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