-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PCMwTPwEqx7hj7AoaZWp/lieagd9bGsT9SRNvj4C157TnilQFF+PvnNGUAcqGwJq 1W+kUz+XPvEKp57BLDJGIg== 0000847557-02-000041.txt : 20020516 0000847557-02-000041.hdr.sgml : 20020516 20020516122129 ACCESSION NUMBER: 0000847557-02-000041 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFG INVESTMENT TRUST C CENTRAL INDEX KEY: 0000879496 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043157232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21444 FILM NUMBER: 02654501 BUSINESS ADDRESS: STREET 1: 200 NYALA FARMS CITY: WESTPORT STATE: CT ZIP: 06880 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 FORMER COMPANY: FORMER CONFORMED NAME: AFG SECURED INCOME TRUST I-C DATE OF NAME CHANGE: 19920205 10-K/A 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10- K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 ----------------- 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 0-21444 ------- AFG INVESTMENT TRUST C ---------------------- (Exact name of registrant as specified in its charter) Delaware 04-3157232 (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 -------------- Securities registered pursuant to Section 12(b) of the Act NONE ---- Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: 2,011,014 Class A Trust Beneficiary Interests --------------------------------------------- (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 X No - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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, 2001 (Part I and II) EXPLANATORY NOTE After AFG Investment Trust C (the "Trust") filed its Annual Report on Form 10-K for the year ended December 31, 2001 with the United States Securities and Exchange Commission, the Trust determined that the amounts recorded as its share of income (loss) on its interest in EFG Kirkwood LLC ("EFG Kirkwood") for the years ended December 31, 2001 and 2000 in its financial statements contained therein required revision. The Trust had previously recorded income of $6,826 and a loss of $726,159 from its interest in EFG Kirkwood for the years ended December 31, 2001 and 2000, respectively. The Trust determined that it should have recorded losses from its interest in EFG Kirkwood LLC of $91,100 and $900,315 for the years ended December 31, 2001 and 2000, respectively. Accordingly, for the year ended December 31, 2001, the Trust recorded an additional loss on its interest in EFG Kirkwood of $97,926, resulting in an increase in the net loss for the year ended December 31, 2001 of $97,926, or $(0.08) per Class A Beneficiary Interest and a decrease in net loss of $0.01 per Class B Beneficiary Interest, respectively. For the year ended December 31, 2000, the Trust recorded an additional loss on its interest in EFG Kirkwood of $174,156, resulting in a decrease in the net income for the year ended December 31, 2000 of $174,156, or $(0.07) per Class A Beneficiary Interest and $(0.01) per Class B Beneficiary Interest, respectively. As a result, the accompanying financial statements for the years ended December 31, 2001 and 2000 have been restated from the amounts previously reported. A summary of the significant effects of the restatement is as follows: AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2001
As Previously As Reported Restated ------------ ------------ STATEMENT OF OPERATIONS DATA: Equity in net income (loss) of EFG Kirkwood LLC $ 6,826 $ (91,100) Net loss $(5,501,267) $(5,599,193) Net loss per Class A Beneficiary Interest $ (2.76) $ (2.84) Net loss per Class B Beneficiary Interest $ (0.11) $ (0.10) BALANCE SHEET DATA: Interest in EFG Kirkwood LLC $ 3,274,817 $ 3,002,735 Total assets $42,442,801 $42,170,719 ============ ============ Total liabilities $24,581,352 $24,581,352 Participants' capital (deficit): Managing Trustee $ (54,368) $ (56,972) Special Beneficiary - - Class A Beneficiary Interests 20,254,184 19,984,706 Class B Beneficiary Interests - - Treasury interests (2,338,367) (2,338,367) ------------ ------------ Total participants' capital $17,861,449 $17,589,367 ============ ============
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
As Previously As Reported Restated ------------ ------------ STATEMENT OF OPERATIONS DATA: Equity in net loss of EFG Kirkwood LLC $ (726,159) $ (900,315) Net income $ 2,224,172 $ 2,050,016 Net income per Class A Beneficiary Interest $ 0.73 $ 0.66 Net income per Class B Beneficiary Interest $ 0.19 $ 0.18 BALANCE SHEET DATA: Interest in EFG Kirkwood LLC $ 3,267,991 $ 3,093,835 Total assets $51,815,592 $51,641,436 ============ ============ Total liabilities $28,452,876 $28,452,876 Participants' capital: Managing Trustee $ 18,027 $ 16,285 Special Beneficiary 148,721 134,353 Class A Beneficiary Interests 25,186,697 25,062,188 Class B Beneficiary Interests 347,638 314,101 Treasury interests (2,338,367) (2,338,367) ------------ ------------ Total participants' capital $23,362,716 $23,188,560 ============ ============
AFG INVESTMENT TRUST C FORM 10-K/A TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Trust's Securities and Related Security Holder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risks 9 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III Item 10. Directors and Executive Officers of the Trust 10 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 12 Item 13. Certain Relationships and Related Transactions 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 ... Annual Report to Participants 20
PART I Item 1. Business. - ------------------- (a) General Development of Business AFG Investment Trust C (the "Trust") was organized as a Delaware business trust in August 1992. 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 known as 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 2,011,014 Beneficiary Interests (hereinafter referred to as Class A Interests) at a subscription price of $25.00 each ($50,275,350 in total) through 9 serial closings commencing December 1992 and ending September 1993. In July 1997, the Trust issued 3,024,740 Class B Interests at $5.00 each ($15,123,700 in total), of which (i) 3,019,220 interests are held by Equis II Corporation, an affiliate of EFG, and a wholly owned subsidiary of Semele Group Inc. ("Semele"), and (ii) 5,520 interests are held by 10 other Class A investors. The Trust repurchased 218,661 Class A Interests in October 1997 at a cost of $2,291,567. In April 1998, the Trust repurchased 5,200 additional Class A Interests at a cost of $46,800. Accordingly, there are 1,787,153 Class A Interests currently outstanding. The Class A and Class B Interest holders are collectively referred to as the "Beneficiaries". The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation, and one Special Beneficiary, Semele. Semele purchased the Special Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues to act as Advisor to the Trust and provides services in connection with the acquisition and remarketing of the Trust's equipment assets. The Managing Trustee is responsible for the general management and business affairs of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation and an affiliate of EFG. Except with respect to "interested transactions", Class A Interests and Class B Interests have identical voting rights and, therefore, Equis II Corporation generally has control over the Trust on all matters on which the Beneficiaries may vote. With respect to interested transactions, holders of those Class B Interests that are the Managing Trustee or any of its affiliates must vote their interests as a majority of the Class A Interests have been voted. The Managing Trustee and the Special Beneficiary are not required to make any additional capital contributions except as may be required under the Second Amended and Restated Declaration of Trust, as amended (the "Trust Agreement"). 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 AFG (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, Chief Executive Officer and sole Director. 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. (b) Financial Information About Industry Segments The Trust is engaged in two industry segments: equipment leasing and real estate ownership, development and management. Historically, the Trust has acquired capital equipment and leased the equipment to creditworthy lessees on a full-payout or operating lease basis. Full-payout leases are those in which aggregate undiscounted, noncancellable rents equal or exceed the purchase price of the leased equipment. Operating leases are those in which the aggregate undiscounted, noncancellable rental payments are less than the purchase price of the leased equipment. With the consent of the Beneficiaries in 1998, the Trust Agreement was modified to permit the Trust to invest in assets other than equipment. During 1999 and 2000, the Trust made real estate acquisitions that the Managing Trustee believes have the potential to enhance the Trust's overall economic performance. During 2001, the Trust and three affiliated trust's (collectively, the "Trusts"), through a jointly owned entity, acquired 83% of the outstanding common stock of PLM International, Inc. ("PLM"). PLM is an equipment management company specializing in the leasing of transportation equipment. See further discussion below. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated herein by reference to the 2001 Annual Report. (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. Significant operations commenced coincident with the Trust's initial purchase of equipment and associated lease commitments in December 1992. Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by December 31, 2004. The Trust has no employees; however, it entered into a Advisory Agreement with EFG. EFG's role, among other things, is to (i) evaluate, select, negotiate and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing and refinancing of equipment, and (iii) arrange the resale of equipment. The Advisor is compensated for such services as described in the Trust Agreement. In addition, the Managing Trustee is compensated for services provided related to the Trust's non-equipment investment other than cash. See Item 13 herein. The Trust's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence, and credit quality 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. Another risk is that the credit quality of the lease may deteriorate after a lease is made. In addition, the leasing industry is very competitive. The Trust is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Trust must compete with lease programs offered directly by manufacturers and other equipment leasing companies, many of which have greater resources, 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. In addition, 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. In addition, a significant portion of the Trust's equipment portfolio consists of used passenger jet aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. The Trust has an interest in two aircraft, which based on equipment cost, account for approximately 62% of the Trust's equipment portfolio at December 31, 2001. These aircraft currently operate in international markets. All rents due under the aircrafts' leases are denominated in U.S. dollars. However, the operation of these aircraft in international markets exposes the Trust to certain political, credit and economic risks. Regulatory requirements of other countries governing aircraft registration, maintenance, liability of lessors and other matters may apply. Political instability, changes in national policy, competitive pressures, fuel shortages, recessions and other political and economic events adversely affecting world or regional trading markets or a particular foreign lessee could also create the risk that a foreign lessee would be unable to perform its obligations to the Trust. The recognition in foreign courts of judgments obtained in United States courts may be difficult or impossible to obtain and foreign procedural rules may otherwise delay such recognition. It may be difficult for the Trust to obtain possession of an aircraft used outside the United States in the event or default by the lessee or to enforce its rights under the related lease. Moreover, foreign jurisdictions may confiscate or expropriate aircraft without paying adequate compensation. Notwithstanding the foregoing, the ultimate realization of residual value for any aircraft is dependent upon many factors, including EFG's ability to sell and re-lease the aircraft. Changes in market conditions, industry trends, technological advances, and other events could converge to enhance or detract from asset values at any given time. Accordingly, EFG will attempt to monitor changes in the airline industry in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each aircraft. The Trust has a 50.6% ownership interest in EFG/Kettle Development LLC ("Kettle Valley"). Kettle Valley is a joint venture among the Trust and an affiliated trust, formed for the purpose of acquiring a 49.9% indirect ownership interest in a real estate development in Kelowna, British Columbia in Canada. The real estate development consists of approximately 280 acres of land under development. The project is zoned for 1,000 residential units in addition to commercial space. To date, 108 residential units have been constructed and sold and 10 additional units are under construction. An unaffiliated third party has retained the remaining 50.1% indirect ownership interest in the development. AFG ASIT Corporation manages Kettle Valley and the development is managed by a Canadian affiliate of EFG. The Trust also has an ownership interest in EFG Kirkwood. EFG Kirkwood is a joint venture among the Trust, certain affiliated Trusts and Semele and is managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures, Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in the Purgatory Ski resort in Durango, Colorado. The risks generally associated with real estate include, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, and other governmental rules. The Trust's involvement in real estate development also introduces financials risks, including the potential need to borrow funds to develop the real estate projects. While the Trust's management presently does not foresee any unusual risks in this regard, it is possible that factors beyond the control of the Trust, its affiliates and joint venture partners, such as a tightening credit environment, could limit or reduce its ability to secure adequate credit facilities at a time when they might be needed in the future. Alternatively, the Trust could establish joint ventures with other parties to share participation in its development projects. Ski resorts are subject to a number of risks, including weather-related risks. The ski resort business is seasonal in nature and insufficient snow during the winter season can adversely effect the profitability of a given resort. Many operators of ski resorts have greater resources and experience in the industry than the Trust, its affiliates and its joint venture partners. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Trust has active business operations in the financial services industry, primarily equipment leasing, and in the real estate industry through its interests in EFG Kirkwood and Kettle Valley. The Trust does not intend to engage in investment activities in a manner or to an extent that would require the Trust to register as an investment company under the Act. However, it is possible that the Trust unintentionally may have engaged, or may engage in an activity or activities that may be construed to fall within the scope of the Act. If the Trust was determined to be an investment company, its business would be adversely affected. The Managing Trustee is engaged in discussions with the staff of the Securities and Exchange Commission regarding whether or not the Trust may be an inadvertent investment company by virtue of its recent acquisition activities. The Trust, after consulting with counsel, does not believe that it is an unregistered investment company. If necessary, the Trust intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2001, 2000 and 1999 is incorporated herein by reference to Note 2 to the financial statements in Item 14. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. The Trust Agreement originally provided for the reinvestment of "Cash From Sales or Refinancings", as defined in the Trust Agreement, in additional equipment until September 1997. In the 1998 amendment to the Trust Agreement, the Trust's reinvestment provisions were reinstated until December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Upon the expiration of each 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. Similarly, any non-equipment investments will be liquidated as the Trust nears its scheduled dissolution date. In December 2000, the Trusts formed MILPI Holdings, LLC ("MILPI"), which formed MILPI Acquisition Corp. ("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts collectively paid $1.2 million for their membership interests in MILPI and MILPI purchased the common stock of MILPI Acquisition for an aggregate purchase price of $1.2 million. MILPI Acquisition entered into a definitive agreement (the "Agreement") with PLM, an equipment leasing and asset management company, for the purpose of acquiring up to 100% of the outstanding common stock of PLM, for an approximate purchase price of up to $27 million. In connection with the acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any and all of PLM's outstanding common stock. Pursuant to the cash tender offer, MILPI Acquisition acquired 83% of PLM's outstanding common stock in February 2001 for a total purchase price of approximately $21.8 million. Under the terms of the Agreement, with the approval of the holders of 50.1% of the outstanding common stock of PLM, MILPI Acquisition would merge into PLM, with PLM being the surviving entity. After a special meeting of the PLM stockholders approved the merger, the merger was consummated on February 6, 2002. The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199 was contributed by the Trust. The funds were obtained from existing resources and internally generated funds and by means of a 364 day, unsecured loan to the Trust from PLM evidenced by a promissory note in the principal amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject to an interest rate cap). As a result of the merger, the Trusts own 100% of the outstanding common stock of PLM through their 100% interest in MILPI. As of December 31, 2001, the Trust has a 34% membership interest in MILPI and its share of the aggregate membership interests in MILPI was $8,518,577. The Trust's ownership in MILPI subsequent to the merger increased to 37.5%. This membership interest is recorded under the equity method of accounting. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne are officers and directors of, and own significant stock in, Semele. Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition. In March 2002 the Trust and Trust D formed C & D IT LLC, a Delaware limited liability company, as a 50%/50% owned joint venture that is co-managed by each of the Trust and Trust D (the "C & D Joint Venture") to which each Trust contributed $1 million. The C & D Joint Venture was formed for the purpose of making a conditional contribution of $2.0 million to the Rancho Malibu Limited Partnership in exchange for 25% of the interests in the Rancho Malibu partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture was admitted to the Rancho Malibu partnership as a co-managing general partner pursuant to the terms of an amendment to the Rancho Malibu Limited Partnership Agreement. The other partners in the Rancho Malibu Limited Partnership are Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other co-managing general partner. Rancho Malibu Limited Partnership owns the 274-acre parcel of land near Malibu, California and is developing it as a single-family luxury residential subdivision. The conditional C & D Joint Venture Contribution was made to assure participation in the future development of the parcel. It was made subject to the future solicitation of the consent of the beneficiaries of each of the Trust and Trust D. The C & D Joint Venture Contribution is conditioned upon the consummation of a transaction pursuant to which Semele and Rancho Malibu Corp. will contribute all of the partnership interests that they hold in Rancho Malibu Limited Partnership along with 100% of the membership interests Semele holds in RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM, a corporation that is jointly owned by the Trust and three affiliated Trusts, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares of common stock of RMLP, Inc. (The sole asset of RM Financing LLC is a Note dated December 31, 1990 (the Note"). The Note was held by Semele's predecessor when it took a deed in lieu of foreclosure on the property from the original owner. The unpaid principal balance of the Note is $14,250,000 plus accrued interest. The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture Contribution from the Rancho Malibu partnership if the transactions have not taken place within 90 days of the receipt by the Rancho Malibu partnership of notice from the C & D Joint Venture that the requisite consents of the beneficiaries of the Trust and Trust D have been received. This right of the C & D Joint Venture is secured by a pledge of 50% of the capital stock of Rancho Malibu Corp. and 50% of the interests in the Rancho Malibu partnership held by Semele and Rancho Malibu Corp. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. Item 2. Properties. - --------------------- None. Item 3. 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 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 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 July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit was intended to be achieved and which, among other things, was expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and superseded a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and was preliminarily approved by the Court on August 20, 1998 when the Court issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement." On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an amended Stipulation of Settlement (the "Amended Stipulation") which was filed with the Court on March 15, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999. The Amended Stipulation, among other things, divided the Class Action Lawsuit into two separate sub-classes that could be settled individually. The second sub-class, which does not include the Trust, remains pending. On April 5, 1999, the Trust mailed a notice to all Class A and Class B Beneficiaries describing, among other things, the Class Action Lawsuit and the proposed settlement terms for the Trust. In addition, the notice advised the Beneficiaries that the Court would conduct a fairness hearing on May 21, 1999 and described the rights of the Beneficiaries and the procedures they should follow if they wished to object to the settlement. On May 26, 1999, the Court issued its Order and Final Judgment approving settlement of the Class Action Lawsuit with respect to claims asserted by the Plaintiffs on behalf of the sub-class that included the Trust. As a result of the settlement, the Trust declared a special cash distribution of $1,513,639, including legal fees for Plaintiffs' counsel of $81,360, that was paid in July 1999 ($0.80 per Class A Interest, net of legal fees). In addition, the parent company of the Managing Trustee, Equis II Corporation, agreed to commit $3,405,688 of its Class B Capital Contributions (paid in connection with its purchase of Class B Interests in July 1997) to the Trust for the Trust's operating and investment purposes. In the absence of this commitment, Equis II Corporation would have been entitled to receive a Class B Capital Distribution for this amount pursuant to the Trust Agreement because the proceeds from the offering of the Class B Interests were intended to be used for approximately a two-year period to re-purchase outstanding Class A Interests for the benefit of each Trust. Subsequently, any Class B capital not so expended was required to be returned to the Class B Interest holders. The settlement required that Equis II Corporation forego this Class B Capital Distribution. The settlement effectively caused Equis II Corporation to remain at risk as a long-term investor in the Trust. Item 4. Submission of Matters to a Vote of Security Holders. - ---------------------------------------------------------------------- None. 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, 2001, there were 1,948 record holders (1,939 of Class A Interests and 9 of Class B Interests) in the Trust. (c) Dividend History and Restrictions Historically, cash distributions had been declared and paid within 45 days after the completion of each calendar month and described in a statement sent to the Beneficiaries. Distributions prior to Class B Payout (defined below) were 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 below); third, 100% to the Class A Beneficiaries up to an additional $0.215 per Class A Interest; and fourth, until Class B Payout was attained, 80% to the Class B Beneficiaries and 20% to the Class A Beneficiaries. After the amendment of the Trust Agreement in 1998, the Managing Trustee 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 intended to continue to evaluate additional new investments, it anticipated that the Trust would be able to fund these new investments with cash on hand or from other sources, such as the proceeds from future asset sales or refinancings and new indebtedness. As a result, in 1999, the Trust declared a special cash distribution to the Trust Beneficiaries totaling $15,200,000, which was paid in January 2000. After the special distribution in January 2000, the Trust adopted a new distribution policy and suspended the payment of regular monthly cash distributions. It is currently expected that, the Managing Trustee will not reinstate cash distributions until expiration of the Trust's reinvestment period in December 2002; however, the Managing Trustee periodically will 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 pay down debt 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. 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 calculated beginning August 1, 1997, the first day of the month following the Class B Closing. Class B Payout occurred in January 2000 in conjunction with the special cash distribution paid on that date. As Class B Payout has been attained, 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 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. In any given year, it is possible that Beneficiaries will be allocated taxable income in excess of distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Beneficiaries adequate to cover any tax obligation. The Trust Agreement requires that sufficient distributions be made to enable the Beneficiaries to pay any state and federal income taxes arising from any sale or refinancing transactions, subject to certain limitations. There were no distributions declared in either 2001 or 2000. Distributions of $15,200,000 declared in December 1999 were paid in January 2000. Item 6. Selected Financial Data. - ------------------------------------ Incorporated herein by reference to the section entitled "Selected Financial Data" in the 2001 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 2001 Annual Report. Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------------- Incorporated herein by reference to the financial statements and supplementary data included in the 2001 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure. - ---------------------- None. 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, 2002 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING TRUSTEE (See Item 13) - --------------------------------------------------------------------------------
Name Title Age Term - ---------------------- ------------------------------------------- --- --------- Gary D. Engle President and Chief Executive . Until a ... Officer of the general partner of EFG and . successor ... President and Director of the Managing . is duly ... Trustee 53 elected ... . . and James A. Coyne Executive Vice President of the . qualified ... general partner of EFG and Senior Vice ... President of the Managing Trustee 42 Michael J. Butterfield Executive Vice President and Chief ... Operating Officer of the general partner of ... EFG and Treasurer of the Managing ... Trustee 42 Gail D. Ofgant Senior Vice President, Lease Operations ... of the general partner of EFG ... and Senior Vice President of the ... Managing Trustee 36
(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 Mr. Engle, age 53, is Director and President of the Managing Trustee and sole shareholder, Director, President and Chief Executive Officer of Equis Corporation, EFG's general partner. Mr. Engle is also Chairman and Chief Executive Officer of Semele Group Inc. ("Semele") and is President and a Director of Equis II Corporation. Mr. Engle controls the general partners of Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Mr. Engle is also a member of the Board of Managers of Echelon Development Holdings LLC. Mr. Engle joined EFG in 1990 and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle co-founded Cobb Partners Development, Inc., a real estate and mortgage banking company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development organization 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. degree from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Coyne, age 42, became Vice President of the Managing Trustee in 1997 and has been Senior Vice President of the Managing Trustee since 1998. Mr. Coyne is Executive Vice President of Equis Corporation, the general partner of EFG, and President and Chief Operating Officer of Semele. He is also a Director and President of Equis II Corporation. Mr. Coyne joined EFG in 1989 and remained with the company until May 1993 when he resigned to join the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. Mr. Coyne remained with the Raymond Company until November 1994 when he re-joined EFG. From 1985 to 1989, Mr. Coyne was employed by Ernst & Whinney (now known as Ernst & Young LLP). Mr. Coyne holds a Masters degree in accounting from Case Western Reserve University and a B.S. in Business Administration from John Carroll University and is a Certified Public Accountant. Mr. Butterfield, age 42, has been Treasurer of the Managing Trustee since 1996. Joining EFG in June 1992, Mr. Butterfield currently serves as Executive Vice President, Chief Operating Officer, Treasurer and Clerk of the general partner of EFG. Mr. Butterfield is also Chief Financial Officer and Treasurer of Semele. Prior to joining EFG, Mr. Butterfield was an audit manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was also employed in public accounting and industry positions in New Zealand and London (UK) 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. Mr. Butterfield holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Ofgant, age 36, has served as Senior Vice President of Managing Trustee since 1998. Ms. Ofgant joined EFG in July 1989 and held various positions in the organization before becoming Senior Vice President of the general partner of EFG in 1998. From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons Not applicable. 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, herein and in Note 8 to the financial statements included in Item 14, herein. (d) Stock Options and Stock Appreciation Rights. Not applicable. (e) Long-Term Incentive Plan Awards Table. Not applicable. (f) Defined Benefit or Actuarial Plan Disclosure. Not applicable. (g) Compensation of Directors None. (h) 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 no outstanding 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 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 15, 2001, the following person or group owns beneficially more than 5% of the Trust's outstanding Beneficiary interests:
Name and Amount Percent Title Address of of Beneficial of of Class Beneficial Owner Ownership Class ------------------- -------------------- -------------- ----- Class B Beneficiary Equis II Corporation Interests 88 Broad Street 3,019,221 Interests 99.82% Boston, MA 02110
Equis II Corporation is a wholly owned subsidiary of Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele and President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of the general partner of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. No person or group is known by the Managing Trustee to own beneficially more than 5% of the Trust's 1,787,153 outstanding Class A Interests as of March 15, 2002. 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, 2001, 2000 and 1999, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
2001 2000 1999 ---------- -------- ---------- Acquisition fees . . . . . . . . . . . . . . . . . . . $ 74,037 $ 15,484 $ 75,281 Management fees. . . . . . . . . . . . . . . . . . . . 433,247 431,078 513,019 Administrative charges . . . . . . . . . . . . . . . . 178,158 197,789 192,348 Reimbursable operating expenses due to third parties. . . . . . . . . . . . . . . . . 965,462 345,574 650,915 ---------- -------- ---------- Total $1,650,904 $989,925 $1,431,563 ========== ======== ==========
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 was compensated by an amount equal to .28% of Asset Base Price paid by the Trust for each asset acquired for the Trust's initial asset portfolio. For acquisition services during the initial reinvestment period, which expired on September 2, 1997, EFG was compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In the 1998 Amendment to the Trust Agreement, the Trust's reinvestment provisions were reinstated through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Acquisition fees paid to EFG in connection such equipment reinvestment assets are equal to 1% of Asset Base Price paid by the Trust. For management services, EFG is compensated by an amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust with respect to equipment acquired on or prior to March 31, 1998. For management services earned in connection with equipment acquired on or after April 1, 1998, EFG is compensated by an amount equal to 2% of gross lease rental revenue received by the Trust. For non-equipment investments other than cash, the Managing Trustee receives an annualized management fee of 1% of such assets under management. 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 this fee and the other fees described above are 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 at actual cost. All equipment was purchased from EFG or directly from external vendors. The Trust's Purchase Price is determined by the method described in Note 3 to the Trust's financial statements included in Item 14, herein. All rents and proceeds from the sale of equipment are paid by the lessee 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, 2001, the Trust was owed $103,602 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in January 2002. Old North Capital Limited Partnership ("ONC"), a Massachusetts limited partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests or less than 1% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and CEO of Semele and President, CEO, sole shareholder and Director of EFG's general partner. In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby generating $15,123,700 in aggregate Class B capital contributions. Class A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such aggregate capital contributions, and then Special Beneficiary, EFG, purchased 3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital contributions. 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 a majority of all of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. See Item 1 (a) of this report regarding certain voting restrictions related to the Class B Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. James A. Coyne is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. See discussion of the MILPI acquisition of PLM included in Item 1. See discussion of the C & D IT LLC joint venture entity included in Item 1. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Trust None. (d) Transactions with Promoters Not applicable. 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 Certified Public Accountants. * Statement of Financial Position at December 31, 2001 (Restated) and 2000 (Restated) * Statement of Operations for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. * Statement of Changes in Participants' Capital for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. * Statement of Cash Flows for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. * Notes to the Financial Statements *
* Incorporated herein by reference to the appropriate portion of the 2001 Annual Report to security holders for the year ended December 31, 2001 (see Part II). (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 - ------ 2 Agreement and Plan of Merger, dated as of December 22, 2000, between MILPI Acquisition Corp. and PLM International, Inc. was filed in the Registrant's Form 8-K dated December 28, 2000 as Exhibit 2.1 and is incorporated by reference. 4 Second Amended and Restated Declaration of Trust was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 4 and is incorporated herein by reference. 4.1 Amendment No. 2 to Second Amended and Restated Declaration of Trust is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 4.1 and is incorporated herein by reference. 10.1 Guarantee Agreement dated March 8, 2000 between AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) and Heller Affordable Housing of Florida, Inc. (among others as Beneficiaries) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.1 and is incorporated herein by reference. 10.2 Guarantee Fee Agreement dated March 8, 2000 between AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) and Echelon Commercial LLC was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.2 and is incorporated herein by reference. 10.3 Guarantors' Contribution Agreement dated March 8, 2000 by and among AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.3 and is incorporated herein by reference. 10.4 Amended and Restated Guarantee Agreement dated December 2000 between AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (each a Guarantor) and Heller Affordable Housing of Florida, Inc. (among others as Beneficiaries) is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 10.4 and is incorporated herein by reference. 13 The 2001 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 Certified Public Accountants. 99(a) Lease agreement with Hyundai Electronics America, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 99 (a) and is incorporated herein by reference. 99(b) Lease agreement with Scandinavian Airlines System was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (a) and is incorporated herein by reference. 99(c) Lease agreement with Scandinavian Airlines System Amendment No. 3 is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (c) and is incorporated herein by reference. 99(d) Operating Agreement of MILPI Holdings, LLC dated as of December 13, 2000 by and among the persons identified on Schedule A thereto was filed in the Registrant's Amendment No. 1 as Schedule TO dated January 29, 2001 ("Schedule TO/A No. 1") as Exhibit (b)(1) and is incorporated herein by reference. 99(e) Subscription Agreement dated as of December 15, 2000 by and among MILPI Holdings, LLC and MILPI Acquisition Corp. was filed in the Registrant's Schedule TO/A No. 1 as Exhibit (b)(2) and is incorporated herein by reference. 99(f) Lease agreement with Aerovias De Mexico, S.A. de C.V. was filed in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 as Exhibit 1 and is incorporated herein by reference. 99(g) Promissory Note, dated as of January 7, 2002, between AFG Investment Trust C and PLM International, Inc. was filed on Form 8-K as Exhibit 99.1 and is incorporated herein by reference. 99(h) C&T IT LLC Operating Agreement, dated March 1, 2002 between AFG Investment Trust C and AFG Investment Trust D is included herein. (b) Reports on Form 8-K Form 8-K dated January 7, 2002 regarding the funding to complete the acquisition of PLM International, Inc. ("PLM") and the promissory note issued to PLM International, Inc. for a loan to fund a portion of the cost of acquiring the outstanding PLM common stock in the merger of MILPI Acquisition Corp. into PLM. (c) Other Exhibits None (d) Financial Statement Schedules (i) Consolidated Financial Statements for MILPI Holdings, LLC and Subsidiary as of December 31, 2001 and for the period February 7, 2001 (Date of Inception) through December 31, 2001 and Independent Auditors' Report. (ii) Audited Financial Statements for EFG Kirkwood LLC as of December 31, 2000 and for the year then ended (iii) Consolidated Financial Statements for DSC/Purgatory, LLC as of May 31, 2001, 2000 and 1999 together with Report of Independent Public Accountants (iv) Financial Statements for EFG Kirkwood LLC as of and for the year ended December 31, 2001 and for the period May 1, 1999 (date of inception) through December 31, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. AFG Investment Trust C By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee of the Registrant. By: /s/ Gary D. Engle ----- --------------- Gary D. Engle President and Chief Executive Officer of the general partner of EFG and President and a Director of the Managing Trustee (Principal Executive Officer) Date: May 15, 2002 -------------- By: /s/ Michael J. Butterfield --- ------------------------ Michael J. Butterfield Executive Vice President and Chief Operating Officer of the general partner of EFG and Treasurer of the Managing Trustee (Principal Financial and Accounting Officer) Date: May 15, 2002 -------------- Exhibit - ------- 13 The 2001 Annual Report. 23 Consent of Independent Certified Public Accountants. 99(h) C&T IT LLC Operating Agreement SCHEDULE 14 D (i) MILPI HOLDINGS, LLC AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page - -------------------------------------------------------------------------------- ---- Independent Auditors' Report 2 Consolidated Balance Sheet as of December 31, 2001 3 Consolidated Statement of Operations for the period February 7, 2001 (Date of Inception) through December 31, 2001 4 Consolidated Statement of Shareholders' Equity for the period February 7, 2001 (Date of Inception) through December 31, 2001 5 Consolidated Statement of Cash Flows for the period February 7, 2001 (Date of Inception) through December 31, 2001 6 Notes to Consolidated Financial Statements 7
INDEPENDENT AUDITORS' REPORT The Board of Directors and Members MILPI Holdings, LLC: We have audited the accompanying consolidated balance sheet of MILPI Holdings, LLC, a Delaware limited liability company, and subsidiary (the "Company") as of December 31, 2001 and the related statements of operations, shareholders' equity and cash flows for the period February 7, 2001 (date of inception) through December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001, and the results of its operations and its cash flows for the period February 7, 2001 (date of inception) through December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Certified Public Accountants Tampa, Florida March 12, 2002 (April 12, 2002 as to paragraph 4 of Note 14) MILPI HOLDINGS, LLC AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 (in thousands of dollars, except share amounts)
ASSETS Cash and cash equivalents $14,037 Receivables, net of allowance for doubtful accounts of $45 39 Receivables from affiliates 951 Equity interest in affiliates 20,948 Restricted cash and cash equivalents 75 Other assets, net 2,759 Goodwill, net of accumulated amortization of $765 4,590 ------- Total assets $43,399 ======== LIABILITIES Payables and other liabilities $ 5,702 Deferred income taxes 9,751 ------- Total liabilities 15,453 ------- Minority interest 3,029 ------- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock ($0.01 par value, 20 shares authorized and outstanding) - Paid-in capital, in excess of par 21,970 Retained earnings 2,947 ------- Total shareholders' equity 24,917 ------- Total liabilities, minority interest and shareholders' equity $43,399 ========
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2001 (in thousands of dollars)
REVENUES Operating lease income $ 472 Management fees 5,217 Partnership interests and other fees 1,716 Acquisition and lease negotiation fees 2,032 Loss on disposition of assets, net (91) Other 1,030 ------- Total revenues 10,376 ------- EXPENSES Operations support 800 Impairment of investment in managed programs 511 Depreciation and amortization 1,255 General and administrative 3,290 ------- Total costs and expenses 5,856 ------- Operating Income 4,520 Interest expense (6) Interest income 384 Other income, net 89 ------- Income before income taxes 4,987 Provision for income taxes 1,611 Minority interest 429 ------- Net income $ 2,947 ======== Net income per weighted-average common share outstanding $ 147 ========
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2001 (in thousands of dollars)
Common Additional Retained Stock Paid in Capital Earnings Total ------- ---------------- --------- ------- Balance at February 7, 2001 $ - $ 21,776 $ - $21,776 Capital contribution - 194 - 194 Net income - - 2,947 2,947 ------- ---------------- --------- ------- Balance at December 31, 2001 $ - $ 21,970 $ 2,947 $24,917 ======== =============== ========= ========
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2001 (in thousands of dollars)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income $ 2,947 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,255 Compensation expense related to variable stock options 315 Loss on disposition of assets, net 91 Partnership interests and other fees (1,716) Impairment of investment in managed programs 511 Minority interest 429 Changes in assets and liabilities: Increase in deferred income taxes 867 Decrease in payables and other liabilities (9,484) Decrease in receivables and receivables from affiliates 1,576 Increase in other assets (176) -------- Net cash used in operating activities (3,385) -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Cash distribution from managed programs 1,591 Loans made to affiliates (5,500) Repayment of loans made to affiliates 5,500 Purchase of property, plant and equipment (71) Proceeds of sale of equipment for lease 313 Proceeds from the sale of assets held for sale 10,250 Decrease in restricted cash 1,673 -------- Net cash provided by investing activities 13,756 -------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Capital contribution 194 Redemption of stock options (919) -------- Net cash used in financing activities (725) -------- Net increase in cash and cash equivalents 9,646 Cash and cash equivalents at beginning of period 4,391 -------- Cash and cash equivalents at end of period $14,037 ======== SUPPLEMENTAL INFORMATION Cash paid during the period for interest $ 6 ======== Cash paid during the period for income taxes $ 6,216 ========
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BACKGROUND MILPI Holdings, LLC ("MILPI" or the "Company") was formed on December 12, 2000, under the laws of the state of Delaware and is governed by its Operating Agreement, dated December 13, 2000. There were no activities of MILPI from December 12, 2000 through February 7, 2001. MILPI was created by four separate trusts (AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust D, collectively the "Trusts") for the purpose of acquiring PLM International, Inc. and subsidiaries ("PLM"). PLM is an equipment management company and operates in one business segment, the leasing of transportation equipment and the creation of equipment-leasing solutions for domestic and international customers. On February 7, 2001 ("Date of Inception"), MILPI Acquisition Corp. ("MAC"), a wholly-owned subsidiary of MILPI, closed on a Tender Offer ("Tender Offer") to purchase all of the outstanding shares of PLM for a cash price of approximately $21.8 million, resulting in goodwill of approximately $5.8 million. The $21.8 million of cash used in the Tender Offer was contributed by the Trusts and represents their initial capital contribution. MAC acquired 83% of the common shares outstanding of PLM through the Tender Offer. On February 6, 2002, MAC completed its acquisition of PLM through the acquisition of the remaining 17% of the outstanding PLM common shares and by effecting a merger of MAC into PLM, under Delaware law. Concurrent with the completion of the merger, PLM ceased to be publicly traded. PLM's shareholders approved the merger pursuant to a special shareholders' meeting. The acquisition of the stock of PLM was accounted for as a business combination in accordance with Accounting Principles Board Opinion No. 16 ("APB No. 16"). In accordance with APB No. 16, the Company allocated the total purchase price to the assets acquired and liabilities assumed based on the estimated fair market values at the date of acquisition. There are no contingencies or other matters that could materially affect the allocation of the purchase cost. The Company's consolidated balance sheet, reflecting the above business combination, as of February 7, 2001 was as follows (in thousands of dollars):
ASSETS Cash and cash equivalents $ 4,391 Restricted cash and cash equivalents 1,748 Receivables 1,222 Receivables from affiliates 1,344 Equity interest in affiliates 21,334 Assets held for sale 10,250 Other assets 3,406 Goodwill 5,840 ------- Total assets $49,535 ======= LIABILITIES Payables and other liabilities $16,275 Deferred income taxes 8,884 ------- Total liabilities 25,159 Minority interest 2,600 SHAREHOLDERS' EQUITY Common stock ($0.01 par value, 20 shares authorized and outstanding) - Paid-in capital, in excess of par 21,776 ------- Total liabilities, minority interest and shareholders' equity $49,535 =======
The Company's fiscal year end is December 31. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION Investments for which the Company has less than a 50% ownership interest are accounted for using the equity method. All significant intercompany transactions among the consolidated group have been eliminated. The Company has recorded a minority interest in the Company's consolidated balance sheet as of December 31, 2001 to reflect the ownership of PLM's common shares that were not tendered. ESTIMATES These consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT IN AND MANAGEMENT OF EQUIPMENT GROWTH FUNDS, OTHER LIMITED PARTNERSHIPS, PRIVATE PLACEMENT PROGRAMS AND LIMITED LIABILITY COMPANY PLM earns revenues in connection with the management of limited partnerships and private placement programs. Equipment acquisition and lease negotiation fees are earned through the purchase and initial lease of equipment, and are recognized as revenue when PLM completes all of the services required to earn the fees, typically when binding commitment agreements are signed. Management fees are earned for managing the equipment portfolios and administering investor programs as provided for in various agreements, and are recognized as revenue over time as they are earned. As compensation for organizing a partnership investment program, PLM was granted an interest (between 1% and 5%) in the earnings and cash distributions of the program, in which PLM Financial Services, Inc. ("FSI"), a wholly owned subsidiary of PLM, is the General Partner. PLM recognizes as partnership interests its equity interest in the earnings of the partnerships, after adjusting such earnings to reflect the effect of special allocations of the programs' gross income allowed under the respective partnership agreements. From May 1995 through May 1996, Professional Lease Management Income Fund I, LLC ("Fund I"), a limited liability company with a no front-end fee structure, was offered as an investor program. FSI serves as the manager for the program. No compensation was paid to PLM for the organization and syndication of interests, the acquisition of equipment, the negotiation of leases for equipment, or the placement of debt. PLM funded the costs of organization, syndication, and offering through the use of operating cash and has capitalized these costs as its investment in Fund I. PLM has equity interest of 15% for its contribution to the program. Costs funded in excess of its 15% interest are considered goodwill and are amortized through the end of the program. In return for its investment, PLM is entitled to a 15% interest in the cash distributions and earnings of Fund I, subject to certain allocation provisions. PLM's interest in the cash distributions and earnings of Fund I will increase to 25% after the investors have received distributions equal to their invested capital. PLM is entitled to monthly fees for equipment management services and reimbursement for providing certain administrative services. The Company is entitled to reimbursement from the investment programs for providing certain administrative services. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121"), the Company reviews the carrying value of its investments whenever circumstances indicate that the carrying value may not be recoverable. If projected undiscounted future cash flows are lower than the carrying value of its equity interest in affiliates, a loss on revaluation is recorded. The Company's projected undiscounted future cash flows are based on the appraised values less costs to sell. During the period February 7, 2001 (Date of Inception) through December 31, 2001, the Company recorded an impairment of $511,000 on its equity interest in affiliates due to a change in market conditions, primarily in the airline industry, after the events of September 11, 2001. RESTRICTED CASH AND CASH EQUIVALENTS The Company considers highly liquid investments readily convertible into known amounts of cash with original maturities of 90 days or less as cash equivalents. Restricted cash consists of bank accounts and short-term investments that are primarily subject to withdrawal restrictions per loan and other legally binding agreements. OTHER ASSETS Other assets include loan fees, which are amortized under the effective interest method over the life of the related loan. GOODWILL Goodwill of approximately $5.8 million was originally recorded in conjunction with the acquisition of 83% of the common stock of PLM. This goodwill included approximately $2.0 million of total costs estimated for severance of PLM employees and relocation costs in accordance with management's formal plan to involuntarily terminate employees, which plan was developed in conjunction with the acquisition. During the fourth quarter of 2001, the estimates for severance and relocation costs were reduced by $0.5 million based on actual costs incurred related to these activities and, therefore, total goodwill was reduced by $0.5 million. Goodwill is amortized using the straight-line method over the estimated life of PLM, which is 7 years. INCOME TAXES MILPI is a partnership for tax purposes and as such is not taxed on its operations. MAC and PLM are C corporations, which recognize income tax expense using the asset and liability method. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred income taxes arise primarily because of differences in the timing of reporting equipment depreciation, partnership income, and certain accruals for financial statement and income tax reporting purposes. NEW ACCOUNTING PRONOUNCEMENTS On June 29, 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141"), was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets with indefinite lives will remain on the balance sheet and not be amortized. The Company implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of the Company. On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), was approved by the FASB. SFAS No. 142 changes the accounting for goodwill and other intangible assets determined to have an indefinite useful life from an amortization method to an impairment-only approach. Amortization of applicable intangible assets will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and has not yet determined the impact, if any, this statement will have on its financial position or results of operations. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which replaces SFAS No. 121. SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity, and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company will apply the new rules on accounting for the impairment or disposal of long-lived assets beginning in the first quarter of 2002, and they are not anticipated to have an impact on the Company's earnings or financial position. 2. ASSETS HELD FOR SALE As of February 7, 2001, the Company had $10.3 million in marine containers classified as assets held for sale. During 2001, the Company sold these marine containers to affiliated programs at cost, which approximated their fair market value. As of December 31, 2001, the Company had no assets held for sale. 3. EQUITY INTEREST IN AFFILIATES FSI is the General Partner or manager of 10 investment programs. Distributions of the programs are allocated as follows: 99% to the limited partners and 1% to the General Partner in PLM Equipment Growth Fund (EGF) I and PLM Passive Income Investors 1988-II; 95% to the limited partners and 5% to the General Partner in EGFs II, III, IV, V, VI, and PLM Equipment Growth & Income Fund VII (EGF VII); and 85% to the members and 15% to the manager in Fund I. PLM's interest in the cash distributions of Fund I will increase to 25% after the investors have received distributions equal to their invested capital. Net income is allocated to the General Partner subject to certain allocation provisions. FSI also receives a management fee on a per car basis at a fixed rate each month, plus an incentive management fee equal to 15% of "Net Earnings" over $750 per car per quarter from Covered Hopper Program 1979-1. Most of the investment program agreements contain provisions for special allocations of the programs' gross income. While none of the partners or members, including the General Partner and manager, are liable for program borrowings, and while the General Partner or manager maintains insurance against liability for bodily injury, death, and property damage for which an investment program may be liable, the General Partner or manager may be contingently liable for nondebt claims against the program that exceed asset values. The summarized combined financial data for FSI's affiliates, in which FSI is the General Partner or manager, as of and for the period February 7, 2001 (date of inception) through December 31, 2001 is as follows (in thousands of dollars):
Total assets $229,358 Total liabilities $ 67,579 Partners' equity $161,779 Total revenues $ 91,085 Total expenses $ 70,688 Net income $ 20,397
MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. OTHER ASSETS, NET Other assets, net, consists of the following as of December 31, 2001 (in thousands of dollars):
Cash surrender value of officers' life insurance policies $2,343 Commercial and industrial equipment, net 178 Prepaid expenses, deposits and other 153 Furniture, fixtures, and equipment, net of accumulated depreciation of $1,071 85 ------ Total other assets, net $2,759 ======
5. WAREHOUSE CREDIT FACILITY In April 2001, PLM entered into a $15.0 million warehouse facility, which is shared with PLM Equipment Growth Fund VI, PLM Equipment Growth & Income Fund VII, and Fund I, LLC, that allows PLM to purchase equipment prior to its designation to a specific program. Borrowings under this facility by the other eligible borrowers reduce the amount available to be borrowed by PLM. All borrowings under this facility are guaranteed by PLM. This facility provides for financing up to 100% of the cost of the asset. Interest accrues at prime or LIBOR plus 200 basis points, at the option of PLM. Borrowings under this facility may be outstanding up to 270 days. This facility was amended in December 2001 to lower the amount available to be borrowed to $10.0 million. This facility expired in April 2002 (see Note 14). 6. INCOME TAXES The provision for income taxes attributable to income from operations consists of the following (in thousands of dollars):
Federal State Total -------- ------ ------ Current $ 551 $ 193 $ 744 Deferred 705 162 867 -------- ------ ------ Total $ 1,256 $ 355 $1,611 ======== ====== ======
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns ultimately filed. The difference between the effective rate and the expected federal statutory rate is reconciled below:
Federal statutory tax expense rate 34% State income tax rate 5 Income reportable at the partnership level (7) --- Effective tax expense rate 32% ===
There are no net operating loss carryforwards for federal income tax purposes of alternative minimum tax credit carryforwards as of December 31, 2001. The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities as of December 31 are presented below (in thousands of dollars): MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets from continuing operations: Partnership Organization and Syndication costs $ 8,300 Federal benefit of state taxes 735 Other 329 -------- Total gross deferred tax assets 9,364 -------- Less valuation allowance (8,594) -------- Net deferred tax assets 770 Deferred tax liabilities: Partnership interests 10,520 Other 1 -------- Total deferred tax liabilities 10,521 -------- Net deferred tax liabilities 9,751 Total net deferred tax liabilities 9,751 ========
Management has reviewed all established interpretations of items reflected in its consolidated tax returns and believes that these interpretations require valuation allowances as described in SFAS No. 109, "Accounting for Income Taxes". The valuation allowance contained in the 2001 deferred tax account includes items that may result in future capital losses. See discussion in Note 7 relative to an Internal Revenue Service audit. 7. COMMITMENTS AND CONTINGENCIES LITIGATION Two class action lawsuits which were filed against PLM and various of its wholly owned subsidiaries in January 1997 in the United States District Court for the Southern District of Alabama, Southern Division (the court), Civil Action No. 97-0177-BH-C (the Koch action), and June 1997 in the San Francisco Superior Court, San Francisco, California, Case No. 987062 (the Romei action), were fully resolved during the fourth quarter 2001. The named plaintiffs were individuals who invested in PLM Equipment Growth Fund IV, PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI, and PLM Equipment Growth & Income Fund VII (the Partnerships), each a California limited partnership for which FSI acts as the General Partner. The complaints asserted causes of action against all defendants for fraud and deceit, suppression, negligent misrepresentation, negligent and intentional breaches of fiduciary duty, unjust enrichment, conversion, conspiracy, unfair and deceptive practices and violations of state securities law. Plaintiffs alleged that each defendant owed plaintiffs and the class certain duties due to their status as fiduciaries, financial advisors, agents, and control persons. Based on these duties, plaintiffs asserted liability against defendants for improper sales and marketing practices, mismanagement of the Partnerships, and concealing such mismanagement from investors in the Partnerships. Plaintiffs sought unspecified compensatory damages, as well as punitive damages. In February 1999, the parties to the Koch and Romei actions agreed to monetary and equitable settlements of the lawsuits, with no admission of liability by any defendant, and filed a Stipulation of Settlement with the court. The court preliminarily approved the settlement in August 2000, and information regarding the settlement was sent to class members in September 2000. A final fairness hearing was held on November 29, 2000, and on April 25, 2001, the federal magistrate judge assigned to the case entered a Report and Recommendation recommending final approval of the monetary and equitable settlements to the federal district court judge. On July 24, 2001, the federal district court judge adopted the Report and Recommendation, and entered a final judgment approving the settlements. No appeal has been filed and the time for filing an appeal has run. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The monetary settlement provides for a settlement and release of all claims against defendants in exchange for payment for the benefit of the class of up to $6.6 million, consisting of $0.3 million deposited by PLM and the remainder funded by an insurance policy. The final settlement amount of $4.9 million (of which PLM's share was approximately $0.3 million) was paid out in the fourth quarter of 2001 and was determined based upon the number of claims filed by class members, the amount of attorneys' fees awarded by the court to plaintiffs' attorneys, and the amount of the administrative costs incurred in connection with the settlement. The equitable settlement provides, among other things, for: (a) the extension (until January 1, 2007) of the date by which FSI must complete liquidation of the Funds' equipment, except for Fund IV, (b) the extension (until December 31, 2004) of the period during which FSI can reinvest the Funds' funds in additional equipment, except for Fund IV, (c) an increase of up to 20% in the amount of front-end fees (including acquisition and lease negotiation fees) that FSI is entitled to earn in excess of the compensatory limitations set forth in the North American Securities Administrator's Association's Statement of Policy; except for Fund IV, (d) a one-time purchase by each of Funds V, VI and VII of up to 10% of that partnership's outstanding units for 80% of net asset value per unit at September 30, 2000; and (e) the deferral of a portion of the management fees paid to an affiliate of FSI until, if ever, certain performance thresholds have been met by the Funds. The equitable settlement also provides for payment of additional attorneys' fees to the plaintiffs' attorneys from Fund funds in the event, if ever, that certain performance thresholds have been met by the Funds. Following a vote of limited partners resulting in less than 50% of the limited partners of each of Funds V, VI and VII voting against such amendments and after final approval of the settlement, each of such Fund's limited partnership agreement was amended to reflect these changes. During the fourth quarter of 2001, the respective Funds repurchased limited partnership units from those equitable class members who submitted timely requests for repurchase. PLM is involved as plaintiff or defendant in various other legal actions incidental to its business. Management does not believe that any of these actions will be material to the financial condition or results of operations of the Company. LEASE AGREEMENTS PLM and its subsidiaries have entered into operating leases for office space. PLM's total net rent expense was $0.4 million in 2001. The portion of rent expense related to its principal office, net of sublease income of $0.4 million was $0.3 million in 2001. The remaining rent expense was related to other office space and rental yard operations. Annual lease commitments for all of PLM's locations total $0.3 million in 2002 and 2003, $0.2 million in 2004 and $0.1 million in 2005. CORPORATE GUARANTEE As of December 31, 2001, PLM had guaranteed certain obligations up to $0.4 million of a Canadian railcar repair facility, in which PLM has a 10% ownership interest. EMPLOYMENT AGREEMENTS PLM entered into employment agreements with five individuals that require PLM to pay severance to these individuals up to two years of their base salaries and benefits if their employment is terminated after a change in control as defined in the employment agreement. As of December 31, 2001, the total future contingent liability for these payments was $0.2 million. WAREHOUSE CREDIT FACILITY See Note 5 for discussion of PLM's credit warehouse facility. INTERNAL REVENUE SERVICE AUDIT In March 2001, the Internal Revenue Service notified PLM that it would conduct an audit of certain Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. The audit relates to payments to unrelated foreign entities made by two partnerships in which PLM formerly held interests as the 100% direct and MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS indirect owner. One partnership's audit relates to Forms 1042 for the years 1997, 1998 and 1999, while the other partnership's audit relates to Forms 1042 for the years 1998 and 1999. The audits remain pending, with the Internal Revenue Service presently reviewing documents and information provided to it by PLM. The Internal Revenue Service has not proposed any adjustments to the Forms 1042,and management believes that the withholding tax returns will be accepted as filed. If the withholding tax returns are not accepted as filed by the Internal Revenue Service, the recipient foreign entities are legally obligated to indemnify PLM for any losses. If the withholding tax returns are not accepted as filed by the Internal Revenue Service, and the recipient foreign entities do not honor the indemnification, the Company's financial condition, results of operations, and liquidity would be materially impacted. OTHER PLM has life insurance policies on certain current and former employees, which had a $2.3 million cash surrender value as of December 31, 2001 and are included in other assets. 8. PROFIT SHARING, 401(K) PLAN AND STOCK OPTION PLANS The PLM Profit Sharing and 401(k) Plan (the "Plan") provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code. The Plan is a contributory plan available to essentially all full-time employees of PLM in the United States. In 2001, PLM employees who participated in the Plan could elect to defer and contribute to the trust established under the Plan up to 9% of pretax salary or wages up to $10,500. PLM matched up to a maximum of $4,000 of PLM employees' 401(k) contributions in 2001 to vest in four equal installments over a four-year period. The Company's total 401(k) contributions, net of forfeitures, were $0.1 million for 2001. Profit-sharing contributions are allocated equally among the number of eligible Plan participants. There was no profit-sharing contributions accrued in 2001. PLM had two nonqualified stock option plans that reserved up to 780,000 shares of PLM's common stock for key employees and directors. Under these plans, the price of the shares issued under an option must be at least 85% of the fair market value of the PLM common stock at the date of grant. Vesting of the options granted under these plans occurred in three equal installments of 33.3% per year, initiating from the date of the grant. Prior to the completion of the Tender Offer by MAC, PLM's Board of Directors voted to immediately vest all options outstanding under these plans. As of December 31, 2001, grants could no longer be made under either the employee or directors' plan. In May 1998, PLM's Board of Directors adopted the 1998 Management Stock Compensation Plan, which reserved 800,000 shares (in addition to the 780,000 shares above) of PLM's common stock for issuance to certain management and key employees of PLM upon the exercise of stock options. The completion of the Tender Offer by MAC in February 2201 was deemed a change in control in accordance with the terms of the 1998 Management Stock Compensation Plan and all options that had been granted immediately vested. In February 2000, PLM's Board of Directors adopted the 2000 Management Stock Compensation Plan, which reserved 70,000 shares with respect to which options may be granted under the 2000 Directors' Plan. In February 2000, each non-employee director of PLM was granted an option to purchase 8,000 shares of common stock under this Plan. Prior to completion of the Tender Offer by MAC, PLM's Board of Directors voted to immediately vest all options outstanding under this plan. Concurrent with the completion of the Tender Offer by MAC in February 2001, PLM redeemed all vested options currently outstanding. PLM paid the difference between the grant price of the option and $3.46 (the amount offered for PLM shares in the Tender Offer). The total cash paid to redeem all outstanding options was $0.9 million. As of December 31, 2001, the 1998 Management Stock Compensation Plan and the 2000 Management Stock Compensation Plan continued to be in effect. There were no options outstanding under either of these plans at December 31, 2001. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. TRANSACTIONS WITH AFFILIATES In addition to various fees payable to PLM or its subsidiaries, the affiliated programs reimburse PLM for certain expenses, as allowed in the program agreements. Reimbursed expenses totaling $1.8 million in 2001 have been recorded as reductions of operations support or general and administrative expenses. Outstanding amounts are paid under normal business terms. As of December 31, 2001, the Company had receivables from affiliates of $1.0 million, which represented unpaid management fees. 10. RISK MANAGEMENT Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables from affiliated entities. The Company places its temporary cash investments with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party. The Company's involvement with the management of the receivables from affiliated entities limits the credit exposure from affiliated entities. In 2001, Professional Lease Management Fund 1, LLC, PLM Equipment Growth Fund VI and PLM Equipment Growth and Income Fund VII, accounted for 26% of total revenues. No other customer accounted for over 10% of revenue in 2001. As of December 31, 2001, management believes the Company had no other significant concentrations of credit risk that could have a material adverse effect on the Company's business, financial condition, or results of operations. 11. GEOGRAPHIC INFORMATION All of the Company's revenues for the period from February 7, 2001 (date of inception) through December 31, 2001 were recognized from entities domiciled in the United States and all of the Company's long-lived assets are located in the United States. 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. For determination of fair value of equity interest in affiliates see Note 1. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations of the Company for the period February 7, 2001 (date of inception) through December 31, 2001(in thousands of dollars):
March June September December Total 31, 30, 30, 31, ------ ------ ---------- --------- ------- Revenue $2,077 $2,406 $ 3,600 $ 2,293 $10,376 Net income $ 775 $ 824 $ 1,275 $ 73 $ 2,947 Net income per weighted-average common share outstanding: $ 39 $ 40 $ 64 $ 4 $ 147
In the third quarter of 2001, PLM earned acquisition and lease negotiation fees of $1.8 million, which resulted in after-tax net income of $1.1 million. MILPI HOLDINGS, LLC AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SUBSEQUENT EVENTS On February 6, 2002, MILPI completed its acquisition of PLM through the acquisition of the remaining 17% of the outstanding PLM common shares and by effecting a merger of PLM into MAC. The merger was completed when MILPI obtained approval of the merger from PLM's shareholders pursuant to a special shareholders' meeting. The remaining interest was purchased for approximately $4.4 million. Concurrent with the completion of the merger, PLM ceased to be publicly traded. On February 11, 2002, the Company entered into separate promissory notes with AFG Investment Trusts C and D, both shareholders in MILPI, loaning those entities an aggregate of $1.3 million. The loans are unsecured and have a term of 364 days. Interest accrues at LIBOR plus 200 basis points. On March 12, 2002, the Company declared and paid a cash dividend of approximately $2.7 million to its shareholders, the Trusts. On April 12, 2002, PLM extended the $10.0 million warehouse facility, which is shared by EGFs V, VI, VII and Fund I and Acquisub LLC, a wholly owned subsidiary of PLM which is the parent company of FSI. The facility provides for financing up to 100% of the cost of the equipment. Outstanding borrowings by one borrower reduce the amount available to each of the other borrowers under the facility. Individual borrowings may be outstanding for no more than 270 days, with all advances due no later than July 11, 2002. Interest accrues either at the prime rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an advance of funds. Borrowings by the funds are guaranteed by PLM. This facility expires on July 11, 2002. SCHEDULE 14 D (ii) EFG KIRKWOOD LLC INDEPENDENT AUDITOR'S REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 2000 - ------ CONTENTS - -------- PAGE
INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance sheet 2 Statement of operations 3 Statement of members' capital 4 Statement of cash flows 5 Notes to financial statements 6 - 13
1 INDEPENDENT AUDITOR'S REPORT To the Members EFG Kirkwood LLC We have audited the accompanying balance sheet of EFG Kirkwood LLC (a limited liability company) as of December 31, 2000, and the related statements of operations, members' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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 EFG Kirkwood LLC at December 31, 2000, and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Moss Adams LLP Stockton, California April 12, 2002 - ------ EFG KIRKWOOD LLC ---------------- EFG KIRKWOOD LLC BALANCE SHEET - -------------- DECEMBER 31, 2000 ASSETS
Advances to and membership interests in: Mountain Resort Holdings LLC $6,842,703 Mountain Springs Resort LLC 1,008,477 ---------- Total assets $7,851,180 ========== LIABILITIES AND MEMBERS' CAPITAL Interest payable $ 8,567 Note payable 197,696 ---------- Total liabilities 206,263 ---------- Members' capital: Class A 7,644,917 Class B - ---------- Total members' capital 7,644,917 ---------- Total liabilities and members' capital $7,851,180 ==========
2 See accompanying notes EFG KIRKWOOD LLC STATEMENT OF OPERATIONS ----------------------- YEAR ENDED DECEMBER 31, 2000
Loss from advances to and membership interests in: Mountain Resort Holdings LLC $ (390,191) Mountain Springs Resort LLC (2,373,950) ----------- (2,764,141) Interest expense 8,567 ------------ Net loss $(2,772,708) ============
See accompanying notes 3 - ------------------------ EFG KIRKWOOD LLC STATEMENT OF MEMBERS' CAPITAL - -------------------------------- YEAR ENDED DECEMBER 31, 2000
Class A Class B Membership Membership Interests Interests Total ----------- ----------- ----------- Members' capital at January 1, 2000 $ 6,700,000 $ 531,110 $ 7,231,110 Members' capital contributions 3,186,515 - 3,186,515 Net loss (2,241,598) (531,110) (2,772,708) ----------- ----------- ----------- Members' capital at December 31, 2000 $ 7,644,917 $ - $ 7,644,917 =========== =========== ===========
4 See accompanying notes EFG KIRKWOOD LLC STATEMENT OF CASH FLOWS ----------------------- YEAR ENDED DECEMBER 31, 2000 See accompanying notes 5 - ------------------------
NET LOSS $(2,772,708) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FROM OPERATIONS: Loss from advances to and membership interests in: Mountain Resort Holdings LLC 390,191 Mountain Springs Resort LLC 2,373,950 CHANGES IN ASSETS AND LIABILITIES: Increase in interest payable, net 8,567 ------------ Net cash from operations - CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of membership interests in: Mountain Resort Holdings LLC (894,756) Mountain Springs Resort LLC (1,700,000) Advances to Mountain Springs Resort LLC (1,000,000) ------------ Net cash from investing activities (3,594,756) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in note payable 408,241 Distributions from Mountain Resort Holdings LLC 210,545 Payment on note payable (210,545) Members' capital contributions 3,186,515 ------------ Net cash from financing activities 3,594,756 NET CHANGE IN CASH AND CASH EQUIVALENTS - CASH AND CASH EQUIVALENTS, beginning of year - ------------ CASH AND CASH EQUIVALENTS, end of year $ - ============ OTHER NON-CASH ACTIVITIES: - --------------------------- Interest earned on convertible debentures $ 26,278 Conversion of principal and accrued, but unpaid, interest on convertible debentures to equity interests in Mountain Springs Resort LLC $ 1,059,125 Interest earned on notes receivable $ 19,259
EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS - -------------------------------- DECEMBER 31, 2000 NOTE 1 - ORGANIZATION EFG Kirkwood LLC (the "Company") was formed as Tandem Capital LLC, a Delaware limited liability company, on December 2, 1998. On April 6, 1999, the Company changed its name to EFG Kirkwood LLC. The Company's operations commenced on June 10, 1999. The Company has two classes of membership interests identified as Class A and Class B. The Class A members consist of AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (collectively, the "AFG Trusts"). The Class B member is Semele Group Inc. The collective voting interests of the Class A members are equal to the voting interests of the Class B member; however, the Class A interest holders are entitled to certain preferred returns prior to the payment of Class B cash distributions. The manager of the Company is AFG ASIT Corporation, which also is the Managing Trustee of the AFG Trusts. (See "Note 5 - Related Party Transactions" herein for additional information concerning the relationships of the Company's members.) At December 31, 2000, the Company owned approximately 38% of each of the Series B preferred member interests and Series A common member interests of Mountain Resort Holdings LLC, and 50% of the common member interests of Mountain Springs Resort LLC. The Company has no business activities other than through its membership interests in and advances to Mountain Resort Holdings LLC and Mountain Springs Resort LLC (hereinafter, collectively referred to as the "Resorts"). Mountain Resort Holdings LLC, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development (see Note 4). Mountain Springs Resort LLC, through its wholly owned subsidiary, Durango Resort LLC, owns 80% of the common member interests and 100% of the Class B preferred member interests of DSC/Purgatory LLC, which owns and operates the Purgatory Ski resort in Durango, Colorado (see Note 4). NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - The Company does not maintain a cash account at any bank or financial institution. All cash transactions involving the Company were funded directly by the Company's members on the Company's behalf. EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 2000 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION - The Company accounts for its membership interests in the Resorts using the equity method of accounting. Under the equity method of accounting, the carrying value of the Company's membership interests are (i) increased or decreased to reflect the Company's share of income or loss from the Resorts and (ii) decreased to reflect any cash distributions paid by the Resorts to the Company. ALLOCATION OF PROFITS AND LOSSES - Profits and losses of the Company are allocated consistent with the economic priorities of the Company's members relative to one another. The Company's operating agreement provides that cash distributions to the Class B member are subordinate to Class A Payout. (Class A Payout is defined as the first time that the Class A members shall have been paid a cash return equal to all of their original capital contributions plus a yield of 12% per annum compounded annually, subject to certain adjustments.) Accordingly, the Company's cumulative losses have been allocated first to the Class B member up to the amount of the its original capital contribution of $750,000. Cumulative losses in excess of $750,000 have been allocated to the Class A members in proportion to their respective interests in aggregate Class A capital. Future net income or net loss will be allocated first to the Class A members until they reach Payout. Neither the Class B nor the Class A members are required to make any additional capital contributions to the Company under the terms of the Company's operating agreement. INCOME TAXES - No provision for federal or state income taxes has been provided for the Company, as the liability for such income taxes is the obligation of the Company's members. NOTE 3 - CONVERTIBLE DEBENTURES On June 10, 1999, the Company purchased $1,000,000 of convertible debentures from Kirkwood Associates, Inc. The debentures earned interest at the annual rate of 6.5%, compounded quarterly, and permitted the Company to convert both principal and accrued, but unpaid, interest into shares of common stock in Kirkwood Associates, Inc. at a defined conversion rate. On April 30, 2000, the Company elected to convert all of the principal and accrued, but unpaid, interest under the debentures ($1,059,125) into 962,841 shares of common stock in Kirkwood Associates, Inc. (see Note 4). EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS - -------------------------------- DECEMBER 31, 2000 NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS LLC AND MOUNTAIN SPRINGS RESORT LLC MOUNTAIN RESORT HOLDINGS LLC - The Company's membership interests in Mountain Resort Holdings LLC were obtained as a result of the recapitalization of Kirkwood Associates, Inc. on April 30, 2000. Under the recapitalization plan, the net assets of Kirkwood Associates, Inc. were contributed to Mountain Resort Holdings LLC and the stockholders of Kirkwood Associates, Inc. exchanged their capital stock for membership interests in Mountain Resort Holdings LLC. At December 31, 2000, the Company owned approximately 38% of each of the Series A common membership interests and the Series B preferred membership interests of Mountain Resort Holdings LLC. The Company purchased its initial equity interests in Kirkwood Associates, Inc. on June 10, 1999 at a discount to book value of approximately $3,329,000. On April 30, 2000, the Company completed certain additional equity transactions in connection with the recapitalization of Kirkwood Associates, Inc. These transactions caused the net purchase discount to be reduced to approximately $2,812,000, such amount representing the net amount by which the Company's share of the net equity reported by Mountain Resort Holdings LLC exceeded the purchase price paid by the Company for such interests. This difference is being treated as a reduction to the depreciable assets recorded by Mountain Resort Holdings LLC and is being amortized over 13 years. The amortization period represents the weighted average estimated useful life of the long-term assets owned by Mountain Resort Holdings LLC. The Company's allocated share of the net income (loss) of Mountain Resort Holdings LLC is adjusted for depreciation expense reductions of $227,629 in 2000. The Company's allocated share of the net income or loss of Mountain Resort Holdings LLC for 2000 was determined based upon its common and preferred equity interests in Mountain Resort Holdings LLC. From June 10, 1999 to April 30, 2000, the Company owned approximately 71% of the outstanding preferred equity interests and approximately 16% of the outstanding common equity interests of Mountain Resort Holdings LLC. After the recapitalization on April 30, 2000, discussed above, the Company held approximately 38% of both the outstanding preferred and common equity interests of Mountain Resort Holdings LLC. The Company's allocated share of the net income or loss of the resort is influenced principally by the Company's percentage share of the outstanding common interests of the resort during the year ended December 31, 2000. Consequently, the Company was allocated a larger share of the operating results of Mountain Resort Holdings LLC during the period May 1, 2000 to December 31, 2000 (approximately 38%) compared to the period January 1, 2000 to April 30, 2000 (approximately 16%). The period from January 1 to April 30 is generally considered peak season for U.S. based ski resorts. During the period January 1, 2000 to April 30, 2000, Mountain Resort Holdings LLC reported net income of approximately $3.6 million compared to a net loss of approximately $3.3 million during the period May 1, 2000 to December 31, 2000. - ------ EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 2000 NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS LLC AND MOUNTAIN SPRINGS RESORT LLC (CONTINUED) The table below provides summarized financial data for Mountain Resort Holdings LLC as of December 31, 2000.
Amounts presented in thousands (000's omitted): Total assets $49,054 Total liabilities $24,624 Total equity $24,430 Total revenues $27,741 Total operating and other income and expenses $27,464 Net income $ 277
MOUNTAIN SPRINGS RESORT LLC - The Company and a third party established Mountain Springs Resort LLC as a 50/50 joint venture for the purpose of acquiring certain common and preferred equity interests in DSC/Purgatory LLC. The Company and its joint venture partner provided cash funds totaling $6,800,000 to Mountain Springs Resort LLC, each member having contributed $2,400,000 of equity and $1,000,000 in the form of a loan. The loans earn interest at the rate of 11.5% annually and mature on November 1, 2001. Subsequent to December 31, 2000, these loans and accrued interest thereon were converted to equity. A wholly owned subsidiary of Mountain Springs Resort LLC, Durango Resort LLC, was established to acquire 80% of the common membership interests and 100% of the Class B preferred membership interests of DSC/Purgatory LLC at a cost of approximately $6,311,000, including transaction costs of approximately $311,000. Subsequently, Mountain Springs Resort LLC contributed additional equity totaling $302,400 to DSC/Purgatory LLC to pay its share of costs associated with planning for the development of Mountain Springs Resort LLC's real estate. The assets, liabilities and equity of DSC/Purgatory LLC were contributed at estimated fair value. The acquisition of DSC/Purgatory was accounted for using the purchase method of accounting. Accordingly, the excess of the purchase price over the net identifiable assets of DSC/Purgatory, or approximately $311,000, was allocated to goodwill and is being amortized over a period of 13 years. The remaining equity interests of DSC/Purgatory LLC, consisting of 20% of the common membership interests and 100% of the Class A preferred membership interests, are owned by a third party. The Class A membership interests are senior to the other equity interests in DSC/Purgatory LLC. Consequently, the Company's economic interests in DSC/Purgatory LLC are subordinate to the Class A member and have resulted in the Company recognizing a larger share of the net losses reported by DSC/Purgatory LLC than its equity interest dictates. EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS - -------------------------------- DECEMBER 31, 2000 NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS LLC AND MOUNTAIN SPRINGS RESORT LLC (CONTINUED) The operations of Mountain Springs Resort LLC and Durango Resort LLC are immaterial except for their investments in the entities as described above. The table below provides summarized financial data for DSC/Purgatory LLC as of December 31, 2000 and for the period May 1, 2000 through December 31, 2000.
Amounts presented in thousands (000's omitted): Total assets $28,171 Total liabilities $19,188 Total equity $ 8,983 Total revenues $ 5,008 Total operating and other income and expenses $ 9,725 Net loss $(4,717)
The Company became a member of DSC/Purgatory LLC on May 1, 2000. Accordingly, amounts reflected for 2000 are for the period May 1, 2000 through December 31, 2000 and therefore exclude what is generally considered peak season for U.S. based ski resorts. NOTE 5 - RELATED PARTY TRANSACTIONS The Company's Class A and Class B members and its manager are affiliated. Semele Group Inc., through a wholly owned subsidiary, owns and controls the Company's manager, AFG ASIT Corporation, as well as a controlling voting interest in each of the AFG Trusts. A different subsidiary of Semele owns Class A Beneficiary interests that collectively represent approximately 0.4% of the outstanding Class A Beneficiary interests of the AFG Trusts. EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 2000 NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED) The membership interests of the Company are owned as follows:
Percentage Class A membership interests AFG Investment Trust A 10% AFG Investment Trust B 20% AFG Investment Trust C 40% AFG Investment Trust D 30% ---- Total Class A membership interests 100% ==== Class B membership interests Semele Group, Inc. 100% ====
NOTE 6 - SUBSEQUENT EVENT - GUARANTEE On August 1, 2001, the Company became a guarantor of a note payable to a bank of DSC/Purgatory LLC. The guarantee is for $3,500,000, the original principal balance of the note. The note is also guaranteed in the same amount by another investor of DSC/Purgatory LLC. EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS - -------------------------------- DECEMBER 31, 2000 NOTE 7 - MOUNTAIN SPRINGS RESORT LLC CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following is the condensed consolidating financial statements of Mountain Springs Resort LLC at December 31, 2000 included to comply with SEC rules and regulations:
Consolidated Mountain DSC/ Durango Durango Springs Purgatory LLC Resort LLC Eliminations Resort LLC Resort LLC Eliminations -------------- ----------- -------------- ------------- ----------- -------------- Cash and cash equivalents $ 2,658,275 $ - $ - $ 2,658,275 $ 229,120 $ - Restricted cash 1,555,767 - - 1,555,767 - - Accounts receivable 1,597,765 60,635 - 1,658,400 - - Other current assets 800,188 - - 800,188 - - Property and equipment, net 19,762,505 - - 19,762,505 - - Investment in subsidiary - 6,199,200 (6,199,200) - 6,564,986 (6,564,986) Goodwill - 297,822 - 297,822 - - Special use permit 1,191,111 - - 1,191,111 - - Other assets 605,121 7,329 - 612,450 2,328 - Total assets $ 28,170,732 $ 6,564,986 $ (6,199,200) $ 28,536,518 $ 6,796,434 $ (6,564,986) Accounts payable and accrued liabilities $ 2,400,511 $ - $ - $ 2,400,511 $ 62,821 $ - Current portion of long-term debt 3,406,330 - - 3,406,330 2,000,000 - Other current liabilities 2,447,689 - - 2,447,689 38,518 - Long-term debt 10,933,648 - - 10,933,648 - - Total liabilities 19,188,178 - - 19,188,178 2,101,339 - Minority interest - - 7,500,000 7,500,000 - - Members' capital 8,982,554 6,564,986 (13,699,200) 1,848,340 4,695,095 (6,564,986) Total liabilities, minority interest and members' capital $ 28,170,732 $ 6,564,986 $ (6,199,200) $ 28,536,518 $ 6,796,434 $ (6,564,986) Consolidated Mountain Springs Resort LLC -------------- Cash and cash equivalents $ 2,887,395 Restricted cash 1,555,767 Accounts receivable 1,658,400 Other current assets 800,188 Property and equipment, net 19,762,505 Investment in subsidiary - Goodwill 297,822 Special use permit 1,191,111 Other assets 614,778 Total assets $ 28,767,966 Accounts payable and accrued liabilities $ 2,463,332 Current portion of long-term debt 5,406,330 Other current liabilities 2,486,207 Long-term debt 10,933,648 Total liabilities 21,289,517 Minority interest 7,500,000 Members' capital (21,551) Total liabilities, minority interest and members' capital $ 28,767,966
EFG KIRKWOOD LLC NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 2000 NOTE 7 - MOUNTAIN SPRINGS RESORT LLC CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
DSC/ Consolidated Mountain Purgatory LLC Durango Durango Springs Eight Months Resort LLC Resort LLC Resort LLC Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, 2000 2000 Eliminations 2000 2000 Eliminations -------------- -------------- ------------ -------------- -------------- ------------- Total revenues $ 5,007,892 $ 335,383 $ - $ 5,343,275 $ - $ - Total operating expenses 9,112,600 365,879 - 9,478,479 746 - Loss from operations (4,104,708) (30,496) - (4,135,204) (746) - Interest expense (611,946) - - (611,946) (38,518) - Loss of subsidiary - - - - (30,496) 30,496 Net loss $ (4,716,654) $ (30,496) $ - $ (4,747,150) $ (69,760) $ 30,496 Consolidated Mountain Springs Resort LLC Year Ended December 31, 2000 ------------- Total revenues $ 5,343,275 Total operating expenses 9,479,225 Loss from operations (4,135,950) Interest expense (650,464) Loss of subsidiary - Net loss $ (4,786,414)
SCHEDULE 14 D (iii) DSC/PURGATORY, LLC (DBA DURANGO MOUNTAIN RESORT) Consolidated Financial Statements As Of May 31, 2001, 2000 And 1999 Together With Report Of Independent Public Accountants REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of DSC/Purgatory, LLC: We have audited the accompanying consolidated balance sheets of DSC/Purgatory, LLC (a Colorado limited liability company dba Durango Mountain Resort) as of May 31, 2001 and 2000, and the related consolidated statements of operations, members' capital (deficit) and cash flows for the year ended May 31, 2001, the one-month period ended May 31, 2000 (post-acquisition - see Note 1), the eleven-month period ended April 30, 2000 (pre-acquisition - see Note 1) and the year ended May 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. As discussed in Note 1 to the consolidated financial statements, the Company sold a majority voting interest effective May 1, 2000. Accordingly, the assets, liabilities and members' capital have been recorded to reflect the purchase price. The assets and liabilities were recorded based upon the estimated fair market values at the date of acquisition. Accordingly, the pre-acquisition and post-acquisition financial statements are not comparable in all material respects since these financial statements report the financial position, results of operations and cash flows on two separate accounting bases. In our opinion, the balance sheets and related statements of operations, members' capital (deficit) and cash flows as of and for the year ended May 31, 2001, and for the one-month period ended May 31, 2000, referred to above present fairly, in all material respects, the financial position of DSC/Purgatory, LLC as of May 31, 2001 and 2000, and the results of its operations and its cash flows for the year and one-month period then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the statements of operations, members' capital (deficit) and cash flows for the eleven-month period ended April 30, 2000, and the year ended May 31, 1999, referred to above present fairly, in all material respects, the results of operations and cash flows of DSC/Purgatory, LLC for the eleven-month period ended April 30, 2000, and the year ended May 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Denver, Colorado, August 31, 2001. Page 1 of 2 DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) CONSOLIDATED BALANCE SHEETS --------------------------- (See Notes 1 and 2) May 31,
ASSETS 2001 2000 - ---------------------------------------------------- ---------------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,039,348 $ 3,268,448 Restricted cash and investments 493,405 226,708 Accounts receivable, net of allowance for doubtful accounts of $13,200 and $13,000, respectively 587,237 466,631 Inventory and supplies, at cost 395,448 430,230 Prepaid expenses 252,968 229,117 -------------- ---------- Total current assets 3,768,406 4,621,134 -------------- ---------- PROPERTY AND EQUIPMENT, at cost: Land, buildings and improvements 9,122,056 8,874,174 Ski lifts and trails 8,382,687 4,795,139 Machinery and equipment 3,596,764 2,782,788 Construction-in-progress 14,023 430,079 -------------- ---------- 21,115,530 16,882,180 Less- accumulated depreciation (2,031,602) (158,035) -------------- ---------- Total property and equipment, net 19,083,928 16,724,145 -------------- ---------- REAL ESTATE DEVELOPMENT 859,331 - RESTRICTED CASH AND INVESTMENTS 963,626 991,879 SPECIAL USE PERMIT, net of accumulated amortization of $32,849 and $1,968, respectively 1,178,491 1,209,372 OTHER ASSETS, net of accumulated amortization of $25,712 and $5,560, respectively 704,043 467,983 -------------- ---------- Total assets $ 26,557,825 $24,014,513 ================ ============
The accompanying notes to consolidated financial statements ----------------------------------------------------------- are an integral part of these consolidated balance sheets. ---------------------------------------------------------- Page 2 of 2 ----------- DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) CONSOLIDATED BALANCE SHEETS --------------------------- (See Notes 1 and 2) May 31,
LIABILITIES AND MEMBERS' CAPITAL 2001 2000 - ----------------------------------------------------- --------------- ------------ CURRENT LIABILITIES: Accounts payable $ 278,127 $ 556,331 Accrued expenses 1,191,941 1,145,223 Related party payable 120,670 115,428 Deferred revenue 525,399 - Current portion of long-term debt 1,409,289 587,260 Current portion of obligations under capital leases 79,424 - Notes payable to related party - 2,500,000 -------------- ---------- Total current liabilities 3,604,850 4,904,242 -------------- ---------- LONG-TERM DEBT: Bonds, including unamortized premium 8,360,310 8,980,524 Notes payable 1,741,734 495,503 Obligation under capital leases 240,357 - -------------- ---------- 10,342,401 9,476,027 -------------- ---------- Total liabilities 13,947,251 14,380,269 -------------- ---------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 200 - MEMBERS' CAPITAL: Duncan interests 7,422,875 7,326,849 Durango Resort, LLC 5,187,499 5,307,395 Contribution receivable - (3,000,000) -------------- ---------- Total members' capital 12,610,374 9,634,244 -------------- ---------- Total liabilities and members' capital $ 26,557,825 $24,014,513 =============== ============
The accompanying notes to consolidated financial statements ----------------------------------------------------------- are an integral part of these consolidated balance sheets. ---------------------------------------------------------- ------ DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) ----------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (See Notes 1 and 2)
(Post- (Pre- Acquisition) Acquisition) For the For the For the One-Month Eleven-Month For the Year Ended Period Ended Period Ended Year Ended May 31, May 31, April 30, May 31, 2001 2000 2000 1999 -------------- ----------------- ----------------- -------------- REVENUES: Lift operations $ 7,994,983 $ - $ 5,629,682 $ 7,997,607 Commercial and other mountain operations 6,714,538 61,620 4,832,342 5,712,669 Other 1,045,362 30,412 771,072 1,001,829 ----------- --------------- --------------- ----------- Total Revenues 15,754,883 92,032 11,233,096 14,712,105 ----------- --------------- --------------- ----------- OPERATING EXPENSES: Lift operations 3,066,098 133,988 2,642,962 2,801,565 Commercial and other mountain operations 4,839,228 252,568 3,443,490 4,178,591 General, administrative and marketing 4,168,772 241,490 3,683,346 3,919,263 Depreciation and amortization 1,908,077 160,135 1,620,168 1,797,611 Other 1,404,234 86,181 955,106 1,034,802 ----------- --------------- --------------- ----------- Total Operating Expenses 15,386,409 874,362 12,345,072 13,731,832 ----------- --------------- --------------- ----------- Income (loss) from operations 368,474 (782,330) (1,111,976) 980,273 OTHER (EXPENSE) INCOME: Interest expense (1,127,539) (104,278) (1,703,228) (1,843,548) Interest income 231,195 20,852 135,776 124,537 ----------- --------------- --------------- ----------- Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738) ============== ================= ================= ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) ----------------------------- CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (DEFICIT) ----------------------------------------------------- FOR THE YEAR ENDED MAY 31, 2001, -------------------------------- THE ONE-MONTH PERIOD ENDED MAY 31, 2000, ---------------------------------------- THE ELEVEN-MONTH PERIOD ENDED APRIL 30, 2000, --------------------------------------------- AND THE YEAR ENDED MAY 31, 1999 ------------------------------- (See Notes 1 and 2)
Duncan Durango Resort, LLC Class A Total Class B Preferred Common Duncan Preferred Common - ------------------------------------ ------------- ---------------- --------------- -------------- --------------- BALANCES, at May 31, 1998 $ (4,107,760) $ - (4,107,760) $ - $ - Net loss (738,738) - (738,738) - - ----------- -------------- ------------- ------------- ------------- BALANCES, at May 31, 1999 (4,846,498) - (4,846,498) - - Net loss (2,679,428) - (2,679,428) - - ----------- -------------- ------------- ------------- ------------- BALANCES, at April 30, 2000 (7,525,926) - (7,525,926) - - Conversion of related party debt 9,030,899 - 9,030,899 - - Acquisition of membership interest - - - 6,000,000 - Contributions of property and equipment 5,995,027 - 5,995,027 - - Contribution receivable - - - - - Net loss - (173,151) (173,151) - (692,605) ----------- -------------- ------------- ------------- ------------- BALANCES, at May 31, 2000 7,500,000 (173,151) 7,326,849 6,000,000 (692,605) Cash contribution - 201,600 201,600 - 302,400 Payment of contribution receivable - - - - - Net loss - (105,574) (105,574) - (422,296) ----------- -------------- ------------- ------------- ------------- BALANCES, at May 31, 2001 $ 7,500,000 $ (77,125) $ 7,422,875 $ 6,000,000 $ (812,501) ============= ================ =============== ============== =============== Total Contribution Durango Receivable Resort, LLC Total - ------------------------------------ --------------- ----------------- ------------ BALANCES, at May 31, 1998 $ - $ - $(4,107,760) Net loss - - (738,738) ------------- --------------- ------------ BALANCES, at May 31, 1999 - - (4,846,498) Net loss - - (2,679,428) ------------- --------------- ------------ BALANCES, at April 30, 2000 - - (7,525,926) Conversion of related party debt - - 9,030,899 Acquisition of membership interest - 6,000,000 6,000,000 Contributions of property and equipment - - 5,995,027 Contribution receivable (3,000,000) (3,000,000) (3,000,000) Net loss - (692,605) (865,756) ------------- --------------- ------------ BALANCES, at May 31, 2000 (3,000,000) 2,307,395 9,634,244 Cash contribution - 302,400 504,000 Payment of contribution receivable 3,000,000 3,000,000 3,000,000 Net loss - (422,296) (527,870) ------------- --------------- ------------ BALANCES, at May 31, 2001 $ - $ 5,187,499 $12,610,374 =============== ================= ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Page 1 of 2 DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) ----------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (See Notes 1 and 2)
(Post- (Pre- Acquisition) Acquisition) For the For the For the One-Month Eleven-Month For the Year Ended Period Ended Period Ended Year Ended May 31, May 31, April 30, May 31, 2001 2000 2000 1999 - ------------------------------------------------- --------------- --------------- --------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization 1,895,379 163,579 1,657,634 1,840,018 (Gain) loss on sale of assets (5,518) 14,937 - 10,890 (Increase) decrease in- Accounts receivable (120,606) (25,489) (62,927) (136,713) Inventory and supplies 34,782 (55,324) 205,172 (143,216) Prepaid expenses (23,851) 9,073 (51,142) 34,543 Other assets (256,212) (14,248) 54,887 10,206 (Decrease) increase in- Accounts payable (278,204) (321,833) 186,386 181,102 Related party payable 5,242 41,193 (339,034) (125,028) Deferred revenue 525,399 - - - Accrued expenses 46,718 802,065 788,441 (41,488) ------------- ------------- ------------- ---------- Net cash provided by (used in) operating activities, excluding real estate investment activities 1,295,259 (251,803) (240,011) 891,576 ------------- ------------- ------------- ---------- Real estate investment activities- Expenditures on real estate development (859,331) - - - ------------- ------------- ------------- ---------- Net cash provided by (used in) operating activities, including real estate investment activities 435,928 (251,803) (240,011) 891,576 ------------- ------------- ------------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (3,857,379) (510,900) (1,018,356) (694,851) Proceeds from sale of property and equipment 17,159 8,603 - 9,272 Payments received on notes receivable - - 12,548 1,963 ------------- ------------- ------------- ---------- Net cash used in investing activities (3,840,220) (502,297) (1,005,808) (683,616) ------------- ------------- ------------- ----------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements Page 2 of 2 DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) ----------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (See Notes 1 and 2)
... . (Post- (Pre- ... . Acquisition) Acquisition) ... . For the For the ... For the One-Month Eleven-Month For the ... Year Ended Period Ended Period Ended Year Ended ... May 31, May 31, April 30, May 31, ... 2001 2000 2000 1999 - ------------------------------------------------- --------------- --------------- --------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from related party line of credit $ - $ - $ 1,950,000 $ 3,275,000 Proceeds from notes payable 2,089,920 - - - Payments on notes payable (71,655) - - - Cash received in purchase transaction - 1,800,000 1,200,000 - Payments on related party notes payable (2,500,000) - - (2,650,000) Payment of bond principal (539,050) - (496,250) (450,950) Payments on capital leases (69,779) - - - Cash received from contribution receivable 3,000,000 - - - Capital contributions 504,000 - - - (Increase) decrease in restricted cash and investments (238,444) (99,279) 476,575 (119,178) Minority interest investment 200 - - - ------------- ------------- ------------- ---------- Net cash provided by financing activities 2,175,192 1,700,721 3,130,325 54,872 ------------- ------------- ------------- ---------- Net (decrease) increase in cash and cash equivalents (1,229,100) 946,621 1,884,506 262,832 CASH AND CASH EQUIVALENTS, beginning of period 3,268,448 2,321,827 437,321 174,489 ------------- ------------- ------------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 2,039,348 $ 3,268,448 $ 2,321,827 $ 437,321 =============== =============== =============== ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 1,088,832 $ 56,322 $ 818,096 $ 1,794,188 =============== =============== =============== ============= Property and equipment acquired under capital lease $ 389,560 $ - $ - $ - =============== =============== =============== =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. DSC/PURGATORY, LLC ------------------ (dba DURANGO MOUNTAIN RESORT) ----------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ AS OF MAY 31, 2001 AND 2000 --------------------------- 1. BUSINESS AND ORGANIZATION: ---------------------------- Operations and Ownership - -------------------------- DSC/Purgatory, LLC is a Colorado limited liability company doing business as ("dba") Durango Mountain Resort (the "Company"). The Company is the owner and operator of a resort formerly known as the Purgatory Resort which is primarily a ski resort. The Company also has related real estate holdings and is located near Durango, Colorado. As of May 31, 2001, the Company is owned by collectively the "Members", as follows: - - Durango Resort, LLC, a Delaware limited liability company ("Durango"). Durango owns 100% of the Class B preferred interest and 80% of the common interest, and the following entities which are related through common ownership (referred to hereinafter collectively as "Duncan"); Duncan owns 100% of the Class A preferred interest and 20% of the common interest, as follows: - - Hermosa Partners, LLP, a Colorado limited liability partnership ("Hermosa") - 5%, - - Duncan Mountain, Inc. ("DMI", fka Durango Ski Corporation ("DSC")), a Colorado "S" corporation - 2%, and - - T-H Land Company, LLP, a Colorado limited liability partnership ("T-H Land") - 13%. Purchase Transaction - --------------------- As part of the purchase agreement among the Members, dated November 24, 1999, (the "Purchase Transaction") effective May 1, 2000, Durango acquired 80% of the common interest of the Company and committed to acquire $6 million of Class B preferred interests of the Company, of which $3 million cash was received as of May 31, 2000 and $3 million was received during the year ended May 31, 2001. During the year ended May 31, 2001, Durango and Duncan contributed to the Company an additional $302,400 and $201,600, respectively, to pay for the respective share of costs associated with planning for the real estate development. In addition, as part of the Purchase Transaction, Duncan converted approximately $9 million of debt and related interest and contributed commercial real estate holdings located at the base of the ski resort valued at approximately $6 million. The Purchase Transaction was accounted for under the purchase method of accounting and the financial statements have been adjusted to reflect the acquisition cost of Durango based upon the estimated fair value of the assets acquired and liabilities assumed. As a result, the assets and liabilities were recorded at the estimated fair value as of May 1, 2000. In conjunction with the Purchase Transaction, the following assets were contributed and liabilities assumed by the Members:
Fair value of assets acquired $ 25,600,607 Contribution receivable 3,000,000 Fair value of liabilities assumed (15,100,607) --------------- Net assets acquired $ 13,500,000 ============= Durango $ 6,000,000 Duncan 7,500,000 --------------- Net assets acquired $ 13,500,000 =============
As a result of the Purchase Transaction and the related purchase accounting adjustments, the results of operations and the financial position of the Company are not comparable between pre- and post-acquisition periods. Prior to the Purchase Transaction, the Company had no employees and functioned under a management agreement with DSC, whereby DSC employees provided operating and management services to the Company in exchange for a management fee (Note 5). In conjunction with the Purchase Transaction, the employees of DSC were transferred to the Company and the May 1, 1996 management agreement between the Company and DSC was terminated. Concurrent with the Purchase Transaction, Durango signed an option agreement with T-H Land to purchase a 51% interest in approximately 500 acres of unentitled real estate surrounding Purgatory Village. The option expires on May 1, 2002. Durango and T-H Land have further agreed to share entitlement costs up to $500,000 incurred prior to the exercise date. These costs will be paid 60% by Durango and 40% by T-H Land. The ski resort operations of the Company have historically generated net losses and working capital deficits. Such losses and working capital deficits, as well as amounts required to fund its capital expenditures, have historically been funded through borrowings from related parties or through capital contributions from Members. Management believes that the cash contributions as well as cash on hand will provide adequate working capital to fund its fiscal 2002 operations. If the estimated cash flows from operations are not achieved, additional capital contributions or borrowings may be necessary during fiscal 2002. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ----------------------------------------------- Basis of Presentation - ----------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. During the year ended May 31, 2001, the Company formed Elk Point Development, LLC ("Elk Point"), a wholly owned subsidiary of the Company. Elk Point is primarily engaged in real estate development and maintenance activities. During the year ended May 31, 2001, the Company and an unrelated third party formed Durango Mountain Realty, LLC ("Realty"), an 80% owned subsidiary of the Company. All profits and losses of Realty are allocated 100% to the Company, after deducting employment compensation of the other member. Realty is primarily engaged in the purchase, sale and development of real estate in the Durango area. Estimates and Assumptions - --------------------------- The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, actual results could differ from those estimates. Allocation of Profits, Losses and Cash Distributions - ---------------------------------------------------------- For financial reporting purposes, the profits and losses of the Company are allocated to the Members based upon their respective common ownership interests. Under the terms of the operating agreement between the Members, if any cash distributions are declared, the Class A preferred interests are entitled to a priority cash distribution of $7,500,000, followed by the Class B preferred interest, which is entitled to a priority cash distribution of $6,000,000. After the priority distributions have been made, the Class A and Class B preferred interests will share pari passu distributions until each has received a 6% compounded, cumulative preferred return. After the priority and preferred distributions, any additional distributions shall be based upon the common ownership interests, which is 80% to Durango and 20% to Duncan. Inventory - --------- Inventory consists primarily of retail clothing, ski equipment and food and beverage inventories. Inventories are valued at the lower of cost or market value, generally using the average cost method, on a first-in, first-out basis. - ------ Property, Equipment and Other Assets - ---------------------------------------- The Company owns approximately one hundred acres of the base area land including approximately 35,000 square feet of commercial facilities in Purgatory Village. The Company also has a significant investment in ski trails, lifts and related assets located on land leased from the United States Forest Service ("USFS") under a Special Use Permit (including two restaurant facilities on USFS land containing an aggregate of approximately 15,000 square feet of commercial space). Property and equipment is depreciated by the Company using the straight-line method over the estimated useful lives of the related assets as follows:
Asset Useful Lives - ---------------------------- -------------- Buildings and improvements 5 to 40 years Ski lifts and trails 10 to 40 years Machinery and equipment 3 to 15 years
Special Use Permit - -------------------- The Special Use Permit was previously held by DSC, as part of the Purchase Transaction, a new forty year Special Use Permit was issued to the Company in January 2000, which expires in 2039. The Special Use Permit is included in other assets in the accompanying consolidated balance sheet as of May 31, 2001 at $1,178,000, net of accumulated amortization. Deferred Loan Costs - --------------------- Costs and fees incurred in connection with the financing activities of the Company have been capitalized and are being amortized to interest expense over the terms of the related loans. Deferred loan costs of $318,000 and $172,000, net of accumulated amortization, are included in other assets in the accompanying consolidated balance sheets as of May 31, 2001 and 2000, respectively. - ------ Accrued Expenses - ----------------- Obligations of the Company are accrued as incurred. Included in accrued expenses are:
2001 2000 - -------------------------------- -------------- ---------- USFS Special Use Permit fees $ 52,000 $ 93,000 Accrued payroll obligations 486,000 400,000 Property taxes 23,000 146,000 Bond refinance costs 120,000 - Pending litigation 136,000 92,000 Accrued interest expense 166,000 146,000 Other 209,000 268,000 ------------- ---------- Total accrued expenses $ 1,192,000 $1,145,000 ============== ==========
Revenue Recognition - -------------------- Resort revenues are derived from a wide variety of sources, including sales of lift tickets, ski school tuition, dining, retail stores, equipment rentals, hotel management operations, travel reservation commissions, and commercial property rentals, and are recognized as services are performed. Deferred Revenue - ----------------- The Company records deferred revenue related to the sale of season ski passes and certain daily lift ticket products. The number of season pass holder visits is estimated based on historical data, and the deferred revenue is recognized throughout the season based on this estimate. During the ski season the estimated visits are compared to the actual visits and adjustments are made if necessary. Income Taxes - ------------- As the Company is a limited liability company, the income tax results and activities flow directly to, and are the responsibility of the Members. As a result, the accompanying consolidated financial statements do not reflect a provision for federal or state income taxes. - ------ Statements of Cash Flows - --------------------------- The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Asset Impairment - ----------------- The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. For long-lived assets which are held and used in operations, the long-lived asset would be impaired if the undiscounted future cash flows related to the long-lived asset did not exceed net book value. The amount of the impairment would then be determined by discounting the cash flows or by using some other measure of fair value. Capitalization Policies - ------------------------ Capitalized development costs include costs associated with the development of land, interest expense and property taxes on land under development and general and administrative expenses to the extent they benefit the development of land. Interest expense of $37,000 has been capitalized by the Company during fiscal 2001. No interest was capitalized relating to the development of land during fiscal 2000. Fair Value of Financial Instruments - --------------------------------------- The recorded amounts for cash and cash equivalents, accounts receivable, other current assets, and accounts payable, accrued expenses and other current liabilities approximate fair value due to the short-term nature of these financial instruments. The fair value of the Company's notes payable approximates fair value due to the variable nature of the interest rate associated with that debt. The fair value of the Company's bonds approximate fair value at May 31, 2000, due to the premium assigned to the bonds on May 1, 2000 associated with the Purchase Transaction. The fair value of the Company's bonds at May 31, 2001 has been estimated using discounted cash flow analyses based on current borrowing rates for debt with similar maturities and ratings. The estimated fair value of the bonds at May 31, 2001 is presented below: May 31, 2001 ------------
Carrying Fair Value Value - -------------------------------------- Bonds, including unamortized premium $8,984,000 $9,078,000
Earnings Per Share - -------------------- Due to the Company's capital structure, the presentation of net income or loss per share is not considered meaningful and has not been presented herein. New Accounting Pronouncements - ------------------------------- In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of." SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation which resulted in two accounting models for long-lived assets to be disposed of. SFAS No. 144, establishes a single accounting model for long-lived assets to be disposed of by sale and requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of SFAS No. 144 will have a material impact on its financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". These statements prohibit pooling-of-interests accounting for transactions initiated after June 30, 2001, require the use of the purchase method of accounting for all combinations after June 30, 2001, and establish new standards for accounting for goodwill and other intangibles acquired in business combinations. Goodwill will continue to be recognized as an asset, but will not be amortized as previously required by APB Opinion No. 17 "Intangible Assets." Certain other intangible assets with indefinite lives, if present, may also not be amortized. Instead, goodwill and other intangible assets will be subject to periodic (at least annual) tests for impairment and recognition of impairment losses in the future could be required based on a fair value approach as prescribed by these pronouncements. The revised standards include transition rules and requirements for identification, valuation and recognition of a much broader list of intangibles as part of business combinations than prior practice, most of which will continue to be amortized. The Company will adopt the following standard on June 1, 2002 and does not believe that the adoption of SFAS No. 141 and SFAS No. 142 will have a material impact on its financial position or results of operation. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operations of a long-lived asset, except for certain obligations of leases. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not assessed the impact of adopting SFAS No. 143 on its financial position or results of operations. In December 1999, the staff of the Securities and Exchange Commission issued its Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 provides guidance on the measurement and timing of revenue recognition in financial statements of public companies. The adoption of SAB No. 101 did not have a material effect on the Company's financial position or results of operations. The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as subsequently amended by SFAS No. 137. SFAS No. 133 requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under SFAS No. 133, accounting for changes in fair value of a derivative depends on its intended use and designation. SFAS No. 133 as amended by SFAS No. 137 was adopted in the first quarter of fiscal year 2001. The adoption of SFAS No. 133 as amended by SFAS No. 137 did not have a material impact on the Company's financial position or results of operations. Reclassifications - ----------------- Certain prior period amounts have been reclassified to conform to the current year presentation. 3. RESTRICTED CASH AND INVESTMENTS: ----------------------------------- The Company maintains reserve funds to secure future bond service obligations as required under the bond agreements. Amounts on deposit in the reserve funds will be transferred to the bond trustee, as needed, to cover any deficiencies in required bond service payments. Reserve funds held are invested in U.S. Governmental Securities. The Company has the positive intent and ability to hold all of its investment securities to maturity and does not engage in trading or sales activity relating to these investments. These investments are classified as held to maturity and are recorded at amortized cost, which approximates their fair value. Other amounts held as current restricted cash represent reserves required under various insurance and purchase contracts. 4. LONG-TERM DEBT: ---------------- Long-term debt consists of the following as of May 31, 2001 and 2000:
May 31, ----------------------------- 2001 2000 --------------- ----------- Series 1989A Industrial Development Revenue Refunding Bonds, interest at 9%; principal and interest payable in quarterly installments to Trustee with unpaid principal due on maturity, February 1, 2010. Secured in parity by certain assets and agreements of the Company. (Including unamortized premium of $280,524 and $311,693 as of May 31, 2001 and 2000, respectively). $ 8,983,974 $ 9,554,193 Note payable to a third party, interest at prime plus 1%, (8% at May 31, 2001); principal and interest payable in December, January, February, March and April each year with unpaid principal due on maturity, April 1, 2008. Secured by certain assets of the Company. 2,031,866 - May 31, 2001 2000 --------------- ------------ Mortgage payable, interest at 9.4%; principal and interest payable monthly with unpaid principal due on maturity, October 1, 2001. Secured by the underlying real estate. $ 495,493 $ 509,094 Notes payable to Duncan, paid in full in April 2001. - 2,500,000 --------------- ------------ 11,511,333 12,563,287 Less: Current portion 1,409,289 3,087,260 --------------- ------------ $ 10,102,044 $ 9,476,027 =============== ============
Bond Covenants - --------------- The bond agreements include various covenants and restrictions, the most restrictive of which relate to limits on the payment of dividends, capital expenditures, financial ratios, and the incurrence or guarantee of additional debt. Debt Maturities - ---------------- Annual maturities for all long-term notes and bonds payable, net of bond premium are as follows:
Year ending May 31- 2002 $ 1,378,263 2003 935,270 2004 995,270 2005 1,057,770 2006 1,127,770 Thereafter 5,736,466 -------------- $ 11,230,809 ====================
5. MANAGEMENT AGREEMENT: ---------------------- DSC entered into a management agreement with the Company effective May 1, 1996 that was terminated on April 30, 2000 in connection with the Purchase Transaction discussed in Note 1. Under the terms of the management agreement, DSC was responsible for operating, managing and maintaining the resort as a full-service ski and summer destination resort. The Company was required to reimburse DSC for the total compensation and employment related expenses of any DSC employee who performed services under the agreement. Also, the Company reimbursed DSC for amounts used to purchase and maintain equipment and supplies to be utilized by the resort up to a budgeted amount. The total amount reimbursed to DSC was $5,536,774 and $6,096,095 for the eleven-month period ended April 30, 2000 and the year ended May 31, 1999, respectively, and has been allocated to the various expense categories in the statements of operations based upon actual services provided as follows.
For the Eleven- Month For the Period year Ended Ended April 30, May 31, 2000 1999 ------------ ---------- Lift operations $ 1,576,836 $1,741,760 Commercial and other mountain operations 1,872,245 2,046,510 Other 519,860 504,122 General, administrative and marketing 1,567,833 1,803,703 ------------ ---------- Total $ 5,536,774 $6,096,095 ============= ==========
DSC was also entitled to a management fee from 2% to 5% of earnings before interest, income taxes, depreciation (and amortization), ("EBITDA") based on annual budget versus actual EBITDA, provided that actual EBITDA is at least 100% of budget. No such amounts were earned for the eleven-month period ended April 30, 2000 or the year ended May 31, 1999. 6. RELATED PARTY TRANSACTIONS: ----------------------------- The Company leased land, retail sales locations and equipment from certain affiliates prior to the Purchase Transaction. In connection with the Purchase Transaction the leased land, retail sales locations and equipment were contributed to the Company (Note 1). Lease payments made by the Company totaled approximately $101,000 and $320,000 for the eleven-month period ended April 30, 2000 and the year ended May 31, 1999, respectively. Insurance coverage is purchased through an insurance agency in which Duncan has a financial interest. Payments under such insurance contracts were approximately $222,000, $3,000, $188,000 and $160,000 for the year ended May 31, 2001, the one-month period ended May 31, 2000, the eleven-month period ended April 30, 2000, and the year ended May 31, 1999, respectively. During the year ended May 31, 2001, the Company repaid the note payable to Duncan in the amount of $2,500,000. The Company also paid interest of $216,000 to Duncan associated with this note payable. As of May 31, 2001 and 2000, certain affiliates of the Members owed the Company approximately $162,000 and $124,000, respectively, for services provided, which is included in accounts receivable in the accompanying consolidated balance sheets. In addition, the Company owed certain affiliates approximately $121,000 and $115,000, as of May 31, 2001 and 2000, respectively, for services provided by the affiliates. The amounts receivable and payable are as follows:
Year Ended May 31, 2001 Year Ended May 31, 2000 Receivable Payable Net Receivable Payable Net - -------------------- ----------- ------------ ------------ ----------- ----------- ---------- Durango $ 7,000 $ - $ 7,000 $ 1,500 $ - $ 1,500 Duncan 30,000 113,000 (83,000) 87,000 115,000 (28,000) Other affiliates 125,000 8,000 117,000 35,500 - 35,500 ---------- ---------- ----------- ---------- ---------- ---------- $ 162,000 $ 121,000 $ 41,000 $ 124,000 $ 115,000 $ 9,000 =========== ============ ============ =========== =========== ==========
7. COMMITMENTS AND CONTINGENCIES: - --------------------------------------- During the normal course of its operations, the Company is a defendant in several ski-related lawsuits which the Company and its insurance carriers are actively contesting. In management's opinion, the outcome of these disputes, net of insurance recoveries will not have a significant effect on the Company's financial position or results of operations. The Company finances a portion of its machinery and equipment under capital lease obligations at interest rates ranging from 6.9% to 10.7%. The future minimum lease payments under capitalized lease obligations at May 31, 2001 are as follows:
Year Ending May 31- 2002 $ 91,808 2003 91,808 2004 91,808 2005 120,258 --------------------- Total payments 395,682 Less: amounts representing interest (75,901) --------------------- Present value of future minimum lease payments 319,781 Less: current portion of capital lease obligations (79,424) --------------------- Long-term capital lease obligations $ 240,357 =====================
The Company leases office and other facilities and certain equipment under long-term operating leases. The majority of the leased office and other facilities and equipment was contributed to the Company in the Purchase Transaction (Note 1). Total rent expense for all operating leases for the year ended May 31, 2001, the one-month period ended May 31, 2000, the eleven-month period ended April 30, 2000, and the year ended May 31, 1999, was approximately $65,000, $9,000, $168,000 and $402,000, respectively. Aggregate future minimum annual rental commitments under noncancellable operating leases as of May 31, 2001, are as follows:
Year Ending May 31- 2002 $ 3,592 2003 2,676 2004 2,676 2005 2,676 2006 2,230 - -------- ... $ 13,850 ====================
The Company has an agreement with two airlines to provide direct flights into the Durango - La Plata County Airport, where one agreement expires March 31, 2002 and the other agreement is indefinite. The agreements require the Company to guarantee specified minimum airline revenue. Any guaranteed obligations are expected to be off-set, in part, by reimbursements from local businesses. The guaranteed amounts expensed for the year ended May 31, 2001, one-month period ended May 31, 2000, the eleven-month period ended April 30, 2000, and the year ended May 31, 1999, totaled approximately $185,000, $0, $118,000 and $150,000, respectively, and are included in general, administrative, and marketing on the accompanying statements of operations. 8. SUBSEQUENT EVENTS: ------------------- Subsequent to yearend the Company entered into a $3.5 million revolving line of credit with a local bank, (the "Revolving Line"). The Revolving Line bears interest based upon Prime and matures on August 1, 2002. Unaudited Subsequent Events - ----------------------------- The Company also refinanced its mortgage payable. The refinanced mortgage bears interest at 8% per annum, which could change on October 1, 2006 and October 1, 2011. On November 29, 2001, the Company issued $8,845,000 of La Plata County, Colorado Recreational Facilities Refunding Revenue Bonds, Series 2001A (the "Series 2001A Bonds"), which will refund the outstanding Series 1989A Industrial Development Revenue Refunding Bonds. The Series 2001A Bonds bear interest at 6.875% and are due February 1, 2012. On November 29, 2001, the Company also issued $3,000,000 of La Plata County, Colorado Taxable Recreational Facilities Revenue Bonds, Series 2001B, which bear interest at 9.0% and are due February 1, 2006. SCHEDULE 14 D (iv) EFG KIRKWOOD LLC Financial Statements as of and for the year ended December 31, 2001 and for the period May 1, 1999 (date of inception) through December 31, 1999 (Unaudited) 1 EFG KIRKWOOD LLC Index to Financial Statements (Unaudited)
Page ---- Statement of Financial Position at December 31, 2001 . . . . . . . . . 3 Statement of Operations for the year ended December 31, 2001 and for the period May 1, 1999 (date of inception) through December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 4 Statement of Changes in Members' Capital for the year ended December 31, 2001 and for the period May 1, 1999 (date of inception) through December 31, 1999. . . . . . . . . . . . . . . . . . . . . . 5 Statement of Cash Flows for the year ended December 31, 2001 and for the period May 1, 1999 (date of inception) through December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes to the financial statements. . . . . . . . . . . . . . . . . . . 7
2 EFG KIRKWOOD LLC STATEMENT OF FINANCIAL POSITION December 31, 2001 (Unaudited)
2001 ---------- ASSETS Advances to and membership interests in: Mountain Resort Holdings, LLC. . . . . $6,647,792 Mountain Springs Resort, LLC . . . . . 777,005 ---------- Total assets . . . . . . . . . . . . . $7,424,797 ========== MEMBERS' CAPITAL Members' capital: Class A. . . . . . . . . . . . . . . . $7,424,797 Class B. . . . . . . . . . . . . . . . -- ---------- Total members' capital . . . . . . . . $7,424,797 ==========
The accompanying notes are an integral part of the financial statements. 3 EFG KIRKWOOD LLC STATEMENT OF OPERATIONS For the year ended December 31, 2001 and the period from May 1, 1999 (date of inception) through December 31, 1999 (Unaudited)
Period May 1, 1999 through December 31, 2001 1999 ---------- -------------- Income (loss) from advances to and membership interests in: Mountain Resort Holdings, LLC. . . $ 15,634 $ (201,317) Mountain Springs Resort, LLC . . . (231,472) (17,573) ---------- -------------- Loss from advances to and membership interests. . . . . . . . . . . . . . (215,838) (218,890) Interest expense . . . . . . . . . . 4,282 -- ---------- -------------- Net loss . . . . . . . . . . . . . . $(220,120) $ (218,890) ========== ==============
The accompanying notes are an integral part of the financial statements. 4 EFG KIRKWOOD LLC STATEMENT OF CHANGES IN MEMBERS' CAPITAL For the year ended December 31, 2001 and the period from May 1, 1999 (date of inception) through December 31, 1999 (Unaudited)
Class A Class B Membership Membership Interests Interests Total ------------ ------------ ----------- Members' capital at May 1, 1999 $ -- $ -- $ -- Members' capital contributions. . . . . . . . 6,700,000 750,000 7,450,000 Net loss for the period May 1, 1999 through December 31, 1999 . . . . . . . . . . . . . -- (218,890) (218,890) ------------ ------------ ----------- Members' capital at December 31, 1999 . . . . $ 6,700,000 $ 531,110 $7,231,110 ============ ============ =========== Members' capital at January 1, 2001 . . . . . $ 7,644,917 -- $7,644,917 Net loss for the year ended December 31, 2001 (220,120) -- (220,120) ------------ ------------ ----------- Members' capital at December 31, 2001 . . . . $ 7,424,797 $ -- $7,424,797 ============ ============ ===========
The accompanying notes are an integral part of the financial statements. 5 EFG KIRKWOOD LLC STATEMENT OF CASH FLOWS For the year ended December 31, 2001 and the period from May 1, 1999 (date of inception) through December 31, 1999 (Unaudited)
Period May 1, 1999 through December 31, 2001 1999 ------------ -------------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (220,120) $ (218,890) Adjustments to reconcile net loss to net cash used in operations: (Income) loss from advances to and membership interests in: Mountain Resort Holdings, LLC. . . . . . . . . . . . . . . (15,634) 201,317 Mountain Springs Resort, LLC . . . . . . . . . . . . . . . 231,472 17,573 Changes in assets and liabilities: Decrease in interest payable, net. . . . . . . . . . . . . . (8,567) -- ------------ -------------- Net cash used in operations. . . . . . . . . . . . . . . . . . . (12,849) -- ------------ -------------- Cash flows used in investing activities: Purchase of convertible debentures . . . . . . . . . . . . . . -- (1,000,000) Purchase of membership interests in: Mountain Resort Holdings, LLC. . . . . . . . . . . . . . . . -- (5,750,000) Mountain Springs Resort, LLC . . . . . . . . . . . . . . . . -- (700,000) ------------ -------------- Net cash used in investing activities. . . . . . . . . . . . -- (7,450,000) ------------ -------------- Cash flows provided by (used in) financing activities: Distribution from Mountain Resort Holdings, LLC. . . . . . . . 210,545 -- Payment of note payable. . . . . . . . . . . . . . . . . . . . (197,696) -- Members' capital contributions . . . . . . . . . . . . . . . . -- 7,450,000 ------------ -------------- Net cash provided by financing activities. . . . . . . . . . 12,849 7,450,000 ------------ -------------- Net change in cash and cash equivalents. . . . . . . . . . . . . -- -- Cash and cash equivalents at beginning of year/period. . . . . . -- -- ------------ -------------- Cash and cash equivalents at end of year/period. . . . . . . . . $ -- $ -- ============ ============== Other non-cash activities: - -------------------------- Interest earned on convertible debentures (Note 3) . . . . . . . -- $ 32,847 Interest earned on note receivable (Note 4). . . . . . . . . . . $ 102,001 -- Recovery of principal on note receivable (Note 4). . . . . . . . $ 1,000,000 -- Exchange of principal and accrued, but unpaid, interest on note receivable for equity interests in Mountain Springs Resort, LLC (Note 4). . . . . . . . . . . . . $(1,121,260) --
. . The accompanying notes are an integral part of the financial statements. 6 EFG KIRKWOOD LLC Notes to the financial statements December 31, 2001 (Unaudited) NOTE 1 - ORGANIZATION EFG Kirkwood LLC (the "Company") was formed as Tandem Capital LLC, a Delaware limited liability company, on December 2, 1998. On April 6, 1999, the Company changed its name to EFG Kirkwood LLC. The Company's operations commenced on June 10, 1999. The Company has two classes of membership interests identified as Class A and Class B. The Class A members consist of AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG Investment Trust D (collectively, the "AFG Trusts"). The Class B member is Semele Group Inc. The collective voting interests of the Class A members are equal to the voting interests of the Class B member; however, the Class A interest holders are entitled to certain preferred returns prior to the payment of Class B cash distributions. The manager of the Company is AFG ASIT Corporation, which also is the Managing Trustee of the AFG Trusts. (See "Note 5 - Related Party Transactions" herein for additional information concerning the relationships of the Company's members.) At December 31, 2001, the Company owned approximately 38% of each of the Series B preferred member interests and the Series A common member interests of Mountain Resort Holdings, LLC, and 50% of the common member interests of Mountain Springs Resort, LLC. The Company has no business activities other than through its membership interests in Mountain Resort Holdings, LLC and Mountain Springs Resort, LLC (hereinafter, collectively referred to as the "Resorts"). Mountain Resort Holdings, LLC - -------------------------------- Mountain Resort Holdings, LLC, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. (See Note 4.) Mountain Springs Resort, LLC - ------------------------------- Mountain Springs Resort, LLC, through its wholly owned subsidiary, Durango Resort, LLC, owns 80% of the common member interests and 100% of the Class B preferred member interests of DSC/Purgatory, LLC, which owns and operates the Purgatory Ski resort in Durango, Colorado. (See Note 4.) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - ------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures contained in the financial statements. Actual results could differ from those estimates and changes in such estimates could affect amounts reported in future periods and could be material. 7 Cash and Cash Equivalents - ---------------------------- The Company does not maintain a cash account at any bank or financial institution. All cash transactions involving the Company were funded directly by the Company's members on the Company's behalf. Revenue Recognition - -------------------- The Company accounts for its membership interests in the Resorts using the equity method of accounting. Under the equity method of accounting, the carrying value of the Company's membership interests are (i) increased or decreased to reflect the Company's share of income or loss from the Resorts and (ii) decreased to reflect any cash distributions paid by the Resorts to the Company. Allocation of Profits and Losses - ------------------------------------ Profits and losses of the Company are allocated consistent with the economic priorities of the Company's members relative to one another. The Company's operating agreement provides that cash distributions to the Class B member are subordinate to Class A Payout. (Class A Payout is defined as the first time that the Class A members shall have been paid a cash return equal to all of their original capital contributions plus a yield of 12% per annum compounded annually, subject to certain adjustments.) Accordingly, the Company's cumulative losses have been allocated first to the Class B member up to the amount of its original capital contribution of $750,000. Cumulative losses in excess of $750,000 have been allocated to the Class A members in proportion to their respective interests in aggregate Class A equity. Future net income or net loss, as the case may be, will be allocated first to the Class A members until they reach Class A Payout. Neither the Class B nor the Class A members are required to make any additional capital contributions to the Company under the terms of the Company's operating agreement. Income Taxes - ------------- No provision for federal or state income taxes has been provided for the Company, as the liability for such income taxes is the obligation of the Company's members. NOTE 3 - CONVERTIBLE DEBENTURES On June 10, 1999, the Company purchased $1,000,000 of convertible debentures from Kirkwood Associates, Inc. The debentures earned interest at the annual rate of 6.5%, compounded quarterly, and permitted the Company to convert both principal and accrued, but unpaid, interest into shares of common stock in Kirkwood Associates, Inc. at a defined conversion rate. On April 30, 2000, the Company elected to convert all of the principal and accrued, but unpaid, interest under the debentures ($1,059,125) into 962,841 shares of common stock in Kirkwood Associates, Inc. (See Note 4.) 8 NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS, LLC AND MOUNTAIN SPRINGS RESORT, LLC Mountain Resort Holdings, LLC - -------------------------------- The Company's membership interests in Mountain Resort Holdings, LLC were obtained as a result of the recapitalization of Kirkwood Associates, Inc. on April 30, 2000. Under the recapitalization plan, the net assets of Kirkwood Associates, Inc., excluding certain tax liabilities, were contributed to Mountain Resort Holdings, LLC and the stockholders of Kirkwood Associates, Inc. exchanged their capital stock for membership interests in Mountain Resort Holdings, LLC. At December 31, 2001, the Company owned approximately 38% of each of the Series A common membership interests and the Series B preferred membership interests of Mountain Resort Holdings, LLC. The Company purchased its initial equity interests in Kirkwood Associates, Inc. on June 10, 1999 at a discount to book value of approximately $3,329,000. On April 30, 2000, the Company completed certain additional equity transactions in connection with the recapitalization of Kirkwood Associates, Inc. These transactions caused the net purchase discount to be reduced to approximately $2,812,000, such amount representing the net amount by which the Company's share of the net equity reported by Mountain Resort Holdings, LLC exceeded the purchase price paid by the Company for such interests. This difference is being treated as a reduction to the depreciable assets recorded by Mountain Resort Holdings, LLC and is being amortized as a reduction of depreciation expense over 13 years. The amortization period represents the weighted average estimated useful life of the long-term assets owned by Mountain Resort Holdings, LLC. The Company's allocated share of the net income (loss) of Mountain Resort Holdings, LLC detailed below is adjusted for depreciation expense reductions of $213,398 and $142,274 in 2001 and 1999, respectively. A summary of the Company's membership interest in Mountain Resort Holdings, LLC from inception through December 31, 1999 and for the year ended December 31, 2001 is presented in the table below.
Initial capital contribution and advances . . . . . . . $6,750,000 Net loss from inception through December 31, 1999 (1) (201,317) ----------- Membership interests and advances at December 31, 1999. $6,548,683 =========== Membership interests at January 1, 2001 . . . . . . . . $6,842,703 Net income for the year ended December 31, 2001 . . . 15,634 Distributions . . . . . . . . . . . . . . . . . . . . (210,545) ----------- Membership interests at December 31, 2001 . . . . . . . $6,647,792 ===========
9 ___________ (1) The Company's allocated share of the net income (loss) of Mountain Resort Holdings, LLC for 2001 and 1999 was determined based upon its common and preferred equity interests in Mountain Resort Holdings, LLC during the respective years/periods. From June 10, 1999 to April 30, 2000, the Company owned approximately 71% of the outstanding preferred equity interests and approximately 16% of the outstanding common equity interests of Mountain Resort Holdings, LLC. After the recapitalization on April 30, 2000, discussed above, the Company held approximately 38% of both the outstanding preferred and common equity interests of Mountain Resort Holdings, LLC. The Company's allocated share of the net income or loss of the resort is influenced principally by the Company's percentage share of the outstanding common interests of the resort during the respective periods. The table below provides summarized financial data for Mountain Resort Holdings, LLC as of December 31, 2001 and 1999, for the year ended December 31, 2001, and for the period June 10, 1999 through December 31, 1999. Amounts presented in thousands (000's omitted):
2001 1999 -------- -------- Total assets. . . . . . . . . . . . . . . . . . . $51,420 $47,584 Total liabilities . . . . . . . . . . . . . . . . $28,392 $22,995 Total equity. . . . . . . . . . . . . . . . . . . $23,028 $24,589 Total revenues (1). . . . . . . . . . . . . . . . $29,597 $ 6,144 Total operating and other income and expenses (1) $30,117 $ 9,094 Net income (loss) (1) ((2 . . . . . . . . . . . $ (520) $(2,950)
___________ (1) The Company's ownership interest was acquired on June 10, 1999. Accordingly, amounts presented for 1999 are for the period June 10, 1999 through December 31, 1999. Mountain Springs Resort, LLC - ------------------------------- The Company and a third party established Mountain Springs Resort, LLC as a 50/50 joint venture for the purpose of acquiring certain common and preferred equity interests in DSC/Purgatory, LLC. The Company and its joint venture partner provided cash funds totaling $6,800,000 to Mountain Springs Resort, LLC, each member having contributed $2,400,000 of equity and $1,000,000 in the form of a loan. The loans earned interest at the rate of 11.5% annually until their maturity on November 1, 2001 whereupon both the Company and its joint venture partner converted their respective loan principal and accrued, but unpaid, interest ($1,121,260 each) into equity interests in Mountain Springs Resort, LLC. 10 A wholly owned subsidiary of Mountain Springs Resort, LLC, Durango Resort, LLC, was established to acquire 80% of the common membership interests and 100% of the Class B preferred membership interests of DSC/Purgatory, LLC at a cost of approximately $6,311,000, including transaction costs of approximately $311,000. Subsequently, Mountain Springs Resort, LLC contributed additional equity totaling $302,400 to DSC/Purgatory LLC to pay its share of costs associated with planning for the development of Mountain Springs Resort, LLC's real estate. The assets, liabilities and equity of DSC/Purgatory, LLC were contributed at estimated fair value. The acquisition of DSC/Purgatory, LLC was accounted for using the purchase method of accounting. Accordingly, the excess of the purchase price over the net identifiable assets of DSC/Purgatory, LLC, or approximately $311,000, was allocated to goodwill and is being amortized over a period of 13 years. The Company's allocated share of the net loss of Mountain Springs Resort, LLC includes amortization expense for goodwill of $11,970 in 2001. The remaining equity interests of DSC/Purgatory, LLC, consisting of 20% of the common membership interests and 100% of the Class A preferred membership interests, are owned by a third party. The Class A preferred membership interests are senior to the other equity interests in DSC/Purgatory, LLC. Consequently, the Company's economic interests in DSC/Purgatory, LLC are subordinate to the Class A member and have resulted in the Company recognizing a larger share of the net losses reported by DSC/Purgatory, LLC than would be the case if all equity interests were pari passu. A summary of the Company's advances to and membership interests in Mountain Springs Resort, LLC from inception through December 31, 1999 and for the year ended December 31, 2001 is presented in the table below.
Initial capital contribution. . . . . . . . . . . . . . $ 700,000 Net loss from inception through December 31, 1999 (1) (17,573) ----------- Membership interests and advances at December 31, 1999. $ 682,427 =========== Membership interests and advances at January 1, 2001. . $1,008,477 Net loss for the year ended December 31, 2001 . . . . (231,472) ----------- Membership interests at December 31, 2001 . . . . . . . $ 777,005 ===========
____________ (1) Mountain Springs Resort, LLC purchased its interest in DSC/Purgatory, LLC effective May 1, 2000. The Company's allocated share of net loss of Mountain Springs Resort, LLC prior to May 1, 2000 does not include any share of the income or loss from DSC/Purgatory, LLC. 11 The Company owns 50% of Mountain Springs Resort, LLC, which through a wholly owned subsidiary, Durango Resorts, LLC, owns 80% of the common membership interests and 100% of the Class B preferred membership interests of DSC/Purgatory, LLC. The operations of Mountain Springs Resort, LLC and Durango Resort, LLC are immaterial except for their investments in the entities as described above. The table below provides summarized financial data for DSC/Purgatory, LLC as of and for the year ended December 31, 2001. Amounts presented in thousands (000's omitted):
2001 -------- Total assets. . . . . . . . . . . . . . . . . $29,793 Total liabilities . . . . . . . . . . . . . . $20,904 Total equity. . . . . . . . . . . . . . . . . $ 8,889 Total revenues. . . . . . . . . . . . . . . . $15,250 Total operating and other income and expenses $15,648 Net loss. . . . . . . . . . . . . . . . . . . $ (398)
NOTE 5 - RELATED PARTY TRANSACTIONS The Company's Class A and Class B members and its manager are affiliated. Semele Group Inc., through a wholly owned subsidiary, owns and controls the Company's manager, AFG ASIT Corporation, as well as a controlling voting interest in each of the AFG Trusts. A different subsidiary of Semele owns Class A Beneficiary interests that collectively represent approximately 0.4% of the outstanding Class A Beneficiary interests of the AFG Trusts. The membership interests of the Company are owned as follows:
Percentage ----------- Class A membership interests - -------------------------------------- AFG Investment Trust A 10% AFG Investment Trust B 20% AFG Investment Trust C 40% AFG Investment Trust D 30% ----------- Total Class A membership interests 100% =========== Class B membership interests - -------------------------------------- Semele Group Inc. 100% ===========
12 NOTE 6 - GUARANTEE The Company is a guarantor of a note payable to a bank of DSC/Purgatory, LLC. The guarantee is for $3,500,000, the original principal balance of the note. The balance of the note is $1,075,000 as of December 31, 2001. The note is also guaranteed in the same amount by another investor of DSC/Purgatory, LLC. NOTE 7 - SUBSEQUENT EVENT In May 2002, the Company received approximately $427,900 from Mountain Resort Holdings, LLC representing the Company's share of a scheduled redemption of a portion of the Series B preferred member interests of Mountain Resort Holdings, LLC. 13 EX-13 3 doc2.txt EXHIBIT 13 AFG INVESTMENT TRUST AFG INVESTMENT TRUST C ANNUAL REPORT TO THE PARTICIPANTS, DECEMBER 31, 2001 AFG Investment Trust C INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page ---- SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 23 FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants.. . . . . . . . . . . . . 34 Statement of Financial Position at December 31, 2001 (Restated) and 2000 (Restated). . . . . . . . . . . . . 35 Statement of Operations for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999 . 36 Statement of Changes in Participants' Capital for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999.. 37 Statement of Cash Flows for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999.. 38 Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . 39 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed. . . . . . . . . . . . . . . . . . . 61 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings (Restated) . . . . . . . . . . . . . 62 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 . . . . . . . . . . . . . . 63 Schedule of Reimbursable Operating Expenses Due to Third Parties . . . . . . 64 Schedule of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
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 each of the five years in the period ended December 31, 2001:
Summary of Operations 2001 2000 1999 1998 1997 - -------------------------------- ------------- ------------- ----------- ----------- ------------ Restated (1) Restated (1) Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635 $15,201,411 $16,912,628 Total income $ 6,985,008 $ 10,785,068 $15,453,298 $19,153,506 $17,455,773 Net income (loss) $ (5,599,193) $ 2,050,016 $ 5,802,601 $ 4,999,220 $ 877,213 Per Beneficiary Interest: Net income (loss) Class A Interests $ (2.84) $ 0.66 $ 1.13 $ 1.17 $ 0.49 Class B Interests $ (0.10) $ 0.18 $ 0.75 $ 0.39 $ (0.12) Cash distributions declared Class A Interests $ - $ - $ 4.56 $ 1.64 $ 3.11 Class B Interests $ - $ - $ 3.66 $ 2.10 $ 0.30 Financial Position - -------------------------------- Total assets $ 42,170,719 $ 51,641,436 $71,090,942 $72,908,929 $82,036,778 Total long-term obligations $ 22,382,964 $ 26,220,794 $32,573,152 $35,072,883 $39,928,173 Participants' capital $ 17,589,367 $ 23,188,560 $21,158,711 $36,360,494 $41,159,172
(1) See Note 1 to the financial statements, regarding the restatement of the Trust's 2001 and 2000 financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year ended December 31, 2001 compared to the year ended December 31, 2000 and the year ended December 31, 2000 compared to the year ended December 31, 1999 Subsequent to the issuance of the financial statements of AFG Investment Trust C (the "Trust") as of and for the year ended December 31, 2001, the Trust restated the amount recorded as its share of loss on its interest in EFG Kirkwood LLC ("EFG Kirkwood") under the equity method of accounting for the years ended December 31, 2001 and 2000. As a result, the financial statements as of and for the years ended December 31, 2001 and 2000 have been restated from amounts previously reported. The effects of the restatements are presented in Note 1 to the accompanying financial statements and have been reflected herein. The following should be read in conjunction with the restated 2001 and 2000 Financial Statements, including notes thereto. The following discussion compares the restated December 31, 2001 financial condition and results of operations to the restated December 31, 2000 financial condition and results of operations and the restated December 31, 2000 results of operations to the results of operations for the year ended December 31, 1999. Certain statements in this annual report of 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 assets, and future economic conditions. Overview - -------- The Trust was organized in 1992 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. In 1998, the Trust Agreement was modified to permit the Trust to invest in assets other than equipment. Subsequently, the Trust has made certain non-equipment investments. During 2001, the Trust and three affiliated trusts (collectively, the "Trusts"), through a jointly owned entity, acquired 83% of the outstanding common stock of PLM International, Inc. ("PLM"). PLM is an equipment management company specializing in the leasing of transportation equipment. See further discussion of PLM and other acquisitions below. Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by December 31, 2004. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Trust has active business operations in the financial services industry, primarily equipment leasing, and in the real estate industry through its interests in EFG Kirkwood and EFG/Kettle Development LLC ("Kettle Valley"). The Trust does not intend to engage in investment activities in a manner or to an extent that would require the Trust to register as an investment company under the Act. However, it is possible that the Trust unintentionally may have engaged, or may engage in an activity or activities that may be construed to fall within the scope of the Act. If the Trust were determined to be an investment company, its business would be adversely affected. The Managing Trustee is engaged in discussions with the staff of the Securities and Exchange Commission regarding whether or not the Trust may be an inadvertent investment company by virtue of its recent acquisition activities. If necessary, the Trust intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. The events of September 11, 2001 and the slowing U.S. economy could have an adverse effect on market values for the Trust's assets and the Trust's ability to negotiate future lease agreements. Notwithstanding the foregoing, it currently is not possible for the Managing Trustee to determine the long-term effects, if any, that these events may have on the economic performance of the Trust's equipment portfolio. Approximately 62% of the Trust's equipment portfolio consists of commercial jet aircraft. The events of September 11, 2001 adversely affected market demand for both new and used commercial aircraft and weakened the financial position of most airlines. No direct damage occurred to any of the Trust's assets as a result of these events and while it is currently not possible for the Managing Trustee to determine the ultimate long-term economic consequences of these events to the Trust, the Managing Trustee expects that the resulting decline in air travel will suppress market prices for used aircraft in the short term and could inhibit the viability of the airline industry. In the event of a default by an aircraft lessee, the Trust could suffer material losses. At December 31, 2001, the Trust has collected substantially all rents owed from aircraft lessees. The Managing Trustee is monitoring the situation and will continue to evaluate potential implications to the Trust's financial position and future liquidity. Critical Accounting Policies and Estimates - ---------------------------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Managing Trustee to make estimates and assumptions that affect the amounts reported in the financial statements. On a regular basis, the Managing Trustee reviews these estimates and assumptions including those related to revenue recognition, asset lives and depreciation, impairment of long-lived assets and contingencies. These estimates are based on the Managing Trustee's historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Managing Trustee believes, however, that the estimates, including those for the above-listed items, are reasonable. The Managing Trustee believes the following critical accounting policies, among others, are subject to significant judgments and estimates used in the preparation of these financial statements: Revenue Recognition: Rents are payable to the Trust monthly or quarterly and no - -------------------- significant amounts are calculated on factors other than the passage of time. The majority of the Trust's leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Asset lives and depreciation method: The Trust's primary business involves the - -------------------------------------- purchase and subsequent lease of long-lived equipment. 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 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 the 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. Impairment of long-lived assets: On a regular basis, the Managing Trustee - ----------------------------------- reviews the net carrying value of equipment and equity investments to determine - ----- whether it can be recovered from undiscounted future cash flows. Adjustments to reduce the net carrying value of long-lived assets are recorded in those instances where estimated net realizable value is considered to be less than net carrying value and are reflected separately on the accompanying Statement of Operations as write-down of equipment. Inherent in the Trust's estimate of net realizable value are assumptions regarding estimated future cash flows. If these assumptions or estimates change in the future, the Trust could be required to record impairment charges for these assets. Contingencies and litigation: The Trust is subject to legal proceedings - ------------------------------- involving ordinary and routine claims related to its business when quantifiable, - ------- estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, the Trust may be required to adjust amounts recorded in its financial statements. Segment Reporting - ------------------ The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes the management of the Trust's equipment lease portfolio and the Trust's interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp., which owns the majority interest in PLM, an equipment leasing and asset management company. The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales through its ownership interests in EFG Kirkwood and Kettle Valley. There are no material intersegment sales or transfers. Segment information for the years ended December 31, 2001, 2000 and 1999 is summarized below.
2001 2000 1999 ------------- ------------- ----------- Restated (1) Restated (1) Total Income: (2) Equipment leasing $ 6,985,008 $ 10,785,068 $15,453,298 Real estate - - - ------------- ------------- ----------- Total $ 6,985,008 $ 10,785,068 $15,453,298 ============= ============= =========== Operating Expenses, Management Fees and Other Expenses: Equipment leasing $ 1,501,130 $ 944,491 $ 1,106,068 Real estate 75,737 80,460 250,214 ------------- ------------- ----------- Total $ 1,576,867 $ 1,024,951 $ 1,356,282 ============= ============= =========== Interest Expense: Equipment leasing $ 2,037,067 $ 2,404,830 $ 2,412,127 Real estate 17,996 58,433 66,623 ------------- ------------- ----------- Total $ 2,055,063 $ 2,463,263 $ 2,478,750 ============= ============= =========== Depreciation, Writedown of Equipment and Amortization Expense: Equipment leasing $ 9,437,264 $ 4,189,657 $ 5,815,665 Real estate 75,495 65,800 - ------------- ------------- ----------- Total $ 9,512,759 $ 4,255,457 $ 5,815,665 ============= ============= =========== Equity Interests: Equipment leasing $ 984,280 $ - $ - Real estate (423,792) (991,381) - ------------- ------------- ----------- Total $ 560,488 $ (991,381) $ - ============= ============= =========== Net Income (Loss): $ (5,599,193) $ 2,050,016 $ 5,802,601 ============= ============= =========== Capital Expenditures: Equipment leasing $ 7,162,123 $ 696,892 $ 412,529 Real estate - 1,287,350 5,846,448 ------------- ------------- ----------- Total $ 7,162,123 $ 1,984,242 $ 6,258,977 ============= ============= =========== Assets: Equipment leasing $ 35,251,213 $ 44,232,338 $63,912,013 Real estate 6,919,506 7,409,098 7,178,929 ------------- ------------- ----------- Total $ 42,170,719 $ 51,641,436 $71,090,942 ============= ============= ===========
(1) See Note 1 to the accompanying financial statements, regarding the restatement of the Trust's 2001 and 2000 financial statements. (2) Includes equipment leasing revenue of $6,519,899, $7,733,941 and $10,286,635 for the years ended December 31, 2001, 2000 and 1999, respectively. Results of Operations - ----------------------- Equipment Leasing - ------------------ For the year ended December 31, 2001, the Trust recognized lease revenue of $6,519,899 compared to $7,733,941 and $10,286,635 for the years ended December 31, 2000 and 1999, respectively. The decrease in lease revenue is due to 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. Future lease term expirations and equipment sales will result in a reduction in lease revenue recognized. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by Equis Financial Group Limited Partnership ("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. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as lease revenue during the year ended December 31, 2001 and its share of the maintenance payment was $35,440, which is accrued as a maintenance obligation at December 31, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs are to receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. During the years ended December 31, 2001, 2000 and 1999, the Trust recognized lease revenue including the early termination fee discussed above of $219,210, $159,904 and $153,980, respectively, related to its interest in this aircraft. Interest income for the year ended December 31, 2001 was $157,725 compared to $666,975 and $1,217,855 for the years ended December 31, 2000 and 1999, respectively. Generally, interest income is generated from the temporary investment of rental receipts and equipment sale proceeds in short-term instruments. 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. The Trust distributed $15,200,000 in January 2000 that resulted in a reduction of cash available for investment. On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the trusts, jointly and severally, 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"). During the year ended December 31, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $224,513, including $89,583 of income related to the guarantee agreement recognized during the year ended December 31, 2001. During the year ended December 31, 2001, the Trust received an upfront cash fee of $175,400 and recognized a total of $301,400 in income related from the guarantee. The guarantee fee is reflected as Other Income in the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. 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 in the first quarter of 1999. This amount is reflected as Other Income on the accompanying Statement of Operations for the year ended December 31, 1999. During the three years ended December 31, 2001, the Trust sold equipment having a net book value of $60,151, $1,412,158 and $5,163,109, respectively, to existing lessees and third parties, which resulted in net gains, for financial statement purposes, of $124,658, $2,012,657 and $3,687,692, respectively. It cannot be determined whether future sales of equipment will result in a net gain or 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 to 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 year ended December 31, 2000, the Trust sold investment securities having a book value of $420,513, resulting in a gain, for financial reporting purposes of $70,095. Depreciation expense was $3,811,250, $4,189,657, and $5,815,665 for the years ended December 31, 2001, 2000 and 1999, 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 the 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. During the year ended December 31, 2001, the Trust recorded a write-down of equipment, representing an impairment to the carrying value of the Trust's interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft. The estimate of the fair value was based on (i) information provided by a third-party aircraft broker and (ii) EFG's assessment of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. Interest expense on equipment related debt was $2,037,067, $2,404,830, and $2,412,127 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest expense will continue to decrease in the future as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees related to equipment leasing were $357,510, $350,618 and $460,805 during the years ended December 31, 2001, 2000 and 1999, 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, subject to certain limitations. Operating expenses - affiliate were $1,143,620, $543,363, and $843,263 for the years ended December 31, 2001, 2000 and 1999, respectively. Operating expenses - - affiliate in 2001 included approximately $293,000 of remarketing costs related to the re-lease of an aircraft in June 2001 and $140,000 for ongoing legal costs associated with the Trust's ongoing discussions with the Securities and Exchange Commission regarding its investment company status. Operating expenses - affiliate also included approximately $114,000 of costs reimbursed to EFG as a result of the successful acquisition of the PLM common stock. In conjunction with the acquisition of the PLM common stock, EFG became entitled to recover certain out of pocket expenses which it had previously incurred. Operating expenses consist principally of administrative charges, professional service costs, such as audit, insurance and legal fees, as well as printing, distribution and remarketing expenses. 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. In addition, the Trust wrote-down other investments $50,510 during the year ended December 31, 2000. For the year ended December 31, 2001, the Trust recorded income of $984,280 and amortization expense of $9,695, in connection with its ownership interest in MILPI. This income represents the Trust's share of the net income of MILPI recorded under the equity method of accounting. The Trust's income from MILPI results from MILPI's indirect ownership of PLM common stock acquired in February 2001. MILPI - ----- During the period February 7, 2001 (date of inception) through December 31, 2001, MILPI recognized operating revenues of approximately $10,376,000, consisting primarily of $5,217,000 of management fees, $2,032,000 of acquisition and lease negotiation fees, $1,716,000 of equity income in partnership interests and $472,000 of operating lease income. In addition, MILPI recognized other income of approximately $467,000, consisting primarily of interest income earned on investments. During the same period, MILPI incurred total operating expenses of $5,856,000, consisting primarily of $3,290,000 of general and administrative expenses, $1,255,000 of depreciation and amortization, $511,000 from impairment of its investment in managed programs and $800,000 of operations support expenses, which include salary and office-related expenses for operational activities. In addition, MILPI also incurred income tax expense of $1,611,000 and recorded minority interest expense of $429,000. Real Estate - ------------ Management fees for non-equipment investments were $75,737, $80,460 and $52,214 for the years ended December 31, 2001, 2000 and 1999, respectively. The management fees on non-equipment assets, excluding cash, were based on 1% of such assets under management. For the year ended December 31, 1999, operating expenses included legal fees of $198,000 related to the Trust's ownership interests in Kettle Valley and EFG Kirkwood. The Trust has an approximately 51% ownership interest in Kettle Valley (see further discussion below). For the years ended December 31, 2001 and 2000, the Trust recorded losses of $332,692 and $91,066, respectively, from its interest in Kettle Valley. The losses represent the Trust's share of the losses of Kettle Valley recorded under the equity method of accounting. In each of the years ended December 31, 2001 and 2000, the Trust recorded amortization expense of $65,800, in connection with its ownership interest in Kettle Valley. Interest expense on a note payable related to the Trust's acquisition of its interest in Kettle Valley was $17,996, $58,433 and $66,623 for the years ended December 31, 2001, 2000, and 1999, respectively. The note was repaid as of December 31, 2001. The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also is the manager of EFG Kirkwood. EFG Kirkwood owns membership interests in: Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail, and food and beverage services, with the remainder of its revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. For the year ended December 31, 2001, the Trust recorded a loss of $91,100 on its ownership interest in EFG Kirkwood, compared to a loss of $900,315 for the year ended December 31, 2000. The loss in 2000 was caused principally by losses reported by Purgatory for the period May 1, 2000 to December 31, 2000. Mountain Springs, through a wholly owned subsidiary, became an equity participant in Purgatory on May 1, 2000. Consequently, Mountain Springs did not participate in the operating results of Purgatory for the period from January 1, 2000 to April 30, 2000, generally the period of Purgatory's peak income activity. Accordingly, the losses incurred in 2000 do not reflect a full year's operating activities for Purgatory. See Note 6 to the accompanying financial statements. Through its ownership of 40% of the Class A membership interests in EFG Kirkwood, the Trust indirectly owns interests in two ski resort operating companies, Purgatory and Mountain Resort. EFG Kirkwood owns 50% of the membership interests in Mountain Springs which, through a wholly-owned subsidiary, owns 80% of the common member interests and 100% of the Class B preferred member interests of Purgatory. EFG Kirkwood also owns approximately 38% of the membership interests in Mountain Resort which, through four wholly-owned subsidiaries, owns Kirkwood Mountain Resort. The Trust accounts for its ownership interests using the equity method of accounting. Mountain Resort - ---------------- Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Other operations include a real estate development division, which has developed and is managing a 40-unit condominium residential and commercial building, an electric and gas utility company, which operates as a regulated utility company and provides electric and gas services to the Kirkwood community, and a real estate brokerage company. During the year ended December 31, 2001, Mountain Resort recorded total revenues of approximately $29,597,000 compared to approximately $27,741,000 for the same period in 2000. The increase in total revenues from 2000 to 2001 of $1,856,000 is primarily the result of an increase in ski-related revenues offset by a decrease in residential-related revenues. Ski-related revenues increased approximately $4,078,000 for the year ended December 31, 2001 compared to 2000. The increase in ski-related revenues resulted from improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 336,000 skiers for the year ended December 31, 2001 as compared to approximately 291,000 skiers in 2000. Residential-related revenues and other operations revenues decreased approximately $2,222,000 for the year ended December 31, 2001 as compared to 2000. The decrease primarily reflects the completion of a 40-unit condominium residential and commercial building in December 1999 resulting in a significant number of condominium sales closing in January 2000. During the year ended December 31, 2001, Mountain Resort recorded total expenses of approximately $30,117,000 compared to approximately $27,464,000 in 2000. The increase in total expenses of $2,653,000 from 2000 to 2001 is the result of increases in ski-related expenses and residential-related and other operations expenses. Ski-related expenses in 2001 increased approximately $2,425,000 compared to 2000 as a result of an increase in ski-related revenue, as discussed above. Residential-related expenses and other operations expenses increased approximately $228,000 in the year end December 31, 2001 compared to 2000, as a result of an increase in other operations expenses largely offset by a decrease in cost of sales from condominium units sold during the year ended December 31, 2001 compared to 2000, as discussed above. Mountain Springs - ----------------- Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails located near Durango, Colorado. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services, with the remainder of revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. Mountain Springs became an equity participant in Purgatory on May 1, 2000 and therefore did not have an interest in Purgatory during the three months ended March 31, 2000. For comparative purposes, the following discussion of Purgatory's operating results includes the operating results for the three months ended March 31, 2000. During the year ended December 31, 2001, Purgatory recorded total revenues of approximately $15,250,000 compared to approximately $13,507,000 for the same period of 2000. The increase in total revenues from 2000 to 2001 of approximately $1,743,000 is the result of improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 306,000 skiers for the year ended December 31, 2001 compared to 286,000 skiers in the same period of 2000. Total expenses were approximately $15,648,000 for the year ended December 31, 2001 compared to approximately $16,163,000 for the same period in 2000. The decrease in total expenses for the year ended December 31, 2001 compared to the same period in 2000 of approximately $515,000 is a result of decreases in operating expenses of approximately $75,000, non-operating costs of approximately $100,000 and financing costs of approximately $340,000. Kettle Valley - -------------- Kettle Valley is a real estate development company located in Kelowna, British Columbia, Canada. The project, which is being developed by Kettle Valley Development Limited Partnership, consists of approximately 280 acres of land that is zoned for 1,120 residential units in addition to commercial space. To date, 108 residential units have been constructed and sold and 10 additional units are under construction. During the twelve months ended December 31, 2001, Kettle Valley recorded revenues of $4,596,837 compared to $6,250,711 for the same period in 2000. The decrease in revenues is the result of a decrease in the number of lot and home sales. Kettle Valley incurred total expenses of $5,967,703 during the twelve months ended December 31, 2001 compared to $7,118,553 for the same period in 2000. The decrease in expenses is the result of a decrease in the number of lot and home sales discussed above. Liquidity and Capital Resources and Discussion of Cash Flows - -------------------------------------------------------------------- The Trust by its nature is a limited life entity. The Trust's principal operating activities have been derived 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 $3,682,916, $5,546,026 and $6,918,949 for the years ended December 31, 2001, 2000 and 1999, respectively. Future renewal, re-lease and equipment sale activities will continue to cause a decline in the Trust's primary-term lease revenue and corresponding sources of operating cash. Expenses associated with rental activities, such as management fees, will also decline as the Trust experiences a higher frequency of remarketing events. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the level of cash available for investment, among other factors. At lease inception, the Trust's equipment was 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 lessee will be maintained. The credit quality of an individual lease may deteriorate after the lease is entered into. 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. At December 31, 2001, the Trust was due aggregate future minimum lease payments of $9,923,959 from contractual lease agreements, a portion of which will be used to amortize the principal balance of notes payable of $22,382,964. 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, the cash flows of the Trust will become less predictable as the Trust remarkets its equipment. Cash expended for asset acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp. ("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts collectively paid $1.2 million for their membership interests in MILPI ($408,000 for the Trust) and MILPI purchased the shares of MILPI Acquisition for an aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition entered into a definitive agreement (the "Agreement") with PLM International, Inc. ("PLM"), an equipment leasing and asset management company, for the purpose of acquiring up to 100% of the outstanding common stock of PLM, for an approximate purchase price of up to $27 million. In connection with the acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any and all of PLM's outstanding common stock. Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83% of PLM's outstanding common stock in February 2001 for a total purchase price of approximately $21.8 million. Under the terms of the Agreement, with the approval of the holders of 50.1% of the outstanding common stock of PLM, MILPI Acquisition would merge into PLM, with PLM being the surviving entity. The merger was completed when MILPI obtained approval of the merger from PLM's shareholders pursuant to a special shareholders' meeting on February 6, 2002. The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199 was contributed by the Trust. The funds were obtained from existing resources and internally generated funds and by means of a 364 day, unsecured loan from PLM evidenced by a promissory note in the principal amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject to an interest rate cap). At December 31, 2001, the Trust has a 34% membership interest in MILPI having an original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects MILPI Acquisition's cost of acquiring the common stock of PLM, including the amount paid for the shares tendered of $7,403,746, capitalized transaction costs of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of $74,037. The acquisition fees were capitalized by the Trust and are being amortized over a period of 7 years beginning March 1, 2001. The Trust's ownership in MILPI subsequent to the merger was increased from 34% to 37.5%. The Trust expended $1,287,350 in 2000 and $2,706,800 in 1999 to acquire its ownership interest in EFG Kirkwood. During 1999, the Trust expended $3,139,648 to acquire its ownership interest in Kettle Valley. In connection with the acquisition of its ownership interest in Kettle Valley, the Trust was paid $1,524,803 for a residual interest in an aircraft In 2001, 2000 and 1999, the Trust expended $26,131, $288,892 and $412,529, respectively, to acquire certain other investments and investment securities. The Trust also realized proceeds from the disposition of investment securities of $490,608, during the year ended December 31, 2000. During 2001, 2000 and 1999, the Trust realized net cash proceeds from equipment disposals of $184,809, $3,424,815, and $8,850,801, respectively. Sales proceeds in 2000 include $2,717,790 related to the Trust's 66% interest in certain rail equipment, which was sold in July 2000. Sales proceeds in 1999 included $4,997,297 related to the Trust's interest in a McDonnell Douglas MD-82 aircraft, 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 risks generally associated with real estate include, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, and other governmental rules. The Trust's involvement in real estate development also introduces financials risks, including the potential need to borrow funds to develop the real estate projects. While the Trust's management presently does not foresee any unusual risks in this regard, it is possible that factors beyond the control of the Trust, its affiliates and joint venture partners, such as a tightening credit environment, could limit or reduce its ability to secure adequate credit facilities at a time when they might be needed in the future. Alternatively, the Trust could establish joint ventures with other parties to share participation in its development projects. Ski resorts are subject to a number of risks, including weather-related risks. The ski resort business is seasonal in nature and insufficient snow during the winter season can adversely affect the profitability of a given resort. Many operators of ski resorts have greater resources and experience in the industry than the Trust, its affiliates and its joint venture partners. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1999, the Trust recorded an unrealized gain on available-for-sale securities of $20,167. This gain was recorded as a component of comprehensive income included in the Statement of Changes in Participants' capital. These available-for-sale securities were sold in 2000 resulting in a realized gain of $70,095. 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. During 1999, the Trust leveraged $1,332,481 of its ownership interest in Kettle Valley. The Kettle Valley debt was repaid as of December 31, 2001. Generally, 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. The amount of cash used to repay debt obligations may fluctuate in the future due to the financing of assets, which may be acquired. In addition, the Trust has a balloon payment obligation of $16,193,280 at the expiration of the lease term related to an aircraft leased to Scandinavian Airlines System ("SAS"). In July 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest. Class A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such aggregate capital contributions, and EFG, as Special Beneficiary, purchased 3,019,220 Class B Interests. Subsequently, EFG transferred its Class B Interests to a special-purpose company, Equis II Corporation. EFG also transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis II Corporation. In December 1999, an affiliate of the Trust, Semele, purchased 85% of the common stock of Equis II Corporation, subject to certain voting restrictions with respect to the Class B Interests of the Trust owned by Equis II Corporation. In May 2000, Semele acquired the remaining 15% of the common stock of Equis II Corporation and, in November 2000, the voting restrictions with respect to the Class B Interests were terminated. As a result, Semele has voting control over the Trust. The former majority stockholders of Equis II Corporation, Gary D. Engle and James A. Coyne, are both members of the Board of Directors of, and collectively own a majority of the stock in, Semele. Mr. Engle is Semele's Chairman and Chief Executive Officer and Mr. Coyne is Semele's President and Chief Operating Officer. The proceeds from the Class B offering were intended to be used principally to repurchase a portion of the Trust's Class A Beneficiary Interests and to pay a one-time special cash distribution of $2,960,865 ($1.47 per Class A Interest) to the Trust's Class A Beneficiaries. That distribution was paid on August 15, 1997. The remainder of the offering proceeds was classified as restricted cash pending its use for the repurchase of Class A Interests or its return to the Class B Interest holders. On August 7, 1997, the Trust commenced an offer to purchase up to 45% of the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997, the Trust used $2,291,567 of the net proceeds realized from the issuance of the Class B Interests to purchase 218,661 of the Class A Interests tendered as a result of the offer. On April 28, 1998, the Trust purchased 5,200 additional Class A Interests at a cost of $46,800. On July 6, 1998, the Trust used $4,646,862 of the Class B offering proceeds to pay a capital distribution to the Class B Beneficiaries. In July 1999, the Trust distributed $1,513,639, including legal fees of $81,360 paid to Plaintiffs' counsel, as a special cash distribution ($0.80 per unit, net of legal fees). In addition, Equis II Corporation agreed to commit $3,405,688 of the Class B Capital Contributions (the remaining balance of the restricted cash) to the Trust for the Trust's investment purposes. After the amendment of the Trust Agreement in 1998, the Managing Trustee 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 intended to continue to evaluate additional new investments, it anticipated that the Trust would be able to fund these new investments with cash on hand or from other sources, such as the proceeds from future asset sales or refinancings and new indebtedness. As a result, in 1999, the Trust declared a special cash distribution to the Trust Beneficiaries totaling $15,200,000, which was paid in January 2000. After the special distribution in January 2000, the Trust adopted a new distribution policy and suspended the payment of regular monthly cash distributions. Looking forward, the Managing Trustee presently does not expect to reinstate cash distributions until expiration of the Trust's reinvestment period in December 2002; however, the Managing Trustee periodically will 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 pay down debt 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. The payment of distributions is presented as a component of financing activities on the accompanying Statement of Changes of Cash Flows. No cash distributions were declared during the years ended December 31, 2001 or 2000. In any given year, it is possible that Beneficiaries will be allocated taxable income in excess of distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Beneficiaries adequate to cover any tax obligation. The Trust Agreement requires that sufficient distributions be made to enable the Beneficiaries to pay any state and federal income taxes arising from any sale or refinancing transactions, subject to certain limitations. 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, the residual value realized for each asset at its disposal date, and the performance of the Trust's non-equipment assets. Future market conditions, technological changes, the ability of EFG to manage and remarket the equipment, and many other events and circumstances, could enhance or detract from individual yields and the collective performance of the Trust's equipment portfolio. The ability of the Managing Trustee and its affiliates to develop and profitably manage its non-equipment assets and the return from its interest in MILPI will impact the Trust's overall performance. 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 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 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. 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, 2001, the Managing Trustee had a negative tax capital account balance of $55,893. No such requirement exists with respect to the Special Beneficiary. New Accounting Pronouncements - ------------------------------- Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Trust believes the adoption of SFAS No. 141 has not had a material impact on its financial statements. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 requires the Trust to complete a transitional goodwill impairment test six months from the date of adoption. The Trust believes the adoption of SFAS No. 142 will not have a material impact on its financial statements. Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in October 2001 and replaces Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business", for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Trust believes that the adoption of SFAS No. 144 will not have a material impact on its financial statements. Report of Independent Certified Public Accountants We have audited the accompanying statements of financial position of AFG Investment Trust C as of December 31, 2001 and 2000, 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, 2001. 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. The consolidated financial statements of MILPI Holdings, LLC, and subsidiary for 2001 and the financial statements of EFG Kirkwood, LLC for 2000, limited liability companies in which the Trust has a 34% and 37.2% interest, respectively, have been audited by other auditors whose reports have been furnished to us; insofar as our opinion on the financial statements relates to data included for MILPI Holdings, LLC, and subsidiary for 2001 and EFG Kirkwood, LLC for 2000, it is based solely on their reports. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of AFG Investment Trust C at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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 the Annual Report 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. The accompanying financial statements for the year ended December 31, 2001 and 2000 have been restated as discussed in Note 1. /S/ ERNST & YOUNG LLP Tampa, Florida May 10, 2002 AFG INVESTMENT TRUST C STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2001 AND 2000
2001 2000 ASSETS Restated Restated ------------- ------------- (See Note 1) (See Note 1) Cash and cash equivalents $ 1,716,588 $ 8,848,816 Rents receivable 124,627 257,399 Accounts receivable - affiliate 103,602 424,853 Guarantee fee receivable - 126,000 Interest receivable - 8,930 Loan receivable - EFG/Kettle Development LLC 176,070 77,059 Interest in EFG/Kettle Development LLC 3,916,771 4,315,263 Interest in EFG Kirkwood LLC 3,002,735 3,093,835 Interest in MILPI Holdings, LLC 8,518,577 408,000 Investments - other 264,513 238,382 Other assets, net of accumulated amortization of $47,039 at December 31, 2001 433,506 478,793 Equipment at cost, net of accumulated depreciation of $27,813,022 and $20,018,229 at December 31, 2001 and 2000, respectively 23,913,730 33,364,106 ------------- ------------- Total assets $ 42,170,719 $ 51,641,436 ============= ============= LIABILITIES AND PARTICIPANTS' CAPITAL Notes payable $ 22,382,964 $ 26,220,794 Accrued interest 38,807 344,871 Accrued liabilities 135,019 284,691 Accrued liabilities - affiliates 150,695 47,835 Deferred rental income 277,357 29,882 Other liabilities 1,596,510 1,524,803 ------------- ------------- Total liabilities 24,581,352 28,452,876 ------------- ------------- Participants' capital (deficit): Managing Trustee (56,972) 16,285 Special Beneficiary - 134,353 Class A Beneficiary Interests (1,787,153 Interests; initial purchase price of $25 each) 19,984,706 25,062,188 Class B Beneficiary Interests (3,024,740 Interests; initial purchase price of $5 each) - 314,101 Treasury Interests (223,861 Class A Interests at Cost) (2,338,367) (2,338,367) ------------- ------------- Total participants' capital 17,589,367 23,188,560 ------------- ------------- Total liabilities and participants' capital $ 42,170,719 $ 51,641,436 ============= =============
The accompanying notes are an integral part of these financial statements AFG INVESTMENT TRUST C STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 Restated Restated ------------ ------------ ------------ INCOME Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635 Interest income 157,725 666,975 1,217,855 Gain on sale of equipment 124,658 2,012,657 3,687,692 Gain on sale of investment securities - 70,095 - Other income 182,726 301,400 261,116 ------------ ------------ ----------- Total income 6,985,008 10,785,068 15,453,298 ------------ ------------ ----------- EXPENSES Depreciation and amortization 3,933,784 4,255,457 5,815,665 Write-down of equipment 5,578,975 - - Interest expense 2,055,063 2,463,263 2,478,750 Management fees - affiliates 433,247 431,078 513,019 Operating expenses - affiliate 1,143,620 543,363 843,263 Write-down of other investment - 50,510 - ------------ ------------ ----------- Total expenses 13,144,689 7,743,671 9,650,697 ------------ ------------ ----------- EQUITY INTERESTS Equity in net loss of EFG/Kettle Development LLC (332,692) (91,066) - Equity in net loss of EFG Kirkwood LLC (91,100) (900,315) - Equity in net income of MILPI Holdings, LLC 984,280 - - ------------ ------------ ----------- Total income (loss) from equity interests 560,488 (991,381) - ------------ ------------ ----------- Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601 ============ ============ =========== Net income (loss) per Class A Beneficiary Interest $ (2.84) $ 0.66 $ 1.13 ============ ============ =========== per Class B Beneficiary Interest $ (0.10) $ 0.18 $ 0.75 ============ ============ =========== Cash distributions declared per Class A Beneficiary Interest $ - $ - $ 4.56 ============ ============ =========== per Class B Beneficiary Interest $ - $ - $ 3.66 ============ ============ ===========
The accompanying notes are an integral part of these financial statements AFG INVESTMENT TRUST C STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Managing Special Trustee Beneficiary Class A Beneficiaries Class B Beneficiaries Amount Amount Interests Amount Interests ---------- ------------- --------------------- ------------ --------------------- Balance at December 31, 1998 $ 12,631 $ 104,209 1,787,153 $30,022,170 3,024,740 Net income - 1999 162,815 1,343,220 - 2,015,010 - Unrealized gain on investment securities 202 1,663 - 14,919 - ---------- ------------- --------------------- ------------ --------------------- Comprehensive income 163,017 1,344,883 - 2,029,929 - Cash distributions declared (195,923) (1,616,362) - (8,153,693) - ---------- ------------- --------------------- ------------ --------------------- Balance at December 31, 1999 (20,275) (167,270) 1,787,153 23,898,406 3,024,740 Net income - 2000 (Restated) 36,762 303,287 - 1,178,700 - Less: Reclassification adjustment for unrealized gain on investment securities (202) (1,664) - (14,918) - ---------- ------------- --------------------- ------------ --------------------- Comprehensive income (Restated) 36,560 301,623 - 1,163,782 - ---------- ------------- --------------------- ------------ --------------------- Balance at December 31, 2000 (Restated) 16,285 134,353 1,787,153 25,062,188 3,024,740 Net loss - 2001 (Restated) (73,257) (134,353) - (5,077,482) - ---------- ------------- --------------------- ------------ --------------------- Balance at December 31, 2001 (Restated) $ (56,972) $ - 1,787,153 $19,984,706 3,024,740 ========== ============= ===================== ============ ===================== Treasury Amount Interests Total ------------- ------------ ------------- Balance at December 31, 1998 $ 8,559,851 $(2,338,367) $ 36,360,494 Net income - 1999 2,281,556 - 5,802,601 Unrealized gain on investment securities 3,383 - 20,167 ------------- ------------ ------------- Comprehensive income 2,284,939 - 5,822,768 Cash distributions declared (11,058,573) - (21,024,551) ------------- ------------ ------------- Balance at December 31, 1999 (213,783) (2,338,367) 21,158,711 Net income - 2000 (Restated) 531,267 - 2,050,016 Less: Reclassification adjustment for unrealized gain on investment securities (3,383) - (20,167) ------------- ------------ ------------- Comprehensive income (Restated) 527,884 - 2,029,849 ------------- ------------ ------------- Balance at December 31, 2000 (Restated) 314,101 (2,338,367) 23,188,560 Net loss - 2001 (Restated) (314,101) - (5,599,193) ------------- ------------ ------------- Balance at December 31, 2001 (Restated) $ - $(2,338,367) $ 17,589,367 ============= ============ =============
The accompanying notes are an integral part of these financial statements AFG INVESTMENT TRUST C STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------- ------------ Restated Restated CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,933,784 4,255,457 5,815,665 Write-down of equipment 5,578,975 - - Accretion of bond discount - (6,504) (1,480) Gain on sale of equipment (124,658) (2,012,657) (3,687,692) Gain on sale of investment securities - (70,095) - (Income) loss from equity interests (560,488) 991,381 - Write-down of other investment - 50,510 - Changes in assets and liabilities: Rents receivable 132,772 (42,709) 126,421 Accounts receivable - affiliate 321,251 515,674 (261,854) Accounts receivable - other - - - Guarantee fee receivable 126,000 (126,000) - Interest receivable 8,930 5,792 (14,722) Loan receivable - EFG/Kettle Development LLC (99,011) - (77,059) Other assets (1,752) (137,842) (340,951) Accrued interest (306,064) 173,087 (57,331) Accrued liabilities (149,672) 187,887 (214,696) Accrued liabilities - affiliates 102,860 (668) (5,699) Deferred rental income 247,475 (287,303) (164,254) Other liabilities 71,707 - - ------------ ------------- ------------ Net cash provided by operating activities 3,682,916 5,546,026 6,918,949 ------------ ------------- ------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 184,809 3,424,815 8,850,801 Investments - other (26,131) (288,892) - Interest in EFG/Kettle Development LLC - - (3,139,648) Interest in EFG Kirkwood LLC - (1,287,350) (2,706,800) Interest in MILPI Holdings, LLC (7,135,992) (408,000) - Other liabilities - - 1,524,803 Purchase of investment securities - - (412,529) Proceeds from sale of investment securities - 490,608 - ------------ ------------- ------------ Net cash provided by (used in) investing activities (6,977,314) 1,931,181 4,116,627 ------------ ------------- ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Restricted cash - - 4,919,327 Proceeds from notes payable 471,032 25,302 - Principal payments - notes payable (4,308,862) (6,377,660) (3,832,212) Distributions paid - (15,200,000) (6,223,847) ------------ ------------- ------------ Net cash used in financing activities (3,837,830) (21,552,358) (5,136,732) ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents (7,132,228) (14,075,151) 5,898,844 Cash and cash equivalents at beginning of year 8,848,816 22,923,967 17,025,123 ------------ ------------- ------------ Cash and cash equivalents at end of year $ 1,716,588 $ 8,848,816 $22,923,967 ============ ============= ============ SUPPLEMENTAL INFORMATION Cash paid during the year for interest $ 2,361,127 $ 2,290,176 $ 2,536,081 ============ ============= ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: See Note 5 to the financial statements. The accompanying notes are an integral part of these financial statements AFG INVESTMENT TRUST C NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS - -------------------------------------------------- After AFG Investment Trust C (the "Trust") filed its Annual Report on Form 10-K for the year ended December 31, 2001 with the United States Securities and Exchange Commission, the Trust determined that the amounts recorded as its share of income (loss) on its interest in EFG Kirkwood LLC ("EFG Kirkwood") for the years ended December 31, 2001 and 2000 in its financial statements contained therein required revision. The Trust had previously recorded income of $6,826 and a loss of $726,159 from its interest in EFG Kirkwood for the years ended December 31, 2001 and 2000, respectively. The Trust determined that it should have recorded losses from its interest in EFG Kirkwood LLC of $91,100 and $900,315 for the years ended December 31, 2001 and 2000, respectively. Accordingly, for the year ended December 31, 2001, the Trust recorded an additional loss on its interest in EFG Kirkwood of $97,926, resulting in an increase in the net loss for the year ended December 31, 2001 of $97,926, or $(0.08) per Class A Beneficiary Interest and a decrease in net loss of $0.01 per Class B Beneficiary Interest, respectively. For the year ended December 31, 2000, the Trust recorded an additional loss on its interest in EFG Kirkwood of $174,156, resulting in a decrease in the net income for the year ended December 31, 2000 of $174,156, or $(0.07) per Class A Beneficiary Interest and $(0.01) per Class B Beneficiary Interest, respectively. As a result, the accompanying financial statements for the years ended December 31, 2001 and 2000 have been restated from the amounts previously reported. NOTE 2 - ORGANIZATION AND TRUST MATTERS - --------------------------------------------- The Trust was organized as a Delaware business trust in August 1992. 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 known as 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 2,011,014 Beneficiary Interests (hereinafter referred to as Class A Interests) at a subscription price of $25.00 each ($50,275,350 in total) through 9 serial closings commencing December 1992 and ending September 1993. In July 1997, the Trust issued 3,024,740 Class B Interests at $5.00 each ($15,123,700 in total), of which (i) 3,019,220 interests are held by Equis II Corporation, an affiliate of EFG, and a wholly owned subsidiary of Semele Group Inc. ("Semele"), and (ii) 5,520 interests are held by 10 other Class A investors. The Trust repurchased 218,661 Class A Interests in October 1997 at a cost of $2,291,567. In April 1998, the Trust repurchased 5,200 additional Class A Interests at a cost of $46,800. Accordingly, there are 1,787,153 Class A Interests currently outstanding. The Class A and Class B Interest holders are collectively referred to as the "Beneficiaries". The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts corporation, and one Special Beneficiary, Semele. Semele purchased the Special Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues to act as Advisor to the Trust and provides services in connection with the acquisition and remarketing of the Trust's equipment assets. The Managing Trustee is responsible for the general management and business affairs of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation and an affiliate of EFG. Except with respect to "interested transactions", Class A Interests and Class B Interests have identical voting rights and, therefore, Equis II Corporation generally has control over the Trust on all matters on which the Beneficiaries may vote. With respect to interested transactions, holders of those Class B Interests that are the Managing Trustee or any of its affiliates must vote their interests as a majority of the Class A Interests have been voted. The Managing Trustee and the Special Beneficiary are not required to make any additional capital contributions except as may be required under the Second Amended and Restated Declaration of Trust, as amended (the "Trust Agreement"). Significant operations commenced coincident with the Trusts initial purchase of equipment and the associated lease commitments in December 1992. Pursuant to the Trust Agreement, each distribution of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings of the Trust is made 90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee. Under the terms of a management agreement between the Trust and EFG, management services are provided by EFG to the Trust for fees, as stated in the agreement. 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 AFG (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, Chief Executive Officer and sole Director. 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 certain Other Investment Programs and to continue managing all assets owned by the Trust and the Other Investment Programs. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------------- Cash Equivalents and Investment Securities - ---------------------------------------------- The Trust classifies any amounts on deposits in banks and all highly liquid investments purchased with an original maturity of three months or less as cash and cash equivalents. Revenue Recognition - -------------------- Effective January 1, 2000, the Trust adopted the provisions of Securities Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB No. 101 had no impact on the Trust's financial statements. 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 $9,923,959 are due as follows:
For the year ending December 31, 2002 $5,298,286 2003 4,283,058 2004 285,025 2005 57,590 ---------- Total $9,923,959 ==========
In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as lease revenue during the year ended December 31, 2001 and its share of the maintenance payment was $35,440, which was accrued as a maintenance obligation at December 31, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs are to receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. ====== Revenue from major individual lessees, which accounted for 10% or more of lease revenue during the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ---------- ---------- ---------- Scandinavian Airlines System. . . $3,321,309 $3,620,348 $3,630,432 Hyundai Electronics America, Inc. $1,146,949 $1,146,949 $1,146,949
Use of Estimates - ------------------ The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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 means the actual cost paid by the Trust to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. 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 the 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 undiscounted future cash flows. 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, 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 and 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. Impairment of Long-Lived Assets - ---------------------------------- The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. If this review results in an impairment, as determined based on the estimated undiscounted cash flow, the carrying value of the related long-lived asset is adjusted to fair value. Accrued Liabilities - Affiliates - ----------------------------------- 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 - Affiliates. Contingencies - ------------- The Trust's policy is to recognize a liability for goods and services during the period when the goods or services are received. To the extent that the Trust has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Trust recognizes a liability in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. Allocation of Net Income or Loss - ------------------------------------- Net income is allocated quarterly 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 (excluding $1,432,279 Class A special cash distributions paid in 1999). Net losses are allocated quarterly 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 for income tax purposes differs from the foregoing and 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 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. The unaudited table below includes detail of the allocation of income (loss) in each of the quarters for the years ended December 31, 2001, 2000 and 1999.
Managing Special Class A Class B Trustee Beneficiary Beneficiaries Beneficiaries Treasury Amount Amount Amount Amount Interests Total ---------- ------------- --------------- --------------- ------------ ------------- December 31, 1998 $ 12,631 $ 104,209 $ 30,022,170 $ 8,559,851 $(2,338,367) $ 36,360,494 Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890) Net income 8,367 69,025 511,150 248,122 - 836,664 ---------- ------------- --------------- --------------- ------------ ------------- March 31, 1999 9,019 74,408 29,801,482 8,452,726 (2,338,367) 35,999,268 Special distribution - Class A - - (1,432,279) - - (1,432,279) Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890) Net income 13,991 115,427 673,949 327,147 - 1,130,514 Unrealized gain 127 1,048 7,760 3,767 - 12,702 ---------- ------------- --------------- --------------- ------------ ------------- June 30, 1999 11,158 92,057 28,319,074 8,428,393 (2,338,367) 34,512,315 Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890) Net income 14,405 118,838 829,911 402,853 - 1,366,007 Unrealized gain 154 1,269 9,399 4,563 - 15,385 ---------- ------------- --------------- --------------- ------------ ------------- September 30, 1999 13,738 113,338 28,426,546 8,480,562 (2,338,367) 34,695,817 Distributions (159,986) (1,319,884) (4,525,900) (9,992,832) - (15,998,602) Net income 126,052 1,039,930 - 1,303,434 - 2,469,416 Unrealized gain (loss), net (79) (654) (2,240) (4,947) - (7,920) ---------- ------------- --------------- --------------- ------------ ------------- December 31, 1999 (20,275) (167,270) 23,898,406 (213,783) (2,338,367) 21,158,711 Net income (Restated) 27,314 225,338 503,205 349,322 - 1,105,179 Unrealized losses (Restated) (285) (1,373) (25,620) (1,184) - (28,462) ---------- ------------- --------------- --------------- ------------ ------------- March 31, 2000 (Restated) 6,754 56,695 24,375,991 134,355 (2,338,367) 22,235,428 Net income (Restated) 740 6,109 52,936 14,258 - 74,043 Unrealized gain (Restated) 64 523 4,536 1,222 - 6,345 ---------- ------------- --------------- --------------- ------------ ------------- June 30, 2000 (Restated) 7,558 63,327 24,433,463 149,835 (2,338,367) 22,315,816 Net income (Restated) 7,474 61,661 534,347 143,927 - 747,409 Unrealized gain (Restated) 40 327 2,835 764 - 3,966 ---------- ------------- --------------- --------------- ------------ ------------- September 30, 2000 (Restated) 15,072 125,315 24,970,645 294,526 (2,338,367) 23,067,191 Net income (Restated) 1,234 10,179 88,212 23,760 - 123,385 Unrealized gain (loss) (Restated) (21) (1,141) 3,331 (4,185) - (2,016) ---------- ------------- --------------- --------------- ------------ ------------- December 31, 2000 (Restated) 16,285 134,353 25,062,188 314,101 (2,338,367) 23,188,560 Net income (Restated) 12,758 105,250 912,084 245,671 - 1,275,763 ---------- ------------- --------------- --------------- ------------ ------------- March 31, 2001 (Restated) 29,043 239,603 25,974,272 559,772 (2,338,367) 24,464,323 Net loss (Restated) (29,043) (239,603) (349,340) (559,772) - (1,177,758) ---------- ------------- --------------- --------------- ------------ ------------- June 30, 2001 (Restated) - - 25,624,932 - (2,338,367) 23,286,565 Net loss (Restated) (3,045) - (301,421) - - (304,466) ---------- ------------- --------------- --------------- ------------ ------------- September 30, 2001 (Restated) (3,045) - 25,323,511 - (2,338,367) 22,982,099 Net loss (Restated) (53,927) - (5,338,805) - - (5,392,732) ---------- ------------- --------------- --------------- ------------ ------------- December 31, 2001 (Restated) $ (56,972) $ - $ 19,984,706 $ - $(2,338,367) $ 17,589,367 ========== ============= =============== =============== ============ =============
Reclassification - ----------------- Certain amounts previously reported have been reclassified to conform to the December 31, 2001 presentation. Accumulated Other Comprehensive Income - ----------------------------------------- Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", effective in 1998, requires the disclosure of comprehensive income (loss) to reflect changes in participants' capital that result from transactions and economic events from non-owner sources. Accumulated other comprehensive income (loss) for the years ended December 31, 2001 and 2000 represents the Trust's unrealized gains (losses) on investment securities:
2001 2000 1999 ----- --------- ------- Beginning Balance. . . . . . . . . . . . . . . . $ -- $ 20,167 $ -- Adjustments related to unrealized gains (losses) on investment securities . . . . . . . . . . . . -- (20,167) 20,167 ----- --------- ------- Ending Balance . . . . . . . . . . . . . . . . . $ -- $ -- $20,167 ===== ========= =======
Net Income and Cash Distributions Per Beneficiary Interest - ----------------------------------------------------------------- Net income and cash distributions per Class A Interest are based on 1,787,153 Class A Interests outstanding. Net income and cash distributions per Class B Beneficiary Interest are based on 3,024,740 Class B Interests outstanding during the years ended December 31, 2001, 2000 and 1999. 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 separate tax returns. New Accounting Pronouncements - ------------------------------- Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Trust believes the adoption of SFAS No. 141 has not had a material impact on its financial statements. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 requires the Trust to complete a transitional goodwill impairment test six months from the date of adoption. The Trust believes the adoption of SFAS No. 142 will not have a material impact on its financial statements. Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in October 2001 and replaces Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business", for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Trust believes that the adoption of SFAS No. 144 will not have a material impact on its financial statements. NOTE 4 - EQUIPMENT - --------------------- The following is a summary of equipment owned by the Trust at December 31, 2001. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 2001 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.
Remaining Lease Term Equipment Equipment Type (Months) at Cost Location - --------------------------------------------- ----------- ------------------------ ----------------------- Aircraft 24-42 $ 32,134,911 Foreign Manufacturing 0-20 9,053,648 CA/MI Locomotives 27 4,574,489 NE Materials handling 0-14 3,161,465 AR/FL/IL/IN/KY/MA/MI/OH - OR/PA/SC/WI/WV/Foreign Computer and peripherals 0-17 1,716,673 FL/IN/MI/OH/WI Construction and mining 0 1,085,566 NV/Foreign ------------------------ Total equipment cost - 51,726,752 Accumulated depreciation - (27,813,022) ------------------------ Equipment, net of accumulated depreciation - $ 23,913,730 ========================
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, 2001, the Trust's equipment portfolio included equipment having a proportionate original cost of $38,342,258, representing approximately 74% 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 $44,000,000 and a net book value of approximately $24,000,000 at December 31, 2001. See Note 9 - Notes Payable. 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. However, the Partnership has purchased supplemental insurance coverage to for its aircraft to reduce the economic risk arising from certain losses. Specifically, the Partnership is insured under supplemental policies for "Aircraft Hull Total Loss Only" and "Aircraft Hull Total Loss Only War and Other Perils." As equipment is sold to third parties, or otherwise disposed of, the Trust recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment will be dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. The summary above includes fully depreciated equipment held for sale or re-lease with an original cost of approximately $1,788,000 at December 31, 2001. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. In addition, the summary above includes equipment being leased on a month-to-month basis. The Trust accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which was issued in March 1995. SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the assets may not be recoverable from undiscounted future cash flows. During the year ended December 31, 2001, the Trust recorded a write-down of equipment, representing an impairment to the carrying value of the Trust's interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft. NOTE 5 - INTEREST IN EFG/KETTLE DEVELOPMENT LLC - ------------------------------------------------------ On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers") formed EFG/Kettle Development LLC, a Delaware limited liability company, for the purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a real estate development in Kelowna, British Columbia in Canada called Kettle Valley. EFG/Kettle Development LLC, upon receiving the Buyers' contributions for their membership interests, purchased the Interest from a special purpose company ("SPC") whose subsidiaries own a 99.9% limited partnership interest in Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were established by the seller, in part, for income tax purposes and have no business interests other than the development of Kettle Valley. KVD LP is a Canadian Partnership that owns the property, consisting of approximately 280 acres of land. The project is zoned for 1,120 residential units in addition to commercial space. To date, 108 residential units have been constructed and sold and units are under construction. The seller is an unaffiliated third-party company and has retained the remaining 50.1% ownership interest in the SPC. A newly organized Canadian affiliate of EFG replaced the original general partner of KVD LP on March 1, 1999. The Trust's ownership share in EFG/Kettle Development LLC is 50.604% and had a cost of $4,472,129, including a 1% acquisition fee of $44,729 paid to EFG. The acquisition was funded with cash of $3,139,648 and a non-recourse note for $1,332,481, which was repaid as of December 31, 2001. The Trust's cost basis in this joint venture was approximately $658,000 greater than its equity interest in the underlying net assets at December 31, 1999. This difference is being amortized over a period of 10 years beginning January 1, 2000. The amount amortized is included in amortization expense as an offset to Interest in EFG / Kettle Valley Development LLC and was $65,800 in each of the years ended December 31, 2001 and 2000. The Trust accounts for its interest in Kettle Valley using the equity method of accounting. Under the equity method of accounting, the Trust's interest is (i) increased (decreased) to reflect the Trust's share of income (loss) of the joint venture and (ii) decreased to reflect any distributions the Trust received from the joint venture. The Trust's interest was decreased by $332,692 and $91,066, respectively, during the years ended December 31, 2001 and 2000, reflecting its share of loss from Kettle Valley. In addition, the seller purchased a residual sharing interest in a Boeing 767-300 aircraft owned by the Buyers and leased to Scandinavian Airlines System ("SAS"). The seller paid $3,013,206 to the Buyers ($1,524,803, or 50.604% to the Trust) for the residual interest, which is subordinate to certain preferred payments to be made to the Buyers in connection with the aircraft. Payment of the residual interest is due only to the extent that the Trust receives net residual proceeds from the aircraft. The residual interest is non-recourse to the Buyers and is reflected as Other Liabilities on the accompanying Statement of Financial Position at both December 31, 2001 and 2000. The table below provides comparative summarized income statement data for KVD LP. KVD LP has a January 31 fiscal year end. The Trust has a December 31 fiscal year end. The operating results of KVD LP shown below have been conformed to the year ended December 31, 2001 and 2000, respectively.
Year ended Year ended December 31, December 31, 2001 2000 -------------- -------------- Total revenues $ 4,596,837 $ 6,250,711 Total expenses (5,967,703) (7,118,553) -------------- -------------- Net loss $ (1,370,866) ($867,842) ============== ==============
NOTE 6 - INTEREST IN EFG KIRKWOOD LLC - -------------------------------------------- On May 1, 1999, the Trust and three affiliated trusts (collectively the "Trusts") and Semele formed a joint venture, EFG Kirkwood LLC ("EFG Kirkwood"), for the purpose of acquiring preferred and common stock interests in Kirkwood Associates Inc. ("KAI"). The Trusts collectively own 100% of the Class A membership interests in EFG Kirkwood and Semele owns 100% of the Class B membership interests in EFG Kirkwood. The Class A interest holders are entitled to certain preferred returns prior to distribution payments to the Class B interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of the voting securities of that entity under the operating agreement for the LLC, which gives equal voting rights to Class A and Class B membership interests. The Managing Trustee is the manager of EFG Kirkwood. On April 30, 2000, KAI's ownership interests in certain assets and substantially all of its liabilities were transferred to Mountain Resort Holdings LLC ("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in KAI's common and preferred stock for corresponding pro-rata membership interests in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership interests in Mountain Resort. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. The Trust holds 40% of EFG Kirkwood's Class A membership interests. On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in Mountain Springs Resort LLC ("Mountain Springs"). Mountain Springs, through a wholly owned subsidiary, owns 80% of the common membership interests and 100% of the Class B Preferred membership interests in an entity that owns the Purgatory Ski Resort ("Purgatory") in Durango, Colorado. The Trust's ownership interest in EFG Kirkwood had an original cost of $3,994,150; including a 1% acquisition fee of $39,546 paid to EFG. The Trust's ownership interest in EFG Kirkwood is accounted for on the equity method and the Trust recorded a loss of $91,100 and $900,315 for the years ended December 31, 2001 and 2000, respectively, representing its pro-rata share of the net loss of EFG Kirkwood. The following table summarizes the selected financial data pertaining to the Trust's membership interests in EFG Kirkwood LLC and the summarized results of the operations of the ski resorts. Mountain Resort has a April 30th fiscal year end and the operating results shown below have been conformed to the twelve months ended December 31, 2001 and 2000, respectively. Purgatory has a May 31st fiscal year end. The operating results shown below have been conformed to the twelve months ended December 31, 2001. The Trust purchased their interest in Purgatory on May 1, 2000 and as such the operating results below have been conformed to reflect the eight months ended December 31, 2000.
2001 2000 ------------ ------------ (Restated) (Restated) EFG Kirkwood LLC - ------------------------------------------------ Total assets (primarily real estate and plant) $ 7,424,797 $ 7,851,180 Total liabilities (primarily borrowings) -- 206,263 ------------ ------------ Net equity of EFG Kirkwood LLC $ 7,424,797 $ 7,644,917 ============ ============ Net equity of EFG Kirkwood LLC $ 7,424,797 $ 7,644,917 Unamortized capitalized acquisition fees (2) 82,043 89,675 ------------ ------------ Aggregate net equity and fees $ 7,506,840 $ 7,734,592 ============ ============ Trust's share of net equity and fees $ 3,002,735 $ 3,093,835 ============ ============ 2001 2000 1999 (1) ------------ ------------ ---------- (Restated) (Restated) Equity in loss $ (215,838) $(2,764,141) $(218,890) Total expenses (4,282) (8,567) -- ------------ ------------ ---------- Net loss of EFG Kirkwood LLC $ (220,120) $(2,772,708) $(218,890) ============ ============ ========== Net loss of EFG Kirkwood LLC $ (220,120) $(2,772,708) $(218,890) Amortization of capitalized acquisition fees (2) (7,632) (6,626) (2,564) ------------ ------------ ---------- Aggregate net loss $ (227,752) $(2,779,334) $(221,454) ============ ============ ---------- Trust's share of net loss $ (91,100) $ (900,315) $ -- ============ ============ ========== Summarized Operating Results - Ski Resorts: - ------------------------------------------------ Revenues Mountain Resort $29,597,000 $27,741,000 ============ ============ Purgatory $15,250,000 $ 5,008,000 ============ ============ Expenses Mountain Resort $30,117,000 $27,464,000 ============ ============ Purgatory $15,648,000 $ 9,725,000 ============ ============
(1) EFG Kirkwood LLC commenced operations on June 10, 1999; therefore, amounts in this column correspond to the period June 10, 1999 to December 31, 1999. (2) Unamortized capitalized acquisition fees represent expenses incurred by the four Trusts in the acquisition of the membership interests in EFG Kirkwood LLC. EFG Kirkwood is a guarantor of a note payable to a bank of DSC/Purgatory LLC, the entity which owns Purgatory. The guarantee is for $3,500,000, the original principal balance of the note. The balance of the note is $1,075,000 at December 31, 2001. The note is also guaranteed in the same amount by another investor of DSC/Purgatory LLC. NOTE 7 -INTEREST IN MILPI HOLDINGS, LLC - --------------------------------------------- In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp. ("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts collectively paid $1.2 million for their membership interests in MILPI ($408,000 for the Trust) and MILPI purchased the shares of MILPI Acquisition for an aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition entered into a definitive agreement (the "Agreement") with PLM International, Inc. ("PLM"), an equipment leasing and asset management company, for the purpose of acquiring up to 100% of the outstanding common stock of PLM, for an approximate purchase price of up to $27 million. In connection with the acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any and all of PLM's outstanding common stock. Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83% of PLM's outstanding common stock in February 2001 for a total purchase price of approximately $21.8 million. Under the terms of the Agreement, with the approval of the holders of 50.1% of the outstanding common stock of PLM, MILPI Acquisition would merge into PLM, with PLM being the surviving entity. The merger was completed when MILPI obtained approval of the merger from PLM's shareholders pursuant to a special shareholders' meeting on February 6, 2002. The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199 was contributed by the Trust. The funds were obtained from existing resources and internally generated funds and by means of a 364 day, unsecured loan from PLM evidenced by a promissory note in the principal amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject to an interest rate cap). At December 31, 2001, the Trust has a 34% membership interest in MILPI having an original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects MILPI Acquisition's cost of acquiring the common stock of PLM, including the amount paid for the shares tendered of $7,403,746, capitalized transaction costs of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of $74,037. The acquisition fees were capitalized by the Trust and are being amortized over a period of 7 years beginning March 1, 2001. The amount amortized is included in amortization expense and was $9,695 during the year ended December 31, 2001. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne, who are a director and an officer of the Trust, respectively, are also officers and directors of, and own significant stock in, Semele. In addition, Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition. The Trust's ownership interest in MILPI is accounted for on the equity method and the Trust recorded income of $984,280 during the year ended December 31, 2001, representing its pro-rata share of the net income of MILPI. The table below provides summarized consolidated balance sheet data as of December 31, 2001 and income statement data for MILPI for the period February 7, 2001 (date of inception) through December 31, 2001.
Total assets $43,399,000 Total liabilities $15,453,000 Minority interest $ 3,029,000 Total equity $24,917,000 Total revenues $10,376,000 Total operating expenses, minority interest And other income and expenses $ 5,818,000 Provision for income taxes $ 1,611,000 Net income $ 2,947,000
See discussion of the PLM acquisition included in Note 15 - Subsequent Events. NOTE 8 - 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, both expensed and capitalized, during the years ended December 31, 2001, 2000 and 1999, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:
2001 2000 1999 ---------- -------- ---------- Acquisition fees $ 74,037 $ 15,484 $ 75,281 Management fees 433,247 431,078 513,019 Administrative charges 178,158 197,789 192,348 Reimbursable operating costs due to third parties 965,462 345,574 650,915 ---------- -------- ---------- Total $1,650,904 $989,925 $1,431,563 ========== ======== ==========
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 was compensated by an amount equal to .28% of Asset Base Price paid by the Trust for each asset acquired for the Trust's initial asset portfolio. For acquisition services during the initial reinvestment period, which expired on September 2, 1997, EFG was compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions were reinstated through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Acquisition fees paid to EFG in connection with such equipment reinvestment assets are equal to 1% of Asset Base Price paid by the Trust. For management services, EFG is compensated by an amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Trust with respect to equipment acquired on or prior to March 31, 1998. For management services earned in connection with equipment acquired on or after April 1, 1998, EFG is compensated by an amount equal to 2% of gross lease rental revenue received by the Trust. For non-equipment investments other than cash, the Managing Trustee receives an annualized management fee of 1% of such assets under management. 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 this fee and the other fees described above are 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 at actual cost. All equipment was purchased from EFG, one of its Affiliates or directly from third-party sellers. The Trust's Purchase Price is determined by the method described in Note 3, Equipment on Lease. All rents and proceeds from the sale of equipment are paid by the lessee 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, 2001, the Trust was owed $103,602 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in January 2002. Old North Capital Limited Partnership ("ONC"), a Massachusetts limited partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests or less than 1% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby generating $15,123,700 in aggregate Class B capital contributions. Class A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such aggregate capital contributions, and then Special Beneficiary, EFG, purchased 3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital contributions. 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 a majority of all of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. See Item 1 (a) of this report regarding certain voting restrictions related to the Class B Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. James A. Coyne is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. See the acquisition of the outstanding stock of PLM and subsequent merger by the Trusts included in Note 7 - Interest in MILPI Holdings, LLC. See the formation of a joint venture in March 2002 by the Trust and Trust D discussed below in Note 15 - Subsequent Events. NOTE 9 - NOTES PAYABLE - -------------------------- Notes payable at December 31, 2001 consisted of installment notes of $22,382,964 payable to banks and institutional lenders. The notes bear fixed interest rates ranging between 6.76% and 9.176%. All of the installment notes are non-recourse and are collateralized by the Trust's equipment and assignment of the related lease payments, as discussed below. Generally, the equipment-related installments notes will be fully amortized by noncancellable rents. However, the Trust has a balloon payment obligation of $16,193,280 at the expiration of the lease term related to its interest in an aircraft leased to SAS in December 2003. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 3 - Revenue Recognition). The Reno Programs executed a debt agreement with a new lender collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of which the Trust's share was $471,032. The Trust used the new debt proceeds and a portion of certain other receipts from Reno to repay the outstanding balance of the existing indebtedness related to the aircraft of $493,137 and accrued interest and fees of $7,347. Management believes that the carrying amount of the notes payable approximates fair value at December 31, 2001 based on its experience and understanding of the market for instruments with similar terms. The annual maturities of notes payable are as follows:
For the year ending December 31, 2002 $ 3,223,028 2003 18,827,727 2004 273,318 2005 58,891 ----------- Total $22,382,964 ===========
NOTE 10 - 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 quarterly 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 (excluding $1,432,279 Class A special cash distributions paid in 1999). Net losses are allocated quarterly 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, 2001, the Managing Trustee had a negative tax capital account balance of $55,893. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------------ ------------ ------------ (Restated) (Restated) Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601 Financial statement depreciation less than tax depreciation (740,333) (2,343,210) (3,482,896) Recognize pass through income (571,344) 710,114 - Reverse income from corporate investment (651,588) - - Tax gain (loss) in excess of book gain (loss) on sale - (765,343) (23,049) Deferred rental income 247,475 (287,303) (164,254) Write-down of equipment 5,578,975 - - Other (190,174) 163,292 62,400 ------------ ------------ ------------ Net income (loss) for federal income tax reporting purposes $(1,926,182) $ (472,434) $ 2,194,802 ============ ============ ============
The following is a reconciliation between participants' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2001 and 2000:
2001 2000 ------------- ------------- (Restated) (Restated) Participants' capital $ 17,589,367 $ 23,188,560 Add back selling commissions and organization and offering costs 4,922,397 4,922,397 Deduct deferred step-down of capital basis (689,869) (689,869) Cumulative difference between federal income tax and financial statement income (loss) (16,317,182) (19,990,193) ------------- ------------- Participants' capital for federal income tax reporting purposes $ 5,504,713 $ 7,430,895 ============= =============
The cumulative difference between federal income tax and financial statement income (loss) represents timing differences. NOTE 11 - GUARANTEE AGREEMENT - --------------------------------- On March 8, 2000, the Trusts entered into a guarantee agreement whereby the Trusts, jointly and severally, 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 Trusts was capped at a maximum of $34,500,000, excluding expenses that could result in the event that Echelon Commercial LLC defaulted under the terms of the master lease agreement. As a result of principal reductions on the average guarantee amount, an amended and restated agreement was entered into in December 2000, that reduced the guaranteed amount among the Trusts. During the year ended December 31, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $224,513, including $89,583 of income related to the guarantee agreement recognized during the year ended December 31, 2001. During the year ended December 31, 2001, the Trust received an upfront cash fee of $175,400 and recognized a total of $301,400 in income related from the guarantee. The guarantee fee is reflected as Other Income on the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. NOTE 12 - 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 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 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 July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit was intended to be achieved and which, among other things, was expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and superseded a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and was preliminarily approved by the Court on August 20, 1998 when the Court issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement." On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an amended Stipulation of Settlement (the "Amended Stipulation") which was filed with the Court on March 15, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999. The Amended Stipulation, among other things, divided the Class Action Lawsuit into two separate sub-classes that could be settled individually. The second sub-class, which does not include the Trust, remains pending. On April 5, 1999, the Trust mailed a notice to all Class A and Class B Beneficiaries describing, among other things, the Class Action Lawsuit and the proposed settlement terms for the Trust. In addition, the notice advised the Beneficiaries that the Court would conduct a fairness hearing on May 21, 1999 and described the rights of the Beneficiaries and the procedures they should follow if they wished to object to the settlement. On May 26, 1999, the Court issued its Order and Final Judgment approving settlement of the Class Action Lawsuit with respect to claims asserted by the Plaintiffs on behalf of the sub-class that included the Trust. As a result of the settlement, the Trust declared a special cash distribution of $1,513,639, including legal fees for Plaintiffs' counsel of $81,360, that was paid in July 1999 ($0.80 per Class A Interest, net of legal fees). In addition, the parent company of the Managing Trustee, Equis II Corporation, agreed to commit $3,405,688 of its Class B Capital Contributions (paid in connection with its purchase of Class B Interests in July 1997) to the Trust for the Trust's operating and investment purposes. In the absence of this commitment, Equis II Corporation would have been entitled to receive a Class B Capital Distribution for this amount pursuant to the Trust Agreement because the proceeds from the offering of the Class B Interests were intended to be used for approximately a two-year period to re-purchase outstanding Class A Interests for the benefit of each Trust. Subsequently, any Class B capital not so expended was required to be returned to the Class B Interest holders. The settlement required that Equis II Corporation forego this Class B Capital Distribution. The settlement effectively caused Equis II Corporation to remain at risk as a long-term investor in the Trust. NOTE 13 - QUARTERLY RESULTS OF OPERATIONS (Unaudited) - ------------------------------------------------------------ The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000: Three Months Ended --------------------
March 31, June 30, September 30, December 31, Total ---------- ------------ --------------- -------------- ------------ 2001 (as restated) - --------------------------------- Lease revenue . . . . . . . . . . $1,607,494 $ 1,642,867 $ 1,690,959 $ 1,578,579 $ 6,519,899 Net income (loss) . . . . . . . . $1,275,763 $(1,177,758) $ (304,466) $ (5,392,732) $(5,599,193) Net income (loss) per Beneficiary Interest: Class A Interests . . . . . . . $ 0.51 $ (0.20) $ (0.17) $ (2.99) $ (2.84) Class B Interests . . . . . . . $ 0.08 $ (0.19) $ -- $ -- $ (0.10) 2001 (as previously reported) - --------------------------------- Lease revenue . . . . . . . . . . $1,607,494 $ 1,642,867 $ 1,690,959 $ 1,578,579 $ 6,519,899 Net income (loss) . . . . . . . . $1,067,698 $(1,132,155) $ (115,773) $ (5,321,037) $(5,501,267) Net income (loss) per Beneficiary Interest: Class A Interests . . . . . . . $ 0.43 $ (0.09) $ (0.06) $ (3.03) $ (2.76) Class B Interests . . . . . . . $ 0.07 $ (0.18) $ -- $ -- $ (0.11) 2000 (as restated) - --------------------------------- Lease revenue . . . . . . . . . . $2,145,097 $ 2,035,590 $ 1,768,284 $ 1,784,970 $ 7,733,941 Net income. . . . . . . . . . . . $1,105,179 $ 74,043 $ 747,409 $ 123,385 $ 2,050,016 Net income per Beneficiary Interest: Class A Interests . . . . . . . $ 0.28 $ 0.03 $ 0.30 $ 0.05 $ 0.66 Class B Interests . . . . . . . $ 0.12 $ -- $ 0.05 $ 0.01 $ 0.18 2000 (as previously reported) - --------------------------------- Lease revenue . . . . . . . . . . $2,145,097 $ 2,035,590 $ 1,768,284 $ 1,784,970 $ 7,733,941 Net income. . . . . . . . . . . . $1,085,484 $ 80,518 $ 913,658 $ 144,512 $ 2,224,172 Net income per Beneficiary Interest: Class A Interests . . . . . . . $ 0.27 $ 0.03 $ 0.37 $ 0.06 $ 0.73 Class B Interests . . . . . . . $ 0.11 $ 0.01 $ 0.06 $ 0.01 $ 0.19
Net loss for the three months ended June 30, 2001 includes a $449,031 loss on interest in EFG/Kettle Development LLC and a $584,110 loss on interest in EFG Kirkwood LLC. Net loss for the three months ended December 31, 2001 includes a $5,578,975 write-down of equipment. NOTE 14 - SEGMENT REPORTING - ------------------------------- The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes the management of the Trust's equipment lease portfolio and the Trust's interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp., which owns the majority interest in PLM, an equipment leasing and asset management company. The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales through its ownership interests in EFG Kirkwood and Kettle Valley. There are no material intersegment sales or transfers. Segment information for the years ended December 31, 2001, 2000 and 1999 is summarized below.
2001 2000 1999 ------------- ------------- ----------- Restated (1) Restated (1) Total Income: (2) Equipment leasing $ 6,985,008 $ 10,785,068 $15,453,298 Real estate - - - ------------- ------------- ----------- Total $ 6,985,008 $ 10,785,068 $15,453,298 ============= ============= =========== Operating Expenses, Management Fees and Other Expenses: Equipment leasing $ 1,501,130 $ 944,491 $ 1,106,068 Real estate 75,737 80,460 250,214 ------------- ------------- ----------- Total $ 1,576,867 $ 1,024,951 $ 1,356,282 ============= ============= =========== Interest Expense: Equipment leasing $ 2,037,067 $ 2,404,830 $ 2,412,127 Real estate 17,996 58,433 66,623 ------------- ------------- ----------- Total $ 2,055,063 $ 2,463,263 $ 2,478,750 ============= ============= =========== Depreciation, Writedown of Equipment and Amortization Expense: Equipment leasing $ 9,437,264 $ 4,189,657 $ 5,815,665 Real estate 75,495 65,800 - ------------- ------------- ----------- Total $ 9,512,759 $ 4,255,457 $ 5,815,665 ============= ============= =========== Equity Interests: Equipment leasing $ 984,280 $ - $ - Real estate (423,792) (991,381) - ------------- ------------- ----------- Total $ 560,488 $ (991,381) $ - ============= ============= =========== Net Income (Loss): $ (5,599,193) $ 2,050,016 $ 5,802,601 ============= ============= =========== Capital Expenditures: Equipment leasing $ 7,162,123 $ 696,892 $ 412,529 Real estate - 1,287,350 5,846,448 ------------- ------------- ----------- Total $ 7,162,123 $ 1,984,242 $ 6,258,977 ============= ============= =========== Assets: Equipment leasing $ 35,251,213 $ 44,232,338 $63,912,013 Real estate 6,919,506 7,409,098 7,178,929 ------------- ------------- ----------- Total $ 42,170,719 $ 51,641,436 $71,090,942 ============= ============= ===========
(3) See Note 1 to the accompanying financial statements, regarding the restatement of the Trust's 2001 and 2000 financial statements. (4) Includes equipment leasing revenue of $6,519,899, $7,733,941 and $10,286,635 for the years ended December 31, 2001, 2000 and 1999, respectively. Results of Operations - ----------------------- Equipment Leasing - ------------------ For the year ended December 31, 2001, the Trust recognized lease revenue of $6,519,899 compared to $7,733,941 and $10,286,635 for the years ended December 31, 2000 and 1999, respectively. The decrease in lease revenue is due to 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. Future lease term expirations and equipment sales will result in a reduction in lease revenue recognized. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by Equis Financial Group Limited Partnership ("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. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as lease revenue during the year ended December 31, 2001 and its share of the maintenance payment was $35,440, which is accrued as a maintenance obligation at December 31, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs are to receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. During the years ended December 31, 2001, 2000 and 1999, the Trust recognized lease revenue including the early termination fee discussed above of $219,210, $159,904 and $153,980, respectively, related to its interest in this aircraft. Interest income for the year ended December 31, 2001 was $157,725 compared to $666,975 and $1,217,855 for the years ended December 31, 2000 and 1999, respectively. Generally, interest income is generated from the temporary investment of rental receipts and equipment sale proceeds in short-term instruments. 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. The Trust distributed $15,200,000 in January 2000 that resulted in a reduction of cash available for investment. On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the trusts, jointly and severally, 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"). During the year ended December 31, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $224,513, including $89,583 of income related to the guarantee agreement recognized during the year ended December 31, 2001. During the year ended December 31, 2001, the Trust received an upfront cash fee of $175,400 and recognized a total of $301,400 in income related from the guarantee. The guarantee fee is reflected as Other Income in the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. 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 in the first quarter of 1999. This amount is reflected as Other Income on the accompanying Statement of Operations for the year ended December 31, 1999. During the three years ended December 31, 2001, the Trust sold equipment having a net book value of $60,151, $1,412,158 and $5,163,109, respectively, to existing lessees and third parties, which resulted in net gains, for financial statement purposes, of $124,658, $2,012,657 and $3,687,692, respectively. It cannot be determined whether future sales of equipment will result in a net gain or 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 to 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 year ended December 31, 2000, the Trust sold investment securities having a book value of $420,513, resulting in a gain, for financial reporting purposes of $70,095. Depreciation expense was $3,811,250, $4,189,657, and $5,815,665 for the years ended December 31, 2001, 2000 and 1999, 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 the 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. During the year ended December 31, 2001, the Trust recorded a write-down of equipment, representing an impairment to the carrying value of the Trust's interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft. The estimate of the fair value was based on (i) information provided by a third-party aircraft broker and (ii) EFG's assessment of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. Interest expense on equipment related debt was $2,037,067, $2,404,830, and $2,412,127 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest expense will continue to decrease in the future as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees related to equipment leasing were $357,510, $350,618 and $460,805 during the years ended December 31, 2001, 2000 and 1999, 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, subject to certain limitations. Operating expenses - affiliate were $1,143,620, $543,363, and $843,263 for the years ended December 31, 2001, 2000 and 1999, respectively. Operating expenses - - affiliate in 2001 included approximately $293,000 of remarketing costs related to the re-lease of an aircraft in June 2001 and $140,000 for ongoing legal costs associated with the Trust's ongoing discussions with the Securities and Exchange Commission regarding its investment company status. Operating expenses - affiliate also included approximately $114,000 of costs reimbursed to EFG as a result of the successful acquisition of the PLM common stock. In conjunction with the acquisition of the PLM common stock, EFG became entitled to recover certain out of pocket expenses which it had previously incurred. Operating expenses consist principally of administrative charges, professional service costs, such as audit, insurance and legal fees, as well as printing, distribution and remarketing expenses. 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. In addition, the Trust wrote-down other investments $50,510 during the year ended December 31, 2000. For the year ended December 31, 2001, the Trust recorded income of $984,280 and amortization expense of $9,695, in connection with its ownership interest in MILPI. This income represents the Trust's share of the net income of MILPI recorded under the equity method of accounting. The Trust's income from MILPI results from MILPI's indirect ownership of PLM common stock acquired in February 2001. MILPI - ----- During the period February 7, 2001 (date of inception) through December 31, 2001, MILPI recognized operating revenues of approximately $10,376,000, consisting primarily of $5,217,000 of management fees, $2,032,000 of acquisition and lease negotiation fees, $1,716,000 of equity income in partnership interests and $472,000 of operating lease income. In addition, MILPI recognized other income of approximately $467,000, consisting primarily of interest income earned on investments. During the same period, MILPI incurred total operating expenses of $5,856,000, consisting primarily of $3,290,000 of general and administrative expenses, $1,255,000 of depreciation and amortization, $511,000 from impairment of its investment in managed programs and $800,000 of operations support expenses, which include salary and office-related expenses for operational activities. In addition, MILPI also incurred income tax expense of $1,611,000 and recorded minority interest expense of $429,000. Real Estate - ------------ Management fees for non-equipment investments were $75,737, $80,460 and $52,214 for the years ended December 31, 2001, 2000 and 1999, respectively. The management fees on non-equipment assets, excluding cash, were based on 1% of such assets under management. For the year ended December 31, 1999, operating expenses included legal fees of $198,000 related to the Trust's ownership interests in Kettle Valley and EFG Kirkwood. The Trust has an approximately 51% ownership interest in Kettle Valley (see further discussion below). For the years ended December 31, 2001 and 2000, the Trust recorded losses of $332,692 and $91,066, respectively, from its interest in Kettle Valley. The losses represent the Trust's share of the losses of Kettle Valley recorded under the equity method of accounting. In each of the years ended December 31, 2001 and 2000, the Trust recorded amortization expense of $65,800, in connection with its ownership interest in Kettle Valley. Interest expense on a note payable related to the Trust's acquisition of its interest in Kettle Valley was $17,996, $58,433 and $66,623 for the years ended December 31, 2001, 2000, and 1999, respectively. The note was repaid as of December 31, 2001. The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also is the manager of EFG Kirkwood. EFG Kirkwood owns membership interests in: Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail, and food and beverage services, with the remainder of its revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. For the year ended December 31, 2001, the Trust recorded a loss of $91,100 on its ownership interest in EFG Kirkwood, compared to a loss of $900,315 for the year ended December 31, 2000. The loss in 2000 was caused principally by losses reported by Purgatory for the period May 1, 2000 to December 31, 2000. Mountain Springs, through a wholly owned subsidiary, became an equity participant in Purgatory on May 1, 2000. Consequently, Mountain Springs did not participate in the operating results of Purgatory for the period from January 1, 2000 to April 30, 2000, generally the period of Purgatory's peak income activity. Accordingly, the losses incurred in 2000 do not reflect a full year's operating activities for Purgatory. See Note 6 to the accompanying financial statements. Through its ownership of 40% of the Class A membership interests in EFG Kirkwood, the Trust indirectly owns interests in two ski resort operating companies, Purgatory and Mountain Resort. EFG Kirkwood owns 50% of the membership interests in Mountain Springs which, through a wholly-owned subsidiary, owns 80% of the common member interests and 100% of the Class B preferred member interests of Purgatory. EFG Kirkwood also owns approximately 38% of the membership interests in Mountain Resort which, through four wholly-owned subsidiaries, owns Kirkwood Mountain Resort. The Trust accounts for its ownership interests using the equity method of accounting. Mountain Resort - ---------------- Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Other operations include a real estate development division, which has developed and is managing a 40-unit condominium residential and commercial building, an electric and gas utility company, which operates as a regulated utility company and provides electric and gas services to the Kirkwood community, and a real estate brokerage company. During the year ended December 31, 2001, Mountain Resort recorded total revenues of approximately $29,597,000 compared to approximately $27,741,000 for the same period in 2000. The increase in total revenues from 2000 to 2001 of $1,856,000 is primarily the result of an increase in ski-related revenues offset by a decrease in residential-related revenues. Ski-related revenues increased approximately $4,078,000 for the year ended December 31, 2001 compared to 2000. The increase in ski-related revenues resulted from improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 336,000 skiers for the year ended December 31, 2001 as compared to approximately 291,000 skiers in 2000. Residential-related revenues and other operations revenues decreased approximately $2,222,000 for the year ended December 31, 2001 as compared to 2000. The decrease primarily reflects the completion of a 40-unit condominium residential and commercial building in December 1999 resulting in a significant number of condominium sales closing in January 2000. During the year ended December 31, 2001, Mountain Resort recorded total expenses of approximately $30,117,000 compared to approximately $27,464,000 in 2000. The increase in total expenses of $2,653,000 from 2000 to 2001 is the result of increases in ski-related expenses and residential-related and other operations expenses. Ski-related expenses in 2001 increased approximately $2,425,000 compared to 2000 as a result of an increase in ski-related revenue, as discussed above. Residential-related expenses and other operations expenses increased approximately $228,000 in the year end December 31, 2001 compared to 2000, as a result of an increase in other operations expenses largely offset by a decrease in cost of sales from condominium units sold during the year ended December 31, 2001 compared to 2000, as discussed above. Mountain Springs - ----------------- Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails located near Durango, Colorado. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services, with the remainder of revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. Mountain Springs became an equity participant in Purgatory on May 1, 2000 and therefore did not have an interest in Purgatory during the three months ended March 31, 2000. For comparative purposes, the following discussion of Purgatory's operating results includes the operating results for the three months ended March 31, 2000. During the year ended December 31, 2001, Purgatory recorded total revenues of approximately $15,250,000 compared to approximately $13,507,000 for the same period of 2000. The increase in total revenues from 2000 to 2001 of approximately $1,743,000 is the result of improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 306,000 skiers for the year ended December 31, 2001 compared to 286,000 skiers in the same period of 2000. Total expenses were approximately $15,648,000 for the year ended December 31, 2001 compared to approximately $16,163,000 for the same period in 2000. The decrease in total expenses for the year ended December 31, 2001 compared to the same period in 2000 of approximately $515,000 is a result of decreases in operating expenses of approximately $75,000, non-operating costs of approximately $100,000 and financing costs of approximately $340,000. Kettle Valley - -------------- Kettle Valley is a real estate development company located in Kelowna, British Columbia, Canada. The project, which is being developed by Kettle Valley Development Limited Partnership, consists of approximately 280 acres of land that is zoned for 1,120 residential units in addition to commercial space. To date, 108 residential units have been constructed and sold and 10 additional units are under construction. During the twelve months ended December 31, 2001, Kettle Valley recorded revenues of $4,596,837 compared to $6,250,711 for the same period in 2000. The decrease in revenues is the result of a decrease in the number of lot and home sales. Kettle Valley incurred total expenses of $5,967,703 during the twelve months ended December 31, 2001 compared to $7,118,553 for the same period in 2000. The decrease in expenses is the result of a decrease in the number of lot and home sales discussed above. NOTE 15 - SUBSEQUENT EVENT ------------------------------ On February 6, 2002, MILPI completed its acquisition of PLM through the acquisition of the remaining 17% of the outstanding PLM common shares by effecting a merger of PLM into MILPI Acquisition Corp. The merger was completed when MILPI obtained approval of the merger from PLM's shareholders pursuant to a special shareholders' meeting. The Trust and Trust D provided $4.4 million to acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199 million was contributed by the Trust. The funds were obtained from existing resources and internally generated funds and by means of a 364 day, unsecured loan to the Trust from PLM evidenced by a promissory note in the principal amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject to an interest rate cap). The Trust's ownership interest in MILPI subsequent to the merger was increased from 34% to 37.5%. On March 12, 2002, PLM declared and paid a cash dividend of approximately $2.7 million, of which the Trust's share was $1,000,092. In March 2002, the Trust and Trust D formed C & D IT LLC, a Delaware limited liability company, as a 50%/50% owned joint venture that is co-managed by each of the Trust and Trust D (the "C & D Joint Venture") to which each Trust contributed $1 million. The C & D Joint Venture was formed for the purpose of making a conditional contribution of $2.0 million to the Rancho Malibu Limited Partnership in exchange for 25% of the interests in the Rancho Malibu partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture was admitted to the Rancho Malibu partnership as a co-managing general partner pursuant to the terms of an amendment to the Rancho Malibu Limited Partnership Agreement. The other partners in the Rancho Malibu Limited Partnership are Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other co-managing general partner. Rancho Malibu Limited Partnership owns the 274-acre parcel of land near Malibu, California and is developing it as a single-family luxury residential subdivision. The conditional C & D Joint Venture Contribution was made to assure participation in the future development of the parcel. It was made subject to the future solicitation of the consent of the beneficiaries of each of the Trust and Trust D. The C & D Joint Venture Contribution is conditioned upon the consummation of a transaction pursuant to which Semele and Rancho Malibu Corp. will contribute all of the partnership interests that they hold in Rancho Malibu Limited Partnership along with 100% of the membership interests Semele holds in RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM International Inc., a corporation that is jointly owned by the Trust and three affiliated Trusts, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares of common stock of RMLP, Inc. (The sole asset of RM Financing LLC is a Note dated December 31, 1990 (the Note"). The Note was held by Semele's predecessor when it took a deed in lieu of foreclosure on the property from the original owner. The unpaid principal balance of the Note is $14,250,000 plus accrued interest as of December 31, 2001. The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture Contribution from the Rancho Malibu partnership if the transactions have not taken place within ninety (90) days of the receipt by the Rancho Malibu partnership of notice from the C & D Joint Venture that the requisite consents of the beneficiaries of the Trust and Trust C have been received. This right of the C & D Joint Venture is secured by a pledge of 50% of the capital stock of Rancho Malibu Corp. and 50% of the interests in the Rancho Malibu partnership held by Semele and Rancho Malibu Corp. ADDITIONAL FINANCIAL INFORMATION AFG INVESTMENT TRUST C SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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 revenue, 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. Expenses, such as management fees, and interest earned on cash generated are not included below. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999 ---------- ----------- ----------- Rents earned prior to disposal of Equipment, net of interest charges $2,135,202 $ 7,830,529 $30,130,592 Sale proceeds realized upon Disposition of equipment 184,809 3,424,815 8,850,801 ---------- ----------- ----------- Total cash generated from rents and equipment sale proceeds 2,320,011 11,255,344 38,981,393 Original acquisition cost of equipment disposed 1,655,583 8,258,489 30,545,847 ---------- ----------- ----------- Excess of total cash generated to cost of equipment disposed $ 664,428 $ 2,996,855 $ 8,435,546 ========== =========== ===========
AFG INVESTMENT TRUST C STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 2001 (RESTATED)
Sales and Operations Refinancings Total ------------ -------------- ------------ Net income (loss) $(5,723,851) $ 124,658 $(5,599,193) Add: Depreciation and amortization 3,933,784 - 3,933,784 Write-down of equipment 5,578,975 - 5,578,975 Management fees 433,247 - 433,247 Income from equity interests (560,488) - (560,488) Book value of disposed equipment - 60,151 60,151 Less: Principal reduction of notes payable (4,308,862) - (4,308,862) ------------ -------------- ------------ Cash from operations, sales and refinancings (647,195) 184,809 (462,386) Less: Management fees (433,247) - (433,247) ------------ -------------- ------------ Distributable cash from operations, sales and refinancings (1,080,442) 184,809 (895,633) Other sources and uses of cash: Cash and cash equivalents at beginning of year 3,748,267 5,100,549 8,848,816 Other assets - (1,752) (1,752) Interest in MILPI Holdings, LLC (1) (1,405,733) (5,730,259) (7,135,992) Net proceeds from note payable refinancing - 471,032 471,032 Net change in receivables and accruals 454,496 - 454,496 ------------ -------------- ------------ Cash and cash equivalents at end of year $ 1,716,588 $ - $ 1,716,588 ============ ============== ============
(1) To the extent available, cash generated from sales and refinancings is used for reinvestment, in accordance with the Trust Agreement. AFG INVESTMENT TRUST C 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 FOR THE YEAR ENDED DECEMBER 31, 2001 For the year ended December 31, 2001, the Trust reimbursed the Managing Trustee and its Affiliates for the following costs: Operating expenses $1,190,432 AFG INVESTMENT TRUST C SCHEDULE OF REIMBURSABLE OPERATING EXPENSES DUE TO THIRD PARTIES FOR THE YEAR ENDED DECEMBER 31, 2001 Operating expenses due to third parties for the year ended December 31, 2001 consisted of the following:
Legal $344,086 Selling & Remarketing 290,762 Accounting and Tax 147,132 Investor Services 60,621 Printing & Document Services 40,740 Insurance 32,523 Travel & Entertainment 23,370 Bank Charges 16,453 Office 9,525 Equipment Maintenance 250 -------- Total $965,462 ========
AFG INVESTMENT TRUST C SCHEDULE OF EQUIPMENT AS OF DECEMBER 31, 2001
Lease Rental Expiration Net Book Lessee Schedule Date Cost Value Debt - ---------------------------------- --------- ---------- ----------- ----------- ----------- Advanced Micro Devices, Inc. 006-RN2 - $ 1,274,733 $ - $ - Aerovias De Mexico, S.A. de C.V. N753RARL1 6/21/05 1,239,941 900,959 420,027 A.O. Smith Corporation A-17RN1 - 36,817 - - Chrysler Corporation A-3 - 56,663 - - Chrysler Corporation B-2 - 97,860 - - Chrysler Corporation B-2B - 15,446 - - Chrysler Corporation E-11 1/31/02 196,487 56,449 - Chrysler Corporation G-2 2/28/02 858,310 166,822 77,501 GE Aircraft Engines 3RN3 - 51,390 - - GATX Logistics, Inc. E-11 - 148,148 - - General Electric Company 4 - 1,339 - - General Electric Company 5 - 335 - - General Motors Corporation H-6 - 75,771 - - General Motors Corporation C-1 - 124,214 - - General Motors Corporation C-2 - 28,782 - - General Motors Corporation C-4 - 815,215 - - General Motors Corporation C-5 - 1,317,467 - - General Motors Corporation B-16RN1 - 46,957 - - Hyundai Electronics America, Inc. 1AO 8/31/03 6,513,220 1,809,228 1,785,134 Owens-Corning Fiberglass Corp. A-35 - 16,507 394 - Owens-Corning Fiberglass Corp. A-38 - 453 - - Scandinavian Airlines System LN-RCGRN1 12/29/03 30,895,170 18,166,569 18,884,089 Temple-Inland Forest Product Group A1RN2 12/31/02 21,485 2,692 - Tenneco Packaging B-75RN1 - 30,500 - - Tenneco Packaging B-76RN1 - 16,887 - - Tenneco Packaging B-77 - 47,991 - - Tenneco Packaging B-81 - 13,089 - - Union Pacific Railroad Company 11011991 3/31/04 4,574,486 2,524,087 1,216,213 USX Corporation A-4 - 503 - - Western Bulk Carriers A-2 - 493,702 53,588 - Western Bulk Carriers A-3 - 591,861 115,084 - Western Bulk Carriers A-4 2/28/03 336,738 117,858 - Warehouse - - 1,788,485 - - ----------- ----------- ----------- Total $51,726,952 $23,913,730 $22,382,964 =========== =========== ===========
EX-23 4 doc3.txt EXHIBIT 23 Consent of Independent Certified Public Accountants We consent to the incorporation by reference in this Annual Report (Form 10-K/A) of AFG Investment Trust C of our report dated May 10, 2002, on the financial statements of AFG Investment Trust C, included in the 2001 Annual Report to the Participants of AFG Investment Trust C. /s/ ERNST & YOUNG LLP Tampa, Florida May 15, 2002 EX-99 5 doc4.txt Exhibit 99 (h) C & D IT LLC OPERATING AND JOINT VENTURE AGREEMENT ------------------------------------- This Operating and Joint Venture Agreement (this "Agreement") of C & D IT LLC (the "Company") is made as of March 1, 2002, by and between the persons identified as the Members on Schedule A attached hereto (such persons and their ---------- respective successors in office or in interest being hereinafter referred to individually as a "Member" or collectively as the "Members"). WHEREAS, the Managing Trustee of AFG Investment Trust C and AFG Investment Trust D has determined that a joint investment by the trusts through a joint venture entity in BMIF/BSLF II Rancho Malibu Limited Partnership would be in the best interest of the respective trusts; WHEREAS, the Members of the Company desire that PLM International, Incorporated, a jointly-owned, indirect subsidiary of the Members, through a to-be-organized subsidiary (the "Acquisition Sub") enter into a contribution agreement with Semele Group, Inc. ("Semele") and the Acquisition Sub, BSLF II Rancho Malibu Corp. ("BSLF") by which the Acquisition Sub will contribute consideration to Semele in exchange for all of Semele's limited partnership interest in BMIF/BSLF II Rancho Malibu Limited Partnership ("RM Limited Partnership") and all of the capital stock of BSLF, the general Partner of RM Limited Partnership (the "RMLP Closing"); WHEREAS, the Members of the Company will obtain the approval of their respective beneficiaries to said contribution through the solicitation of consents and such solicitations will take several months to accomplish and may not be successful; WHEREAS, Semele will not defer taking other action with respect to its interests in RM Limited Partnership without a $2 million financial commitment from the Members during the period of time before the Members receive the consents of their respective beneficiaries; WHEREAS, the Members have determined to contribute $1 million each to the Company; WHEREAS, the Members have directed the Company to contribute $2 million to RM Limited Partnership in exchange for a general partnership interest in RM Limited Partnership that (a) gives the Company rights as a co-managing general partner, and (b) is subject to a "claw back" right that requires the refund of said $2 million contribution in the event that (i) said consents of the Members' beneficiaries are not obtained by the deadline for such consents, or (ii) the RMLP Closing has not occurred within 45 days after the date the forms of consents must be received by the Members, which claw back right shall be secured by the pledge of a security interest by Semele of all of its capital stock in BSLF, its limited partnership interest in RM Limited Partnership and all of the assets of RM Limited Partnership; WHEREAS, the Company was formed as a limited liability company under the Delaware Limited Liability Company Act (as amended from time to time, the "Act") pursuant to the Certificate of Formation of the Company dated March 1, 2002 (the "Certificate of Formation"); WHEREAS, the Members desire to engage in a joint venture which will act as a co-managing general partner of RM Limited Partnership; WHEREAS, the Members will actively manage the joint venture and will act as the initial Managers of the Company (each Member in its capacity as Manager referred to herein as a "Manager" and, collectively, the "Managers"), although the Members intend to reserve the right in the future to appoint Managers who are not Members; and WHEREAS, the Members wish to set out fully their respective rights, obligations and duties regarding the Company, its assets and liabilities and the joint venture; NOW, THEREFORE, in consideration of the mutual covenants expressed herein, the parties hereby agree as follows: ARTICLE I Organization and Powers 1.1. Organization. The Company has been formed by the filing of its ------------ Certificate of Formation (as amended from time to time, the "Certificate" or the "Certificate of Formation") with the Delaware Secretary of State pursuant to the Act. The Certificate of Formation may be restated by the Managers as provided in the Act or amended by the Managers to change the address of the office of the Company in Delaware and the name and address of its resident agent in Delaware or to make corrections required by the Act. Other additions to or amendments of the Certificate of Formation shall be authorized by the Members as provided in Section 10.4. 1.2. Purposes and Powers. The Company shall have authority to engage in any ------------------- lawful business, trade, purpose or activity permitted by the Act, and it shall possess and may exercise all of the powers and privileges granted by the Act and any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company, including without limitation the following powers: (a) to conduct its business and operations in any state, territory or possession of the United States or in any foreign country or jurisdiction; (b) to purchase, receive, take, lease or otherwise acquire, own, hold, improve, maintain, use or otherwise deal in and with, sell, convey, lease, exchange, transfer or otherwise dispose of, mortgage, pledge, encumber or create a security interest in all or any of its real or personal property, or any interest therein, wherever situated; (c) to borrow or lend money or obtain or extend credit and other financial accommodations, to invest and reinvest its funds in any type of security or obligation of or interest in any public, private or governmental entity, and to give and receive interests in real and personal property as security for the payment of funds so borrowed, loaned or invested; (d) to make contracts, including contracts of insurance, incur liabilities and give guaranties, whether or not such guaranties are in furtherance of the business and purposes of the Company, including without limitation guaranties of obligations of other persons who are interested in the Company or in whom the Company has an interest; (e) to appoint one or more Managers of the Company, to employ officers, employees, agents and other persons, to fix the compensation and define the duties and obligations of such personnel, to establish and carry out retirement, incentive and benefit plans for such personnel and to indemnify such personnel to the extent permitted by this Agreement and the Act; (f) to make donations irrespective of benefit to the Company for the public welfare or for community, charitable, religious, educational, scientific, civic or similar purposes; (g) to institute, prosecute and defend any legal action or arbitration proceeding involving the Company, and to pay, adjust, compromise, settle or refer to arbitration any claim by or against the Company or any of its assets; and (h) to be a partner in one or more partnerships or a member or manager in one or more limited liability companies. Notwithstanding the foregoing, however, the Company shall not have the authority to engage in any business, trade, purpose or activity or exercise any power or privilege that (i) exceeds the authority, rights, privileges or powers conferred to any Member in such Member's charter documents, or (ii) contravenes or conflicts with the charter documents of any Member. 1.3. Principal Place of Business. The principal office and place of ------------------------------ business of the Company shall initially be 200 Nyala Farms, Westport, CT 06880. The Members may change the principal office or place of business of the Company at any time and may cause the Company to establish other offices or places of business. 1.4. Fiscal Year. The fiscal year of the Company shall end on December 31 ------------ in each year. 1.5. Qualification in Other Jurisdictions. The Managers shall cause the --------------------------------------- Company to be qualified or registered under applicable laws of any jurisdiction in which the Company transacts business and shall be authorized to execute, deliver and file any certificates and documents necessary to effect such qualification or registration, including without limitation the appointment of agents for service of process in such jurisdictions. ARTICLE II Members 2.1. Members. The initial Members of the Company and their addresses shall ------- be listed on Schedule A and such Schedule shall be amended from time to time by ---------- the Managers to reflect the withdrawal of Members or the admission of new or additional Members pursuant to this Agreement. Schedule A shall set forth the ---------- percentage interest which each Member holds in the profits and losses of the Company (the "Membership Interests"). The Members shall constitute a single class or group of Members of the Company for all purposes of the Act, unless otherwise expressly provided herein. The Managers shall notify the Members of changes in Schedule A, which shall constitute the record list of the Members for ---------- all purposes of this Agreement. 2.2. Admission of New Members. Additional persons may be admitted to the --------------------------- Company as Members and may participate in the profits, losses, distributions, allocations and capital contributions of the Company upon such terms as are established by the Managers, which may include the establishment of classes or groups of one or more Members having different relative rights, powers and duties, or the right to vote as a separate class or group on specified matters, by amendment of this Agreement under Section 10.4. Existing Members shall have no preemptive or similar right to subscribe to the purchase of new membership interests in the Company. 2.3. Meetings of Members. --------------------- (a) Meetings of Members may be called for any proper purpose at any time by the Managers or by any Member. The Managers or the Members calling the meeting shall determine the date, time and place of each meeting of Members, and written notice thereof shall be given by the Managers to each Member not less than seven (7) days nor more than sixty (60) days prior to the date of the meeting. Notice shall be sent to Members of record on the date when the meeting is called. The business of each meeting of Members shall be limited to the purposes described in the notice. A written waiver of notice, executed before or after a meeting by a Member or its authorized attorney and delivered to the Managers, shall be deemed equivalent to notice of the meeting. (b) All Members must be present for the transaction of any business at a meeting of Members. Members may attend a meeting in person or by proxy. Members may also participate in a meeting by means of conference telephone or similar communications equipment that permits all Members present to hear each other. If less than all of the Members are present, the meeting may be adjourned by the chairman to a later date, time and place, and the meeting may be held as adjourned without further notice. When an adjourned meeting is reconvened, any business may be transacted that might have been transacted at the original meeting. (c) A chairman selected by the Managers shall preside at all meetings of the Members unless the Members elect a Member to act as a chairman of the meeting. The chairman shall determine the order of business and the procedures to be followed at each meeting of Members. 2.4. Action Without a Meeting. There is no requirement that the Members --------------------------- hold a meeting in order to take action on any matter. Any action required or permitted to be taken by the Members may be taken without a meeting if one or more written consents to such action shall be signed by Members holding all of the Membership Interests in the Company. Such written consents shall be delivered to the Managers at the principal office of the Company and unless otherwise specified shall be effective on the date when the first consent is so delivered. The Managers shall give prompt notice to all Members who did not consent to any action taken by written consent of Members without a meeting. 2.5. Voting Rights. All actions, approvals and consents to be taken or -------------- given by the Members under the Act, this Agreement or otherwise shall require the affirmative vote or written consent of all Members. 2.6. Limitation of Liability of Members. Except as otherwise provided in ------------------------------------- the Act, no Member of the Company shall be obligated personally for any debt, obligation or liability of the Company or of any other Member, whether arising in contract, tort or otherwise, solely by reason of being a Member of the Company. Except as otherwise provided in the Act, by law or expressly in this Agreement, no Member shall have any fiduciary or other duty to another Member with respect to the business and affairs of the Company, and no Member shall be liable to the Company or any other Member for acting in good faith reliance upon the provisions of this Agreement. Subject to Section 7.2, no Member shall have any responsibility to restore any negative balance in its Capital Account (as defined in Section 6.1) or to contribute to or in respect of the liabilities or obligations of the Company or return distributions made by the Company except as required by the Act or other applicable law; provided, however, that Members -------- ------- are responsible for their failure to make required Contributions under Section 6.2. The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or the management of its business or affairs under this Agreement or the Act shall not be grounds for making its Members or Managers responsible for the liabilities of the Company. 2.7. Authority. Unless specifically authorized by the Managers, no Member --------- that is not a Manager shall be an agent of the Company or have any right, power or authority to act for or to bind the Company or to undertake or assume any obligation or responsibility of the Company or of any other Member. 2.8. No Right to Withdraw; No Appraisal Rights. No Member shall have any -------------------------------------------- right to resign or withdraw from the Company without the consent of the other Members or to receive any distribution or the repayment of its capital contribution except as provided in Section 7.2 and Article IX upon dissolution and liquidation of the Company. No Member shall have any right to have the fair value of its Membership Interest in the Company appraised and paid out upon the resignation or withdrawal of such Member or any other circumstances. 2.9. Rights to Information. Members shall have the right to receive from ----------------------- the Managers upon request a copy of the Certificate and of this Agreement, as amended from time to time, and such other information regarding the Company as is required by the Act, subject to reasonable conditions and standards established by the Managers, as permitted by the Act, which may include without limitation withholding or restricting the use of confidential information. ARTICLE III Management ---------- 3.1. Managers. The Members shall be the initial Managers of the Company -------- hereunder. The names and addresses of the Managers shall be listed on Schedule -------- A which shall be amended from time to time by the Managers to reflect the resignation or removal of Managers or the appointment of new or additional Managers pursuant to this Agreement. 3.2. Qualification. Each Manager shall actively devote such time to the ------------- business and affairs of the Company as is reasonably necessary for the performance of such Manager's duties, but shall not be required to devote exclusive efforts to the performance of such duties and may delegate its responsibilities as provided in Section 3.3. A Manager need not be a Member. 3.3. Powers and Duties of the Managers. The business and affairs of the ------------------------------------- Company shall be managed under the direction of the Managers, who shall have and may exercise on behalf of the Company all of its rights, powers, duties and responsibilities under Section 1.2 or as provided by law, including without limitation the right and authority: (a) to manage the business and affairs of the Company and for this purpose to employ, retain or appoint any officers, employees, consultants, agents, brokers, professionals or other persons in any capacity for such compensation and on such terms as the Managers deem necessary or desirable and to delegate to such persons such of their duties and responsibilities as the Managers shall determine; (b) to enter into, execute, deliver, acknowledge, make, modify, supplement or amend any documents or instruments in the name of the Company; (c) to borrow money or otherwise obtain credit and other financial accommodations on behalf of the Company on a secured or unsecured basis as provided in Section 1.2(c), and to perform or cause to be performed all of the Company's obligations in respect of its indebtedness and any mortgage, lien or security interest securing such indebtedness; and (d) to make elections and prepare and file returns regarding any federal, state or local tax obligations of the Company. Unless otherwise provided in this Agreement, any action taken by a Manager, and the signature of a Manager on any agreement, contract, instrument or other document on behalf of the Company, shall be sufficient to bind the Company and shall conclusively evidence the authority of that Manager and the Company with respect thereto. 3.4. Tax Matters Partner. The Members shall serve as the "Tax Matters --------------------- Partners" of the Company for purposes of Section 6231(a)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), with power to manage and represent the Company in any administrative proceeding of the Internal Revenue Service. 3.5. Reliance by Third Parties. Any person dealing with the Company, the ---------------------------- Managers or any Member may rely upon a certificate signed by any Manager as to (i) the identity of any Manager or Member; (ii) any factual matters relevant to the affairs of the Company; (iii) the persons who are authorized to execute and deliver any document on behalf of the Company; or (iv) any action taken or omitted to be taken by the Company, the Managers or any Member. 3.6. Resignation and Removal. Any Manager may resign upon at least sixty ------------------------- (60) days' notice to the Members and the other Managers (unless notice is waived by them). Any Manager may be removed at any time with or without cause by the Members. 3.7. Meetings and Action of Managers. Unless otherwise determined by the ---------------------------------- Members or Managers, all action to be taken by the Managers shall be taken by majority vote or written consent of a majority of the Managers then in office. There is no requirement that the Managers hold a meeting in order to take action on any matter. Meetings of the Managers may be called by any Manager. If action is to be taken at a meeting of the Managers, notice of the time, date and place of the meeting shall be given to each Manager by an officer or the Manager calling the meeting by personal delivery, telephone or fax sent to the business or home address of each Manager at least twenty-four (24) hours in advance of the meeting, or by written notice mailed to each Manager at either such address at least seventy-two (72) hours in advance of the meeting; however, no notice need be given to a Manager who waives notice before or after the meeting, or who attends the meeting without protesting at or before its commencement the inadequacy of notice to him or her. Managers may also attend a meeting in person or by proxy, and they may also participate in a meeting by means of conference telephone or similar communications equipment that permits all Managers present to hear each other. A chairman selected by the Managers shall preside at all meetings of the Managers. The chairman shall determine the order of business and the procedures to be followed at each meeting of the Managers. 3.8. Compensation. Each Manager may receive such compensation for his ------------ services and benefits as may be approved from time to time by the Members. In addition, the Managers shall be entitled to reimbursement for out-of-pocket expenses incurred by them in connection with the performance of their duties for the Company. 3.9. Limitation of Liability of Manager. No Manager shall be obligated -------------------------------------- personally for any debt, obligation or liability of the Company or of any Member, whether arising in contract, tort or otherwise, solely by reason of being or acting as Manager of the Company. No Manager shall be personally liable to the Company or to its Members for breach of any fiduciary or other duty that does not involve (i) a breach of the duty of loyalty to the Company or its Members, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) a transaction from which the Manager derived an improper personal benefit. ARTICLE IV Indemnification --------------- 4.1. Definitions. For purposes of this Article IV: ----------- (a) "Manager" includes (i) a person serving as a Manager of the Company or in a similar executive capacity appointed by the Managers and exercising rights and duties delegated by the Managers, (ii) a person serving at the request of the Company as a director, Manager, officer, employee or other agent of another organization, and (iii) any person who formerly served in any of the foregoing capacities; (b) "expenses" means all expenses, including attorneys' fees and disbursements, actually and reasonably incurred in defense of a proceeding or in seeking indemnification under this Article, and except for proceedings by or in the right of the Company or alleging that a Manager received an improper personal benefit, any judgments, awards, fines, penalties and reasonable amounts paid in settlement of a proceeding; and (c) "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and any claim which could be the subject of a proceeding. 4.2. Right to Indemnification. Except as limited by law and subject to the ------------------------- provisions of this Article, the Company shall indemnify each of its Managers against all expenses incurred by them in connection with any proceeding in which a Manager is involved as a result of serving in such capacity, except that no indemnification shall be provided for a Manager regarding any matter as to which it shall be finally determined that such Manager did not act in good faith and in the reasonable belief that its action was in the best interests of the Company. Subject to the foregoing limitations, such indemnification may be provided by the Company with respect to a proceeding in which it is claimed that a Manager received an improper personal benefit by reason of its position, regardless of whether the claim arises out of the Manager's service in such capacity, except for matters as to which it is finally determined that an improper personal benefit was received by the Manager. 4.3. Award of Indemnification. The determination of whether the Company is ------------------------- authorized to indemnify a Manager hereunder and any award of indemnification shall be made in each instance (a) by a majority of the Managers who are not parties to the proceeding in question, (b) by independent legal counsel appointed by the Managers or the Members or (c) by the holders of all of the Membership Interests of the Members who are not parties to the proceeding in question. The Company shall be obliged to pay indemnification applied for by a Manager unless there is an adverse determination (as provided above) within forty-five (45) days after the application. If indemnification is denied, the applicant may seek an independent determination of its right to indemnification by a court, and in such event, the Company shall have the burden of proving that the applicant was ineligible for indemnification under this Article. Notwithstanding the foregoing, in the case of a proceeding by or in the right of the Company in which a Manager is adjudged liable to the Company, indemnification hereunder shall be provided to such Manager only upon a determination by a court having jurisdiction that in view of all the circumstances of the case, such Manager is fairly and reasonably entitled to indemnification for such expenses as the court shall deem proper. 4.4. Successful Defense. Notwithstanding any contrary provisions of this ------------------- Article, if a Manager has been wholly successful on the merits in the defense of any proceeding in which it was involved by reason of its position as Manager or as a result of serving in such capacity (including termination of investigative or other proceedings without a finding of fault on the part of the Manager), the Manager shall be indemnified by the Company against all expenses incurred by the Manager in connection therewith. 4.5. Advance Payments. Except as limited by law, expenses incurred by a ----------------- Manager in defending any proceeding, including a proceeding by or in the right of the Company, shall be paid by the Company to the Manager in advance of final disposition of the proceeding upon receipt of its written undertaking to repay such amount if the Manager is determined pursuant to this Article or adjudicated to be ineligible for indemnification, which undertaking shall be an unlimited general obligation but need not be secured and may be accepted without regard to the financial ability of the Manager to make repayment; provided, -------- however, that no such advance payment of expenses shall be made if it is --- determined pursuant to Section 4.3 of this Article on the basis of the --- circumstances known at the time (without further investigation) that the Manager --- is ineligible for indemnification. 4.6. Insurance. The Company shall have power to purchase and maintain --------- insurance on behalf of any Manager, officer, agent or employee against any liability or cost incurred by such person in any such capacity or arising out of its status as such, whether or not the Company would have power to indemnify against such liability or cost. 4.7. Heirs and Personal Representatives. The indemnification provided by ------------------------------------- this Article shall inure to the benefit of the heirs, personal representatives, successors and assigns of each Manager. 4.8. Non-Exclusivity. The provisions of this Article shall not be construed --------------- to limit the power of the Company to indemnify its Managers, Members, officers, employees or agents to the full extent permitted by law or to enter into specific agreements, commitments or arrangements for indemnification permitted by law. The absence of any express provision for indemnification herein shall not limit any right of indemnification existing independently of this Article. 4.9. Amendment. The provisions of this Article IV may be amended or --------- repealed in accordance with Section 10.5; provided, however, that no amendment -------- ------- or repeal of such provisions that adversely affects the rights of a Manager under this Article IV with respect to its acts or omissions at any time prior to such amendment or repeal shall apply to such Manager without its consent. ARTICLE V Conflicts of Interest --------------------- 5.1. Transactions with Interested Persons. Unless prohibited by the charter ------------------------------------ documents of any Member and unless entered into in bad faith, no contract or transaction between the Company and one or more of its Managers or Members, or between the Company and any other corporation, partnership, association or other organization in which one or more of its Managers or Members have a financial interest or are directors, partners, Managers or officers, shall be voidable solely for this reason or solely because such Manager or Member was present or participated in the authorization of such contract or transaction if: (a) the material facts as to the relationship or interest of such Manager or Member and as to the contract or transaction were disclosed or known to the other Managers (if any) or Members and the contract or transaction was authorized by the disinterested Managers (if any) or Members; or (b) the contract or transaction was fair to the Company as of the time it was authorized, approved or ratified by the disinterested Managers (if any) or Members; and no Manager or Member interested in such contract or transaction, because of such interest, shall be considered to be in breach of this Agreement or liable to the Company, any Manager or Member, or any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. ARTICLE VI Capital Accounts and Contributions ---------------------------------- 6.1. Capital Accounts. ----------------- (a) There shall be established on the books of the Company a separate capital account (a "Capital Account") for each Member. (b) The Capital Account of each Member (regardless of the time or manner in which such Member's interest was acquired) shall be maintained in accordance with the rules of Section 704(b) of the Internal Revenue Code of 1986, as amended, from time to time (the "Code"), and Treasury Regulation Section 1.704-1(b)(2)(iv). Adjustments shall be made to the Capital Accounts for distributions and allocations as required by the rules of Section 704(b) of the Code and the Treasury Regulations thereunder. (c) If there is a transfer of all or a part of an interest in the Company by a Member, the Capital Account of the transferor that is attributable to the transferred interest shall carry over to the transferee of such Member. (d) Subject to Section 7.2, notwithstanding any other provision contained herein to the contrary, no Member shall be required to restore any negative balance in its Capital Account. 6.2. Contributions. Each Member shall make the contributions to the capital ------------- of the Company (herein "Contributions") specified on Schedule A. All ---------- Contributions shall be paid in cash unless otherwise specified on Schedule A or ---------- agreed to by the Members. Except as set forth on Schedule A, no Member or ---------- Manager shall be entitled or required to make any contribution to the capital of the Company unless approved by all Managers and Members; however, the Company may borrow from its Members as well as from banks or other lending institutions to finance its working capital or the acquisition of assets upon such terms and conditions as shall be approved by the Managers, and any such borrowing from Members shall not be considered Contributions or reflected in their Capital Accounts. The value of all non-cash Contributions made by Members shall be set forth on Schedule A. No Member shall be entitled to any interest or ----------- compensation with respect to its Contribution or any services rendered on behalf -- of the Company except as specifically provided in this Agreement or approved by the Managers. No Member shall have any liability for the repayment of the Contribution of any other Member and each Member shall look only to the assets of the Company for return of its Contribution. ARTICLE VII Profits, Losses and Distributions --------------------------------- 7.1. Profits, Losses and Distributions. ------------------------------------ (a) All profits and losses arising from the normal course of business operations or otherwise and all cash available for distribution from whatever source, commencing with the date of this Agreement, shall be allocated or distributed to the Members according to their Membership Interests. (b) All profits and losses allocated to the Members shall be credited or charged, as the case may be, to their Capital Accounts. The terms "profits" and "losses" as 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 Company and computed in a manner consistent with Treasury Regulation Section 1.704-1(b)(2)(iv). Profits and losses for Federal income tax purposes shall be allocated in the same manner as profits and losses for purposes of this Article VII, except as provided in Section 7.3(a). 7.2. Distributions Upon Dissolution. -------------------------------- (a) Upon dissolution and termination, after payment of, or adequate provision for, the debts and obligations of the Company, the remaining assets of the Company (or the proceeds of sales or other dispositions in liquidation of the Company assets, as may be determined by the remaining or surviving Member(s)) shall be distributed to the Members in accordance with the positive balances in their Capital Accounts after taking into account all Capital Account adjustments for the Company taxable year. In the event that a Member has a negative balance in his Capital Account following the liquidation of the Company or his interest in the Company after taking into account all Capital Account adjustments for the Company taxable year in which the liquidation occurs, such Member shall pay to the Company in cash an amount equal to the deficit balance in the Capital Account of such Member. (b) With respect to assets distributed in kind to the Members 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 Company immediately prior to the liquidation or other distribution event; and (ii) such profits and losses shall be allocated to the Members and credited or charged to their Capital Accounts, 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 7.2(b), "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 Company's basis in such assets as determined under Treasury Regulation Section 1.704-1(b). This Section 7.2(b) 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 7.2(b) or elsewhere in this Agreement 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 Manager with the Consent of the Members. 7.3. Special Provisions. ------------------- Notwithstanding the foregoing provisions in this Article VII: (a) Income, gain, loss and deduction with respect to Company property which has a variation between its basis computed in accordance with Treasury Regulation Section 1.704-(b) and its basis computed for Federal income tax purposes shall be shared among Members so as to take account of the variation in a manner consistent with the principles of Section 704(c) of the Code and Treasury Regulation Section 1.704-3. (b) Section 704 of the Code and the Treasury Regulations issued thereunder, including but not limited to the provisions of such regulations addressing qualified income offset provisions, minimum gain chargeback requirements and allocations of deductions attributable to nonrecourse debt and partner nonrecourse debt, are hereby incorporated by reference into this Agreement. 7.4. Distribution of Assets in Kind. No Member shall have the right to ---------------------------------- require any distribution of any assets of the Company to be made in cash or in kind. If the Managers determine to distribute assets of the Company in kind, such assets shall be distributed on the basis of their fair market value as determined by the Managers. Any Member entitled to any interest in such assets shall, unless otherwise determined by the Managers, receive separate assets of the Company, and not an interest as tenant-in-common with other Members so entitled in each asset being distributed. Distributions in kind need not be made on a pro-rata basis but may be made on any basis which the Managers determine to be reasonable under the circumstances. ARTICLE VIII Transfers of Interests ---------------------- 8.1. Transfer of a Member's Membership Interest. Subject to the provisions ------------------------------------------- of this Article VIII, each Member may sell, assign, give, pledge, hypothecate, encumber or otherwise transfer, including, without limitation, any assignment or transfer by operation of law or by order of court, such Member's Membership Interest in the Company, with the consent of the other Members and the Managers (which may not be unreasonably withheld or delayed). 8.2. Death, Incompetence, Dissolution of a Member. If a Member dies, such ---------------------------------------------- Member's executor, administrator, or trustee, or, if he or she is adjudicated incompetent, such Member's guardian, or, if it is a corporation, trust, limited liability company or partnership and is dissolved, the liquidator, shall automatically become an assignee (the "Assignee") of the Membership Interest of the deceased, incompetent, or dissolved Member. The Assignee may receive distributions and shall have all the rights of a Member for the purpose of settling or managing such deceased or incompetent Member's estate, but shall not be a Member and shall not have the power to vote such Member's Membership Interest. The Assignee shall also have such power as the decedent, incompetent or dissolved entity possessed: (1) to assign all or any part of the Member's Membership Interest subject to Section 8.1; and (2) to satisfy conditions precedent to the assignment of the Membership Interest set forth in Section 8.1. 8.3. Admission of Member; Effect of Transfer. -------------------------------------------- (a) If the transferee of any Member is admitted as a Member or is already a Member, the Member transferring its Membership Interest shall be relieved of liability with respect to the transferred Membership Interest arising or accruing under this Agreement on or after the effective date of the transfer, unless the transferring Member (the "Transferring Member") affirmatively assumes such liability; provided, however, that the Transferring Member shall not -------- ------- be relieved of any liability for prior distributions and unpaid contributions unless the transferee affirmatively assumes such liabilities. (b) Any person who acquires in any manner a Membership Interest or any part thereof in the Company, whether or not such person has accepted and assumed in writing the terms and provisions of this Agreement or been admitted as a Member, shall be deemed by the acquisition of such Membership Interest to have agreed to be subject to and bound by all of the provisions of this Agreement with respect to such Membership Interest, including without limitation, the provisions hereof with respect to any subsequent transfer of such Membership Interest. 8.4 Right of First Refusal. All or any part of a Member's Interest in the Company proposed to be transferred by a Member shall be subject to the right of first refusal contained in this Section 8.4: (a) Notice of Proposed Transfer. The Transferring Member, prior to making any proposed transfer of all or any part of such Transferring Member's Membership Interest in the Company, shall first give written notice to the other Members of the proposed transfer and the terms of the proposed transfer (such notice being hereinafter referred to as the "First Offer Notice"). Such First Offer Notice shall constitute an offer by the Transferring Member to sell to the other Members all, but not less than all, of the Membership Interest in the Company that the Transferring Member proposes to transfer (the "Offered Interest") upon the terms and conditions set forth in the First Offer Notice. The last of the dates on which, pursuant to the provisions of Section 10.2, the First Offer Notice is deemed to be given to the Members is hereinafter referred to as the "Notice Date." Those non-transferring Members desiring to purchase all or a portion of the Offered Interest shall agree among themselves as to the portion of the Offered Interest to be purchased by each. In the absence of such an agreement, each non-transferring Member desiring to purchase all or a portion of the Offered Interest shall be entitled to purchase a portion of the Offered Interest in the same ratio as the percentage of Membership Interests held by such non-transferring Member holds relative to the collective percentage of Membership Interests held by all non-transferring Members desiring to purchase all or a portion of the Offered Interest. (b) Notice of Acceptance. The non-transferring Members shall have sixty (60) days from the Notice Date to purchase the Offered Interest. Such election shall be exercised by the giving of notice of such exercise to the Transferring Member. No such exercise shall be valid unless said option to purchase has been exercised with respect to the entire Offered Interest. (c) Acceptance of Offer; Closing. Upon the acceptance by all or some of the non-transferring Members of the Transferring Member's offer, the transfer of the Offered Interest from the Transferring Member to the purchasing Member(s) (the "Purchasing Member(s)") shall be closed and consummated in the principal office of the Company, on or before 11:00 A.M. local time on the ninetieth (90th) day following the Notice Date (or, if such day is not a business day, the business day next following such day). At such closing, the Transferring Member shall execute and deliver all documents and instruments to the Purchasing Member(s) as are reasonably deemed appropriate by counsel to the Company to effectuate the transfer. The Purchasing Member(s) shall acquire the Offered Interest subject to the transfer restrictions of this Agreement as to further Transfers of all or any part of such Offered Interest. (d) Transfer to Third Party; Later Transfer. If the Members fail to give timely notice of their desire to acquire the Offered Interest, then the Transferring Member shall be permitted to transfer all, but not less than all, of the Offered Interest; provided, however, that such transfer shall be made substantially in accordance with the terms of the proposed transfer as described in the First Offer Notice; and provided further that such transfer must be consummated prior to the one hundred eightieth (180th) day following the Notice Date; and provided further that such transfer shall comply with all the terms and conditions of this Article VIII. The transferee shall acquire the Offered Interest subject to all of the terms and previsions of this Agreement, including without limitation, the transfer restrictions and substitution provisions of this Article VIII. In the event the Transferring Member fails, prior to such date, to consummate such proposed transfer, then prior to any subsequent transfer of all or any part of the Transferring Member's Interest in the Company, the Transferring Member shall be required to give the Members Notice thereof, and the right of first refusal provisions described in this Section 8.4 shall again be exercisable with respect thereto. ARTICLE IX Dissolution, Liquidation and Termination ---------------------------------------- 9.1. Dissolution. The Company shall dissolve and its affairs shall be wound ----------- up upon the first to occur of the following: (a) the written consent of the Members; (b) the entry of a decree of judicial dissolution under Section 18-802 of the Act; or (c) the consolidation or merger of the Company in which it is not the resulting or surviving entity. 9.2. Liquidation. Upon dissolution of the Company, the Managers shall act ----------- as its liquidating trustees or the Managers may appoint one or more Managers or Members as liquidating trustee. The liquidating trustees shall proceed diligently to liquidate the Company and wind up its affairs and shall dispose of the assets of the Company as provided in Section 7.2 hereof. Until final distribution, the liquidating trustees may continue to operate the business and properties of the Company with all of the power and authority of the Managers. As promptly as possible after dissolution and again after final liquidation, the liquidating trustees shall cause an accounting by the accounting firm then serving the Company of the Company's assets, liabilities, operations and liquidating distributions to be given to the Members. 9.3. Certificate of Cancellation. Upon completion of the distribution of ----------------------------- Company assets as provided herein, the Company shall be terminated, and the Managers (or such other person or persons as the Act may require or permit) shall file a Certificate of Cancellation with the Secretary of State of Delaware under the Act, cancel any other filings made pursuant to Sections 1.1 and 1.5 and take such other actions as may be necessary to terminate the existence of the Company. ARTICLE X General Provisions ------------------ 10.1. Offset. Whenever the Company is obligated to make a distribution or ------ payment to any Member, any amounts that Member owes the Company may be deducted from said distribution or payment by the Managers. 10.2. Notices. Except as expressly set forth to the contrary in this ------- Agreement, all notices, requests, or consents required or permitted to be given under this Agreement must be in writing and shall be deemed to have been properly given if sent by registered or certified mail, postage prepaid, by commercial overnight courier, by facsimile or if delivered in hand to Members at their addresses on Schedule A, or such other address as a Member may ----------- specify by notice to the Managers and to the Company or the Managers at the address of the principal office of the Company specified in Section 1.3. Whenever any notice is required to be given by law, the Certificate or this Agreement, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 10.3. Entire Agreement; Binding Effect. This Agreement constitutes the ----------------------------------- entire agreement of the Members and the Managers relating to the Company and supersedes all prior oral or written agreements or understandings with respect to the Company. This Agreement is binding on and inures to the benefit of the parties and their respective successors, permitted assigns and legal representatives. 10.4. Amendment or Modification. Except as specifically provided herein, --------------------------- this Agreement may be amended or modified from time to time only by a written instrument signed by all of the Members. 10.5. Governing Law; Severability. This Agreement is governed by and shall ---------------------------- be construed in accordance with the law of the State of Delaware, exclusive of its conflict-of-laws principles. In the event of a conflict between the provisions of this Agreement and any provision of the Certificate or the Act, the applicable provision of this Agreement shall control, to the extent permitted by law. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable to any extent, the remainder of this Agreement and the application of that provision shall be enforced to the fullest extent permitted by law. 10.6. Further Assurances. In connection with this Agreement and the ------------------- transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and those transactions, as requested by the Managers. 10.7. Waiver of Certain Rights. Each Member irrevocably waives any right it ------------------------ may have to maintain any action for dissolution of the Company or for partition of the property of the Company. The failure of any Member to insist upon strict performance of a covenant hereunder or of any obligation hereunder, irrespective of the length of time for which such failure continues, shall not be a waiver of such Member's right to demand strict compliance herewith in the future. No consent or waiver, express or implied, to or of any breach or default in the performance of any obligation hereunder shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. 10.8. Third-Party Beneficiaries. The provisions of this Agreement are not -------------------------- intended to be for the benefit of any creditor or other person to whom any debts or obligations are owed by, or who may have any claim against, the Company or any of its Members or Managers, except for Members or Managers in their capacities as such. Notwithstanding any contrary provision of this Agreement, no such creditor or person shall obtain any rights under this Agreement or shall, by reason of this Agreement, be permitted to make any claim against the Company or any Member or Manager. 10.9. Interpretation. For the purposes of this Agreement, terms not defined -------------- in this Agreement shall be defined as provided in the Act; and all nouns, pronouns and verbs used in this Agreement shall be construed as masculine, feminine, neuter, singular, or plural, whichever shall be applicable. Titles or captions of Articles and Sections contained in this Agreement are inserted as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. 10.10. Counterparts. This Agreement may be executed in any number of ------------ counterparts with the same effect as if all parties had signed the same document, and all counterparts shall be construed together and shall constitute the same instrument. [The remainder of this page is left intentionally blank.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date set forth above. MANAGERS AND MEMBERS: AFG INVESTMENT TRUST C By: AFG ASIT CORPORATION, not in its individual capacity but solely as Managing Trustee By: ___________________________________ Its: ___________________________________ AFG INVESTMENT TRUST D By: AFG ASIT CORPORATION, not in its individual capacity but solely as Managing Trustee By: ___________________________________ Its: ___________________________________ OPERATING AND JOINT VENTURE AGREEMENT OF C & D IT LLC Schedule A ---------- MEMBERS
Membership Name and Address of Member Contribution Interest - ---------------------------------------------- ------------- ----------- AFG INVESTMENT TRUST C c/o AFG ASIT Corporation, its Managing Trustee 200 Nyala Farms Westport, CT 06880 $ 1,000,000 50% AFG INVESTMENT TRUST D c/o AFG ASIT Corporation, its Managing Trustee 200 Nyala Farms Westport, CT 06880 $ 1,000,000 50%
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