National Steel's counterclaims and finding in favor of EFG on certain
issues and in favor of National Steel on other issues. The Trust does not
anticipate that it will experience any material losses as a result of this
action.
NOTE 8 - ISSUANCE OF CLASS B INTERESTS
On October 26, 1996, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission (the "SEC") which subsequently
was sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the
Securities Exchange Act. The Solicitation Statement sought the consent of the
Beneficiaries to a proposed amendment (the "Amendment") to the Amended and
Restated Declaration of Trust (the "Trust Agreement") which would (i) amend the
provisions of the Trust Agreement governing the redemption of Beneficiary
Interests to permit the Trust to offer to redeem outstanding Beneficiary
Interests at such times, in such amounts, in such manner and at such prices as
the Managing Trustee might determine from time to time, in accordance with
applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an
9
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
additional class of security with such designations, preferences and relative,
participating, optional or other special rights, powers and duties as the
Managing Trustee might affix. The funds obtained through the issuance of such a
security would be used by the Trust to (a) expand redemption opportunities for
Beneficiaries without using Trust funds which might otherwise be available for
cash distributions; and (b) make a special one-time cash distribution to the
Class A Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required
the consent of the Beneficiaries holding more than 50% in the aggregate of the
Class A Interests held by all Class A Beneficiaries. A majority of Class A
Interests, representing 369,960 Interests or 55.6% of all Class A Interests,
voted in favor of the Amendment; 69,792 Interests or 10.5% of all Class A
Interests voted against the Amendment; and 24,444 Interests or 3.7% of all Class
A Interests abstained. Approximately 69.8% of all Class A Interests participated
in the vote. Accordingly, the Trust Agreement was amended.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 1,000,961 Class B Interests at $5.00 per interest, thereby
generating $5,004,805 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 3,588 Class B Interests, generating $17,940 of such
aggregate capital contributions, and the Special Beneficiary, EFG, purchased
997,373 Class B Interests, generating $4,986,865 of such aggregate capital
contributions. The Trust incurred offering costs in the amount of $50,048 and
professional service costs of $62,170 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $979,449, to Class A Beneficiaries on August 15, 1997. See Note 9
regarding the redemption of Class A Interests.
NOTE 9 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust by filing a Form
13E-4, Issuer Tender Offer Statement, with the SEC and distributing to the Class
A Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $785,295 of the net proceeds realized from the
issuance of the Class B Interests to purchase 82,837 of the Class A Interests
tendered as a result of the offer. The Tender Documents described, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. On December 1, 1997, the Trust used an additional $6,080
of such proceeds to purchase 640 additional Class A Interests. The Trust intends
to continue to purchase additional outstanding Class A Interests through future
offers to purchase during the Initial Redemption Period (two years following the
close of the Class B offering which occurred on July 17,1997). These purchases
will be funded by the net proceeds realized from the issuance of the Class B
Interests less the portion thereof used to pay a special distribution to the
Class A Beneficiaries and to redeem Class A Interests to date. These funds are
reserved for future purchases of Class A
10
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Interests pursuant to the Trust Agreement and are classified as Restricted Cash
on the Trust's Statement of Financial Position at March 31, 1998 and December
31, 1997 (see also Note 10).
NOTE 10 - SUBSEQUENT EVENT
On May 5, 1998, the Trust filed a definitive Solicitation Statement with
the United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a proposed
amendment (the "Amendment") to the Second Amended and Restated Declaration of
Trust (the "Trust Agreement"). The Solicitation Statement and accompanying
Consent of Beneficiary were mailed to all of the Beneficiaries of the Trust on
May 6, 1998. The Beneficiaries were requested to use the Consent of Beneficiary
to vote on several proposals and return their votes on or before June 5, 1998.
Subject to attaining a settlement in the Class Action Lawsuit described in
Note 7 herein, the Amendment, if approved, would modify the Trust Agreement in
the following principal respects: (i) the Trust would pay a Special Cash
Distribution to the Class A Beneficiaries of record as of September 1, 1997, or
to their successors or assigns, totaling $500,709 (or approximately $0.75 per
Class A Interest) using a portion of the Class B capital contributions that
otherwise would be distributed as a Class B Capital Distribution to Equis II
Corporation, the parent company of the Managing Trustee and an affiliate of EFG;
(ii) Equis II Corporation will be required to reduce its prospective Class B
Capital Distributions by $1,126,596 and treat such amount as a long-term equity
investment in the Trust; (iii) certain voting restrictions will be placed upon
the Class B Interests owned by Equis II Corporation; (iv) the Trust's
reinvestment period, which originally expired on September 8, 1996, will be
reinstated until December 31, 2001; and (v) acquisition fees paid to EFG in
connection with reinvestment assets acquired after the Amendment date will be
reduced from a maximum of 3% to 1% and management fees earned in connection with
such assets will be reduced from a maximum of 5% to 2%.
The proposed Amendment also provides for other modifications to the Trust
Agreement which are not contingent upon reaching a settlement in the Class
Action Lawsuit, principally as follows: (i) the Trust's stated investment
policies and objectives will be broadened to permit the Trust to invest in
assets other than leased equipment, and (ii) the Trust's financing provisions
will be modified to eliminate any cap on the amount of aggregate Trust
indebtedness and permit the Trust to use cross-collateralized and other recourse
debt structures, thereby enabling the Trust to secure financing at interest
rates that, generally, would be lower than under current borrowing arrangements.
The Solicitation Statement contains additional information concerning the
proposed Amendment and associated risk factors. The Amendment will be adopted or
rejected based upon the majority of the Class A Interests actually voted
(including 839 Class A Interests owned by an affiliate of EFG). Accordingly, the
Amendment will be adopted no matter how few Class A Interests are actually
voted, provided a majority of those Interests are voted in favor of the
Amendment. Although Equis II Corporation has voting control of the Trust, it
will vote its Class B Interests in the same proportion in which the majority of
the Class A Interests are voted.
11
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this quarterly report of AFG Investment Trust B (the
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the outcome of the Class Action Lawsuit
described in Note 7 to the accompanying financial statements, and the ability of
Equis Financial Group Limited Partnership (formerly American Finance Group)
("EFG") to collect all rents due under the attendant lease agreements and to
successfully remarket the Trust's equipment, upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. EFG's computer
programs were designed and written using four digits to define the applicable
year. As a result, EFG does not anticipate system failure or miscalculations
causing disruptions of operations. Based on recent assessments, EFG determined
that minimal modification of software is required so that its network operating
system will function properly with respect to dates in the year 2000 and
thereafter. EFG believes that with these modifications to the existing operating
system, the Year 2000 Issue will not pose significant operational problems for
its computer systems. EFG will utilize internal resources to upgrade software
for Year 2000 modifications and anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any anticipated impact on its operating
system. The total cost of the Year 2000 project is expected to be insignificant
and have no effect on the results of operations of the Trust.
Three months ended March 31, 1998 compared to the three months ended March 31,
1997:
Overview
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the future business
operations of the Trust. See Note 7 to the accompanying financial statements.
The Trust's operations commenced in 1992.
Results of Operations
For the three months ended March 31, 1998, the Trust recognized lease
revenue of $973,652 compared to $1,348,618 for the same period in 1997. The
decrease in lease revenue from 1997 to 1998 resulted principally from primary
lease term expirations and the sale of equipment. The future level of lease
revenue to be recognized by the Trust may be impacted by the proposed amendment
to the Trust Agreement as described in Note 10 to the accompanying financial
statements.
The Trust's equipment portfolio includes certain assets in which the Trust
holds a proportionate ownership interest. In such cases, the remaining interests
are owned by EFG or an affiliated equipment leasing program
12
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART I. FINANCIAL INFORMATION
sponsored by EFG. Proportionate equipment ownership enables the Trust to further
diversify its equipment portfolio by participating in the ownership of selected
assets, thereby reducing the general levels of risk which could result from a
concentration in any single equipment type, industry or lessee. The Trust and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment.
Interest income for the three months ended March 31, 1998 was $96,824
compared to $39,200 for the same period in 1997. Generally, interest income is
generated from the temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. Interest income in 1998 includes interest
earned on unexpended proceeds resulting from the issuance of Class B Interests
(see below). Future interest income will fluctuate in relation to prevailing
interest rates, the collection of lease revenue and the proceeds from equipment
sales.
During the three months ended March 31, 1998, the Trust sold equipment
having a net book value of $166,405 to existing lessees and third parties. These
sales resulted in a net loss, for financial statement purposes, of $16,711
compared to a net gain of $3,160 in 1997 on equipment having a net book value of
$11,554.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Trust, as such transactions will be dependent upon
the condition and type of equipment being sold and its marketability at the time
of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
Depreciation and amortization expense was $656,759 and $1,020,428 for the
three months ended March 31, 1998 and 1997, respectively. For financial
reporting purposes, to the extent that an asset is held on primary lease term,
the Trust depreciates the difference between (i) the cost of the asset and (ii)
the estimated residual value of the asset on a straight-line basis over such
term. For purposes of this policy, estimated residual values represent estimates
of equipment values at the date of primary lease expiration. To the extent that
an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Interest expense was $23,485 or 2.4% of lease revenue for the three months
ended March 31, 1998 compared to $45,110 or 3.3% of lease revenue for the same
period in 1997. Interest expense in future periods will continue to decline in
amount and as a percentage of lease revenue as the principal balance of notes
payable is reduced through the application of rent receipts to outstanding
indebtedness.
Management fees were 4.9% and 4.2% of lease revenue during the three month
periods ended March 31, 1998 and 1997, respectively. Management fees are based
on 5% of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
13
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 6% and 3.1% of lease revenue during the three months ended March 31,
1998 and 1997, respectively. The increase in operating expenses from 1997 to
1998 was due primarily to professional service costs incurred in connection with
the Solicitation Statement described in Note 10 to the accompanying financial
statements and an increase in administrative charges. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a trust.
Other fluctuations typically occur in relation to the volume and timing of
remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview". As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $1,566,335 and $1,231,298 in the three months ended March 31, 1998
and 1997, respectively. Future renewal, re-lease and equipment sale activities
will cause a gradual decline in the Trust's primary-term lease revenue and
corresponding sources of operating cash. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will decline as the Trust experiences a higher frequency of
remarketing events.
The Trust's equipment is leased by a number of creditworthy,
investment-grade companies and, to date, the Trust has not experienced any
material collection problems and has not considered it necessary to provide an
allowance for doubtful accounts. Notwithstanding a positive collection history,
there is no assurance that all future contracted rents will be collected or that
the credit quality of the Trust's lessees will be maintained. Collection risk
could increase in the future, particularly as the Trust remarkets its equipment
and enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During the three months
ended March 31, 1998, the Trust realized equipment sale proceeds of $149,694
compared to $14,714 during the same period in 1997. 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 repayments of principal related to such indebtedness are
reported as components of financing activities. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In
14
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART I. FINANCIAL INFORMATION
future periods, the amount of cash used to repay debt obligations will decline
as the principal balance of notes payable is reduced through the collection and
application of rents. However, the Trust has a balloon payment obligation of
$282,421 at the expiration of the primary lease term related to the aircraft
leased to Reno Air.
In accordance with the Trust Agreement, upon the dissolution of the Trust,
the Managing Trustee will be required to contribute to the Trust an amount equal
to any negative balance which may exist in the Managing Trustee's tax capital
account. At December 31, 1997, the Managing Trustee had a positive tax capital
account balance.
At March 31, 1998, the Trust had aggregate future minimum lease payments
of $1,896,134 from contractual lease agreements (see Note 3 to the financial
statements), a portion of which will be used to amortize the principal balance
of notes payable of $1,298,523 (see Note 6 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often dependent upon the needs and interests of the existing
lessees. Some lessees may choose to renew their lease contracts, while others
may elect to return the equipment. In the latter instances, the equipment could
be re-leased to another lessee or sold to a third party. Accordingly, as the
Trust matures and a greater level of its equipment assets become available for
remarketing, the cash flows of the Trust will become less predictable. In
addition, the Trust will have cash outflows to satisfy interest on indebtedness
and to pay management fees and operating expenses. Ultimately, the Trust is
expected to meet its future disbursement obligations and to distribute any
excess of cash inflows over cash outflows to the Participants in accordance with
the Trust Agreement. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described herein
and in the accompanying financial statements and result in fluctuations to the
Trust's periodic cash distribution payments.
On July 18, 1997, the Trust issued 1,000,961 Class B Interests at $5.00
per interest, thereby generating $5,004,805 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,588 Class B Interests,
generating $17,940 of such aggregate capital contributions, and the Special
Beneficiary, EFG, purchased 997,373 Class B Interests, generating $4,986,865 of
such aggregate capital contributions. The Trust incurred offering costs in the
amount of $50,048 and professional service costs of $62,170 in connection with
this offering. Subsequently, EFG transferred its Class B Interests to a
special-purpose company, Equis II Corporation, a Delaware corporation. EFG also
transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the
Trust, to Equis II Corporation. As a result, Equis II Corporation has voting
control of the Trust through its ownership of the majority of the Trust's
outstanding voting interests, as well as its ownership of AFG ASIT Corporation.
Equis II Corporation is controlled by EFG's President and Chief Executive
Officer, Gary D. Engle. Accordingly, control of the Managing Trustee did not
change as a result of the foregoing transactions (see also Note 8 to the
accompanying financial statements).
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $979,449, to Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997,
the Trust used $785,295 of the net proceeds realized from the issuance of the
Class B Interests to purchase 82,837 of the Class A Interests tendered as a
result of the offer. On December 1, 1997, the Trust used an additional $6,080 of
such proceeds to purchase 640 additional Class A Interests. The Trust intends to
purchase additional Class A Interests through future offers to purchase during
the Initial Redemption Period (two years following the close of the Class B
offering which occurred on July 17,1997). These purchases will be funded by the
remaining net proceeds of $3,121,763 realized from the
15
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART I. FINANCIAL INFORMATION
issuance of the Class B Interests which are classified as Restricted Cash on the
Trust's Statement of Financial Position (see also Notes 9 and 10 to the
accompanying financial statements).
Cash distributions paid to the Participants consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Trust and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash
distribution level that is consistent with the operating cash flows of the Trust
and to optimize the long-term value of the Trust. A distribution level that is
higher than the Trust's operating cash flows could compromise the Trust's
working capital position, as well as its ability to refurbish or upgrade
equipment in response to lessee requirements or other market circumstances.
Accordingly, in order to better align monthly cash distributions with the
Trust's operating cash flows, the Managing Trustee reduced the level of monthly
cash distributions from an annualized rate of $2.52 per Class A Interest (the
rate established and paid from the Trust's inception through September 1995) to
an annualized rate of $1.26 per Class A Interest commencing in October 1995. In
October 1996, the Managing Trustee increased the annualized distribution rate to
$1.64 per Class A Interest and has sustained this distribution rate through the
first quarter of 1998. For the Class B Beneficiaries, the Managing Trustee
established and paid, from the Trust, an annualized distribution of $0.66 per
Class B Interest commencing July 18, 1997. Future distributions with respect to
Class B Interests, will be subordinate to certain distributions with respect to
Class A Interests.
Cash distributions to the Managing Trustee, the Special Beneficiary and
the Beneficiaries are declared and generally paid within 45 days following the
end of each calendar month. The payment of such distributions is presented as a
component of financing activities. For the three months ended March 31, 1998,
the Trust declared total cash distributions of $443,805. The Beneficiaries were
allocated $402,753 ($238,598 for Class A Beneficiaries and $164,155 for Class B
Beneficiaries); the Special Beneficiary was allocated $36,614; and the Managing
Trustee was allocated $4,438.
The nature of the Trust's principal cash flows gradually will shift from
rental receipts to equipment sale proceeds as the Trust matures. As this occurs,
the Trust's cash flows will become more volatile in that certain of the Trust's
equipment leases will be renewed and certain of its assets will be sold. In some
cases, the Trust may be required to expend funds to refurbish or otherwise
improve the equipment being remarketed in order to make it more desirable to a
potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing
Trustee will attempt to monitor and manage these events to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
the collection of contractual rents, the retirement of scheduled indebtedness,
the Trust's future working capital and equipment requirements, in establishing
future cash distribution. Ultimately, the Beneficiaries should expect that cash
distribution rates will fluctuate over the long term as a result of future
remarketing activities.
16
<PAGE>
AFG Investment Trust B
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 7 to the financial statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response:
On May 5, 1998, the Trust filed a definitive
Solicitation Statement with the United States
Securities and Exchange Commission in connection
with the solicitation by the Trust of the consent
of the Beneficiaries to a proposed amendment to
the Second Amended and Restated Declaration of
Trust. The Solicitation Statement and accompanying
Consent of Beneficiary were mailed to all of the
Beneficiaries of the Trust on May 6, 1998. Refer
to Note 10 to the financial statements herein.
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
17
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AFG Investment Trust B
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee of
the Registrant.
By: /s/ Michael J. Butterfield
-------------------------------------------
Michael J. Butterfield
Treasurer AFG ASIT Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 15, 1998
-------------------------------------------
By: /s/ Gary Romano
-------------------------------------------
Gary M. Romano
Clerk of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1998
-------------------------------------------
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,547,124
<SECURITIES> 0
<RECEIVABLES> 346,145
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,893,269
<PP&E> 23,503,274
<DEPRECIATION> 15,152,924
<TOTAL-ASSETS> 16,243,619
<CURRENT-LIABILITIES> 305,473
<BONDS> 1,298,523
0
0
<COMMON> 0
<OTHER-SE> 14,639,623
<TOTAL-LIABILITY-AND-EQUITY> 16,243,619
<SALES> 0
<TOTAL-REVENUES> 1,053,765
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 762,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,485
<INCOME-PRETAX> 267,293
<INCOME-TAX> 0
<INCOME-CONTINUING> 267,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 267,293
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
