<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-21390
AFG Investment Trust B
(Exact name of registrant as specified in its charter)
Delaware 04-3157230
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [_] No [_]
<PAGE>
AFG INVESTMENT TRUST B
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 2000 and December 31, 1999............................... 3
Statement of Operations
for the three and nine months ended September 30, 2000 and 1999........... 4
Statement of Changes in Participants' Capital
for the nine months ended September 30, 2000.............................. 5
Statement of Cash Flows
for the nine months ended September 30, 2000 and 1999..................... 6
Notes to the Financial Statements........................................... 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 11-15
PART II. OTHER INFORMATION:
Items 1-6........................................................................... 16
</TABLE>
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF FINANCIAL POSITION
September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................. $ 5,396,912 $ 10,193,277
Marketable securities..................................................... 73,500 108,544
Rents receivable.......................................................... 14,939 635
Accounts receivable--affiliate............................................ 35,952 112,228
Accounts receivable--other................................................ 45,333 -
Interest receivable....................................................... 2,161 3,681
Note receivable........................................................... 50,500 -
Investment in EFG/Kirkwood................................................ 1,764,776 1,353,400
Equipment at cost, net of accumulated depreciation of $6,246,551 and
$6,686,836 at September 30, 2000 and December 31, 1999, respectively... 1,085,357 1,280,251
------------- -------------
Total assets.................................................... $ 8,469,430 $ 13,052,016
============= =============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable............................................................. $ 572,085 $ 656,454
Accrued interest.......................................................... 1,880 2,386
Accrued liabilities....................................................... 41,800 53,608
Accrued liabilities--affiliate............................................ 26,221 15,436
Deferred rental income.................................................... 10,982 42,050
Cash distributions payable to participants................................ - 5,300,000
------------- -------------
Total liabilities............................................... 652,968 6,069,934
------------- -------------
Participants' capital (deficit):
Managing Trustee....................................................... 2,774 (26,988)
Special Beneficiary.................................................... 22,884 (222,647)
Class A Beneficiary Interests (582,017 Interests; initial purchase
price of $25 each)................................................... 8,522,483 8,336,812
Class B Beneficiary Interests (1,000,961 Interests; initial purchase
price of $5 each).................................................... 59,696 (313,720)
Treasury Interests (83,477 Class A Interests at Cost).................. (791,375) (791,375)
------------- -------------
Total participants' capital..................................... 7,816,462 6,982,082
------------- -------------
Total liabilities and participants' capital..................... $ 8,469,430 $ 13,052,016
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF OPERATIONS
For the three and nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income:
Lease revenue........................... $ 238,160 $ 306,090 $ 801,568 $ 976,481
Interest income......................... 94,054 129,870 272,352 395,050
Gain on sale of equipment............... 16,000 20,414 36,124 494,717
Gain on sale of marketable securities... - - 21,520 -
Other income............................ 11,186 - 79,296 261,116
------------- ------------- ------------- -------------
Total income..................... 359,400 456,374 1,210,860 2,127,364
------------- ------------- ------------- -------------
Expenses:
Depreciation............................ 32,487 72,672 103,442 591,376
Interest expense........................ 11,424 12,433 35,182 37,934
Management fees - affiliates............ 15,967 18,045 51,212 51,651
Operating expenses - affiliate.......... 73,407 118,002 182,106 488,434
------------- ------------- ------------- -------------
Total expenses................... 133,285 221,152 371,942 1,169,395
------------- ------------- ------------- -------------
Net income................................. $ 226,115 $ 235,222 $ 838,918 $ 957,969
============= ============= ============= =============
Net income
per Class A Beneficiary Interest........ $ 0.27 $ 0.25 $ 0.33 $ 0.98
============= ============= ============= =============
per Class B Beneficiary Interest........ $ 0.05 $ 0.07 $ 0.37 $ 0.28
============= ============= ============= =============
Cash distributions declared
per Class A Beneficiary Interest........ $ - $ 0.41 $ - $ 2.04
============= ============= ============= =============
per Class B Beneficiary Interest........ $ - $ 0.12 $ - $ 0.36
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
For the nine months ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Managing Special Class A Class B
Trustee Beneficiary Beneficiaries Beneficiaries Treasury
Amount Amount Interests Amount Interests Amount Interests Total
------ ------ --------- ------ --------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999...... $ (26,988) $ (222,647) 582,017 $8,336,812 1,000,961 $ (313,720) $ (791,375) $6,982,022
Net income...................... 29,807 245,661 - 190,248 - 373,202 - 838,918
Unrealized gain(loss) on
marketable securities/
marketable securities--
affiliate......... (45) (130) - (4,577) - 214 - (4,538)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income ............. 29,762 245,531 - 185,671 - 373,416 - 834,380
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2000..... $ 2,774 $ 22,884 582,017 $8,522,483 1,000,961 $ 59,696 $ (791,375) $7,816,462
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AFG INVESTMENT TRUST B
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C>
Cash flows provided by (used in) operating activities:
Net income.......................................................... $ 838,918 $ 957,969
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 103,442 591,376
Accretion of bond discount..................................... (1,626) -
Gain on sale of equipment...................................... (36,124) (494,717)
Gain on sale of marketable securities.......................... (21,520) -
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable............................................... (14,304) 233,968
Accounts receivable - affiliate................................ 76,276 45,691
Accounts receivable - other.................................... (45,333) -
Interest receivable............................................ 1,520 -
Increase (decrease) in:
Accrued interest............................................... (506) (580)
Accrued liabilities............................................ (11,808) (99,000)
Accrued liabilities - affiliate................................ 10,785 796
Deferred rental income......................................... (31,068) 1,422
Other liabilities.............................................. - (197,950)
------------- -------------
Net cash provided by operating activities................. 868,652 1,038,975
------------- -------------
Cash flows provided by (used in) investing activities:
Purchase of marketable securities................................ - (32,132)
Proceeds from equipment sales.................................... 127,576 4,721,955
Proceeds from sale of marketable securities...................... 53,652 -
Investment in EFG/Kirkwood....................................... (411,376) (1,212,000)
Note receivable................................................. (50,500) -
------------- -------------
Net cash (used in) provided by investing activities....... (280,648) 3,477,823
------------- -------------
Cash flows provided by (used in) financing activities:
Principal payments--notes payable................................ (84,369) (135,562)
Distributions paid............................................... (5,300,000) (1,654,038)
Restricted cash.................................................. - 1,627,304
------------- -------------
Net cash used in financing activities..................... (5,384,369) (162,296)
------------- -------------
Net (decrease) increase in cash and cash equivalents................ (4,796,365) 4,354,502
Cash and cash equivalents at beginning of period.................... 10,193,277 5,909,535
------------- -------------
Cash and cash equivalents at end of period.......................... $ 5,396,912 $ 10,264,037
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......................... $ 35,688 $ 38,514
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 1--Basis of Presentation
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X
of the Securities and Exchange Commission and are unaudited. As such, these
financial statements do not include all information and footnote disclosures
required under generally accepted accounting principles for complete financial
statements and, accordingly, the accompanying financial statements should be
read in conjunction with the footnotes presented in the 1999 Annual Report.
Except as disclosed herein, there have been no material changes to the
information presented in the footnotes to the 1999 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 2000 and December 31, 1999 and results of operations
for the three and nine months ended September 30, 2000 and 1999 have been made
and are reflected.
Note 2--Cash Equivalents and Marketable Securities
The Trust considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Marketable securities consist of
equity securities and debt securities that are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of participants' capital. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included
in interest income on the accompanying Statement of Operations.
The Trust recorded a net unrealized loss on available-for-sale securities
of $4,538 during the nine months ended September 30, 2000 that is included as a
separate component of participants' capital. At September 30, 2000, total debt
securities had an amortized cost of $72,996 and a fair value of $73,500. During
the nine months ended September 30, 2000, total comprehensive income amounted to
$834,380.
Note 3--Revenue Recognition
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of $488,320 are due as follows:
For the year ending September 30,
2001....................... $ 288,735
2002....................... 159,715
2003....................... 39,870
----------
Total...................... $ 488,320
==========
7
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 4--Equipment
The following is a summary of equipment owned by the Trust at September 30,
2000. Remaining Lease Term (Months), as used below, represents the number of
months remaining from September 30, 2000 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment,
Equipment Type (Months) at Cost
-------------- -------- -------
<S> <C> <C>
Communications.................... 3 $ 2,703,590
Materials handling................ 0-25 2,019,310
Aircraft.......................... 27 1,239,741
Computers and peripherals......... 10 1,051,435
Construction and mining........... 3 219,162
Trailers/intermodal containers.... 5 56,976
Manufacturing..................... 0 41,694
-------------
Total equipment cost 7,331,908
Accumulated depreciation 6,246,551
-------------
Equipment, net of
accumulated depreciation $ 1,085,357
=============
</TABLE>
At September 30, 2000, the Trust's equipment portfolio included equipment
having a proportionate original cost of $5,245,162, representing approximately
72% of total equipment cost.
Certain of the Trust's equipment and the related lease streams were used to
secure the Trust's term loans with third-party lenders. The preceding summary
includes leveraged equipment having an aggregate original cost of approximately
$1,240,000 and a net book value of $973,555 at September 30, 2000.
The summary above includes fully-depreciated equipment held for sale or re-
lease with a cost of $859,132. The Managing Trustee is actively seeking the sale
or re-lease of all equipment not on lease.
Note 5--Investment in EFG/Kirkwood
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and another affiliate formed EFG/Kirkwood Capital LLC ("EFG/Kirkwood")
for the purpose of acquiring preferred and common stock interests in Kirkwood
Associates Inc. ("KAI"). The Trusts purchased Class A Interests in EFG/Kirkwood
and the other affiliate purchased Class B Interests in EFG/Kirkwood. Generally,
the Class A Interest holders are entitled to certain preferred returns prior to
distribution payments to the Class B Interest holder. On May 1, 2000, the Trusts
exchanged their interests in KAI common stock and preferred stock for
corresponding pro-rata interests in Mountain Resort Holdings LLC ("Mountain
Resort"). Mountain Resort owns a ski resort, a local public utility, and land
which is held for development. The resort is located in Kirkwood, California and
is approximately 30 miles from South Lake Tahoe, Nevada. Subsequent to making
its investment in Mountain Resort, EFG/Kirkwood made a 50% investment in
Mountain Springs Resorts LLC, an entity formed for the purpose of acquiring an
ownership interest in a Colorado ski resort. The Trust's ownership interest in
EFG/Kirkwood had a cost of $1,764,776, including a 1% acquisition fee ($17,473)
paid to EFG. The Trust's investment in EFG/Kirkwood is accounted for on the
equity method.
8
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 6--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 nine month periods ended September 30, 2000
and 1999, which were paid or accrued by the Trust to EFG or its Affiliates, are
as follows:
<TABLE>
<CAPTION>
For the nine months
ended September 30,
2000 1999
---------- ----------
<S> <C> <C>
Management fees.......................................... $ 51,212 $ 51,651
Acquisition fees......................................... 4,810 12,321
Administrative charges................................... 82,027 101,338
Reimbursable operating expenses due to third parties..... 100,079 387,096
---------- ----------
Total............................................... $ 238,128 $ 552,406
========== ==========
</TABLE>
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
September 30, 2000, the Trust was owed $35,952 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in October 2000.
Note 7--Notes Payable
Notes payable at September 30, 2000 consisted of an installment note of
$572,085 payable to an institutional lender. The note bears a fluctuating
interest rate based on LIBOR (approximately 6.62% at September 30, 2000) plus a
margin. The installment note is non-recourse and is collateralized by the
Trust's interest in an aircraft leased to Reno Air, Inc. and the assignment of
the related lease payments. The Trust has a balloon payment obligation of
$282,421 at the expiration of the related lease term in January 2003. The
carrying amount of the note approximates fair value at September 30, 2000.
The annual maturities of the note are as follows:
For the year ending September 30,
2001........................ $ 121,614
2002........................ 133,242
2003........................ 317,229
----------
Total....................... $ 572,085
==========
Note 8--Guaranty Agreement
On March 8, 2000, the Trust and three affiliated trusts entered into a
guaranty agreement whereby the trusts, jointly and severally, have guaranteed
the payment obligations under a master lease agreement between Echelon
Commercial LLC, a newly-formed Delaware company that is controlled by Gary D.
Engle, President and Chief Executive Officer of EFG, as lessee, and Heller
Affordable Housing of Florida, Inc., and two other entities, as lessor
("Heller"). The lease payments of Echelon Commercial LLC to Heller are supported
by lease payments to Echelon Commercial LLC from various sub-lessees who are
parties to commercial and residential lease agreements under the master lease
agreement. The guarantee of lease payments by the Trust and the three affiliated
trusts is capped at
9
<PAGE>
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 8--Guaranty Agreement (continued)
a maximum of $34,500,000 excluding expenses that could result in the event that
Echelon Commercial LLC experiences a default under the terms of the master lease
agreement. An agreement among the four trusts provides that the Trust is
responsible for 11.58% of the current guaranteed amount, or $2,765,198 at
September 30, 2000. In consideration for its guarantee, the Trust will receive
an annualized fee equal to 4% of the average guarantee amount outstanding during
each quarterly period. Accrued but unpaid fees will accrue and compound interest
quarterly at an annualized interest rate of 7.5% until paid. The Trust will
receive minimum aggregate fees for its guarantee of not less than $115,800,
excluding interest. During the nine months ended September 30, 2000, the Trust
received an upfront cash fee of $57,900 and recognized $79,296 of income related
to this guaranty fee. The guaranty fee is reflected as Other Income on the
accompanying Statement of Operations for the nine months ended September 30,
2000.
10
<PAGE>
AFG INVESTMENT TRUST B
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this quarterly report of AFG Investment Trust B (the
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the collection of the Trust's contracted rents,
the realization of residual proceeds for the Trust's equipment, the performance
of the Trust's non-equipment investments, and future economic conditions.
Three and nine months ended September 30, 2000 compared to the three and nine
months ended September 30, 1999
Results of Operations
For the three and nine months ended September 30, 2000, the Trust
recognized lease revenue of $238,160 and $801,568, respectively, compared to
$306,090 and $976,481 for the same periods in 1999. The decrease in lease
revenue from 1999 to 2000 resulted primarily from lease term expirations and the
sale of equipment. The level of lease revenue to be recognized by the Trust in
the future may be impacted by future reinvestment; however, the extent of such
impact cannot be determined at this time.
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.
Interest income for the three and nine months ended September 30, 2000 was
$94,054 and $272,352, respectively, compared to $129,870 and $395,050 for the
same periods in 1999. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sales proceeds in short-term
instruments. Interest income in 1999 also included interest earned on proceeds
from the issuance of the Trust's Class B Interests in 1997. The amount of future
interest income is expected to fluctuate as a result of changing interest rates
and the amount of cash available for investment, among other factors. In
addition, the Trust made a distribution of $5,300,000 in January 2000, which
resulted in a reduction in cash available for investment.
During the three and nine months ended September 30, 2000, the Trust sold
fully-depreciated equipment and equipment having a net book value of $91,452 to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $16,000 and $36,124, respectively.
11
<PAGE>
During the three and nine months ended September 30, 1999, the Trust sold
equipment having a net book value of $28,337 and $4,227,238, respectively, to
existing lessees and third parties. These sales resulted in a net gain for
financial statement purposes of $20,414 and $494,717, respectively.
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.
During the nine months ended September 30, 2000, the Trust sold marketable
securities, having a book value of $32,132, resulting in a gain for financial
statement purposes, of $21,520.
On March 8, 2000, the Trust and three affiliated trusts entered into a
guaranty agreement whereby the trusts, jointly and severally, have guaranteed
the payment obligations under a master lease agreement between Echelon
Commercial LLC, as lessee, and Heller Affordable Housing of Florida, Inc., and
two other entities, as lessor ("Heller"). In consideration for its guarantee,
the Trust will receive an annualized fee equal to 4% of the average guarantee
amount outstanding during each quarterly period. Accrued but unpaid fees will
accrue and compound interest quarterly at an annualized interest rate of 7.5%
until paid. During the nine months ended September 30, 2000, the Trust received
an upfront cash fee of $57,900 and recognized $79,296 of income related to this
guaranty fee. The guaranty fee is reflected as Other Income on the accompanying
Statement of Operations for the nine months ended September 30, 2000.
The Trust received $261,116 in 1999 as a breakage fee from a third-party
seller in connection with a transaction for new investments that was canceled by
the seller during the first quarter of 1999. This amount is reflected as Other
Income on the accompanying Statement of Operations for the nine months ended
September 30, 1999.
Depreciation expense for the three and nine months ended September 30, 2000
was $32,487 and $103,442, respectively, compared to $72,672 and $591,376 for the
same periods in 1999. For financial reporting purposes, to the extent that an
asset is held on primary lease term, the Trust depreciates the difference
between (i) the cost of the asset and (ii) the estimated residual value of the
asset on a straight-line basis over such term. For purposes of this policy,
estimated residual values represent estimates of equipment values at the date of
primary lease expiration. To the extent that an asset is held beyond its primary
lease term, the Trust continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Interest expense was $11,424 and $35,182, respectively, for the three and
nine months ended September 30, 2000, compared to $12,433 and $37,934 for the
same periods in 1999. Interest expense will continue to decrease in future
periods as the principal balance of notes payable is reduced through the
application of rent receipts to outstanding debt.
12
<PAGE>
Management fees totaled $15,967 and $51,212, respectively, for the three
and nine months ended September 30, 2000, compared to $18,045 and $51,651,
respectively, for the same periods in 1999. 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. Management fees also include a 1% management
fee on non-equipment investments, excluding cash.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Operating expenses were $73,407 and
$182,106, respectively, for the three and nine months ended September 30, 2000
compared to $118,002 and $488,434 for the same periods in 1999. Operating
expenses were greater in 1999 primarily as a result of costs incurred of
approximately $191,000 related to the repair and remarketing of an aircraft
formerly leased to Alaska Airlines, Inc., in which the Trust held an interest.
In addition, operating expenses in 1999 included an adjustment for 1998 actual
administrative and third-party costs of approximately $46,000. 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. 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 $868,652 and $1,038,975 for the nine months ended September 30, 2000
and 1999, respectively. Future renewal, re-lease and equipment sale activities
will cause a decline in the Trust's lease revenue and corresponding sources of
operating cash. Expenses associated with rental activities, such as management
fees, also 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.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During the nine months ended September 30, 2000 and
1999, the Trust expended $411,376 and $1,212,000, respectively, for its
investment in EFG/Kirkwood (See Note 5 to the financial statements herein). The
Trust loaned $50,500 to a third party and expended $32,132 to purchase
marketable securities during the nine months ended September 30, 2000 and 1999,
respectively. During the nine months ended September 30, 2000, the Trust
realized net cash proceeds from equipment disposals of $127,576 compared to
$4,721,955 for the same period in 1999. Sales proceeds in 1999 include
$4,619,262 related to the Trust's 39.59% interest in a McDonnell Douglas MD-82
aircraft formerly leased to Alaska Airlines, Inc., which was sold in January
1999. Future inflows of cash from equipment 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 also realized
proceeds from the sale of marketable securities of $53,652 during the nine
months ended September 30, 2000.
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At September 30, 2000, the Trust was due aggregate future minimum lease
payments of $488,320 from contractual lease agreements, a portion of which will
be used to amortize the principal balance of notes payable of $572,085. See
Notes 3 and 7 to the financial statements herein. 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 becomes available for remarketing, the cash flows
of the Trust will become less predictable.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", marketable
debt and equity securities classified as available-for-sale are required to be
carried at fair value. During the nine months ended September 30, 2000, the
Trust recorded a net unrealized loss on available-for-sale securities of $4,538.
The Trust obtained long-term financing in connection with certain equipment
leases. The repayments of principal related to such indebtedness are reported as
a component of financing activities. At September 30, 2000, the Trust had only
one debt obligation outstanding pertaining to its ownership interest in an
aircraft leased to Reno Air, Inc. That note will be partially amortized by the
remaining contracted lease payments. Upon expiration of the lease agreement in
2003, the Trust will have a balloon payment obligation of $282,421 to retire
this indebtedness.
The Managing Trustee has evaluated and pursued a number of potential new
investments, several of which the Managing Trustee concluded had market returns
that it believed were less than adequate given the potential risks. Most
transactions involved the equipment leasing, business finance and real estate
development industries. Although the Managing Trustee intends to continue to
evaluate additional new investments, it anticipates that the Trust will be able
to fund these new investments with cash on hand or other sources, such as the
proceeds from future asset sales or refinancings and new indebtedness. As a
result, the Trust declared a special cash distribution during the fourth quarter
of 1999 to the Trust Beneficiaries totaling $5,300,000, which was paid on
January 19, 2000.
After the special distribution on January 19, 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. The Managing Trustee presently does not expect to reinstate cash
distributions until expiration of the Trust's reinvestment period in December
2001; however, the Managing Trustee will periodically review and consider other
one-time distributions. In addition to maintaining sale proceeds for
reinvestment, the Managing Trustee expects that the Trust will retain cash from
operations to fully retire its balloon debt obligation and for the continued
maintenance of the Trust's assets. The Managing Trustee believes that this
change in policy is in the best interests of the Trust over the long term and
will have the added benefit of reducing the Trust's distribution expenses.
In the future, the nature of the Trust's operations and principal cash
flows will continue to shift from rental receipts to equipment sale proceeds as
the Trust matures and changes as a result of potential new investments not
consisting of equipment acquisitions. As this occurs, the Trust's cash flows
resulting from equipment investments may 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 in order to
maximize the residual value of the Trust's equipment and will consider these
factors, in addition to new investment activities, the collection of contractual
rents, the retirement of scheduled indebtedness, and the Trust's future working
capital requirements, in establishing the amount and timing of future cash
distributions.
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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, 1999, the Managing Trustee had a positive tax capital
account balance. No such requirement exists with respect to the Special
Beneficiary.
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AFG INVESTMENT TRUST B
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
27 Financial Data Schedule
Item 6(b). Reports on Form 8-K
Response: None
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AFG INVESTMENT TRUST B
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee
of the Registrant.
By: /s/ MICHAEL J. BUTTERFIELD
Michael J. Butterfield
Treasurer of AFG ASIT Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 14, 2000
17
