<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________________ to ____________________
Commission file number 0-21390
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AFG Investment Trust B
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(Exact name of registrant as specified in its charter)
Delaware 04-3157230
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad St., Sixth Floor, Boston, MA 02110
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
- --------------------------- ----------------------------------------------
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Securities registered pursuant to Section 12(g) of the Act:
665,494 Class A Trust Beneficiary Interests
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(Title of class)
1,000,961 Class B Trust Beneficiary Interests
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
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State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1997 (Part I and II)
<PAGE>
AFG Investment Trust B
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Trust's Securities and Related
Security Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
PART III
Item 10. Directors and Executive Officers of the Trust 9
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and Management 11
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13-15
PART I
ITEM 1. BUSINESS.
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<PAGE>
(a) General Development of Business
AFG Investment Trust B (the "Trust") was organized as a Delaware
business trust in accordance with the Delaware Business Trust Act on May 28,
1992 for the purpose of acquiring and leasing to third parties a diversified
portfolio of capital equipment. Participants' capital initially consisted of
contributions of $1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000
from the Special Beneficiary, Equis Financial Group Limited Partnership
(formerly American Finance Group), a Massachusetts limited partnership, ("EFG"
or the "Advisor") and $100 from the Initial Beneficiary, AFG Assignor
Corporation, a wholly-owned affiliate of EFG. The Trust issued an aggregate of
665,494 Beneficiary Interests (hereinafter referred to as Class A Interests) at
a subscription price of $25.00 each ($16,637,350 in total) to 803 investors on
September 8, 1992. On July 18, 1997, the Trust issued 1,000,961 Class B
Interests at $5.00 each ($5,004,805 in total), of which (i) 997,373 interests
are held by Equis II Corporation, an affiliate of EFG, and (ii) 3,588 interests
are held by 5 Class A investors. The Trust repurchased 82,837 Class A Interests
on October 10, 1997 and an additional 640 Class A Interests on December 1, 1997
using proceeds from the offering of Class B Interests. Accordingly, there are
582,017 Class A Interests currently outstanding.
The Trust has one Managing Trustee, AFG ASIT Corporation, a
Massachusetts corporation, and one Special Beneficiary, EFG. AFG ASIT
Corporation is a wholly-owned subsidiary of Equis II Corporation and an
affiliate of EFG. Class A Interests and Class B Interests basically have
identical voting rights and, therefore, Equis II Corporation has control over
the Trust on all matters on which the Beneficiaries may vote. The Managing
Trustee and the Special Beneficiary are not required to make any other capital
contributions except as may be required under the Second Amended and Restated
Declaration of Trust (the "Trust Agreement").
(b) Financial Information About Industry Segments
The Trust is engaged in only one industry segment: the business of
acquiring capital equipment and leasing the equipment to creditworthy lessees on
a full-payout or operating lease basis. Full-payout leases are those in which
aggregate noncancellable rents equal or exceed the Purchase Price of the leased
equipment. Operating leases are those in which the aggregate noncancellable
rental payments are less than the Purchase Price of the leased equipment.
Industry segment data is not applicable.
(c) Narrative Description of Business
The Trust was organized to acquire a diversified portfolio of capital
equipment subject to various full-payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Trust's primary investment objectives are to acquire and lease equipment
which will:
1. Generate monthly cash distributions;
2. Preserve and protect Trust capital; and
3. Maximize residual value for ultimate sale.
The Trust has the additional objective of providing certain federal
income tax benefits.
The Closing Date of the offering of Class A Beneficiary Interests was
September 8, 1992. Significant operations commenced coincident with the Trust's
initial purchase of equipment and associated lease commitments on September 8,
1992. The acquisition of the equipment and its associated leases is described in
detail in Note 3 to the financial statements included in Item 14, herein. The
Trust is expected to terminate by December 31 of the eleventh year following its
Closing Date, or December 31, 2003; however, 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 has no employees; however, it entered into an Advisory
Agreement with EFG. EFG's role, among other things, is to (i) evaluate, select,
negotiate, and consummate the acquisition of equipment, (ii) manage the leasing,
re-leasing, financing, and refinancing of equipment, and (iii) arrange the
resale of equipment.
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The Advisor is compensated for such services as described in the Trust
Agreement, Item 13 herein, and in Note 4 to the financial statements, included
in Item 14, herein.
The Trust's investment in equipment is, and will continue to be, subject
to various risks, including physical deterioration, technological obsolescence
and defaults by lessees. A principal business risk of owning and leasing
equipment is the possibility that aggregate lease revenues and equipment sale
proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
Consequently, the success of the Trust is largely dependent upon the ability of
the Managing Trustee and its Affiliates to forecast technological advances, the
ability of the lessees to fulfill their lease obligations and the quality and
marketability of the equipment at the time of sale.
In addition, the leasing industry is very competitive. Although
substantially all funds available for acquisitions have been invested in
equipment, subject to noncancellable lease agreements, the Trust will encounter
considerable competition when equipment is re-leased or sold at the expiration
of primary lease terms. The Trust will compete with lease programs offered
directly by manufacturers and other equipment leasing companies, including
business trusts and limited partnerships organized and managed similarly to the
Trust and including other EFG-sponsored partnerships and trusts, which may seek
to re-lease or sell equipment within their own portfolios to the same customers
as the Trust. Many competitors have greater financial resources and more
experience than the Trust, the Managing Trustee and the Advisor.
The Trust Agreement provided for the reinvestment of Cash From Sales or
Refinancings in additional equipment until September 1996, a period of four
years following Closing (see Note 10 to the financial statements included in
Item 14 herein). Upon the expiration of each primary lease term, the Managing
Trustee will determine whether to sell or re-lease the Trust's equipment,
depending on the economic advantages of each alternative. Over time, the Trust
will begin to liquidate its portfolio of equipment.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is
incorporated herein by reference to Note 2 to the financial statements in the
1997 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
Default by a lessee under a lease agreement may cause equipment to be
returned to the Trust at a time when the Managing Trustee or the Advisor is
unable to arrange the sale or re-lease of such equipment. This could result in
the loss of a portion of potential lease revenues and weaken the Trust's ability
to repay related indebtedness.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Trust and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating
primarily to the business of originating new leases, and the name "American
Finance Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Trust and the Other Investment Programs and to continue managing all assets
owned by the Trust and the Other Investment Programs.
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(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Not applicable.
ITEM 2. PROPERTIES.
Incorporated herein by reference to Note 3 to the financial statements
in the 1997 Annual Report.
ITEM 3. LEGAL PROCEEDINGS.
Incorporated herein by reference to Note 7 to the financial statements
in the 1997 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE TRUST'S SECURITIES AND RELATED SECURITY HOLDER MATTERS.
(a) Market Information
There is no public market for the resale of the Interests and it is not
anticipated that a public market for resale of the Interests will develop.
(b) Approximate Number of Security Holders
At December 31, 1997, there were 680 record holders (674 Class A
Interests and 6 Class B Interests) in the Trust.
(c) Dividend History and Restrictions
In addition to the Managing Trustee and the Special Beneficiary, the
Trust has Class A and Class B Beneficiaries. 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. Notwithstanding the foregoing, the Managing
Trustee may, in its sole discretion, restrict or suspend distributions if it
believes such action to be in the best interests of the Trust. Each distribution
shall be made 90.75% to the Class A and Class B Beneficiaries, 8.25% to the
Special Beneficiary, and 1% to the Managing Trustee. Currently, there are no
restrictions that materially limit the Trust's ability to make distributions or
that the Trust believes are likely to materially limit future distributions. The
Trust expects to continue to make distributions on a monthly basis.
Distributions, prior to Class B Payout (defined below), are allocated to
the Class A and Class B Beneficiaries as follows: 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 Interest, reduced by the Class B
Distribution Reduction Factor (defined later herein); 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 400%, divided by the difference between 100% and the Class B
Distribution Reduction Factor, of the amount so distributed with respect to each
Class B Interest. The Class B Distribution Reduction Factor means the percentage
determined as a fraction, the numerator of which is the aggregate amount of any
cash distributions paid to the Class B Beneficiaries as a return of their
original capital contributions (on a per Class B Subordinated Interest basis),
discounted at 8% per annum (commencing August 1, 1997, the first day of the
month following the Class B Closing) and the denominator of which is $5.00.
Distributions in 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Managing Special
Total Trustee Beneficiary Beneficiaries
----- ------- ----------- -------------
<S> <C> <C> <C> <C>
Total 1997 distributions:
Class A Interests $2,118,339 $ 11,389 $ 93,958 $2,012,992
Class B Interests 328,714 3,287 27,119 298,308
Total 1996 distributions:
Class A Interests 1,039,491 10,395 85,758 943,338
---------- --------- ---------- ----------
Total $3,486,544 $ 25,071 $ 206,835 $3,254,638
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
Distributions payable at December 31, 1997 and 1996 were $235,577 and
$200,199, 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
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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 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.
Class A Payout means the first time when the aggregate amount of all
distributions actually made to the Class A Beneficiaries equals $25 per Class A
Interest (minus all uninvested capital contributions returned to the Class A
Beneficiaries) plus a cumulative annual distribution of 10% compounded quarterly
and calculated beginning with the last day of the month of the Trust's initial
Class A Closing.
Class B Payout means the first time when the aggregate amount of all
distributions actually made to the Class B Beneficiaries equals $5 per Class B
Interest plus a cumulative annual return of 8% per annum compounded quarterly
with respect to capital contributions returned to them as a Class B Capital
Distribution and 10% per annum, compounded quarterly, with respect to the
balance of their capital contributions and calculated beginning August 1, 1997,
the first day of the month following the Class B Closing.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are determined and paid within 45 days after the
completion of each calendar month. Each Distribution is described in a statement
sent to the Beneficiaries.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the section entitled "Selected
Financial Data" in the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Incorporated herein by reference to the financial statements and
supplementary data included in the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE TRUST.
(a-b) Identification of Directors and Executive Officers
The Trust has no Directors or Officers. As indicated in Item 1 of this
report, AFG ASIT Corporation is the Managing Trustee of the Trust. Under the
Trust Agreement, the Managing Trustee is solely responsible for the operation of
the Trust's properties and the Beneficiaries have no right to participate in the
control of such operations. The names, titles and ages of the Directors and
Executive Officers of the Managing Trustee as of March 15, 1998 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS
OF THE MANAGING TRUSTEE (See Item 13)
<TABLE>
<CAPTION>
Name Title Age Term
- ----------------------- -------------------------------------------- ------- -------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the Managing Trustee 49 elected and
qualified
Gary D. Engle President and Chief Executive Officer
and member of the Executive
Committee of EFG and a Director
of the Managing Trustee 49
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the Managing Trustee 38
Michael J. Butterfield Vice President, Finance and Treasurer
of EFG and Treasurer of the
Managing Trustee 38
James A. Coyne Executive Vice President of EFG and
Vice President of the Managing Trustee 37
James F. Livesey Vice President, Aircraft and Vessels
of EFG 48
Sandra L. Simonsen Senior Vice President, Information Systems
of EFG 47
Gail D. Ofgant Vice President, Lease Operations
of EFG 32
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Directors or
Executive Officers.
(e) Business Experience
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Mr. MacDonald, age 49, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the Managing Trustee.
Mr. MacDonald was also a co-founder, Director and Senior Vice President of EFG's
predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Old North
Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors,
Mr. MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds an M.B.A. from Boston College and
a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 49 is President and Chief Executive Officer and a member
of the Executive Committee of EFG and President of AFG Realty Corporation. Mr.
Engle is Vice President and a Director of certain of EFG's affiliates and a
Director of the Managing Trustee. Mr. Engle owns a controlling interest in and
is President of Equis II Corporation and is a limited partner in ONC. Mr. Engle
is also Chairman, Chief Executive Officer and a member of the Board of Directors
of Semele Group, Inc. ("Semele"). On December 16, 1994, Mr. Engle acquired
control of the Managing Trustee, EFG and each of EFG's subsidiaries. From
1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners
Development, Inc., a real estate and mortgage banking company. From 1980 to
1987, Mr. Engle was Senior Vice President and Chief Financial Officer of
Arvida Disney Company, a large scale community development company owned by
Walt Disney Company. Prior to 1980, Mr. Engle served in various management
consulting and institutional brokerage capacities. Mr. Engle has an M.B.A.
from Harvard University and a B.S. degree from the University of
Massachusetts (Amherst).
Mr. Romano, age 38, is Executive Vice President and Chief Operating
Officer of EFG and certain of its affiliates and Clerk of the Managing Trustee.
Mr. Romano is also Secretary of Equis II Corporation and Vice President and
Chief Financial Officer of Semele. Mr. Romano joined EFG in November 1989 and
was appointed Executive Vice President and Chief Operating Officer in April
1996. Prior to joining EFG, Mr. Romano was Assistant Controller for a
privately-held real estate company which he joined in 1987. Mr. Romano held
audit staff and manager positions at Ernst & Whinney (now Ernst & Young LLP)
from 1982 to 1986. Mr. Romano is a C.P.A. and holds a B.S. degree from Boston
College.
Mr. Butterfield, age 38, joined EFG in June 1992 and was appointed Vice
President, Finance and Treasurer of EFG and certain affiliates in April 1996,
and is Treasurer of the Managing Trustee, Equis II Corporation and Semele. Prior
to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP,
which he joined in 1987. Mr. Butterfield was employed in public accounting and
industry positions in New Zealand and London (U.K.) prior to coming to the
United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has completed
his C.P.A. requirements in the United States. He holds a Bachelor of Commerce
degree from the University of Otago, Dunedin, New Zealand.
Mr. Coyne, age 37, is Executive Vice President of EFG and Vice President
of the Managing Trustee and Equis II Corporation. Mr. Coyne is Chief Operating
Officer of Semele, a stockholder of Equis II Corporation and a limited partner
in ONC. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG
in November 1994. Mr. Coyne was appointed Executive Vice President of EFG in
September 1997. From May 1993 through November 1994, he was with the Raymond
Company, a private investment firm, where he was responsible for financing
corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was
affiliated with a real estate investment company and an equipment leasing
company. Prior to 1985 he was with the accounting firm of Ernst & Whinney (now
Ernst & Young LLP). He has a BS in Business Administration from John Carroll
University, a Masters Degree in Accounting from Case Western Reserve University
and is a Certified Public Accountant.
Mr. Livesey, age 48, is Vice President, Aircraft and Vessels. Mr.
Livesey joined EFG in October, 1989, and was promoted to Vice President in
January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing
positions with two privately-held leasing firms. Mr. Livesey holds an M.B.A.
from Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 47, joined EFG in February 1990. She became Senior
Vice President, Information Systems in April 1996. Prior to joining EFG, Ms.
Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company which she joined in 1973. Ms. Simonsen provided systems
consulting for a subsidiary of American International Group and authored a
software program published by IBM. Ms. Simonsen holds a B.A. degree from Wilson
College.
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<PAGE>
Ms. Ofgant, age 32, joined EFG in July 1989, and is currently Vice
President, Lease Operations. Ms. Ofgant held the position of Manager, Lease
Operations at EFG through March, 1996. Prior to joining EFG, Ms. Ofgant was
employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS
Degree in Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
ITEM 11. EXECUTIVE COMPENSATION.
(a) Cash Compensation
Currently, the Trust has no employees. However, under the terms of the
Trust Agreement, the Trust is obligated to pay all costs of personnel employed
full or part-time by the Trust, including officers or employees of the Managing
Trustee or its Affiliates. There is no plan at the present time to make any
officers or employees of the Managing Trustee or its Affiliates employees of the
Trust. The Trust has not paid and does not propose to pay any options, warrants
or rights to the officers or employees of the Managing Trustee or its
Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Trust has no employees, as discussed in Item 11(a),
pursuant to section 10.4(c) of the Trust Agreement, the Trust incurs a monthly
charge for personnel costs of EFG for persons engaged in providing
administrative services to the Trust. A description of the remuneration paid by
the Trust to the Managing Trustee and its Affiliates for such services is
included in Item 13 of this report and in Note 4 to the financial statements
included in Item 14 herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the Managing
Trustee or its Affiliates which results or may result from their resignation,
retirement or any other termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
By virtue of its organization as a trust, the Trust has outstanding no
securities possessing traditional voting rights. However, as provided in Section
11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a majority interest
of the Beneficiaries have voting rights with respect to:
1. Amendment of the Trust Agreement;
2. Termination of the Trust;
3. Removal of the Managing Trustee; and
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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).
As of March 1, 1998, the following person or group owns beneficially
more than 5% of the Trust's outstanding Beneficiary interests:
<TABLE>
<CAPTION>
Name and Amount Percent
Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
------------------------- --------------------- ----------------- ---------
<S> <C> <C> <C>
Interests Representing Equis II Corporation
Class B Beneficiary 88 Broad Street 997,373 Interests 99.64%
Boston, MA 02110
</TABLE>
No person or group is known by the Managing Trustee to own beneficially
more than 5% of the Trust's 582,017 outstanding Class A Interests as of March 1,
1998.
Equis II Corporation is controlled by EFG's President and Chief
Executive Officer, Gary D. Engle (see Item 10 and Item 13 of this report).
The ownership and organization of EFG is described in Item 1 of this
report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Managing Trustee of the Trust is AFG ASIT Corporation, an affiliate
of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Trust are paid by EFG on behalf
of the Trust and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the years ended December 31, 1997, 1996 and
1995, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equipment acquisition fees $ -- $ 36,673 $107,415
Offering costs 50,048 -- --
Equipment management fees 235,030 249,205 244,800
Administrative charges 65,196 42,123 21,000
Reimbursable operating expenses
due to third parties 207,741 98,758 100,358
-------- -------- --------
Total $558,015 $426,759 $473,573
-------- -------- --------
-------- -------- --------
</TABLE>
As provided under the terms of the Trust Agreement, EFG is compensated
for its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG is compensated
by an amount equal to .28% of Asset Base Price paid by the Trust. For
acquisition services resulting from reinvestment, EFG is compensated by an
amount equal to 3% of Equipment Base Price paid by the Trust. For management
services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Trust or (ii) fees which the Managing Trustee reasonably
believes to be competitive for similar services for similar equipment. Both of
these fees are subject to certain limitations defined in the Trust Agreement
(see Note 10 to the financial statements included in Item 14 herein concerning
proposed changes to the fees paid to EFG and its affiliates). Compensation to
EFG for services connected to the remarketing of equipment is calculated as the
lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage
fees otherwise payable under arm's length circumstances. Payment of the
remarketing fee is subordinated to Payout and is subject to certain limitations
defined in the Trust Agreement.
-12-
<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.
All equipment was purchased from EFG or directly from external vendors.
The Trust's Purchase Price is determined by the method described in Note 2 to
the Trust's financial statements included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
December 31, 1997, the Trust was owed $350,009 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1998.
On July 18, 1997, the Trust issued 1,000,961 Class B Interests at $5.00
per interest, thereby generating $5,004,805 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,588 Class B Interests,
generating $17,940 of such aggregate capital contributions, and the Special
Beneficiary, EFG, purchased 997,373 of such Class B Interests, generating
$4,986,865 of such aggregate capital contributions. The Trust incurred offering
costs in the amount of $50,048 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.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership formed in 1995 and owned and controlled by certain principals of
EFG, owns 839 Class A Interests or less than 1% of the total outstanding Class A
Interests of the Trust. EFG owns a 49% limited partnership interest in ONC,
which it acquired in December 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Trust
None.
(d) Transactions with Promoters
See Item 13(a) above.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors..........................*
Statement of Financial Position
at December 31, 1997 and 1996...........................*
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995....*
Statement of Changes in Participants' Capital
for the years ended December 31, 1997, 1996 and 1995....*
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995....*
Notes to the Financial Statements.......................*
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K,
as set forth in Item 601 of Regulation S-K, are not
applicable.
Exhibit
Number
------
4 Second Amended and Restated Declaration of Trust.
13 The 1997 Annual Report to security holders, a copy of
which is furnished for the information of the
Securities and Exchange Commission. Such Report, except
for those portions thereof which are incorporated
herein by reference, is not deemed "filed" with the
Commission.
23 Consent of Independent Auditors.
99 (a) Lease agreement with OMI Corporation was filed in
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 as Exhibit 28 (d) and is
incorporated herein by reference.
* Incorporated herein by reference to the appropriate portion of the 1997
Annual Report to security holders for the year ended December 31, 1997 (see
Part II).
Exhibit
Number
------
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<PAGE>
99 (b) Lease agreement with Alaska Airlines, Inc. was
filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 as Exhibit 28 (e)
and is incorporated herein by reference.
99 (c) Lease agreement with Tarmac Mid-Atlantic,
Incorporated was filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1993 as Exhibit 28 (g) and is incorporated herein by
reference.
99 (d) Lease agreement with Montgomery Ward and Company,
Inc. is filed in the Registrant's Annual Report on form
10-K for the year ended December 31, 1997 and is
included herein.
(b) Reports on Form 8-K
None.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the registrant and in the
capacity and on the date indicated.
AFG Investment Trust B
By: AFG ASIT Corporation,
a Massachusetts corporation and the
Managing Trustee of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
-------------------------------- -------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and
Managing Trustee a Director of the Managing Trustee
(Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------------- ------------------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
-------------------------------- -------------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer
of the Managing Trustee of the Managing Trustee
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------------- ------------------------------
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<PAGE>
Exhibit 4
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
<PAGE>
Second Amended and Restated
Declaration of Trust
<TABLE>
<CAPTION>
<S> <C>
RECITALS.....................................................................1
DECLARATION..................................................................1
ARTICLE I -THE TRUST.........................................................1
1.1 NAME.....................................................................1
1.2 LOCATION.................................................................2
1.3 NATURE OF TRUST..........................................................2
1.4 PURPOSES.................................................................2
1.6 TERM AND DISSOLUTION.....................................................2
ARTICLE II - DEFINITIONS.....................................................3
ARTICLE III - CAPITAL.......................................................14
3.1 CAPITAL CONTRIBUTION OF THE SPECIAL BENEFICIARY AND MANAGING TRUSTEE....14
3.2 CLASS A BENEFICIARIES; OFFERING OF CLASS B INTERESTS; BENEFICIARY
INTERESTS...............................................................14
3.3 CAPITAL ACCOUNTS........................................................15
3.4 ADDITIONAL CAPITAL CONTRIBUTIONS........................................16
ARTICLE IV - TRUSTEES.......................................................16
4.1 THE TRUSTEES; LIABILITY FOR TRUST OBLIGATIONS...........................16
4.2 EXTENT OF MANAGING TRUSTEE POWERS AND DUTIES............................16
4.3 DELEGATION OF POWERS....................................................22
4.4 RELIANCE BY THIRD PARTIES...............................................22
4.5 LIMITATIONS ON THE EXERCISE OF POWERS OF MANAGING TRUSTEE...............22
4.6 LIABILITY FOR ACTS OR OMISSIONS AND INDEMNIFICATION.....................23
4.7 COMPENSATION OF TRUSTEES................................................24
4.8 RESIGNATION OF TRUSTEES.................................................25
4.9 REMOVAL OF TRUSTEES.....................................................26
4.10 CONSEQUENCES OF RESIGNATION OR REMOVAL.................................26
4.11 LIABILITY OF RESIGNED OR REMOVED TRUSTEE...............................27
4.12 CONTINUATION OF TRUST BUSINESS.........................................27
4.13 POWERS AND LIMITATIONS OF DELAWARE TRUSTEE.............................27
ARTICLE V - ADVISOR SERVICES AND COMPENSATION...............................28
5.1 COMPENSATION TO ADVISOR AND CERTAIN AFFILIATES..........................28
5.2 OTHER INTERESTS OF THE ADVISOR AND ITS AFFILIATES.......................30
5.3 OTHER TRANSACTIONS INVOLVING THE ADVISOR AND ITS AFFILIATES.............31
ARTICLE VI - TRUST BENEFICIARIES............................................31
6.1 ABSENCE OF CONTROL OVER TRUST BUSINESS..................................31
6.2 LIMITED LIABILITY.......................................................31
6.3 FIDUCIARY DUTY OF MANAGING TRUSTEE TO TRUST BENEFICIARIES...............32
ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES............................32
7.1 INVESTMENT OBJECTIVES AND POLICIES......................................32
7.2 ASSETS AND LESSEES......................................................32
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.3 SALES AND LEASES OF ASSETS FROM OR TO THE MANAGING TRUSTEE AND ITS
AFFILIATES..............................................................32
7.4 LOANS TO OR FROM THE MANAGING TRUSTEE AND ITS AFFILIATES................33
7.5 JOINT INVESTMENTS.......................................................33
7.6 RESALES.................................................................35
7.7 IN-KIND DISTRIBUTIONS...................................................35
7.8 ROLL-UPS................................................................35
7.9 CHANGE IN INVESTMENT OBJECTIVE AND POLICIES.............................36
ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS................................36
8.1 DISTRIBUTION OF DISTRIBUTABLE CASH......................................36
8.2 ALLOCATION OF PROFITS AND LOSSES........................................37
8.3 RECOURSE TO TRUST ASSETS ONLY...........................................38
8.5 SPECIAL PROVISIONS.....................................................38
ARTICLE IX - TRANSFER OF INTERESTS..........................................42
9.1 WITHDRAWAL OF A BENEFICIARY.............................................42
9.2 ASSIGNMENT.............................................................42
9.3 SUBSTITUTION............................................................42
9.4 PROHIBITED ASSIGNMENT...................................................43
9.5 CHANGE OF STATUS OF BENEFICIARY.........................................44
9.6 RIGHT TO TENDER INTERESTS FOR REDEMPTION................................44
9.7 STATUS OF AN ASSIGNING BENEFICIARY......................................45
9.8 WITHDRAWAL OF SPECIAL BENEFICIARY; SUBSTITUTION.........................45
ARTICLE X - FISCAL MATTERS..................................................46
10.1 TITLE TO PROPERTY AND BANK ACCOUNTS....................................46
10.2 MAINTENANCE OF, AND ACCESS TO, BASIC TRUST DOCUMENTS...................46
10.3 FINANCIAL BOOKS AND ACCOUNTING.........................................47
10.4 TRUST EXPENSES.........................................................47
10.5 FISCAL YEAR............................................................49
10.6 REPORTS AND ACCOUNTING DECISIONS.......................................49
10.7 PARTNERSHIP CLASSIFICATION; FEDERAL TAX ELECTIONS......................51
ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES....................51
11.1 MEETINGS...............................................................51
11.2 VOTING PROCEDURES; VOTING RIGHTS OF BENEFICIARIES......................52
11.3 VALUATION OF INTERESTS OF THE MANAGING TRUSTEE.........................53
ARTICLE XII - AMENDMENTS....................................................53
12.1 CERTAIN AMENDMENTS REQUIRING MAJORITY CONSENT..........................53
12.2 OTHER AMENDMENTS.......................................................53
ARTICLE XIII - POWER OF ATTORNEY............................................54
13.1 APPOINTMENT............................................................54
13.2 AMENDMENTS TO AGREEMENT................................................55
13.3 POWER COUPLED WITH AN INTEREST.........................................55
13.4 POWER OF ATTORNEY BY SUBSTITUTE BENEFICIARIES..........................55
ARTICLE XIV - GENERAL PROVISIONS............................................56
14.1 NOTICES, APPROVALS AND CONSENTS........................................56
14.2 FURTHER ASSURANCES.....................................................56
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
14.3 CAPTIONS...............................................................56
14.4 BINDING EFFECT.........................................................56
14.5 SEPARABILITY...........................................................56
14.6 INTEGRATION............................................................56
14.7 APPLICABLE LAW.........................................................57
14.8 COUNTERPARTS...........................................................57
14.9 CREDITORS..............................................................57
14.10 INTERPRETATION........................................................57
14.11 ARBITRATION; VENUE....................................................57
SCHEDULE A..................................................................59
</TABLE>
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<PAGE>
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
AFG INVESTMENT TRUST B
THE AMENDED AND RESTATED DECLARATION OF TRUST OF AFG INVESTMENT TRUST B
made and agreed to by the Trustees and the Trust Beneficiaries as of May 29,
1992, as amended through the date hereof, is hereby amended and restated
pursuant to this Second Amended and Restated Declaration of Trust dated as of
July 15, 1997 to read in its entirety as follows (certain capitalized terms used
and not otherwise defined herein shall have the respective meanings specified in
Article II):
RECITALS
A. A Certificate of Trust for the Trust has been filed in the Filing
Office in accordance with the Business Trust Act. The Trust has been created as
a Delaware business trust to acquire a diversified portfolio of new and used
capital equipment (the "Assets"). The business of the Trust will be controlled
by the Managing Trustee for the benefit of the Trust Beneficiaries.
B. The Managing Trustee may acquire, hold, invest and dispose of Trust
Assets on behalf of the Trust in the manner provided in this Agreement.
C. The beneficial interest in the Trust Assets shall be divided into units
of beneficial interest (the "Interests"), as provided in this Agreement.
DECLARATION
NOW, THEREFORE, the Trustees hereby declare that they will hold all
property of every type and description which they may acquire as trustees,
together with the proceeds thereof, in trust, and carry on the business of the
Trust for the benefit of the Trust Beneficiaries, in the manner and subject to
the provisions of this Agreement.
ARTICLE I -THE TRUST
1.1 Name.
The name of the Trust shall be "AFG INVESTMENT TRUST B" and so far as may
be practicable, the Managing Trustee shall conduct the Trust's activities,
execute all documents and sue or be sued under that name, which name (and the
word "Trust" whenever used in this Agreement, except where the context otherwise
requires) shall refer to the Trustees in their capacity as Trustees, and not
individually or personally, and shall not refer to the Trust Beneficiaries or to
the agents or employees of the Trust or of such Trustees. Should the Managing
Trustee determine that the use of such name is not practicable, legal, or
convenient in any jurisdiction, the Managing Trustee may use such other
designation or adopt such other name for the Trust in such jurisdiction as the
Managing Trustee deems proper and the Trust may hold property and conduct its
activities under such designation or name, subject, however, to the limitations
contained in Section 1.3.
-1-
<PAGE>
1.2 Location.
The Trust shall maintain an office 98 North Washington Street, Boston,
Massachusetts 02114, and may have such other offices or places of business as
the Managing Trustee may from time to time determine as necessary or expedient.
1.3 Nature of Trust.
The Trust shall be of the type commonly termed a Delaware business trust.
The Trust is not intended to be, shall not be deemed to be, and shall not be
treated as, a general partnership, limited partnership, joint venture,
corporation or joint stock company (provided, however, that the Trust shall be
classified as a partnership for tax purposes, as provided in Section 10.7(a)).
The Trust Beneficiaries shall be beneficiaries and their relationship to the
Trustees shall be solely in that capacity in accordance with the rights
conferred upon them hereunder.
1.4 Purposes.
The purposes of the Trust are to acquire, invest in, maintain, operate,
lease, re-lease, finance, refinance, hold, encumber, manage, sell, exchange and
otherwise in any manner deal with the Assets and to engage in the business
contemplated by this Agreement. The Trust shall not engage in any other business
or activity.
1.5 Powers.
In furtherance of its purposes, the Trust shall have the power:
(a) to acquire, invest in, maintain, operate, lease, re-lease, finance,
refinance, hold, encumber, sell, manage, exchange and otherwise deal in Assets
situated in any location and to enter into Joint Ventures, and to make any
Permitted Investments, in each case as deemed appropriate by the Managing
Trustee;
(b) subject to any applicable statutes and regulations, to borrow money
from any lender to further the purposes of the Trust, to issue evidences of
indebtedness in respect thereof and to secure the same by mortgage, pledge,
grant of lien on, or other security interest in any Assets; and
(c) to do all other things, carry on any activities and enter into,
perform, modify, supplement or terminate any contracts necessary to, in
connection with, or incidental to the furtherance of the purposes of the Trust,
all so long as such things, activities and contracts may be lawfully done,
carried on or entered into by the Trust under the laws of the State and the
United States of America and any other jurisdictions whose laws may apply and
under the terms of this Agreement.
1.6 Term and Dissolution.
The Trust shall continue in full force and effect until December 31, 2003,
except that the Trust shall be dissolved, its affairs wound up, and its assets
liquidated prior to such date upon:
(a) the sale or other disposition of all or substantially all Assets
unless the Managing Trustee elects to continue the Trust business for the
purpose of the receipt and collection of any consideration to be received in
exchange for Assets (which activities shall be deemed to be a part of such sale
or other disposition and the winding-up of the affairs of the Trust);
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<PAGE>
(b) the occurrence of any event as a result of which no Managing Trustee
remains if the Trust is not reconstituted pursuant to Section 4.12;
(c) the election to dissolve the Trust made in writing by the Managing
Trustee with Majority Consent or, subject to compliance with Article XI, made by
a Majority in Interest of the Beneficiaries without any action by the Managing
Trustee;
(d) the entry of a final decree of dissolution of the Trust by a court of
competent jurisdiction; or
(e) any other event which causes the dissolution or winding-up of the
Trust under the Business Trust Act to the extent not otherwise provided for
herein.
In such event, the Managing Trustee shall liquidate the Assets and apply
and distribute the proceeds thereof in accordance with Section 8.1(b).
Notwithstanding the foregoing, if during liquidation the Managing Trustee shall
determine that an immediate sale of all of the Assets would be impermissible,
impractical or would cause undue loss to the Participants, the Managing Trustee
may defer liquidation of, and withhold from distribution for a reasonable time,
any Assets except those necessary to satisfy Trust debts and obligations. Upon
completion of the winding-up of the Trust, the Managing Trustee (or its
trustees, receivers or successors) shall cause the cancellation of the
Certificate of Trust.
During the period of dissolution and winding-up of the Trust, the Managing
Trustee, or any other Person performing such actions, may exercise all of the
powers granted to the Managing Trustee herein, and may adopt such plan, method
or procedure as may be deemed reasonable in order to effectuate an orderly
winding-up. If such functions shall be performed by a Person other than the
Managing Trustee or an Affiliate, such Person shall be entitled to reasonable
compensation from the Trust for his services.
The Managing Trustee shall use its best efforts to cause the Trust to sell
all of the Assets not later than the end of the tenth year following Final
Closing, provided that market conditions existing at the time permit sale of the
Assets on terms deemed reasonable by the Managing Trustee.
ARTICLE II - DEFINITIONS
Whenever used in this Agreement, unless the context otherwise requires,
the terms defined in this Article II shall have the following respective
meanings:
"Accountants" mean Ernst & Young, Boston, LLP, Massachusetts, or another
nationally recognized firm of independent accountants selected for the Trust by
the Managing Trustee.
"Acquisition Expenses" means expenses (other than Acquisition Fees)
incurred by any party attributable to selection and acquisition of Assets,
whether or not acquired, including but not limited to legal fees and expenses,
travel and communication expenses, costs of credit reports and appraisals,
non-refundable option payments and accounting fees and expenses; provided,
however, that Acquisition Expenses will not include any expenses described in
Section 10.4 that relate to the operation of the Trust rather than the selection
and acquisition of Assets; and provided, further, that Acquisition Expenses will
not include any expenses paid by an Affiliate of the Managing Trustee for which
such Affiliate does not receive any reimbursement from the Trust.
"Acquisition Fee" means any fee or commission paid by any party in
connection with the selection, purchase, evaluation, construction, acquisition,
initial leasing or operation, and initial arrangement for leasing or placing in
service of any Asset by the Trust, however designated and however treated for
tax or accounting purposes, but not including any Acquisition Expenses.
-3-
<PAGE>
"Adjusted Class A Investment" means, on an aggregate basis for all Class A
Interests, an amount equal to (a) the sum of (i) $25 per Class A Interest owned
by all Class A Beneficiaries and (ii) the amount by which all Distributions made
to the Class A Beneficiaries in the aggregate until Class A Payout are less than
the Cumulative Class A Annual Distribution minus (b) the sum of (i) the amount
by which all Distributions made to the Class A Beneficiaries in the aggregate
until Class A Payout exceed the Cumulative Annual Distribution and (ii) all
uninvested Capital Contributions which have been returned to the Class A
Beneficiaries pursuant to this Agreement.
"Advisor" means EFG, together with its successor and assigns as advisor
under the Advisory Agreement.
"Advisory Agreement" means the agreement between the Advisor and the Trust
pursuant to which the Advisor will provide certain management and advisory
services for the Trust.
"Affiliate" means, when used with reference to a specific Person, (i) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is an officer, director or partner in, the specified Person or
of which the specified Person is an officer, director or partner, or (iii) any
Person that is the beneficial owner of, or controls, 10% or more of any class of
voting securities of the specified Person.
"AFG Investment Trusts" means, collectively, AFG Investment Trust A, AFG
Investment Trust B, AFG Investment Trust C and AFG Investment Trust D.
"Agreement" means this Second Amended and Restated Declaration of Trust,
as amended from time to time.
"Asset" means, collectively, any real or personal property, including
equipment and related tangible property, acquired by the Trust and any interest
of the Trust therein, whether directly or indirectly through a nominee, Joint
Venture or otherwise.
"Asset Base Price" means the amount paid by the Trust to the seller of an
Asset for such Asset, which shall be (i) the manufacturer's invoice cost to the
Trust if the Asset is acquired directly from the manufacturer, (ii) if the Asset
is acquired from a seller who is not the manufacturer and not the Managing
Trustee or an Affiliate thereof, the lower of (a) the price invoiced by such
seller or (b) fair market value as determined by the Managing Trustee in its
best judgment, or (iii) if acquired from the Managing Trustee or an Affiliate
thereof, the lower of (a) the price paid by such seller plus all reasonable,
necessary and actual costs accrued in maintaining the Asset (including, without
limitation, the cost of storage, carrying, warehousing, interest cost, repair,
marketing, financing and taxes from the date of acquisition thereof) less the
amount of primary term lease rentals accrued from the date of acquisition
thereof and retained by the Managing Trustee or an Affiliate thereof from
leasing the Asset or (b) fair market value as determined by the Managing Trustee
in its best judgment, including in each case described in (i), (ii) and (iii)
the amounts of all liens and encumbrances on the Asset and all reasonable,
necessary and actual expenses of the seller incurred in connection with
acquiring and transferring the Asset to the Trust (including but not limited to
all financing expenses, sales taxes, delivery charges and attorneys' fees paid
to or on behalf of third parties) but not including any Acquisition Fees or
Acquisition Expenses. In no event, however, shall any of the expense items
described herein be included in the Asset Base Price for any Asset (i) which
cannot be included consistent with generally accepted accounting principles or
(ii) which is not actually acquired by the Trust.
"Asset Management" means personnel and services necessary to the leasing
activities of the Trust,
-4-
<PAGE>
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.
"Asset Management Fee" means the fee payable to the Advisor for managing
the leasing, financing and re-financing of Assets pursuant to Section 5.1(c).
"Assign" means, with respect to any Interest or any part thereof, to sell,
assign, transfer, give or otherwise dispose of, whether voluntarily or by
operation of law, except that in the case of a bona fide pledge or other
hypothecation; no Assignment shall be deemed to have occurred unless and until
the secured party has exercised his right of foreclosure with respect thereto.
"Assignment" means any transaction in which an Interest or any part
thereof is Assigned.
"B" and "Baa" mean bond ratings assigned by Moody's Investors Service,
Inc. to the senior debt obligations of prospective initial Lessees which are in
the middle of the Moody's rating scale of "Aaa" (highly unlikely to default) to
"D" (in default). Specifically, according to Moody's, bonds rated "Baa" are
considered as medium grade obligations, i.e., they are neither highly protected
nor poorly secured; interest payments and principal security appear to be
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; and such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Also, according to Moody's, bonds rated "B" generally
lack characteristics of a desirable investment and assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
"Beneficiary" means the owner of a Beneficiary Interest and shall include
each Class A Beneficiary and Class B Beneficiary. The term "Beneficiary" does
not include the Special Beneficiary.
"Beneficiary Interest" means the beneficial interest of a Beneficiary in
this Trust created pursuant to this Agreement and shall include each Class A
Interest and Class B Interest.
"Business Trust Act" means the Delaware Business Trust Act, 12 Del. C.
Section 3801, et. seq., as amended from time to time.
"Capital Account" means the capital account of the Managing Trustee, the
Special Beneficiary and each Beneficiary established and maintained in
accordance with Section 3.3.
"Capital Contribution" means the total amount of money actually
contributed to the Trust by each Participant (or any prior Participant) prior to
the deduction of any organization and offering expenses or selling commissions.
"Cash from Operations" means the cash provided by the Trust's normal
operations (including Lease renewals and without deduction for depreciation or
other non-cash charges) after the general expenses and current liabilities of
the Trust (other than any portion of the Asset Management Fee which is required
to be accrued and the Subordinated Resale Fee) are paid and discharged, as
reduced by any reserves funded from such cash for working capital 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
-5-
<PAGE>
or destruction of Assets), as (i) reduced by (a) all debts and liabilities of
the Trust required to be paid as a result of Sale or Refinancing transactions,
whether or not then payable, (including without limitation, any liabilities on
an Asset sold which are not assumed by the buyer and any remarketing fees
required to be paid to Persons not affiliated with the Managing Trustee but not
including any Subordinated Resale Fee whether or not then due and payable) and
(b) general expenses and current liabilities of the Trust (other than any
portion of the Asset Management Fee which is required to be accrued and the
Subordinated Resale Fee) and (c) any reserves for working capital and contingent
liabilities funded from such cash to the extent deemed reasonable by the
Managing Trustee, and (ii) increased by any portion of such reserves then deemed
by the Managing Trustee not to be required for Trust operations. In the event
the Trust takes back a note in connection with any Sale or Refinancing
transaction, all payments subsequently received in cash by the Trust with
respect to such note shall be included in Cash From Sales or Refinancings,
irrespective of the treatment of such payments by the Trust for tax or
accounting purposes. If, in payment for Assets sold, the Trust receives purchase
money obligations secured by liens on such Assets, the amount of such
obligations shall not be included in Cash From Sales or Refinancings until and
to the extent the obligations are realized in cash, sold, or otherwise disposed
of.
"Certificate of Trust" means the certificate of trust filed with the
Filing Office for the Trust in accordance with the Business Trust Act, as
amended or restated from time to time.
"Class A Beneficiary" means any Beneficiary who owns a Class A Interest.
"Class A Closings" means the dates designated by the Managing Trustee on,
or as of which, subscribers acquired Class A Interests and became Class A
Beneficiaries of the Trust.
"Class A Interests" means the interests owned by Class A Beneficiaries in
the Trust created pursuant to this Agreement.
"Class A Offering" means the offering of Class A Interests pursuant to the
Class A Prospectus.
"Class A Payout" means the first time where the aggregate amount of
Distributions actually made to the Class A Beneficiaries equals $25 per Class A
Interest, minus all uninvested Capital Contributions which have been returned to
the Class A Beneficiaries, plus the Cumulative Class A Annual Distribution.
"Class A Prospectus" means the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of the Class A Interests under the Securities Act of 1933, as amended, in the
final form in which said prospectus was filed with said Commission and as
thereafter amended or supplemented pursuant to Rule 424 under said Act.
"Class B Beneficiary" means any Beneficiary who owns a Class B
Subordinated Interest.
"Class B Capital Distributions" means the aggregate amount of any cash
payments to the Class B Beneficiaries made by the Trust as a return of their
Capital Contributions from excess Class B Offering proceeds.
"Class B Closing" means the date designated by the Managing Trustee on, or
as of which, subscribers acquire Class B Subordinated Interests and become Class
B Beneficiaries.
"Class B Distribution Reduction Factor" means the percentage determined as
the fraction, the numerator which is the Class B Capital Distributions (on a per
Class B Subordinated Interest basis), discounted at 8% annum from the
Distribution Commencement Date, and the denominator of which is
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$5.00.
"Class B Offering" means the offering of Class B Subordinated Interests by
the Trust pursuant to the Class B Prospectus.
"Class B Payout" means the first time that the Class B Beneficiaries have
received cash from the Trust in an aggregate amount of $5 per Class B
Subordinated Interest, together with a return from the Distribution Commencement
Date of 8% per annum, compounded quarterly, with respect to the portion of their
capital contributions returned to them as Class B Capital Distributions and of
10% per annum, compounded quarterly, with respect to the balance of their
capital contributions.
"Class B Prospectus" means the prospectus contained in the registration
statement filed with the Securities and Exchange Commission for the registration
of Class B Subordinated Interests under the Securities Act of 1933, as amended,
in the final form in which said prospectus is filed with said Commission and as
thereafter amended or supplemented pursuant to Rule 424 under said Act.
"Class B Subordinated Interests" or "Class B Interests" means the
beneficial interests created pursuant to this Agreement owned by Class B
Beneficiaries.
"Closings" means, collectively, the Class A Closings and the Class B
Closing.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of subsequent laws.
"Competitive Asset Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase and sale of equipment which is
reasonable, customary and competitive in light of the size, type and location of
equipment.
"Consent" means either the consent given by vote at a meeting called and
held in accordance with Section 11.1 or the written consent of a Person to do
the act or thing for which the consent is solicited, or the act of granting such
consent, as the context may require.
"Controlling Person" means, with respect to the Managing Trustee or any
Affiliate, any of its chairman, directors, president, secretary or clerk,
treasurer, vice presidents, and holders of a 5% or larger equity interest in the
Managing Trustee or Affiliate, or any Person having the power to direct or cause
the direction of the Managing Trustee or Affiliate, whether through the
ownership of voting securities, by contract or otherwise.
"Cumulative Class A Annual Distribution" means an aggregate annual
Distribution to the Class A Beneficiaries of 10% per annum, compounded
quarterly, on Adjusted Class A Investment commencing from the last day of the
month of the initial Class A Closing until Class A Payout.
"Dealer-Manager" means American Finance Group Securities Corp., a
Massachusetts corporation which is an Affiliate of the Managing Trustee and the
Advisor.
"Dealer-Manager Agreement" means the agreement of the Dealer-Manager
and the Managing Trustee, on their own behalf and on behalf of the Trust,
designating American Finance Group Securities Corp. as Dealer-Manager.
"Delaware Trustee" means the Trustee designated as such in accordance with
Section 4.1(a) which
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maintains its principal place of business in the State.
"Dissolution Event" means a sale, condemnation, eminent domain taking,
casualty, or other disposition affecting all or substantially all of the Trust's
then remaining Assets which results in the dissolution of the Trust pursuant to
Section 1.6.
"Distributable Cash From Operations" means Cash from Operations, as
reduced by (i) any accrued and unpaid Asset Management Fee and (ii) after
Payout, any accrued and unpaid Subordinated Resale Fee.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings, as reduced by (i)(a) any amounts reinvested in additional Assets
in accordance with Sections 4.2(b)(v) and 4.2(b)(vi), or (b) the proceeds of the
sale of an interest in a Joint Venture which are reinvested in additional
Assets, (ii) any accrued and unpaid Asset Management Fee and Acquisition Fees
and Acquisition Expenses paid with respect to additional Assets acquired through
reinvestment of Cash From Sales or Refinancings in accordance with Section
4.2(b)(v) and (iii) after Payout, any accrued and unpaid Subordinated Resale
Fee.
"Distribution Commencement Date" means the first day of the month
following Class B Closing.
"Distributions" means Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"D-M Commission" means the commission payable to the Dealer-Manager of 7%
of Gross Class A Proceeds.
"EFG" means Equis Financial Group, a Massachusetts partnership.
"Eligible Citizen" means (i) an individual who is a citizen of the United
States or one of its possessions (a "U.S. Citizen") or a citizen of a foreign
country lawfully admitted for permanent residence in the United States as an
immigrant in conformity with the regulations of the Immigration and
Naturalization Service of the Department of Justice (a "Resident Alien"); (ii) a
partnership of which each member is a U.S. Citizen (a "U.S. Partnership"); (iii)
a corporation created or organized under the laws of the United States or of any
state, territory, or possession of the United States of which the president and
two-thirds or more of the board of directors and other managing officers thereof
are U.S. Citizens and of which at least 75% of the voting interests are owned or
controlled by U.S. Citizens (a "U.S. Corporation"); (iv) an association of which
each member is a U.S. Citizen; or (v) a trust of which each trustee is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association, but only if each beneficiary under the related trust is a U.S.
Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S.
Association.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means the interest-bearing escrow account (in which
subscriptions of up to $100,000 per subscriber are insured by the Federal
Deposit Insurance Corporation ("FDIC")), including any savings account, bank
money market account, or account investing in short-term securities issued or
guaranteed by the United States government, which complies with Rule 15c-4 under
the Securities Exchange Act of 1934, held by the Escrow Agent into which
subscription payments from subscribers for Class B Interests are to be deposited
prior to the Class B Closing.
"Escrow Agent" means the escrow agent selected by the Managing Trustee to
administer the Escrow Account, initially Trust Company of America.
"Escrow Interest" means the interest actually earned on monies paid by
each subscriber into the
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Escrow Account during the period that such monies are held in the Escrow Account
prior to the Class B Closing (net of certain fees and expenses of the Escrow
Agent).
"FAA" means the Federal Aviation Administration.
"Filing Office" means the Office of the Secretary of State of the State.
"Final Closing" means the last date, or as of which, subscribers acquired
Class A Interests and became Class A Beneficiaries of the Trust.
"Foreign Beneficiary" means any Person who is a "non-resident alien
individual" or "foreign partnership" within the meaning of Section 1441 of the
Code, a "foreign corporation" within the meaning of Section 1442 of the Code or
any Person "who is not a United States person" within the meaning of Section
1446 of the Code.
"Foreign Investor" means any Person who is not an Eligible Citizen.
"Front-End Fees and Expenses" means fees and expenses, however designated,
paid by any Person for any services rendered during the Trust's organizational
or acquisition phase, including without limitation Sales and Distribution
Expenses borne by the Trust, Acquisition Fees and Acquisition Expenses and
similar fees and expenses, but not including: (i) Organizational and Offering
Expenses paid by the Managing Trustee for which the Managing Trustee may not be
reimbursed by the Trust pursuant to Section 10.4; (ii) reserves for working
capital and contingent liabilities included in Investment in Assets; and (iii)
any Acquisition Fees or Acquisition Expenses paid by a manufacturer of an Asset
to any of its employees unless such Persons are Affiliates of a Sponsor. Any
Acquisition Fees and Acquisition Expenses from the reinvestment of Cash From
Sales or Refinancings permitted under this Agreement are considered Front-End
Fees and Expenses. If the Trust's Leverage Level is equal to the Minimum
Leverage Level, total Front-End Fees and Expenses will not exceed 10% of Gross
Proceeds. However, if the Trust's Leverage Level is greater than the Minimum
Leverage Level, the maximum amount of Front-End Fees and Expenses which a Trust
may incur will increase .0625% for each 1% that the Leverage Level is greater
than the Minimum Leverage Level. In no event, however, will total Front-End Fees
and Expenses paid by the Trust exceed 13% of Gross Proceeds.
"Full Payout Lease" means a lease under which the aggregate rental
payments during the original term are at least sufficient to permit the Trust to
recover the Purchase Price of the Assets leased thereby.
"Gross Class A Proceeds" means the aggregate Capital Contributions of
all Class A Beneficiaries.
"Gross Class B Proceeds" means the aggregate Capital Contributions of all
Class B Beneficiaries.
"Gross Proceeds" means, collectively, Gross Class A Proceeds and Gross
Class B Proceeds.
"Immediate Family Member" means, with respect to any Person, his spouse,
parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law or
child-in-law.
"Independent Expert" means a Person with no current material or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Trust and who is qualified to perform such work.
"Initial Redemption Period" is the period of time commencing with the
Class B Closing through 24 months thereafter during which the Class A Interests
may be redeemed by the Trust with the proceeds
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of the Class B Offering, as provided in the Class B Prospectus.
"Interest" means any Class A Interest or Class B Interest in the Trust.
"Investment in Assets" means the aggregate amount of Capital Contributions
of the Class A Beneficiaries actually paid for or allocated to the purchase and
refurbishment of Assets acquired by the Trust, including the Trust's equity
investment in Assets and reserves for working capital and contingent liabilities
(but excluding any such reserves in excess of 3% of the aggregate Capital
Contributions of the Class A Beneficiaries) and other capitalizable cash
payments such as interest and taxes, but excluding all Front-End Fees and
Expenses.
"IRA" means an Individual Retirement Account.
"Joint Venture" has the meaning given it in Section 7.5.
"Lease" means a Full Payout Lease or Operating Lease.
"Lease Commitment" means either (i) an executed binding lease agreement
under which either the Trust or an Affiliate of the Managing Trustee is the
lessor, which agreement is assignable by such Affiliate to the Trust, or (ii)
such other agreement or commitment to lease equipment which constitutes an
enforceable obligation against the Lessee.
"Lessee" means any lessee under any Lease.
"Leverage Level" means the amount of indebtedness encumbering the Assets
acquired from the Gross Proceeds.
"Losses" has the meaning given it in Section 8.2(d).
"Majority Consent" means the Consent of Beneficiaries representing a
Majority in Interest of the Beneficiaries.
"Majority Vote" means the vote of a majority in interest of the Trust
Beneficiaries.
"Majority in Interest of the Beneficiaries" means the Class A
Beneficiaries and the Class B Beneficiaries holding more than 50% in the
aggregate of the Beneficiary Interests held by all Beneficiaries; provided,
however, that in cases where a Beneficiary who is also a Managing Trustee or
Affiliate thereof is not entitled to participate in the Consents or votes of the
Beneficiaries, the calculation of "Majority in Interest of the Beneficiaries"
shall exclude the Class A Interests owned by such Beneficiary.
"Managing Trustee" has the meaning given it in Section 4.1.
"Maximum Class B Offering" means the sale of all 826,072 Class B
Subordinated Interests in the Trust which are being offered pursuant to the
Class B Offering.
"Managing Trustee Interest" means the interest of the Managing Trustee in
the Trust pursuant to this Agreement.
"Minimum Investment Amount" means the minimum number of Interests which a
Beneficiary was or is required to purchase in the Class A Offering or Class B
Offering, or, if the Beneficiary does not acquire
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his Interests in either such Offering, the minimum number of Class A Interests
or Class B Interests which a Beneficiary is required to acquire from his
transferor in accordance with this Agreement.
"Minimum Class B Investment Amount" means the minimum number of Interests
which a Class B Beneficiary is required to purchase in the Offering.
"Minimum Class B Offering" means the sale of at least 413,036 Class B
Subordinated Interests in the Trust (included for this purpose any Class B
Subordinated Interests which are purchased by the Managing Trustee and any
Affiliate, including the Special Beneficiary).
"Minimum Leverage Level" means at least 12% of the Total Purchase Price of
the Assets acquired from Gross Class A Proceeds.
"NASAA Guidelines" means the Statement of Policy for Equipment Programs,
as amended April 22, 1988 and October 24, 1991, by the North American Securities
Administrators Association, Inc., as in effect on the date of the Class A
Prospectus.
"Net Class A Proceeds" means Gross Class A Proceeds minus all sales
commissions (including the D-M Commissions) and Organizational and Offering
Expenses of the Trust relating to the Class A Offering reimbursable pursuant to
Section 10.4.
"Net Class B Proceeds" means Gross Class B Proceeds minus all offering
expenses of the Trust relating to the Class B Offering payable or reimbursable
pursuant to this Agreement.
"Non-Eligible Beneficiary" means a Beneficiary who (i) has represented to
the Trust that he is an Eligible Citizen but is no longer an Eligible Citizen,
or (ii) fails at the time he acquires his Interests to certify his citizenship
to the Managing Trustee pursuant to Section 9.5.
"Operating Lease" means a lease under which the aggregate rental payments
during the original term are not sufficient to permit the Trust to recover the
Purchase Price of the Assets leased thereby.
"Organizational and Offering Expenses" shall have the meaning set forth
in Section 10.4(a).
"Over-Subscription Privilege" means the right of exercising rights holders
to subscribe for all or a portion of the Class B Subordinated Interests that
were not otherwise subscribed for by other rights holders.
"Participant" means the Managing Trustee, the Special Beneficiary or
any Beneficiary.
"Permitted Investments" means securities issued or guaranteed by the
United States government or any agency or instrumentality thereof, certificates
of deposit of United States banks having a net worth of at least $50,000,000,
bankers' acceptances, bank repurchase agreements covering securities issued or
guaranteed by the United States government or any agency or instrumentality
thereof, money market funds having a net worth of at least $100,000,000 or
similar highly liquid investments (other than tax exempt securities or
obligations). No funds of the Trust will be invested in any money market fund,
savings and loan, bank or other financial institution which is affiliated with
any Managing Trustee or its Affiliates.
"Person" means any individual, partnership, corporation, trust,
association, governmental official, body or agency, or other legal entity of any
type.
"Profits" has the meaning given it in Section 8.2(d).
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"Prospectuses" means, collectively, the Class A Prospectus and the
Class B Prospectus.
"Purchase Price" means the price paid by the Trust, whether directly or
indirectly through a Joint Venture, for an Asset, including the amount of
Acquisition Fees and Acquisition Expenses and the amounts of all liens and
mortgages on such Asset, but excluding points and prepaid interest.
"Qualified Income Offset Item" means (1) an allocation of loss or
deduction that, as of the end of each year, reasonably is expected to be made
(a) pursuant to Section 704(e)(2) of the Code to a donee of an interest in the
Trust, (b) pursuant to Section 706(d) of the Code as the result of a change in a
Participant's interest in the Trust, and (c) pursuant to Treasury Regulation
Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of
unrealized receivables or inventory items, and (2) a distribution that, as of
the end of such year, reasonably is expected to be made to a Participant to the
extent it exceeds offsetting increases to the Participant's Capital Account
which reasonably are expected to occur during or prior to the Trust taxable year
in which such distribution reasonably is expected to occur.
"Qualified Plan" means any qualified pension, profit-sharing, or stock
bonus plan (including a Keogh Plan) and an IRA.
"Record Date" has the meaning given it in Section 11.1(c).
"Record Date Holders" means holders of record as of the close of business
on April 1, 1997, of Class A Interests and Special Beneficiary Interests.
"Recording Date" has the meaning given it in Section 9.3.
"Redemption Date" means the date selected by the Managing Trustee, in its
sole discretion, on which Interests tendered for redemption will be redeemed by
the Trust in accordance with Section 9.6.
"Removal" has the meaning specified in Section 4.9.
"Removed Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Removal.
"Reserve Account" means the account maintained by the Trust as reserves
for working capital and contingent liabilities, including repairs, replacements,
contingencies, accruals required by lenders for insurance, compensating balances
required by lenders to the Trust and other appropriate items.
"Resignation" means the resignation of a Trustee or the voluntary
Assignment of all of the Managing Trustee's Interest pursuant to Section 4.8.
"Resigned Trustee" means a Trustee whose tenure as Trustee has been
terminated by a Resignation.
"Right" means non-transferable subscription rights to Record Date Holders
to acquire Class B Subordinated Interests.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion or consolidation either directly or indirectly of the Trust and the
issuance of securities of a Roll-Up Entity. Such term does not include: (a) a
transaction involving the securities of the Trust that have been for at least 12
months listed on a national securities exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust, partnership or
association form of only the Trust if, as a consequence of the transaction,
there will be no
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significant adverse change in any of the following: (i) Beneficiary's voting
rights; (ii) the term of existence of the Trust; (iii) Sponsor compensation; and
(iv) the investment objectives of the Trust.
"Roll-Up Entity" means a partnership, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed Roll-Up transaction.
"Sale or Refinancing" means the sale, refinancing, exchange, condemnation,
eminent domain taking, casualty or other disposition of any Asset or any
interest in any Joint Venture.
"Sales and Distribution Expenses" means expenses incurred in connection
with preparing the Trust for registration and subsequently offering and
distributing the Interests to the public, including sales commissions paid to
the Dealer-Manager in connection with the distribution of the Interests and all
advertising expenses relating to the leasing of the Assets.
"Schedule A" means Schedule A to this Agreement, as amended from time to
time.
"S-D Commissions" means the commissions of 7% of Gross Proceeds payable to
the Soliciting Dealers by the Dealer-Manager or such other amount to be paid to
the Soliciting Dealers as the S-D Commission as specified in Section 5.1(a).
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Soliciting Dealers" means those member firms of the National
Association of Securities Dealers, Inc. (including the Dealer-Manager) that
offer Interests.
"Special Beneficiary" means Equis Financial Group in its capacity as
Special Beneficiary pursuant to this Agreement, together with its successors and
assigns in such capacity.
"Special Beneficiary Interest" means the interest of the Special
Beneficiary in the Trust created pursuant to this Agreement and representing the
capital contribution set forth in Schedule A to this Agreement.
"Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, the Trust, or any Person who will manage or
participate in the management of the Trust and any Affiliate of any such Person.
Sponsor does not include the Delaware Trustee or a Person whose only relation
with the Trust is that of an independent equipment manager or whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services rendered in connection with the Class A Offering or
Class B Offering.
"State" means the State of Delaware.
"Subordinated Resale Fee" means the fee to be paid by the Trust to the
Advisor for services rendered by the Advisor in connection with the sale or
other disposition of the Assets, as described in Section 5.1(e).
"Subscription Agent" means Gemisys Corporation.
"Subscription Agreement" means the Subscription Agreement, the form of
which was attached as
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Exhibit B to the Class A Prospectus, containing, among other things,
representations made by each Class A Beneficiary.
"Subscription Certificates" means the subscription certificate evidencing
the Rights and set forth as Appendix A to the Class B Prospectus.
"Substitute Trustee" means an assignee of the Trustee's Interest who is
admitted to the Trust as a Trustee pursuant to Section 4.12 or 11.2.
"Substitute Beneficiary" means an assignee of a Beneficiary Interest who
becomes a Beneficiary pursuant to Section 9.3.
"Substitute Special Beneficiary" means an assignee of the Special
Beneficiary Interest who becomes a Special Beneficiary pursuant to Section 9.8.
"Trust" means AFG Investment Trust B, a Delaware business trust, as the
same may be constituted from time to time.
"Trust Beneficiaries" means the Beneficiaries and the Special
Beneficiary.
"Trust Beneficiary Interests" means the Beneficiary Interests and the
Special Beneficiary Interest.
"Trust Counsel" means Peabody & Brown, Boston, Massachusetts, or other
counsel for the Trust selected by the Managing Trustee.
"Trustees" means the Managing Trustee, the Delaware Trustee and any Person
or Persons who subsequently become additional or substitute Trustees as provided
in Section 4.1(a), in each such Person's capacity as a Trustee of the Trust. At
all times when there is only one Trustee so acting, the terms "Trustees" and
"Managing Trustee" shall refer to such Trustee.
"UBTI" means unrelated business taxable income determined in accordance
with Sections 511-514 of the Code.
ARTICLE III - CAPITAL
3.1 Capital Contribution of the Special Beneficiary and Managing Trustee.
The Managing Trustee and the Special Beneficiary have each contributed as
its Capital Contribution in its capacity as Managing Trustee and Special
Beneficiary cash in the amount set forth opposite its name in Schedule A. No
other Trustee shall have the right or obligation to make any Capital
Contribution to the Trust.
3.2 Class A Beneficiaries; Offering of Class B Interests; Beneficiary
Interests.
(a) The Trust has accepted Class A Beneficiaries who own 665,494 Class A
Interests for a Purchase Price of $25 per Interest. Such Purchase Price
constituted the Capital Contributions of the Class A Beneficiaries for all
purposes of this Agreement. Each Class A Beneficiary acquired not less than the
Minimum Class A Investment Amount and no Class A Beneficiary acquired or shall
thereafter own a fractional Class A Interest.
(b) A subscriber for Class B Interests shall become a Class B Beneficiary
in accordance with
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his Subscription Certificate and the subscription procedures described in the
Class B Prospectus. All subscriptions for Class B Interests shall be received by
the Escrow Agent in trust and deposited in the Escrow Account. Any Escrow
Interest shall be paid to the subscribers who become Class B Beneficiaries by
the Escrow Agent within fifteen (15) days after the Class B Closing; provided,
however, that no Escrow Interest shall be paid with respect to subscription
payments received fewer than three days prior to such Closing. If the Escrow
Agent does not receive subscriptions for at least Class B Interests on or before
December 31, 1997 (or such earlier date as of which the Managing Trustee shall
have terminated the Offering), the subscribers shall not acquire any Class B
Interests and the Escrow Agent shall return all monies deposited by subscribers
for Class B Interests to such subscribers, together with any Escrow Interest,
within fifteen (15) business days after such date. All subscriptions shall be
accepted or rejected by the Managing Trustee within thirty (30) days of their
receipt. Subscription payments which are rejected shall be promptly returned to
the subscriber without Escrow Interest. Upon receipt of subscriptions for not
less than the Minimum Offering acceptable to the Managing Trustee and the
determination of the Managing Trustee to proceed to the Class B Closing, the
Escrow Agent shall release the proceeds of such subscriptions to the Trust.
(c) The Managing Trustee is hereby authorized to do all things necessary
and desirable to allow subscribers to subscribe for Class B Interests and become
Class B Beneficiaries in accordance with this Agreement and the Class B
Prospectus, including registering the Class B Interests under the Securities Act
of 1933, as amended, pursuant to the rules and regulations of the Securities and
Exchange Commission and qualifying the Class B Interests for sale with state
securities regulatory authorities or perfecting exemptions from qualification.
3.3 Capital Accounts.
A Capital Account shall be established and maintained for each
Participant. Subject to such other adjustments as may be required under the
Code, the Capital Account of each Participant shall consist of (i) the sum of
(a) the amount of cash actually contributed to the Trust by such Participant,
(b) the fair market value of any property contributed to the Trust by or on
behalf of such Participant net of any liabilities assumed by the Trust or to
which such property is subject, and (c) the amount of Profits or gain or
tax-exempt income of the Trust allocated to such Participant, minus (ii) the sum
of (a) the amount of Losses and deductions of the Trust allocated to such
Participant, (b) the amount of Distributions made by the Trust to such
Participant, (c) any amount distributed by the Trust to such Participant
pursuant to Section 8.4, and (d) the fair market value of any property
distributed by the Trust to such Participant net of any liabilities assumed by
such Participant or to which such property is subject. Any special basis
adjustments resulting from Section 743 of the Code shall not be taken into
account for any purpose in establishing and maintaining Capital Accounts for
such Participant pursuant to this Section 3.3. The Capital Account of each
Beneficiary shall be reduced by the actual sales commissions and other
non-deductible, non-capitalizable expenses paid by the Trust with respect to
Interests acquired by such Beneficiary.
Except where this Agreement otherwise requires, a Substitute Beneficiary
or Substitute Special Beneficiary shall be deemed to have received the Capital
Account and made the Capital Contributions to the Trust which were made by the
Beneficiary or Special Beneficiary whom such Substitute Beneficiary or
Substitute Special Beneficiary succeeds, and to have received from the Trust the
Distributions and allocations received from the Trust by such former Beneficiary
or Special Beneficiary.
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3.4 Additional Capital Contributions.
No Participant shall be required to make any Capital Contribution or be
entitled to bring an action for partition against the Trust, or to demand or
receive any distribution of or with respect to his Capital Contribution, except
as specifically provided under this Agreement. No loan made by a Participant to
the Trust as permitted by this Agreement shall constitute a Capital Contribution
for any purpose.
ARTICLE IV - TRUSTEES
4.1 The Trustees; Liability for Trust Obligations.
(a) The number of Trustees shall not be less than two nor more than four
and shall be fixed from time to time by the Managing Trustee. One Trustee shall
be designated as the Managing Trustee and one Trustee shall be designated as the
Delaware Trustee. The Managing Trustee is AFG ASIT Corporation and the Delaware
Trustee is Wilmington Trust Company. Each Person designated as a Trustee shall
serve as Trustee hereunder until such Trustee's Removal or Resignation, as
provided in this Article IV. In the event of the Removal or Resignation of the
Delaware Trustee, the Managing Trustee shall designate a Substitute Delaware
Trustee.
(b) The Managing Trustee shall have complete exclusive discretion in the
management and control of the affairs and business of the Trust, as more
particularly provided in Section 4.2. Any action required or permitted to be
taken by a corporate Managing Trustee hereunder may be taken by such of its
officers or agents as it shall validly designate for such purposes. The Managing
Trustee shall devote so much of its time as may be necessary to carry out the
purposes and conduct the business of the Trust in accordance with this Agreement
and to carry out its duties as Managing Trustee hereunder. The Delaware Trustee
shall have only the rights and obligations of the Delaware Trustee specifically
provided in this Agreement and shall have no Interest, make no Capital
Contribution and have no right to Consent to any matters affecting the Trust
except as otherwise specifically provided herein. In the event that the Managing
Trustee shall designate additional Trustees pursuant to Section 4.1(a), such
Trustees shall have such rights and obligations as shall be delegated to them by
the Managing Trustee but any such delegation shall not relieve the Managing
Trustee of its primary responsibility for the affairs of the Trust hereunder.
(c) If any Managing Trustee shall become unable to serve in such capacity
or shall Resign or be Removed as Trustee and the Beneficiaries shall not have
designated a successor Managing Trustee pursuant to Section 4.12, the Persons
acting as Trustees may from time to time designate from among themselves by
mutual consent a successor Managing Trustee. If for any reason no designation is
in effect, the powers of the Managing Trustee shall be exercised by majority
consent of the remaining Persons acting as Trustees (including, without
limitation, the Delaware Trustee).
(d) The Managing Trustee, when acting in such capacity, shall be
personally liable for the acts, omissions or obligations of the Trust, except as
may be provided to the contrary in any contractual agreement of the Trust.
Neither the Delaware Trustee nor any other Trustee, other than the Managing
Trustee, shall have any personal liability to any other Person for any act,
omission or obligation of the Trust or any other Trustee.
4.2 Extent of Managing Trustee Powers and Duties.
Except as expressly limited by this Agreement, the Managing Trustee shall
have complete and exclusive discretion in the management and control of the
affairs and business of the Trust and all power necessary, convenient or
appropriate to carry out the purposes, conduct the business and exercise the
powers of the Trust.
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(a) General Powers and Duties. The Managing Trustee shall use its best
efforts during so much of its time as may be necessary to carry out its duties
in accordance with this Agreement and in the best interest of the Trust and so
as to protect the interests of the Trust Beneficiaries as a group. The Managing
Trustee shall be accountable as a fiduciary for the safekeeping and use of all
funds and Assets of the Trust and shall not employ or permit another Person to
employ such funds or Assets in any manner except for the benefit of the Trust.
In particular, the Managing Trustee, solely, shall be responsible for and shall
use its best efforts and exercise discretion to the best of its ability:
(i) to cause Assets to be acquired, held, leased, re-leased,
financed and refinanced, sold, exchanged or otherwise disposed of (except
as limited by Section 1.6 and Article VII);
(ii) to lease, maintain and operate the Assets so as to comply with
the provisions of any indebtedness relating thereto;
(iii) to select and supervise the activities of the Advisor (which
may be an Affiliate);
(iv) to ensure the proper application of revenues of the Trust;
(v) to maintain proper books of account for the Trust and to prepare
all reports of operations and tax returns which are to be furnished to the
Trust Beneficiaries pursuant to this Agreement or which are required by
taxing bodies or other governmental agencies;
(vi) in general to supervise the redemption of Class A Interests
pursuant to Section 9.6;
(vii) in particular to cause the Trust to purchase and redeem Class
A Interests pursuant to the last paragraph of Section 9.6.
(viii) to maintain or cause to be maintained, to the extent it deems
necessary or appropriate, adequate insurance with respect to all insurable
Assets of the Trust pursuant to policies of insurance in form and coverage
customary to property similar to the Assets;
(ix) to supervise the offer and sale of Class A Interests and Class
B Interests;
(x) to establish reasonable procedures for the transfer of Interests
(including actions which may impose restrictions on the transferability of
Interests as set forth in Section 9.2, provided such restrictions on
transfers do not cause the assets of the Trust to be deemed to be plan
assets with respect to Beneficiaries which are Qualified Plans) and to
take such other actions with respect to the manner in which Interests are
transferred as it, in its sole discretion, deems necessary or appropriate
in order to preserve the status of the Trust as an entity taxable as a
partnership for federal income tax purposes, to prevent the Trust from
being deemed a publicly traded partnership under the Code, to prevent the
Trust from being terminated for federal income tax purposes, to prevent
the deregistration of any FAA-registered aircraft or vessels documented
under the laws of the United States and to assure that the Beneficiaries
will be treated as owners of the Interests for federal income tax purposes
under the Code (and to amend this Agreement without the Consent of any
Beneficiary in order to effect the foregoing); provided, however, that any
transfer restrictions imposed without the Majority Consent to prevent
adverse tax consequences to the Beneficiaries will only be imposed to the
extent necessary to prevent such adverse tax consequences and will be
modified or eliminated to the extent that such restrictions become
unnecessary in the future;
(xi) to execute and file with any state tax authority, if necessary
or appropriate to
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comply with or minimize withholding obligations under the laws of that
state, a statement on behalf of the Trust Beneficiaries acknowledging and
confirming their obligations to file tax returns with such state;
(xii) in the event that either (y) the Assets would constitute plan
assets for purposes of ERISA or (z) the transactions contemplated under
this Agreement would constitute prohibited transactions under ERISA or the
Code and an exemption for such transactions is not obtainable or not
sought by the Managing Trustee from the Department of Labor, to
restructure the Trust's activities to the extent necessary to comply with
any exemption in any final plan asset regulation adopted by the Department
of Labor or any condition which the Department of Labor might impose as a
condition to granting a prohibited transaction exemption, including, but
not limited to, establishing a fixed percentage of Interests permitted to
be held by Qualified Plans or other tax-exempt Beneficiaries and/or
discontinuing sales to such Entities after a given date. The Managing
Trustee is empowered to amend this Section 4.2(a)(x) to the extent it
deems necessary or appropriate in order to comply with any applicable
federal or state legislation, rules or regulations enacted or promulgated
or administrative pronouncements or interpretations and/or judicial
interpretations thereof after the date of this Agreement; provided,
however, that any amendments imposed without Majority Consent to prevent
adverse consequences to the Trust Beneficiaries under ERISA or the Code
shall only be imposed to the extent necessary to prevent such adverse tax
consequences and will be modified or eliminated to the extent that such
restrictions become unnecessary in the future. Any amendments made by the
Managing Trustee under the circumstances described above shall be deemed
to be made pursuant to the fiduciary duty of the Managing Trustee to the
Trust and the Trust Beneficiaries;
(xii) to determine whether any Foreign Investors may be admitted
as Beneficiaries and establish requirements for the admission of
Foreign Investors;
(xiii) to establish a fixed percentage of Interests permitted to be
held by or discontinue sales to Foreign Investors after a given date and
take any additional actions as the Managing Trustee deems necessary or
appropriate in order to maintain the registration with the FAA of any
FAA-registered aircraft and the documentation of any vessels documented
under the laws of the United States;
(xiv) to take such actions as the Managing Trustee deems necessary
or appropriate, including, without limitation, borrowing funds on behalf
of the Trust, to comply with the requirements of Sections 1441, 1442 and
1446 of the Code or setting aside Distributions otherwise payable to
Foreign Beneficiaries in an escrow account to meet future requirements
under Sections 1441, 1442 and 1446 of the Code; and
(xv) to do all things and to execute all documents the Managing
Trustee shall deem necessary or advisable in connection with the
supervision of the affairs, business and assets of the Trust.
In establishing criteria for the resolution of conflicts of interest among
the Trust and the Managing Trustee and its Affiliates, the Managing Trustee will
act in conformity with its fiduciary duty to the Trust and the Beneficiaries.
(b) Amplification of Powers and Duties. As amplification of, and not by
way of limitation on, the powers expressed herein, the Managing Trustee shall
have, subject to the express provisions of this Agreement, full power and
authority on behalf of the Trust, in order to carry out and accomplish its
purposes and functions:
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(i) to expend Trust capital and income;
(ii) to purchase, lease, sell, exchange, improve, repair, refurbish,
upgrade, divide, combine and otherwise transact business with respect to
interests in real and personal property, in each case on terms that the
Managing Trustee deems to be in the best interests of the Trust, and in
that connection to employ engineers, contractors, attorneys, accountants,
brokers, appraisers and such other consultants, advisors, artisans and
workmen as may be necessary or advisable for such purpose;
(iii) to borrow money or otherwise to procure extensions of credit
for the Trust in accordance with the borrowing policies set forth in the
Prospectus (as such policies may be altered in accordance with the Class A
Prospectus and Section 7.1), and in connection therewith to execute, seal,
acknowledge and deliver agreements, promissory notes, guarantees and other
written documents constituting obligations or evidences of indebtedness,
and as security therefor to pledge, hypothecate, mortgage, assign,
transfer or convey mortgages or security interests in the Assets;
(iv) for a period of four years from Final Class A Closing, to
reinvest Cash from Sales and Refinancings in additional Assets; provided,
however, that the Lease of any Asset so acquired shall have a term which
shall expire not later than ten years after Final Closing; and provided,
further, that sufficient Distributions are made to enable the
Beneficiaries to pay any state and federal income taxes arising from the
Sale or Refinancing transaction (assuming the Beneficiaries are in a
combined federal and state marginal tax bracket of 33%) or the rate
effective at the time of the Sale or Refinancing transaction;
(v) to invest any Sale or Refinancing proceeds resulting from the
loss or destruction of any Asset in replacement assets;
(vi) to execute, deliver, amend, modify and cancel documents and
instruments relating to real and personal property of whatever kind and
description, including, but not limited to, mortgages, leases, and other
documents of title or conveyance, assumption agreements pertaining to such
agreements, powers of attorney and other contracts, instruments and
agreements of all kinds;
(vii) to hold all or any portion of the Assets in the name of one or
more trustees (including trustees which are Affiliates of the Managing
Trustee or the Advisor), nominees, or other agents of or for the Trust
(including the Managing Trustee) for the purpose of facilitating
transactions involving said Assets;
(viii) to establish reserves for normal repairs, replacements, and
contingencies and, in its discretion, for any other proper Trust purpose;
(ix) to amend this Agreement to reflect the addition or substitution
of Trustees or Trust Beneficiaries or the reduction of Capital Accounts
upon the return of Capital Contributions to Participants;
(x) to determine the time and amount of Distributions, if any, to
the Participants;
(xi) to designate depositories of the Trust's funds and the terms
and conditions of such deposits and drawings thereon;
(xii) to invest in one or more Joint Ventures in accordance with
Section 7.5;
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(xiii) to utilize Cash from Operations and Cash From Sales or
Refinancings to redeem Class A Interests in accordance with the terms of
Section 9.6; and
(xiv) in general to do all things and execute all documents it shall
deem necessary or convenient to accomplish the purposes of the Trust or to
protect and preserve the Assets to the same extent as if it owned such
Assets individually.
(c) Right to Acquire Interests. The Managing Trustee shall have the right
in its sole discretion, without the Consent of any Beneficiary, the Special
Beneficiary or other Trustee:
(i) to acquire Interests to the extent required to prevent the
Assets of the Trust from being deemed plan assets with respect to
Beneficiaries which are Qualified Plans and to prevent a prohibited
transaction from occurring under ERISA; provided that such Interests shall
be acquired at fair market value (as determined by an independent
appraiser retained by the Managing Trustee); and
(ii) to become a Substitute Beneficiary with respect to Interests
held by a Non-Eligible Beneficiary in accordance with Section 9.5.
(d) Authority to Enter into Dealer-Manager Agreement. The Managing Trustee
shall cause the Trust to enter into the Dealer-Manager Agreement pursuant to
which the Dealer-Manager shall act as dealer-manager for the Class A Offering.
(e) Authority to Enter into Advisory Agreement. The Managing Trustee shall
cause the Trust to enter into the Advisory Agreement with the Advisor. The
Managing Trustee may not amend the Advisory Agreement in any manner which would
adversely affect the Beneficiaries without Majority Consent. The Advisory
Agreement shall provide that the Trust shall have the right to terminate the
Advisory Agreement effective immediately and without penalty in the event of the
Removal of the Managing Trustee.
(f) Reserves. The Managing Trustee shall endeavor to maintain an adequate
Reserve Account at all times. Such amount may be increased if necessary to
comply with the conditions of lenders requiring compensating balances or other
reserves. If used, cash reserves need not be restored, but, if restored, will be
restored from revenues derived from Trust operations including the proceeds from
the sale of Assets or from borrowings. Funds in the Reserve Account may be
distributed in accordance with Section 8.1(a) if and when deemed advisable by
the Managing Trustee. The Trust's reserves will not be reduced below a level
which the Managing Trustee deems necessary for Trust operations.
(g) Designation, Duties, and Expenses of Tax Matters Participant. The
Managing Trustee shall from time to time (but at least as frequently as required
by law) designate a Tax Matters Participant pursuant to Section 6231 of the Code
and hereby designates itself as the initial Tax Matters Participant. The Tax
Matters Participant shall have the following duties:
(i) to the extent and in the manner required by applicable law and
regulations, to furnish the name, address, profits, interest, and taxpayer
identification number of each Trust Beneficiary to the Secretary of the
Treasury or his delegate (the "Secretary"); and
(ii) to the extent and in the manner required by applicable law and
regulations, to keep each Trust Beneficiary informed of administrative and
judicial proceedings for the adjustment at the Trust level of any item
required to be taken into account by a Trust Beneficiary for federal
income tax purposes (such administrative and judicial proceedings referred
to hereinafter as judicial
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review).
The Trust shall indemnify and reimburse the Tax Matters Participant for
any and all expenses, including legal and accounting fees, claims, liabilities,
losses and damages incurred in connection with any judicial or administrative
review with respect to the tax liability of the Trust Beneficiaries, subject to
the provisions of Section 4.6. The payment of all such expenses shall be made
before any Distributions are made. Neither the Managing Trustee nor any
Affiliate nor any other Person shall have any obligation to provide funds for
such purpose. The taking of any action and the incurring of any expense by the
Tax Matters Participant in connection with any such proceeding, except to the
extent required by law, is a matter in the sole discretion of the Tax Matters
Participant; and the provisions on limitations of liability of the Managing
Trustee and indemnification set forth in Section 4.6 shall be fully applicable
to the Tax Matters Participant in its capacity as such.
The Tax Matters Participant is hereby authorized, but not required:
(i) to enter into any settlement agreement with the Service with
respect to any tax audit or judicial review, in which agreement the Tax
Matters Participant may expressly state that such agreement shall bind the
Trustees and the Trust Beneficiaries, except that such settlement
agreement shall not bind any Person who is entitled to file and who
(within the time prescribed pursuant to the Code and regulations
thereunder) files a statement with the Service stating that the Tax
Matters Participant shall not have the authority to enter into a
settlement agreement on the behalf of such Person;
(ii) in the event that a notice of a final administrative adjustment
at the Trust level of any item required to be taken into account by a
Trustee or Trust Beneficiary for tax purposes (a final adjustment) is
mailed to the Tax Matters Participant, to seek judicial review of such
final adjustment, including the filing of a petition for readjustment with
the Tax Court, the District Court of the United States for the district in
which the Trust's principal place of business is located or the United
States Claims Court;
(iii) to intervene in any action brought by a Trustee or Trust
Beneficiary for judicial review of a final adjustment;
(iv) to file a request for an administrative adjustment with the
Service at any time and, if any part of such request is not allowed by the
Service, to file a petition for judicial review with respect to such
request;
(v) to enter into an agreement with the Service to extend the period
for assessing any tax which is attributable to any item required to be
taken into account by a Trustee or Trust Beneficiary for tax purposes, or
an item affected by such item; and
(vi) to take any other action on behalf of any other Trustee or
Trust Beneficiary in connection with any administrative or judicial tax
proceeding to the extent permitted by applicable law or regulations.
(h) Insurance Policies. The Managing Trustee shall cause the Trust to
purchase and maintain such insurance policies as the Managing Trustee deems
reasonably necessary to protect the interests of the Trust (to the extent that
such policies are not maintained by the Lessees or other parties for the benefit
of the Trust). The Trust shall not pay for any insurance covering liability of
the Managing Trustee, its Affiliates, agents or employees for actions or
omissions to act for which indemnification is not permitted hereunder. The Trust
may purchase and pay for such types of insurance, including extended coverage
liability and
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casualty and workmen's compensation, as would be customary for any
person owning comparable property and engaged in a similar business and may name
the Trustees and their Affiliates as additional insured parties thereunder,
provided that such addition does not add to the cost of premiums payable by the
Trust. The Trust may not incur the cost of any insurance which would insure the
Trustees or their Affiliates against liabilities to which they are prohibited
from being indemnified under Section 4.6; provided, however, that this
prohibition shall not preclude the addition of such parties as additional
insureds on any public liability insurance to the extent that such added parties
do not increase the cost of such insurance to the Trust or to the extent that
any additional cost is not borne by the Trust. Notwithstanding the foregoing,
the Delaware Trustee shall be named as an additional insured on any public
liability insurance policy at the expense of the Trust.
(i) Determination of Adjusted Basis in Connection with Section 754
Election. The Managing Trustee is authorized to make the election under Section
754 of the Code, but is not obligated and does not expect to make the Section
754 election. If a Section 754 election is made, in determining the adjustment
to any Beneficiary's proportionate share of the adjusted basis of Assets in
connection with the Section 754 election, the Managing Trustee, for purposes of
accounting simplicity, shall treat each Beneficiary who acquires one or more
Interests at any time during a calendar month as having acquired the same at a
price equal to the weighted average of the price paid for all Interests
transferred during such month, irrespective of the date on or price at which
such Interests actually were acquired by such Beneficiary during such month. The
Managing Trustee shall be authorized to alter these accounting conventions and
to conform such conventions with any regulations issued by the Treasury
Department or rulings or advice of the Service, as the Managing Trustee shall
determine necessary or appropriate, without Consent of any Beneficiary or the
Special Beneficiary. To the extent the Managing Trustee is required to determine
the adjusted basis of any Assets with respect to which the Code requires that
records of such adjusted basis be kept and maintained by the Trust
Beneficiaries, the Managing Trustee may request information regarding such
adjusted basis from such Trust Beneficiary, in writing, and such Trust
Beneficiary shall furnish such information to the Managing Trustee within 30
calendar days after such request is mailed by the Managing Trustee.
4.3 Delegation of Powers.
Except as otherwise provided under this Agreement or by law and subject to
the provisions of Section 5.3 and 10.4, the Managing Trustee may delegate all or
any of its duties under this Agreement to any of its officers, employees and
agents and in furtherance of such delegation may elect, employ, contract or deal
with any Person (including any Affiliate of the Managing Trustee).
4.4 Reliance by Third Parties.
No Person dealing with the Trust, or its assets, whether as mortgagee,
assignee, purchaser, lessee, grantee or otherwise, shall be required to
investigate the authority of the Managing Trustee in selling, assigning,
leasing, mortgaging, conveying or otherwise dealing with any Assets or any part
thereof, nor shall any such assignee, lessee, purchaser, mortgagee, grantee or
other Person entering into a contract with the Trust be required to inquire as
to whether the approval of the Trust Beneficiaries for any such sale,
assignment, lease, mortgage, transfer or other transaction has been first
obtained. Any such Person shall be conclusively protected in relying upon a
certificate of authority or any other material fact signed by the Managing
Trustee, or in accepting any instrument signed by the Managing Trustee in the
name and on behalf of the Trust or the Managing Trustee.
4.5 Limitations on the Exercise of Powers of Managing Trustee.
The Managing Trustee shall not:
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(i) do any act in contravention of this Agreement or any applicable
law or regulation;
(ii) possess Trust property or assign the Trust's rights in specific
Trust property for other than a Trust purpose;
(iii) permit any Person to become a Trust Beneficiary, except as
provided in or contemplated by this Agreement;
(iv) knowingly commit any act that would subject any Trust
Beneficiary to unlimited liability in any jurisdiction;
(v) change the Trust's purposes from those set forth in Section 1.4;
(vi) acquire any Assets in exchange for interests in the Trust;
(vii) invest in junior chattel mortgages or deeds of trust, except
that the Trust may acquire chattel mortgages or deeds of trust in
connection with the sale of Assets;
(viii) invest in or underwrite the securities of other issuers,
except as provided in Sections 7.1 and 7.5;
(ix) do any act required to be approved or ratified in writing by
some or all Trust Beneficiaries under the Business Trust Act without such
approval or ratification unless the right to do so is expressly otherwise
given in this Agreement;
(x) reinvest Distributable Cash From Operations in Assets; or
(xi) cause the Trust to engage in any purchase or redemption of
Interests if, and to the extent that, such purchase or redemption would
result in the Trust being treated as a publicly traded partnership for
purposes of Section 7704 of the Code.
4.6 Liability for Acts or Omissions and Indemnification.
Neither any Trustee nor its Affiliates shall have any liability to the
Trust or to any other Trustee or any Trust Beneficiary for any loss suffered by
the Trust which arises out of any action or inaction of the Trustee or its
Affiliates while acting on behalf of, or in the course of performing services
for, the Trust, if the Trustee, in good faith, determined that such course of
conduct was in the best interest of the Trust and such course of conduct did not
constitute negligence or misconduct of the Trustee or its Affiliates. Each
Trustee and its Affiliates shall be indemnified by the Trust against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by them in connection with the Trust, provided that the same were not
the result of negligence or misconduct on the part of the Trustee or its
Affiliates and the Trustee determined in good faith that the course of conduct
that caused the loss, judgment, liability or claim was in the best interest of
the Trust. Notwithstanding the above, the Managing Trustee and its Affiliates
shall not be indemnified for any losses, liabilities or expenses arising from or
out of any alleged violation of any obligations any such Person might have as
ERISA fiduciaries unless (i) there has been a successful adjudication on the
merits of each count involving alleged violations of such obligations as to the
particular indemnitee and such court approves the indemnification of litigation
costs, (ii) such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee and such court
approves the indemnification of litigation costs, or (iii) a court of competent
jurisdiction approves the settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and related costs
should be made. Further, notwithstanding the above, the
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Managing Trustee and its Affiliates and any Person acting as a broker-dealer
shall not be indemnified for any losses, liabilities, or expenses arising from
or out of any alleged violation of federal or state securities laws unless (i)
there has been a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee and a court of
competent jurisdiction approves the indemnification of litigation costs, (ii)
such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and a court of competent
jurisdiction approves the indemnification of litigation costs, or (iii) a court
of competent jurisdiction approves a settlement of the claims against a
particular indemnitee and finds that indemnification of the settlement and
related costs should be made. In any claim for indemnification for federal or
state securities law violations, the party seeking indemnification shall place
before the court the position of the Securities and Exchange Commission, the
Massachusetts Securities Division, the Michigan Corporations & Securities
Bureau, the Pennsylvania Securities Commission, the Tennessee Securities
Commission and the Commissioner of Corporations of the State of California with
respect to the issue of indemnification for securities law violations. The Trust
shall not incur the cost of a portion of any insurance which insures any party
against any liability the indemnification of which is herein prohibited;
provided, however, that this prohibition shall not preclude the addition of such
parties as additional insureds on any public liability insurance to the extent
that such added parties do not increase the cost of such insurance to the Trust
or to the extent that any additional cost is not borne by the Trust.
Furthermore, any amount recoverable under this Section shall be recoverable only
out of the assets of the Trust and not from the assets of any Trust Beneficiary.
The Trust may make advances from Trust funds for legal expenses and other
costs incurred as a result of any legal action to any Person permitted
indemnification hereby (the "Indemnitee") provided (i) such suit, action or
proceeding relates to or arises out of, or is alleged to relate to or arise out
of, any action or inaction on the part of the Indemnitee in the performance of
its duties or provision of its services by the Managing Trustee or its
Affiliates on behalf of the Trust; (ii) the Indemnitee undertakes to repay any
funds advanced pursuant to this Section 4.6 in cases in which the indemnitee
would not be entitled to indemnification hereunder; and (iii) such suit, action
or proceeding is initiated by a third party who is not a holder of the
Interests; and (iv) such suit, action or proceeding is not initiated against the
Managing Trustee or its Affiliates. If advances are permissible under this
Section 4.6, the Indemnitee shall furnish the Trust with an undertaking as set
forth in the preceding sentence and shall thereafter bill the Trust from time to
time for such amounts as the indemnitee is obligated to make payment therefor.
The Trust shall pay any and all such bills and shall honor any and all such
requests for payment for which the Trust is liable hereunder. In the event that
a final determination is made that the Trust is not obligated hereunder for all
or any portion of the amounts advanced to the Indemnitee, such Indemnitee shall
refund such amount, plus interest thereon at the prevailing market rate of
interest, within 45 days of such final determination, and in the event that a
final determination is made that the Trust is so obligated in respect of any
amount not paid by the Trust to a particular Indemnitee, the Trust shall pay
such amount to such Indemnitee within 45 days of such determination.
For purposes of this Section 4.6 only, the term "Affiliate" shall mean any
person performing services on behalf of the Trust and acting on behalf of the
Managing Trustee who (i) directly or indirectly controls, is controlled by, or
is under common control with the Managing Trustee; (ii) owns or controls 10% or
more of the outstanding voting securities of the Managing Trustee; (iii) is an
officer, director, partner or trustee of the Managing Trustee; or (iv) if the
Managing Trustee is an officer, director, partner or trustee, in any company for
which the Managing Trustee acts in any such capacity.
4.7 Compensation of Trustees.
(a) Managing Trustee. The Managing Trustee shall not, in its capacity as
Managing Trustee, receive any salary, fees, profits or Distributions except:
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(i) the Managing Trustee shall be entitled to receive the
allocations and Distributions which are provided under Article VIII in
respect of its Managing Trustee Interest; and
(ii) the Managing Trustee and its Affiliates shall be entitled to
receive reimbursement for expenses incurred by them in connection with the
operation of the Trust, subject to the limitations set forth in Section
10.4.
(b) Delaware Trustee. The Delaware Trustee shall receive an annual fee of
$1,000, payable quarterly in advance, commencing with the first quarter
following Closing. The Delaware Trustee shall also receive an initial fee of
$1,000 payable at Closing. The Delaware Trustee shall also be entitled to
reimbursement for any expenses incurred by it in the performance of its
obligations hereunder. The Delaware Trustee, as such, shall not receive any
other salary, fees, allocations of Profits or Losses or any Distributions. The
fee of the Delaware Trustee may be modified from time to time as determined by
the Managing Trustee in its sole discretion to compensate the Delaware Trustee
appropriately for the performance of its duties hereunder.
(c) Specific Fees. Notwithstanding the foregoing, the Managing Trustee and
its Affiliates have the right to receive all fees and compensation specifically
provided for in this Agreement. If the Managing Trustee or an Affiliate
purchases Interests, it shall be entitled to the same benefits to which each
Beneficiary is entitled with respect to his Interests, except as otherwise
provided in Section 11.2(b).
(d) Liability of Managing Trustee. The Managing Trustee, when acting in
such capacity, shall be personally liable for the acts, omissions or obligations
of the Trust, except as may be expressly provided to the contrary in any
contractual agreement of the Trust. No other Trustee shall have any personal
liability to any other Person for any act, omission or obligation of the Trust
or any other Trustee.
4.8 Resignation of Trustees.
(a) No Managing Trustee may Resign unless (i) the Trust Beneficiaries have
received 60 days' advance written notice of the Managing Trustee's intention to
Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the
effect that such Resignation will not constitute a termination of the Trust or
otherwise materially adversely affect the status of the Trust as an entity
taxable as a partnership for federal income tax purposes, and (iii) a new
Managing Trustee shall have been selected who, or which, (x) shall have
expressed a willingness to become (and shall in fact duly become) the Substitute
Managing Trustee, (y) shall satisfy the then applicable provisions of the Code
and any applicable procedures, regulations, rules and rulings (including
published private rulings) thereunder, including applicable net worth
requirements, so that the Trust shall be classified as an entity taxable as a
partnership for federal income tax purposes, and (z) shall have received the
specific written Consent to such admission of a Majority in Interest of the
Beneficiaries. In the event of the Resignation of a Managing Trustee, such
Resigned Managing Trustee shall be liable for any costs or expenses incurred by
the Trust as a result of such Resignation.
(b) No Delaware Trustee may Resign unless (i) the Managing Trustee has
received 60 days' advance written notice of the Delaware Trustee's intention to
Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the
effect that such Resignation will not constitute a termination of the Trust or
otherwise materially adversely affect the status of the Trust as an entity
taxable as a partnership for federal income tax purposes, and (iii) a new
Delaware Trustee shall have been admitted who, or which, shall satisfy the then
applicable provisions of the Business Trust Act. In the event of the Resignation
of a Delaware Trustee, such Resigned Delaware Trustee shall be liable for any
costs or expenses incurred by the Trust as a result of such Resignation unless
such resignation is at the request of the Managing Trustee.
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4.9 Removal of Trustees.
A Trustee shall be deemed to have been removed (a "Removal") as a Trustee
from the Trust upon the occurrence of any of the following events: (a) the
Removal of the Trustee pursuant to a vote of the Beneficiaries made in
accordance with Article XI, (b) the making of an assignment for the benefit of
creditors, the filing of a voluntary petition in bankruptcy, or an adjudication
of bankruptcy, (c) the termination of the Trustee, or (d) any other involuntary
event which constitutes an event of removal under the Business Trust Act.
4.10 Consequences of Resignation or Removal.
(a) Any Resigned or Removed Trustee or its legal representatives shall be
entitled to receive from the Trust (i) (in the case of a Managing Trustee), any
positive balance in its Capital Account (as adjusted to the date of such
Resignation or Removal), provided, however, that in no event shall such amount
exceed the fair market value of the Resigned or Removed Trustee's Interest, (ii)
any amounts due and owing to it by the Trust less any amounts due and owing by
it to the Trust, and (iii) the remaining balance, if any, of fees payable as and
when due pursuant to this Agreement or any other written agreements between the
Trust and such Trustee in its capacity as Trustee; provided, however, that the
Resigned or Removed Trustee shall not be entitled to any such fees which had not
yet been earned by it prior to its Resignation or Removal. The right of the
Resigned or Removed Trustee or its legal representatives to payment of said
amounts and fees shall be subject to any claim for damages which the Trust or
any other Trustee or Trust Beneficiary may have against such Trustee or its
legal representatives if such Resignation or Removal is in contravention of this
Agreement.
(b) The Managing Trustee hereby covenants and agrees, in the event of its
Resignation or Removal, to transfer to a Substitute Managing Trustee selected as
provided in Section 4.8 or Section 4.12 or to the Trust, such portion, if any,
of its Managing Trustee's Interest as the Substitute Managing Trustee or the
Trust shall elect to purchase. Any such transfer will be made in consideration
of the payment by the Substitute Managing Trustee to the Resigned or Removed
Managing Trustee or its legal representatives, of 86.5% of the fair market value
of such Interest less any amounts payable pursuant to Section 4.10(a) by the
Trust. The fair market value of the Trustee's Interest shall be as determined by
the parties to the transfer, or otherwise in accordance with Section 11.3. The
method of payment to the Resigned or Removed Managing Trustee must be fair and
must protect the solvency and liquidity of the Trust. In the event of the
Resignation of the Managing Trustee, payment may be made by means of a
non-interest-bearing unsecured promissory note with principal payable, if at
all, from Distributions which the Resigned Managing Trustee would have received
but for its Resignation. In the event of the Removal of the Managing Trustee,
the Substitute Managing Trustee or the Trust shall make such payment by means of
a promissory note bearing interest at a floating annual rate equal to the prime
rate of interest announced by Fleet Bank of Massachusetts, N.A., maturing in not
less than five years with equal installments of principal and interest payable
each year. Any portion of such Removed Managing Trustee's Interest which is not
required to be transferred as aforesaid may be retained by such Removed Managing
Trustee or its estate or legal representatives as appropriate. The Managing
Trustee acknowledges and agrees that the payment of 86.5% of the fair market
value of any portion of its Trustee's Interest which has been transferred shall
be full payment for such Trustee's Interest. To the extent of such retained
Trustee's Interest, if any, such Resigned or Removed Managing Trustee or its
estate or legal representatives shall be treated as Trust Beneficiaries.
(c) The Delaware Trustee hereby covenants and agrees, in the event of its
Resignation or Removal, to transfer to a Substitute Delaware Trustee selected as
provided in Sections 4.1 and 4.8, or to the Trust, such portion, if any, of its
Trustee's Interest as the Substitute Delaware Trustee or the Trust shall elect
to purchase. Any such transfer will be made in consideration of the payment by
the Trust of one dollar, plus any amounts payable pursuant to Section 4.10(a) by
the Trust.
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(d) If the Removal of the Managing Trustee shall occur as part of a
removal and replacement of such Managing Trustee effected in accordance with
Article XI, the provisions of Article XI shall govern to the extent (if any)
that the provisions of said Article XI are inconsistent with the provisions of
this Section 4.10.
4.11 Liability of Resigned or Removed Trustee.
If the business of the Trust is continued after Resignation or Removal of
the Trustee, the Resigned or Removed Trustee or its legal representatives shall
remain liable for all obligations and liabilities incurred by it while a Trustee
and for which it was liable as a Trustee, but shall be free of any obligation or
liability incurred on account of or arising from the activities of the Trust
from and after the time such Resignation or Removal shall have become effective.
4.12 Continuation of Trust Business.
Upon any Removal of the sole Managing Trustee, such Removed Managing
Trustee or its representatives shall promptly notify the Trust Beneficiaries. In
the event of a failure to give such notice, any Trust Beneficiary may notify the
other Trust Beneficiaries of such circumstances. Any Trust Beneficiary may then
propose for admission a Substitute Managing Trustee, unless a Substitute
Managing Trustee shall have already been proposed by the Trust Beneficiaries
pursuant to Article XI. If any remaining Managing Trustee is a sole Managing
Trustee at the time of its Removal, then that subsequent Removal will be
governed by the provisions of this Agreement relating to the Removal of a sole
Managing Trustee. Any Substitute Managing Trustee proposed pursuant to this
Section 4.12 or Section 11.2 shall, with Majority Vote, become a Substitute
Managing Trustee upon his or its execution of this Agreement and may thereupon
elect to continue the Trust business. If no Substitute Managing Trustee has
received such Majority Vote and executed this Agreement within one hundred
eighty (180) days from the date of the Managing Trustee's Removal, then the
Trust shall dissolve and its affairs shall be wound up.
4.13 Powers and Limitations of Delaware Trustee.
(a) Notwithstanding any other provision of this Agreement, unless
specifically authorized in writing by the Managing Trustee and consented to by
the Delaware Trustee, the Delaware Trustee shall not participate in any
decisions or possess any authority or approval right with respect to the
operation of any business of the Trust, the investment of Trust property or the
payment of Distributions to the Beneficiaries. No amendment to this Agreement
shall require the approval or signature of the Delaware Trustee. The Delaware
Trustee shall have the power and authority to execute, deliver, acknowledge and
file all necessary documents and to maintain all necessary records of the Trust
as required by the Business Trust Act. The Delaware Trustee shall provide prompt
notice to the Managing Trustee of its performance of the foregoing acts.
(b) The Delaware Trustee shall not be liable for acts or omissions of the
Managing Trustee and shall owe no other fiduciary duties to the Beneficiaries
other than as expressly provided for in this Section 4.13.
(c) The Delaware Trustee accepts the Trust hereby created and agrees to
perform its duties hereunder with respect to the same but only upon the terms of
this Agreement. The Delaware Trustee shall not be personally liable under any
circumstances except (x) for its own misconduct or negligence or (y) for taxes,
fees or other charges on, based on or measured by any fees, commissions or
compensation received by the Delaware Trustee in connection with the provision
of its services hereunder. In particular, but not by way of limitation:
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(i) No provision of this Agreement shall require the Delaware
Trustee to expend or risk its personal funds, or otherwise incur any
financial liability in the performance of its rights or powers hereunder,
if the Delaware Trustee shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured or provided to it;
(ii) Under no circumstances shall the Delaware Trustee be
personally liable for any indebtedness or obligation of the Trust;
(iii) In the exercise or administration of its duties hereunder, the
Delaware Trustee may, at the expense of the Trust, consult with counsel
and it shall not be liable for anything done, suffered or omitted in good
faith by it in accordance with the advice or opinion of such counsel; and
(iv) The Delaware Trustee shall not be liable for the default or
misconduct of the Managing Trustee and shall not be liable for any act or
omission taken at the discretion of the Managing Trustee.
(d) Notwithstanding anything in this Section 4.13, the Delaware Trustee
shall be subject to the indemnification provisions contained in Section 4.6 of
this Agreement.
ARTICLE V - ADVISOR SERVICES AND COMPENSATION
5.1 Compensation to Advisor and Certain Affiliates.
The Advisor and other Affiliates of the Managing Trustee shall receive
fees and compensation as follows:
(a) For services rendered in connection with the sale of Class A
Interests, the Trust will pay the Dealer-Manager a D-M Commission of 7% of
the Gross Proceeds. The Dealer-Manager will reallow to each Soliciting
Dealer a commission of 7% of the Gross Class A Proceeds per Class A
Interest sold by such Soliciting Dealer. In addition, the Dealer-Manager,
in its sole discretion, may reallow to a Soliciting Dealer all or a
portion of the non-accountable expense allowance of 1.5% of Gross Class A
Proceeds per Class A Interest and the accountable due diligence expense
allowance of 0.5% of Gross Proceeds per Class A Interest under the
Dealer-Manager Agreement payable with respect to the Interests sold by
such Soliciting Dealer. The Dealer-Manager may retain the entire D-M
Commission earned with respect to sales of Interests to the Managing
Trustee or its Affiliates. Total payments, including commissions, expense
allowances, any sales incentives, wholesaling fees and any and all other
underwriting compensation made to the Dealer-Manager and the Soliciting
Dealers in connection with the Class A Offering from all sources,
including the Trust and the Dealer-Manager, will never exceed ten percent
(10%) of Gross Class A Proceeds, except that up to an additional one-half
of one percent (0.5%) of Gross Class A Proceeds may be paid for
reimbursement of bona fide due diligence expenses.
(b) For rendering services in connection with the initial
acquisition of Assets by the Trust, the Trust shall pay to the Advisor
Acquisition Fees and Acquisition Expenses equal to the lesser of (A) 0.28%
of the Asset Base Price paid by the Trust for each Asset acquired or (B) a
fee, which in conjunction with all other fees paid by or on behalf of the
Trust to all Persons in connection with the acquisition of an Asset, the
Managing Trustee believes to be competitive with that charged by
non-Affiliated Persons for rendering comparable services. For rendering
services in
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connection with the acquisition of additional Assets by the Trust through
the reinvestment of Cash From Sales or Refinancings, the Trust shall pay
to the Advisor Acquisition Fees and Acquisition Expenses equal to the
lesser of (A) 3% of the Asset Base Price paid by the Trust for each Asset
acquired or (B) a fee, which in conjunction with all other fees paid by or
on behalf of the Trust to all Persons in connection with the acquisition
of an Asset, the Managing Trustee believes to be competitive with that
charged by non-Affiliated Persons for rendering comparable services.
Notwithstanding the foregoing, the Trust's Investment in Assets shall not
be less than the greater of (A) 80% of the Gross Proceeds, reduced by
.0625% for each 1% of leverage encumbering Trust Assets, or (B) 75% of
Gross Class A Proceeds. In no event, however, will the Trust's Investment
in Assets be less than 90% of the Gross Class A Proceeds (including 1% of
Gross Class A Proceeds for working capital reserves). To the extent that
such limitation is not otherwise satisfied, Acquisition Fees and
Acquisition Expenses payable or paid by the Trust to the Advisor will be
reduced or refunded to the extent necessary to comply with such
limitation. In addition, if Acquisition Fees or Acquisition Expenses are
paid to the Advisor or an Affiliate thereof in connection with the
reinvestment of Cash From Sales or Refinancings, such fees and expenses
shall be limited so that the Trust's Investment in Assets, after taking
into account the Front-End Fees and Expenses incurred in connection with
the initial acquisition of the Trust's Assets, shall be equal to at least
90% of Gross Class A Proceeds (including up to 3% of Gross Class A
Proceeds for working capital reserves) reduced by .0625% for each 1% of
leverage encumbering the Trust's Assets, but not less than 85% of Gross
Class A Proceeds (including up to 3% of Gross Class A Proceeds for working
capital reserves). The total of all fees paid to all Persons in connection
with the acquisition of Assets, when aggregated with all travel,
communication and overhead reimbursements paid to the Managing Trustee or
its Affiliates, shall not exceed a fee competitive with that charged by
non-Affiliated Persons for rendering comparable services. No Acquisition
Fees and Acquisition Expenses are payable with respect to Assets acquired
with insurance proceeds or other indemnity payments to be leased under the
original leases of lost or destroyed Assets except to the extent that
insurance proceeds or indemnity payments are sufficient to pay such
Acquisition Fees and Acquisition Expenses after deducting the Asset Base
Price of the replacement Asset and payment of all existing indebtedness
secured by the lost or destroyed Asset.
(c) For Asset Management, the Trust shall pay the Advisor an Asset
Management Fee, payable monthly, equal to the lesser of (A) the fees which
the Managing Trustee reasonably believes to be competitive for similar
services for similar assets or (B) 5% of gross lease rental revenues of
the Trust from Operating Leases and 2% of gross lease rental revenues of
the Trust from Full Payout Leases for the month for which such payment is
being made. To the extent that the Trust does not have sufficient cash to
pay the Asset Management Fee in full when due, any unpaid amount will be
accrued and paid in the next succeeding month or months. No interest shall
accrue on unpaid amounts of Asset Management Fee. The Advisory Agreement
shall provide that it may be terminated by the Trust without penalty on no
more than sixty (60) days' written notice to the Advisor. The Advisory
Agreement shall also provide that it may be terminated by the Trust
effective immediately and without penalty in the event of the Removal of
the Managing Trustee.
(d) For rendering services in connection with the sale of any
Assets, the Trust shall pay to the Advisor a Subordinated Resale Fee in an
amount equal to the lesser of (A) 3% of the gross sales proceeds of the
Asset, or (B) one-half of a Competitive Asset Sale Commission; provided
that in no event shall any such Subordinated Resale Fee be paid prior to
Payout; and provided, further, that the Advisor shall not be entitled to
receive any amount of Subordinated Resale Fee to the extent that such
amount would cause the total compensation paid to all Persons, in
connection with the sale of such Asset, to exceed a Competitive Asset Sale
Commission. No interest shall accrue on unpaid amounts of the Subordinated
Resale Fee. After Payout any and all Subordinated Resale Fees previously
earned by the Advisor shall be paid by the Trust prior to any
Distributions to
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the Participants.
(e) The Trust shall pay the Managing Trustee and its Affiliates an
amount equal to 1% of the Gross Class B Proceeds as a non-accountable
expense allowance in connection with the Class B Offering.
5.2 Other Interests of the Advisor and its Affiliates.
The Advisor, the Managing Trustee and any other Affiliate of the Advisor
may engage in or possess an interest in other business ventures (unconnected
with the Trust) of every kind and description, independently or with others,
including, but not limited to, serving as general partner of partnerships or
trustees of trusts and participating in the equipment leasing business in all of
its phases, which shall include, without limitation, ownership, operation,
leasing, re-leasing, financing, refinancing, management and syndication of
equipment and which may involve equipment competitive with any Asset. The
officers and directors of the Managing Trustee and the Advisor will devote only
such time to the affairs of the Trust as they, in their sole discretion,
determine in good faith to be necessary for the business and operations of the
Trust. Neither the Trust nor the Trust Beneficiaries shall have any rights in
and to such independent ventures or the income or profits therefrom by reason of
the Advisor's or Managing Trustee's position with the Trust. Notwithstanding the
foregoing, the Managing Trustee will act at all times in a manner consistent
with its fiduciary duties to the Trust.
In the event the Managing Trustee is presented by the Advisor with a
potential investment which might be made by the Managing Trustee, EFG or its
Affiliates, including investment entities advised, managed, controlled or to be
formed by the Managing Trustee, the Advisor and/or its Affiliates (collectively,
the "Investment Entities"), the Managing Trustee will analyze the assets already
purchased and investment objectives of each Investment Entity involved and will
make the decision as to which Investment Entity will purchase the assets based
upon such factors, among others, as (i) the amount of cash available in each
Investment Entity for such acquisition and the length of time such funds have
been available, (ii) the current and long-term liabilities of each Investment
Entity, (iii) the effect of such acquisition on the diversification of each
Investment Entity's equipment portfolio by type of equipment, (iv) the credit
diversification (geographically and/or by industry) of each Investment Entity's
equipment portfolio, (v) the estimated income tax consequences from such
acquisition to the investors in each Investment Entity, (vi) the cash
distribution objectives of each Investment Entity, (vii) the policy of each
Investment Entity relating to leverage, and (viii) any specialized investment
purpose of an Investment Entity (which may, in the discretion of the Advisor,
entitle such entity to priority as to certain types of assets). If, after
analyzing the foregoing and any other appropriate factors, the Managing Trustee
determines that an acquisition would be equally suitable for more than one
Investment Entity, then the Managing Trustee will purchase assets for the
Investment Entities based on the length of time such funds have been available.
In the event that two or more of AFG Investment Trust B, AFG Investment Trust B,
AFG Investment Trust C and AFG Investment Trust D have a substantial portion of
their uninvested Net Proceeds available at the same time for purchase of Assets,
the Managing Trustee will allocate available Assets among them on a pro-rata
basis, determined by the cash balances in each in excess of funds designated for
its Reserve Account and for distribution to its Participants.
In the event of a conflict between two or more Investment Entities advised
or managed or controlled (or in the process of being formed) by the Managing
Trustee, EFG or its Affiliates, for the financing of the acquisition of Assets
contemporaneously, the Managing Trustee and EFG will seek to cause the available
financing to be obtained by the Investment Entity that has been seeking
financing the longest.
In the event of a conflict between two or more Investment Entities,
advised, managed or controlled by the Managing Trustee, EFG or an Affiliate, to
re-lease or sell similar assets contemporaneously, the first
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opportunity to re-lease or sell equipment will generally be allocated to the
Investment Entity attempting to re-lease or sell equipment which has been
subject to the lease which expired first, or, if the leases expire
simultaneously, the lease which was first to take effect. However, the Managing
Trustee and EFG, in their discretion, may make exceptions to this general policy
where Assets are subject to remarketing commitments or where there are other
circumstances which, in their judgment, make the application of such policy
inequitable for a particular Entity. In addition, exceptions to this general
policy will be made when a buyer or new lessee indicates a preference for a
specific item or items of equipment.
5.3 Other Transactions Involving the Advisor and its Affiliates.
Except as specifically permitted by this Agreement, the Managing Trustee
is prohibited from entering into any agreements, contracts or arrangements on
behalf of the Trust with the Advisor or any Affiliate (including the Managing
Trustee itself). Such prohibition shall include, without limitation, that
neither the Advisor nor any such Affiliate shall receive directly or indirectly
a commission or fee in connection with the reinvestment of the proceeds of the
sale or refinancing of any Equipment or in connection with any insurance
obtained by the Trust except as provided in Section 5.1. In addition, in
connection with any agreement entered into by the Trust with the Advisor or any
Affiliate, no rebates or give-ups may be received by the Advisor or any such
Affiliate, nor may the Advisor or any such Affiliate participate in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of this Agreement.
The Advisor and its Affiliates shall not receive any fees or compensation
other than as provided for in Sections 4.7, 5.1, 7.4, 10.4(a) and 10.4(b). If
the Advisor or an Affiliate purchases Interests, it shall be entitled to the
same benefits to which each other Beneficiary is entitled, except as otherwise
provided in Section 11.2(b).
ARTICLE VI - TRUST BENEFICIARIES
6.1 Absence of Control over Trust Business.
The Trust Beneficiaries hereby consent to the exercise by the Managing
Trustee of the power conferred on the Managing Trustee by this Agreement. No
Trust Beneficiary (except one who is also the Managing Trustee and then only in
its capacity as the Managing Trustee) shall participate in or have any control
over the Trust's business or have any right or authority to act for or to bind
the Trust. No Trust Beneficiary shall have the right to have the Trust dissolved
and liquidated or have his Capital Contributions returned except as provided in
this Agreement.
6.2 Limited Liability.
Except as set forth below, each Trust Beneficiary in his capacity as a
Trust Beneficiary shall be entitled, pursuant to ss. 3803 (a) of the Business
Trust Act, to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. Except (i) as may otherwise be required by law, (ii)
to the extent that a Trust Beneficiary may be liable to the Trust for an amount
equal to any Distributions made to him if, after such Distribution is made, the
then fair market value of the remaining Assets of the Trust is not sufficient to
pay its then outstanding liabilities and (iii) as set forth below with respect
to Foreign Beneficiaries, the liability of each Trust Beneficiary in his
capacity as a Trust Beneficiary shall be limited to the amount of his Capital
Contribution as described in Sections 3.2 and 3.4 and no Trust Beneficiary
shall, in his capacity as Trust Beneficiary, have any further obligations to the
Trust or be required to contribute any additional capital or loan any funds to
the Trust.
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Notwithstanding the foregoing, each Foreign Beneficiary shall indemnify
the Trust and the Trustees for any costs or expenses incurred by the Trust or
the Trustees in connection with the withholding requirements applicable to
Foreign Beneficiaries under the Code, including, without limitation, Sections
1441, 1442 and 1446.
Upon issuance of the Class B Interests as provided in this Agreement, the
Class B Interests so issued shall be deemed to be validly issued, fully paid and
non-assessable.
6.3 Fiduciary Duty of Managing Trustee to Trust Beneficiaries.
No Trust Beneficiary shall forgo by means of contract the fiduciary duty
owed to the Trust Beneficiary by the Managing Trustee under the Business Trust
Act or the common law of the State.
ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES
7.1 Investment Objectives and Policies.
The Managing Trustee shall use its best efforts to cause the Trust to
follow the investment objectives and policies set forth in the Class A
Prospectus. The Managing Trustee may not make substantial or material
modifications in such investment objectives without Majority Consent. However,
the Managing Trustee, in its sole discretion and as permitted by this Agreement
but subject to any and all limitations on its exercise of such discretion
contained in this Article VII, may alter the investment, borrowing or other
policies of the Trust as set forth in the Class A Prospectus without the consent
of any Trust Beneficiary to the extent the Managing Trustee deems such
alterations to be necessary or appropriate to enable the Trust better to meet
its investment objectives; provided, however, that in no event may the Managing
Trustee alter the investment, borrowing or other policies of the Trust as set
forth in the Class A Prospectus if such alteration would cause the investment,
borrowing or other policies of the Trust to violate the NASAA Guidelines. In
addition, the Managing Trustee may not alter the investment policies of the
Trust to increase the amount of leverage which may be incurred by the Trust or
to decrease the standards for determining a Creditworthy Lease Portfolio. All
funds held by the Trust which are not invested in Assets (including subscription
payments upon their release to the Trust) may be invested by the Trust in
Permitted Investments. The Trust shall not make loans except in connection with
the purchase, sale or other disposition of Assets. The Trust shall not redeem or
repurchase Interests except to the extent that such Interests are forfeited in
order to (a) prevent the assets of the Trust from being deemed plan assets or
(b) prevent Foreign Beneficiaries from remaining Trust Beneficiaries under
certain circumstances provided herein or (c) as permitted by Section 9.6. The
Managing Trustee shall use its best efforts to ensure that the Trust shall not
be deemed an investment company, as such term is defined in the Investment
Company Act of 1940.
7.2 Assets and Lessees.
The Trust shall acquire various types of Assets as provided in the Class A
Prospectus.
7.3 Sales and Leases of Assets from or to the Managing Trustee and its
Affiliates.
The Trust may not purchase Assets in which the Managing Trustee or any of
its Affiliates (the "Interested Parties") has an interest except for Assets
acquired on an interim basis (generally not in excess of six months) by one of
the Interested Parties for the purpose of facilitating the acquisition by the
Trust of the Asset or obtaining financing for the Trust or in connection with a
Joint Venture. The Trust may not purchase Assets from any program in which the
Managing Trustee or any of its Affiliates has an interest; provided that such
restriction shall not prohibit the Trust from being a participant in a Joint
Venture. The
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Trust may acquire any such Assets from the Interested Parties only if: (i) such
acquisition is in the best interests of the Trust; (ii) such Asset is purchased
by the Trust for a price no greater than the Asset Base Price; (iii) there is no
difference in interest terms of the loans secured by such Asset at the time
acquired by one of the Interested Parties and the time acquired by the Trust,
unless any such difference is favorable to the Trust; and (iv) no other benefit
arises out of such transaction to the Interested Parties apart from compensation
otherwise permitted by this Agreement. Assets shall not be acquired from an
Interested Party if such transaction would involve the payment of duplicative
Asset Management Fees or other fees or would have the effect of circumventing
any of the restrictions on and prohibitions of transactions involving conflicts
of interest contained herein. The aggregate primary term rental payments
received or accrued to the Interested Parties with respect to Assets prior to
the time that the Trust purchases the Asset from the Interested Parties shall
reduce the purchase price paid by the Trust for such Asset by such amounts
unless such primary term rental payments are assigned to the Trust.
If one of the Interested Parties purchases an Asset in its own name in
order to facilitate the ultimate purchase by the Trust, the Trust may purchase
such Asset and such Interested Party will be entitled to receive interest on the
funds expended for such purchase on behalf of the Trust. Interest on such
temporary purchases will be charged at a floating rate equal to the rate of
interest charged by third party financing institutions on comparable loans for
the same purpose (but not in excess of 2% per annum over the base rate from time
to time announced by Fleet Bank of Massachusetts, N.A. Interest shall accrue and
be payable at the above-determined rate from the date of the Managing Trustee's
or Affiliate's acquisition of the Asset until such Asset is sold to the Trust.
The Trust shall not lease Assets from or to the Interested Parties. The
Trust shall not sell Assets to the Interested Parties, except as provided in
this Section.
7.4 Loans to or from the Managing Trustee and its Affiliates.
No loans may be made by the Trust to the Managing Trustee or its
Affiliates. The Managing Trustee or its Affiliates may loan funds on a
short-term basis to the Trust but only with interest rates equal to the amounts
that are charged (without reference to the Managing Trustee's or any Affiliate's
financial abilities or guarantees) by unrelated banks on comparable loans for
the same purpose (but not in excess of 2% per annum over the base rate from time
to time announced by Fleet Bank of Massachusetts, N.A.). Interest on such loans
will begin to accrue on the date the loan is funded. Neither the Managing
Trustee nor any Affiliate shall provide permanent financing for the Trust, and
all payments of principal and interest on any financing provided by the Managing
Trustee or any of its Affiliates shall be due and payable within 12 months after
the date of the loan. Neither the Managing Trustee nor any Affiliate may receive
points or other financial charges or fees (excluding interest charges) in
respect of any loans to the Trust, although the Managing Trustee's or an
Affiliate's compensation (specifically, Acquisition Fees and Asset Management
Fees) may be increased as an indirect result of such loans.
Any borrowings from the Managing Trustee or its Affiliates incurred for
organization and offering expenses will be non-interest-bearing and will be
repaid out of offering proceeds (subject to the limitations of Section 10.4).
The Trust shall not enter into any borrowing arrangement with the Managing
Trustee or its Affiliates which calls for a prepayment charge or penalty to be
paid to the Managing Trustee or its Affiliates.
7.5 Joint Investments.
The Trust shall not make investments in the limited partnership interests
or other equity interests of any other program. The Trust may enter into a
general partnership, joint venture, trust or other business arrangement (other
than a corporation) (collectively, a "Joint Venture") with an Unaffiliated
Person if all of
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the following conditions are satisfied. First, the Trust shall acquire a
controlling interest in any such Joint Venture. For purposes hereof, the Trust
shall be deemed to have a controlling interest in such Joint Venture if (i) the
Trust holds or is contractually entitled to acquire an interest of not less than
50% in the capital and profits of the Joint Venture and the Joint Venture
agreement or related documents grant to the Trust and its Affiliates the joint
right to make basic management decisions concerning the leasing, financing,
refinancing, sale or other disposition of the Assets or (ii) the Trust holds a
less than 50% interest in the capital and profits of the Joint Venture, but the
Joint Venture Agreement or related documents grant to the Trust and its
Affiliates the exclusive right to make all basic management decisions concerning
the leasing, financing, refinancing, sale or other disposition of the Asset.
Second, no such Joint Venture shall be entered into by the Trust which involves
the payment of duplicative equipment management or other fees or which would
have the effect of circumventing any of the restrictions on and prohibitions
against transactions involving conflicts of interest contained in this
Agreement. Third, such Joint Venture must either own specific Assets or be in
the process of acquiring specific Assets (i.e., a commitment for the purchase of
the specific Asset has been executed, but the Joint Venture has not yet acquired
title to or paid for the Asset). The Trust may enter into Joint Ventures which
satisfy the preceding requirements with respect to any Asset at any time during
the life of the Trust; provided, however, that Offering Proceeds received
directly by the Trust from Beneficiaries are invested within 24 months after
commencement of the Offering. In no event may a Trust enter into a Joint Venture
if by means of the Joint Venture the Trust will acquire Assets from a program in
which the Managing Trustee or any of its Affiliates has an interest in
contravention of the provisions of Section 7.3 of this Agreement.
The Trust may enter into Joint Ventures with Affiliates of the Managing
Trustee or EFG or programs sponsored by the Managing Trustee or its Affiliates
(including Joint Ventures organized after the Closing) (collectively,
"Affiliated Venturers") but only if (i) such Affiliated Venturers are limited or
general partnerships, trusts, joint ventures, unincorporated associations or
similar organizations other than a corporation formed for the primary purpose of
investment in and operation of or gain from an interest in equipment, (ii) such
Affiliated Venturers have substantially identical investment objectives and
management compensation provisions to those of the Trust, (iii) no such Joint
Venture shall be entered into by the Trust which involves the payment of
duplicative equipment management or other fees or which would have the effect of
circumventing any of the restrictions on and prohibitions of transactions
involving conflicts of interest contained in this Agreement, (iv) the
compensation to the Managing Trustee and its Affiliates with respect to such
Joint Ventures shall be substantially identical to the compensation described in
this Agreement, (v) in the event of a proposed sale of the Asset or interest
therein initiated by another Joint Venture partner, the Trust must have a right
of first refusal, pro rata with the other remaining parties, to purchase the
other party's or parties' interest, (vi) the Joint Venture is done either for
the purpose of effecting appropriate diversification for such programs or for
the purpose of relieving the Managing Trustee from a commitment entered into in
connection with the acquisition of an Asset which was acquired for subsequent
transfer to the Trust, and (vii) the investment by each party must be on
substantially the same terms and conditions except as a result from varying
percentage interests in the Joint Venture. The Trust will not acquire any Asset
through a Joint Venture with EFG or any non-corporate Affiliate unless it is
intended that such Joint Venture will be temporary in nature and will not last
more than six months. Further, no lender to a Joint Venturer may have a security
or other interest in the Trust's interest in the Joint Venture except to the
extent of funds loaned directly to or for the benefit of the Trust. The Trust
may cease to be a party to a Joint Venture by sale of its interest to another
Joint Venturer or to a third-party purchaser. The Trust will not acquire Assets
through a Joint Venture with the Managing Trustee or any other corporate
Affiliate of EFG.
The Trust may also enter into a Joint Venture with one or more
unaffiliated Persons and one or more Affiliated Venturers provided that (i) the
Trust and its Affiliated Venturers acquire collectively a controlling interest
(as such term is described above) in such Joint Venture; (ii) the conditions set
forth in subsections (i)-(iii) and (vi) above are satisfied; (iii) the Joint
Venture Agreement or related documents grant to the Trust and its Affiliated
Venturers the joint right to make basic management decisions concerning the
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leasing, financing, refinancing, sale or other disposition of the Asset; and
(iv) in the event of a proposed sale of the Asset or interest therein initiated
by another Affiliated Joint Venture partner, the Trust has a right of first
refusal, pro rata with the other Affiliated Venturers only, to purchase all
other Affiliated Venturers' interests therein. Notwithstanding anything
contained in this Section 7.5 to the contrary, the Trust may enter into Joint
Ventures only where such investments will further the investment objectives of
the Trust and where such Joint Ventures do not involve the payment to the
Managing Trustee, the Advisor or any Affiliate of the foregoing, equipment
management or other fees that would not be permitted under this Agreement.
7.6 Resales.
No exclusive listing for the sale of Assets shall be granted to the
Managing Trustee or any of its Affiliates.
7.7 In-Kind Distributions.
The Trust shall not make in-kind distributions to the Participants.
7.8 Roll-Ups.
The Trust shall not participate in any proposed Roll-Up if any of the
following conditions are present:
(i) the proposed Roll-Up would result in the Beneficiaries having
voting rights in the Roll-Up Entity which are less than those contained in
this Agreement. If the Roll-Up Entity is a corporation, the voting rights
of the Beneficiaries shall correspond to the voting rights provided for in
this Agreement to the greatest extent possible;
(ii) the proposed Roll-Up includes provisions which would operate to
materially impede or frustrate the accumulation of shares by any purchaser
of the securities in the Roll-Up Entity (except to the minimum extent
necessary to preserve the tax status of the Roll-Up Entity);
(iii) the proposed Roll-Up would limit the ability of a Beneficiary
to exercise the voting rights of his securities of the Roll-Up Entity on
the basis of the number of Interests held by the Beneficiary;
(iv) the Beneficiaries' rights of access to the records of the
Roll-Up Entity will be less than those provided in this Agreement;
(v) any of the costs of the proposed Roll-Up would be borne by the
Trust if the Roll-Up is not approved by the Beneficiaries; or
(vi) the Person sponsoring the Roll-Up fails to offer the
Beneficiaries who vote on the proposal the choice of (a) accepting the
securities of the Roll-Up Entity offered in the proposed Roll-Up; or (b)
one of the following: (i) remaining as Beneficiaries in the Trust and
preserving their interests therein on the same terms and conditions as
existed previously; or (ii) receiving cash in an amount equal to the
Beneficiaries' pro-rata share of the appraised value of the net assets of
the Trust.
(b) If the Trust may participate in a Roll-Up pursuant to this Section, an
appraisal of all assets of the Trust shall be obtained from a competent,
Independent Expert. The assets of the Trust shall be appraised on a consistent
basis. The appraisal shall be based upon an evaluation of all relevant
information
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and shall indicate the value of the Trust's assets as of a date no earlier than
30 days prior to the announcement of the proposed Roll-Up. The appraisal shall
assume an orderly liquidation of the Trust's assets over a 12 month period. If
the appraisal will be included in a Prospectus used to offer the securities of
the Roll-Up Entity, the appraisal shall be filed with the Securities and
Exchange Commission and the states as an exhibit to the registration statement
for the offering. The terms of the engagement of the Independent Expert shall
clearly state that the engagement is for the benefit of the Trust and the
Beneficiaries. A summary of the independent appraisal, indicating all material
assumptions underlying the appraisal, shall be included in a report to the
Beneficiaries in connection with the proposed Roll-Up.
7.9 Change in Investment Objective and Policies.
The Managing Trustee shall be subject to the limitations provided in this
Article VII in its administration of the Trust unless Majority Consent is
obtained.
ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS
8.1 Distribution of Distributable Cash.
(a) In General. Distributions prior to dissolution shall be made to the
Participants within 45 days after completion of each month of each fiscal year.
However, a Beneficiary may elect to have such Distributions made to him on a
quarterly basis. Such election must accompany the Beneficiary's Subscription
Agreement or be delivered to the Managing Trustee in writing on the anniversary
of the Trust's Closing. Notwithstanding the foregoing, the Managing Trustee may,
in its sole discretion, restrict or suspend Distributions if it believes such
action to be in the best interests of the Trust. Commencing as of the
Distribution Commencement Date, each Distribution shall be made (i) 90.75% to
the Beneficiaries, (ii) 8.25% to the Special Beneficiary and (iii) 1% to the
Managing Trustee.
Distributions so to be made to the Class A Beneficiaries and the Class B
Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis
(pro rated for fractional quarters):
Prior to Class B Payout:
first, 100% to the Class A Beneficiaries up to $0.41 per Class A
Interest;
second, 100% to the Class B Beneficiaries up to $0.164 per
Class B Subordinated Interest, reduced by the Class B Distribution
Reduction Factor;
third, 100% to the Class A Beneficiaries up to an additional
$0.215 per Class A Interest; and
fourth, until Class B Payout has been attained, 80% to the Class B
Beneficiaries and 20% to the Class A Beneficiaries.
After Class B Payout:
all further Distributions will be made to the Class A Beneficiaries
and the Class B Beneficiaries in amounts so that each Class A Beneficiary
receives with respect to each Class A Interest an amount equal to 400%,
divided by the difference between 100% and the Class B Capital Reduction
Factor, of the amount so distributed with respect to each Class B
Interest.
(b) Liquidation Distributions. Upon dissolution and termination of the
Trust, after payment of,
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or adequate provision for, the debts and obligations of the Trust, the remaining
assets of the Trust (or the proceeds of sales or other dispositions in
liquidation of Trust assets, as may be determined by the remaining or surviving
Trustees) shall be distributed to the Participants in accordance with the
positive balances in their Capital Accounts after taking into account all
Capital Account adjustments for the Trust's taxable year, including adjustments
to Capital Accounts pursuant to Section 8.2(a). In the event that the Managing
Trustee has a deficit balance in its Capital Account following the liquidation
of the Trust or its interest in the Trust as determined after taking into
account all Capital Account adjustments for the Trust taxable year in which such
liquidation occurs, the Managing Trustee shall pay to the Trust in cash an
amount equal to the deficit balance in its Capital Account by the end of such
taxable year (or, if later, within ninety (90) days after the date of such
liquidation) which amount shall, upon liquidation of the Trust, be paid to
recourse creditors of the Trust or distributed to the Trust Beneficiaries in
accordance with their positive Capital Account balances.
(c) Notwithstanding the provisions of Sections 8.1(a) and 8.1(b), the
Managing Trustee shall have the right to withhold funds from Distributions to be
made to Beneficiaries who are Foreign Beneficiaries or deduct certain amounts
from such Distributions under the circumstances set forth in Section 8.4(h). Any
such withholdings or repayments or deductions shall be deemed to have been
Distributions made to such Foreign Beneficiaries for all purposes of this
Agreement.
(d) Promptly after the Class B Closing, the Trust will make the Special
Class A Distribution to the Class A Beneficiaries.
(e) The Trust will make Class B Capital Distributions not later than the
expiration of the Initial Redemption Period provided that there are proceeds
remaining from the Class B Offering after paying Class B Offering expenses
making the Special Class A Distribution and redeeming Class A Interests pursuant
to the last paragraph of Section 9.6.
8.2 Allocation of Profits and Losses.
(a) Profits from the normal operations of the Trust or from Sales or
Refinancings or a Dissolution Event for each fiscal year or portion thereof will
be allocated:
First, to the extent that the Managing Trustee or any Trust
Beneficiary has a negative balance in its or his Capital Account (after
taking into account the reduction in Capital Accounts resulting from
Distributions during such fiscal year), to such Person(s) until such
Capital Account balance(s) are increased to zero; and if profits are
insufficient to bring all such Capital Accounts up to zero, then pro rata
according to the negative balances in their respective Capital Accounts;
and
Second, any remaining Profit shall be allocated among the Managing
Trustee, the Beneficiaries and the Special Beneficiary in such a manner
that, as of the end of such fiscal year the Capital Account of each shall
be equal (after taking into account the reduction in such Capital Account
resulting from any Distributions made during the fiscal year) to the
respective net amounts which would be distributed to each under this
Agreement if the Trust were to (i) sell its remaining assets for an amount
equal to their adjusted basis determined under Regulation Section
1.704-1(b)(2)(iv)(g) and (ii) distribute all such proceeds and any other
Trust cash not previously distributed pursuant to Section 8.1(a).
Notwithstanding the foregoing, no Profit shall be allocated under
Section 8.2(a) Clause Second to the extent that an allocation of Profit
has been made under Section 8.2(a) Clause First to offset a reduction in
Capital Account(s) resulting from a Distribution made to the Managing
Trustee or a Trust Beneficiary during such fiscal year.
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Losses from the normal operations of the Trust or from Sales or
Refinancings or a Dissolution Event for each fiscal year or portion thereof will
be allocated:
First, to the extent that the Managing Trustee or any Class B
Beneficiary has a positive balance in his Capital Account, to such
Person(s) until such Capital Account balance(s) are decreased to zero, and
if Losses are insufficient to reduce all such Capital Accounts to zero,
then pro rata according to the positive balances in each Capital Account;
and
Second, to the extent that any Class A Beneficiary has a positive
balance in his Capital Account, to such Class A Beneficiary(ies) until
such Capital Account balance(s) are decreased to zero, and if Losses are
insufficient to reduce all such Capital Accounts to zero, then pro rata
according to the positive balances in each Capital Account; and
Third, the remainder to the Managing Trustee.
(b) Notwithstanding Section 8.2(a), in no event shall there be allocated
to the Managing Trustee less than 1% of the Profits or Losses of the Trust
unless such allocation is mandated by Section 704(b) or Section 704(c) of the
Code. In the event that the amount of Profits and Losses allocable to the
Managing Trustee under Section 8.2(a) is less than 1% of the aggregate amount,
then the amounts otherwise allocable first to the Special Beneficiary and then
to the Beneficiaries shall be reduced in order to provide the Managing Trustee
with its 1% share.
(c) All Profits, Losses and Distributions made or allocated to the
Participants shall be credited or charged, as the case may be, to their
respective Capital Accounts.
(d) The terms "Profits" and "Losses" used in this Agreement shall mean
income and losses, and each item of income, gain, loss, deduction or credit
entering into the computation thereof, as determined in accordance with the
accounting methods followed by the Trust and consistent with Treasury Regulation
Section 1.704-(1)(b)(2)(iv). Profits and losses for federal income tax purposes
shall be determined in the same manner as Profits and Losses except as otherwise
provided in Section 8.4(a).
8.3 Recourse to Trust Assets Only.
The Participants shall look solely to the assets of the Trust for the
return of their respective Capital Contributions or any other Distributions with
respect to their Interests. If the assets remaining after payment or discharge,
or provision for payment or discharge, of Trust debts and liabilities are
insufficient to return the Capital Contributions or to make any other
Distribution to the Participants, no such person shall have any recourse against
personal assets of any other Participant for that purpose, except to the limited
extent set forth in Sections 4.6 and 8.1(b).
8.4 Special Provisions.
Notwithstanding anything contained in this Article VIII to the contrary:
(a) Income, gain, loss, and deduction with respect to Trust property which
has a variation between its basis computed in accordance with Treasury
Regulation Section 1.704(1)(b) and its basis computed for federal income tax
purposes shall be shared among the Participants for federal income tax purposes
so as to take account of such variation in a manner consistent with the
principles of Section 704(c) of the Code and Treasury Regulation Section
1.704-3.
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(b) (i) All Distributions or allocations to the Class A Beneficiaries,
other than those based on the Capital Account balances, shall be shared by
the Class A Beneficiaries in the ratio of the aggregate number of Class A
Interests held by each of them to the total number of Class A Interests
held by all of them.
(ii) Except as otherwise provided pursuant to this Agreement, for
each taxable year (i) Profits and Losses from normal operations and any
special allocations of items thereof shall be allocated by determining the
Profits and Losses from normal operations and any special allocations of
items thereof attributable to each fiscal quarter on the basis of interim
closings of the books of the Trust as of the close of business on the last
day of each such fiscal quarter and by allocating the amount of such
Profits and Losses from normal operations and special allocations of items
thereof, among the Persons that are Beneficiaries as of the close of
business on the last day of each month during such fiscal quarter in
proportion to the aggregate number of Interests owned by each such Person
as of the close of business on the last day of each such month, and (ii)
Profits and Losses from Sales or Refinancings and any special allocations
of items thereof allocable with respect to the Interests that have been
transferred shall be allocated to the Persons that are Beneficiaries as of
the close of business on the last day of the month that includes the date
of the Sale or Refinancing to which such Profit or Loss from Sales or
Refinancings is attributable, except that any such Profit from Sales or
Refinancings that is recognized by the Trust upon the receipt of a
deferred payment after the close of the month that includes the date of
the Sale or Refinancing relating to such deferred payment shall be
allocated to the Persons that are Beneficiaries as of the close of
business on the last day of the month in which the Trust receives such
deferred payment; provided, however, that notwithstanding anything to the
contrary contained herein, the Managing Trustee may, after sixty days'
prior notice to the Beneficiaries, allocate Profits and Losses from normal
operations and from Sales or Refinancings and special allocations among
the Beneficiaries during the taxable year in any other manner that the
Managing Trustee, in its sole discretion, determines will satisfy Sections
704 and 706 of the Code and the taking of any such action by the Managing
Trustee shall be deemed to effect an amendment to this Agreement and shall
not require the Consent of any Beneficiary.
(iii) Distributable Cash from Operations distributable to the
Beneficiaries with respect to each month shall be distributed among the
Persons that are Beneficiaries as of the close of business on the last day
of the month with respect to which such Distribution is made and
Distributable Cash from Sales or Refinancings distributable to the
Beneficiaries shall be distributed to the Persons that are Beneficiaries
as of the close of business on the last day of the month that includes the
date of the Sale or Refinancing to which any such Distributable Cash from
Sales or Refinancings is attributable; provided, however, Distributable
Cash from Sales or Refinancings that is attributable to deferred payments
and interest thereon received by the Trust after the close of the month
that includes the date of the Sale or Refinancing relating to any such
deferred payment shall be distributed to the Persons that are
Beneficiaries as of the close of business on the last day of the month
that includes the date such Distributable Cash from Sales or Refinancings
is paid to the Trust; and provided, further, that, notwithstanding
anything contained herein to the contrary, the Managing Trustee may, after
giving sixty days' prior notice to the Beneficiaries, adopt any other
method for determining the distributions of Distributable Cash from
Operations or Distributable Cash from Sales or Refinancings to which the
Beneficiaries are entitled, that the Managing Trustee, in its sole
discretion, determines is reasonable, and the taking of any such action by
the Managing Trustee shall be deemed to effect an amendment to this
Agreement and shall not require the Consent of any Beneficiary.
(iv) All Distributions or allocations to the Class B Beneficiaries,
other than those based on the Capital Account balances, shall be shared by
the Class B Beneficiaries in the ratio of the
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aggregate number of Class B Interests held by each of them to the total
number of Class B Interests held by all of them.
(c) To the extent that interest on loans made by the Managing Trustee or
its Affiliates is determined to be deductible by the Trust in excess of the
amount of interest actually payable, such additional interest deduction shall be
allocated solely to the Managing Trustee.
(d) If any Trust expenditure treated as a deduction on its federal income
tax return is disallowed as a deduction and treated as a distribution to the
Managing Trustee or the Special Beneficiary pursuant to Section 731(a) of the
Code, there shall be a special allocation of gross income to the Managing
Trustee or the Special Beneficiary equal to the amount of such distribution.
(e) If a Trust Beneficiary unexpectedly receives (1) an allocation of loss
or deduction made (a) pursuant to Section 704(e)(2) of the Code to a donee of an
interest in the Trust, (b) pursuant to Section 706(d) of the Code as the result
of a change in any Trust Beneficiary's interest in the Trust, or (c) pursuant to
Treasury Regulation Section 1.751-1(b)(2)(ii) as the result of a distribution by
the Trust of unrealized receivables or inventory items or (2) a Distribution,
and such allocation and/or Distribution would cause a deficit in a Trust
Beneficiary's Capital Account, then such Trust Beneficiary shall be allocated
items of income and gain in an amount and manner sufficient to eliminate such
deficit balance as quickly as possible. For purposes of this Article, a Trust
Beneficiary's Capital Account shall be treated as reduced by Qualified Income
Offset Items.
(f) Except as otherwise provided herein, each Beneficiary shall be
allocated Profits and Losses in accordance with this Section 8.4 from the first
day of the calendar month in which he becomes a Beneficiary.
(g) The Trustees shall have the right, from time to time and at such times
as they shall determine, to request each Beneficiary to certify to the Trust, in
form acceptable to the Trustees, that such Beneficiary is not a nonresident
alien individual or foreign partnership within the meaning of Section 1441 of
the Code, a foreign corporation within the meaning of Section 1442 of the Code
or a Person who is not a United States person within the meaning of Section 1446
of the Code. Any Beneficiary who fails to deliver this certification shall be
treated for all purposes of this Agreement as a Foreign Beneficiary until such
time as such Beneficiary delivers an acceptable certification to the Trust.
(h) The Trustees shall have the right, with respect to any Beneficiary who
is determined to be a Foreign Beneficiary, to (i) pay over to the Service on
behalf of such Foreign Beneficiary such amounts as they may determine may be
required to comply with the Code, including without limitation Sections 1441,
1442 and 1446 and (ii) to deduct and maintain in a non-interest bearing escrow
account for the benefit of such Foreign Beneficiary all or a portion of
Distributions to be made to such Foreign Beneficiary to the extent that the
Managing Trustee determines that such distributions may be needed by the Trust
to comply at a later date with the Code, including without limitation Sections
1441, 1442 and 1446, or to repay principal, interest and other borrowing costs
on any borrowings made by the Trust to comply with the requirements of the Code,
including without limitation Sections 1441, 1442 or 1446. To the extent that the
Managing Trustee determines that any amounts deducted from the Distributions of
any Foreign Beneficiaries under clause (ii) above are not needed to enable the
Trust to comply with the Code, including without limitation Sections 1441, 1442
and 1446, or (iii) to pay principal, interest or other borrowing costs on any
borrowings made by the Trust in connection therewith, such amounts shall be paid
over to the Foreign Beneficiaries with respect to whom the amounts were
deducted. Any Foreign Beneficiary shall on demand reimburse the Trust for any
amounts received by such Foreign Beneficiary as Distributions which are
necessary to satisfy the Trust's obligations under the Code, including, without
limitation, Sections 1441, 1442 and 1446. Each Foreign Beneficiary hereby grants
to the Trust a first lien and security interest in and
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to the Interests of such Foreign Beneficiary and all proceeds thereof to secure
the obligations of such Foreign Beneficiary under this Section 8.4(h) and the
indemnification by each Foreign Beneficiary described in Section 6.2.
(i) To the extent that the Trust incurs any costs or expenses in
connection with the withholding obligation described in Section 8.4(h), such
costs or expenses shall be allocated solely to the Foreign Beneficiaries (and
shall not enter into the computation of Profits and Losses allocated under
Section 8.2) and shall reduce their Capital Accounts accordingly.
(j) If the Managing Trustee determines, after consultation with tax
counsel, that the allocation of any item of Trust income, gain, loss, deduction
or credit will not be recognized for federal income tax purposes, the Managing
Trustee is authorized to amend this Agreement to cure such defect without the
consent of Trust Beneficiaries.
(k) If any profit arises from the disposition of any Trust asset which
shall be treated as ordinary income under the depreciation recapture provisions
of the Code, then the full amount of such gain shall be allocated among the
Managing Trustee and Trust Beneficiaries in the proportions that the Trust
deductions from the depreciation giving rise to such recapture were actually
allocated. In the event that subsequently enacted provisions of the Code result
in other recapture income, no allocation of such recapture income shall be made
to any Managing Trustee or Trust Beneficiary who has not received the benefit of
those items giving rise to such other recapture income.
(l) With respect to assets distributed in kind to the Managing Trustee and
Trust Beneficiaries in liquidation or otherwise, (i) any unrealized appreciation
or unrealized depreciation in the values of such assets shall be deemed to be
profits and losses realized by the Trust immediately prior to the liquidation or
other distribution event; and (ii) such profits and losses shall be allocated to
the Managing Trustee and Trust Beneficiaries in accordance with Section 8.2(a),
and any property so distributed shall be treated as a distribution of an amount
in cash equal to the excess of such fair market value over the outstanding
principal balance of and accrued interest on any debt by which the property is
encumbered. For the purposes of this Section 8.4(l), "unrealized appreciation"
or "unrealized depreciation" shall mean the difference between the fair market
value of such assets, taking into account the fair market value of the
associated financing (but subject to Section 7701(g) of the Code) and the
Trust's adjusted basis for such assets as determined under Section 1.704-1(b).
This Section 8.4(l) is merely intended to provide a rule for allocating
unrealized gains and losses upon liquidation or other distribution event, and
nothing contained in this Section 8.4(l) or elsewhere herein is intended to
treat or cause such distributions to be treated as sales for value. The fair
market value of such assets shall be determined by an appraiser to be selected
by the Managing Trustee.
(m) If the Managing Trustee determines that it is in the best interests of
the Trust and it is permitted under Treasury Regulation Section
1.704-1(b)(2)(iv)(f), the Managing Trustee may re-value the assets of the Trust
to reflect their fair market value and adjust the Capital Accounts of the
Managing Trustee and the Trust Beneficiaries to reflect the difference between
such fair market value (referred to herein as the "Book Value") and the Trust's
tax basis in such assets (or, in the case of a prior revaluation, the Trust's
prior Book Value). The Managing Trustee is authorized to take whatever actions
it deems necessary or appropriate to effect this revaluation of assets and the
equitable adjustment of Capital Accounts on behalf of the Trust. In the event of
a revaluation of Trust assets pursuant to this Section 8.4(m), subsequent
allocations of gain, income, loss and deduction (including, without limitation,
cost recovery and amortization deductions) with respect to such assets for the
purpose of computing Profits or Losses shall be determined based on the Book
Value of such assets and shall be computed consistent with Treasury Regulation
Section 1.704-1(b)(2)(iv)(g). Allocations of gain, income, loss and deduction
(including, without limitation, cost recovery and amortization deductions) with
respect to such assets for the purpose of computing profits, losses and gains
for tax purposes shall be allocated among the Managing Trustee and the
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Trust Beneficiaries in accordance with the principles of Section 704(c) of the
Code and Treasury Regulation Section 1.704-3.
(n) Section 704 of the Code and the Regulations issued thereunder,
including but not limited to the provisions of such regulations addressing
minimum gain chargeback requirements and allocations of deductions attributable
to nonrecourse debt and partner nonrecourse debt, are hereby incorporated by
reference.
ARTICLE IX - TRANSFER OF INTERESTS
9.1 Withdrawal of a Beneficiary.
Subject to compliance with this Agreement, a Beneficiary may withdraw from
the Trust only by assigning or otherwise transferring his Beneficiary Interest
specified in this Article IX. The withdrawal of Beneficiaries shall not dissolve
or terminate the Trust. In the event of the withdrawal of a Beneficiary because
of death, legal incompetence, dissolution or other termination, the estate,
legal representative or successor of such withdrawn Beneficiary shall be deemed
to be the assignee of such withdrawn Beneficiary's Interest and may become a
Substitute Beneficiary upon compliance with the provisions of Section 9.3.
9.2 Assignment.
Subject to Section 4.2(a)(viii) and Section 9.4, each Beneficiary may
Assign all or a portion of his Beneficiary Interest (but not less than the
Minimum Investment Amount) to another Person (the "Transferee") without the
Consent of any Beneficiary, provided that the following conditions are met: (i)
the Transferee delivers to the Managing Trustee a duly executed and completed
assignment form in form satisfactory to the Managing Trustee (which is available
upon request from the Managing Trustee) not less than 30 days in advance of such
Assignment in which the Transferee agrees to be bound by the Agreement and which
will contain various representations, including whether or not he is an Eligible
Citizen; (ii) the Transferee satisfies the investor suitability standards
applicable to the original Offering; (iii) the Assignment complies with all
applicable laws and regulations, including, without limitation, such minimum
investment and investor suitability requirements as may then be applicable under
state or foreign securities laws; (iv) the Transferee executes a power of
attorney which provides the Managing Trustee with authority to execute certain
documents on his behalf; (v) the Transferee (or the Beneficiary) pays a transfer
fee, not to exceed $100 per Assignment, to cover the expenses incurred in
connection therewith; and (vi) the Managing Trustee consents to the Assignment
(which consent may be withheld if the conditions to such Assignment are not met
or if such Assignment would constitute a prohibited assignment described in
paragraphs (a) through (g) of Section 9.4). A Transferee who desires to make a
further Assignment of his Beneficiary Interest shall be subject to the
provisions of this Section 9.2 to the same extent and in the same manner as the
prior assignor. No Assignment shall be deemed to constitute an Assignment of a
Beneficiary's entire Beneficiary Interest unless the provisions of Section 9.3
are satisfied in full. The rights of a Transferee who does not become a
Substitute Beneficiary shall be limited to the receipt of his share of Profits,
Losses and Distributions, as determined under Article VIII. Transferees shall be
recognized as Assignees monthly, as of the first day of the calendar month in
which the notice of assignment and other required documentation are received and
accepted by the Managing Trustee; provided, however, that if an Assignee makes a
subsequent Assignment of his Beneficiary Interest in the same calendar month, he
shall not be recognized as an Assignee with respect to such Beneficiary Interest
for any purpose.
9.3 Substitution.
No Person shall have the right to become a Substitute Beneficiary in place
of his assignor unless all
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of the following conditions are met:
(a) the Beneficiary Interest was assigned in accordance with Sections 9.1
and 9.2;
(b) the Managing Trustee shall consent in writing to such substitution
(which consent may be withheld for any reason in the sole discretion of the
Managing Trustee);
(c) such Transferee executes an instrument reasonably satisfactory to the
Managing Trustee accepting and adopting the terms and provisions of this
Agreement; and
(d) in the case of Assignments other than by operation of law, the
assignor states his intention in writing to have his Transferee become a
Substitute Beneficiary.
If all of the conditions of Sections 9.2 and 9.3 shall have been met, the
Transferee shall become a Substitute Beneficiary within 30 days after the
Managing Trustee consents to the admission of the Substitute Beneficiary (the
"Recording Date"). The records of the Trust and this Agreement shall be amended
to reflect any such substitution on or prior to the Recording Date; provided,
however, that the records of the Trust and this Agreement shall be amended at
least once each calendar quarter to reflect the admission of Substitute
Beneficiaries. Failure or refusal of the Managing Trustee to admit a Transferee
as a Substitute Beneficiary shall in no way affect the right of such Transferee
to receive Distributions and allocations of Profits or Losses to which his
predecessor in interest would have been entitled in accordance with Article
VIII.
9.4 Prohibited Assignment.
No Trust Beneficiary Interests may be assigned or otherwise transferred
under the following circumstances unless the Managing Trustee shall give its
express written consent:
(a) to a minor or incompetent (unless a guardian, custodian, or
conservator has been appointed to handle the affairs of such Person);
(b) to any Person not permitted to be a transferee under applicable law,
including, in particular but without limitation, applicable federal, state or
foreign securities laws, which generally provide that, except in the case of a
transfer by gift, inheritance, intrafamily transfer or family dissolution, each
transferee of a Beneficiary Interest must acquire no fewer than the Minimum
Investment Amount and must satisfy investor suitability standards similar to
those which were applicable to the original Offering, and that each transferor
must transfer the number of Interests equal to the Minimum Investment Amount;
(c) to any assignee if such assignee would hold after such Assignment a
fraction of an Interest;
(d) to any Person if, in the opinion of Trust Counsel, such transfer would
result in the termination under the Code of the Trust's taxable year or of its
status as an entity taxable as a partnership;
(e) to a Person who is a Foreign Beneficiary if, in the Managing Trustee's
best judgment, such assignment or transfer would adversely affect the
registration of any aircraft registered with the FAA or the documentation of any
vessel documented under the laws of the United States;
(f) to any Person if such transfer would cause the assets of the Trust to
be considered plan assets under ERISA and the regulations thereunder; or
(g) to any Person, if such Assignment, would cause the Trust to be treated
as a publicly traded partnership for purposes of Section 7704 of the Code.
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Any such attempted Assignment without the express written consent of the
Managing Trustee shall be void and shall not bind the Trust. In the case of a
proposed Assignment which is prohibited solely under clause (d) above, however,
the Trust shall be obligated to permit such Assignment to become effective if
and when, in the opinion of Trust Counsel, such Assignment would no longer have
either of the adverse consequences under the Code which are specified in that
clause.
9.5 Change of Status of Beneficiary.
In the event that (i) the Managing Trustee determines that a Beneficiary
or a Person for whom a Beneficiary is acting as nominee who has previously
represented to the Trust that he is an Eligible Citizen is no longer an Eligible
Citizen or (ii) the Beneficiary fails to certify his citizenship to the Managing
Trustee at the time that he acquires his Interests, the Managing Trustee may
require that the status of the Beneficiary be changed to that of a Non-Eligible
Beneficiary. In the event that the number of Non-Eligible Beneficiaries exceeds
80% of the maximum number of non-eligible Persons permitted to be Trust
Beneficiaries pursuant to applicable laws or regulations governing the
registration of any Asset owned by the Trust, the Managing Trustee may, in its
sole discretion, expend Trust assets to redeem the Interests of Non-Eligible
Beneficiaries. Any such Interests redeemed shall be redeemed by the Trust at a
price equal to (i) 80% of the Non-Eligible Beneficiary's original Capital
Contribution as reduced by any amounts returned to the Non-Eligible Beneficiary
as uninvested Capital Contributions pursuant to Section 8.4, minus (ii) all
Distributions made to the Non-Eligible Beneficiary.
9.6 Right to Tender Interests for Redemption.
A Beneficiary shall have the right to tender Class A Interests for
redemption by the Trust subject to all of the following conditions:
(a) no Interests may be tendered within 24 months of Closing;
(b) Interests may be tendered by Beneficiaries for redemption by the Trust
only on a date selected by the Managing Trustee, in its sole discretion, on
which Interests tendered for redemption may be redeemed (the "Redemption Date"),
which shall be declared not more than once in each calendar year of the Trust;
(c) the Beneficiary must tender all Interests owned if he tenders any
Interests owned;
(d) at least 120 days' prior written notice of the Redemption Date
shall be provided to the Beneficiaries;
(e) a redemption agreement fully executed by the Beneficiary on a form
provided by the Trust and a redemption fee payable to the Trust, not to exceed
$100, to cover the expenses incurred in connection therewith, must be received
by the Trust at least 60 calendar days prior to the Redemption Date;
(f) not more than 10% of the total interests in Trust capital or Profits,
when aggregated with all other Trust Beneficiary Interests sold or otherwise
disposed of (other than the Permitted Transfers defined in clauses (i) through
(vi) of Section 9.4(g)), may be redeemed pursuant to Section 9.5 and Section 9.6
or otherwise sold or disposed of in any taxable year of the Trust;
(g) the Trust must have sufficient cash, as determined in the sole
discretion of the Managing Trustee, to redeem the Interests tendered; provided
that the Trust may not redeem Interests in any fiscal quarter in which the
Distribution paid in that quarter is less than 2.5% of Adjusted Investment;
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(h) Interests tendered shall be redeemed in the order in which completed
redemption agreements and redemption fees, are received by the Trust;
(i) the price at which Interests shall be redeemed by the Trust shall
equal (i) 90% of a Beneficiary's original Capital Contribution as reduced by any
amounts returned to the Beneficiary as uninvested Capital Contributions pursuant
to Section 8.4, minus (ii) all Distributions made to the Beneficiary; and
(j) redemption of the Interests shall not be in violation of any
applicable legal requirements, shall not cause the Trust to be deemed an
investment company pursuant to the provisions of the Investment Company Act of
1940, shall not cause the Assets of the Trust to be considered plan assets under
ERISA and the regulations thereunder, and shall not subject the Trust to
taxation as an association taxable as a corporation.
In addition to the foregoing, the Trust shall have the right to purchase
and redeem Interests at such times, in such amounts, in such manner and at such
prices as the Managing Trustee may determine from time to time in its sole
discretion; provided, however, that any such purchase and redemption shall not
be in violation of any applicable legal requirements, shall not result in the
termination under the Code of the Trust or of its status as an entity taxable as
a partnership, shall not result in the Trust being treated as a publicly traded
partnership, shall not cause the Trust to be deemed an "investment company"
pursuant to the provisions of the Investment Company Act of 1940 and shall not
cause the Assets of the Trust to be considered "plan assets" under ERISA and the
regulations thereunder.
9.7 Status of an Assigning Beneficiary.
Any Beneficiary who shall assign all of his Interests shall cease to be a
Beneficiary and shall no longer have any of the rights or privileges of a
Beneficiary, except that unless and until a Substitute Beneficiary is admitted
in his place such assigning Beneficiary shall retain any statutory rights of an
assignor of a Beneficiary Interest under the Business Trust Act. Any Beneficiary
who shall have his Interests redeemed by the Trust shall cease to be a
Beneficiary, and no Person shall have any of the rights or privileges of a
Beneficiary with respect to the Interests which were redeemed.
9.8 Withdrawal of Special Beneficiary; Substitution.
Subject to compliance with this Agreement, the Special Beneficiary may
withdraw from the Trust by assigning or otherwise transferring its Special
Beneficiary Interest upon the express written consent of the Managing Trustee.
Once the Special Beneficiary shall assign all of its Special Beneficiary
Interest, the Special Beneficiary shall cease to be a Trust Beneficiary and
shall no longer have any of the rights or privileges of a Trust Beneficiary,
except that unless and until a Substitute Special Beneficiary is admitted in its
place such assigning Special Beneficiary shall retain any statutory rights of an
assignor of a Special Beneficiary Interest under the Business Trust Act.
The Special Beneficiary hereby covenants and agrees, in the event of the
Resignation or Removal of the Managing Trustee pursuant to Section 4.8 or 11.3,
to transfer to a Substitute Managing Trustee selected as provided in Section 4.8
or Section 4.12 or to the Trust, such portion, if any, of its Special
Beneficiary Interest as the Substitute Managing Trustee or the Trust shall elect
to purchase. The Substitute Managing Trustee shall become a substitute Special
Beneficiary. Any such transfer will be made in consideration of the payment by
the Substitute Managing Trustee or the Trust to the Special Beneficiary or its
legal representatives, of 86.5% of the fair market value of such Interest. The
fair market value of the Special Beneficiary's Interest shall be as determined
by the parties to the transfer, or otherwise in accordance with
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Section 11.3. The method of payment to the Special Beneficiary must be fair and
must protect the solvency and liquidity of the Trust. In the event of the
Resignation of the Managing Trustee, payment to the Special Beneficiary, if any,
may be made by means of a non-interest-bearing unsecured promissory note with
principal payable, if at all, from Distributions which the Special Beneficiary
would have received but for its resignation. In the event of the Removal of the
Managing Trustee, the Substitute Managing Trustee or the Trust shall make such
payment to the Special Beneficiary by means of a promissory note bearing
interest at a floating annual rate equal to the prime rate of interest announced
by Fleet Bank of Massachusetts, N.A., maturing in not less than five years with
equal installments of principal and interest payable each year. Any portion of
such Special Beneficiary's Interest which is not required to be transferred as
aforesaid may be retained by such Special Beneficiary or its estate or legal
representatives as appropriate. The Special Beneficiary acknowledges and agrees
that the payment of 86.5% of the fair market value of any portion of its Special
Beneficiary Interest which has been transferred shall be full payment for such
Special Beneficiary Interest. To the extent of such retained Special Beneficiary
Interest, if any, such Special Beneficiary or its estate or legal
representatives shall be treated as a Trust Beneficiary.
Notwithstanding the foregoing, the resigned Special Beneficiary or its
legal representatives shall be entitled to receive from the Trust (i) any
positive balance in its Capital Account (as adjusted to the date of such
resignation), provided, however, that in no event shall such amount exceed the
fair market value of the Special Beneficiary's Interest, (ii) any amounts due
and owing to it by the Trust less any amounts due and owing by it to the Trust.
The right of the Special Beneficiary or its legal representatives to payment of
said amounts shall be subject to any claim for damages which the Trust or any
Trustee or any other Trust Beneficiary may have against such Special Beneficiary
or its legal representatives if such resignation is in contravention of this
Agreement.
ARTICLE X - FISCAL MATTERS
10.1 Title to Property and Bank Accounts.
Except to the extent that trustees, nominees or other agents are used as
specified in Section 4.2(b)(viii), the Assets shall be held in the name of the
Trust. The funds of the Trust shall be deposited in the name of the Trust in
such bank account or accounts as shall be designated by the Managing Trustee,
and withdrawals therefrom shall be made upon the signature of the Managing
Trustee or such Person or Persons as shall be designated in writing by the
Managing Trustee. The funds of the Trust shall not be commingled with those of
any other Person or entity except that the use of a zero balance or clearing
account shall not constitute a commingling of Trust funds; and the funds of the
Trust and funds of other entities sponsored by the Advisor or its Affiliates may
be held in an account or accounts established and maintained for the purpose of
making computerized disbursements and/or short-term investments provided the
Trust's funds are protected from claims of such other entities and creditors of
such other entities.
10.2 Maintenance of, and Access to, Basic Trust Documents.
The Managing Trustee shall maintain at the Trust's principal office the
following documents: (i) an alphabetical list of the names, addresses, and
business telephone numbers of the Trust Beneficiaries along with the number of
Interests held by each of them (the "Trust Beneficiary List"); (ii) a copy of
the Certificate of Trust and all amendments thereto; (iii) copies of the Trust's
federal, state and local income tax returns and reports, if any, for the three
most recent years; and (iv) copies of this Agreement as then in effect and of
any financial statements of the Trust for the three most recent years. Such
documents and all other Trust records are subject to inspection and copying by
any Trust Beneficiary or his designated representatives at the reasonable
request, and at the expense of such Trust Beneficiary during ordinary business
hours. The Trust Beneficiary List shall be updated at least quarterly to reflect
changes in the information contained therein. A copy of the Trust Beneficiary
List shall be mailed to any Beneficiary
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requesting the Trust Beneficiary List within ten days of the request. The copy
of the Trust Beneficiary List shall be printed in alphabetical order, on white
paper, and in readily readable type (in no event smaller than 10-point type). A
reasonable charge for copy work may be charged by the Trust. The purposes for
which a Beneficiary may request a copy of the Trust Beneficiary List include,
without limitation, matters relating to Beneficiaries' voting rights under this
Agreement and the exercise of Beneficiaries' rights under federal proxy laws. If
the Sponsor neglects or refuses to exhibit, produce or mail a copy of the Trust
Beneficiary List as requested, the Sponsor shall be liable to any Beneficiary
requesting the List for costs, including attorney's fees, incurred by that
Beneficiary for compelling the production of the Trust Beneficiary List, and for
actual damages suffered by any Beneficiary by reason of such refusal or neglect.
It shall be a defense that the actual purpose and reason for the requests for
inspection or for a copy of the Trust Beneficiary List is to secure such list of
Beneficiaries or other information for the purpose of selling such list or
copies thereof, or of using the same for a commercial purpose other than in the
interest of the applicant as a Beneficiary relative to the affairs of the Trust.
The Sponsor may require the Beneficiary requesting the Trust Beneficiary List to
represent that the list is not requested for a commercial purpose unrelated to
the Beneficiary's interest in the Trust. The remedies provided hereunder to
Beneficiaries requesting copies of the Trust Beneficiary List are in addition
to, and shall not in any way limit, other remedies available to Beneficiaries
under federal law, or the laws of any state. Except to the extent requested by
any Trust Beneficiary, the Managing Trustee shall have no obligation to deliver
or mail a copy of the Certificate of Trust or any amendment thereto to the Trust
Beneficiaries. Each Trust Beneficiary shall also have the right to obtain from
the Managing Trustee from time to time upon reasonable demand: (i) true and full
information regarding the status of the business and financial condition of the
Trust; (ii) promptly after becoming available, a copy of the Trust's federal,
state and local income tax returns for each year; and (iii) such other
information regarding the affairs of the Trust as may reasonably be produced by
the Trust.
10.3 Financial Books and Accounting.
The Managing Trustee shall keep or cause to be kept complete and accurate
financial books with respect to the Trust's business. Except to the extent
otherwise required by the accounting methods adopted by the Trust for federal
income tax purposes, such books shall be kept on an accrual basis. Profits and
Losses shall be determined for each fiscal year in accordance with Article VIII.
Except as otherwise provided herein, whenever a proportionate part of Profits or
Losses is credited or charged to a Trust Beneficiary's Capital Account, every
item of income, gain, loss or deduction entering into the computation of such
Profits or Losses shall be considered either credited or charged, as the case
may be, and every item of credit or tax preference related to such Profits or
Losses and applicable to the period during which such Profits or Losses were
realized shall be allocated to such Capital Account in the same proportion.
10.4 Trust Expenses.
No reimbursement shall be permitted to the Managing Trustee or any of its
Affiliates for services for which the Managing Trustee or any such Affiliate is
entitled to compensation by way of a separate fee.
(a) Organizational and Offering Expenses. The Trust shall reimburse the
Managing Trustee and any Affiliate thereof for Organizational and Offering
Expenses incurred by the Managing Trustee and its Affiliates with respect to the
Class A Offering provided that in no event shall the amount of Organizational
and Offering Expenses paid directly or indirectly by the four AFG Investment
Trusts exceed 2.5% of Gross Class A Proceeds in all four AFG Investment Trusts.
Such expenses shall be allocated among the six AFG Investment Trusts based on
the number of Interests sold in each such Trust as compared to the total
Interests sold in all four AFG Investment Trusts, without regard to the actual
expenses incurred by each Trust. However, the Trust shall not pay Organizational
and Offering Expenses in an amount in excess of 2.5% of the Gross Class A
Proceeds. For purposes hereof, "Organizational and Offering Expenses" shall mean
(i) those expenses (including the non-accountable expense allowance payable to
the Dealer-Manager)
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incurred in connection with, and in preparing the Trust for, qualification under
federal and state securities laws and subsequently offering and distributing the
Interests to the public, except for sales commissions paid by the Trust in
connection with the offering of Interests, (ii) expenses for salaries and direct
expenses of officers, directors and members of the executive committee of any
Affiliate of the Managing Trustee while engaged in registering and marketing the
Interests, and (iii) any due diligence expenses attributable to the Offering.
The Managing Trustee or its Affiliates will bear all Sales and Distribution
Expenses in excess of nine and one-half percent (9.5%) of Gross Proceeds without
recourse to or reimbursement from the Trust.
(b) Other Reimbursable Costs. Except for Organizational and Offering
Expenses for the Class A Offering and with respect to organizational and
offering expenses with respect to the Class B Offering provided for in Section
5.1(e) and Section 8.2(e), the Trust shall not reimburse the Managing Trustee or
its Affiliates except for (i) the actual cost to the Managing Trustee or its
Affiliates of goods and materials used for or by the Trust and obtained from
Persons unaffiliated with the Managing Trustee and its Affiliates provided that
such goods or materials are necessary to the prudent operation of the Trust and
that the actual cost thereof includes only the price of goods and materials paid
to independent third parties and direct costs incurred by the Managing Trustee
or Affiliates in the transaction excluding general or administrative overhead
and costs of personnel who are Controlling Persons of the Managing Trustee or
its Affiliates and (ii) Acquisition Expenses, including but not limited to
expenses related to the purchase, operation and financing of Assets. In no
event, however, shall the Trust reimburse the Managing Trustee or its Affiliates
for rent, depreciation, utilities, capital equipment and other administrative
items. The Trust's annual report to the Beneficiaries will include a schedule
itemizing costs reimbursed to the Managing Trustee and its Affiliates.
(c) Other Trust Expenses. Subject to the provisions of Sections 10.4(a)
and (b), the Trust shall pay all expenses of the Trust (which expenses shall be
billed directly to the Trust) which are necessary or appropriate for the prudent
operation of the Trust and which may include but are not limited to: (i) all
costs of personnel providing administrative services (excluding rent or
depreciation, utilities, capital equipment, and other administrative items)
employed full or part-time by the Trust and involved in the business of the
Trust and allocated pro rata to their services performed on behalf of the Trust,
and such personnel may include Persons who may also be officers or employees of
the Managing Trustee or its Affiliates (other than Controlling Persons of the
Managing Trustee or its Affiliates); (ii) all costs of borrowed money, taxes and
assessments on Assets and other taxes applicable to the Trust; (iii) legal,
audit, accounting, brokerage, and other fees; (iv) printing, engraving, and
other expenses and taxes incurred in connection with the issuance, distribution,
transfer, registration, and recording of documents evidencing ownership of an
interest in the Trust or in connection with the business of the Trust; (v) fees
and expenses paid to bankers, brokers, and services, consultants and other
equipment management personnel, insurance brokers and other agents; (vi)
expenses in connection with the disposition, replacement, alteration, repair,
leasing, re-leasing, financing, and operation of Assets (including the costs and
expenses of insurance premiums and of maintenance of such Assets); (vii)
expenses of organizing, revising, amending, converting, modifying or terminating
the Trust; (viii) expenses in connection with distributions made by the Trust
to, and communications and bookkeeping and clerical work necessary in
maintaining relations with, its Beneficiaries, including the costs of printing
and mailing to such Persons evidences of ownership of Interests and reports of
meetings of the Trust, and of preparation of proxy statements and solicitations
of proxies in connection therewith; (ix) expenses in connection with preparing
and mailing reports required to be furnished to Beneficiaries for investor tax
reporting or other purposes, and reports which the Managing Trustee deems to be
in the best interests of the Trust to furnish to the Beneficiaries; (x) any
accounting, computer, statistical or bookkeeping costs necessary for the
maintenance of the books and records of the Trust; and (xi) the cost of
preparation and dissemination of informational material and documentation
relating to potential sale, refinancing or other disposition of Assets.
Reimbursement to the Managing Trustee or its Affiliates of the cost of services
rendered to the Trust shall be limited to the lesser of the costs of those
services or a rate equivalent to ninety percent (90%) of the rate which would be
charged by an unaffiliated party to perform such services. As part
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of their annual audit of the Managing Trustee and its Affiliates, the Managing
Trustee shall cause the Accountants to verify the allocation of costs of the
Managing Trustee and its Affiliates to the Trust. The additional cost of the
Accountants' verification of this reimbursement for services shall not be paid
by the Trust unless the aggregate sum of the cost of the services and the cost
of the Accountants' verification do not exceed ninety percent (90%) of the rate
which would be charged by an unaffiliated party to perform the services
performed by the Managing Trustee and its Affiliates.
(d) Other Limitations. Other than as specifically described above in this
Section 10.4 and in Section 4.6 and Article V, the Trust shall not pay the
Managing Trustee for any other items, including rent, travel expenses or
salaries of the Managing Trustee or its Affiliates or Controlling Persons of the
Managing Trustee or its Affiliates, generally considered to be the Managing
Trustee's overhead and expenses. The Managing Trustee and its Affiliates will
not be compensated for services provided to the Trust unless such parties or
their predecessors were engaged in rendering those services as an ongoing
business for Persons other than the Trust. The Managing Trustee shall not
provide services to the Trust other than as provided in, or permitted by, this
Agreement.
10.5 Fiscal Year.
Except as may otherwise be determined from time to time by the Managing
Trustee, the Trust's fiscal year for federal income tax and financial reporting
purposes shall end on December 31 of each year.
10.6 Reports and Accounting Decisions.
(a) Reports to Beneficiaries.
(i) Quarterly Reports. Within 60 days after the end of each of the
first three quarters of each fiscal year, the Managing Trustee shall send
to each Person who was a Beneficiary on the last day of the quarter then
ended (1) a condensed balance sheet, (2) statements of cash flows and
operations including a description of any material events with respect to
the Trust's revenues, assets, liabilities, expenses, contractual
obligations or contingent liabilities, (3) a statement describing (A) any
new agreement, contract or arrangement required to be reported by any
section hereof and (B) the amount of all fees and other compensation and
distributions paid by the Trust for such quarter to the Managing Trustee
or any Affiliate of the Managing Trustee and a description of the services
rendered or to be rendered by the Managing Trustee or such Affiliate for
such fees and compensation (which requirement may not be circumvented by
lump-sum payments to entities which disburse funds to others), (4) until
the Capital Contributions derived from the Offering shall be fully
invested except for reserves, a special report of Asset acquisitions
including (A) a general description of Asset purchased, (B) a description
of the Lease arrangements made with respect thereto and identification of
the Lessee, (C) the actual purchase price, (D) the amount of cash expended
from Capital Contributions to acquire such Asset, and (E) the amount of
Capital Contributions which then remains unexpended, if any, stated in
terms of both dollar amounts and percentage of the total amount of Capital
Contributions, and (5) other pertinent material regarding the activities
of the Trust during such fiscal quarter. Distribution to the Beneficiaries
of the financial information contained in the Trust's quarterly report on
Form 10-Q under the Securities Exchange Act of 1934 will satisfy the
financial statement distribution requirements contained herein. No such
statement or reports need be audited.
(ii) Annual Reports. Within 120 days after the end of each fiscal
year, the Managing Trustee shall send to each Person who was a Beneficiary
on the last day of the fiscal year then ended a report in narrative form
summarizing the status of the Trust's investments and containing (1) a
balance sheet as of the end of such fiscal year and statements of
operations, Beneficiaries'
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equity and cash flows for such fiscal year, all of which shall be prepared
in accordance with generally accepted accounting principles and
accompanied by an auditor's report (containing an opinion of the
Accountants), (2) a report (which need not be audited) summarizing the
fees and other remuneration paid by the Trust for such fiscal year to the
Managing Trustee or any Affiliate of the Managing Trustee or to the
Delaware Trustee and a statement describing any new agreement, contract or
arrangement required to be reported by any section hereof, and (3) a
statement (which need not be audited) showing the Distributable Cash From
Operations and Distributable Cash From Sales or Refinancings distributed
per Interest to the Beneficiaries during such fiscal year. Such report
shall separately identify (to the extent then applicable) Distributions
from (a) Cash From Operations during the period, (b) Cash From Operations
during a prior period which had been held in the Reserve Account, (c) Cash
From Sales or Refinancings during the period, (d) Cash From Sales or
Refinancings during a prior period which had been held in the Reserve
Account, and (e) Reserve Account amounts from Gross Proceeds. Until the
Capital Contributions of the Trust derived from the Offering shall be
fully invested except for reserves, the annual report shall also contain a
special report of Asset acquisitions containing the information specified
above for quarterly reports. If any Asset acquired by the Trust
individually represents at least 10% of the Trust's total Investment in
Assets, the Managing Trustee shall include a status report as part of the
annual report, which status report shall indicate: (1) the condition of
the Asset, (2) how the Asset is being utilized as of the end of the year,
(3) the remaining term of the Lease, (4) the projected use of the Asset
for the next year, and (5) such other information relevant to the value or
utilization of the Asset as the Managing Trustee deems appropriate.
Distribution to the Beneficiaries of the financial information contained
in the Trust's annual report on Form 10-K under the Securities Exchange
Act of 1934 will satisfy the financial statement distribution requirements
contained herein.
The Managing Trustee shall cause the Accountants, as part of their annual
audit of the Managing Trustee and its Affiliates, to issue to the Trust a
special report prepared in accordance with the standards of the American
Institute of Certified Public Accountants on the allocation of costs incurred by
the Managing Trustee and its Affiliates and reimbursed to them by the Trust. In
preparing this special report, the Accountants shall, at a minimum, review (1)
the time records of individual employees, the costs of whose services were
reimbursed by the Trust, and (2) the specific nature of the work performed by
such employees.
Each annual report will also include the fair market value of the
Interests at the end of the preceding fiscal year. For each of the first two
years after Closing, the Managing Trustee will value the Interests at the public
offering price. Thereafter, the Managing Trustee will secure each year an
independent appraisal of the fair market value of the Trust's assets as of the
next annual valuation date and will prepare a per Interest valuation. The
Managing Trustee will seek to provide such annual valuation to trustees and
custodians of IRAs no later than January 15 of each year, based on valuation
information as of the preceding October 31, updated for any material changes
occurring between October 31 and December 31 of the preceding year. Qualified
Plans will be furnished such annual valuation within 75 days after the close of
the Trust's fiscal year. The Managing Trustee will revise the valuation
procedures described above to conform to any relevant guidelines issued by the
Department of Labor or the Service.
(b) Tax Returns and Tax Information.
The Managing Trustee shall:
(i) prepare or cause the Accountants to prepare the tax returns
(federal, state and local, if any) of the Trust for each fiscal year
within 75 days after the end of each calendar year in which such fiscal
year was completed; and
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(ii) deliver to each Person who was a Beneficiary during a calendar
year within 75 days after the end of such calendar year the information
necessary to prepare his federal income tax return for the calendar year
during which such fiscal year was completed, including information
regarding unrelated business taxable income for the use of tax-exempt
Beneficiaries.
(c) Accounting Decisions. All decisions as to accounting matters, except
as specifically provided to the contrary herein, shall be made by the Managing
Trustee in accordance with the accounting methods adopted by the Trust for
federal income tax purposes or otherwise in accordance with generally accepted
accounting principles and procedures applied in a consistent manner. The
Managing Trustee may rely upon the advice of the Accountants as to whether such
decisions are in accordance with the methods adopted by the Trust for federal
income tax purposes or generally accepted accounting principles.
(d) Reports to Appropriate State Authorities. The Managing Trustee shall
prepare and file with appropriate state authorities all reports required to be
so filed by state securities or Blue Sky authorities.
(e) General. No cause of action shall accrue to any Beneficiary if the
Managing Trustee shall have acted in good faith in attempting to satisfy the
requirements of this Section 10.6, and the Managing Trustee's actions or
inactions did not constitute negligence, misconduct or material breach of
fiduciary duty so as to subject the Managing Trustee to liability under Section
4.6.
10.7 Partnership Classification; Federal Tax Elections.
(a) Partnership Classification. The Trust is intended to be classified as
a partnership under the Code and the regulations thereunder and in accordance
with the tax laws of the State and other jurisdictions in a manner consistent
with such objective.
(b) Federal Tax Elections. The Trust, in the sole discretion of the
Managing Trustee, may make elections for federal tax purposes as follows:
(i) in case of transfer of all or part of the Interest of the
Managing Trustee, the Special Beneficiary or any Beneficiary, the Trust,
in the absolute discretion of the Managing Trustee, may elect pursuant to
Section 754 of the Code (or corresponding provisions of future law) and
pursuant to similar provisions of applicable state or local income tax
laws, to adjust the basis of the assets of the Trust and in such event,
any basis adjustment attributable to such election shall be allocated
solely to the transferee; and
(ii) all other elections, including but not limited to the adoption
of accelerated or straight-line depreciation cost recovery methods,
required or permitted to be made by the Trust under the Code shall be made
by the Managing Trustee in such manner as will, in the opinion of the
Managing Trustee, be in the best interest of the Trust. (In reaching such
opinion the Managing Trustee shall not be required to poll or survey the
Beneficiaries.) The Trust shall, to the extent permitted by applicable law
and regulations, elect to treat as an expense for federal income tax
purposes all amounts incurred by it for state and local taxes, interest
and other charges which may, in accordance with applicable law and
regulations, be considered as expenses.
ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES
11.1 Meetings.
(a) Meetings of the Beneficiaries for any purpose may be called by the
Managing Trustee and shall be called by the Managing Trustee upon receipt of a
request in writing signed by Beneficiaries owning
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10% or more of the Interests in the aggregate held by all Beneficiaries as of
the date of such written request. Notice of any such meeting shall be sent in
accordance with the requirements of Section 11.1(b) within ten days after
receipt of such request. Such request shall state the purpose of the proposed
meeting and the matters proposed to be acted upon at the meeting. Such meeting
shall be held at the principal office of the Trust or at such other place as may
be designated by the Managing Trustee or, if called upon the request of
Beneficiaries, as designated by such Beneficiaries. In addition, the Managing
Trustee may submit, and upon request in writing signed by 10% or more in
interest of the Beneficiaries, shall submit, any matter upon which the
Beneficiaries are entitled to act to the Beneficiaries for a vote by written
Consent without a meeting.
(b) The Managing Trustee shall provide, within 10 days of receipt of such
request, written notice personally or by certified mail of such meeting to be
held not less than 15 days nor more than 60 days after the distribution of such
notice, to each Beneficiary at his record address, or at such other address
which he may have furnished in writing to the Managing Trustee; provided,
however, that any notice of any meeting at which a vote will be taken to (i)
amend this Agreement, (ii) dissolve the Trust, (iii) remove any Managing Trustee
and elect a new Managing Trustee, or (iv) approve or disapprove the sale of all
or substantially all the assets of the Trust, or any notice of any meeting to be
held pursuant to a written request signed by 10% or more in interest of the
Beneficiaries, shall be given by certified mail. Such notice shall be in
writing, and shall state the place, date, and hour of the meeting, and shall
indicate that it is being issued at or by the direction of the Managing Trustee
or Beneficiary calling the meeting. The notice shall state the purpose of the
meeting. If a meeting is adjourned to another time or place, and if any
announcement of the adjournment of time or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting. The presence in
person or by proxy of a Majority in Interest of the Beneficiaries shall
constitute a quorum at all meetings of the Beneficiaries; provided, however,
that if there be no such quorum, holders of a Majority in Interest of such
Beneficiary Interests so present or so represented may adjourn the meeting from
time to time without further notice, until a quorum shall have been obtained. No
notice of the time, place or purpose of any meeting of Beneficiaries need be
given to any Beneficiary who attends in person or is represented by proxy
(except when a Beneficiary attends a meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business on
the ground that the meeting is not lawfully called or convened), or to any
Beneficiary otherwise entitled to such notice who, in writing, has executed and
filed with the records of the meeting, either before or after the time thereof,
waiver of such notice.
(c) For the purpose of determining the Beneficiaries entitled to vote on
any matter on which a vote is to be taken or to vote at any meeting of the Trust
or any adjournment thereof pursuant to this Article XI, the Trustees or the
Beneficiaries requesting such meeting may fix, in advance, a date as the record
date (the "Record Date") for any such determination. Such date shall not be more
than 50 days nor less than 20 days before any such meeting.
(d) Each Beneficiary may authorize any Person or Persons to act for him by
proxy in all matters in which a Beneficiary is entitled to participate, whether
by waiving notice of any meeting, or voting or participating at a meeting. Every
proxy must be signed by the Beneficiary or his attorney-in-fact. No proxy shall
be valid after the expiration of 11 months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the Beneficiary executing it.
(e) At each meeting of Beneficiaries, the Beneficiaries present or
represented by proxy may adopt such rules for the conduct of such meeting as
they shall deem appropriate, provided that such rules shall not be inconsistent
with the provisions of this Agreement.
11.2 Voting Procedures; Voting Rights of Beneficiaries.
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(a) A Majority in Interest of the Beneficiaries, without the concurrence
of the Trustees, may (i) amend this Agreement, subject to the provisions of
Article XII and to the conditions that such amendment (A) may not cause the
Beneficiaries to lose the limited liability accorded them by the Business Trust
Act and (B) may not, without the specific written consent of the Managing
Trustee (which may not be unreasonably withheld), add to the duties or diminish
the rights of the Managing Trustee or its Affiliates as set forth herein or
reduce the compensation to which the Managing Trustee and its Affiliates are
entitled for services to be provided hereunder, (ii) terminate the Trust, (iii)
remove the Managing Trustee and elect a replacement therefor, (iv) approve or
disapprove the sale of all or substantially all of the Assets of the Trust in a
single sale or in multiple sales in the same 12-month period, except in the
orderly liquidation and winding up of the business of the Trust upon its
termination and dissolution.
(b) A Beneficiary shall be entitled to cast one vote for each Interest
that he owns. Only the votes of Beneficiaries of record on the Record Date,
whether at a meeting or otherwise, shall be counted. The Managing Trustee and
its Affiliates shall be entitled to vote with respect to any Interests which
they own; provided that the Managing Trustee and its Affiliates may not vote
their Interests with respect to the compensation or the withdrawal or removal of
the Managing Trustee pursuant to this Agreement or regarding any transaction
between the Trust and the Managing Trustee or its Affiliates.
11.3 Valuation of Interests of the Managing Trustee.
In the event of removal of the Managing Trustee pursuant to Section 11.2,
its Interest shall be appraised by two independent appraisers, one selected by
the removed Managing Trustee and one by the Beneficiaries. In the event that
such two appraisers are unable to agree on the value of the removed Managing
Trustee's Interest within 90 days, they shall within 20 days thereafter jointly
appoint a third independent appraiser whose determination shall be final and
binding; provided, however, that if the two appraisers are unable to agree
within such 20 days on a third appraiser, the third appraiser shall be selected
by the American Arbitration Association. If either the removed Managing Trustee
or the Beneficiaries fails to appoint an appraiser, the value of the removed
Managing Trustee's Interest shall be determined by arbitration in accordance
with the then applicable rules of the American Arbitration Association. The
costs of appraisal shall be borne equally between the Trust and the removed
Managing Trustee. The Trust may elect to pay the removed Managing Trustee for
the value of its Interest as so determined by delivery of a promissory note
bearing interest at a floating annual rate equal to the prime rate of interest
announced by Fleet Bank of Massachusetts, N.A., maturing in not less than five
years with equal installments of interest and principal payable annually.
ARTICLE XII - AMENDMENTS
12.1 Certain Amendments Requiring Majority Consent.
The Managing Trustee shall not amend this Agreement without Majority
Consent in order to (i) Resign as Managing Trustee, (ii) appoint a new Managing
Trustee, (iii) sell all or substantially all of the Assets of the Trust in a
single sale or multiple sales in the same 12-month period, except in the
ordinary liquidation and winding up of the Trust upon its termination and
dissolution or (iv) permit the taking of any of the actions described in Section
7.8. The Managing Trustee may not amend this Agreement to change the voting
rights of the Beneficiaries without Majority Consent, unless the Business Trust
Act requires the change or such a change is necessary to preserve the status of
the Trust as an entity taxable as a partnership for federal tax purposes or to
conform to any operative legal precedent providing that trust beneficiaries will
be entitled to limited liability for the purposes of the Business Trust Act. A
written consent may not be withdrawn or voided once it is filed with the
Managing Trustee.
12.2 Other Amendments.
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In addition to any amendments otherwise authorized herein, this Agreement
may be amended from time to time by the Managing Trustee without the Consent of
any Trust Beneficiary: (i) to add to the representations, duties or obligations
of the Managing Trustee or surrender any right or power granted to the Managing
Trustee herein, for the benefit of the Trust Beneficiaries; (ii) to correct any
mistake, omission or inconsistency or cure any ambiguity, to correct or
supplement any provision herein which may be inconsistent with any other
provision herein, or to make any other provisions for the benefit of the Trust
Beneficiaries with respect to matters or questions arising under this Agreement
which will not be inconsistent with the provisions of this Agreement; (iii) to
preserve the status of the Trust as an entity taxable as a partnership for
federal income tax purposes, including amendments to prevent the Trust from
being treated as a publicly traded partnership; (iv) to delete or add any
provision of this Agreement required to be so deleted or added by the staff of
the Securities and Exchange Commission or other federal agency, the National
Association of Securities Dealers, Inc., or by a state Blue Sky commission or
other state agency or any judicial authority or similar such official, (v) to
permit the Interests to fall within any exemption from the definition of plan
assets contained in Section 2510.3-101 of Title 29 of the Code of Federal
Regulations; (vi) to effect an amendment to this Agreement as (a) contemplated
under Section 4.2(a)(viii), Section 4.2(a)(x) or 8.5(b) or (b) necessary in
order to effect the provisions of Section 9.5; (vii) to make any other
amendments which do not adversely affect the rights of the Trust Beneficiaries;
and (viii) to authorize the Trust to issue an additional class of Interests (or
other securities), with any designations, preferences and relative,
participating, optional and other special rights, including special voting
rights, as shall be fixed by the Managing Trustee.
ARTICLE XIII - POWER OF ATTORNEY
13.1 Appointment.
Each of the Beneficiaries (through acceptance of their Interests) agrees
to be bound by this Agreement and hereby makes, constitutes and appoints the
Managing Trustee, the president and each vice president of the Managing Trustee,
and each Person who shall thereafter become an additional or Substitute Managing
Trustee during the term of the Trust and any continuation of the Trust pursuant
to Section 4.12 and Article XI, with full power of substitution, the true and
lawful attorney-in-fact of, to act in the name, place and stead of such
Beneficiary, with the power from time to time to execute, acknowledge, make,
verify, swear to, certify, deliver, record, file and/or publish:
(a) this Agreement under the laws of the State or any other jurisdiction,
any subsequent amendment to this Agreement, the Certificate of Trust and any
amendments thereto or restatement thereof;
(b) any other document required to reflect any action of the Managing
Trustee or Beneficiaries duly taken in the manner provided for in this
Agreement, whether or not the Beneficiary voted in favor of or otherwise
Consented to such action;
(c) any other application, certificate, affidavit, instrument and document
as may be required or appropriate in connection with documentation and
registration of Assets with the FAA and any other governmental authority having
jurisdiction;
(d) any other instrument, certificate or document which may be required by
any regulatory agency, laws of the United States, any state or any other
jurisdiction in which the Trust is doing or intends to do business or which the
Managing Trustee deems advisable to file or record, provided such instrument,
certificate or document is not inconsistent with the terms of this Agreement as
then in effect;
(e) any certificate of dissolution or cancellation of the Certificate of
Trust that may be
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necessary upon the termination of the Trust;
(f) any instrument or papers required to continue or terminate the
business of the Trust pursuant to Sections 4.12 and 1.6;
(g) any amendment to this Agreement permitted hereunder; and
(h) any and all instruments which the Managing Trustee deems appropriate
to reflect a change or modification of the Trust in accordance with the terms of
this Agreement.
13.2 Amendments to Agreement.
The terms of this Agreement permit certain amendments of this Agreement to
be effected and certain other actions to be taken or omitted by, or with respect
to, the Trust, in each case with the approval of less than all the Beneficiaries
if a specified percentage of the Beneficiaries shall have voted in favor of, or
otherwise Consented to, such action. This power of attorney shall permit the
Managing Trustee and the Trust to act on behalf of the Beneficiary, in
accordance with the terms of this Agreement, whether or not the Beneficiary
shall have Consented to such action, in order to effect the orderly
administration of the Trust's affairs.
13.3 Power Coupled With an Interest.
The foregoing grant of authority:
(a) is a special power of attorney coupled with an interest in favor of
such attorneys-in-fact and as such shall be irrevocable and shall survive the
death, incapacity, insolvency, dissolution or termination of each Beneficiary;
(b) may be exercised for each Beneficiary by a signature of any one of
such attorneys-in-fact or by listing the names of all of the Beneficiaries,
including such Beneficiary, and executing any instrument with a single signature
of any one of such attorneys-in-fact acting as attorney-in-fact for all of them;
and
(c) shall survive the Assignment by any Beneficiary of the whole or any
portion of his Beneficiary Interest, as applicable, except that, where the
assignee of the whole thereof has furnished a power of attorney and has been
approved by the Managing Trustee for admission to the Trust as a Substitute
Beneficiary this power of attorney shall survive such Assignment with respect to
the assignor for the sole purpose of enabling such attorneys-in-fact to execute,
acknowledge and file any instrument necessary to effect such substitution and
shall thereafter terminate with respect to any Beneficiary who assigns all of
his Beneficiary Interest.
13.4 Power of Attorney by Substitute Beneficiaries.
A similar power of attorney shall be one of the instruments which the
Managing Trustee shall require an assignee of a Beneficiary to execute as a
condition to the admission of such assignee as a Substitute Beneficiary.
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ARTICLE XIV - GENERAL PROVISIONS
14.1 Notices, Approvals and Consents.
All notices, approvals, Consents or other communications hereunder shall
be in writing and signed by the party giving the same, and shall be deemed to
have been given when the same are (a) deposited in the United States mail and
sent by first class mail (or certified if so required under Section 11.1(b)),
postage prepaid, or (b) delivered in hand. In each case, said mailing or
delivering shall be made to the parties at the addresses set forth below or at
such other addresses as such parties may designate by notice to the Trust:
(a) If to the Trust or the Managing Trustee, at the principal office of
the Trust;
(b) If to the Delaware Trustee at its principal office in the State as set
forth in the records of the Trust and in Schedule A;
(c) If to any other Trustee at its principal office as set forth in the
records of the Trust;
(d) If to the Special Beneficiary, at its principal office as set forth in
the records of the Trust; and
(e) If to a Beneficiary, at the address set forth in the records of the
Trust (as provided to the Trust by such Beneficiary), or to such other address
as may be designated by notice from such Beneficiary given in the manner hereby
specified.
14.2 Further Assurances.
The Trustees and Trust Beneficiaries will execute, acknowledge and deliver
such further instruments and do such further acts and things as may be required
to carry out the intent and purpose of this Agreement.
14.3 Captions.
Captions contained in this Agreement are inserted only as a matter of
convenience and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any of the provisions thereof.
14.4 Binding Effect.
Except to the extent required under the Business Trust Act, as provided in
Section 4.1(d) with respect to the Managing Trustee, and for fees, rights to
reimbursement, and other compensation provided as such, none of the provisions
of this Agreement shall be for the benefit of or be enforceable by any creditor
of the Trust.
14.5 Separability.
If one or more of the provisions of this Agreement or any application
thereof shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and any
other application thereof shall not in any way be affected or impaired thereby,
and such remaining provisions shall be interpreted consistently with the
omission of such invalid, illegal or unenforceable provisions.
14.6 Integration.
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This Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings of the parties in connection
therewith which conflict with the express terms of this Agreement. No covenant,
representation or condition not expressed in this Agreement shall affect or be
effective to interpret, change or restrict the express provisions of this
Agreement.
14.7 Applicable Law.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State.
14.8 Counterparts.
This Agreement may be signed by each party hereto upon a separate copy,
and all counterparts so executed shall constitute one agreement binding on all
parties hereto, notwithstanding that all parties are not signatory to the
original or same counterpart.
14.9 Creditors.
No creditor who makes a non-recourse loan to the Trust shall have or
acquire at any time, as a result of making such loan, any direct or indirect
interest in the profits, capital or property of the Trust other than as a
secured creditor.
14.10 Interpretation.
Unless the context in which words are used in this Agreement otherwise
indicates that such is the intent, words in the singular shall include the
plural and in the masculine shall include the feminine and neuter and vice
versa.
14.11 Arbitration; Venue.
This Agreement does not impose mandatory arbitration or venue in
connection with the settlement of disputes involving any Beneficiary; provided,
however, that this provision shall not affect or supersede any other agreement
which does provide for mandatory arbitration or venue, including any agreement
between any Beneficiary and any Soliciting Dealer.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Second Amended and Restated Declaration of Trust as of July 15, 1997.
MANAGING TRUSTEE BENEFICIARIES
AFG ASIT CORPORATION Each Person named as a Beneficiary on
Schedule A attached hereto
By: AFG ASIT Corporation as
Attorney-in-Fact for each such
Person
By:__________________________________ By:_______________________________
Authorized Officer Authorized Officer
DELAWARE TRUSTEE
WILMINGTON TRUST COMPANY
By:___________________________________
Authorized Officer
SPECIAL BENEFICIARY
EQUIS FINANCIAL GROUP
By:____________________________________
Authorized Officer
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SCHEDULE ASCHEDULE A
NAMES, BUSINESS ADDRESSES AND CAPITAL CONTRIBUTIONS OF TRUSTEES AND
BENEFICIARIES
I. Managing Trustee
AFG ASIT Corporation $1,000
98 North Washington Street
Boston, MA 02114
II. Delaware Trustee
Wilmington Trust Company N/A
Rodney Square North
Wilmington, DE 19890
III. Special Beneficiary
Equis Financial Group $1,000
98 North Washington Street
Boston, MA 02114
Class A and Class B
IV. Class A and B Beneficiaries
(attached hereto
as Exhibit A)
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AFG INVESTMENT TRUST
AFG Investment Trust B
Annual Report to the Participants, December 31, 1997
<PAGE>
AFG Investment Trust B
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-8
FINANCIAL STATEMENTS:
Report of Independent Auditors 9
Statement of Financial Position
at December 31, 1997 and 1996 10
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 11
Statement of Changes in Participants' Capital
for the years ended December 31, 1997, 1996 and 1995 12
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 13
Notes to the Financial Statements 14-24
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 25
Statement of Cash and Distributable Cash From
Operations, Sales and Refinancings 26
Schedule of Costs Reimbursed to the
Managing Trustee and its Affiliates as
Required by Section 10.4 of the Second
Amended and Restated Declaration of Trust 27
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SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For the years ended December 31, 1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Summary of
Operations 1997 1996 1995 1994 1993
- ---------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Lease revenue $ 5,400,331 $ 5,809,086 $ 6,173,972 $ 5,507,765 $ 5,611,138
Net income $ 1,174,206 $ 807,840 $ 527,564 $ 1,771,705 $ 710,004
Per Beneficiary Interest:
Net income
Class A Interests $ 1.05 $ 1.10 $ 0.72 $ 2.42 $ 0.97
Class B Interests $ 0.05 $ -- $ -- $ -- $ --
Cash distributions
Class A Interests $ 3.11 $ 1.42 $ 2.00 $ 2.52 $ 2.52
Class B Interests $ 0.30 $ -- $ -- $ -- $ --
<CAPTION>
Financial Position
------------------
<S> <C> <C> <C> <C> <C>
Total assets $17,214,157 $16,631,159 $19,573,350 $22,320,875 $25,677,488
Total long-term obligations $ 2,038,628 $ 4,352,811 $ 7,097,113 $ 8,713,009 $11,971,262
Participants' capital $14,816,135 $11,925,600 $12,157,251 $13,092,674 $13,168,952
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year ended
December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of AFG Investment Trust B (the
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the outcome of the Class Action Lawsuit
described in Note 7 to the accompanying financial statements, and the ability of
Equis Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG"), to collect all rents due under the
attendant lease agreements and to successfully remarket the Trust's equipment,
upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. EFG's computer
programs were designed and written using four digits to define the applicable
year. As a result, EFG does not anticipate system failure or miscalculations
causing disruptions of operations. Based on recent assessments, EFG determined
that minimal modification of software is required so that its network operating
system will function properly with respect to dates in the year 2000 and
thereafter. EFG believes that with these modifications to the existing operating
system, the Year 2000 Issue will not pose significant operational problems for
its computer systems. EFG will utilize internal resources to upgrade software
for Year 2000 modifications and anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any anticipated impact on its operating
system. The total cost of the Year 2000 project is expected to be insignificant
and have no effect on the results of operations of the Trust.
OVERVIEW
As an equipment leasing trust, the Trust was organized to acquire a
diversified portfolio of capital equipment subject to lease agreements with
third parties. The Trust was designed to progress through three principal
phases: acquisitions, operations, and liquidation. During the operations phase,
a period of approximately six years, all equipment in the Trust's portfolio will
progress through various stages. Initially, all equipment will generate rental
revenues under primary term lease agreements. During the life of the Trust,
these agreements will expire on an intermittent basis and equipment held
pursuant to the related leases will be renewed, re-leased or sold, depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Over time, a greater portion of
the Trust's original equipment portfolio will become available for remarketing
and cash generated from operations and from sales or refinancings will
fluctuate. Presently, the Trust is a Nominal Defendant in a Class Action
Lawsuit. The outcome of the Class Action Lawsuit could alter the future business
operations of the Trust. See Note 7 to the accompanying financial statements.
The Trust's operations commenced in 1992.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Trust recognized lease revenue of
$5,400,331 compared to $5,809,086 and $6,173,972 for the years ended December
31, 1996 and 1995, respectively. The decrease in lease revenue from 1996 to 1997
resulted principally from primary lease term expirations and the sale of
equipment. The decrease in lease revenue from 1995 to 1996 was due primarily to
the Trust's sale of its interest in a Boeing 747-SP aircraft leased to United
Air Lines, Inc. (the "United Aircraft") in February 1996, as discussed below.
The future level of lease revenue to be recognized by the Trust may be impacted
by the proposed amendment to the Trust Agreement as described in Note 10 to the
accompanying financial statements.
Interest income for the year ended December 31, 1997 was $264,503 compared
to $106,186 and $45,156 for the years ended December 31, 1996 and 1995,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income
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<PAGE>
in 1997 included interest earned on unexpended proceeds resulting from the
issuance of Class B Interests (see below). Future interest income will fluctuate
in relation to prevailing interest rates, the collection of lease revenue and
the proceeds from equipment sales.
The Trust's equipment portfolio includes certain assets in which the Trust
holds a proportionate ownership interest. In such cases, the remaining interests
are owned by EFG or an affiliated equipment leasing program sponsored by EFG.
Proportionate equipment ownership enables the Trust to further diversify its
equipment portfolio by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could result from a
concentration in any single equipment type, industry or lessee. The Trust and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment.
During 1997, the Trust sold equipment having a net book value of $272,233 to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $76,559.
In February 1996, the Trust concluded the sale of its interest in the United
Aircraft to the lessee, United Air Lines Inc. The Trust recognized a net loss of
$560,982 in connection with this transaction, of which $384,782 was recognized
as Write-Down of Equipment in 1995. The remainder of $176,200 was recognized as
a loss on sale of equipment on the accompanying financial statements for the
year ended December 31, 1996. In addition to lease rents, the Trust received net
sale proceeds of $1,684,292 for the aircraft. A portion of such sale proceeds
was reinvested in other equipment in March 1996 through the acquisition of an
8.86% ownership interest in an aircraft (the "Reno Aircraft") at an aggregate
cost of $1,239,741. To acquire its interest in the Reno Aircraft, the Trust
obtained long-term financing of $997,888 from a third-party lender and utilized
cash proceeds of $241,853 from the sale of the United Aircraft. During the year
ended December 31, 1996, the Trust sold other equipment having a net book value
of $389,885 to existing lessees and third parties. These sales resulted in a net
loss, for financial statement purposes, of $48,394.
During 1995, the Trust sold equipment having a net book value of $4,084,735
to existing lessees and third parties. These sales resulted in a net loss, for
financial statement purposes, of $225,037. The equipment sales included the
Trust's interest in a vessel with an original cost and net book value of
$5,406,468 and $4,023,021, respectively, which the Trust sold to an existing
lessee in June 1995. In connection with this sale, the Trust realized sale
proceeds of $3,567,942 and the purchaser assumed related debt and interest of
$269,023 and $1,734, respectively, which resulted in a net loss, for financial
statement purposes, of $184,322. This equipment was sold prior to the expiration
of the related lease term. The sale proceeds related to this transaction were
fully reinvested in other equipment in 1995. The Trust received $199,450 in 1996
from the lessee related to a residual sharing agreement between the lessee and
the Trust. In connection with this agreement, the Trust was entitled to a
portion of the sale proceeds realized by the lessee upon its ultimate
disposition of the vessel to a third party. This amount is reflected as Other
Income on the accompanying Statement of Operations for the year ended December
31, 1996.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Trust, as such transactions will be dependent upon
the condition and type of equipment being sold and its marketability at the time
of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
-4-
<PAGE>
Depreciation and amortization expense was $3,862,631, $4,284,049 and
$4,176,540 for the years ended December 31, 1997, 1996 and 1995, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the Trust
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life. The Trust
purchased equipment during both 1996 and 1995.
Interest expense was $196,589 or 3.6% of lease revenue in 1997, $408,153 or
7% of lease revenue in 1996 and $539,047 or 8.7% of lease revenue in 1995.
Interest expense in future periods will continue to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding indebtedness.
Management fees were 4.4%, 4.3% and 4% of lease revenue during the years
ended December 31, 1997, 1996 and 1995, respectively. Management fees are based
on 5% of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 5%, 2.4% and 2% of lease revenue during the years ended December 31,
1997, 1996 and 1995, respectively. The increase in operating expenses from 1996
to 1997 was due primarily to costs incurred in connection with the Solicitation
and Registration Statements described in Note 8 to the accompanying financial
statements and increases in administrative and professional service costs. The
increase in operating expenses from 1995 to 1996 was due primarily to an
increase in administrative and professional service costs. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a trust.
Other fluctuations typically occur in relation to the volume and timing of
remarketing activities.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Trust by its nature is a limited life entity which was established for
specific purposes described in the preceding "Overview". As an equipment leasing
program, the Trust's principal operating activities derive from asset rental
transactions. Accordingly, the Trust's principal source of cash from operations
is provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $4,399,596, $5,645,405 and $4,877,921 in 1997, 1996 and 1995,
respectively. Future renewal, re-lease and equipment sale activities will cause
a decline in the Trust's primary-term lease revenue and corresponding sources of
operating cash. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Trust experiences a higher frequency of remarketing events.
The Trust's equipment is leased by a number of creditworthy,
investment-grade companies and, to date, the Trust has not experienced any
material collection problems and has not considered it necessary to provide an
allowance for doubtful accounts. Notwithstanding a positive collection history,
there is no assurance that all future contracted rents will be collected or that
the credit quality of the Trust's lessees will be maintained. Collection risk
could increase in the future, particularly as the Trust remarkets its equipment
and enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Ultimately, the Trust will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in
-5-
<PAGE>
the collection of stipulated cash settlements pursuant to terms and conditions
contained in the underlying lease agreements.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. The Trust expended $1,441,796 and $5,605,829 to acquire
equipment during the years ended December 31, 1996 and 1995, respectively,
including new equipment acquired pursuant to the reinvestment provisions of the
Trust's Prospectus of approximately $1,400,000 and $3,500,000 during the
respective years. The reinvestment equipment was financed through a combination
of leveraging and the sale proceeds available from the aircraft and vessel
transactions, discussed above. There were no equipment acquisitions during 1997.
During 1997, the Trust received sale proceeds of $348,792. In 1996, the Trust
realized equipment sale proceeds of $2,025,783, including $1,684,292 of proceeds
from the United Aircraft and; in 1995, the Trust received sale proceeds of
$3,588,941, including $3,567,942 of proceeds from the vessel transaction. Future
inflows of cash from asset disposals will vary in timing and amount and will be
influenced by many factors including, but not limited to, the frequency and
timing of lease expirations, the type of equipment being sold, its condition and
age, and future market conditions.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. Cash inflows of
$997,888 and $2,296,728 in 1996 and 1995, respectively, resulted from leveraging
a portion of the Trust's equipment portfolio with third-party lenders. Each note
payable is recourse only to the specific equipment financed and to the minimum
rental payments contracted to be received during the debt amortization period
(which period generally coincides with the lease rental term). As rental
payments are collected, a portion or all of the rental payment is used to repay
the associated indebtedness. In future periods, the amount of cash used to repay
debt obligations will decline as the principal balance of notes payable is
reduced through the collection and application of rents. However, the Trust has
a balloon payment obligation of $282,421 at the expiration of the primary lease
term related to the Reno Aircraft. The Managing Trustee also expects to use a
portion of the Trust's available cash to retire certain indebtedness.
In accordance with the Trust Agreement, upon the dissolution of the Trust,
the Managing Trustee will be required to contribute to the Trust an amount equal
to any negative balance which may exist in the Managing Trustee's tax capital
account. At December 31, 1997, the Managing Trustee had a positive tax capital
account balance (see Note 6 to the financial statements).
At December 31, 1997, the Trust had aggregate future minimum lease payments
of $2,493,960 from contractual lease agreements (see Note 2 to the financial
statements), a portion of which will be used to amortize the principal balance
of notes payable of $2,038,628 (see Note 5 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often dependent upon the needs and interests of the existing
lessees. Some lessees may choose to renew their lease contracts, while others
may elect to return the equipment. In the latter instances, the equipment could
be re-leased to another lessee or sold to a third party. Accordingly, as the
Trust matures and a greater level of its equipment assets become available for
remarketing, the cash flows of the Trust will become less predictable. In
addition, the Trust will have cash outflows to satisfy interest on indebtedness
and to pay management fees and operating expenses. Ultimately, the Trust is
expected to meet its future disbursement obligations and to distribute any
excess of cash inflows over cash outflows to the Participants in accordance with
the Trust Agreement. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the Trust's anticipated cash flows as described herein
and in the accompanying financial statements and result in fluctuations to the
Trust's periodic cash distribution payments.
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 1,000,961 Class B Interests at $5.00 per interest, thereby
generating $5,004,805 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 3,588 Class B Interests, generating $17,940 of such
aggregate capital contributions, and the Special Beneficiary, EFG, purchased
997,373 of such Class B Interests, generating
-6-
<PAGE>
$4,986,865 of such aggregate capital contributions. The Trust incurred
offering costs in the amount of $50,048 and professional service costs of
$62,170 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of the Trust's outstanding voting
interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution to
the Class A Beneficiaries of the Trust. The Managing Trustee declared and paid
this special cash distribution of approximately $1.47 per Class A Interest,
aggregating $979,449, to the Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the
outstanding Class A Beneficiary Interests of the Trust by filing a Form 13E-4,
Issuer Tender Offer Statement, with the SEC and distributing to the Class A
Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $785,295 of the net proceeds realized from the
issuance of the Class B Interests to purchase 82,837 of the Class A Interests
tendered as a result of the offer. The Tender Documents describe, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. On December 1, 1997, the Trust used an additional $6,080
of such proceeds to purchase 640 of the remaining Class A Interests. The Trust
intends to continue to purchase additional outstanding Class A Interests through
future offers to purchase during the Initial Redemption Period (two years
following the close of the Class B offering which occurred on July 17,1997).
These purchases will be funded by the remaining net proceeds realized from the
issuance of the Class B Interests and are classified as Restricted Cash on the
Trust's Statement of Financial Position at December 31, 1997 (see also Note 10
to the accompanying financial statements).
Cash distributions paid to the Participants consist of both a return of and
a return on capital. Cash distributions do not represent and are not indicative
of yield on investment. Actual yield on investment cannot be determined with any
certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, and the residual value realized for each asset at its disposal
date. Future market conditions, technological changes, the ability of EFG to
manage and remarket the assets, and many other events and circumstances, could
enhance or detract from individual asset yields and the collective performance
of the Trust's equipment portfolio.
It is the intention of the Managing Trustee to maintain a cash distribution
level that is consistent with the operating cash flows of the Trust and to
optimize the long-term value of the Trust. A distribution level that is higher
than the Trust's operating cash flows could compromise the Trust's working
capital position, as well as its ability to refurbish or upgrade equipment in
response to lessee requirements or other market circumstances. Accordingly, in
order to better align monthly cash distributions with the Trust's operating cash
flows, the Managing Trustee reduced the level of monthly cash distributions from
an annualized rate of $2.52 per Class A Interest (the rate established and paid
from the Trust's inception through September 1995) to an annualized rate of
$1.26 per Class A Interest commencing in October 1995. In October 1996, the
Managing Trustee increased the annualized distribution rate to $1.64 per Class A
Interest and sustained this distribution rate throughout 1997. For the Class B
Beneficiaries, the Managing Trustee established and paid, from the Trust, an
annualized distribution of $0.66 per Class B Interest commencing July 18, 1997.
Future distributions with respect to Class B Interests, will be subordinate to
certain distributions with respect to Class A Interests.
Cash distributions to the Managing Trustee, the Special Beneficiary and the
Beneficiaries are declared and generally paid within 45 days following the end
of each calendar month. The payment of such distributions is presented as a
component of financing activities. For the year ended December 31, 1997, the
Trust declared total cash distributions of $2,447,053, including the special
distribution described above. The Beneficiaries were allocated $2,311,300
($2,012,992 for Class A Beneficiaries and $298,308 for Class B Beneficiaries);
the Special Beneficiary was allocated $121,077; and the Managing Trustee was
allocated $14,676.
-7-
<PAGE>
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.
-8-
<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, 1997 and 1996, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AFG Investment Trust B at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Participants is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 11, 1998
-9-
<PAGE>
AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,893,242 $ 2,829,093
Restricted cash 3,121,763 --
Rents receivable 675,629 339,293
Accounts receivable - affiliate 350,009 154,395
Equipment at cost, net of accumulated
depreciation of $14,796,020 and $12,161,949
at December 31, 1997 and 1996, respectively 9,173,514 13,307,711
Organization costs, net of accumulated
amortization of $5,000 and $4,333
at December 31, 1997 and 1996, respectively -- 667
------------ ------------
Total assets $ 17,214,157 $ 16,631,159
------------ ------------
------------ ------------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 2,038,628 $ 4,352,811
Accrued interest 27,395 36,571
Accrued liabilities 11,550 23,250
Accrued liabilities - affiliate 49,597 47,178
Deferred rental income 35,275 45,550
Cash distributions payable to participants 235,577 200,199
------------ ------------
Total liabilities 2,398,022 4,705,559
------------ ------------
Participants' capital:
Managing Trustee 3,535 (30,382)
Special Beneficiary 29,162 (257,894)
Class A Beneficiary Interests (582,017 and
665,494 Interests at December 31, 1997 and 1996,
respectively; initial purchase price of $25 each) 10,864,150 12,213,876
Class B Beneficiary Interests (1,000,961 Interests;
initial purchase price of $5 each) 4,710,663 --
Treasury Interests (83,477 Interests at Cost) (791,375) --
------------ ------------
Total participants' capital 14,816,135 11,925,600
------------ ------------
Total liabilities and participants' capital $ 17,214,157 $ 16,631,159
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-10-
<PAGE>
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Lease revenue $ 5,400,331 $ 5,809,086 $ 6,173,972
Interest income 264,503 106,186 45,156
Other income -- 199,450 --
Gain (loss) on sale of equipment 76,559 (224,594) (225,037)
----------- ----------- -----------
Total income 5,741,393 5,890,128 5,994,091
----------- ----------- -----------
Expenses:
Depreciation and amortization 3,862,631 4,284,049 4,176,540
Write-down of equipment -- -- 384,782
Interest expense 196,589 408,153 539,047
Equipment management fees - affiliate 235,030 249,205 244,800
Operating expenses - affiliate 272,937 140,881 121,358
----------- ----------- -----------
Total expenses 4,567,187 5,082,288 5,466,527
----------- ----------- -----------
Net income $ 1,174,206 $ 807,840 $ 527,564
----------- ----------- -----------
----------- ----------- -----------
Net income
per Class A Beneficiary Interest $ 1.05 $ 1.10 $ 0.72
----------- ----------- -----------
----------- ----------- -----------
per Class B Beneficiary Interest $ 0.05 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
Cash distributions declared
per Class A Beneficiary Interest $ 3.11 $ 1.42 $ 2.00
----------- ----------- -----------
----------- ----------- -----------
per Class B Beneficiary Interest $ 0.30 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-11-
<PAGE>
AFG Investment Trust B
STATEMENT OF CHANGES IN
PARTICIPANTS' CAPITAL for the years
ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Managing Special Class A Beneficiaries Class B Beneficiaries
Trustee Beneficiary ----------------------- ----------------------- Treasury
Amount Amount Interests Amount Interests Amount Interests Total
-------- --------- -------- ------------ --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $(18,711) $(161,611) 665,494 $ 13,272,996 -- $ -- $ -- $ 13,092,674
Net income - 1995 5,276 43,524 -- 478,764 -- -- -- 527,564
Cash distributions declared (14,630) (120,696) -- (1,327,661) -- -- -- (1,462,987)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1995 (28,065) (238,783) 665,494 12,424,099 -- -- -- 12,157,251
Net income - 1996 8,078 66,647 -- 733,115 -- -- -- 807,840
Cash distributions declared (10,395) (85,758) -- (943,338) -- -- -- (1,039,491)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1996 (30,382) (257,894) 665,494 12,213,876 -- -- -- 11,925,600
Class B capital contribution -- -- -- -- 1,000,961 5,004,805 -- 5,004,805
Less: Offering costs -- -- -- -- -- (50,048) -- (50,048)
Net income - 1997 48,593 408,133 -- 663,266 -- 54,214 -- 1,174,206
Cash distributions declared (14,676) (121,077) -- (2,012,992) -- (298,308) -- (2,447,053)
Acquisition of Treasury
Interests, at Cost -- -- (83,477) -- -- -- (791,375) (791,375)
-------- --------- -------- ------------ --------- ----------- --------- ------------
Balance at December 31, 1997 $ 3,535 $ 29,162 582,017 $ 10,864,150 1,000,961 $ 4,710,663 $(791,375) $ 14,816,135
-------- --------- -------- ------------ --------- ----------- --------- ------------
-------- --------- -------- ------------ --------- ----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-12-
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 1,174,206 $ 807,840 $ 527,564
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 3,862,631 4,284,049 4,176,540
Write-down of equipment -- -- 384,782
(Gain) loss on sale of equipment (76,559) 224,594 225,037
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable (336,336) 390,262 (329,882)
Accounts receivable - affiliate (195,614) (48,901) (66,857)
Increase (decrease) in:
Accrued interest (9,176) (102,023) 80,950
Deferred interest -- 14,408 --
Accrued liabilities (11,700) 3,250 4,500
Accrued liabilities - affiliate 2,419 47,178 (83,863)
Deferred rental income (10,275) 24,748 (40,850)
----------- ----------- -----------
Net cash from operating activities 4,399,596 5,645,405 4,877,921
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment -- (1,441,796) (5,605,829)
Proceeds from equipment sales 348,792 2,025,783 3,588,941
----------- ----------- -----------
Net cash from (used in) investing activities 348,792 583,987 (2,016,888)
----------- ----------- -----------
Cash flows from (used in) financing
activities:
Proceeds from capital contributions 5,004,805 -- --
Payment of offering costs (50,048) -- --
Purchase of Treasury Interests (791,375) --
Restricted cash (3,121,763) -- --
Proceeds from notes payable -- 997,888 2,296,728
Principal payments - notes payable (2,314,183) (3,742,190) (3,643,601)
Distributions paid (2,411,675) (993,290) (1,618,196)
----------- ----------- -----------
Net cash used in financing activities (3,684,239) (3,737,592) (2,965,069)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,064,149 2,491,800 (104,036)
Cash and cash equivalents at beginning of year 2,829,093 337,293 441,329
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,893,242 $ 2,829,093 $ 337,293
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 205,765 $ 495,768 $ 458,097
----------- ----------- -----------
----------- ----------- -----------
</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.
The accompanying notes are an integral part of
these financial statements.
-13-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
December 31, 1997
NOTE 1 - ORGANIZATION AND TRUST MATTERS
AFG Investment Trust B (the "Trust") was organized as a Delaware business
trust in accordance with the Delaware Business Trust Act on May 28, 1992 for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special
Beneficiary, Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership, ("EFG" or the "Advisor")
and $100 from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned
affiliate of EFG. The Trust issued an aggregate of 665,494 Beneficiary Interests
(hereinafter referred to as Class A Interests) at a subscription price of $25.00
each ($16,637,350 in total) to 803 investors on September 8, 1992. On July 18,
1997, the Trust issued 1,000,961 Class B Interests at $5.00 each ($5,004,805 in
total), of which (i) 997,373 interests are held by Equis II Corporation, an
affiliate of EFG, and (ii) 3,588 interests are held by 5 other Class A
investors. The Trust repurchased 82,837 Class A Interests on October 10, 1997
and an additional 640 Class A Interests on December 1, 1997 using proceeds from
the issuance of Class B Interests. Accordingly, there are 582,017 Class A
Interests currently outstanding.
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, EFG. The Managing Trustee is
responsible for the general management and business affairs of the Trust while
the Special Beneficiary acts as Advisor to the Trust and provides services in
connection with the acquisition and remarketing of the Trust's assets. AFG ASIT
Corporation is a wholly-owned subsidiary of Equis II Corporation and an
affiliate of EFG. Class A Interests and Class B Interests basically have
identical voting rights and, therefore, Equis II Corporation has control over
the Trust on all matters on which the Beneficiaries may vote. The Managing
Trustee and the Special Beneficiary are not required to make any other capital
contributions except as may be required under the Second Amended and Restated
Declaration of Trust (the "Trust Agreement").
Significant operations commenced September 8, 1992 when the Trust made
its initial equipment purchase. Pursuant to the Trust Agreement, each
distribution of Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings of the Trust shall be made 90.75% to the Beneficiaries,
8.25% to the Special Beneficiary and 1% to the Managing Trustee.
Under the terms of the Advisory Agreement between the Trust and EFG,
management services are provided by EFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also see Note 4.)
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Trust and several
other Direct-Participation equipment leasing programs sponsored or co-sponsored
by EFG (the "Other Investment Programs"). The Company arranges to broker or
originate equipment leases, acts as remarketing agent and asset manager, and
provides leasing support services, such as billing, collecting, and asset
tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating
primarily to the business of originating new leases, and the name "American
Finance Group," and its acronym, to a third party. AFG changed its name
-14-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms of the sale agreements, EFG specifically reserved the rights
to continue using the name American Finance Group and its acronym in connection
with the Trust and the Other Investment Programs and to continue managing all
assets owned by the Trust and the Other Investment Programs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS AND RESTRICTED CASH
The Trust considers liquid investment instruments purchased with a maturity
of three months or less to be cash equivalents. From time to time, the Trust
invests excess cash with large institutional banks in federal agency discount
notes and reverse repurchase agreements with overnight maturities. Under the
terms of the agreements, title to the underlying securities passes to the Trust.
The securities underlying the agreements are book entry securities. At December
31, 1997, the Trust had $6,911,300 invested in federal agency discount notes and
reverse repurchase agreements secured by U.S. Treasury Bills or interests in
U.S. Government securities. Such cash includes $3,121,763 which represents net
proceeds realized from the offering of the Class B Interests less the portion
thereof used to pay a special distribution to the Class A Beneficiaries and to
redeem Class A Interests (see Note 9). These funds are reserved for future
purchases of Class A Interests pursuant to the Trust Agreement and are
classified as Restricted Cash on the Trust's Statement of Financial Position at
December 31, 1997.
REVENUE RECOGNITION
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $2,493,960 are due as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1998 $1,576,201
1999 340,958
2000 257,841
2001 159,480
2002 159,480
----------
Total $2,493,960
----------
----------
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Alaska Airlines, Inc. $1,001,979 $1,004,770 $1,004,770
Tarmac Mid-Atlantic, Incorporated $ 640,293 $ -- $ --
Montgomery Ward and Company, Inc. $ 576,457 $ -- $ --
OMI Corporation $ -- $ -- $ 623,598
</TABLE>
USE OF ESTIMATES
-15-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment cost represents Asset Base Price plus acquisition
fees and was determined in accordance with the Trust Agreement and certain
regulatory guidelines. Asset Base Price is affected by the relationship of the
seller to the Trust as summarized herein. Where the seller of the equipment was
EFG or an Affiliate, Asset Base Price was the lower of (i) the actual price paid
for the equipment by EFG or the Affiliate plus all actual costs accrued by EFG
or the Affiliate while carrying the equipment less the amount of all primary
term rents earned by EFG or the Affiliate prior to selling the equipment or (ii)
fair market value as determined by the Managing Trustee in its best judgment,
including all liens and encumbrances on the equipment and other actual expenses.
Where the seller of the equipment was a third party who did not manufacture the
equipment, Asset Base Price was the lower of (i) the price invoiced by the third
party or (ii) fair market value as determined by the Managing Trustee. Where the
seller of the equipment was a third party who also manufactured the equipment,
Asset Base Price was the manufacturer's invoice price, net of any manufacturer
rebates or incentives, which price was considered to be representative of fair
market value.
DEPRECIATION AND AMORTIZATION
The Trust's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Trust depreciates the difference between (i) the
cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Trust continues to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
Periodically, the Managing Trustee evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. For purposes of
this comparison, "net carrying value" represents, at a given date, the net book
value (equipment cost less accumulated depreciation for financial reporting
purposes) of the Trust's equipment and "net realizable value" represents, at the
same date, the aggregate undiscounted cash flows resulting from future
contracted lease payments plus the estimated residual value of the Trust's
equipment. The Managing Trustee evaluates significant equipment assets, such as
aircraft and vessels, individually. All other assets are evaluated collectively
by equipment type unless the Managing Trustee learns of specific circumstances,
such as a lessee default, technological obsolescence, or other market
developments, which could affect the net realizable value of particular assets.
Adjustments to reduce the net carrying value of equipment are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value. Such adjustments are reflected separately on the accompanying
Statement of Operations as Write-Down of Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Organization costs are amortized using the straight-line method over a
period of five years.
ACCRUED LIABILITIES - AFFILIATE
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (See Note 4).
-16-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
ALLOCATION OF NET INCOME OR LOSS
Prior to adoption of the current Trust Agreement on July 15, 1997 (see
Note 8), the Trust allocated net income or loss to the Participants for
financial reporting purposes according to their respective beneficial interests
in the Trust (1% to the Managing Trustee, 8.25% to the Special Beneficiary, and
90.75% to the Class A Beneficiaries). Subsequent to adoption of the current
Trust Agreement, net income is allocated first, to eliminate any Participant's
negative capital account balance and second, 1% to the Managing Trustee, 8.25%
to the Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period. Net losses
are allocated first, to eliminate any positive capital account balance of the
Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second,
to eliminate any positive capital account balances of the Class A Beneficiaries;
and third, any remainder to the Managing Trustee.
The allocation of net income or loss pursuant to the Trust Agreement is
based upon government rules and regulations for federal income tax reporting
purposes and assumes, for each income tax reporting period, the liquidation of
all of the Trust's assets and the subsequent distribution of all available cash
to the Participants. For income tax purposes, the Trust adjusts its allocations
of income and loss to the Participants so as to cause their tax capital account
balances at the end of the reporting period to be equal to the amount that would
be distributed to them at such date in the event of a liquidation and
dissolution of the Trust. This methodology does not consider the costs attendant
to liquidation or whether the Trust intends to have future business operations.
If the Trust made similar assumptions and allocations for financial reporting
purposes and the Trust was liquidated at December 31, 1997 for an amount equal
to its net carrying value for financial reporting purposes, the capital accounts
of the Managing Trustee, Special Beneficiary, Class A Beneficiaries, and Class B
Beneficiaries would have reflected ending balances of $151,696, $1,251,493,
$7,904,516, and $5,508,430, respectively. See Note 6 for additional information
concerning the allocation of net income or loss for income tax reporting
purposes.
NET INCOME AND CASH DISTRIBUTIONS PER BENEFICIARY INTEREST
Net income and cash distributions per Class A Interest in 1997 are based
on 665,494 Class A Interests outstanding during the period January 1, 1997
through October 9, 1997, 582,657 Class A Interests outstanding during the period
October 10, 1997 through November 30, 1997 and 582,017 Class A Interests
outstanding during the period December 1, 1997 through December 31, 1997. Net
income and cash distributions per Class A Beneficiary Interest are based on
665,494 Class A Interests outstanding during each of the years ended December
31, 1996 and 1995. Net income and cash distributions per Class B Interest are
based on 1,000,961 Class B Interests outstanding during the period July 18, 1997
through December 31, 1997. For each of the aforementioned periods, net income
and cash distributions per Beneficiary Interest are computed after allocation of
the Managing Trustee's and Special Beneficiary's shares of net income and cash
distributions.
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1997. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1997 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-
-17-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
lease or being leased on a month-to-month basis. In the opinion of EFG, the
acquisition cost of the equipment did not exceed its fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------------- ------------ -------------- ----------------------------------
<S> <C> <C> <C>
Aircraft 0-60 $ 8,018,105 NV/WA
Computers and peripherals 0-12 4,210,804 AL/CA/CO/FL/GA/IL/IN/KS/LA/MA
Materials handling 0-33 4,167,304 MD/MI/MN/NC/NJ/NM/NY/OH
Communications 3-12 2,908,263 OK/OR/PA/SC/TN/TX/VA/WI/WV
AR/CA/FL/GA/IA/IL/IN/MI/NC/NY/OH
PA/TX/VA/WV
AL/AR/AZ/CA/CO/FL/GA/IA/ID/IL/IN
KS/KY/LA/MD/MI/MN/MO/MT/NC
ND/NE/NH/NM/NV/NY/OH/OK/OR
PA/SC/TN/TX/VA/VT/WA/WI/WV WY
General plant and warehouse 0 1,576,077 VA
Retail store fixtures 0-3 1,101,551 CO/FL/GA/LA/TX
Construction and mining 0-36 836,390 NV/VA
Manufacturing 0 449,902 IL/VA
Furniture and fixtures 10 284,019 PA
Tractors and heavy duty trucks 0-21 245,851 CO/FL/MI/VA
Trailers/intermodal containers 0-6 128,443 OH/VA
Photocopying 0 42,825 CT/IN
--------------
Total equipment cost 23,969,534
Accumulated depreciation (14,796,020)
--------------
Equipment, net of accumulated depreciation $ 9,173,514
--------------
--------------
</TABLE>
In certain cases, the cost of the Trust's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. The Trust and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Trust to further diversify its equipment portfolio by participating
in the ownership of selected assets, thereby reducing the general levels of risk
which could result from a concentration in any single equipment type, industry
or lessee. At December 31, 1997 the Trust's equipment portfolio included
equipment having a proportionate original cost of $13,229,034, representing
approximately 55% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately
$11,551,000 and a net book value of approximately $6,900,000 at December 31,
1997. (See Note 5.)
Generally, the costs associated with maintaining, insuring and operating
the Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust.
As equipment is sold to third parties, or otherwise disposed of, the Trust
will recognize a gain or loss equal to the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition. The ultimate realization of estimated residual value
in the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment
-18-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
upon the expiration of the primary lease terms. At December 31, 1997, the Trust
held equipment which had been fully depreciated for sale or re-lease with an
original cost of approximately $18,000. The Managing Trustee is actively seeking
the sale or re-lease of this equipment. In addition, the summary above also
includes equipment being leased on a month-to-month basis.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1997, 1996 and
1995, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equipment acquisition fees $ -- $ 36,673 $107,415
Offering costs 50,048 -- --
Equipment management fees 235,030 249,205 244,800
Administrative charges 65,196 42,123 21,000
Reimbursable operating expenses
due to third parties 207,741 98,758 100,358
-------- -------- --------
Total $558,015 $426,759 $473,573
-------- -------- --------
-------- -------- --------
</TABLE>
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG is compensated
by an amount equal to .28% of Equipment Base Price paid by the Trust. For
acquisition services resulting from reinvestment, EFG is compensated by an
amount equal to 3% of Equipment Base Price paid by the Trust. For management
services, EFG is compensated by an amount equal to the lesser of (i) 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Trust or (ii) fees which the Managing Trustee
reasonably believes to be competitive for similar services for similar
equipment. Both of these fees are subject to certain limitations defined in the
Trust Agreement (see Note 10 concerning proposed changes to the fees paid to EFG
and its affiliates). Compensation to EFG for services connected to the
remarketing of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG.
All equipment was purchased from EFG, one of its Affiliates or from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
December 31, 1997, the Trust was owed $350,009 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 1998.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership formed in 1995 and owned and controlled by certain principals of
EFG, owns 839 Class A Interests or less than 1% of the total outstanding Class A
Interests of the Trust. EFG owns a 49% limited partnership interest in ONC,
which it acquired in December 1996.
-19-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Refer to Note 8 regarding the purchase of Class B Interests by an
affiliate, Equis II Corporation and the change in ownership of the Managing
Trustee.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of installment notes of
$2,038,628 payable to banks and institutional lenders. The notes bear interest
rates ranging between 5.69% and 8.11%, except for one note which bears a
fluctuating interest rate based on LIBOR (5.72% at December 31, 1997) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trust has a balloon payment obligation of $282,421 at the expiration of the
primary lease term related to the Reno Aircraft. The carrying amount of notes
payable approximates fair value at December 31, 1997.
The annual maturities of the notes payable are as follows:
<TABLE>
<C> <S>
For the year ending December 31,1998 $1,284,439
1999 109,537
2000 118,459
2001 128,106
2002 398,087
----------
Total $2,038,628
----------
----------
</TABLE>
NOTE 6 - INCOME TAXES
The Trust is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Trust.
For financial statement purposes, the Trust allocates net income first, to
eliminate any Participant's negative capital account balance and second, 1% to
the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively
to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period. Net losses are allocated first, to eliminate
any positive capital account balance of the Managing Trustee, the Special
Beneficiary and the Class B Beneficiaries; second, to eliminate any positive
capital account balances of the Class A Beneficiaries; and third, any remainder
to the Managing Trustee. This convention differs from the income or loss
allocation requirements for income tax and Dissolution Event purposes as
delineated in the Trust Agreement. For income tax purposes, the Trust allocates
net income or net loss in accordance with the provisions of such agreement.
Pursuant to the Trust Agreement, upon dissolution of the Trust, the Managing
Trustee will be required to contribute to the Trust an amount equal to any
negative balance which may exist in the Managing Trustee's tax capital account.
At December 31, 1997, the Managing Trustee had a positive tax capital account
balance.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Net income $ 1,174,206 $ 807,840 $ 527,564
Tax depreciation in excess of
financial statement depreciation 766,944 (279,916) (830,733)
Tax gain in excess of book gain (loss) 185,325 619,935 865,755
Deferred rental income (10,275) 24,748 (40,850)
</TABLE>
-20-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other (115,487) 21,123 --
----------- ----------- ---------
Net income for federal income tax
reporting purposes $ 2,000,713 $ 1,193,730 $ 521,736
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The following is a reconciliation between participants' capital
reported for financial statement and federal income tax reporting purposes for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Participants' capital $14,816,135 $11,925,600
Add back selling commissions and organization
and offering costs 1,625,692 1,575,644
Financial statement distributions in excess of
tax distributions -- 18,518
Cumulative difference between federal income tax
and financial statement income (loss) (5,054,895) (5,881,402)
----------- -----------
Participants' capital for federal income tax
reporting purposes $11,386,932 $ 7,638,360
----------- -----------
----------- -----------
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs")
filed a class and derivative action, captioned Leonard Rosenblum, et al. v.
Equis Financial Group Limited Partnership, et al., in the United States District
Court for the Southern District of Florida (the "Court") on behalf of a proposed
class of investors in 28 equipment leasing programs sponsored by EFG, including
the Trust (collectively, the "Nominal Defendants"), against EFG and a number of
its affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On March 9, 1998, counsel for the Defendants and the Plaintiffs entered
into a Memorandum of Understanding setting forth the terms pursuant to which a
settlement of the Class Action Lawsuit is intended to be achieved and which,
among other things, is expected to reduce the burdens and expenses attendant to
continuing litigation. The Memorandum of Understanding represents a preliminary
step towards a comprehensive Stipulation of Settlement between the parties that
must be presented to and approved by the Court as a condition precedent to
effecting a settlement. The Memorandum of Understanding (i) prescribes a number
of conditions necessary to achieving a settlement, including providing the
beneficiaries (or partners, as applicable) of the Nominal Defendants with the
opportunity to vote on any settlement and (ii) contemplates various changes
that, if effected, would alter the future operations of the Nominal Defendants.
(See Note 10) To the extent that the
-21-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
parties agree upon a Stipulation of Settlement that is approved by the Court,
the complete terms thereof will be communicated to all of the beneficiaries (or
partners) of the Nominal Defendants to enable them to vote thereon.
There can be no assurance that the parties will agree on a Stipulation
of Settlement, or that it will be approved by the Court, or that the outcome of
the voting by the beneficiaries (or partners) of the Nominal Defendants,
including the Trust, will result in a settlement finally being effected or in
the Trust being included in any such settlement. The Managing Trustee and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that a Stipulation of Settlement will be agreed upon by the
parties and approved by the Court. In the absence of a Stipulation of Settlement
approved by the Court, the Defendants intend to defend vigorously against the
claims asserted in the Class Action Lawsuit. The Managing Trustee and its
affiliates cannot predict with any degree of certainty the ultimate outcome of
such litigation.
On July 27, 1995, EFG, on behalf of the Trust and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Trust, National Steel
Corporation ("National Steel"), under a certain Master Lease Agreement ("MLA")
for the lease of certain equipment. EFG is seeking the reimbursement by National
Steel of certain sales and/or use taxes paid to the State of Illinois and other
remedies provided by the MLA. On August 30, 1995, National Steel filed a Notice
of Removal which removed the case to the United States District Court, District
of Massachusetts. On September 7, 1995, National Steel filed its Answer to EFG's
Complaint along with Affirmative Defenses and Counterclaims, seeking declaratory
relief and alleging breach of contract, implied covenant of good faith and fair
dealing and specific performance. EFG filed its Answer to these counterclaims on
September 29, 1995. Though the parties have been discussing settlement with
respect to this matter for some time, to date, the negotiations have been
unsuccessful. Notwithstanding these discussions, EFG recently filed an Amended
and Supplemental Complaint alleging further default under the MLA and the matter
remains pending before the Court. The Trust has not experienced any material
losses as a result of this action.
NOTE 8 - ISSUANCE OF CLASS B INTERESTS
On October 26, 1996, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission (the "SEC") which subsequently
was sent to the Beneficiaries pursuant to Regulation 14A of Section 14 of the
Securities Exchange Act. The Solicitation Statement sought the consent of the
Beneficiaries to a proposed amendment (the "Amendment") to the Amended and
Restated Declaration of Trust (the "Trust Agreement") which would (i) amend the
provisions of the Trust Agreement governing the redemption of Beneficiary
Interests to permit the Trust to offer to redeem outstanding Beneficiary
Interests at such times, in such amounts, in such manner and at such prices as
the Managing Trustee might determine from time to time, in accordance with
applicable law; and (ii) add a provision to the Trust Agreement that would
permit the Trust to issue, at the discretion of the Managing Trustee and without
further consent or approval of the Beneficiaries, an additional class of
security with such designations, preferences and relative, participating,
optional or other special rights, powers and duties as the Managing Trustee
might affix. The funds obtained through the issuance of such a security would be
used by the Trust to (a) expand redemption opportunities for Beneficiaries
without using Trust funds which might otherwise be available for cash
distributions; and (b) make a special one-time cash distribution to the Class A
Beneficiaries.
Pursuant to the Trust Agreement, the adoption of the Amendment required the
consent of the Beneficiaries holding more than 50% in the aggregate of the Class
A Interests held by all Class A Beneficiaries. A majority of Class A Interests,
representing 369,960 Interests or 55.6% of all Class A Interests, voted in favor
of the Amendment; 69,792 Interests or 10.5% of all Class A Interests voted
against the Amendment; and 24,444 Interests or 3.7% of all Class A Interests
abstained. Approximately 69.8% of all Class A Interests participated in the
vote. Accordingly, the Trust Agreement was amended.
-22-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
On February 12, 1997, the Trust filed a Registration Statement on Form S-1
with the SEC, which became effective June 10, 1997. The Registration Statement
covered the issuance and sale of a new class of beneficiary interests in the
Trust (the "Class B Interests"). The characteristics of the Class B Interests,
associated risk factors and other matters of importance to the Beneficiaries and
purchasers of the Class B Interests were set forth in a Prospectus sent to the
Beneficiaries. On July 17, 1997, the offering closed and on July 18, 1997 the
Trust issued 1,000,961 Class B Interests at $5.00 per interest, thereby
generating $5,004,805 in aggregate Class B capital contributions. Class A
Beneficiaries purchased 3,588 Class B Interests, generating $17,940 of such
aggregate capital contributions, and the Special Beneficiary, EFG, purchased
997,373 Class B Interests, generating $4,986,865 of such aggregate capital
contributions. The Trust incurred offering costs in the amount of $50,048 and
professional service costs of $62,170 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions.
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $979,449, to Class A Beneficiaries on August 15, 1997. See Note 9
regarding the redemption of Class A Interests.
NOTE 9 - REDEMPTION OF CLASS A INTERESTS
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust by filing a Form
13E-4, Issuer Tender Offer Statement, with the SEC and distributing to the Class
A Beneficiaries information (the "Tender Documents") concerning the offer. On
October 10, 1997, the Trust used $785,295 of the net proceeds realized from the
issuance of the Class B Interests to purchase 82,837 of the Class A Interests
tendered as a result of the offer. The Tender Documents describe, among other
things, the terms of the offer and the purchase price per Class A Interest being
offered by the Trust. On December 1, 1997, the Trust used an additional $6,080
of such proceeds to purchase 640 of the remaining Class A Interests. The Trust
intends to continue to purchase additional outstanding Class A Interests through
future offers to purchase during the Initial Redemption Period (two years
following the close of the Class B offering which occurred on July 17,1997).
These purchases will be funded by the remaining net proceeds realized from the
issuance of the Class B Interests less the portion thereof used to pay a special
distribution to the Class A Geneficiaries and to redeem Class A Interests. These
funds are reserved for future purchases of Class A Interests pursuant to the
Trust Agreement and are classified as Restricted Cash on the Trust's Statement
of Financial Position at December 31, 1997 (see also Note 10 to the accompanying
financial statements).
NOTE 10 - SUBSEQUENT EVENT
On March 11, 1998, the Trust filed a Solicitation Statement with the
United States Securities and Exchange Commission in connection with the
solicitation by the Trust of the consent of the Beneficiaries to a proposed
amendment (the "Amendment") to the Second Amended and Restated Declaration of
Trust (the "Trust Agreement"). The Solicitation Statement is subject to
regulatory review and comment and thereafter is expected to be distributed to
all of the Beneficiaries of the Trust.
Subject to attaining a settlement in the Class Action Lawsuit described
in Note 8 herein, the Amendment, if approved, would modify the Trust Agreement
in the following principal respects: (i) the Trust would pay a Special
-23-
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Cash Distribution to the Class A Beneficiaries of record as of September 1,
1997, or to their successors or assigns, totaling $500,709 (or approximately
$0.75 per Class A Interest) using a portion of the Class B capital contributions
that otherwise would be distributed as a Class B Capital Distribution to Equis
II Corporation, the parent company of the Managing Trustee and an affiliate of
EFG; (ii) Equis II Corporation will be required to reduce its prospective Class
B Capital Distributions by $1,126,596 and treat such amount as a long-term
equity investment in the Trust; (iii) certain voting restrictions will be placed
upon the Class B Interests owned by Equis II Corporation; (iv) the Trust's
reinvestment period, which originally expired on September 8, 1996, will be
reinstated until December 31, 2001; and (v) acquisition fees paid to EFG in
connection with reinvestment assets acquired after the Amendment date will be
reduced from a maximum of 3% to 1% and management fees earned in connection with
such assets will be reduced from a maximum of 5% to 2%.
The proposed Amendment also provides for other modifications to the Trust
Agreement which are not contingent upon reaching a settlement in the Class
Action Lawsuit, principally as follows: (i) the Trust's stated investment
policies and objectives will be broadened to permit the Trust to invest in
assets other than leased equipment, and (ii) the Trust's financing provisions
will be modified to eliminate any cap on the amount of aggregate Trust
indebtedness and permit the Trust to use cross-collateralized and other recourse
debt structures, thereby enabling the Trust to secure financing at interest
rates that, generally, would be lower than under current borrowing arrangements.
The Solicitation Statement contains additional information concerning the
proposed Amendment and associated risk factors. The Amendment will be adopted or
rejected based upon the majority of the Class A Interests actually voted
(including 839 Class A Interests owned by an affiliate of EFG). Accordingly, the
Amendment will be adopted no matter how few Class A Interests are actually
voted, provided a majority of those Interests are voted in favor of the
Amendment. Although Equis II Corporation has voting control of the Trust, it
will vote its Class B Interests in the same proportion in which the majority of
the Class A Interests are voted.
-24-
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AFG Investment Trust B
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1997, 1996 and 1995
The Trust classifies all rents from leasing equipment as lease revenue.
Upon expiration of the primary lease terms, equipment may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Trust for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Rents earned prior to disposal of
equipment, net of interest charges $1,777,768 $2,609,305 $2,619,020
Sale proceeds including assumption of
debt and interest, realized upon
disposition of equipment 348,792 2,025,783 3,859,698
---------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds 2,126,560 4,635,088 6,478,718
Original acquisition cost of
equipment disposed 1,500,126 4,311,864 5,576,700
---------- ---------- ----------
Excess of total cash generated to
cost of equipment disposed $ 626,434 $ 323,224 $ 902,018
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-25-
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
----------- ------------ ------------
<S> <C> <C> <C>
Net income $ 1,097,647 $ 76,559 $ 1,174,206
Add:
Depreciation and amortization 3,862,631 -- 3,862,631
Management fees 235,030 -- 235,030
Book value of disposed equipment -- 272,233 272,233
Less:
Principal reduction of notes
payable (2,314,183) -- (2,314,183)
----------- ----------- -----------
Cash from operations, sales and
refinancings 2,881,125 348,792 3,229,917
Less:
Management fees (235,030) -- (235,030)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings 2,646,095 348,792 2,994,887
Other sources and uses of cash:
Cash at beginning of year 1,247,218 1,581,875 2,829,093
Proceeds from capital contributions 5,004,805 -- 5,004,805
Payment of offering costs (50,048) -- (50,048)
Purchase of Treasury Interests (791,375) -- (791,375)
Restricted cash (3,121,763) -- (3,121,763)
Net change in receivables and
accruals (560,682) -- (560,682)
Less:
Cash distributions paid (2,411,675) -- (2,411,675)
----------- ----------- -----------
Cash at end of year $ 1,962,575 $ 1,930,667 $ 3,893,242
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-26-
<PAGE>
AFG Investment Trust B
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED
AND RESTATED DECLARATION OF TRUST
December 31, 1997
For the year ended December 31, 1997, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses $ 263,484
Offering costs $ 50,048
</TABLE>
-27-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AFG Investment Trust B of our report dated March 11, 1998, included in
the 1997 Annual Report to the Participants of AFG Investment Trust B.
ERNST & YOUNG LLP
Boston, Massachusetts
March 11, 1998
<PAGE>
I hereby certify that I have compared this copy
with the original and that it is a true and
correct copy.
Signed: /s/ Wendy Sievert
-----------------
Name: WENDY SIEVERT
-----------------------
Title: Account Specialist
------------------
Date: 4/28/94
------------------
EQUIPMENT LEASE AGREEMENT
This Lease Agreement is made the 22nd day of December, 1993 between
GENERAL ELECTRIC CAPITAL COMPUTER LEASING CORPORATION, a California corporation
with its principal office at 2000 Powell Street, Suite 200, Emeryville, CA 94608
("Lessor") and MONTGOMERY WARD & CO., INCORPORATED, an Illinois corporation with
its principal office at One Montgomery Ward Plaza, Chicago, IL 60671 ("Lessee").
The parties agree as follows:
1. Lease. Lessor agrees to lease to Lessee, and Lessee agrees to lease
from Lessor, the equipment and/or features (the "Equipment") described in
Equipment Schedule(s) attached hereto. Any reference to "Lease" shall mean this
Lease Agreement, the Equipment Schedule(s) and any amendments, addenda or riders
thereto.
2. Term of Lease. The term of this Lease as to each item of Equipment
designated on any Equipment Schedule shall commence on the date specified in the
Equipment Schedule for such item of Equipment (the "Commencement Date"),
provided, however, that if the date of acceptance of the Equipment by Lessee is
after the date specified in the Equipment Schedule, the Commencement Date shall
be the date of acceptance by Lessee of the Equipment, and said term shall
continue for an initial period ending that number of months from the
Commencement Date as is specified in the applicable Equipment Schedule (the
"Initial Term"). Lessor's obligation to lease Equipment to Lessee is subject to
the Commencement Date being prior to the "Cut-off Date" specified in the
applicable Equipment Schedule. The term of this Lease for all such Equipment may
be extended, by mutual agreement of the parties, for successive periods upon
such terms as shall be agreed between the parties. Notwithstanding the
foregoing, if at the end of any Initial Term or extension thereof, the parties
have failed to reach an agreement with regard to the extension or termination of
this Lease, then until an agreement is reached, this Lease shall continue on a
month to month basis.
3. Rental.
(a) The monthly rental ("Monthly Rental") for each item of
Equipment payable hereunder is as set forth in the applicable Equipment
Schedule. Rental for each item of Equipment shall begin to accrue on the
Commencement Date. Lessor shall issue to Lessee one (1) invoice for the total
Monthly Rental not later than thirty (30) days prior to the date on which the
Monthly Rental shall be due and payable, and failure of Lessor to so invoice
Lessee shall relieve Lessee from liability for late payment of the Monthly
Rental to the extent attributable to late invoicing.
(b) In addition to the Monthly Rental set forth in the Equipment
Schedule(s), Lessee shall pay all taxes which are
<PAGE>
levied or based on the Monthly Rental and the Equipment or its original
acquisition from the manufacturer use, lease, operation, control or value,
excluding taxes based on Lessor's income.
4. Quiet Possession, Use and Discontinuance of Equipment.
(a) Neither Lessor nor any party acting through or by Lessor shall
deny Lessee the uninterrupted right to enjoy the quiet possession and exclusive
use of the Equipment while the applicable Equipment Schedule is in force,
without limitation as to time, provided Lessee shall not be in default
hereunder.
(b) Except in the event of an assignment or sublease permitted
under Section 5(b) herein, Lessee will at all times keep the Equipment in its
sole possession and control. The Equipment shall not be moved from the Equipment
Location without written notice to Lessor within thirty (30) days prior to
moving the Equipment outside the UCC filing jurisdiction, unless circumstances
reasonably prevent such notice.
(c) Lessee may, at its expense, make alterations in or add
attachments to the Equipment, provided such alterations or attachments are
readily removable and do not subject the Equipment to the lien or security
interest of a third party. All such alterations and attachments shall be and
become the property of Lessor or, at the option of Lessee, shall be removed by
Lessee and the Equipment restored, at Lessee's expense, to its original
condition, reasonable wear and tear excepted, not later than the termination of
this Lease as to the applicable Equipment Schedule. Upon such removal and
restoration, the alteration and/or attachment which was made by Lessee shall
become the property of Lessee. The manufacturer of the Equipment may incorporate
engineering changes or make temporary alterations to the Equipment upon the
request of Lessee.
(d) Lessee shall, during the term of this Lease either maintain the
Equipment internally or, at its expense, have each item of Equipment maintained
by either the manufacturer of the Equipment or by another company selected by
Lessee and said maintenance may be accomplished, at Lessee's election, by the
use of either a maintenance contract or a "time and materials" arrangement.
(e) At the termination of this Lease as to the applicable Equipment
Schedule, Lessee shall, at Lessee's expense, return to Lessor in good repair and
working order, normal wear and tear excepted and, unless the Equipment has been
maintained by the manufacturer or its authorized representative during the
entire term of this Lease, will qualify for maintenance by its manufacturer, the
Equipment or, if the Equipment Schedule so provides, equipment of identical
make, same or later model, and equal or greater value as the Equipment. The
Equipment shall be
2
<PAGE>
returned to a location designated by Lessor within 500 miles of the site of
original installation. Any dismantling, packaging, transportation and
transportation insurance and shipping charges shall be borne by Lessee. This
Lease shall continue in full force and effect until the Equipment is returned to
Lessor in the condition required by this Section 4 [illegible] Lessor receives
the purchase price for the Equipment at end of Lease.
5. Ownership and Inspection.
(a) Lessee shall have no interest in the Equipment other than the
rights acquired as a lessee hereunder and the Equipment shall remain personalty
regardless of the manner in which it may be installed or attached.
(b) Lessee shall keep the Equipment free and clear of all liens and
encumbrances except liens or encumbrances arising through the actions or
omissions of Lessor. However, Lessee may at any time, assign this Lease or any
of its rights hereunder or sublease the Equipment, at its expense and upon prior
written consent of Lessor, such consent not to be unreasonably withheld;
provided that, no such consent shall be required for assignment to a parent,
subsidiary or affiliated corporation of Lessee. Upon any assignment or sublease,
Lessee shall execute and deliver to Lessor, or any assignee of Lessor, such
documentation as Lessor or such assignee may reasonably require, including but
not limited to documentation to evidence and put third parties on notice of
Lessor's or its assignee's interest in the Equipment. No assignment or sublease
shall relieve Lessee of any of its obligations hereunder.
(c) Upon prior notice, Lessor shall have reasonable access to the
Equipment during normal business hours for the purpose of inspection and for any
other purpose contemplated in this Lease.
6. No Warranties by Lessor. LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT
BEING THE MANUFACTURER OF THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE
SELLER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED,
AS TO ANY MATTER WHATSOEVER INCLUDING THE EQUIPMENT'S MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL OR
WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all
such risks, as between Lessor and Lessee, are to be borne by Lessee. Lessee
agrees to look solely to the manufacturer or to suppliers of the Equipment for
any and all warranty claims and any and all warranties made by the manufacturer
or the supplier of Lessor are hereby assigned to Lessee, to the extent permitted
by the manufacturer or the supplier, for the term of the applicable Equipment
Schedule. Lessor shall not be responsible for any direct, indirect, special or
consequential loss or damage of Lessee resulting from the operation or use of
the Equipment. Lessor hereby assigns to Lessee for the term of this Agreement
all warranties made with regard to the Equipment by a manufacturer or vendor.
With
3
<PAGE>
respect to warranties which are not assignable, Lessor agrees to take such
actions as are necessary to enforce such warranties for Lessee's benefit and at
Lessee's expense.
7. Risk of Loss, Indemnity and Insurance.
(a) From the date the Equipment is delivered to Lessee until it is
returned to Lessor, Lessee relieves Lessor of responsibility for all risks of
physical damage to or loss or destruction of the Equipment, howsoever caused.
(b) If any item of Equipment is rendered unusable as a result of
any physical damage to, or loss or destruction of, the Equipment, or title
thereto shall be taken by any governmental authority under power of eminent
domain or otherwise, Lessee shall give to Lessor immediate notice thereof and
this Lease shall continue in full force and effect without any abatement of
rental. Lessee shall determine, within thirty (30) days after the date of
occurrence of any such damage or destruction, whether such item of Equipment can
be repaired. In the event Lessee determines that the item of Equipment cannot be
repaired or such item of Equipment was lost, destroyed or title thereto taken,
Lessee shall at its option either (i) pay to Lessor the Casualty Amount set
forth on the applicable Equipment Schedule for said item of Equipment, or (ii)
replace such item of Equipment with equipment of identical make, same or later
model, and equal or greater value as the Equipment and convey title to such
replacement equipment to Lessor free and clear of all liens, claims, equities
and encumbrances and this Lease shall continue in full force and effect as
though such damage, loss, destruction or taking of title had not occurred,
except that the replacement equipment shall become Equipment for purposes of
this Lease in lieu of the replaced Equipment. In the event Lessee determines
that such item of Equipment can be repaired, Lessee shall cause such item of
Equipment to be promptly repaired.
(c) Except for the negligence or willful misconduct of Lessor,
Lessee shall indemnify, defend and hold harmless Lessor against any and all
actions, claims, demands, suits, losses, costs, damages, judgments and expense
incurred or to be incurred arising out of the lease, ownership, operation,
possession or use of the Equipment, including without limitation the death of or
injury to any person or damage to any property which resulted or is alleged to
have resulted from the Equipment or its use; provided that, Lessor shall give
Lessee prompt notice of any such action, claim, demand or suit. Lessor shall
cooperate with Lessee, as reasonably requested, in such defense. Lessor may,
with Lessee's consent, settle any such actions, claims, demands and suits.
4
<PAGE>
(d) During the term of this Lease as to any Equipment Schedule,
Lessee shall, at its expense, furnish Lessor with evidence of self insurance.
8. Tax Indemnity. (a) This Lease has been entered into on the
assumption that Lessor shall be entitled to certain deductions, credits and
other tax benefits as are provided by the Internal Revenue Code of 1986 and
regulations adopted thereunder as in effect on the date hereof (the "Code").
(b) Lessee agrees that it shall not take any action which under the
Code would cause any item of Equipment to cease to be eligible for any
deduction, credit or other tax benefits to which Lessor would be entitled.
(c) If any action by Lessee should cause a disallowance or
recapture of any deduction credits or other tax benefits causing a reduction in
Lessor's after-tax economic return resulting from ownership and lease of the
Equipment hereunder, then Lessee's lease payments shall be increased by an
amount sufficient to provide Lessor with the same net after-tax economic yield
that would have realized had such disallowance or recapture not occurred.
9. Events of Default and Remedies. (a) The occurrence of any one of the
following shall constitute an Event of Default hereunder:
(i) Lessee fails to pay any installment of rent when due and
such failure shall continue uncured for twenty (20) days after
Lessee receives written notice thereof from Lessor.
(ii) Lessee shall fail to observe or perform any of the
other obligations required to be observed or performed hereunder
and such failure shall continue uncured for thirty (30) days after
Lessee receives written notice thereof from Lessor, or for such
additional time as may reasonably be needed if such default is not
curable within thirty (30) days.
(iii) Lessee ceases doing business as a going concern, admits
in writing its inability to pay its debts as they become due, files
a voluntary petition in bankruptcy, consents to or acquiesces in
the appointment of a custodian, trustee, receiver, or liquidator of
it or of all or any substantial part of its assets or properties,
or if an order for relief is entered against Lessee under the
federal bankruptcy laws.
5
<PAGE>
(iv) Within sixty (60) days after the commencement of any
proceedings against Lessee seeking reorganization, arrangement,
readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such proceedings
shall not have been dismissed, or if within sixty (60) days after
the appointment without Lessee's consent or acquiescence of any
custodian, trustee, receiver or liquidator of it or of all or any
substantial part of its assets and properties, such appointment
shall not be vacated.
(b) Upon the occurrence of an Event of Default by Lessee, Lessor
may at its option do any or all of the following: (i) by notice to Lessee
terminate this Lease as to the subject Equipment Schedule; (ii) whether this
Lease is terminated as to any or all Equipment Schedules, under process of law
and upon notice to Lessee take possession of any or all of the Equipment listed
on any or all Equipment Schedules, wherever situated, and for such purpose enter
upon any premises or Lessor may cause Lessee to return said Equipment to Lessor
as provided in this Lease; (iii) recover from Lessee, as liquidated damages for
loss of a bargain and not as a penalty, an amount equal to the present value of
all monies to be paid by Lessee pursuant to the Equipment Schedule for the
subject Equipment during the remaining Initial Term or any successive period
then in effect, discounted at the rate of like-term U.S. Treasury bills; (iv)
sell, dispose of or lease any Equipment as Lessor in its sole discretion may
determine (and Lessor shall act in a commercially reasonable manner in the sale,
disposal or lease of the Equipment). In any event, Lessee shall, without further
demand, pay to Lessor an amount equal to all sums due and payable for all
periods up to and including the date on which Lessor has declared this Lease to
be in default.
(c) In the event that Lessee shall have paid to Lessor the
liquidated damages and other amounts referred to in the preceding paragraph,
Lessor hereby agrees to pay to Lessee, promptly after receipt thereof, either
(i) if Lessor releases the Equipment, all rentals or proceeds received from the
reletting of the Equipment during the balance of the Initial Term or any
successive period then in effect discounted at the rate of like-term U.S.
Treasury bills (after deduction of all expenses incurred by Lessor), or (ii) if
Lessor sells the Equipment, all proceeds received from the sale (after deduction
of the estimated residual value of the Equipment as of the end of the Initial
Term or any successive period then in effect and of all reasonable expenses
incurred by Lessor). Lessee hereby agrees that, in any event, it will be liable
for any deficiency after any sale, lease or other disposition by Lessor. The
rights afforded Lessor hereunder shall not be deemed to be exclusive, but shall
be in addition to any rights or remedies provided by law.
6
<PAGE>
10. Assignment. (a) Lessor may transfer or assign all or any part of
Lessor's right, title and interest in, under or to the Equipment and this Lease
or any Equipment Schedule, and any or all sums due or to become due pursuant to
any of the above, to any third party (the "Assignee"), but only with prior
written notice to Lessee, and any attempted assignment by Lessor without prior
written notice to Lessee shall be null and void. Lessee agrees that upon receipt
of notice of an assignment, Lessee shall perform all of its obligations
hereunder for the benefit of Assignee and, if so directed, shall pay all sums
due or to become due hereunder directly to Assignee or to any other party
designated by Assignee in writing; provided that, such assignment shall not
relieve Lessor of its obligations for the performance of all of the terms and
conditions of this Lease Agreement.
(b) Upon acceptance of Lessor's request for any such transfer or
assignment, Lessee agrees to promptly execute and deliver to Lessor such
documentation as Assignee may reasonably require to secure and/or complete such
transfer or assignment.
11. Fair Market Value and Lease Renewal Option Equipment Purchase Option.
(a) Lessee shall have the right to renew this Lease as to any or all of the
Equipment on an Equipment Schedule at the fair market value renewal rate or to
purchase any or all of the Equipment on an Equipment Schedule at the fair market
value purchase rate, at the expiration of the Initial Term of said Equipment
Schedule or any extensions thereto.
(b) If Lessee desires to exercise either the renewal or purchase
option, it shall advise Lessor at ninety (90) days prior to the expiration of
the Initial Term or any extension thereto of its desire to establish the
applicable fair market value rate ("FMV"). FMV shall be deemed to be the rental
or sale amount at which a lessee under no compulsion to lease or buy, would
lease or buy the Equipment at retail from a lessor under no compulsion to lease
or sell, each as the case may be. If Lessee desires to exercise either the
renewal or purchase option, it shall advise Lessor at least ninety (90) days
prior to the expiration of the Initial Term or any extension thereto of its
desire to establish the applicable FMV. Lessee and Lessor shall have ten (10)
from the date of such notice to mutually agree to the FMV in accordance with
subsection 11(c) below. If Lessee and Lessor fail to agree to the FMV within ten
(10) days, then the appraisal process shall be commenced and concluded within
the following fifteen (15) day period in accordance with subsection 11(c) below.
Lessee shall not be obligated to renew the Lease or to purchase the Equipment by
virtue of requesting the FMV appraisals. Lessee shall have the right to exercise
the Lease renewal option or the Equipment purchase option by advising Lessor in
writing of its intent to do so at least sixty (60) days prior to the expiration
of the Initial Term of the applicable
7
<PAGE>
Equipment Schedule or any extensions thereto or sixty (60) days after the FMV is
established, whichever is later.
(c) The FMV shall be determined by mutual agreement of the parties.
In the absence of such an agreement, two independent and unaffiliated
appraisers, one selected by Lessee and one selected by Lessor shall determine
the FMV by taking the simple average appraised value of the two FMV appraisal
amounts. However, in the event that the two appraisal amounts differ by
twenty-five percent (25%) or more, a third unaffiliated appraiser shall be
selected by mutual agreement of Lessee and Lessor. The average of the two of the
three appraisals received which is arithmetically closest shall then be the FMV
for Lease renewal or Equipment purchase, whichever is applicable.
(d) The parties agree to use their best efforts to expedite the
procedure of determining the FMV so that the timeframes set forth in this
Section can be met.
(e) In the event Lessee elects to purchase the Equipment, Lessor
shall deliver to Lessee good and marketable title to the Equipment, free and
clear of all liens, encumbrances, rights, title and interests of others, arising
out of Lessor's actions.
12. Alterations, Additions and Attachments.
(a) Subject to Subsection (b) below, Lessor and Lessee hereby agree
that as soon as possible after receipt of a written request from Lessee, Lessor
shall acquire and lease to Lessee any alteration, addition or attachment
(hereinafter collectively referred to as "Addition") to the Equipment so
requested by Lessee.
(b) The obligations of Lessor hereunder are subject to the
following conditions:
(i) The cost of the Addition shall be acceptable
to Lessor and Lessee;
(ii) Lessor and Lessee shall have executed
mutually acceptable documentation relating to
the lease of the Addition;
(iii) Lessee shall pay all costs and expenses
incurred in connection with shipping and
installation of said Addition, including but
not limited to all transportation,
installation and insurance charges;
(iv) The lease of the Addition shall be for a term
which is coterminous with the Initial Term
8
<PAGE>
set forth in the Equipment Schedule at a monthly rental
agreed upon between the parties.
(c) Nothing herein contained shall be construed to prevent Lessee
from leasing, financing or other acquiring, any Addition from any source other
than Lessor, provided such Addition is readily removable and does not subject
the Equipment to the lien or security interest of a third party. Lessee shall
not install a non-readily removable Addition without the consent of Lessor,
which consent shall not be unreasonably withheld.
13. Miscellaneous.
(a) Neither this Lease, any Equipment Schedule nor any consent or
approval provided for herein shall be binding upon either party until signed by
a duly authorized officer of each party. This Lease shall be deemed to have been
made in the State of Illinois and shall be governed in all respects by the laws
of such State.
(b) This Lease and each Equipment Schedule constitute the entire
agreement and understanding of the parties with respect to the lease of the
Equipment listed on each Equipment Schedule (notwithstanding any contrary
provision contained in any instrument submitted by Lessee or Lessor), supersede
any and all prior agreements and understandings relating to the subject matter
hereof, and may not be changed orally but only by an agreement in writing signed
by both parties.
(c) All notices hereunder shall be in writing and shall be
delivered in person or sent by registered or certified mail, postage prepaid, or
by overnight courier, if to Lessor to the address appearing on the first page
hereof to the attention of VP-Operations, and if to Lessee, to the attention of
Vice President - MIS, at the address appearing on the first page hereof or to
such other address as either party shall have designated by proper notice.
(d) This Lease shall be binding upon and inure to the benefit of
Lessor and Lessee and their respective successors and assigns (including any
subsequent assignee of Assignee).
(e) No representation or statement made by any representative of
either party not contained herein shall be binding upon such party. No provision
of this Lease or any Equipment Schedule which may be deemed unenforceable shall
in any way invalidate any other provision or provisions hereof, all of which
shall remain in full force and effect. Neither any failure nor any delay on the
part of either party in exercising any of
9
<PAGE>
its rights hereunder shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise or the exercise
of any other right hereunder.
(f) No waiver of any of the terms and conditions hereof shall be
effective unless in writing and signed by the party against whom such waiver is
sought to be enforced. Any waiver of the terms hereof shall be effective only in
the specific instance and for the specific purpose given.
(g) Lessor is hereby authorized by Lessee to cause this Lease or
other instruments, including Uniform Commercial Code Financing Statements, to be
filed or recorded for the purposes of evidencing and putting third parties on
notice of Lessor's or Assignee's interest in the Equipment.
(h) In the event of any conflict between the terms and conditions
of this Lease Agreement and the terms and conditions of any Equipment Schedule
or any amendment, addendum or rider thereto, the terms and conditions of such
Equipment Schedule, amendment, addendum or rider shall prevail.
(i) Each Lease is a net lease and Lessee's obligations to pay
Monthly Rent and other amounts due shall be absolute and unconditional. This
obligation of Lessee shall not be affected by or subject to any abatement,
reduction, set-off, defense, counterclaim, interruption, deferment or recoupment
of any kind whatsoever, including without limitation Lessor's actual or alleged
gross negligence or willful misconduct, frustration of contract, or the loss of
possession or destruction of all or any part of the Equipment. It is the intent
of the parties that Monthly Rent and other amounts due shall continue to be
payable in all events in the manner and at the times set forth in the Lease.
Nothing contained herein shall impair Lessee's right to maintain an independent
action at law or in equity.
(j) Any payments of Monthly Rental or other amounts payable by
Lessee hereunder that become past due shall bear interest from the occurrence of
an Event of Default until paid at the prime rate as published in the Wall Street
Journal plus two percent (2%); provided that, no interest shall be due and
payable until the occurrence of a second Event of Default.
10
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be
executed by their duly authorized representatives on the dates indicated below.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL MONTGOMERY WARD & CO.,
COMPUTER LEASING CORPORATION INCORPORATED
By: /s/ David J. Lidstone By: /s/ Douglas V. Gathany
------------------------- ----------------------------
Title: VP and General Counsel Title: Senior Assistant Treasurer
---------------------- -------------------------
Print Name: David J. Lidstone Print Name: Douglas V. Gathany
----------------- --------------------
Date: 12/21/93 Date: 12/27/93
---------------------- --------------------------
11
<PAGE>
EQUIPMENT SCHEDULE
EQUIPMENT
Manufacturer Serial No. Type Quantity Rental
- ------------ ---------- ---- -------- ------
Date of Commencement: 19
------------------------------ -----------, ---
Initial Term: months
-----------------------------
Casualty Amount: $
-------------------------
Additional Terms: -----------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,015,005
<SECURITIES> 0
<RECEIVABLES> 1,025,638
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,040,643
<PP&E> 23,969,534
<DEPRECIATION> 14,796,020
<TOTAL-ASSETS> 17,214,157
<CURRENT-LIABILITIES> 359,394
<BONDS> 2,038,628
0
0
<COMMON> 0
<OTHER-SE> 14,816,135
<TOTAL-LIABILITY-AND-EQUITY> 17,214,157
<SALES> 0
<TOTAL-REVENUES> 5,741,393
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,370,598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196,589
<INCOME-PRETAX> 1,174,206
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,174,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,174,206
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
