-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SxDWqMdItHVzvdjC6j6gPPv14pDBFC51AInam/arB+lWYrr2mHlZMl6Phx4k9tGV tm8NafhUqbP1PZJX2ujoqA== 0000847557-03-000034.txt : 20030331 0000847557-03-000034.hdr.sgml : 20030331 20030331150104 ACCESSION NUMBER: 0000847557-03-000034 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFG INVESTMENT TRUST C CENTRAL INDEX KEY: 0000879496 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043157232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21444 FILM NUMBER: 03629659 BUSINESS ADDRESS: STREET 1: 200 NYALA FARMS CITY: WESTPORT STATE: CT ZIP: 06880 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON ST CITY: BOSTON STATE: MA ZIP: 02114 FORMER COMPANY: FORMER CONFORMED NAME: AFG SECURED INCOME TRUST I-C DATE OF NAME CHANGE: 19920205 10-K 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10- K (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, 2002 ----------------- 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.) 1050 Waltham Street, Suite 310, Lexington, MA 02421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 676-0009 -------------- 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 Trust Class A 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes____ No X___ ---- 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, 2002 (Part I and II) AFG INVESTMENT TRUST C FORM 10-K TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 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 9 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 12 Item 14. Controls and Procedures 14 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 Annual Report to Participants 21
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 ("AFG")), 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 ("Class A Interests") at a subscription price of $25.00 each ($50.3 million 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 ("Class B Interests") at $5.00 each ($15.1 million 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", an affiliate of EFG), 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 $2.3 million. In April 1998, the Trust repurchased 5,200 additional Class A Interests at a cost of $47,000. 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 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, which is a wholly owned subsidiary of Semele. 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 Class B Interests which 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 other 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 "EFG") are engaged in various aspects of the equipment leasing business, including EFG's role as Equipment Manager or Advisor to the Trust and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). EFG 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 EFG sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Trust and certain Other Investment Programs and to continue managing all assets owned by the Trust and the Other Investment Programs. (b) Financial Information About Industry Segments The Trust is engaged in three industry segments: equipment leasing, equipment management 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. In 1999, the Company purchased a minority interest in EFG/Kettle Valley Development LLC "Kettle Valley" and EFG Kirkwood LLC ("EFG Kirkwood"). Kettle Valley is a real estate development located in Canada. The Trusts and an affiliated corporation, Semele, formed a joint venture, EFG Kirkwood, which then acquired a minority interest in two ski resorts: Mountain Resort Holdings LLC and Mountain Springs Resort LLC. During 2001, the Trust and three affiliated trust's (collectively, the "Trusts"), through a jointly owned entity MILPI Holdings, LLC ("MILPI"), acquired 83% of the outstanding common stock of PLM International, Inc. ("PLM"), an equipment management company specializing in the leasing of transportation and related equipment. The Trust originally owned 34% of the entity that purchased PLM. During 2002, the Trust and AFG Investment Trust D ("Trust D") collectively provided approximately $4.4 million to acquire the remaining 17% of PLM's outstanding common stock. Subsequent to the merger, the Trust's ownership interest increased from 34% to 38%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated herein by reference to the 2002 Annual Report. (c) Narrative Description of Business The Trust was organized in 1992 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. In 1998, the Trust Agreement was modified to permit the Trust to invest in assets other than equipment. Subsequently, the Trust has made certain non-equipment acquisitions. During 1999 and 2000, the Company purchased a minority interest in Kettle Valley and EFG Kirkwood. During 2001 and 2002, the Trusts acquired PLM. Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by December 31, 2004. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne, who are directors and officers of the Trust, respectively, are also officers and directors of, and own significant stock in Semele. In addition, Mr. Engle and Mr. Coyne are officers and directors of MILPI. The Trust has no employees; however, it entered into an Advisory Agreement with EFG. EFG's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. 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 of 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 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 events of September 11, 2001 have caused a significant deterioration in the value of the Trust's aircraft resulting in write-downs totaling approximately $5.6 and $0.5 million for the years ended December 2001 and 2002, respectively. The Advisor does not anticipate aircraft values returning to their pre- September 11, 2002 values. The Trust has an interest in two aircrafts, which, based on original equipment cost, account for approximately 71% of the Trust's equipment portfolio at December 31, 2002. These aircraft currently operate in international markets and are stage three compliant. 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. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, political stability and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers") formed EFG/Kettle Development LLC, a Delaware limited liability company, for the purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a real estate development in Kelowna, British Columbia in Canada called Kettle Valley. EFG/Kettle Development LLC, upon receiving the Buyers' contributions for their membership interests, purchased the Interest from a special purpose company ("SPC") whose subsidiaries owned a 99.9% limited partnership interest in Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were established by the seller, in part, for income tax purposes and have no business interests other than the development of Kettle Valley. The seller is an unaffiliated third-party company and has retained the remaining 50.1% ownership interest in the SPC. KVD LP is a Canadian Partnership that owns the property, consisting of approximately 280-acres of land. The project is zoned for 1,120 residential units in addition to commercial space. To date, 154 residential units have been constructed and sold and 13 additional units are under construction. A newly organized Canadian affiliate of EFG replaced the original general partner of KVD LP on March 1, 1999. On May 1, 1999, the Trusts and an affiliated corporation, Semele, formed a joint venture, EFG Kirkwood for the purpose of acquiring a minority interest in two ski resorts: Mountain Resort Holdings LLC and Mountain Springs Resort LLC. The Trusts collectively own 100% of the Class A membership interests in EFG Kirkwood and Semele owns 100% of the Class B membership interests in EFG Kirkwood. The Class A interest holders are entitled to certain preferred returns prior to any distribution payments to the Class B interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of the voting securities of that entity under the operating agreement for EFG Kirkwood, which gives equal voting rights to Class A and Class B membership interests. The Trust holds 40% of EFG Kirkwood's Class A membership interests. The Managing Trustee is the manager of EFG Kirkwood. On April 30, 2000, Kirkwood Associates Inc.'s ("KAI") ownership interests in certain assets and substantially all of its liabilities were transferred to Mountain Resort Holdings LLC ("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in KAI's common and preferred stock for corresponding pro-rata membership interests in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership interests in Mountain Resort. Mountain Resort, through four wholly owned subsidiaries, owns and operates 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. On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in Mountain Springs Resorts LLC ("Mountain Springs"). Mountain Springs, through a wholly owned subsidiary, owns 80% of the common membership interests and 100% of the Class B Preferred membership interests in an entity that owns the Purgatory Ski Resort ("Purgatory") in Durango, Colorado. In October 2002, an existing owner and an unrelated third party contributed approximately $2.5 million to Mountain Springs. As a result of the capital contribution, EFG Kirkwood's membership interest in Mountain Springs decreased from 50% to 33%. Mountain Springs used the proceeds from the additional capital contribution to exercise an option to purchase 51% of Durango Mountain Land Company, LLC, a real estate development company owning land 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 financial 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. Because the investments in Mountain Resorts and Mountain Springs include real estate development companies, the risks and uncertainties associated with the tourism industry can adversely affect the value of the real estate development companies associated with these investments. Decrease in tourism, weather-related conditions or other risks discussed above can permanently decrease the value of the investment and future operations. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2002, 2001 and 2000 is incorporated herein by reference to Note 2 to the financial statements included in Item 15. Refer to Item 15(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 February 1999. 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. As the Trust nears its scheduled dissolution date of December 31, 2004, 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 for the purpose of acquiring PLM through its wholly-owned subsidiary MILPI Acquisition Corporation ("MAC"). The Trusts collectively paid $1.2 million of which AFG Investment Trust C contributed $0.4 million. AFG Investment Trust C's capital contribution gave the Trust a 34% interest in MILPI. In February 2001, the Trusts through MAC acquired 83% of PLM's common stock for a total purchase price of $21.8 million at $3.46 per share and contributed the shares to MILPI. AFG Investment Trust C's portion of the acquisition was $7.1 million, which included acquisition fees paid to a wholly-owned subsidiary of Semele of $0.1 million. The purchase price was determined based on competitive bids and a valuation model using the expected future cash flows of PLM. MILPI also hired an investment banking firm to issue a fairness opinion on the purchase price. The assets of PLM included cash and cash equivalents of approximately $4.4 million. The 83% acquisition resulted in goodwill of approximately $5.8 million. On February 6, 2002, the Trusts through MAC, completed its acquisition of PLM by purchasing the remaining 17% of the outstanding PLM common stock and by effecting a merger of MAC into PLM, with PLM as the surviving entity. The merger was completed when MAC obtained approval of the merger from PLM's shareholders pursuant to a special shareholder's meeting. The remaining interest was purchased for $4.4 million at the $3.46 per common share price established in the tender offer, which was financed by AFG Investment Trust C and D. An investment banking firm issued a fairness opinion on the purchase price of this transaction. The Trust's portion of the purchase price was $2.4 million, which included transaction costs of $24,000 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele. The 17% acquisition resulted in additional goodwill of approximately $3.5 million. No goodwill is expected to be deducted for tax purposes. Concurrent with the completion of the merger, PLM ceased to be publicly traded. Concurrent to the February 6, 2002 acquisition, the Trust's ownership interest in MILPI increased from 34% to 38%. In March 2002, the Trust and AFG Investment Trust D ("Trust D") formed C & D IT LLC, a Delaware limited liability company, as a 50%/50% owned joint venture that is co-managed by the Trust and Trust D (the "C & D Joint Venture") to which each Trust contributed $1.0 million. The C & D Joint Venture was formed for the purpose of making a conditional contribution of $2.0 million to BMLF/BSLF II Rancho Malibu Limited Partnership ("Rancho Malibu Limited Partnership") in exchange for 25% of the interests in Rancho Malibu Limited Partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture was admitted to Rancho Malibu Limited Partnership as a co-managing general partner pursuant to the terms of an amendment to Rancho Malibu Limited Partnership Agreement. The other partners in 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 a 274-acre parcel of land near Malibu, California which is being developed 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. The conditional contribution 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, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares of common stock of RMLP, Inc., approximately 15% interest in RMLP Inc. The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture Contribution from Rancho Malibu Limited Partnership if the transactions have not taken place within ninety days of the receipt by Rancho Malibu Limited 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 Rancho Malibu Limited Partnership held by Semele and Rancho Malibu Corp. On February 12, 2003, the Trust filed a proxy statement with the SEC, pursuant to which the Trust solicited the approval of the Beneficiaries to the following proposals, which were subsequently approved by the Trust's shareholders. On March 14, 2003, the Beneficiaries approved the following proposals: 1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that they control, to continue to operate their ongoing business making investments after December 31, 2002, notwithstanding the end of the reinvestment period for the Trust. 2. To approve a transaction whereby a new formed subsidiary of PLM, RMLP, Inc., will receive a contribution from Semele Group, Inc., of partnership interests in Rancho Malibu, a partnership that owns and is developing approximately 274 acres of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares (15 %) of the common stock of RMLP, Inc. 3. To amend Section 7.5 of the Trust Agreement to approve grants and exercises of rights of first refusal in connection with joint ventures between the Trust and its affiliates. 4. To approve the purchase by MILPI of the membership interests in MILPI held by AFG Investment Trust A and AFG Investment Trust B, for $5.9 million which gives the Trust, together with AFG Investment Trust D, shared 100% ownership of MILPI. After this purchase the Trust will owns 50% of MILPI. 5. To allow the Trust, in its operation of PLM, to enter into business arrangements with affiliates of the Trust in the ordinary course of business on terms no less favorable than those that they would receive if such arrangements were being entered into with independent third parties. In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in Rancho Malibu as indicated in the proposal above. d) Financial Information About Foreign and Domestic Operations and Export Sales Incorporated herein by reference to the financial statements and supplementary data included in the 2002 Annual Report. Item 2. Properties. - --------------------- None. Item 3. Legal Proceedings. - ----------------------------- 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 C&D IT LLC, 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 were determined to be an investment company, its business would be adversely affected. The Managing Trustee, AFG ASIT Corporation, has 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 Managing Trustee has consulted counsel and believes that the Trust is not an investment company. The Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business or interstate commerce. If necessary, the Trust intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. The Trust is subject to various claims and proceeding in the normal course of business. Management believes that the disposition of such matters is not expected to have a material adverse effect on the financial position of the Trust or its results of operations. 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. There are several secondary markets in which limited partnership units trade. Secondary markets are characterized as having few buyers for limited partnership interests and therefore are viewed as being inefficient vehicles for the sale of limited partnership units. Presently, there is no public market for the limited partnership units and none is likely to develop. (b) Approximate Number of Security Holders At December 31, 2002, there were 1,945 record holders (1,935 of Class A Interests and 10 of Class B Interests) in the Trust. (c) Dividend History and Restrictions Prior to 1998, cash distributions were 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 $15.2 million, 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 cash distributions. The Managing Trustee did not reinstate cash distributions through the expiration of the Trust's reinvestment period in December 2002. In addition to maintaining sale proceeds for reinvestment, the Managing Trustee determined that the Trust would retain cash from operations to pay down debt and for the continued maintenance of the Trust's assets. The Managing Trustee believed that this decision was 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 2002, 2001 or 2000. Distributions of $15.2 million 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 2002 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 2002 Annual Report. Item 7a. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------------- The Trust's primary market risk exposure is that of interest rate and currency devaluation risk. During the year ended December 31, 2002, 63% of the Trust's total lease revenues from wholly-owned and jointly-owned equipment was earned from lessees domiciled outside the United States. If these lessees' currency devalues against the US dollar, these lessees could potentially encounter difficulty in making the US dollar-denominated lease payments. Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------------- Incorporated herein by reference to the financial statements and supplementary data included in the 2002 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, 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 31, 2003 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 is President and Director of Managing duly elected and Trustee 54 qualified James A. Coyne Executive Vice President of the general partner of EFG and Senior Vice President of the Managing Trustee 43 Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corporation 40 Gail D. Ofgant Senior Vice President, Lease Operations of the general partner of EFG and Senior Vice President of the Managing Trustee 37
(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 54, 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 43, 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. Brock, age 40, became Chief Financial Officer and Treasurer of AFG ASIT Corp. in 2002. Mr. Brock is also the Chief Financial Officer of PLM International, Inc. Mr. Brock has been associated with PLM for over twelve years holding positions including Chief Financial Officer and Corporate Controller. Ms. Ofgant, age 37, has served as Senior Vice President, Lease Operations 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 the Advisor 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 audited financial statements included in Item 15, 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 31, 2003, the following person or group owns beneficially more than 5% of the Trust's outstanding Beneficiary interests:
Title Name and Amount of Percent of Address of Beneficial of Class Beneficial Owner Ownership Class - --------------------- -------------------- ------------------- -------- Class B Equis II Corporation Beneficiary Interests 200 Nyala Farms 3,019,220 Interests 99.82% Westport, CT 06880
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 31, 2003. 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 Various operating expenses incurred by the Trust are paid by Equis Financial Group, LP ("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, 2002, 2001 and 2000, which were paid or accrued by the Trust to EFG or its affiliates, are as follows (in thousands of dollars):
2002 2001 2000 ----- ------ ------ Acquisition fees $ 24 $ 74 $ 15 Management fees 434 433 431 Administrative charges 201 178 198 Reimbursable operating costs due to third parties - 966 397 ----- ------ ------ Total $ 659 $1,651 $1,041 ===== ====== ======
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 equipment acquisition services, EFG was compensated by an amount equal to 0.28% of Asset Base Price paid by the Trust for each asset acquired for the Trust's initial asset portfolio. For reinvestment equipment acquisitions completed prior to September 2, 1997, EFG was compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions, which were scheduled to expire on September 2, 1997, were extended through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. Acquisition fees paid to EFG in connection with equipment reinvestment assets acquired after September 2, 1997 are equal to 1% of Asset Base Price paid by the Trust. The Trust does not anticipate, nor have there been, any equipment acquisitions subsequent to September 1997. Acquisition fees associated with non-equipment acquisitions are negotiated at the date of each acquisition. Historically fees associated with non-equipment acquisitions have been approximately 1% of the Asset Base Price. 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 September 2, 1997. For non-equipment assets 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 disposition 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. Prior to June 2002, an affiliated company supported the administrative function. Subsequently, the administrative functions were outsourced to an unrelated third party with the exception of some administrative functions which will continue to be supported by EFG. During 2001 and 2000, EFG paid the majority of operating costs on behalf of the Trust. Costs incurred by EFG were subsequently reimbursed by the Trust on a monthly basis. During 2002, the Trust paid all of its direct costs. Therefore, there were no reimbursable direct operating costs paid to an affiliate during the year. All equipment was purchased from EFG, one of its Affiliates, or directly from third-party sellers. The Trust's Purchase Price is determined by the method described in Note 3 to the audited financial statements, Equipment. On December 31, 2002, the Trust had a receivable from affiliate of $0.1 million. The receivable consists of approximately $0.1 million of revenues and other proceeds received by EFG. All rents and proceeds from the sale of equipment are paid by the lessee directly to either EFG or a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Trust. The Trust's cash proceeds received by EFG are reimbursed to the Trust on a monthly basis. The remaining balance of the receivable, approximately $0.1 million, relates to costs incurred by the Trust associated with the sale of an aircraft on behalf of EFG. Old North Capital Limited Partnership ("ONC"), a Massachusetts limited partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests or less than 1% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest, thereby generating approximately $15.1 million in aggregate Class B capital contributions. Class A Beneficiaries purchased 5,520 Class B Interests, generating $28,000 of such aggregate capital contributions, and then the Special Beneficiary, EFG, purchased 3,019,220 of such Class B Interests, generating approximately $15.1 million 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 the majority 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. During the first quarter of 2002, the Trust borrowed $0.7 million from MILPI Holdings, LLC. The note issued had an interest rate LIBOR plus 200 basis points and was scheduled to mature on January 6, 2003. In December 2002, the note was paid in full plus accrued interest. The interest paid to MILPI under this note during the year ended December 31, 2002 was $28,000. 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. Item 14. Controls and Procedures - ------------------------------------ Based on their evaluation as of a date within 90 days of the filing of this Form 10-K, the Managing Trustee's Principal Executive Officer and Chief Financial Officer have concluded that the Trust's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Trust files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Trust's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. PART IV Item 15. 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. * Report of Deloitte & Touche LLP, Independent Auditors. * Statements of Financial Position at December 31, 2002 and 2001 * Statements of Operations for the years ended December 31, 2002, 2001 and 2000 * Statements of Changes in Participants' Capital for the years ended December 31, 2002 , 2001 and 2000. * Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. * Notes to the Financial Statements *
* Incorporated herein by reference to the appropriate portion of the 2002 Annual Report to security holders for the year ended December 31, 2002 (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. 13 The 2002 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) 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(g) C&T IT LLC Operating Agreement, dated March 1, 2002 between AFG Investment Trust C and AFG Investment Trust D was filed on Form 10-K for the year ended December 31, 2001 and is incorporated herein by reference. 99(h) Operating Agreement of EFG Kirkwood LLC, dated May 1, 1999 99(i) Amended and Restated Operating Agreement of Mountain Springs, LLC dated October 24, 2002 99.1 Certificate of the Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley 99.2 Certificate of the Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley (b) Reports on Form 8-K None (c) Other Exhibits None (d) Financial Statement Schedules (i) Consolidated Financial Statements for MILPI Holdings, LLC and Subsidiaries as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period February 7, 2001 through December 31, 2001 and Independent Auditors' Report. 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:March 31, 2003 ----------------- By: /s/ Richard K Brock ---------------------- Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corp., the Managing Trustee of the Trust (Principal Financial and Accounting Officer) Date:March 31, 2003 ---------------- CERTIFICATION: I, Gary D. Engle, certify that: 1. I have reviewed this annual report on Form 10-K of AFG Investment Trust C; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Gary D. Engle ---------------------- Gary D. Engle President of AFG ASIT Corporation, the Managing Trustee of the Trust (Principal Executive Officer) March 31, 2003 - ------ CERTIFICATION: I, Richard K Brock, certify that: 1. I have reviewed this annual report on Form 10-K of AFG Investment Trust C; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Richard K Brock - ----------------------- Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corp., the Managing Trustee of the Trust (Principal Financial and Accounting Officer) March 31, 2003 Exhibit Number - ------ 13 The 2002 Annual Report 23 Consent of Independent Certified Public Accountants 99(h) Operating Agreement of EFG Kirkwood LLC 99(i) Amended and Restated Operating Agreement of Mountain Springs, LLC 99.1 Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley Act 99.2 Certificate of Chief Financial Officer pursuant to Section 906 of Sarbanes - Oxley Act Schedule 14 D (i) Schedule 14 D (i) MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page - ---------------------------------------------------------------------------------------------- ---- Independent Auditors' Report 3 Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 4 Consolidated Statements of Income for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 5 Consolidated Statements of Shareholders' Equity for the year ended December 31, 2002 and for for the period from February 7, 2001 through December 31, 2001 6 Consolidated Statements of Cash Flows for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 7 Notes to Consolidated Financial Statements 8
INDEPENDENT AUDITORS' REPORT The Board of Directors and Members MILPI Holdings, LLC: We have audited the accompanying consolidated balance sheets of MILPI Holdings, LLC, a Delaware limited liability company, and subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related statements of income, shareholders' equity and cash flows for the year ended December 31, 2002 and for the period from February 7, 2001 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 audits. We conducted our audits 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 audits provide 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, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets with the adoption in fiscal 2002 of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP Certified Public Accountants Tampa, Florida March 28, 2003 MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (in thousands of dollars, except share amounts)
2002 2001 ------- ------- ASSETS Cash and cash equivalents $ 6,622 $14,037 Receivables, net of allowance for doubtful accounts of $136 at December 31, 2002 and $45 at December 31, 2001 305 39 Receivables from affiliates 670 951 Equity interest in affiliates 19,361 20,948 Restricted cash and cash equivalents 60 75 Assets held for sale 6,227 - Goodwill, net of accumulated amortization of $765 as of December 31, 2002 and 2001 8,134 4,590 Other assets, net 3,021 2,759 ------- ------- Total assets $44,400 $43,399 ======= ======= LIABILITIES Payables and other liabilities $ 5,899 $ 5,702 Deferred income taxes 12,541 9,751 ------- ------- Total liabilities 18,440 15,453 ------- ------- MINORITY INTERESTS - 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 21,676 21,970 Retained earnings 4,284 2,947 ------- ------- Total shareholders' equity 25,960 24,917 ------- ------- Total liabilities, minority interests and stockholders' equity $44,400 $43,399 ======= =======
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars)
For the Period For the Year From February 7, Ended 2001 through December 31, December 31, 2002 2001 --------- --------------- REVENUES Management fees $4,494 $5,217 Operating lease income 122 472 Acquisition and lease negotiation fees - 2,032 Gain (loss) on disposition of assets 24 (91) Other 588 1,030 ------ ------ Total revenues 5,228 8,660 ------ ------ EXPENSES Depreciation and amortization 177 1,255 Impairment of investment in managed programs 501 511 General and administrative 2,800 4,090 ------ ------ Total expenses 3,478 5,856 ------ ------ Operating income 1,750 2,804 Equity income in managed programs 133 1,716 Interest income, net 323 378 Other (expense) income, net (55) 89 ------ ------ Income before income taxes and minority interest 2,151 4,987 Provision for income taxes 774 1,611 Minority interest 40 429 Net income $1,337 $2,947 ====== ====== Net income per weighted-average common share outstanding $ 67 $ 147 ====== ======
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEBMER 31, 2002 AND FOR THE PERIOD FROM FEBRUARY 7, 2001 THROUGH DECEMBER 31, 2001 (in thousands of dollars, except shares)
Common Additional Retained Shares Stock Paid in Capital Earnings Total ------- ------ ------------------ --------- ------- Balance at February 7, 2001 20 $ - $ 21,776 $ - $21,776 Capital contribution - - 194 - 194 Net income - - - 2,947 2,947 ------- ------ ------------------ --------- ------- Balance at December 31, 2001 20 - 21,970 2,947 24,917 Capital contribution - - 4,363 - 4,363 Dividends paid - - (4,657) - (4,657) Net income - - - 1,337 1,337 ------- ------ ------------------ --------- ------- Balance at December 31, 2002 20 $ - $ 21,676 $ 4,284 $25,960 ------- ------ ------------------ --------- -------
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars)
For the Period from For the Year February 7, 2001 Ended through December 31, December 31, 2002 2001 --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income $ 1,337 $ 2,947 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization expense 177 1,255 Compensation expense related to variable stock options -- 315 (Gain) loss on disposition of assets (24) 91 Equity income in managed programs (133) (1,716) Minority interest 40 429 Impairment of equity Investments 501 511 Deferred income tax provision 561 867 Changes in assets and liabilities: (14)-- -- Receivables and receivables from affiliates 15 1,576 Other assets, net (406) (176) Payables and other liabilities (250) (9,484) --------------------- ------------------ Net cash provided by (used in) operating activities 1,818 (3,385) --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Cash distributions from managed programs 1,645 1,591 Loans made to shareholders (1,345) (5,500) Repayment of loans made to shareholders 1,345 5,500 Purchase of property, plant and equipment (67) (71) Proceeds of sale of equipment for lease 58 313 Proceeds from the sale of assets held for sale -- 10,250 Purchase of the assets held for sale (6,227) -- Purchase of PLM International, Inc. minority interest (4,363) -- Decrease in restricted cash -- 1,673 --------------------- ------------------ Net cash (used in) provided by investing activities (8,954) 13,756 --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Restricted cash 15 -- Capital contribution 4,363 194 Dividends paid (4,657) -- Redemption of stock options -- (919) --------------------- ------------------ Net cash used in financing activities (279) (725) --------------------- ------------------ Net (decrease) increase in cash and cash equivalents (7,415) 9,646 Cash and cash equivalents at beginning of period 14,037 4,391 --------------------- ------------------ Cash and cash equivalents at end of period $ 6,622 $ 14,037 ===================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for taxes $ 243 $ 6,216 ===================== ================== Cash paid during the period for interest $ 1 $ 6 ===================== ==================
See accompanying notes to these consolidated financial statements. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BACKGROUND MILPI Holdings, LLC and subsidiaries ("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. MILPI had no activities 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 the entire interest in PLM International, Inc. and subsidiaries ("PLM"). PLM is an equipment management company and operates in one business segment, the leasing of transportation equipment. On February 7, 2001, MILPI Acquisition Corp. ("MAC"), a wholly-owned subsidiary of MILPI, closed on its tender offer to purchase any and all of PLM's outstanding common stock for a purchase price of $3.46 per share. The purchase price was determined based on competitive bids and a valuation model using the expected future cash flows of the Company. The Company also hired an investment banking firm to issue a fairness opinion on the purchase price. Pursuant to the cash tender offer, the Trusts through MAC acquired approximately 83% of PLM's common stock in February 2001 for a total purchase price of $21.8 million and contributed the shares to MILPI. 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, were accrued as acquisition costs. The assets of PLM included cash and cash equivalents of approximately $4.4 million. The acquisition resulted in goodwill of approximately $5.8 million. Goodwill was reduced by approximately $0.5 million later in 2001 due to a revision in the estimates of severance and relocation costs originally recorded as acquisition costs. Amounts paid in 2001 related to the severance of employees and for relocation costs were approximately $1.5 million. 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 =======
On February 6, 2002, the Trusts through MAC, completed their acquisition of PLM by purchasing the remaining 17% of the outstanding PLM common stock and by effecting a merger of MAC into PLM, with PLM as the surviving entity. The merger was completed when MAC obtained approval of the merger from PLM's shareholders pursuant to a special shareholder's meeting on February 6, 2002. The remaining interest was purchased for $4.4 million at the $3.46 per common share price established in the tender offer. Approximately 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $0.4 million of total costs estimated for severance of PLM employees and property abandonment in accordance with management's formal plan to involuntary terminate employees, which plan was developed in conjunction with this acquisition, were accrued as acquisition costs. Amounts paid related to the severance of employees and for property abandonment in 2002 were approximately $0.1 million. The allocation of the February 6, 2002 purchase price is as follows (in thousands of dollars):
Equity Interest in Affiliates $ 426 Goodwill 3,544 Payables and Other Liabilities (446) Deferred Income Tax Liability (2,230) Minority Interest 3,069 ------- Total $ 4,363 =======
The acquisition of the stock of PLM was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141"). In accordance with SFAS No. 141, the Company allocates the total purchase price to the assets acquired and liabilities assumed based on the respective 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 results of operations of PLM since February 7, 2001 have been included in the consolidated financial statements. Concurrent with the February 7, 2001, acquisition, PLM ceased to be publicly traded. On October 10, 2002, the Company formed a limited liability company under the Delaware Limited Liability Company Act, MILPI Equipment Management, LLC (MILPI EM). MILPI EM is expected to begin earning revenues in connection with the management of limited partnerships and other managed programs sometime in 2003. The Company's fiscal year end is December 31. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of MILPI Holdings, LLC and its wholly-owned subsidiaries. In addition, investments for which the Company acts as manager or general partner, and therefore has significant influence but does not control, are accounted for using the equity method. All significant intercompany balances and transactions among the consolidated group have been eliminated. The Company recognized a minority interest in the Company's consolidated financial statements, until February 6, 2002, the date the Company acquired the minority interest, to reflect PLM's common shares not owned by the Company as of that date. 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. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT IN, AND MANAGEMENT OF, EQUIPMENT GROWTH FUNDS, OTHER LIMITED PARTNERSHIPS, PRIVATE PLACEMENT PROGRAMS AND LIMITED LIABILITY COMPANY The Company earns revenues in connection with the management of limited partnerships and other managed programs. Equipment acquisition and lease negotiation fees are earned through the purchase and initial lease of equipment, and are recognized as revenue when the Company 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, the Company 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. The Company 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. PLM has an equity interest of 15% for its contribution to 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. The Company is entitled to reimbursement from the investment programs for providing certain administrative services at the lesser of cost or market rates. In accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying values of such assets may not be recoverable. Losses for impairment are recognized when the undiscounted cash flows estimated to be realized from a long-lived asset are determined to be less than the carrying value of the asset and the carrying amount of long-lived assets exceed its fair value. The determination of fair value for a given investment requires several considerations, including but not limited to, income expected to be earned from the asset, estimated sales proceeds, and holding costs excluding interest. OPERATING LEASE INCOME Operating lease income consists of rental revenue generated from assets held for operating leases and assets held for sale that are on lease, which is recognized equally on a straight-line basis over the lease term. 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 subject to withdrawal restrictions per loan agreements. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill represents the excess of the aggregate purchase price of PLM over the fair market value of the identifiable net assets acquired in accordance with SFAS No. 141. The Company allocates the total purchase price to the assets acquired and liabilities assumed based on the relative fair market values at the date of acquisition. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS. No. 142") on January 1, 2002. As a result, the discontinuance of goodwill amortization was effective upon adoption of SFAS No. 142. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The amount of the impairment is the difference between the carrying amount and the fair value of the asset. Fair value of the asset is calculated using several valuation models which utilize the expected future cash flows of the Company. In accordance with SFAS No. 142, the Company performed an evaluation of the fair value of goodwill as of January 1, 2002 and found no indication that goodwill was impaired. Based on an analysis performed as of December 31, 2002, and consideration of events that have occurred and circumstances that have changed since the most recent fair value determination, including the minority interest acquisition, the likelihood that a current fair value determination would be less than the carrying amount of the reporting unit is remote as of December 31, 2002. Goodwill of approximately $5.4 million was recorded in conjunction with the acquisition of 83% of the common stock of PLM. The Company recorded goodwill of approximately $3.5 million in conjunction with the acquisition of the remaining 17% of the outstanding common stock of PLM in February 2002. The comparison of the net income for the year ended December 31, 2002 and the pro forma net income for the period from February 7, 2001 through December 31, 2001, assuming no goodwill amortization, are summarized as follows (in thousands of dollars):
For the For the Period From Year February 7, 2001 Ended Through December 31, 2002 December 31, 2001 ------------------ ------------------ Reported net income $ 1,337 $ 2,947 Add back: goodwill amortization - 765 ------------------ ------------------ Pro forma net income $ 1,337 $ 3,712 ================== ================== Net earnings per share: Reported net income $ 67 $ 147 Add back: Goodwill amortization - 38 ------------------ ------------------ Pro forma net income $ 67 $ 185 ================== ==================
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows (in thousands of dollars):
Balance as of December 31, 2001 $4,590 Add: Goodwill acquired during the year 3,544 ------ Balance at December 31, 2002 $8,134 ======
INCOME TAXES MILPI is a partnership and as such is not taxed on its operations. PLM is a C corporation, which recognizes 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 In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("Statement") No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. The Company adopted Statement No. 143 at the beginning of fiscal 2003 and such adoption had no effect on the Company's financial position and results of operations. In April 2002 the FASB issued SFAS No.145, "Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections." As a result of the rescission of SFAS No.4, a gain or loss on extinguishment of debt will no longer be presented as an extraordinary item upon the adoption of SFAS No.145. The Company adopted SFAS No. 145 in the second quarter of fiscal 2002. In July 2002 the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.146 is based on the general principle that a liability for a cost associated with an exit or disposal activity should be recorded when it is incurred and initially measured at fair value. SFAS No.146 applies to costs associated with (1) an exit activity that does not involve an entity newly acquired in a business combination, or (2) a disposal activity within the scope of SFAS No.144. These costs include certain termination benefits, costs to terminate a contract that is not a capital lease, and other associated costs to consolidate facilities or relocate employees. Because the provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002, the effect of adopting this statement cannot be determined. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation elaborates on the disclosures to be made by a guarantor in its financial statements. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002. It also requires the guarantor to recognize a liability for the fair value of guarantees entered into after December 31, 2002 at the inception of the guarantee. This interpretation had no effect on the financial position and results of operations of the Company. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN 46"). This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) when the equity investors in an entity do no have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest," commonly evidenced by a guarantee arrangement or other commitment to provide financial support, in a "variable interest entity," commonly a thinly capitalized entity, and further determine when such variable interest requires a company to consolidate the variable interest entities financial statement with its own. The Company is required to perform this assessment by September 30, 2003 and consolidate any variable interest entities for which the Company will absorb a majority of the entities' expected losses or receive a majority of the expected residual gains. The Company has determined that it is not reasonably possible that they have any variable interests. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with current year presentation and do not change the results of the prior period financial statements. 2. ASSETS HELD FOR SALE In conjunction with the acquisition of PLM in February 2001, the Company acquired $10.3 million in marine containers that were classified as assets held for sale. The Company sold the marine containers to affiliated programs at cost, which approximated fair value in the first quarter of 2001. The Company has arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) managed programs in which FSI provides management services but does not hold an ownership interest (Non-Program Affiliates). These railcars will be delivered over the next three years. A leasing company affiliated with the manufacturer will acquire approximately 70% of the railcars and lease them to a Non-Program Affiliate. The remaining 30% will either be purchased by other third parties to be managed by the Company or by the Program Affiliates. The Company will manage the leased and purchased railcars. The Company will not be liable for these railcars. The Company estimates that the total value of purchased railcars will not exceed $26.0 million with approximately one third of the railcars being purchased in each of 2002, 2003 and 2004. As of December 31, 2002, the Company had purchased $6.2 million of these railcars. The Company sold these railcars to a Program Affiliate in the first quarter of 2003 (See Note 16). 3. EQUITY INTEREST IN AFFILIATES FSI is the General Partner or manager of ten 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. In accordance with SFAS No. 144, the Partnership evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying bases of such assets may not be recoverable. Whenever circumstances indicate that an impairment may exist, the Company evaluates future cash flows of the asset and compares this amount to the carrying value. If projected undiscounted future cash flows are lower than the carrying value of the asset, a loss is recorded. The loss recorded is equal to the difference between the carrying amount and the fair value of the asset. The fair value of the asset is determined based on a valuation model which includes expected future cash flows of the asset, current market prices and management's market knowledge. On December 31, 2002, one of the PLM managed programs in which MILPI has an equity investment adopted a formal plan of liquidation and transferred the remaining assets of this managed program to a liquidating trust. MILPI is actively marketing the equipment in this managed program and is in the process of finalizing the estimated costs of liquidation. 3. EQUITY INTEREST IN AFFILIATES (CONTINUED) Based on a revised liquidation analysis as of December 31, 2002, completed for this managed program on February 7, 2003, MILPI believes its equity investment in this program is impaired. Therefore, for the year ended December 31, 2002, MILPI recorded an impairment loss of $0.5 million on its equity investment in this affiliate. 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"), in 2001 the Company reviewed the carrying value of its investments whenever circumstances indicated that the carrying value may not be recoverable. If projected undiscounted future cash flows were lower than the carrying value of its equity interest in affiliates, an impairment was recorded. During the period from February 7, 2001 through December 31, 2001, the Company recorded an impairment of $0.5 million 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. 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 as of and for the year ended December 31, 2002, and as of and for the period from February 7, 2001 through December 31, 2001 is as follows (in thousands of dollars):
2002 2001 -------- -------- Total assets $201,683 $229,358 Total liabilities 53,617 67,579 Partners' equity 148,065 161,779 Total revenues $72,078 $91,085 Total expenses 68,286 70,688 Net income 3,792 20,397
4. OTHER ASSETS, NET Other assets, net, consists of the following as of December 31, 2002, and 2001, respectively (in thousands of dollars):
2002 2001 ------ ----- Cash surrender value of officers' life insurance policies $2,721 2,343 Prepaid expenses, deposits and other 169 153 Furniture, fixtures, and equipment, net 102 85 Commercial and industrial equipment, net 29 178 ------ ----- Total other assets, net $3,021 2,759 ------ -----
5. WAREHOUSE CREDIT FACILITY The Company is a participant in a $10.0 million warehouse facility. In July 2002, the Company reached an agreement with the lenders of the $10.0 million warehouse facility to extend the expiration date of the facility to June 30, 2003. The warehouse facility is shared by the Company, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, PLM Equipment Growth and Income Fund VII and Fund I. The facility provides for financing up to 100% of the cost of 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 June 30, 2003. 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. All borrowings are guaranteed by PLM. As of December 31, 2002, there were no outstanding borrowings on this facility by any of the eligible borrowers. 6. INCOME TAXES The provision for income taxes attributable to income from operations consists of the following (in thousands of dollars):
2002 2001 ---------------------------- -------------------------- Federal State Total Federal State Total Current $ 64 $ 149 $ 213 $ 551 $ 193 $ 744 Deferred 395 166 561 705 162 867 ------ ------- ------ ------- ----- ------ Total $ 459 $ 315 $ 774 $ 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:
Year Ended Period from February 7, December 31, 2001 through 2002 December 31, 2001 ------------- ------------------------ Federal statutory tax expense rate 34% 34% State income tax rate 5 5 Other (3) (7) ------------- ------------------------ Effective tax expense rate 36% 32% ============= ========================
There are no net operating loss carryforwards for federal income tax purposes or alternative minimum tax credit carryforwards as of December 31, 2002. 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):
Year Ended Period from February December 31, 7, 2001 through 2002 December 31, 2001 ----------------- ---------------------- Deferred tax assets from continuing operations: Partnership Organization and Syndication costs $ 8,300 $ 8,300 Federal benefit of state taxes 905 735 Other 126 329 ----------------- ---------------------- Total gross deferred tax assets 9,331 9,364 Less valuation allowance (8,300) (8,594) ----------------- ---------------------- Net deferred tax assets 1,031 770 ----------------- ---------------------- Deferred tax liabilities: Partnership interests 12,685 10,520 Other 887 1 ----------------- ---------------------- Total deferred tax liabilities 13,572 10,521 ----------------- ---------------------- Total net deferred tax liabilities $ 12,541 $ 9,751 ================= ======================
6. INCOME TAXES (CONTINUED) 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 2002 deferred tax account includes items that may result in future capital losses. 7. TRANSACTIONS WITH AFFILIATES In addition to various fees payable to the Company or its subsidiaries, the affiliated programs reimburse the Company for certain expenses, as allowed in the program agreements. Reimbursed expenses totaled $1.3 million and $1.8 million for the year ended December 31, 2002 and the period from February 7, 2001 through December 31, 2001, respectively. Outstanding amounts are paid under normal business terms. On February 11, 2002, the Company loaned $1.3 million to two of the trusts that own MILPI Holdings, LLC. The notes bear interest at LIBOR plus 200 basis points and matured on January 6, 2003. The interest rate charged on the loan is consistent with third party rates. This loan was prepaid in full plus all outstanding interest in December 2002. As of December 31, 2002, the Company had receivables from affiliates of approximately $0.7 million, which represented unpaid management fees. 8. SHAREHOLDERS' EQUITY In February 2002 the four Trusts that own MILPI contributed $4.4 million to the Company. These funds were used to purchase the remaining outstanding stock of PLM. In March and December 2002, the Company declared and paid cash dividends of approximately $2.7 million and $2.0 million, respectively, to the Trusts. 9. MINORITY INTEREST Minority interest is related to the portion of PLM's stock not owned by MILPI Holdings, LLC. The decrease in minority interest is attributable to the Company's purchase of the remaining 17% minority interest in the first quarter of 2002. Because all of the remaining minority interest shares were purchased in the first quarter of 2002, minority interest has been eliminated as of December 31, 2002. 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 2002, Professional Lease Management Income Fund 1, LLC, PLM Equipment Growth Fund VI, and PLM Equipment Growth and Income Fund VII accounted for 17%, 17% and 17% of total revenues, respectively. No other customer accounted for over 10% of revenue in 2002. In 2001, Professional Lease Management Income Fund 1, LLC, PLM Equipment Growth Fund VI and PLM Equipment Growth and Income Fund VII, accounted for 26%, 20% and 13% of total revenues, respectively. No other customer accounted for over 10% of revenue in 2001. 10. RISK MANAGEMENT (CONTINUED) As of December 31, 2002, 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 year ended December 31, 2002, and for the period from February 7, 2001 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. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations of the Company for the year ended December 31, 2002 (in thousands of dollars, except per share amounts):
2002 ----------------------------------------------- March June September December 31, 30, 30, 31, Total ------ ------ ---------- ---------- ------ Revenue $1,509 $1,334 $ 1,011 $ 1,374 $5,228 Net income $ 553 $ 807 $ 104 $ (127) $1,337 Net income per weighted-average common share outstanding: $ 28 $ 40 $ 5 $ (6) $ 67
During the third quarter ended September 30, 2002, the Company had a decrease in operating lease revenue, management and other fees totaling approximately $0.3 million compared to the quarter ended June 30, 2002. The Company's equity interests in the growth funds decreased approximately $0.4 million. Both decreases contributed to a decline in net income at September 30, 2002, compared to the period ended June 30, 2002. During the quarter ended December 31, 2002, the Company had increased management fee revenue related to forklifts that had not been on lease during the quarter ended September 30, 2002. In addition, management fee revenue was recognized for the payment of receivables that had previously been written off. The Company's equity interests in the growth funds decreased approximately $0.2 million as a result of railcar impairments. Additionally, the Company recorded a $0.5 million impairment loss in conjunction with a managed program that adopted a formal plan of liquidation. The following is a summary of the quarterly results of operations of the Company for the period February 7, 2001 through December 31, 2001 (in thousands of dollars, except per share amounts):
2001 --------------------------------------------- March June September December 31, 30, 30, 31, Total ------ ---------- --------- ------ ------ Revenue $1,648 $ 2,005 $ 3,157 $1,850 $8,660 Net income $ 776 $ 568 $ 1,293 $ 310 $2,947 Net income per weighted-average common share outstanding: $ 39 $ 28 $ 65 $ 16 $ 147
13. QUARTERLY RESULTS OF OPERATIONS (CONTINUED) 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. 14. COMMITMENTS AND CONTINGENCIES INTERNAL REVENUE SERVICE AUDIT In March 2001, the Internal Revenue Service ("IRS") 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 related to payments to unrelated foreign entities made by two partnerships in which PLM formerly held interests as the 100% direct and indirect owner. One partnership's audit related to Forms 1042 for the years 1997, 1998 and 1999, while the other partnership's audit related to Forms 1042 for the years 1998 and 1999. In September 2002, the IRS notified PLM that they had completed their examination of the related tax returns and that they had assessed no changes to the reported taxes. LEASE AGREEMENTS PLM and its subsidiaries have entered into operating leases for office space. PLM's total net rent expense was $0.2 million and $0.4 million for the year ended December 31, 2002 , and for the period from February 7, 2001 through December 31, 2001, respectively. Future payments under lease agreements are $0.3 million in 2003, $0.2 million in 2004, $0.1 million in 2005, $0 in 2006, 2007, and thereafter, respectively. Future receipts under a noncancelable sublease extending through 2004 are $0.1 million as of December 31, 2002. CORPORATE GUARANTEE As of December 31, 2002, PLM had guaranteed certain obligations up to $0.4 million of a Canadian railcar repair facility, in which PLM had a 10% ownership interest. This obligation was accrued at December 31, 2002. EMPLOYMENT AGREEMENTS PLM entered into a severance agreement with an individual that will require PLM to pay severance in the event the employee is terminated after a change in control as defined in the employment agreement. In addition, PLM is under agreement to pay the health benefits of one individual through September 2003. As of December 31, 2002, 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. OTHER PLM life insurance policies on certain current and former employees, which had a $2.7 million cash surrender value as of December 31, 2002, are included in other assets. COMMITMENT TO PURCHASE RAILCARS The Company has arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) managed programs in which FSI provides management services but does not hold an ownership interest (Non-Program Affiliates). These railcars will be delivered over the next three 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) years. A leasing company affiliated with the manufacturer will acquire approximately 70% of the railcars and lease them to a Non-Program Affiliate. The remaining 30% will either be purchased by other third parties to be managed by the Company or by the Program Affiliates. The Company will manage the leased and purchased railcars. The Company will not be liable for these railcars. The Company estimates that the total value of purchased railcars will not exceed $26.0 million with one third of the railcars being purchased in each of 2002, 2003 and 2004. As of December 31, 2002, the Company had purchased $6.2 million of these railcars. The Company sold these railcars to Program Affiliates in the first quarter of 2003 (See Note 16). Commitments and contingencies as of December 31, 2002 are as follows (in thousands of dollars):
Less than 1-3 4-5 After 5 Current Obligations Total 1 year Years Years Years ------- ------- -------- ------ -------- Commitment to purchase railcars $ 19,742 $11,300 $ 8,442 $ - $ - Line of credit - - - - - ------- ------- -------- ------ -------- $19,742 $11,300 $ 8,442 $ - $ - ------- ------- -------- ------ --------
LITIGATION PLM is involved as a 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. 15. PROFIT SHARING, 401(K) PLAN AND STOCK OPTION PLANS The 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 2002, PLM employees who participated in the Plan could elect to defer and contribute to the trust established under the Plan wages up to $11,000. 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 2002. The Profit Sharing and Stock Option Plans were terminated upon completion of the merger in 2002. 16. SUBSEQUENT EVENTS In the first quarter of 2003, the Company sold its portfolio of railcars to a Program Affiliate for its cost of $6.2 million, which approximated fair market value. This sale resulted in a gain on disposition to the Company of $0.1 million. On February 12, 2003, AFG Investment Trust C and AFG Investment Trust D filed a proxy statement, which was subsequently approved. In March 2003, the shareholders approved the following articles: 1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that they control, to continue to operate their ongoing business making investments after December 31, 2002, notwithstanding the end of the reinvestment period for AFG Investment Trust C and AFG Investment Trust D. 2. To approve a transaction whereby a newly formed subsidiary of PLM, RMLP, Inc., will receive a contribution from Semele Group, Inc., of partnership interests in Rancho Malibu, a partnership that owns and is developing 274 acres of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares (15%) of the common stock of RMLP, Inc. 3. To amend Section 7.5 of the Trust Agreements of AFG Investment Trust C and AFG Investment Trust D to approve grants and exercises of rights of first refusal in connection with joint ventures between AFG Investment Trust C and AFG Investment Trust D and its affiliates. 4. To approve the purchase by MILPI of the membership interests in MILPI held by AFG Investment Trust A Liquidating Trust and AFG Investment Trust B Liquidating Trust, which gave AFG Investment Trust C and AFG Investment Trust D shared 100% ownership of MILPI. 5. To allow AFG Investment Trust C and AFG Investment Trust D, in the operation of PLM, to enter into business arrangements with affiliates of AFG Investment Trust C and AFG Investment Trust D in the ordinary course of business on terms no less favorable than those that they would receive if such arrangements were being entered into with independent third parties. In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in Rancho Malibu as indicated in the proposal above. EX-13 3 doc6.txt EXHIBIT 13 AFG INVESTMENT TRUST C ANNUAL REPORT TO THE PARTICIPANTS, DECEMBER 31, 2002 AFG Investment Trust C INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
.. Page ---- SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 24 FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants.. . 39 Report of Deloitte & Touche LLP, Independent Auditors. 40 Statements of Financial Position at December 31, 2002 and 2001. . . . . . . . . . . . . 41 Statements of Operations for the years ended December 31, 2002, 2001 and 2000 . 42 Statements of Changes in Participants' Capital for the years ended December 31, 2002, 2001 and 2000 . 43 Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 . 44 Notes to the Financial Statements. . . . . . . . . . . 45 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed. . . . . . . . 63 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings. . . . . . . . 64 Schedule of Equipment. . . . . . . . . . . . . . . . . 65
SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 2002 (in thousands of dollars, except per share amounts):
Summary of Operations 2002 2001 2000 1999 1998 - -------------------------------- -------- -------- ------- ------- ------- Lease revenue $ 5,682 $ 6,520 $ 7,734 $10,287 $15,201 Total revenue $ 5,521 $ 6,986 $10,785 $15,453 $19,154 Net income (loss) $(1,451) $(5,599) $ 2,050 $ 5,803 $ 4,999 Per Beneficiary Interest: Net income (loss) Class A Interests $ (0.83) $ (2.84) $ 0.66 $ 1.13 $ 1.17 Class B Interests $ - $ (0.10) $ 0.18 $ 0.75 $ 0.39 Cash distributions declared Class A Interests $ - $ - $ - $ 4.56 $ 1.64 Class B Interests $ - $ - $ - $ 3.66 $ 2.10 Financial Position - -------------------------------- Total assets $36,524 $42,172 $51,641 $71,091 $72,909 Total long-term obligations $18,151 $22,383 $26,221 $32,573 $35,073 Participants' capital $16,139 $17,590 $23,189 $21,159 $36,360
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 AND FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 FORWARD-LOOKING INFORMATION Certain statements in this annual report of the AFG Investment Trust C (the, "Trust") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the collection of the Trust's contracted rents, the realization of residual proceeds for the Trust's equipment, the performance of the Trust's non-equipment assets, and future economic conditions. OVERVIEW The Trust was organized in 1992 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. In 1998, the Trust Agreement was modified to permit the Trust to invest in assets other than equipment. Subsequently, the Trust has made certain non-equipment acquisitions. In 1999, the Company purchased a minority interest in EFG/Kettle Valley Development LLC "Kettle Valley" and EFG Kirkwood LLC ("EFG Kirkwood"). Kettle Valley is a real estate development located in Canada. EFG Kirkwood is a company created by the Trust and three affiliated trusts (collectively, the "Trusts") that acquired a minority interest in two ski resorts: Mountain Resort Holdings LLC and Mountain Springs Resort LLC. During 2002 and 2001, the Trusts acquired 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. In 2002, the Trust and AFG Investment Trust D ("Trust D") formed C & D IT LLC, a Delaware limited liability company, as a 50%/50% owned joint venture that is co-managed by the Trust and Trust C (the "C & D Joint Venture") to which each Trust contributed $1.0 million. C&D IT LLC is a limited liability company that owns a minority interest in a real estate development company located in Malibu, California. Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by December 31, 2004. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Trust has active business operations in the financial services industry, primarily equipment leasing, and in the real estate industry through its interests in C&D IT LLC, 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 were determined to be an investment company, its business would be adversely affected. The Managing Trustee, AFG ASIT Corporation, has 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 Managing Trustee has consulted counsel and believes that the Trust is not an investment company. The Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business or interstate commerce. 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Managing Trustee to make estimates and assumptions that affect the amounts reported in the financial statements. On a regular basis, the Managing Trustee reviews these estimates and assumptions including those related to revenue recognition, asset lives and depreciation, impairment of long-lived assets and contingencies. These estimates are based on the Managing Trustee's historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Managing Trustee believes, however, that the estimates, including those for the above-listed items, are reasonable. The Managing Trustee believes the following critical accounting policies are subject to significant judgments and estimates used in the preparation of these financial statements: Revenue Recognition - -------------------- Rents are payable to the Trust monthly and quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Depreciation and Amortization - ------------------------------- The Trust's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of the primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including he Trust's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. The Trust attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. The Trust amortizes deferred financing cost over the life of the related debt. The Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. As a result, the discontinuance of goodwill and other intangible asset amortization was effective upon adoption of SFAS No. 142. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The amount of the impairment is the difference between the carrying amount and the fair value of the asset. The fair value of the assets should be calculated using several valuation models which utilize the expected future cash flows of the Trust. Equity Ownership Investments - ------------------------------ Equity securities that are not publicly traded are accounted for in accordance with Accounting Principles Board ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock." If the Trust's ownership interest in the investment enables the Trust to influence the operating financial decisions of the investee, the investment is accounted for under the equity method of accounting. Otherwise, the investment is accounted for under the cost method of accounting. The equity method of accounting is discontinued when the investment is reduced to zero and does not provide for additional losses unless the Trust has guaranteed obligations of the investee or is otherwise committed to provide further financial support to the investment. Whenever circumstances indicate an impairment exists, the Trust evaluates the fair value of the investment. The fair value of the equity investment is based on current market prices, management's market knowledge and on a valuation models which include expected future cash flows of the investment. If the fair value of the investments is below the carrying value, a loss is recorded. The Company defines control as the ability of an entity or person to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limits its losses from that other entity's activities without the assistance of others. Impairment of Long-Lived Assets - ---------------------------------- The Trust accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which was issued in August 2001. The Trust adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144, the Trust evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying bases of such assets may not be recoverable. Whenever circumstances indicate that an impairment may exist, the company evaluates future cash flows of the asset to the carrying value. If projected undiscounted future cash flows are lower than the carrying value of the asset, a loss is recorded. The loss recorded is equal to the difference between the carrying amount and the fair value of the asset. The fair value of the asset is determined based on a valuation model which includes expected discounted future cash flows of the asset, current market prices and management's market knowledge. The fair market value of long-lived assets secured by non-recourse debt is determined based on a valuation model which includes expected future cash flows and the recoverable value. The recoverable value is determined based on management's decision to either sell, re-lease or return the asset to the lender. The Managing Trustee evaluates the net realizable value of significant equipment assets, such as aircraft, individually. All other assets are evaluated collectively by equipment type unless the Managing Trustee learns of specific circumstances, such as a lessee default, technological obsolescence, or other market developments, which could affect the net realizable value of particular assets. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value and are reflected separately on the accompanying Statement of Operations as write-down of equipment. Contingencies and Litigation - ------------------------------ The Trust's policy is to recognize a liability for goods and services during the period when the goods or services are received. To the extent that the Trust has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Trust recognizes a liability in accordance with SFAS No. 5 "Accounting for Contingencies". SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. The Trust adopted SFAS 141 on January 1, 2002 and such adoption had no effect on the Trust's financial position and results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. The Trust adopted SFAS No. 143 at the beginning of fiscal 2003 and such adoption had no effect on the Trust's financial position and results of operations. In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections." As a result of the rescission of SFAS No. 4, a gain or loss on extinguishment of debt will no longer be presented as an extraordinary item upon the adoption of SFAS No. 145. The Trust adopted SFAS No. 145 in the second quarter of fiscal 2002. This resulted in a charge of approximately $0.4 million classified in operating income as opposed to an extraordinary item associated with debt refinancing. In July 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.146 is based on the general principle that a liability for a cost associated with an exit or disposal activity should be recorded when it is incurred and initially measured at fair value. SFAS No.146 applies to costs associated with (1) an exit activity that does not involve an entity newly acquired in a business combination, or (2) a disposal activity within the scope of SFAS No.144. These costs include certain termination benefits, costs to terminate a contract that is not a capital lease, and other associated costs to consolidate facilities or relocate employees. Because the provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002, the effect of adopting this statement has not been determined. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material impact on the Company's financial position or results of operations. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN 46"). This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest," commonly evidenced by a guarantee arrangement or other commitment to provide financial support, in a "variable interest entity," commonly a thinly capitalized entity, and further determine when such variable interest requires a company to consolidate the variable interest entities financial statement with its own. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when this interpretation becomes effective, the enterprise shall disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. Based on the recent release of this interpretation, we have not completed our assessment as to whether or not the adoption of this interpretation will have a material impact on our financial statements. RESULTS OF OPERATIONS The Trust has three principal operating segments: 1) Equipment Leasing 2) Equipment Management and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes acquiring and leasing to third parties a diversified portfolio of capital equipment . The Equipment Management segment includes the Trust's interest in MILPI Holdings, LLC ("MILPI"), which owns 100% of PLM an equipment leasing and asset management company. From February 2001 to February 6, 2002, MILPI, through a wholly owned subsidiary MILPI Acquisition, owned approximately 83% of PLM. On February 7, 2002, MILPI Acquisition purchased the remaining 17% of PLM's stock and was merged into PLM. The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales included in the Trust's ownership interests in EFG Kirkwood, C & D IT LLC, and Kettle Valley. The Trust's reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers. During the fourth quarter of 2002, the Trust increased its number of reportable segments to include the Equipment Management segment. Previously, the Company reported on two operating segments: Equipment Leasing and Real Estate. Segment information for the years ended December 31, 2001 and 2000 have been revised to reflect the new operating segment. Segment information for the years ended December 31, 2002, 2001 and 2000 is summarized below (in thousands of dollars).
2002 2001 2000 -------- -------- -------- Total Revenue (1): Equipment leasing $ 5,521 $ 6,803 $10,414 Equipment management - - - Real estate - 183 371 -------- -------- -------- Total $ 5,521 $ 6,986 $10,785 Operating Expenses, Management Fees and Other Expenses: Equipment leasing $ 1,341 $ 1,427 $ 946 Equipment management 98 74 - Real estate 85 76 80 -------- -------- -------- Total $ 1,524 $ 1,577 $ 1,026 Interest Expense: Equipment leasing $ 1,814 $ 2,037 $ 2,405 Equipment management 28 - - Real estate - 18 58 -------- -------- -------- Total $ 1,842 $ 2,055 $ 2,463 Depreciation, Impairment of assets and Amortization Expense (2): Equipment leasing $ 3,259 $ 9,438 $ 4,189 Equipment management - - - Real estate 115 75 66 -------- -------- -------- Total $ 3,374 $ 9,513 $ 4,255 Equity (Loss) Income: Equipment leasing $ - $ - $ - Equipment management 493 984 - Real estate (725) (424) (991) -------- -------- -------- Total $ (232) $ 560 $ (991) Net (Loss) Income: $(1,451) $(5,599) $ 2,050 ======== ======== ======== Investment in Minority Interest Investments: Equipment leasing $ - $ 26 $ 289 Equipment management 2,423 7,136 408 Real estate 1,000 - 1,287 -------- -------- -------- Total $ 3,423 $ 7,162 $ 1,984 Assets: Equipment leasing $19,564 $26,217 $43,824 Equipment management 9,688 8,519 408 Real estate 7,272 7,436 7,409 -------- -------- -------- Total $36,524 $42,172 $51,641
(1) Includes equipment leasing revenue of $5.7 million, $6.5 million and $7.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. (2) Includes write-down of equipment leasing assets of $0.5 million and $5.6 million for the fiscal years ended December 31, 2002 and 2001, respectively. In addition, the real estate segment recorded a $0.1 million impairment on its minority interest investment in EFG Kirkwood LLC. EQUIPMENT LEASING - ------------------ LEASE REVENUE: For the year ended December 31, 2002, the Trust recognized lease revenue of $5.7 million compared to $6.5 million and $7.7 million for the years ended December 31, 2001 and 2000, respectively. Lease revenue represents rental revenue recognized from the leasing of the equipment owned by the Trust. Approximately $0.2 million of the $0.8 million decrease in lease revenues from 2001 to 2002 was attributable to the sale of equipment. The remaining $0.6 million decrease was the result of lease termination fees received in 2001. No such fees were earned in 2002. Lease revenue decreased by $1.2 million from 2000 to 2001. This decrease was primarily attributable to the progressive sale of equipment over the respective periods. Lease revenue is expected to decline in the future as the Trust's equipment portfolio is sold and not replaced. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. INTEREST INCOME: Interest income in 2002 was $0.1 million for fiscal 2002 compared to $0.2 million and $0.7 million in fiscal 2001 and 2000, respectively. The decrease in interest income from 2000 to 2002 is the result of a decrease in the average cash balance over the respective years. The decrease in the Trust's average cash balance is attributable to the purchase of MILPI and C & D IT LLC which utilized $10.9 million of the Trust's cash. Equipment on lease had an original cost of $43.6 million, $51.7 million and $53.3 million in fiscal 2002, 2001 and 2000, respectively. GAIN/LOSS ON THE SALE OF EQUIPMENT, NET: During the years ended December 31, 2002, 2001 and 2000, the Trust had net (losses) gains on the sale of equipment of $(0.2) million, $0.1 million and $2.0 million, respectively. During 2002, the Trust received cash of $2.7 million associated with the sale of equipment. During 2002, equipment sales included the sale of an aircraft sold for $0.3 million in cash with a net book value of $0.4 million. The remaining $2.4 million of proceeds from equipment sold consisted of forklifts, cranes and other miscellaneous equipment. During 2001, the Trust sold assets consisting primarily of forklifts with a net book value of $0.1 million for approximately $0.2 million. Total cash from the sale of equipment was $3.4 million for equipment with a net book value of $1.4 million in 2000. The majority of cash received on equipment sales during 2000 was associated with a bulk sale of forklifts to an unrelated third party which the Trust received approximately $2.8 million of cash related to the bulk sale which resulted in a gain of $1.5 million. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was $2.8 million, $3.9 million and $4.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Depreciation and amortization is primarily comprised of depreciation of equipment on lease. Depreciation and amortization decreased by $1.1 million from 2001 to 2002 and $0.4 million from 2000 to 2001. The decrease in depreciation for the respective periods is attributable to the sale of the Trust's leasing equipment. Depreciation and amortization is expected to continue to decline in the future as the Trust's equipment portfolio is sold and not replaced. WRITE-DOWN OF EQUIPMENT: During the year ended December 31, 2002, the Trust recorded a write-down of equipment, representing an impairment in the carrying value of the Trust's interest in a McDonnell Douglas MD-87 aircraft resulting from weakened market conditions including the bankruptcy of two major United States airlines and a weakened United States economy. The resulting charge of $0.5 million was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft which is in the equipment leasing segment. During the year ended December 31, 2001, the Trust recorded a write-down of equipment, representing an impairment to the carrying value of the Trust's interest in Boeing 767-300ER aircraft. The resulting charge of $5.6 million was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft. The estimate of the fair value was based on a current offer to purchase the aircraft and the assessment by the management of the Trusts of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. The decrease in the fair market value of the aircraft are due to the events of September 11, 2001, along with a recession in the United States, which have continued to adversely affect the market demand for both new and used commercial aircraft. Management believes there is a significant oversupply of commercial aircraft available and that this oversupply will continue for some time. If the aircraft market continues to deteriorate from its current condition, the Trust may have additional impairment changes. INTEREST EXPENSE: Interest expense on third party debt was $1.8 million, $2.0 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in interest expense for each of the respective years is attributable to lower average outstanding debt balances. MANAGEMENT FEES- AFFILIATE: Management fees- affiliate from equipment leasing and non-equipment management was $0.3 million, $0.3 million and $0.4 million for each of the fiscal years ended 2002, 2001 and 2000, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases, subject to certain limitations. During the periods from fiscal 2000 to 2001, management fees associated with equipment leasing decreased by approximately $0.1 million due to decreased lease revenues associated with the decrease in the Trust's equipment portfolio. OPERATING EXPENSES AND OPERATING EXPENSES-AFFILIATE: Operating expenses and operating expenses-affiliate were $1.1 million, $1.1 million and $0.6 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. The increase in operation costs of $0.5 million from 2000 to 2001 is attributable to several factors. Operating expenses in 2001 included approximately $0.4 million of remarketing costs related to the re-lease of an aircraft in June 2001 and $0.1 million for legal costs associated with the Trust's discussions with the Securities and Exchange Commission regarding its investment company status. Equipment Management - --------------------- EQUITY INTEREST: Equity income from equipment management operations was $0.5 million, $1.0 million and $0 for the fiscal years ended 2002, 2001 and 2000, respectively. Equity income from equipment leasing operations is the result of the Trust's interest in MILPI. This equity income represents the Trust's share of the net income of MILPI recorded under the equity method of accounting. PLM is an equipment management and asset management company. In December 2000, the Trusts formed MILPI for the purpose of acquiring PLM through its wholly-owned subsidiary MILPI Acquisition Corporation ("MAC"). The Trusts collectively paid $1.2 million of which AFG Investment Trust C contributed $0.4 million. AFG Investment Trust C's capital contribution gave the Trust a 34% interest in MILPI. In February 2001, the Trusts through MAC acquired 83% of PLM's outstanding stock pursuant to a cash tender offer for a purchase price of $3.46 per share resulting in a total purchase price of $21.8 million and contributed the shares to MILPI. AFG Investment Trust C's portion of the capital contribution was $7.1 million. In February 6, 2002, MILPI completed its acquisition of PLM by purchasing the remaining 17% of the outstanding PLM stock. The remaining interest was purchased for $4.4 million at the $3.46 per common share price established in the tender offer, which was financed by AFG Investment Trust C and D. AFG Investment Trust C's portion of the purchase price was $2.4 million. Concurrent with the February 2002 acquisition, The Trust's ownership interest in MILPI increased from 34% to 38%. The decrease in equity income of $0.5 million from 2001 to 2002 is attributable to the decrease in MILPI's net income from 2001 compared to 2002. MILPI reported net income of $1.3 million and $2.9 million for the fiscal years ended December 31, 2002 and 2001, respectively. MILPI's total revenues decreased by $3.4 million in 2002 compared to 2001. The decrease was due to a $2.0 million decrease in acquisition and lease negotiation fee revenue. The remaining decrease in revenues is primarily attributable to a $1.1 million decrease in management fees and operating lease revenue. Management fees are primarily based on gross revenues generated by equipment under management. Management fee revenue decreased by approximately $0.7 million due to the reduction in the size of the managed equipment portfolio. Management fee revenue will continue to decrease as the investment programs managed by PLM liquidate unless PLM can find new sources of capital to fund future transactions. Operating lease income consists of rental revenues generated from assets held for operating leases and assets held for sale that are on lease. Operating lease revenue decreased by approximately $0.4 million primarily due to the sale of commercial and industrial equipment. Operating lease income is expected to decline in the future as MILPI's commercial and industrial equipment portfolio is sold and not replaced. The $3.4 million decrease in revenues was partially offset by a decrease in expenses of $2.4 million. The decrease was attributable to several factors. This decrease was partially attributable to $0.8 million in the amortization of goodwill in 2001 associated with the acquisition of PLM. On January 1, 2002, MILPI adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires the Trust to discontinue the amortization of goodwill and other intangible assets. Depreciation expense decreased by approximately $0.3 million. The decrease in depreciation is associated with the sale of the Trust's commercial and industrial equipment. Depreciation is expected to continue to decline in the future as the Trust's commercial and industrial equipment portfolio is sold and not replaced. The remaining decrease in expenses of $1.4 million is due to a decrease in general and administrative costs. This decrease is attributable to the relocation and consolidation of corporate service functions including staff reductions and lower rent on office space. Real Estate - ------------ OTHER INCOME: Other income from real estate operations was $0, $0.2 million and $0.4 million for the fiscal years ended 2002, 2001 and 2000, respectively. On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the Trusts, jointly and severally, guaranteed the payment obligations under a master lease agreement between Echelon Commercial LLC, as lessee, and several third party entities, as lessor. During the year ended December 31, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $0.2 million, including $0.1 million of income related to the guarantee agreement recognized during the year ended December 31, 2001. During the year ended December 31, 2000, the Trust received an upfront cash fee of $0.2 million and recognized a total of $0.3 million in income related to this guarantee fee. The guarantee fee is reflected as Other income on the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. MANAGEMENT FEES- AFFILIATE: Management fees for non-equipment assets were $0.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. The management fees on non-equipment assets, excluding cash, are based on 1% of the cost of such assets under management. These investments include the Trust's interest in Kettle Valley and EFG Kirkwood. EQUITY INTEREST: Equity loss from real estate operations consists of the Trust's equity interest in Kettle Valley, EFG Kirkwood and C&D IT LLC. Kettle Valley - -------------- Kettle Valley is a real estate development company located in Kelowna, British Columbia, Canada. The project, which is being developed by Kettle Valley Development Limited Partnership, consists of approximately 280 acres of land that is zoned for 1,120 residential units in addition to commercial space. To date, 154 residential units have been constructed. The Trust has a 25% ownership interest in Kettle Valley through several holding companies. The Trust recorded equity loss related to Kettle valley of $0.2 million, $0.3 million and $0.1 million for the fiscal years ended 2002, 2001 and 2000, respectively. Equity loss from Kettle Valley represents the Trust's share of the net loss from Kettle Valley recorded under the equity method of accounting. Kettle Valley reported net losses of $0.6 million $1.4 million and $0.9 million for the fiscal years 2002, 2001 and 2000, respectively. The increase in net loss from 2000 to 2001 is attributable to a $0.3 million impairment recorded on the real estate in 2001. The impairment was recorded to reflect the decrease in the fair market value of the property due to a change in the real estate market. The decrease in net loss from 2001 to 2002 is attributable to $0.3 million of professional fees accrued in 2001 that were renegotiated in 2002. As a result of the renegotiation, the fees were reversed in 2002 and recorded as a reduction in expenses. EFG Kirkwood - ------------- The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also is the manager of EFG Kirkwood. EFG Kirkwood's assets consist of two minority interest investments accounted for under the equity method of accounting. The investments consist of an interest in two ski resorts: Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail, and food and beverage services, with the remainder of its revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Other operations at Mountain Resort include a real estate development division, which has developed and is managing a 40-unit condominium residential and commercial building, an electric and gas utility company, which operates as a regulated utility company and provides electric and gas services to the Kirkwood community, and a real estate brokerage company. The Trust recorded a net loss from its equity investment in EFG Kirkwood of $0.5 million, $0.1 million and $0.9 million for the periods ended December 31, 2002, 2001 and 2000, respectively. The increase in net loss from the Trust's equity investment of $0.4 million from 2001 to 2002 is related to EFG Kirkwood's increase in net loss. During the year ended December 31, 2002, EFG Kirkwood recorded net losses of approximately $1.2 million compared to $0.2 million in 2001. The increase in net loss of $1.0 million from fiscal 2001 to 2002 is primarily attributable to EFG Kirkwood's investment in Mountain Springs. Mountain Springs increased its net loss in 2002 by $2.2 million, from $0.4 million in 2001 to $2.6 million in 2002. During the twelve months ended December 31, 2002, Mountain Springs recorded revenues of approximately $15.2 million, a decrease of approximately $0.1 million from $15.3 million for the same period ended December 31 2001. Lift ticket revenue decreased $0.6 million due to a decrease in visitors, primarily as a result of poor snowfall levels during the 2001-2002 ski season. As a result, retail sales also declined $0.3 million. Mountain Springs also experienced a decline in other revenue sources of $0.2 million including the ski school, reservations, food and beverage and equipment rentals. Offsetting these decreases in revenues was an increase of approximately $1.0 million in real estate commissions earned through the sale of seven townhome units. Mountain Spring's cost of sales increased approximately $0.4 million, from $1.1 million in 2001 to $1.5 million in 2002. The increase was driven primarily by a significant increase in the costs related to the seven units. Variable costs increased at Mountain Springs by approximately $0.7 million, from $4.8 million in 2001 to $5.5 million in 2002. The increase is a result of increased payroll and benefit costs. This increase was partially caused by the early opening of the resort for the 2002-2003 ski season compared to the 2001-2002 season. Mountain Spring's fixed costs increased approximately $0.7 million during 2002, to approximately $6.5 million, compared to approximately $5.8 million in 2001. The increase was due to increased spending in advertising and resort entertainment. The resort also incurred approximately $0.5 million in costs related to the Mountain Spring's airline subsidy program. These costs increased as a result of adding an additional airline carrier to the program, as well as a decrease in anticipated occupancy levels. Mountain Springs incurred approximately $0.2 million in additional financing costs during 2002, from $0.9 million in 2001 to approximately $1.1 million in 2002. The result of the increase was primarily related to additional interest payments made as a result of debt refinancing of Mountain Spring's notes payable. The decrease in net loss from the Trust's equity investment in EFG Kirkwood of $0.8 million from 2000 to 2001 is due to a decrease in EFG Kirkwood's net loss. EFG Kirkwood recorded net losses of $0.2 million and $2.7 million in 2001 and 2000, respectively. The decrease in EFG Kirkwood's net loss of $2.5 million is primarily attributable to its interest in Mountain Springs. EFG Kirkwood purchased its interest in Mountain Springs on May 1, 2000. Consequently, EFG Kirkwood did not participate in the operating results of Mountain Springs for the period from January 1, 2000 to April 30, 2000, generally the period of the ski resorts peak income activity. Accordingly, the losses incurred in 2000 do not reflect a full year's operating activities for the resort. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS Cash requirements in 2002 were satisfied through cash flow from operations, proceeds from equipment sales and dividends from equity investments. Future inflows of cash from equipment disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. Rents receivable increased by $33,000 million from fiscal 2002 to 2001, or 26%. The increase in rents receivable is attributable the timing of cash receipts. Accounts receivable-affiliate increased by $18,000, or 17%. Receivable from affiliates consists of rent or proceeds from the sale of equipment by EFG, an affiliated entity. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account and remits to the Trust on a monthly basis. The increase in receivables from affiliates is attributable to proceeds due to the Trust associated with the sale of an aircraft in December 2002, which were collected by EFG. The loan receivable from Kettle Valley decreased by $0.1 million or 55% from 2001 to 2002. The decrease was attributable to $30,000 of principal payments received and approximately $0.1 million of the principal balance that was renegotiated to lower the value of the note. The Trusts' investment in Kettle Valley decreased by $0.2 million during 2002 or 6%. The decrease in the investment is attributable to the Company equity loss of $0.2 million recorded during the year from this investment. Investment in EFG Kirkwood decreased by $0.9 million or 28% from 2001 to 2002. The decrease is attributable to an equity loss of $0.5 million recorded during 2002. In addition to the equity loss recorded, the investment was also reduced by a dividend declared and paid in 2002 totaling $0.3 million and an impairment on the investment of $0.1 million. The Trust's interest in MILPI increased by $1.2 million or 14% from 2001 to 2002. The increase in the investment was attributable to equity income of $0.5 million recorded during the year and the Trust contributing $2.4 million to MILPI to finance acquisition of PLM's remaining outstanding stock in February of 2002. This increase was partially offset by a dividend received from the investment for $1.7 million. The Trust invested $1.0 million in C&D IT LLC during 2002. In March 2002, the Trust and AFG Investment 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 trusts to which each Trust contributed $1.0 million. The joint venture was formed for the purpose of making a conditional contribution of $2.0 million to BMLF/BSLF II Rancho Malibu Limited Partnership in exchange for 25% of the interest in the partnership. The partnership owns a 274-acre parcel of land near Malibu, California which is being developed into a single-family luxury residential subdivision. C&D IT LLC's only asset consists of its interest in Rancho Malibu which is accounted for under the equity method of accounting. The partnership's property is in the development stage. As a result, no income or loss has been recorded by the entity. Once development is completed, the Trust will record its equity income or loss in proportion to its investment in the partnership's net income or loss. Cash distributions from the investments are not anticipated in the near future since the company is using its cash flow to complete development of the property. Equipment held for lease decreased by $6.2 million or 26% during 2002. A decrease in equipment of $2.8 million is attributable to depreciation expense recorded during the year. In addition to depreciation, the Trust sold equipment with a net book value of $2.9 million during the year. The remaining decrease is attributable to a write-down of $0.5 million recorded associated with a McDonnell Douglas MD-87 aircraft. The decrease in the fair market value of the asset is due to the events of September 11, 2001, along with a recession in the United States. These events have continued to adversely affect the market demand for both new and used commercial aircraft. Management believes there is a significant oversupply of commercial aircraft available and that this oversupply will continue for some time. The Trusts balance in notes payable decreased by $4.2 million or 19% from 2001 to 2002. The decrease in notes payable is attributable to principal payments made during the year. During the first quarter of 2002, the Trust borrowed approximately $0.7 million from MILPI. The note issued had an interest rate of LIBOR plus 200 basis points and was scheduled to mature on January 6, 2003. The interest charged on the loan was consistent with third party rates. In December 2002, the note plus accrued interest was paid in full. Accrued liabilities and accrued liabilities-affiliate increased by $24,000 or 7% from 2001 to 2002. Accrued liabilities- affiliate consists of operating costs paid by EFG during 2001 on behalf of the Trust. During 2001, Trust's operating costs were paid by EFG and subsequently reimbursed by the Trust monthly. No such transactions occurred in 2002. The increase in accrued liabilities and accrued liabilities-affiliate is attributable to a increase in legal costs associated with the Trust's proxy statements filed on February 12, 2003. In addition, the decrease in accrued interest is attributable to decrease in notes payable and timing of interest on remaining debt at December 31, 2002 compared to 2001. MINORITY INTEREST INVESTMENTS The Trust has a minority interest investment in several equipment management and real estate operations, which are accounted for under the equity method of accounting. The financial position and liquidity of these companies could have a material impact to the Trust. A description of the Trust's minority interest investments and a brief summary of the financial position are summarized below: Kettle Valley - --------------- Kettle Valley is a real estate development company located in Kelowna, British Columbia, Canada. Kettle Valley has historically operated at a net loss and has sustained negative cash flows from operations. As of December 31, 2002, the company has approximately $6,000 in cash and $1.6 million in debt to third parties. Because the real estate is in the early phase of development, the net loss and negative cash flows from operations are expected to continue for some time. Kettle Valley expects to pay existing obligations with the sales proceeds from future lot sales. Lot and home sales were 34 and 15, respectively in 2002 compared to 38 lots and 10 homes sold in 2001. Kettle Valley did not pay dividends in 2002, 2001 or 2000 and does not anticipate paying dividends in the near future until lots sales and cash flow from home construction and sales are sufficient to support operations. The Trust's reinvestment phase has ended and therefore future capital needs that may be required by Kettle Valley are expected to be financed by the other equity holders or outside investors. EFG Kirkwood - ------------- EFG Kirkwood was formed for the purpose of acquiring a minority interest in two real estate investments. The investments consist of an interest in two ski resorts: Mountain Resort and Mountain Springs. EFG Kirkwood has no other significant assets other than its interest in the ski resorts. MOUNTAIN SPRINGS: Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in Purgatory in Durango, Colorado. Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails. Mountain Spring's primary cash flows come from its ski operations during the ski season, which is heavily dependent on snowfall. Additional cash flow is provided by its real estate development activities and by the resort's summer recreational programs. When out of season, operations are funded by available cash and through the use of a $3.5 million dollar line of credit, which is guaranteed by EFG Kirkwood. Mountain Springs did not make any distributions during 2002 and does not expect to pay any distributions in the near future. Excess cash flows will be used to finance development on the real estate surrounding the resort. At December 31, 2002, Mountain Springs had current assets of $5.6 million, which consisted of cash of $3.8 million, and accounts receivable of $0.7 million. Inventories and other assets totaled $1.1 million. Long-term assets consist primarily of buildings, equipment and real estate totaling approximately $26.0 million. Liabilities totaled approximately $22.5 million at December 31, 2002 and consisted primarily of debt and notes outstanding. MOUNTAIN RESORT: Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Mountain Resort's primary cash flows come from its ski operations during the ski season, which is heavily dependent on snowfall. Mountain Resort did not pay any distributions during 2002 and does not expect to pay any distributions in the near future. Excess cash flows will be used to finance development on the real estate surrounding the resort. At December 31, 2002, Mountain Resort had current assets of approximately $7.0 million, which consisted of cash of $3.6 million, accounts receivable of $2.0 million, and inventory and other assets of $1.4 million. Long-term assets consisted primarily of buildings, equipment and real estate totaling $42.1 million. Liabilities were approximately $29.0 million, which consisted primarily of long-term senior notes and affiliated debt. Both Mountain Springs and Mountain Resort are subject to a number of risks, including weather-related risks and the risks associated with real estate development and resort ownership. The ski resort business is seasonal in nature and insufficient snow during the winter season can adversely affect the profitability of a given resort. Many operators of ski resorts have greater resources and experience in the industry than the Trust, its affiliates and its joint venture partners. MILPI Holdings, LLC - --------------------- MILPI Holdings, LLC ("MILPI") is an equipment leasing management company that operates in one business segment, equipment management. As of December 31, 2002, MILPI had approximately $19.4 million of equity investments in several equipment leasing programs, which comprised approximately 44% of MILPI's total assets. MILPI is a participant in a $10.0 million warehouse credit facility, which expires in June 2003. The warehouse credit facility is shared by MILPI and several of its managed equipment leasing programs. All borrowings are guaranteed by MILPI. As of December 31, 2002, there were no borrowings outstanding on the credit facility. MILPI has no other long-term debt outstanding. At December 31, 2002, MILPI had $6.6 million in cash and cash equivalents. MILPI has arranged for the lease or purchase of a total of 1,050 pressurized tank railcars. These railcars will be delivered over the next three years. A leasing company affiliated with the manufacturer will acquire approximately 70% of the railcars and lease them to a non-program affiliate. The remaining 30% will either be purchased by other third parties to be managed by MILPI or by the affiliated programs. MILPI will manage the leased and purchased railcars and will earn management fees from the lease revenue. As of December 31, 2002, MILPI had purchased $6.2 million of these railcars and expects to sell these railcars to affiliated entities in the first quarter of 2003. MILPI had positive cash flows from operations of $1.8 million during 2002. Cash flows from operations were used to finance operating costs and purchase additional assets to increase the company's portfolio of managed assets. MILPI paid approximately $4.7 million in cash dividends in 2002 to the Trusts. The Trust's share of the dividend was $1.7 million. MILPI is planning on acquiring AFG Investment Trust A and B Liquidating Trusts' interest in MILPI during 2003. The acquisition will be financed through existing cash reserves and cash flows generated from the sale of railcars. Subsequent to the acquisition, the Trust and AFG Investment Trust D's ownership interest in MILPI will increase to 50% per trust. MILPI also anticipates purchasing an interest in Rancho Malibu partnership, a real estate development company with 274 acres of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares (15%) of the common stock of RMLP, Inc., a newly formed subsidiary of MILPI. The acquisition will be financed through existing cash flows and proceeds from the sale of railcars. C&D IT LLC - ------------ In March 2002, the Trust and AFG Investment 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 investors. The joint venture was capitalized by a $1.0 million capital contribution from each investor. C&D IT LLC was formed for the purpose of making a conditional contribution of $2.0 million to BMLF/BSLF II Rancho Malibu Limited Partnership ("Rancho Malibu") in exchange for 25% of the interests in Rancho Malibu. The C&D IT LLC joint venture was admitted to the Rancho Malibu partnership with the other investors which include Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other co-managing general partner. Rancho Malibu owns a 274-acre parcel of land near Malibu, California, which is being developed into 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. The contribution was made subject to future solicitation of the consent of the beneficiaries of each of the Trust and Trust C. The joint venture 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 along with 100% of the membership interests Semele holds in Rancho Malibu to RMLP, Inc., a newly formed subsidiary of MILPI, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares of common stock of RMLP, Inc., approximately 15% interest in RMLP Inc. C&D IT LLC's only asset consists of its interest in Rancho Malibu, which is accounted for under the equity method of accounting. Rancho Malibu is in the development stage. As a result, no income or loss has been recorded by C&D IT LLC. Once development is completed, the Trust will record its equity income or loss in proportion to its investment in Rancho Malibu's net income or loss. Cash distributions from the investments are not anticipated in the near future since C&D IT LLC is using its cash flow to complete development of the property. COMMITMENTS AND CONTINGENCIES Commitments and contingencies as of December 31, 2002 are as follows (in thousands of dollars):
Less than 1-3 4-5 After 5 Current Commitments and Contingencies Total 1 year Years Years Years Long-term Debt $18,151 $18,151 $ - $ - $- Contingent residual interest in aircraft 1,597 1,597 - - - ------- ------ -------- -- -- Total $19,748 $19,748 $ - $ - $- ------- ------ -------- -- --
LONG-TERM DEBT: Long-term debt at December 31, 2002 consisted of two installment notes totaling $18.2 million, payable to banks and institutional lenders. The notes bears a fixed interest rate of 8% and 9%. Both of the installment notes are non-recourse and are collateralized by certain of the Trust's aircraft and assignment of the related lease payments. These notes will be partially amortized by the remaining contracted lease payments. However, the Trust has balloon payment obligations on one of the notes of approximately $16.1 million due in November 2003. Management 's plan is to dispose of the aircraft at the end of the lease term. COMMITMENT ON RESIDUAL INTEREST IN AIRCRAFT: In conjunction with the Trust's acquisition of its interest in Kettle Valley, the Trust sold a residual interest in a Boeing 767-300 aircraft lease to the independent third party from which the Trust purchased its interest in Kettle Valley. The Trust received $1.5 million for the residual interest in the aircraft, which is subordinate to certain preferred payments to be made to the Trust in connection with the aircraft. Payment of the residual interest is non-recourse and is realizable upon the sale of the aircraft, the residual interest is included in Other Liabilities on the Statement of Financial Position at both December 31, 2002 and 2001. As of December 31, 2002, the net book value of the related aircraft was $0.6 million below the carrying value of the debt. OUTLOOK FOR THE FUTURE Several other factors may affect the Trust's operating performance during the remainder of 2003 and beyond including: - -changes in markets for the Trust's equipment; - -changes in the regulatory environment in which the Trust's equipment operates; and - -changes in the real estate markets in which the Trust has ownership interest. In February 2003, the Trust filed a proxy statement soliciting the shareholders to vote on several articles proposed by the Managing Trustee. The Managing Trustee believes that the various proposed articles would increase the value of MILPI and improve general operations. In March 2003, the Trust's shareholders approved the following proposals which included: 1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that they control, to continue to operate their ongoing business making investments after December 31, 2002, notwithstanding the end of their reinvestment period for the Trust. 2. To approve a transaction whereby a new formed subsidiary of PLM, RMLP, Inc., will receive a contribution from Semele Group, Inc., of partnership interests in Rancho Malibu, a partnership that owns and is developing 274 acres of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares (15%) of the common stock of RMLP, Inc. 3. To amend Section 7.5 of the Trust Agreement to approve grants and exercises of rights of first refusal in connection with joint ventures between the Trust and its affiliates. 4. To approve the purchase by MILPI of the membership interests in MILPI held by AFG Investment Trust A Liquidating Trust and AFG Investment Trust B Liquidating Trust, which gave the Trust, together with Trust D, shared 100% ownership of MILPI. 5. To allow the Trust, in its operation of PLM, to enter into business arrangements with affiliates of the Trust in the ordinary course of business on terms no less favorable than those that they would receive if such arrangements were being entered into with independent third parties. In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in Rancho Malibu as indicated in the proposal above. The future out look for the different operating segments of the Trust is as follows: Real Estate - ------------ The Trust has a minority interest in two ski resorts, which are subject to the risks of the tourism industry. The economic downturn in the tourism industry following September 11, 2001, terrorist attacks had an adverse impact on the operating results of the resorts and the Trust. While management cannot determine if this event will have a material effect on the operations in future years, it is monitoring the travel, tourism and real estate industries. There can be no assurance that the travel and tourism industry will return to its pre-September 11 levels. The resorts have customers who both fly and drive to the resort locations. At this time, management does not believe the economic downturn in the travel industry will recover in the near future. In addition, the resorts are also subject to a number of other risks, including weather-related risks. The ski resort business is seasonal in nature and insufficient snow during the winter season can adversely affect the profitability of a given resort. Many operators of ski resorts have greater resources and experience in the industry than the Trust, its affiliates and its joint venture partners. The Trust also has a minority interest in several real estate development companies, some of which are located at the resorts. 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. Because the investments in the ski resorts include real estate development companies, the risks and uncertainties associated with the tourism industry can adversely affect the value of the real estate development companies associated with these investments. Decrease in tourism, weather-related conditions or other risks discussed above can permanently decrease the value of the investment and future operations. The Trust does not anticipate receiving dividend distributions from the real estate investments in the near future due to the uncertainty of the current market conditions. Equipment Leasing and Equipment Management - ---------------------------------------------- The events of September 11, 2001 have also adversely affected market demand for both new and used commercial aircraft and weakened the financial position of several airline companies. While it currently is not possible for the Trust to determine the ultimate long-term economic consequences of theses events to the equipment leasing segment, management anticipates that the resulting decline in air travel will suppress market prices for used aircraft in the short-term and nhibit the viability of some airlines. In the event of a lease default by an aircraft lessee, the Trust could experience material losses. At December 31, 2002, the Trust has collected substantially all rents owed from aircraft lessees. The Trust is monitoring developments in the airline industry and will continue to evaluate the potential implications to the Trust's financial position and future liquidity. Management does not anticipate significant improvements in the airline industry in the near future. At lease inception, the Trust equipment was leased by a number of credit worthy, investment-grade companies. To date, the Trust has not experienced any material collection problems and has not considered it necessary to provide an allowance for doubtful accounts. Notwithstanding a positive collection history, there is no assurance that all future contracted rents will be collected or that the credit quality of the Trust's leases will be maintained. The credit quality of an individual lease may deteriorate after the lease is entered into. Collection risk could increase in the future, particularly as the Trust remarkets its equipment and enters re-lease agreements with different lessees. The Managing Trustee will continue to evaluate and monitor the Trust's experience in collecting accounts receivable to determine whether a future allowance for doubtful accounts may become appropriate. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including condition and type of equipment being sold and its marketability at the time of sale. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. The Trust attempts to monitor these change in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. In the future, the nature of the Trust's operations and principal cash flows will continue to shift from rental receipts and equipment sale proceeds to distributions from equity investments. As this occurs, the Trust's cash flows resulting from equipment investments may become more volatile in that certain of the Trust's equipment leases will be renewed and certain of its assets will be sold. In some cases, the Trust may be required to expend funds to refurbish or otherwise improve the equipment being remarketed in order to make it more desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to monitor and manage these events in order to maximize the residual value of the Trust's equipment and will consider these factors, in addition to the collection of contractual rents, the retirement of scheduled indebtedness, and the Trust's future working capital requirements, in establishing the amount and timing of future cash distributions. As a result, the Trust does not anticipate declaring any dividend distributions in the near future. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance, which may exist in the Managing Trustee's capital account. At December 31, 2002, the Managing Trustee had a negative capital account balance of $0.1 million. No such requirement exists with respect to the Special Beneficiary. MILPI's asset base consists of its interest in the management in several equipment growth funds with limited lives. If MILPI does not find new sources of capital and revenue, its source of revenues and asset base will decrease and eventually terminate as the equipment growth funds liquidate. Report of Independent Certified Public Accountants To AFG Investment Trust C We have audited the accompanying statements of financial position of AFG Investment Trust C as of December 31, 2002 and 2001, and the related statements of operations, changes in participants' capital, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of MILPI Holdings, LLC, and subsidiaries for 2002 and 2001 and the financial statements of EFG Kirkwood, LLC for 2000, limited liability companies in which the Trust has a 36% and 27.9% interest, respectively, have been audited by other auditors whose reports have been furnished to us; insofar as our opinion on the financial statements relates to data included for MILPI Holdings, LLC, and subsidiaries for 2002 and 2001 and EFG Kirkwood, LLC for 2000, it is based solely on their reports. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of AFG Investment Trust C at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to the Annual Report is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /S/ ERNST & YOUNG LLP Tampa, Florida March 26, 2003 Report of Deloitte & Touche LLP, Independent Auditors The Board of Directors and Members MILPI Holdings, LLC: We have audited the accompanying consolidated balance sheets of MILPI Holdings, LLC, a Delaware limited liability company, and subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related statements of income, shareholders' equity and cash flows for the year ended December 31, 2002 and for the period from February 7, 2001 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 audits. We conducted our audits 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 audits provide 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, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets with the adoption in fiscal 2002 of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP Certified Public Accountants Tampa, Florida March 28, 2003 AFG INVESTMENT TRUST C STATEMENTS OF FINANCIAL POSITION DECEMBER 31, (in thousands of dollars, except share amounts)
2002 2001 -------- -------- ASSETS Cash and cash equivalents $ 1,168 $ 1,717 Rents receivable 158 125 Accounts receivable - affiliate 122 104 Loan receivable - EFG/Kettle Development LLC 79 176 Interest in EFG/Kettle Development LLC 3,675 3,917 Interest in EFG Kirkwood LLC 2,148 3,003 Interest in MILPI Holdings, LLC 9,688 8,519 Interest in C & D IT, LLC 1,000 - Investments - other 260 265 Other assets, net of accumulated amortization of $0.1 million and $47,000 at December 31, 2002 and December 31, 2001, respectively 470 432 Equipment at cost, net of accumulated depreciation - - of $25.9 million and $27.8 million at December 31, 2002 - - and 2001, respectively 17,756 23,914 -------- -------- Total assets $36,524 $42,172 -------- -------- LIABILITIES AND PARTICIPANTS' CAPITAL Notes payable $18,151 $22,383 Accrued liabilities 349 174 Accrued liabilities - affiliates - 151 Deferred rental income 288 277 Other liabilities 1,597 1,597 Total liabilities 20,385 24,582 -------- -------- Participants' capital (deficit): Managing Trustee (30) (57) Special Beneficiary - - Class A Beneficiary Interests (1,787,153 Interests; initial purchase price of $25 each) 18,507 19,985 Class B Beneficiary Interests (3,024,740 Interests; initial purchase price of $5 each) - - Treasury Interests (223,861 Class A Interests at cost) (2,338) (2,338) Total participants' capital 16,139 17,590 -------- -------- Total liabilities and participants' capital $36,524 $42,172 -------- --------
The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST C STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars, except per share amounts)
2002 2001 2000 ------- -------- -------- REVENUE Lease revenue $ 5,682 $ 6,520 $ 7,734 Interest income 64 158 667 Gain on sale of equipment 1,249 132 2,017 Loss on the sale of equipment (1,474) (7) (4) Other income - 183 371 ------- -------- -------- Total revenue 5,521 6,986 10,785 ------- -------- -------- EXPENSES Depreciation and amortization 2,775 3,934 4,255 Write-down of equipment 599 5,579 - Interest expense 1,842 2,055 2,463 Management fees - affiliates 434 433 431 Operating expenses 889 - - Operating expenses - affiliates 201 1,144 595 ------- -------- -------- Total expenses 6,740 13,145 7,744 ------- -------- -------- EQUITY INTERESTS Equity in net loss of EFG/Kettle Development LLC (241) (333) (91) Equity in net loss of EFG Kirkwood LLC (484) (91) (900) Equity in net income of MILPI Holdings, LLC 493 984 - ------- -------- -------- Total income (loss) from equity interests (232) 560 (991) ------- -------- -------- Net (loss) income $(1,451) $(5,599) $ 2,050 ======== ======== ======== Net (loss) income per Class A Beneficiary Interest $ (0.83) $ (2.84) $ 0.66 ======== ======== ======== per Class B Beneficiary Interest $ - $ (0.10) $ 0.18 ======== ======== ========
The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST C STATEMENTS OF CHANGES IN PARTICIPANTS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (in thousands of dollars, except shares)
Managing Special Trustee Beneficiary Class A Beneficiaries - Class B Beneficiaries Amount Amount Interests Amount Interests ---------- ------------- --------- ------- --------- Balance at December 31, 1999 $ (20) $ (167) 1,787,153 $23,898 3,024,740 Net income - 2000 37 303 - 1,179 - Less: Reclassification adjustment for unrealized gain on investment securities - (2) - (15) - ---------- ------------- --------- ------- --------- Comprehensive income 37 301 - 1,164 - ---------- ------------- --------- ------- --------- Balance at December 31, 2000 17 134 1,787,153 25,062 3,024,740 Net loss - 2001 (74) (134) - (5,077) - ---------- ------------- --------- ------- --------- Balance at December 31, 2001 (57) - 1,787,153 19,985 3,024,740 ---------- ------------- --------- ------- --------- Net income (loss) - 2002 27 - - (1,478) - ---------- ------------- --------- ------- --------- Balance at December 31, 2002 $ (30) $ - 1,787,153 $18,507 3,024,740 ========== ============= ========= ======= ========= - Treasury Amount Interests Total -------- ----------- ------- Balance at December 31, 1999 $ (214) $ (2,338) $21,159 Net income - 2000 531 - 2,050 Less: Reclassification adjustment for unrealized gain on investment securities (3) - (20) -------- ----------- ------- Comprehensive income 528 - 2,030 -------- ----------- ------- Balance at December 31, 2000 314 (2,338) 23,189 Net loss - 2001 (314) - (5,599) -------- ----------- ------- Balance at December 31, 2001 - (2,338) 17,590 -------- ----------- ------- Net income (loss) - 2002 - - (1,451) -------- ----------- ------- Balance at December 31, 2002 $ - $ (2,338) $16,139 ======== =========== =======
The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST C STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars)
2002 2001 2000 -------- -------- --------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) $(1,451) $(5,599) $ 2,050 Adjustments to reconcile net income (loss) to net - - - cash provided by (used in) operating activities: - - - Depreciation and amortization 2,775 3,934 4,255 Write-down of equipment 599 5,579 - Accretion of bond discount - - (7) Gain on sale of equipment (1,249) (132) (2,017) Loss on sale of equipment 1,474 7 4 Gain on sale of investment securities - - (70) (Income) loss from equity interests 232 (560) 991 Write-down of other investment - - 51 Changes in assets and liabilities: - - - Rents receivable (33) 133 (43) Accounts receivable - affiliate (18) 321 516 Accounts receivable - other - 126 - Guarantee fee receivable - 9 (126) Other assets 12 (407) (132) Accrued liabilities 175 (47) 362 Accrued liabilities - affiliates (151) 247 (1) Deferred rental income 11 72 (287) -------- -------- --------- Net cash provided by operating activities 2,376 3,683 5,546 -------- -------- --------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 2,722 185 3,425 Investments - other 5 (26) (289) Purchase of interest in EFG Kirkwood LLC - - (1,287) Dividend received from investment in EFG Kirkwood LLC 256 - - Purchase of interest in MILPI Holdings LLC (2,399) (7,062) (393) Acquisition fees paid to affiliate (24) (74) (15) Dividend received from MILPI Holdings, LLC 1,747 - - Purchase of interest in C & D IT, LLC (1,000) - - Proceeds from sale of investment securities - - 491 -------- -------- --------- Net cash provided by (used in) investing activities 1,307 (6,977) 1,932 -------- -------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from notes payable - affiliate 720 471 25 Principal payments - notes payable -affiliate (720) - - Principal payments - notes payable (4,232) (4,309) (6,378) Distributions paid - - (15,200) -------- -------- --------- Net cash used in financing activities (4,232) (3,838) (21,553) -------- -------- --------- Net decrease in cash and cash equivalents (549) (7,132) (14,075) Cash and cash equivalents at beginning of year 1,717 8,849 22,924 -------- -------- --------- Cash and cash equivalents at end of year $ 1,168 $ 1,717 $ 8,849 ======= ======= ======== SUPPLEMENTAL INFORMATION Cash paid during the year for interest $ 1,876 $ 2,361 $ 2,290 ======= ======= ========
The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST C NOTES TO THE FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND TRUST MATTERS - --------------------------------------------- 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 and its subsidiaries (formerly known as American Finance Group ("AFG")), 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 ("Class A Interests") at a subscription price of $25.00 each ($50.3 million 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 ("Class B Interests") at $5.00 each ($15.1 million 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", an affiliate of EFG), 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 $2.3 million. In April 1998, the Trust repurchased 5,200 additional Class A Interests at a cost of $47,000. 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 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, which is a wholly owned subsidiary of Semele. 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 Class B Interests which 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 other capital contributions except as may be required under the Second Amended and Restated Declaration of Trust, as amended (the "Trust Agreement"). Significant operations commenced coincident with the Trust's initial purchase of equipment and the associated lease commitments in December 1992. Pursuant to the Trust Agreement, each distribution is made 90.75% to the Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee. Under the terms of the management agreement between the Trust and EFG, management services are provided by EFG to the Trust for fees, as stated in the agreement. 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"). In January 1996, EFG sold certain assets relating primarily to the business of originating new leases, to a third party. Pursuant to terms of the sale agreements, EFG specifically reserved the right to continue managing all assets owned by the Trust and the Other Investment Programs. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------------- Cash Equivalents - ----------------- The Trust classifies any amounts on deposits in banks and all highly liquid investments purchased with an original maturity of three months or less as cash and cash equivalents. Revenue Recognition - -------------------- Rents are payable to the Trust monthly or quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Trust may enter primary-term, renewal or re-lease agreements which expire beyond the Trust's anticipated dissolution date, which is December 31, 2004. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as AFG ASIT Corporation, the managing trustee of the Trust ("Managing Trustee") and the Trust's advisor would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. Future minimum rents of approximately $3.7 million are due as follows (in thousands of dollars):
For the year ending December 31, 2003 $3,594 2004 55 2005 37 ------ .. Total $3,686 ======
Revenue from individual lessees which accounted for 10% or more of revenue in the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands of dollars):
% of % of % of 2002 Revenue 2001 Revenue 2000 Revenue ------ -------- ------ -------- ------ -------- Scandinavian Airlines System $3,358 61% $3,321 48% $3,620 34% Hyundai Electronics America, Inc. $1,147 21% $1,147 16% $1,147 11% TTX Company - - - - $1,628 15%
Use of Estimates - ------------------ The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equipment on Lease - -------------------- All equipment was acquired from EFG, one of its affiliates, or from third-party sellers. The Trust has capitalized costs to acquire the equipment which include acquisition fees. The cost of equipment acquired from EFG, or an affiliate reflects the actual price paid for the equipment by EFG or the affiliate plus all actual costs incurred by EFG or the affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the affiliate prior to selling the equipment. The cost of equipment purchased from a third party is the amount paid to the unaffiliated third party. Generally, the costs associated with maintaining, insuring and operating the Trust's equipment are incurred by the respective lessees pursuant to the terms specified in their individual lease agreements with the Trust. When the Trust incurs repairs and maintenance costs, the expenses are charged when incurred. The estimated residual value of leased assets is determined based on third party appraisals and valuations, as well as market information, offers for similar types of assets and overall industry expertise. Depreciation and Amortization - ------------------------------- The Trust's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of the primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Trust continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. The Trust amortizes deferred financing costs over the life of the related debt. The Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. As a result, the discontinuance of goodwill and other intangible asset amortization was effective upon adoption of SFAS No. 142. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The amount of the impairment is the difference between the carrying amount and the fair value of the asset. Fair value of the asset should be calculated using several valuation models which utilize the expected future cash flows of the Trust. SFAS No. 142 requires the Trust to complete a transitional goodwill impairment analysis during the quarter ended June 30, 2002. There was no material impact on the Trust's financial statements as a result of adopting SFAS No. 142. Equity Ownership Investments - ------------------------------ Equity securities that are not publicly traded are accounted for in accordance with Accounting Principles Board ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock." If the Trust's ownership interest in the investment enables the Trust to influence the operating financial decisions of the investee, the investment is accounted for under the equity method of accounting. Otherwise, the investment is accounted for under the cost method of accounting. The equity method of accounting is discontinued when the investment is reduced to zero and does not provide for additional losses unless the Trust has guaranteed obligations of the investee or is otherwise committed to provide further financial support to the investment. Whenever circumstances indicate an impairment exists, the Trust evaluates the fair value of the investment. The fair value of the equity investment is based current market prices, management's market knowledge and on a valuation models which includes expected future cash flows of the investment. If the fair value of the investments is below the carrying value, a loss is recorded. The Company defines control as the ability of an entity or person to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limits its losses from that other entity's activities without the assistance of others. Impairment of Long-Lived Assets - ---------------------------------- The Trust accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which was issued in August 2001. The Trust adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144, the Trust evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying bases of such assets may not be recoverable. Whenever circumstances indicate that an impairment may exist, the company evaluates future cash flows of the asset to the carrying value. If projected undiscounted future cash flows are lower than the carrying value of the asset, a loss is recorded. The loss recorded is equal to the difference between the carrying amount and the fair value of the asset. The fair value of the asset is determined based on a valuation model which includes expected future cash flows of the asset, current market prices and management's market knowledge. The fair market value of long-lived assets secured by non-recourse debt is determined based on a valuation model which includes expected future cash flows and the recoverable value. If the Trust decides to return the asset to the lender, the recoverable value will not be less than the balance of the non-recourse debt. The Managing Trustee evaluates the net realizable value of significant equipment assets, such as aircraft, individually. All other assets are evaluated collectively by equipment type unless the Managing Trustee learns of specific circumstances, such as a lessee default, technological obsolescence, or other market developments, which could affect the net realizable value of particular assets. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value and are reflected separately on the accompanying Statement of Operations as write-down of equipment. Accrued Liabilities -Affiliates - --------------------------------- Accrued liabilities -affiliates include various fees due to affiliates and expenses paid by affiliates on behalf of the Trust that the Trust will reimburse the affiliate. Contingencies - ------------- The Trust recognizes a liability for goods and services during the period when the goods or services are received. To the extent that the Trust has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Trust recognizes a liability in accordance with SFAS No. 5 "Accounting for Contingencies". SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. Allocation of Net Income or Loss - ------------------------------------- Net income is allocated quarterly, first to eliminate any participant's negative capital account balance and second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively to the Class A and Class B Beneficiaries. The latter is allocated proportionately between the Class A and Class B Beneficiaries based upon the ratio of cash distributions declared and allocated to the Class A and Class B Beneficiaries during the period. Net losses are allocated quarterly first, to eliminate any positive capital account balance of the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second, to eliminate any positive capital account balances of the Class A Beneficiaries; and third, any remainder to the Managing Trustee. However, in no event shall there be allocated to the Managing Trustee less than 1% of the profits or losses of the Trust. The allocation of net income or loss pursuant to the Trust Agreement for income tax purposes differs from the foregoing and is based upon government rules and regulations for federal income tax reporting purposes and assumes, for each income tax reporting period, the liquidation of all of the Trust's assets and the subsequent distribution of all available cash to the Participants. For income tax purposes, the Trust adjusts its allocations of income and loss to the Participants so as to cause their capital account balances at the end of the reporting period to be equal to the amount that would be distributed to them in the event of a liquidation and dissolution of the Trust. This methodology does not consider the costs attendant to liquidation or whether the Trust intends to have future business operations. The unaudited table below includes detail of the allocation of income (loss) in each of the quarters for the years ended December 31, 2002, 2001 and 2000 (in thousands of dollars):
Managing Special Class A Class B Trustee Beneficiary Beneficiaries Beneficiaries Treasury Amount Amount Amount Amount Interests Total December 31, 1999 $ (20) $ (167) $ 23,898 $ (214) $ (2,338) $21,159 Net income 28 225 504 349 - 1,106 Unrealized losses - (2) (26) (1) - (29) March 31, 2000 8 56 24,376 134 (2,338) 22,236 ---------- ------------- --------------- --------------- ----------- -------- Net income 1 6 53 14 - 74 Unrealized gain - 1 5 1 - 7 June 30, 2000 9 63 24,434 149 (2,338) 22,317 ---------- ------------- --------------- --------------- ----------- -------- Net income 7 62 534 144 - 747 Unrealized gain - - 3 1 - 4 September 30, 2000 16 125 24,971 294 (2,338) 23,068 ---------- ------------- --------------- --------------- ----------- -------- Net income 1 10 88 24 - 123 Unrealized loss - (1) 3 (4) - (2) December 31, 2000 17 134 25,062 314 (2,338) 23,189 ---------- ------------- --------------- --------------- ----------- -------- Net income 12 106 912 246 - 1,276 March 31, 2001 29 240 25,974 560 (2,338) 24,465 ---------- ------------- --------------- --------------- ----------- -------- Net loss (29) (240) (349) (560) - (1,178) June 30, 2001 - - 25,625 - (2,338) 23,287 ---------- ------------- --------------- --------------- ----------- -------- Net loss (3) - (301) - - (304) September 30, 2001 (3) - 25,324 - (2,338) 22,983 ---------- ------------- --------------- --------------- ----------- -------- Net loss (54) - (5,339) - - (5,393) December 31, 2001 (57) - 19,985 - (2,338) 17,590 ---------- ------------- --------------- --------------- ----------- -------- Net income 72 123 1,066 287 - 1,548 March 31, 2002 15 123 21,051 287 (2,338) 19,138 ---------- ------------- --------------- --------------- ----------- -------- Net loss (27) (123) (763) (287) - (1,200) June 30, 2002 (12) - 20,288 - (2,338) 17,938 ---------- ------------- --------------- --------------- ----------- -------- Net loss (11) - (1,111) - - (1,122) September 30, 2002 (23) - 19,177 - (2,338) 16,816 ---------- ------------- --------------- --------------- ----------- -------- Net loss (7) - (670) - - (677) December 31, 2002 $ (30) $ - $ 18,507 $ - $ (2,338) $16,139 ---------- ------------- --------------- --------------- ----------- --------
Reclassification - ---------------- Certain amounts previously reported have been reclassified to conform to the December 31, 2002 presentation. Accumulated Other Comprehensive Income - ----------------------------------------- SFAS No. 130, "Reporting Comprehensive Income", requires the disclosure of comprehensive income (loss) to reflect changes in participants' capital that result from transactions and economic events from non-owner sources. Accumulated other comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 represents the Trust's unrealized gains (losses) on investment securities (in thousands of dollars):
2002 2001 2000 ----- ----- ------ Beginning Balance. . . . . . . . . . . . $ -- $ -- $ 21 Adjustments related to unrealized losses on investment securities . . . . . . . . -- -- (21) ----- ----- ------ Ending Balance . . . . . . . . . . . . . $ -- $ -- $ -- ===== ===== ======
Net Income (Loss) and Cash Distributions Per Beneficiary Interest - ------------------------------------------------------------------------- Net income (loss) and cash distributions per Class A Interest are based on 1,787,153 Class A Interests outstanding. Net income (loss) and cash distributions per Class B Interest are based on 3,024,740 Class B Interests outstanding. Net income and cash distributions per Beneficiary Interest are computed after allocation of the Managing Trustee's and Special Beneficiary's shares of net income (loss) and cash distributions. Provision for Income Taxes - ----------------------------- No provision or benefit from income taxes is included in the accompanying financial statements. The Participants are responsible for reporting their proportionate shares of the Trust's taxable income or loss and other tax attributes on their separate tax returns. New Accounting Pronouncements - ------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. The Trust adopted SFAS 141 on January 1, 2002 and such adoption had no effect on the Trust's financial position and results of operations. In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections." As a result of the rescission of SFAS No. 4, a gain or loss on extinguishment of debt will no longer be presented as an extraordinary item upon the adoption of SFAS No.145. The Trust adopted SFAS No. 145 in the second quarter of fiscal 2002. This resulted in a charge of approximately $0.4 million classified in operating income during the year ended December 31, 2002, as opposed to an extraordinary item associated with the debt refinance. In July 2002 the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.146 is based on the general principle that a liability for a cost associated with an exit or disposal activity should be recorded when it is incurred and initially measured at fair value. SFAS No.146 applies to costs associated with (1) an exit activity that does not involve an entity newly acquired in a business combination, or (2) a disposal activity within the scope of SFAS No.144. These costs include certain termination benefits, costs to terminate a contract that is not a capital lease, and other associated costs to consolidate facilities or relocate employees. Because the provisions of this statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002, the effect of adopting this statement has not been determined. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material impact on the Company's financial position or results of operations. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN 46"). This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do no have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest," commonly evidenced by a guarantee arrangement or other commitment to provide financial support, in a "variable interest entity," commonly a thinly capitalized entity, and further determine when such variable interest requires a company to consolidate the variable interest entities financial statement with its own. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when this interpretation becomes effective, the enterprise shall disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. Based on the recent release of this interpretation, we have not completed our assessment as to whether or not the adoption of this interpretation will have a material impact on our financial statements. NOTE 3 - EQUIPMENT - --------------------- The following is a summary of equipment owned by the Trust at December 31, 2002. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 2002 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease term equal to zero reflects equipment either held for sale, re-lease or being leased on a month-to-month basis. Equipment consists of the following at December 31, 2002 (in thousands of dollars):
Remaining Equipment Lease Term at Cost Equipment Type (Months) (in the thousands) - --------------------------------------------- ----------- ------------------- Aircraft 12 $ 30,896 Manufacturing 2-8 8,857 Locomotives 8 196 Materials handling 0-33 2,003 Other 0-5 1,717 ------------------- Total equipment cost 43,669 Accumulated depreciation (25,913) ------------------- Equipment, net of accumulated depreciation $ 17,756 ===================
The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated program sponsored by EFG. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk which could result from a concentration in any single equipment type, industry or lessee. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Equipment with an approximate original cost of approximately $30.9 million is proportionately owned with other affiliated entities. As of December 31, 2002, the Trust's ownership interest in aircraft and related lease payment streams are used to secure the term loans with third-party lenders. The preceding summary of equipment includes leveraged equipment having an original cost of approximately $37.4 million and a net book value of approximately $17.6 million at December 31, 2002. The summary above includes off-lease equipment held for sale or re-lease with an original cost of approximately $2.0 million and a net book value of approximately $30,000. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. During the year ended December 31, 2002, the Trust recorded a write-down of equipment, representing an impairment in the carrying value of the Trust's interest in a McDonnell Douglas MD-87 aircraft resulting from weakened market conditions including the bankruptcy of two major United States airlines and a weakened United States economy. The resulting charge of $0.5 million was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft which is in the equipment leasing segment. If the aircraft market continues to deteriorate from its current condition, the Trust may have additional impairment changes. During the year ended December 31, 2001, the Trust recorded a write-down of equipment, representing an impairment to the carrying value of the Trust's interest in Boeing 767-300ER aircraft. The resulting charge of $5.6 million was based on a comparison of estimated fair value and carrying value of the Trust's interest in the aircraft. The estimate of the fair value was based on a current offer to purchase the aircraft and the assessment by the management of the Trusts of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. The decrease in the fair market value of the aircraft is due to the events of September 11, 2001, along with a recession in the United States, which have continued to adversely affect the market demand for both new and used commercial aircraft. Management believes there is a significant oversupply of commercial aircraft available and that this oversupply will continue for some time. During the year ended December 31, 2002, the Trust evaluated the aircraft, which is secured by non-recourse debt, in accordance with the Trust's policy for recording an impairment on long-lived assets (see Note 2). The recoverable value of the aircraft was determined based on management's assumption that the asset would not be sold or re-leased. If the Company anticipated selling or re-leasing the asset, the recoverable value would have been significantly lower which would have resulted in an impairment. The aircrafts' fair value was determined by an independent third party appraiser. The appraiser made several assumptions when calculating the fair value. The appraiser assumed the aircraft will sell at current market prices which are based on "today's" market conditions which included a thorough review of recent market activity and known transaction data involving the subject aircraft types. In addition, the appraiser considered the perceived current demand for the asset, its availability on the market, and expressed views of the industry. The appraiser also considered the most reasonable value on an open market under conditions requisite to a fair sale, the effects of September 11, 2001. NOTE 4 - INTEREST IN EFG/KETTLE DEVELOPMENT LLC - ------------------------------------------------------ On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers") formed EFG/Kettle Development LLC ("Kettle Valley"), a Delaware limited liability company, for the purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a real estate development in Kelowna, British Columbia in Canada called Kettle Valley. The Trust's cost basis in this joint venture was approximately $0.7 million greater than its equity interest in the underlying net assets at December 31, 1999. This difference was amortized using a period of 10 years. The amount amortized had been included in amortization expense as an offset to the Interest in Kettle Valley and was approximately $66,000 during the years ended December 31, 2002 and 2001. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", the discontinuance of goodwill amortization was effective as of January 1, 2002. Kettle Valley, upon receiving the Buyers' contributions for their membership interests, purchased the Interest from a special purpose company ("SPC") whose subsidiaries own a 99.9% limited partnership interest in Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were established by the seller, in part, for income tax purposes and have no business interests other than the development of Kettle Valley. KVD LP is a Canadian Partnership that owns the property, consisting of approximately 280 acres of land. The project is zoned for 1,120 residential units in addition to commercial space. To date, 154 residential units have been constructed and sold and 13 additional units are under construction. The seller is an unaffiliated third-party company and has retained the remaining 50.1% ownership interest in the SPC. A newly organized Canadian affiliate of EFG replaced the original general partner of KVD LP on March 1, 1999. The Trust's ownership share in EFG/Kettle Development LLC is 50% and had a cost of approximately $4.4 million including a 1% acquisition fee of approximately $45,000 paid to EFG. This acquisition was funded with cash of approximately $3.1 million and a non-recourse note for approximately $1.3 million, which was repaid as of December 31, 2001. The Trust accounts for its interest in Kettle Valley using the equity method of accounting. Under the equity method of accounting, the Trust's interest is (i) increased (decreased) to reflect the Trust's share of income (loss) of the joint venture and (ii) decreased to reflect any distributions the Trust received from the joint venture. The Trust's interest was decreased by approximately $0.2 million, $0.3 million and $0.1 million, during the years ended December 31, 2002, 2001 and 2000, respectively, reflecting its share of loss from Kettle Valley. In addition, the seller of the Trust's interest in Kettle Valley purchased a residual sharing interest in a Boeing 767-300 aircraft owned by the Buyers and leased to an independent third party. The seller paid approximately $3.0 million to the Buyers ($1.5 million or 50% to the Trust) for the residual interest, which is subordinate to certain preferred payments to be made to the Buyers in connection with the aircraft. Payment of the residual interest is due only to the extent that the Trust receives net residual proceeds from the aircraft. The residual interest is non-recourse to the Buyers and is included as Other Liabilities on the accompanying Statements of Financial Position at both December 31, 2002 and December 31, 2001. The table below provides KVD LP's summarized consolidated balance sheet as of December 31, 2002 and 2001 (in thousands of dollars):
December 31, December 31, 2002 2001 ------------- ------------- Total assets $ 15,479 $ 14,752 Total liabilities 4,339 2,337 ------------- ------------- Net equity $ 11,140 $ 12,415 ============= =============
The table below provides KVD LP's summarized consolidated income statement data for the twelve months ended December 31, 2002, 2001 and 2000 (in thousands of dollars):
December 31, December 31, December 31, 2002 2001 2000 -------------- -------------- -------------- Total revenues $ 3,679 $ 4,597 $ 6,251 Total expenses 4,469 5,968 (7,119) -------------- -------------- -------------- Net loss $ (790) $ (1,371) $ (868) ============== ============== ==============
For the year ended December 31, 2002, in addition to its share of the loss of KVD LP, the Trust's net loss from Kettle Valley includes a loss of approximately $42,000 reflecting the Trust's share of the operating results of one of Kettle Valley's wholly-owned subsidiaries. NOTE 5 - INTEREST IN EFG KIRKWOOD LLC - -------------------------------------------- On May 1, 1999, the Trust and three affiliated trusts (collectively the "Trusts") and an affiliated corporation, Semele, formed a joint venture, EFG Kirkwood LLC ("EFG Kirkwood"), for the purpose of acquiring preferred and common stock interests in Kirkwood Associates Inc. ("KAI"). The Trusts collectively own 100% of the Class A membership interests in EFG Kirkwood and Semele owns 100% of the Class B membership interests in EFG Kirkwood. The Trust holds 40% of EFG Kirkwood's Class A membership interests. The Class A interest holders are entitled to certain preferred returns prior to distribution payments to the Class B interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of the voting securities of that entity under EFG Kirkwood's operating agreement, which gives equal voting rights to Class A and Class B membership interests. The Managing Trustee is the manager of EFG Kirkwood. On April 30, 2000, KAI's ownership interests in certain assets and substantially all of its liabilities were transferred to Mountain Resort Holdings LLC ("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in KAI's common and preferred stock for corresponding pro-rata membership interests in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership interests in Mountain Resort. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in Mountain Springs Resorts LLC ("Mountain Springs"). Mountain Springs, through a wholly owned subsidiary, owns 80% of the common membership interests and 100% of the Class B Preferred membership interests in an entity that owns the Purgatory Ski Resort ("Purgatory") in Durango, Colorado. In October 2002, an existing owner and an unrelated third party contributed approximately $2.5 million to Mountain Springs. As a result of the capital contribution, EFG Kirkwood's membership interest in Mountain Springs decreased from 50% to 33%. Mountain Springs used the proceeds from the additional capital contribution to exercise an option to purchase 51% of Durango Mountain Land Company, LLC, a real estate development company owning land in Durango, Colorado. On August 1, 2001, EFG Kirkwood entered into a guarantee agreement whereby EFG Kirkwood guarantees the payment obligations under a revolving line of credit between Purgatory and a third party lender. The amount of the guarantee shall consist of outstanding balance of the line of credit which cannot exceed the principal balance of $3.5 million. As of December 31, 2002, Purgatory had an outstanding balance of approximately $2.6 million on the line of credit. The Trusts' ownership interest in EFG Kirkwood had an original cost of $4.0 million; including a 1% acquisition fee of $40,000 paid to EFG. The Trust's ownership interest in EFG Kirkwood is accounted for on the equity method. The Trust recorded a loss of $0.5 million, $0.1 million and $0.9 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively, which represented its pro-rata share of the net loss of EFG Kirkwood. On December 20, 2002, EFG Kirkwood declared and paid a dividend of $0.6 million, of which the Trust received $0.3 million. The table below provides EFG Kirkwood's summarized consolidated balance sheet as of December 31, 2002 and 2001 respectively (in thousands of dollars):
December 31, December 31, 2002 2001 ------------- ------------- Total assets $ 5,578 $ 7,424 Total liabilities - - ------------- ------------- Net equity $ 5,578 $ 7,424 ============= =============
The table below provides EFG Kirkwood's summarized consolidated income statement data for the years ended December 31, 2002, 2001 and 2000, respectively (in thousands of dollars):
December 31, December 31, December 31, 2002 2001 2000 ------------- ------------- ------------- Equity loss on investments $ 1,210 $ 216 $ 2,764 Other (income) expenses (2). 4 9 ------------- ------------- ------------- Net loss $ 1,208 $ 220 $ 2,773 ============= ============= =============
The table below provides comparative summarized income statement data for Mountain Resort and the Mountain Springs for the twelve months ended December 31, 2002, 2001 and 2000. The operating companies have a fiscal year end of April 30th which is different from the Trust. Therefore, the operating results shown below have been conformed to the twelve months ended December 31, 2002, 2001 and 2000. The Trust purchased their interest in Purgatory on May 1, 2000 and as such the operating results below have been conformed to reflect the eight months ended December 31, 2000.
For the Twelve For the Twelve For the Twelve Months Ended Months Ended Months Ended December 31, December 31, December 31, 2002 2001 2000 --------------- ---------------- --------------- Mountain Resorts Total revenues $ 29,462 $ 29,597 $ 27,741 Total expenses 30,336 30,117 27,464 --------------- ---------------- --------------- Net income (loss) $ (874) $ (520) $ 277 =============== ================ =============== Mountain Springs Total revenues $ 15,198 $ 15,250 $ 5,008 Total expenses 17,834 15,648 9,725 --------------- ---------------- --------------- Net income (loss) $ (2,636) $ (398) $ (4,717) =============== ================ ===============
Due to the economic downturn in the tourism industry following September 11, 2001 terrorist attacks, the Trust evaluated the fair value of its investment in EFG Kirkwood. The Trust hired an independent third party appraiser who valued the minority interest investment. The appraiser used a valuation model to determine the fair value of the investment which included expected future cash flows from the ski resorts. Based on the Company's overall industry knowledge and the valuation performed by the appraiser, the Company recorded an impairment on the investment of $0.1 million as of December 31, 2002. NOTE 6 -INTEREST IN MILPI HOLDINGS, LLC - --------------------------------------------- In December 2000, the Trusts formed MILPI Holdings, LLC ("MILPI"), which formed MILPI Acquisition Corp. ("MAC"), a wholly-owned subsidiary of MILPI, for the purpose of acquiring PLM International, Inc. and subsidiaries ("PLM"). The Trusts collectively paid $1.2 million for their membership interests in MILPI ($0.4 million for the Trust which gave the Trust a 34% interest in MILPI). MAC 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 $27.0 million. In connection with the acquisition, on December 29, 2000, MAC commenced a tender offer to purchase any and all of PLM's outstanding common stock. On February 7, 2001, pursuant to the cash tender offer, the Trusts through MAC acquired approximately 83% of PLM's outstanding common stock for a purchase price of $3.46 per share resulting in a total purchase price of $21.8 million and contributed the shares to MILPI. The Trust's portion of the capital contribution was $7.1 million which included acquisition fees of $0.1 million. The purchase price was determined based on competitive bids and a valuation model using the expected future cash flows of PLM. MILPI also hired an investment banking firm to issue a fairness opinion on the purchase price. The assets of PLM included cash and cash equivalents of approximately $4.4 million. The acquisition resulted in goodwill at MILPI of approximately $5.3 million. On February 6, 2002, the Trusts through MAC, completed their acquisition of PLM by purchasing the remaining 17% of the outstanding PLM common stock and by effecting a merger of MAC into PLM, with PLM as the surviving entity. The merger was completed when MAC obtained approval of the merger from PLM's shareholders pursuant to a special shareholder's meeting. The remaining interest was purchased for $4.4 million at the $3.46 per common share price established in the tender offer which was financed by the Trust and AFG Investment Trust D. An investment banking firm was hired and issued a fairness opinion on the purchase price of this transaction. The Trust's portion of the purchase price was $2.4 million which included transaction costs of $24,000, a 1% acquisition fee paid to a wholly-owned subsidiary of Semele. The acquisition resulted in goodwill of approximately $3.5 million. No goodwill is expected to be deducted for tax purposes. Concurrent with the completion of the merger, PLM ceased to be publicly traded. Due to the February 6, 2002 acquisition, the Trust's ownership interest in MILPI increased from 34% to 38%. MILPI accounted for the acquisition of the stock of PLM using the purchase method of accounting. In accordance with SFAS No. 141, the Company allocates the total purchase price to the assets acquired and liabilities assumed based on the respective 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. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne, who are directors and officers of the Trust, respectively, are also officers and directors of, and own significant stock in Semele. In addition, Mr. Engle and Mr. Coyne are officers and directors of MILPI. The Trusts' ownership interest in MILPI is accounted for on the equity method and the Trust recorded income of approximately $0.5 million and $1.0 million for the fiscal years ending 2002 and 2001, respectively. During 2002, MILPI declared and paid a cash dividends totaling $4.7 million. The Trust's share of the dividend was $1.7 million. The table below provides summarized consolidated balance sheet data as of December 31, 2002 and 2001, and income statement data for MILPI for the year ended December 31, 2002 and for the period February 7, 2001 through December 31, 2001. As discussed above, approximately 83% of PLM's common stock was acquired in February 2001, with the remaining interest acquired in February 2002. The table below provides MILPI's summarized consolidated balance sheet as of December 31, 2002 and 2001 and the income statement data for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 (in thousands of dollars):
December 31, December 31, 2002 2001 ============= ============= Total Assets $ 44,400 $ 43,399 Total Liabilities 18,440 15,453 Minority Interests - 3,029 ------------- ------------- Equity $ 25,960 $ 24,917 ============= =============
For the Period from February 7, Year Ended 2001 through December 31, December 31, 2002 2001 -------- -------- Total revenues $ 5,228 $ 8,660 Total expenses (3,478) (5,856) Equity income in managed programs 133 1,716 Other income, net 268 467 Minority interests (40) (429) Provision for taxes (774) (1,611) -------- -------- Net income $ 1,337 $ 2,947 ======== ========
In February 2003, the Trust filed a proxy statement soliciting the shareholders on several articles proposed by the Managing Trustee (see Note 15). In March 2003, the Trust's shareholders approved all the articles included in the proxy statement. One of the articles approved authorized MILPI to purchase Trust A and B's interest in MILPI at a pre-determined price. MILPI is planning on acquiring AFG Investment Trust A and B Liquidating Trust's interest in MILPI during 2003. The acquisition will be financed through MILPI's existing cash reserves and cash flows generated from the sale of railcars. Subsequent to the acquisition, the Trust and AFG Investment Trust C's ownership interest in MILPI will increase to 50% per trust. NOTE 7 - INTEREST IN C & D IT LLC - ------------------------------------------ In March 2002, the Trust and AFG Investment Trust D ("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 $1.0 million. The C & D Joint Venture was formed for the purpose of making a conditional contribution of $2.0 million to BMLF/BSLF II Rancho Malibu Limited Partnership ("Rancho Malibu Limited Partnership") in exchange for 25% of the interests in Rancho Malibu Limited Partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture was admitted to Rancho Malibu Limited Partnership as a co-managing general partner pursuant to the terms of an amendment to Rancho Malibu Limited Partnership Agreement. The other partners in 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 a 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, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares of common stock of RMLP, Inc., approximately 15% interest in RMLP Inc. In February 2003, the Trust solicited the shareholders, which was subsequently approved, for several articles including the transaction above (see Note 15). The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture Contribution from Rancho Malibu Limited Partnership if the transactions have not taken place within ninety days of the receipt by Rancho Malibu Limited 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 Rancho Malibu Limited Partnership held by Semele and Rancho Malibu Corp. NOTE 8 - RELATED PARTY TRANSACTIONS - ---------------------------------------- Various 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, 2002, 2001 and 2000, which were paid or accrued by the Trust to EFG or its affiliates, are as follows (in thousands of dollars):
2002 2001 2000 ----- ------ ------ Acquisition fees $ 24 $ 74 $ 15 Management fees 434 433 431 Administrative charges 201 178 198 Reimbursable operating costs due to third parties - 966 397 ----- ------ ------ Total $ 659 $1,651 $1,041 ===== ====== ======
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 equipment 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 reinvestment equipment acquisitions completed prior to September 2, 1997, EFG was compensated by an amount equal to 3% of Asset Base Price paid by the Trust. In connection with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's reinvestment provisions, which were scheduled to expire on September 2, 1997, were extended through December 31, 2002 and the Trust was permitted to invest in assets other than equipment. The Trust does not anticipate, nor have there been, any equipment acquisitions subsequent to September 1997. Acquisition fees associated with non-equipment acquisitions have been approximately 1% of the Asset Base Price. 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 September 2, 1997. For non-equipment assets 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 disposition 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. Prior to June 2002, an affiliated company supported the administrative function. Subsequently, the administrative functions were outsourced to an unrelated third party with the exception of some administrative functions which will continue to be supported by EFG. During 2001 and 2000, EFG paid the majority of operating costs on behalf of the Trust. Costs incurred by EFG were subsequently reimbursed by the Trust on a monthly basis. During 2002, the Trust paid all of its direct costs. Therefore, there were no reimbursable direct operating costs paid to an affiliate during the year. All equipment was purchased from EFG, one of its affiliates, or directly from third-party sellers. The Trust's Purchase Price is determined by the method described in Note 2, Equipment on Lease. On December 31, 2002, the Trust had a receivable from affiliate of $0.1 million. The receivable consists of approximately $0.1 million of revenues and other proceeds received by EFG. 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. The Trust's cash proceeds received by EFG are reimbursed to the Trust on a monthly basis. The remaining balance of the receivable, approximately $0.1 million, relates to costs incurred by the Trust associated with the sale of an aircraft in December 2002, on behalf of EFG. 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 1% of the total outstanding Class A Interests of the Trust. The general partner of ONC is controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. Equis II Corporation has voting control of the Trust through its ownership of the majority of the Trust's outstanding voting interests, as well as its ownership of AFG ASIT Corporation. 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. During the first quarter of 2002, the Trust borrowed $0.7 million from MILPI Holdings, LLC. The note issued had an interest rate LIBOR plus 200 basis points and was scheduled to mature on January 6, 2003. Interest paid to MILPI under this note was $28,000. In December 2002, the note plus accrued interest was paid in full. NOTE 9 - NOTES PAYABLE - -------------------------- Notes payable at December 31, 2002 consisted of two installment notes totaling $18.2 million payable to banks and institutional lenders. The notes bear a fixed interest rate of 8% and 9%. The Trust estimates, based on recent transactions, that the fair value of the fixed rate notes is approximately $17.5 million. Both of the installment notes are non-recourse and are collateralized by certain of the Trust's aircraft and assignment of the related lease payments. These notes will be partially amortized by the remaining contracted lease payments. However, the Trust has balloon payment obligations of approximately $16.1 million at the expiration of the debt in November 2003. NOTE 10 - CONTINGENCIES AND COMMITTMENTS - --------------------------------------------- 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, C & D IT LLC 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 may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. If the Trust were determined to be an investment company, its business would be adversely affected. The Managing Trustee has 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 Managing Trustee has consulted counsel and believes that the Trust is not an investment company. The Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business or interstate commerce. 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. NOTE 11 - INCOME TAXES - -------------------------- The Trust is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Trust. For financial statement purposes, the Trust allocates net income quarterly first, to eliminate any Participant's negative capital account balance and second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75% collectively to the Class A and Class B Beneficiaries. The latter is allocated proportionately between the Class A and Class B Beneficiaries based upon the ratio of cash distributions declared and allocated to the Class A and Class B Beneficiaries during the period. Net losses are allocated quarterly first, to eliminate any positive capital account balance of the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries; second, to eliminate any positive capital account balances of the Class A Beneficiaries; and third, any remainder to the Managing Trustee. This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Trust Agreement. For income tax purposes, the Trust allocates net income or net loss in accordance with the provisions of such agreement. Pursuant to the Trust Agreement, upon dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance, which may exist in the Managing Trustee's capital account. At December 31, 2002, the Managing Trustee had a negative capital account balance of $0.1 million. The following is a reconciliation between net income (loss) reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 -------- -------- -------- .. Net income (loss) $(1,451) $(5,599) $ 2,050 Tax depreciation in excess of (less than) financial statement depreciation (1,360) (740) (2,343) Tax gain (loss) in excess of book gain (loss) on sale 1,964 - (765) Recognize pass through income 1,145 (571) 710 Reverse income from corporate investment 1,367 (652) - Deferred rental income 10 247 (287) Write-down of equipment 599 5,579 - Other - (190) 163 -------- -------- -------- Net income (loss) for federal income tax reporting purposes $ 2,274 $(1,926) $ (472) ======== ======== ========
The following is a reconciliation between participants' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2002 and 200:
.. 2002 2001 --------- --------- .. Participants' capital $ 16,139 $ 17,590 Add back selling commissions and organization and offering costs 4,922 4,922 Deferred step-down of capital basis (690) (690) Cumulative difference between federal income tax and financial statement net loss (12,592) (16,318) --------- --------- Participants' capital for federal income tax reporting purposes $ 7,779 $ 5,504 ========= =========
The cumulative difference between federal income tax and financial statement income (loss) represents timing differences. NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - ------------------------------------------------------------ The following is a summary of the quarterly results of operations for the years ended December 31, 2002 and 2001 (in thousands of dollars, except for shares):
March 31, June 30, September 30, December 31, Total ---------- ---------- --------------- -------------- -------- 2002 Lease revenue $ 1,501 $ 1,352 $ 1,333 $ 1,496 $ 5,682 Net income (loss) $ 1,548 $ (1,200) $ (1,122) $ (677) $(1,451) Net income (loss) per Beneficiary Interest: Class A Interests $ 0.60 $ (0.43) $ (0.62) $ (0.38) $ (0.83) Class B Interests $ 0.10 $ (0.10) $ - $ - $ - 2001 Lease revenue $ 1,607 $ 1,643 $ 1,691 $ 1,579 $ 6,520 Net income (loss) $ 1,276 $ (1,178) $ (304) $ (5,393) $(5,599) Net income (loss) per Beneficiary Interest: Class A Interests $ 0.51 $ (0.20) $ (0.17) $ (2.98) $ (2.84) Class B Interests $ 0.08 $ (0.18) $ - $ - $ (0.10)
In the fourth quarter of fiscal year 2002, the Trust reversed depreciation of approximately $0.4 million relating to one of its aircraft. Approximately $0.1 million related to each of the three months ended March 31, 2002, June 30, 2002 and September 30, 2002. The respective quarterly results above have been adjusted to reflect this adjustment. Net loss for the three months ended September 30, 2002 includes a $0.8 million loss on the Trust's interest in EFG Kirkwood. In addition, the three months ended September 30, 2002 includes a $0.2 million of expenses related to the Trust's proxy statements filed in February 2003. Net loss for the three months ended June 30, 2002 includes a $0.7 million loss on the Trust's interest in EFG Kirkwood and $0.4 million loss on interest in MILPI Holdings LLC. Net loss for the three months ended December 31, 2001 includes a $5.6 million write-down of equipment. Net loss for the three months ended June 30, 2001 includes approximately a $0.4 million loss on interest in Kettle Valley and $0.6 million loss on interest in EFG Kirkwood. NOTE 13 - SEGMENT REPORTING - ------------------------------- The Trust has three principal operating segments: 1) Equipment Leasing 2) Equipment Management and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes acquiring and leasing to third parties a diversified portfolio of capital equipment . The Equipment Management segment includes the Trust's interest in MILPI Holdings, LLC ("MILPI"), which owns 100% of PLM an equipment leasing and asset management company. From February 2001 to February 6, 2002, MILPI, through a wholly owned subsidiary MILPI Acquisition, owned approximately 83% of PLM. On February 7, 2002, MILPI Acquisition purchased the remaining 17% of PLM's stock and was merged into PLM. The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales included in the Trust's ownership interests in EFG Kirkwood, C & D IT LLC, and Kettle Valley. The Trust's reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers. During the fourth quarter of 2002, the Trust increased its number of reportable segments to include the Equipment Management segment. Previously, the Company reported on two operating segments: Equipment Leasing and Real Estate. Segment information for the years ended December 31, 2001 and 2000 have been revised to reflect the new operating segment. Segment information for the years ended December 31, 2002, 2001 and 2000 is summarized below (in thousands of dollars).
2002 2001 2000 -------- -------- -------- .. Total Revenue (1): Equipment leasing $ 5,521 $ 6,803 $10,414 Equipment management - - - Real estate - 183 371 -------- -------- -------- Total $ 5,521 $ 6,986 $10,785 Operating Expenses, Management Fees and Other Expenses: Equipment leasing $ 1,341 $ 1,427 $ 946 Equipment management 98 74 - Real estate 85 76 80 -------- -------- -------- Total $ 1,524 $ 1,577 $ 1,026 Interest Expense: Equipment leasing $ 1,814 $ 2,037 $ 2,405 Equipment management 28 - - Real estate - 18 58 -------- -------- -------- Total $ 1,842 $ 2,055 $ 2,463 Depreciation, Impairment of assets and Amortization Expense (2): Equipment leasing $ 3,259 $ 9,438 $ 4,189 Equipment management - - - Real estate 115 75 66 -------- -------- -------- Total $ 3,374 $ 9,513 $ 4,255 Equity (Loss) Income: Equipment leasing $ - $ - $ - Equipment management 493 984 - Real estate (725) (424) (991) -------- -------- -------- Total $ (232) $ 560 $ (991) Net (Loss) Income: $(1,451) $(5,599) $ 2,050 ======== ======== ======== Investment in Minority Interest Investments: Equipment leasing $ - $ 26 $ 289 Equipment management 2,423 7,136 408 Real estate 1,000 - 1,287 -------- -------- -------- Total $ 3,423 $ 7,162 $ 1,984 Assets: Equipment leasing $19,564 $26,217 $43,824 Equipment management 9,688 8,519 408 Real estate 7,272 7,436 7,409 -------- -------- -------- Total $36,524 $42,172 $51,641
(1) Includes equipment leasing revenue of $5.7 million, $6.5 million and $7.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. (2) Includes write-down of equipment leasing assets of $0.5 million and $5.6 million for the fiscal years ended December 31, 2002 and 2001, respectively. In addition, the real estate segment recorded a $0.1 million impairment on its minority interest investment in EFG Kirkwood LLC. NOTE 14 - GEOGRAPHIC INFORMATION - ------------------------------------ The Trust owns certain leasing equipment and minority interest investments that either operate internationally or are leased in countries outside the United States. A limited number of the Trust's transactions are denominated in foreign currency. Gains or losses resulting from foreign currency transaction are included in the results of operations and are not material. Equipment leasing revenues from foreign lessees are generated from aircraft leases. During 2002, the Trust had three aircraft leases with lessees domiciled outside the United States in Sweden, Spain and Mexico. During 2002, Equity income (loss) generated from foreign countries consists of the Trust's interest in Kettle Valley which is located in Kelowna, British Columbia in Canada. The table below sets forth total revenues and equity income (loss) by operating segment and geographic region for the Trust's leasing equipment and minority interest investments (in thousands of dollars):
Equipment Leasing Equipment Management Real Estate ------------------------------------------------------- -------------------- -------------------- Region 2002 2001 2000 2002 2001 2000 2002 2001 2000 ------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------ REVENUES - ------------------------ United States $ 2,024 $ 3,409 $ 6,774 $ - $ - $ - $ - $ 183 $ 371 Sweden 3,358 3,321 3,640 - - - - - - Mexico 139 73 - - - - - - - ------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------ Total revenues $ 5,521 $ 6,803 $ 10,414 $ - $ - $ - $ - $ 183 $ 371 ------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------ EQUITY INTEREST United States - - - 493 984 - (484) (91) (900) Canada - - - - - - (241) (333) (91) ------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------ Equity income (loss) $ - $ - $ - $ 493 $ 984 $ - $(725) $(424) $(991) ------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
The table below sets forth total assets organized by operating segment and geographic region for the fiscal years ending December 31, 2002 and 2001, respectively (in thousands of dollars):
Equipment Leasing Equipment Management Real Estate ----------------------------------------- --------------------- -------------- Region 2002 2001 2002 2001 2002 2001 ------ ------ ------ United States $ 2,709 $ 6,149 $ 9,688 $8,519 $3,148 $3,003 - ---------------- ------------------ --------------------- ------------ ------ ------ ------ Sweden 16,855 18,167 - - - - Mexico - 901 - - - - Canada - - - - 4,124 4,433 Total Assets $ 19,564 $ 26,217 $ 9,688 $8,519 $7,272 $7,436 ------------------ --------------------- ------------ ------ ------ ------
NOTE 15 - SUBSEQUENT EVENT - ------------------------------ On February 12, 2003, the Trust filed a proxy statement, which was subsequently approved. In March 2003, the shareholders approved the following proposals: 1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that they control, to continue to operate their ongoing business making investments after December 31, 2002, notwithstanding the end of their reinvestment period for the Trust. 2. To approve a transaction whereby a new formed subsidiary of PLM, RMLP, Inc., will receive a contribution from Semele Group, Inc., of partnership interests in Rancho Malibu, a partnership that owns and is developing 274 acres of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5 million promissory note and 182 shares (15%) of the common stock of RMLP, Inc. 3. To amend Section 7.5 of the Trust Agreement to approve grants and exercises of rights of first refusal in connection with joint ventures between the Trust and its affiliates. 4. To approve the purchase by MILPI of the membership interests in MILPI held by AFG Investment Trust A and AFG Investment Trust B, which gave the Trust, together with Trust D, shared 100% ownership of MILPI. 5. To allow the Trust, in its operation of PLM, to enter into business arrangements with affiliates of the Trust in the ordinary course of business on terms no less favorable than those that they would receive if such arrangements were being entered into with independent third parties In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in Rancho Malibu as indicated in the proposal above. ADDITIONAL FINANCIAL INFORMATION AFG INVESTMENT TRUST C SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 The Trust classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenues, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition, may not reflect the aggregate residual proceeds realized by the Trust for such equipment. Expenses, such as management fees, and interest earned on cash generated are not included below. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 2002, 2001 and 2000 (in thousands of dollars):
2001 2001 2000 ------- ------ ------- Rents earned prior to disposal of equipment, net of interest charges $ 8,417 $2,135 $ 7,831 Sale proceeds realized upon disposition of equipment 2,722 185 3,425 ------- ------ ------- Total cash generated from rents and equipment sale proceeds 11,139 2,320 11,256 Original acquisition cost of equipment disposed 8,058 1,656 8,259 ------- ------ ------- Excess of total cash generated to cost of equipment disposed $ 3,081 $ 664 $ 2,997 ======= ====== =======
ADDITIONAL FINANCIAL INFORMATION AFG INVESTMENT TRUST C STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 2002 (IN THOUSANDS OF DOLLARS)
Sales and Operations Refinancings Total ------------ -------------- -------- Net income (loss) $ (2,700) $ 1,249 $(1,451) Add: Depreciation and amortization $ 2,775 - 2,775 Write-down of equipment 599 - 599 Loss on sale of equipment 1,474 - 1,474 Management fees 434 - 434 (Income) loss from equity interests 232 - 232 Book value of disposed equipment - 1,473 1,473 Less: Principal reduction of notes payable (4,952) - (4,952) ------------ -------------- -------- Cash from operations, sales and refinancings (2,138) 2,722 584 Less: Management fees (434) - (434) ------------ -------------- -------- Distributable cash from operations, sales and refinancings (2,572) 2,722 150 Other sources and uses of cash: Cash and cash equivalents at beginning of year 1,717 - 1,717 Investments - other - 5 5 Interest in EFG Kirkwood LLC - 256 256 Interest in MILPI Holdings, LLC 1,723 (2,399) (676) Intertest in C & D IT, LLC (1,000) - (1,000) Net proceeds from note payable refinancing 720 - 720 Net change in receivables and accruals (4) - (4) ------------ -------------- -------- Cash and cash equivalents at end of year $ 584 $ 584 $ 1,168 ============ ============== ========
ADDITIONAL FINANCIAL INFORMATION AFG INVESTMENT TRUST C SCHEDULE OF EQUIPMENT AS OF DECEMBER 31, 2002 (IN THOUSANDS OF DOLLARS)
Lease Expiration Net Book Lessee Date Cost Value Debt - ---------------------------------- ---------- ------- --------- ------- Advanced Micro Devices, Inc. * $ 1,275 $ - $ - Chrysler Corporation * 57 - - Chrysler Corporation 2/28/03 754 79 - GE Aircraft Engines 5/31/03 51 - - GATX Logistics, Inc. * 148 - - General Electric Company * 1 - - General Electric Company * - - - General Motors Corporation * 76 - - General Motors Corporation * 124 - - General Motors Corporation * 1,317 - - General Motors Corporation * 47 - - Hyundai Electronics America, Inc. 8/31/03 6,513 724 742 Owens-Corning Fiberglass Corp. * 17 - - Owens-Corning Fiberglass Corp. * - - - Scandinavian Airlines System 12/29/03 30,895 16,856 17,409 Temple-Inland Forest Product Group * 21 - - Tenneco Packaging * 48 - - USX Corporation * 1 - - Western Bulk Carriers 2/28/03 337 67 - Warehouse 1,987 30 - ---------- ------- --------- Total $43,669 $ 17,756 $18,151 ======= ========= =======
* Currently leased on a month-to-month basis EX-23 4 doc7.txt Exhibit 23 Consent of Independent Certified Public Accountants We consent to the incorporation by reference in this Annual Report (Form 10-K) of AFG Investment Trust C of our report dated March 31, 2003, with respect to the financial statements of AFG Investment Trust C, included in the 2002 Annual Report to the Participants of AFG Investment Trust C. /s/ ERNST & YOUNG LLP Tampa, Florida March 26, 2003 EX-99 5 doc2.txt Exhibit 99(h) EFG KIRKWOOD LLC OPERATING AGREEMENT ------------------- This Operating Agreement of EFG Kirkwood LLC (the "Company") is made as of May 1, 1999 (this "Agreement"), by and between the persons identified as the Managers and Members on Schedule A attached hereto (such persons and their respective successors in office or in interest being hereinafter referred to individually as a "Manager" or "Member" or collectively as the "Managers" or "Members"). WHEREAS, the Company was formed as a limited liability company under the Delaware Limited Liability Company Act (as amended from time to time, the "Act") on December 2, 1998;* WHEREAS, the Company intends to purchase interests in Kirkwood Associates, Inc., a California corporation ("KAI") as follows: 6.5% Convertible Note of KAI in the principal amount of $1,000,000 (the "Convertible Note"); and shares of common stock of KAI representing approximately 15% of the outstanding common shares of KAI (the "Purchased Stock"); and WHEREAS, the Managers and the Members wish to set out fully their respective rights, obligations and duties regarding the Company and its assets and liabilities and the acquisition of the Purchased Stock and the Convertible Note. NOW, THEREFORE, in consideration of the mutual covenants expressed herein, the parties hereby agree as follows (capitalized terms used and not otherwise defined herein have the respective meanings specified in Article X): 1. ARTICLE I Organization and Powers ----------------------- ARTICLE I Organization and Powers ----------------------- 1.1 Organization. The Company has been formed by the filing of its ------------ Certificate of Formation with the Delaware Secretary of State pursuant to the Act on December 2, 1998.* The Certificate of Formation may be restated by the Managers as provided in the Act or amended by the Managers to change the address of the office of the Company in Delaware and the name and address of its resident agent in Delaware or to make corrections required by the Act. Other additions to or amendments of the Certificate of Formation shall be authorized by the Members as provided in Section 11.4. The Certificate of Formation, as amended from time to time, is referred to herein as the "Certificate." The Managers shall deliver a copy of the Certificate and any amendment thereto to any Member who so requests. 1.2 Purposes and Powers. The Company shall have authority to acquire, -------------------- own, vote, sell and otherwise deal with the KAI Securities (as defined in Article XII) and to engage in any other lawful business, trade, purpose or activity permitted by the Act, and shall possess and may exercise all of the powers and privileges granted by the Act and any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company, including without limitation the following powers: (a) to acquire, hold, dispose of and otherwise deal with the KAI Securities; (b) to sell, transfer, convert or otherwise dispose of the KAI Securities and to pay all legal and other costs associated therewith and to vote, provide proxies and make all investment decisions with respect to the KAI Securities.; (c) to designate individuals, including Affiliates, to serve on the Board of Directors of KAI; (d) upon distribution of the Company to distribute the KAI Securities in kind to the Members; (e) to conduct its business and operations in any state, territory or possession of the United States or in any foreign country or jurisdiction; (f) to purchase, receive, take, lease or otherwise acquire, own, hold, improve, maintain, use or otherwise deal in and with, sell, convey, lease, exchange, transfer or otherwise dispose of, mortgage, pledge, encumber or create a security interest in all or any of its real or personal property, or any interest therein, wherever situated; (g) to borrow or lend money or obtain or extend credit and other financial accommodations, to invest and reinvest its funds in any type of security or obligation of or interest in any public, private or governmental entity, and to give and receive interests in real and personal property as security for the payment of funds so borrowed, loaned or invested; (h) to make contracts, including contracts of insurance, incur liabilities and give guaranties, whether or not such guaranties are in furtherance of the business and purposes of the Company, including without limitation guaranties of obligations of other persons who are interested in the Company or in whom the Company has an interest; (i) to institute, prosecute and defend any legal action or arbitration proceeding involving the Company, and to pay, adjust, compromise, settle or refer to arbitration any claim by or against the Company or any of its assets; (j) to be a partner in one or more partnerships or a member in one or more limited liability companies; and (k) to enter into any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with, or coincidental to the accomplishment of the purposes of the limited liability company, so long as said activities and contracts may be lawfully carried on or performed by the Company under the laws of the State. 1.3 Principal Place of Business. The principal office and place of ------------------------------ business of the Company shall initially be One Canterbury Green, 8th Floor, 201 Broad Street, Stamford, Connecticut 06901. After giving notice to the Members, the Managers may change the principal office or place of business of the Company at any time and may cause the Company to establish other offices or places of business. 1.4 Fiscal Year. The fiscal year of the Company shall end on December ------------ 31 in each year. 1.5 Qualification in Other Jurisdictions. The Managers shall cause the ------------------------------------ Company to be qualified or registered under applicable laws of any jurisdiction in which the Company transacts business and shall be authorized to execute, deliver and file any certificates and documents necessary to effect such qualification or registration, including without limitation the appointment of agents for service of process in such jurisdictions. 1. ARTICLE II Members ------- ARTICLE II Members ------- 2.1 Members. The initial Members of the Company are the Class A ------- Members and the Class B Members and their addresses are listed on Schedule A and such Schedule shall be amended from time to time by the Managers to reflect the withdrawal of Members or the admission of new or additional Members pursuant to this Agreement. Schedule A shall set forth the percentage interest which each Class A Member and Class B Member holds in the profits and losses and Cash Flow of the Company allocated to such Class (the "Membership Interests"). The Members shall constitute a single class or group of Members of the Company for all purposes of the Act, except as otherwise explicitly provided herein as to the Class A Members and Class B Members. The Managers shall notify the Members of changes in Schedule A, which shall constitute the record list of the Members for all purposes of this Agreement. 2.2 Admission of New Members. Additional persons may be admitted to --------------------------- the Company as Members and may participate in the profits, losses, distributions, allocations and capital contributions of the Company upon such terms as are established by the Managers, which may include the establishment of classes or groups of one or more Members having different relative rights, powers and duties, or the right to vote as a separate class or group on specified matters, by amendment of this Agreement under Section 11.4. Existing Members shall have no preemptive or similar right to subscribe to the purchase of new membership interests in the Company. 2.3 Meetings of Members. --------------------- (a) Meetings of Members may be called for any proper purpose at any time by the Managers or the holders of a majority of the Membership Interests. The Managers or the Members calling the meeting shall determine the date, time and place of each meeting of Members, and written notice thereof shall be given by the Managers to each Member not less than seven days or more than 60 days prior to the date of the meeting. Notice shall be sent to Members of record on the date when the meeting is called. The business of each meeting of Members shall be limited to the purposes described in the notice. A written waiver of notice, executed before or after a meeting by a Member or its authorized attorney and delivered to the Managers, shall be deemed equivalent to notice of the meeting. (b) Persons holding a majority of the Membership Interests of each Class shall constitute a quorum for the transaction of any business at a meeting of Members. Members may attend a meeting in person or by proxy. Members may also participate in a meeting by means of conference telephone or similar communications equipment that permits all Members present to hear each other. If less than a quorum of the Members is present, the meeting may be adjourned by the chairman to a later date, time and place, and the meeting may be held as adjourned without further notice. When an adjourned meeting is reconvened, any business may be transacted that might have been transacted at the original meeting. (c) A chairman selected by the Managers shall preside at all meetings of the Members unless the Members elect from the Membership a chairman of the meeting. The chairman shall determine the order of business and the procedures to be followed at each meeting of Members. 2.4 Action Without a Meeting. There is no requirement that the Members ------------------------ hold a meeting in order to take action on any matter. Any action required or permitted to be taken by the Members may be taken without a meeting if one or more written consents to such action shall be signed by Members who hold the Membership Interests or other interest in the Company required to approve the action being taken. Such written consents shall be delivered to the Managers at the principal office of the Company and unless otherwise specified shall be effective on the date when the first consent is so delivered. The Managers shall give prompt notice to all Members who did not consent to any action taken by written consent of Members without a meeting. 2.5 Voting Rights. Unless otherwise required by the Act or this -------------- Agreement, all actions, approvals and consents to be taken or given by the Members under the Act, this Agreement or otherwise shall require the affirmative vote or written consent of Members holding a majority of the Class A Membership Interests and Class B Membership Interests. 2.6 Limitation of Liability of Members. Except as otherwise provided ------------------------------------ in the Act, no Member of the Company shall be obligated personally for any debt, obligation or liability of the Company or of any other Member, whether arising in contract, tort or otherwise, solely by reason of being a Member of the Company. Except as otherwise provided in the Act, by law or expressly in this Agreement, no Member shall have any fiduciary or other duty to another Member with respect to the business and affairs of the Company, and no Member shall be liable to the Company or any other Member for acting in good faith reliance upon the provisions of this Agreement. No Member shall have any responsibility to restore any negative balance in its Capital Account (as defined in Section 6.1) or to contribute to or in respect of the liabilities or obligations of the Company or return distributions made by the Company except as required by the Act or other applicable law; provided, however, that Members are responsible for their failure to make required Contributions under Section 6.2. The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or the management of its business or affairs under this Agreement or the Act shall not be grounds for making its Members or Managers responsible for the liabilities of the Company. 2.7 Authority. Unless specifically authorized by the Managers, no --------- Member that is not a Manager shall be an agent of the Company or have any right, power or authority to act for or to bind the Company or to undertake or assume any obligation or responsibility of the Company or of any other Member. 2.8 No Right to Withdraw. No Member shall have any right to resign or --------------------- withdraw from the Company without the consent of the other Members or to receive any distribution or the repayment of its capital contribution except as provided in Sections 7.1 and 7.2 and Article IX upon dissolution and liquidation of the Company. No Member shall have any right to have the fair value of its Membership Interest in the Company appraised and paid out upon the resignation or withdrawal of such Member or any other circumstances. 2.9 Rights to Information. Members shall have the right to receive ----------------------- from the Managers upon request a copy of the Certificate and of this Agreement, as amended from time to time, and such other information regarding the Company as is required by the Act, subject to reasonable conditions and standards established by the Managers, as permitted by the Act, which may include without limitation withholding or restricting the use of confidential information. 1. ARTICLE III - Management ---------- ARTICLE III Management ---------- 3.1 Managers. AFG ASIT Corporation, a Massachusetts corporation, shall -------- be the initial Manager of the Company. The names and addresses of the Managers shall be listed on Schedule A which shall be amended from time to time by the Managers to reflect the resignation or removal of Managers or the appointment of new or additional Managers pursuant to this Agreement. 3.2 Performance of Duties. Each Manager shall devote such time to the ---------------------- business and affairs of the Company as is reasonably necessary for the performance of such Manager's duties, but shall not be required to devote full time to the performance of such duties and may delegate its responsibilities as provided in Section 3.3. A Manager need not be a Member. 3.3 Powers and Duties of the Managers. The business and affairs of the --------------------------------- Company shall be managed under the direction of the Managers, who shall have and may exercise on behalf of the Company all of its rights, powers, duties and responsibilities under Section 1.2 or as provided by law, including without limitation the right and authority: (a) acquire, vote, make all decisions with respect to and, otherwise, deal with the KAI Securities on behalf of the Company to manage the business and affairs of the Company and for this purpose to employ, retain or appoint any officers, employees, consultants, agents, brokers, professionals or other persons in any capacity for such compensation and on such terms as the Managers deem necessary or desirable and to delegate to such persons such of their duties and responsibilities as the Managers shall determine; (b) to enter into, execute, deliver, acknowledge, make, modify, supplement or amend any documents or instruments in the name of the Company; (c) to borrow money or otherwise obtain credit and other financial accommodations on behalf of the Company on a secured or unsecured basis as provided in Section 1.2(c), and to perform or cause to be performed all of the Company's obligations in respect of its indebtedness and any mortgage, lien or security interest securing such indebtedness; and (d) to make elections and prepare and file returns regarding any federal, state or local tax obligations of the Company. Unless otherwise provided in this Agreement, any action taken by a Manager, and the signature of a Manager on any agreement, contract, instrument or other document on behalf of the Company, shall be sufficient to bind the Company and shall conclusively evidence the authority of that Manager and the Company with respect thereto. 3.4 Tax Matters Partner. The Member so designated by the Managers from ------------------- time to time shall serve as the "Tax Matters Partner" of the Company for purposes of Section 6231(a)(7) of the Internal Revenue Code of 1986 as amended (the "Code"), with power to manage and represent the Company in any administrative proceeding of the Internal Revenue Service. The initial Tax Matters Partner of the Company shall be Semele Group, Inc. 3.5 Reliance by Third Parties. Any person dealing with the Company, ---------------------------- the Managers or any Member may rely upon a certificate signed by any Manager as to (i) the identity of any Manager or Member; (ii) any factual matters relevant to the affairs of the Company; (iii) the persons who are authorized to execute and deliver any document on behalf of the Company; or (iv) any action taken or omitted by the Company, the Managers or any Member. 3.6 Resignation and Removal. Any Manager may resign upon at least 60 ------------------------- days' notice to the Members and the other Managers (unless notice is waived by them). Any Manager may be removed at any time with or without cause by the Members. 3.7 Meetings and Action of Managers. Unless otherwise determined by ---------------------------------- the Members or Managers, all action to be taken by the Managers shall be taken by majority vote or written consent of a majority of the Managers then in office. There is no requirement that the Managers hold a meeting in order to take action on any matter. Meetings of the Managers may be called by any Manager. If action is to be taken at a meeting of the Managers, notice of the time, date and place of the meeting shall be given to each Manager by an officer or the Manager calling the meeting by personal delivery, telephone or fax sent to the business or home address of each Manager at least 24 hours in advance of the meeting, or by written notice mailed to each Manager at either such address at least 72 hours in advance of the meeting; however, no notice need be given to a Manager who waives notice before or after the meeting, or who attends the meeting without protesting at or before its commencement the inadequacy of notice to him or her. Managers may also attend a meeting in person or by proxy, and they may also participate in a meeting by means of conference telephone or similar communications equipment that permits all Managers present to hear each other. A chairman selected by the Managers shall preside at all meetings of the Managers. The chairman shall determine the order of business and the procedures to be followed at each meeting of the Managers. 3.8 Compensation. Each Manager shall receive such compensation for his ------------ services and benefits as may be approved from time to time by the Managers. In addition, the Managers shall be entitled to reimbursement for out-of-pocket expenses incurred by them in connection with the performance of their duties for the Company. 3.9 Limitation of Liability of Manager. No Manager shall be obligated ----------------------------------- personally for any debt, obligation or liability of the Company or of any Member, whether arising in contract, tort or otherwise, solely by reason of being or acting as Manager of the Company. No Manager shall be personally liable to the Company or to its Members for breach of any fiduciary or other duty that does not involve (i) a breach of the duty of loyalty to the Company or its Members, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) a transaction from which the Manager derived an improper personal benefit. 1. ARTICLE IV - Indemnification --------------- ARTICLE IV Indemnification --------------- 4.1 Definitions. For purposes of this Article IV: ----------- "Manager" includes (i) a person serving as a Manager of the Company or in a similar executive capacity appointed by the Managers and exercising rights and duties delegated by the Managers, (ii) a person serving at the request of the Company as a director, Manager, officer, employee or other agent of another organization, and (iii) any person who formerly served in any of the foregoing capacities; "expenses" means all expenses, including attorneys' fees and disbursements, actually and reasonably incurred in defense of a proceeding or in seeking indemnification under this Article, and except for proceedings by or in the right of the Company or alleging that a Manager received an improper personal benefit, any judgments, awards, fines, penalties and reasonable amounts paid in settlement of a proceeding; and "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and any claim which could be the subject of a proceeding. 4.2 Right to Indemnification. Except as limited by law and subject to ------------------------- the provisions of this Article, the Company shall indemnify each of its Managers against all expenses incurred by them in connection with any proceeding in which a Manager is involved as a result of serving in such capacity, except that no indemnification shall be provided for a Manager regarding any matter as to which it shall be finally determined that such Manager did not act in good faith and in the reasonable belief that its action was in the best interests of the Company. Subject to the foregoing limitations, such indemnification may be provided by the Company with respect to a proceeding in which it is claimed that a Manager received an improper personal benefit by reason of its position, regardless of whether the claim arises out of the Manager's service in such capacity, except for matters as to which it is finally determined that an improper personal benefit was received by the Manager. 4.3 Award of Indemnification. The determination of whether the Company ------------------------ is authorized to indemnify a Manager hereunder and any award of indemnification shall be made in each instance (a) by a majority of the Managers who are not parties to the proceeding in question, (b) by independent legal counsel appointed by the Managers or the Members or (c) by the holders of a majority of the Membership Interests of the Members who are not parties to the proceeding in question. The Company shall be obliged to pay indemnification applied for by a Manager unless there is an adverse determination (as provided above) within forty-five (45) days after the application. If indemnification is denied, the applicant may seek an independent determination of its right to indemnification by a court, and in such event, the Company shall have the burden of proving that the applicant was ineligible for indemnification under this Article. Notwithstanding the foregoing, in the case of a proceeding by or in the right of the Company in which a Manager is adjudged liable to the Company, indemnification hereunder shall be provided to such Manager only upon a determination by a court having jurisdiction that in view of all the circumstances of the case, such Manager is fairly and reasonably entitled to indemnification for such expenses as the court shall deem proper. 4.4 Successful Defense. Notwithstanding any contrary provisions of ------------------- this Article, if a Manager has been wholly successful on the merits in the defense of any proceeding in which it was involved by reason of its position as Manager or as a result of serving in such capacity (including termination of investigative or other proceedings without a finding of fault on the part of the Manager), the Manager shall be indemnified by the Company against all expenses incurred by the Manager in connection therewith. 4.5 Advance Payments. Except as limited by law, expenses incurred by a ---------------- Manager in defending any proceeding, including a proceeding by or in the right of the Company, shall be paid by the Company to the Manager in advance of final disposition of the proceeding upon receipt of its written undertaking to repay such amount if the Manager is determined pursuant to this Article or adjudicated to be ineligible for indemnification, which undertaking shall be an unlimited general obligation but need not be secured and may be accepted without regard to the financial ability of the Manager to make repayment; provided, however, that no such advance payment of expenses shall be made if it is determined pursuant to Section 4.3 of this Article on the basis of the circumstances known at the time (without further investigation) that the Manager is ineligible for indemnification. 4.6 Insurance. The Company shall have power to purchase and maintain --------- insurance on behalf of any Manager, officer, agent or employee against any liability or cost incurred by such person in any such capacity or arising out of its status as such, whether or not the Company would have power to indemnify against such liability or cost. 4.7 Heirs and Personal Representatives. The indemnification provided ------------------------------------ by this Article shall inure to the benefit of the heirs and personal representatives of each Manager. 4.8 Non-Exclusivity. The provisions of this Article shall not be --------------- construed to limit the power of the Company to indemnify its Managers, Members, officers, employees or agents to the full extent permitted by law or to enter into specific agreements, commitments or arrangements for indemnification permitted by law. The absence of any express provision for indemnification herein shall not limit any right of indemnification existing independently of this Article. 4.9 Amendment. The provisions of this Article may be amended or --------- repealed in accordance with Section 11.4; however, no amendment or repeal of such provisions that adversely affects the rights of a Manager under this Article with respect to its acts or omissions at any time prior to such amendment or repeal shall apply to such Manager without its consent. 1. ARTICLE V - Conflicts of Interest --------------------- ARTICLE V Conflicts of Interest --------------------- 5.1 Transactions with Interested Persons. Unless entered into in bad -------------------------------------- faith, no contract or transaction between the Company and one or more of its Managers or Members, or between the Company and any other corporation, partnership, association or other organization in which one or more of its Managers or Members have a financial interest or are directors, partners, Managers or officers, shall be voidable solely for this reason or solely because such Manager or Member was present or participated in the authorization of such contract or transaction if: (a) the material facts as to the relationship or interest of such Manager or Member and as to the contract or transaction were disclosed or known to the other Managers (if any) or Members and the contract or transaction was authorized by the disinterested Managers (if any) or Members; or (b) the contract or transaction was fair to the Company as of the time it was authorized, approved or ratified by the disinterested Managers (if any) or Members; and no Manager or Member interested in such contract or transaction, because of such interest, shall be considered to be in breach of this Agreement or liable to the Company, any Manager or Member, or any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. 2. ARTICLE VI - Capital Accounts and Contributions ---------------------------------- ARTICLE VI Capital Accounts and Contributions ---------------------------------- 6.1 Capital Accounts. ----------------- (a) There shall be established on the books of the Company a separate capital account (a "Capital Account") for each Member. (b) The Capital Account of each Member (regardless of the time or manner in which such Member's interest was acquired) shall be maintained in accordance with the rules of Section 704(b) of the Internal Revenue Code of 1986, as amended, from time to time (the "Code"), and Treasury Regulation Section 1.704-1(b)(2)(iv). Adjustments shall be made to the Capital Accounts for distributions and allocations as required by the rules of Section 704(b) of the Code and the Treasury Regulations thereunder. (c) If there is a transfer of all or a part of an interest in the Company by a Member, the Capital Account of the transferor that is attributable to the transferred interest shall carry over to the transferee of such Member. (d) Subject to Section 7.2, notwithstanding any other provision contained herein to the contrary, no Member shall be required to restore any negative balance in its Capital Account. 6.2 Contributions. Each Member shall make the contributions to the ------------- capital of the Company (herein "Contributions") specified on Schedule A. All Contributions shall be paid in cash unless otherwise specified on Schedule A or agreed to by the Members. Except as set forth on Schedule A, no Member or Manager shall be entitled or required to make any contribution to the capital of the Company; however, the Company may borrow from its Members as well as from banks or other lending institutions to finance its working capital or the acquisition of assets upon such terms and conditions as shall be approved by the Managers, and any such borrowing from Members shall not be considered Contributions or reflected in their Capital Accounts. The value of all non-cash Contributions made by Members shall be set forth on Schedule A. No Member shall be entitled to any interest or compensation with respect to its Contribution or any services rendered on behalf of the Company except as specifically provided in this Agreement or approved by the Managers. No Member shall have any liability for the repayment of the Contribution of any other Member and each Member shall look only to the assets of the Company for return of its Contribution. 1. ARTICLE VII - Profits, Losses and Distributions --------------------------------- ARTICLE VII Profits, Losses and Distributions --------------------------------- 7.1 Profits and Losses; Cash Flow. ---------------------------------- (a) Subject to Section 7.3, profits and losses shall be allocated to the Members as follows: (1) As to Profits: First, profits shall be allocated to the Members to the extent that cumulative losses allocated to the Members pursuant to Section 7.1(a)(2) for all prior fiscal years exceed the aggregate amount of profits previously allocated to Members pursuant to this Section 7.1(a)(1), with such profits to be allocated ratably among the Members according to the excess losses allocated to each Member; and Second, an amount of profits shall be allocated to each of the Members until the positive balance in the Capital Account of each Member equals, as nearly as possible, the amount of cash which would be distributed to such Member if the aggregate amount in the Capital Accounts of all Members were cash available to be distributed in accordance with clauses First through Third of Section 7.1(b). (2) As to Losses: First, losses shall be allocated to the Members to the extent that cumulative profits allocated to the Members pursuant to Section 7.1(a)(1) for all prior fiscal years exceed the amount of losses previously allocated to Members pursuant to this Section 7.1(a)(2), with such losses to be allocated ratably among the Members according to the excess profits allocated to each Member; Second, an amount of losses equal to the aggregate positive balances (if any) in the Capital Accounts of all Members having positive Capital Account balances shall be allocated to such Members in proportion to their positive Capital Account balances until all such Capital Accounts shall have a zero balance; and Third, the balance, if any, of such losses shall be allocated to the Members who bear the economic risk for such losses, or otherwise in accordance with Membership Interests. (b) Except to the extent governed by Section 7.2, Cash Flow of the Company for each fiscal year (or portion thereof) shall be distributed among the Partners as follows: 1. First, 100% to the Class A Members until Class A Payout; 2. Second, 100% of all Cash Flow to the Class B Members until Class B Payout; and 3. Third, thereafter all Cash Flow will be distributed 15% to the Class A Members and 85% to the Class B Members. (c) The terms "profits" and "losses" used in this Agreement shall mean income and losses, and each item of income, gain, loss, deduction or credit entering into the computation thereof, as determined in accordance with Regulation Section 1.704-1(b)(2)(iv). 7.2 Termination Distributions. -------------------------- (a) Upon dissolution and termination, after payment of, or adequate provision for, the debts and obligations of the Partnership, the remaining assets of the Partnership shall be distributed to the Partners in accordance with the positive balances in their Capital Accounts after taking into account all Capital Account adjustments for the Partnership taxable year. (b) With respect to assets distributed in kind to the Partners in liquidation or otherwise, (i) any unrealized appreciation or unrealized depreciation in the values of such assets shall be deemed to be profits and losses realized by the Partnership immediately prior to the liquidation or other distribution event; and (ii) such profits and losses shall be allocated to the Partners in accordance with Section 7.1(a), and any property so distributed shall be treated as a distribution of an amount in cash equal to the excess of such fair market value over the outstanding principal balance of and accrued interest on any debt by which the property is encumbered. For the purposes of this Section 7.2(b), "unrealized appreciation" or "unrealized depreciation" shall mean the difference between the fair market value of such assets, taking into account the fair market value of the associated financing (but subject to Section 7701(g) of the Code) and the Partnership's adjusted basis for such assets as determined under Section 1.704-1(b). This Section 7.2(b) is merely intended to provide a rule for allocating unrealized gains and losses upon liquidation or other distribution event, and nothing contained in this Section 7.2(b) or elsewhere herein is intended to treat or cause such distributions to be treated as sales for value. 7.3 Special Provisions. ------------------- (a) Section 704 of the Code and the Regulations issued thereunder, including but not limited to the provisions of such regulations addressing qualified income offset provisions, minimum gain chargeback requirements and allocations of deductions attributable to nonrecourse debt and partner nonrecourse debt, are hereby incorporated by reference. (b) Except as otherwise provided in this Agreement, all profits, losses and Cash Flow shared by Class A Member and Class B Member shall be shared by each Class A Member and Class B Member in the ratio of his Capital Contribution to the Class Contribution of all Members of such Class. 1. ARTICLE VIII - Transfers of Interests ---------------------- ARTICLE VIII Transfers of Interests ---------------------- 8.1 Transfer of a Member's Membership Interest. ----------------------------------------------- (a) Except as set forth in the first sentence of Section 8.2, no Member may sell, assign, give, pledge, hypothecate, encumber or otherwise transfer, including, without limitation, any assignment or transfer by operation of law or by order of court, such Member's Membership Interest in the Company, without first complying with the provisions of Section 8.1(b). Any attempted sale, transfer, assignment, pledge or other disposition in contravention of the provisions of this section shall be void and ineffectual and shall not bind, or be recognized, by the Company. (b) Before any Membership Interest or any part thereof may be sold, assigned, gifted, pledged, hypothecated, encumbered or otherwise transferred, including transfer by operation of law or by order of court, the Member holding such Membership Interest proposing such sale or transfer (the "Transferor") shall first give written notice thereof to other Members at least sixty (60) days prior to the proposed date of transfer (the "Transfer Date") stating the proposed transferee, the Membership Interest proposed to be transferred, the purchase price, if any, and the terms of the proposed transaction. The Members receiving such notice (the "Purchasing Members") shall thereupon have the option, but not the obligation, to acquire all, but not less than all, of the Membership Interest proposed to be sold or transferred by the Transferor for the Purchase Price determined pursuant to Section 8.1(d) (the "Purchase Price"). Within thirty (30) days after the giving of such notice by the Transferor, each Purchasing Member shall give written notice ("Purchase Notice") to the Transferor stating whether or not the Purchasing Member elects to exercise the option to purchase and a date and time (the "Closing Date") for the consummation of the purchase not less than sixty (60) or more than ninety (90) days after the giving of the Purchase Notice. If two (2) or more Purchasing Members desire to purchase the Membership Interest proposed to be sold or transferred, then, in the absence of an agreement between or among them, each such Purchasing Member shall purchase the Membership Interest proposed to be sold or transferred in the proportion that its Membership Interest bears to the total Membership Interests of all the Purchasing Members who desire to so purchase. Failure by a Purchasing Member to deliver a Purchase Notice within the time period allowed shall be deemed an election by such Purchasing Member not to exercise such option. If the Purchase Price is determined by appraisal as set forth in Section 8.1(d)(ii), a Purchasing Member may rescind its election to purchase by written notice to the Transferor given within ten (10) days after being notified of the determination of the appraisers. (c) If the Purchasing Members waive in writing their option to purchase or fail to exercise their right to purchase within the time period allowed, the Transferor may transfer such Membership Interest at any time during the 60-day period after the termination of such time period, but only upon the terms and to the transferee stated in its notice delivered pursuant to subsection (b). After such Membership Interest is so transferred, or if the transfer is not consummated within such period, the Membership Interest shall again become subject to the terms of this Agreement. (d) The Purchase Price shall be determined as follows: (i) In the case of a proposed sale or transfer under paragraph (b) to a third party in a bona fide transaction for fair value payable in cash or the equivalent currently or in future installments, the Purchase Price for such Membership Interest shall be the value offered by such third party payable upon the same terms. (ii) In all other cases, including without limitation a proposed transfer or other disposition not constituting a sale described in subsection (i), the Purchase Price shall be the fair market value of the Membership Interest being purchased as of the last day of the month immediately prior to the month during which the Transferor gave its notice. "Fair market value" as of any date shall mean the cash price obtainable in an arm's-length sale between an informed and willing buyer (under no compulsion to purchase) and an informed and willing seller (under no compulsion to sell) of the Membership Interest, based upon the going concern value of the Company, taking into account any minority or non-control discount. If the parties are unable to agree upon the fair market value, such fair market value shall be determined by appraisal as follows: Either party may require appraisal by giving written notice to the other party and appointing an independent appraiser. The other party shall deliver a written notice appointing an independent appraiser within fifteen (15) days after receipt of the notice from the other. The two appraisers so appointed, or if only one appraiser is appointed, that appraiser, shall promptly seek to determine the fair market value. If the two appraisers cannot agree within thirty (30) days of their appointment, a third independent appraiser shall be chosen within ten (10) days thereafter by the mutual consent of such first two appraisers or, if such first two appraisers fail to agree upon the appointment of a third appraiser, such appointment shall be made by the office of the American Arbitration Association nearest to the principal office of the Company, or any organization successor thereto, and shall be a disinterested person qualified in the valuation of business enterprises engaged in the same or similar lines of business as the Company. The three appraisers shall make the determination in accordance with the rules of the American Arbitration Association or any such successor then in effect, and such determination shall be binding and conclusive on the parties. Each party shall pay the costs of its own appraiser and shall share equally in the costs, if any, of a third appraiser and any other costs of arbitration, excluding their own costs. 8.2 Death, Incompetence, Dissolution of a Member. If a Member dies, ----------------------------------------------- such Member's executor, administrator, or trustee, or, if he or she is adjudicated incompetent, such Member's guardian, or, if it is a corporation, trust, limited liability company or partnership and is dissolved, the liquidator, shall automatically become an assignee (the "Assignee") of the Membership Interest of the deceased, incompetent, or dissolved Member. The Assignee may receive distributions and shall have all the rights of a Member for the purpose of settling or managing such deceased or incompetent Member's estate, but shall not be a Member and shall not have the power to vote such Member's Membership Interest. The Assignee shall also have such power as the decedent, incompetent or dissolved entity possessed to: (1) assign all or any part of the Member's Membership Interest subject to Section 8.1; and (2) to satisfy conditions precedent to the assignment of the Membership Interest set forth in Section 8.1. 8.3 Admission of Member; Effect of Transfer. -------------------------------------------- (a) In no event may any person obtaining a Membership Interest in the Company by assignment, transfer, pledge or other means from an existing Member be admitted as a successor Member without the affirmative vote or written consent of Members of the Membership Interests exclusive in each case of the Member whose Membership Interest is being transferred. (b) If the transferee is admitted as a Member or is already a Member, the Member transferring its Membership Interest shall be relieved of liability with respect to the transferred Membership Interest arising or accruing under this Agreement on or after the effective date of the transfer, unless the transferor affirmatively assumes such liability; provided, however, that the transferor shall not be relieved of any liability for prior distributions and unpaid contributions unless the transferee affirmatively assumes such liabilities. (c) Any person who acquires in any manner a Membership Interest or any part thereof in the Company, whether or not such person has accepted and assumed in writing the terms and provisions of this Agreement or been admitted as a Member, shall be deemed by the acquisition of such Membership Interest to have agreed to be subject to and bound by all of the provisions of this Agreement with respect to such Membership Interest, including without limitation, the provisions hereof with respect to any subsequent transfer of such Membership Interest. 2. ARTICLE IX - Dissolution, Liquidation and Termination ---------------------------------------- ARTICLE IX Dissolution, Liquidation and Termination ---------------------------------------- 9.1 Dissolution. The Company shall dissolve and its affairs shall be ----------- wound up upon the first to occur of the following: (a) the written consent of the Members; (b) the entry of a decree of judicial dissolution under Section 18-802 of the Act; or (c) The consolidation or merger of the Company in which it is not the resulting or surviving entity. 9.2 Liquidation. Upon dissolution of the Company, the Managers shall ----------- act as its liquidating trustees or the Managers may appoint one or more Managers or Members as liquidating trustee. The liquidating trustees shall proceed diligently to liquidate the Company and wind up its affairs and shall dispose of the assets of the Company as provided in Section 7.2 hereof. Until final distribution, the liquidating trustees may continue to operate the business and properties of the Company with all of the power and authority of the Managers. As promptly as possible after dissolution and again after final liquidation, the liquidating trustees shall cause an accounting by the accounting firm then serving the Company of the Company's assets, liabilities, operations and liquidating distributions to be given to the Members. 9.3 Certificate of Cancellation. Upon completion of the distribution ----------------------------- of Company assets as provided herein, the Company shall be terminated, and the Managers (or such other person or persons as the Act may require or permit) shall file a Certificate of Cancellation with the Secretary of State of Delaware under the Act, cancel any other filings made pursuant to Sections 1.1 and 1.5 and take such other actions as may be necessary to terminate the existence of the Company. ARTICLE X Certain Definitions ------------------- The following defined terms have the meaning specified below: "Adjusted Class A Investment" means the paid-in Capital Contribution of each Class A Member reduced from time to time by the amount of Cash Flow distributed to such Member pursuant to Clause First of Section 7.1(b) in excess of the Cumulative Class A Annual Distribution. "Adjusted Class B Investment" means the paid-in Capital Contribution of each Class B Member reduced from time to time by the amount of Cash Flow distributed to such Member pursuant to Clause Second of Section 7.1(b) in excess of the Cumulative Class B Annual Distribution. "Cash Flow" means all cash receipts of the Company with respect to the KAI Securities or other miscellaneous sources, less all amounts expended to pay for the costs, liabilities and expenses of the Company. "Class A Members" means the Class A Members designated as such in Schedule A, together with their successors and assigns in such capacity. "Class A Payout" means the first time where the aggregate amount of Cash Flow actually made to the Class A Members equals their paid-in Capital Contribution, plus the Cumulative Class A Annual Distribution. "Class B Members" means the Class B Member of Members designated as such in Schedule A, together with their successors and assigns in such capacity. "Class B Payout" means the first time that the Class B Members have received cash from the Trust in an aggregate amount of their paid-in Capital Contribution, plus the Cumulative Class B Annual Distribution. "Cumulative Class A Annual Distribution" means an aggregate annual distribution of Cash Flow to the Class A Member of 12% per annum, compounded annually, on Adjusted Class A Investment. "Cumulative Class B Annual Distribution" means an aggregate annual distribution of Cash Flow to the Class B Member of 11% per annum, compounded annually on the Adjusted Class B Investment. "KAI Securities" means, as the context shall permit or require, all or any portion of the Purchased Stock and the Convertible Note, any and all shares of preferred or common stock of KAI into which such Purchased Stock and the Convertible Note may be converted, and any and all other securities of KAI or any other issuer or other property, assets or money into which such shares may be converted or which may be received by the Company with respect thereto, whether as a result of any reorganization, recapitalization, reclassification, merger, stock dividend, distribution or otherwise. 1. ARTICLE X - General Provisions ------------------ ARTICLE XI General Provisions ------------------ 11.1 Offset. Whenever the Company is obligated to make a distribution ------ or payment to any Member, any amounts that Member owes the Company may be deducted from said distribution or payment by the Managers. 11.2 Notices. Except as expressly set forth to the contrary in this ------- Agreement, all notices, requests, or consents required or permitted to be given under this Agreement must be in writing and shall be deemed to have been properly given if sent by registered or certified mail, postage prepaid, by commercial overnight courier, by facsimile or if delivered in hand to Members at their addresses on Schedule A, or such other address as a Member may specify by notice to the Managers and to the Company or the Managers at the address of the principal office of the Company specified in Section 1.3. Whenever any notice is required to be given by law, the Certificate or this Agreement, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 11.3 Entire Agreement; Binding Effect. This Agreement constitutes the --------------------------------- entire agreement of the Members and the Managers relating to the Company and supersedes all prior oral or written agreements or understandings with respect to the Company. This Agreement is binding on and inures to the benefit of the parties and their respective successors, permitted assigns and legal representatives. 11.4 Amendment or Modification. Except as specifically provided --------------------------- herein, this Agreement may be amended or modified from time to time only by a written instrument signed by Members holding a majority of the Membership Interests. 11.5 Governing Law; Severability. This Agreement is governed by and ----------------------------- shall be construed in accordance with the law of the State of Delaware, exclusive of its conflict-of-laws principles. In the event of a conflict between the provisions of this Agreement and any provision of the Certificate or the Act, the applicable provision of this Agreement shall control, to the extent permitted by law. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable to any extent, the remainder of this Agreement and the application of that provision shall be enforced to the fullest extent permitted by law. 11.6 Further Assurances. In connection with this Agreement and the ------------------- transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and those transactions, as requested by the Managers. 11.7 Waiver of Certain Rights. Each Member irrevocably waives any --------------------------- right it may have to maintain any action for dissolution of the Company or for partition of the property of the Company. The failure of any Member to insist upon strict performance of a covenant hereunder or of any obligation hereunder, irrespective of the length of time for which such failure continues, shall not be a waiver of such Member's right to demand strict compliance herewith in the future. No consent or waiver, express or implied, to or of any breach or default in the performance of any obligation hereunder shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. 11.8 Third-Party Beneficiaries. The provisions of this Agreement are -------------------------- not intended to be for the benefit of any creditor or other person to whom any debts or obligations are owed by, or who may have any claim against, the Company or any of its Members or Managers, except for Members or Managers in their capacities as such. Notwithstanding any contrary provision of this Agreement, no such creditor or person shall obtain any rights under this Agreement or shall, by reason of this Agreement, be permitted to make any claim against the Company or any Member or Manager. 11.9 Interpretation. For the purposes of this Agreement, terms not -------------- defined in this Agreement shall be defined as provided in the Act; and all nouns, pronouns and verbs used in this Agreement shall be construed as masculine, feminine, neuter, singular, or plural, whichever shall be applicable. Titles or captions of Articles and Sections contained in this Agreement are inserted as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. 11.10 Counterparts. This Agreement may be executed in any number of ------------ counterparts with the same effect as if all parties had signed the same document, and all counterparts shall be construed together and shall constitute the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date set forth above. MANAGER: - ------- AFG ASIT Corporation By:___________________________________ __________________, Authorized Officer CLASS A MEMBERS: - ----------------- AFG Investment Trust A By: AFG ASIT Corporation, Managing Trustee By: ___________________________________ ________________, Authorized Officer AFG Investment Trust B By: AFG ASIT Corporation, Managing Trustee By: ___________________________________ ________________, Authorized Officer AFG Investment Trust C By: AFG ASIT Corporation, Managing Trustee By: ___________________________________ ________________, Authorized Officer AFG Investment Trust D By: AFG ASIT Corporation, Managing Trustee By: ___________________________________ ________________, Authorized Officer CLASS B MEMBER: - ---------------- Semele Group, Inc. By: ______________________________________ _________________, Authorized Officer EFG KIRKWOOD LLC Schedule A ---------- MANAGERS Name and Address of Manager - ----------- AFG ASIT Corporation 88 Broad Street Boston, MA 02110
Name and Address of Members Class A Contribution Membership Interest - -------------- -------------- -------------------- AFG Investment Trust A $ 600,000 10% 88 Broad Street Boston, Massachusetts 02110 AFG Investment Trust B $ 1,200,000 20% 88 Broad Street Boston, Massachusetts 02110 AFG Investment Trust C $ 2,400,000 40% 88 Broad Street Boston, Massachusetts 02110 AFG Investment Trust D $ 1,800,000 30% 88 Broad Street Boston, Massachusetts 02110 _________ _____ $ 6,000,000 100% Class B Member: Class B - --------------------------- Membership Interest -------------------- Semele Group, Inc.* $ 750,000 100% ============== ====================
EX-99 6 doc3.txt Exhibit 99 (i) Amended and Restated Operating Agreement AMENDED AND RESTATED OPERATING AGREEMENT OF MOUNTAIN SPRINGS RESORTS, LLC A DELAWARE LIMITED LIABILITY COMPANY This Amended and Restated Operating Agreement (the "Agreement") shall be effective as of October 24, 2002, and replaces and supercedes the Operating Agreement of Mountain Springs Resort, LLC, dated as of October 15, 1999 by and among Mountain Springs Resorts, LLC (the "Company"), Cobb Nevada Partners Limited, a Nevada limited partnership, and EFG/Kirkwood LLC, a Delaware limited liability company (the "Initial Operating Agreement"). The undersigned members ("Members") have, through their authorized persons, formed a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act, 6 De. C. 18-101, et seq. (the "Act"). The Members hereby declare -- --- the following to be the Operating Agreement of such limited liability company: 1. Definitions1.9 Definitions. For purposes of this Agreement, the ----------- ----------- following terms shall have the meanings ascribed to them below. (a) "Adjusted Cost" shall mean as set forth on Exhibit 6.1 the dollar -------------- amount paid by a Member prior to the date of this Agreement as adjusted for the effect of the Capital Contributions made on the date of this Agreement and as expressed in terms of equivalent units of ownership interest in the Company. (b) "AffiliateAffiliate" of any specified Person shall mean any other Person ------------------ directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and, for an individual shall include without limitation, (i) upon death of any such individual, such individual's heirs, executors or administrators, (ii) the members of such individual's immediate family, (iii) any trust established by or on behalf of such individual for estate planning purposes, (iv) upon incapacity of such individual, such individual's guardians. For purposes of this definition, "control" when used with respect to any specified Person, shall mean the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing. With respect to EFG (as defined herein), any Person directly or indirectly controlled by or under direct or indirect common control with EFG or any subsidiary or affiliate of EFG, including, without limitation, Semele Group, Inc., Equis Financial Group Limited Partnership, Equis II Corporation, Gary D. Engle, Geoffrey A. MacDonald, AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C, AFG Investment Trust D, and Equis Financial Group, Inc., a rollup entity proposed to be formed by Equis Financial Group Limited Partnership, shall be and constitute "Affiliates" as used herein. (c) "AgreementAgreement" shall mean this Amended and Restated Operating ------------------ Agreement, as the same may be amended from time to time (including by the addition of Counterparts). (d) "Alternate ManagerAlternate Manager" shall mean a person designated by a ---------------------------------- Manager as his or her Alternate Manager as provided for in Section 11.1. (e) "ApprovalApproval" shall mean consent by the Members to an action by ---------------- the affirmative vote of Members holding a majority of the Percentage Interests entitled to vote with respect to such matter, or such other percentage as may be expressly stated herein, which vote may be obtained either at a meeting of Members duly noticed (to the address of each Member shown on the Company's records at least ten (10) days prior to the date set forth in such notice or waiver thereof) or by a written consent executed and delivered by such Members; provided, however, that if Approval is obtained by written consent, the Company must send written notice of the action so taken to each non-consenting Member within three (3) days after the taking of such action. The failure of the Company to provide such written notice to the non-consenting Members shall not invalidate the action so taken so long as such failure was inadvertent. (f) "BankruptcyBankruptcy" shall mean with respect to any person, being the -------------------- subject of an order for relief under Title 11 of the United States Code, or any successor statute in any foreign jurisdiction having like import or effect, or that such person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such person. (g) "BoardBoard" shall mean the Board of Managers of the Company, designated ---------- in accordance with Section 11.1. (h) "Book ValueBook Value" shall mean, as of any particular date, the value --------------------- at which the Company's assets are properly reflected on the books of the Company as of such date in accordance with the provisions of Treasury Regulations Section 1.704-1(b). The Book Values of all Company assets shall, if the Board in its sole discretion deems it appropriate, be adjusted to equal their respective gross fair market values, as determined by the Board, at the times specified in those regulations. (i) "Capital AccountCapital Account" shall mean the individual capital -------------------------------- account of a Member maintained in accordance with Section 6.8 hereof. (j) "Capital ContributionsCapital Contribution" shall have the meaning set ------------------------------------------- forth in Section 6.2 hereof, and shall include Deemed Capital Contributions as defined in Section 6.5(d) hereof. (k) "CodeCode" shall mean the Internal Revenue Code of 1986, as amended. -------- (l) "CompanyCompany" shall mean Mountain Springs Resorts, LLC, a Delaware -------------- limited liability company organized pursuant to the Act. (m) "CounterpartCounterpart" shall mean an additional document executed and ---------------------- delivered by (i) any new Member admitted to membership in the Company after the original date of this Agreement, and (ii) such existing Members having the right under this Agreement to approve the admission of such new Member, which document shall set forth the new Member's Percentage Interest, the resulting Percentage Interests of all other Members, and any other terms and conditions as shall apply to such Members' membership in the Company. Each Counterpart shall be attached to, and shall become part of, this Agreement. (n) "Fair Market ValueFair Market Value" shall mean the price a willing -------------------------------------- seller would pay a willing buyer neither acting under compulsion for a sale of one hundred percent (100%) of the Membership Interests as determined by the Board in its sole and absolute discretion. Fair Market Value shall not take into consideration any discounts for lack of control or marketability. (o) "Hurdle Value" shall have the meaning as set forth in Section 15.3, the ------------- dollar amount reflecting a value that meets or exceeds a return of the dollar investment by each Member plus a 12% annual return. (p) "Initial Operating Agreement" shall mean the first operating agreement ----------------------------- of the Company adopted as of October 15, 1999. (q) "Involuntary TransferInvoluntary Transfer" means any transaction, ------------------------------------------ proceeding or action by or in which any Member shall be involuntarily deprived or divested of any right, title or interest in or to any of the Membership Interests, including, without limitation, any seizure under levy of attachment or execution, transfer in connection with bankruptcy or other court proceeding to a trustee in bankruptcy or receiver or other officer of agency, any transfer to a state or to a public officer or agency pursuant to any applicable statute pertaining to escheat or abandoned property or any court-ordered transfer to a spouse or former spouse of a Member, and shall include the transfer of Membership Interests by a Member's legal representative following his death (testate or intestate) or incompetence to any person other than a Permissible Transferee of such deceased or incompetent Member. (r) "Liquidity ClosingClosing" shall have the meaning set forth in 15.3 (b). ----------------- (s) "Liquidity Offer" shall have the meaning set forth in 15.3 (a). ---------------- (t) "ManagerManager" shall mean a person elected to the Board of Managers in -------------- accordance with Section 11.1. (u) "MemberMember" shall mean the Members and each other person or entity ------------ admitted to membership in the Company whose names, Capital Contributions and Percentage Interests are set forth on Exhibit 6.1 and all Counterparts. ------------ (v) "Membership Interests" means a Person's share of the Profits and Losses --------------------- of, and the right to receive distribution from the Company. (w) "Percentage InterestPercentage Interest" shall have the meaning set -------------------------------------- forth in Section 6.1. (x) "Permissible Transferee" shall have the meaning set forth in Section ----------------------- 13.1(a). (y) "PersonPerson" means any individual natural person, estate, legal ------------ representative, trust, partnership, association, limited liability company, organization, firm, company or corporation, joint venture, any other business entity unincorporated or incorporated, any nation or any state or territory thereof or any public officer, agency, board or instrumentality thereof. (z) "ProfitProfit" or "LossLoss" shall mean for each taxable year, the ---------------------------- Company's taxable income or taxable loss for such taxable year, as determined under Section 703(a) of the Code and Section 1.703-1 of the Treasury Regulations (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or taxable loss), but with the following adjustments: (i) any tax-exempt income or Company expenditures described in Section 705(a)(2)(B) of the Code shall be taken into account in computing such taxable income or taxable loss; (ii) any item of income or gain required to be allocated specially to a Member under Section 6.2 hereof shall not be taken into account in computing such taxable income or taxable loss; and (iii) in lieu of the depreciation, amortization, gain or loss taken into account in computing such taxable income or loss, the Company shall compute such items based on the Book Value of Company property rather than its tax basis, in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(g)(3). (aa) "Related Person" shall mean as set forth in Section 11.5.4, any Member, -------------- Manager or an Affiliate (or any member of a Member's, Manager's or Affiliate's immediate family). (ab) "Subsidiary" - any entity which the Company directly and indirectly has ---------- an equity interest in, and which at the date of this Agreement includes Durango Resort, LLC, DSC/Purgatory, LLC and Durango Mountain Land Company, LLC. (ac) "Treasury RegulationsTreasury Regulations" shall mean the Income Tax ------------------------------------------ Regulations issued by the Department of the Treasury. 2. Name. The name of the limited liability company formed hereby is ---- Mountain Springs Resorts, LLC (the "Company"). 3. Purpose and Powers. The purpose of the Company is to operate and -------------------- maximize its investment in the Durango Colorado real estate and resort business. The Company shall have the authority to enter into all contracts and agreements in connection therewith, expressly including all financing and/or refinancing documents, and to engage in all activities incidental or related thereto. The Company shall possess and may exercise all of the powers and privileges granted by the Act or by any other law or by this Agreement, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business purposes or activities of the Company as set forth in this Section 2. 4. Registered Office and Registered Agent. The registered office of the ------------------------------------------ Company in the State of Delaware is located at 15 East North Street, Dover Delaware 19909. The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware is Incorporating Services, Ltd. 15 East North Street, Dover, Delaware 19909. 5. Admission of Members; Names and Addresses. Simultaneously with the ------------------------------------------ execution and delivery of this Agreement the Members are admitted as the members of the Company. The name and address of the Members are as follows: Cobb Nevada Partners Limited Partnership ("CNPLP") 502 East Johns Street, Suite E Carson City, NV 89796 EFG/Kirkwood LLC ("EFG") One Canterbury Green 201 Broad Street Stamford, CT 06901 John W. Temple ("Temple") 2300 NW Corporate Boulevard Suite 238 Boca Raton, FL 33431 6. Capital. ------- 6.1 Capital Contributions2.2 Capital Contributions. Upon execution --------------------- --------------------- of the Initial Operating Agreement and through the date of this Agreement, the Members contributed to the Company cash and property in the respective amounts as set forth on item nos. 1-7 of Exhibit 6.1. The contributions made by the ----------- Members under this Section 6.2 and the subsequent Capital Contributions by Members to the Company as set forth on item 8 of Exhibit 6.1 and under Sections ----------- 6.4, 6.5 and 6.6 are hereafter referred to as "Capital Contributions." 6.2 Percentage Interests2.1 Percentage Economic Interests. Each Member --------------------- ----------------------------- shall have a percentage interest equal to the percentage set forth next to such Member's name on Exhibit 6.1, attached hereto and made a part hereof (or, after ----------- admission of new Members, on the most recently adopted Counterpart) as such interest may be adjusted from time to time for additional Capital Contributions ("Percentage Interest"). A new Counterpart shall be prepared after each new additional Member and each additional Capital Contributions. 6.3 Member Advances2.3 Member Advances. In addition to the Capital ---------------- ---------------- Contributions provided for under Section 6.2 and without limiting the provisions of Sections 6.4, 6.5 and 6.6, the Members or an Affiliate may, if the Board in its discretion deems it appropriate, make cash advances in such amounts and upon such commercially reasonable repayment, interest and other terms as the Board and the Member or Affiliate providing such advance shall agree. Any such cash advances shall be treated as loans to the either the Company or its subsidiaries as the case may be, rather than Capital Contributions and shall therefore not affect a Member's Capital Account. Such Advances may become Capital Contributions subject to the provisions of this Agreement. 6.4 Additional Capital Contributions2.4 Additional Capital ---------------------------------- ------------------- ContributionsNoNo Member shall be obligated to make any other Capital ----- Contributions, and no Member shall make any such further Capital Contributions -- except as otherwise provided in this Agreement. 6.5 Discretionary Capital Contribution2.6 Discretionary Capital ------------------------------------ ---------------------- Contribution. --------- (a) After April 7, 2004, the Board may from time to time determine in its sole and absolute discretion that a significant shortfall exists in working capital and that the Company is unable to obtain adequate third party financing on a reasonable and timely basis to cover such shortfall. In such event the Company shall notify the Members of such determination in writing (the "Shortfall NoticeShortfall Notice") and the reasons therefore and may raise additional capital from the Members to cover such shortfall. (b) The Members or an Affiliate shall have the right, but not the obligation, to make additional Capital Contributions of their pro rata share of any such capital to be raised pursuant to this Section 6.5. For purposes of this Section 6.5, a Member's pro rata share shall mean such Member's Percentage Interest (as of the date of the Shortfall Notice) of the additional Capital Contributions. (c) Within thirty (30) days after the date of the Shortfall Notice, the Members or Affiliates who participate ("Contributing Member") may make such additional Capital Contributions, pro rata, for the amount any Member fails to make Capital Contributions (a "Non-Contributing MemberNon-Contributing Member") pursuant to this Section 6.5, based on the Percentage Interests of all such participating Members who have elected to so contribute. (d) Each Member or Affiliate making additional Capital Contributions pursuant to this Section 6.5 shall be deemed to have made a capital contribution (the "Deemed Capital Contribution") in an amount equal to the greater of either: (i) twice the amount actually contributed as adjusted for the equivalent ownership units shown at Exhibit 6.1, if Fair Market Value is less than or equal to the total dollar amount of all Capital Contributions made by Members prior to making the additional Capital Contribution, or (ii) if Fair Market Value is greater than the total dollar amount of all Capital Contributions made by Members prior to making the additional Capital Contribution, twice the Capital Contribution's Percentage Interest as determined by the additional capital contribution (including any additional capital contributed by a Contributing Member to make up for an amount not contributed by a Non-Contributing Member) divided by the Fair Market Value, adjusted for the equivalent ownership units shown at Exhibit 6.1 . (e) Fair Market Value shall be determined by the Board, as of the date of the Shortfall Notice. The Percentage Interest of each Member shall be adjusted after additional Capital Contributions are made pursuant to this Section 6.5, with the adjusted Percentage Interest obtained by dividing: (X) A Member's Percentage Interest at the greater of Fair Market Value or Adjusted Cost without giving effect to the Deemed Capital Contribution plus the amount of the Member's Deemed Capital Contribution as determined in accordance with Section 6.5(d) above. by (Y) The greater of Fair Market Value or Adjusted Cost of all Members' Percentage Interests without giving effect to the Deemed Capital Contribution plus the amount of all Members' Deemed Capital Contribution as determined in accordance with Section 6.5(d) above. (f) Examples. A summary follows of examples as set forth on Exhibit -------- 6.5(f) assuming a $2 million capital call and beginning with 10,492,424 equivalent ownership units from Exhibit 6.1. Where any inconsistencies exist between the examples set forth herein and the provisions of this Section 6.5, the examples shall prevail: (i) No increase in Fair Market Value. A $2 million Capital Contribution ---------------------------------- shall be treated as a 4,453,018 Deemed Capital Contribution for a total equivalent ownership of 14,945,442 after the Capital Contribution. The Member(s) contributing $2 million will be acquiring 4,453,018 Deemed Capital Contribution divided by the 14,945,442 of equivalent ownership units or 29.7952% ownership interest. (ii) $4,000,000 increase in Fair Market Value. A total of $13,425,000 -------------------------------------------- fair market value or $1.27949 per equivalent ownership unit. A $2 million Capital Contribution shall be treated as a 3,126,234 Deemed Capital Contribution (2,000,000 divided by 1.27949 equals 1,563,117 equivalent units; these units would be multiplied by two) for a total equivalent ownership of 13,618,658 after the Capital Contribution. The Member(s) contributing $2 million will be acquiring 3,126,234 Deemed Capital Contribution divided by the 13,618,658 of equivalent ownership units or 22.9555% ownership interest. (f) For purposes of this Section 6.5, the Percentage Interest of a Non-Contributing Member shall be decreased by the increase in the Percentage Interest of the Contributing Member. In order to give effect to such dilution, the decrease in the Percentage Interest of the Non-Contributing Member under Section 6.5, shall be deemed to be assigned to the Contributing Member, without additional consideration, and the Contributing Member's Percentage Interest shall be correspondingly increased, and the Board is hereby authorized and directed to reflect such assignment on the books of the Company. On the date the adjusted Percentage Interest is determined as provided for in this Section 6.5, each Member shall be considered as of such date, solely for purposes of further calculations and adjustments of each Member's invested capital to have made Capital Contributions, as determined by this Section 6.5. (g) After the date of this Agreement, the Company may raise in the aggregate up to and including on a cumulative basis no more than Two Million Dollars ($2,000,000) of additional Capital Contributions and no more than a 29.7952% interest in the Company may be issued pursuant to this Section 6.5. (h) With respect to any Capital Contribution made by an Affiliate, such Affiliate's Capital Contribution when combined with the Member to which such Affiliate is an Affiliate, shall not exceed the Capital Contribution otherwise permitted if made solely by the Member. 6.6 Preemptive Rights2.7 Preemptive Rights. Except as set forth in ------------------ ------------------ Section 6.5, each Member has the pro rata right (but not the obligation), in proportion to such holder's proportionate ownership of the then outstanding Percentage Interest ("Preemptive RightPreemptive Right"), to subscribe to any or all issues of new Membership Interest (the "New IssueNew Issue"). Each Member may exercise its Preemptive Right with respect to a New Issue within a reasonable period of time established by the Board after the giving of notice of the New Issue by the Board. New Issues shall not include any equity incentive plan approved by the Board and holders of seventy percent (70%) of the then outstanding Percentage Interest. In the event that portions of a New Issue remain unsubscribed ("Unsubscribed InterestUnsubscribed Interest") after the pro rata exercise of Preemptive Rights referenced above, then each Member who exercised its Preemptive Right to the fullest extent provided in this Section 6.6, shall have the right to subscribe to its pro rata share of the Unsubscribed Interest. 6.7 Return of Capital; Partition2.9 Return of Capital; Partition. ------------------------------ ---------------------------- Except as otherwise provided herein, no Member shall have any right to (a) withdraw from the Company, (b) demand the return of all or any part of such Member's Capital Account during the term of the Company or (c) receive a return of such Member's Capital Account from any specific assets of the Company. Each Member irrevocably waives any right which such Member may have to cause a partition of all or any part of the Company's assets. No Member shall be entitled to receive any interest with respect to a Capital Contribution. 6.8 LIABILITY OF MEMBERS2.10 LIABILITY OF MEMBERS. NOTWITHSTANDING -------------------- -------------------- ANYTHING TO THE CONTRARY HEREIN CONTAINED, NO MEMBER SHALL BE LIABLE FOR ANY DEBTS, EXPENSES, LIABILITIES OR OBLIGATIONS OF THE COMPANY EXCEPT AS OTHERWISE AGREED IN WRITING BY SUCH MEMBER OR AS PROVIDED BY LAW. The Members may but are not required to make any contribution of property or money to the Company in excess of their Capital Contribution. 7. Tax Characterization and Returns. ----------------------------------- (a) Tax Treatment. The Members declare that it is the intention of the ------------- Company to be treated as a "partnership" for federal and all relevant state tax purposes and the Company shall make all available elections to be so treated. All provisions of the Company's certificate of formation and this Agreement are to be construed so as to preserve that tax status under those circumstances. (b) Tax Information. In accordance with Section 7(a) (Tax Treatment) ----------------- hereof, then no later than the dates the federal, state or local income tax (or information) returns, as the case may be, are due as they may be extended, the Company will cause to be delivered to each person who was a member at any time during such fiscal year a Form K-1 and such other information, if any, with respect to the Company as may be necessary for the preparation of each member's federal, state or local income tax (or information) returns, including a statement showing each member's share of income, gain or loss, and credits for the fiscal year. (c) Section 754 Election - If such election has no adverse impact --------------------- on any other Member, the Company shall make an election under Section 754 of the Internal Revenue Code (the "754 Election") when requested by a Member. Any discretion to be exercised by the Company in connection with any adjustments to the Capital Account of a Member following the 754 Election, and the allocation of such adjustment among the assets of the Company, shall be reasonable and determined by the Tax Matters Partner in the exercise of reasonable discretion, after consultation with the Board of Managers and such professional advisors as the Tax Matters Partner considers appropriate. 8. Capital Accounts2.8 Capital Accounts. ----------------- ----------------- (a) A separate capital account (a "Capital AccountCapital Account") shall be maintained for each Member strictly in accordance with the rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv). Subject to the preceding sentence, each Member's Capital Account shall be (i) increased by the amount of Capital Contributions made by such Member to the Company and allocations to such Member of Company Profits and other items of book income and gain; and (ii) decreased by the amount of money and fair market value of property (net of liabilities secured by such distributed property that such Member is considered to assume or take subject to under Section 752 of the Code) distributed to it by the Company and allocations to such Member of Company Loss and other items of book loss and deductions; and (iii) otherwise adjusted in accordance with the additional rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv). (b) In the event the Book Values of Company assets are adjusted pursuant to Treasury Regulations Section 1.704-1(b) and Section 1.9(g), the Capital Accounts of all Members shall be adjusted simultaneously to reflect the allocations of income, gain, loss or deduction that would be made to the Members if there were a taxable disposition of the Company's property for its fair market value. If any assets of the Company are to be distributed in kind, such assets shall be distributed on the basis of their fair market values after the Members' Capital Accounts have been adjusted to reflect the manner in which any unrealized income gain, loss or deduction with respect to such assets (that have not been reflected in the Capital Accounts previously) would be allocated between the Members if there were a taxable disposition of the property for its fair market value. (c) If any interest in the Company is transferred in accordance with the provisions of this Agreement, the transferee Member shall succeed to that portion of the Capital Account of the transferring Member as relates to such transferred interest. (d) It is the intent of the Company that the Capital Accounts of all Members be determined and maintained in accordance with the principles of Treasury Regulations Section 1.704-1 at all times throughout the full term of the Company and the foregoing provisions of this Section 2.5 shall be interpreted in accordance with such intention. 9. Percentage Interest and Allocations of Profits and Losses. On the ----------------------------------------------------------- date hereof, the Member's interest in the Company shall be as set forth as the "Percentage Interest" on Exhibit 6.1 hereto. As of the date hereof, all of the Company's Profits and Losses shall be allocated to the Members in accordance with the Percentage Interest. In the event additional members are admitted to the Company, the Company's Profits and Losses shall thereafter be allocated in accordance with the Percentage Interests of the members, respectively. 10. Distributions. Except to the extent restricted by Sections 18-607 ------------- (Limitations on Distributions) or 18-804 (Distribution of Assets) of the Act, the Board may cause the Company to distribute any cash or other assets held by it to the Members at any time. In the event additional members are admitted to the Company, and except as set forth in Section 16 (Distribution Upon Dissolution) hereof, cash or other assets available for distribution shall be distributed to the members in accordance with their respective Percentage Interests. 11. Management. The Company shall be managed by the Board. The Board shall ---------- have all powers as set forth herein and such powers which may be delegated to officers duly elected by the Managers. 11.1 Board of Managers3.1 Board of Managers. ------------------- ------------------- (a) The Board shall consist of eight (8) Managers, or such higher or lower number of persons determined by Approval of Members holding seventy percent (70%) of all then outstanding Percentage Interests. The largest holder of the outstanding Percentage Interests (the "Largest MemberLargest Member"), shall have the right to nominate four (4) Managers. Any Member (other than the Largest Member) holding at least thirty-three percent (33%) (the "33% Member") shall have the right to nominate three (3) Managers. Any Member (other than the Largest Member or the 33% Member) holding at least twenty-five percent (25%) of the outstanding Percentage Interests shall have the right to nominate two (2) Managers. As long as John W. Temple ("TempleKlein") or EFG, or their Affiliates, shall each own five percent (5%) or more Percentage Interest, such 5% Member (Temple or EFG) each shall be entitled to nominate one Manager. Each of the Members agrees to cast its votes for the election of Managers in a manner so as to elect the nominees for Manager as set forth above and to elect the same Members to the Board(s) of any Subsidiaries of the Company. Each Member agrees not to make any nominations for the Board inconsistent with the provisions hereof. The Board may also have Alternate Managers, who shall take the place of Managers, should Managers be unavailable. Each Manager may designate an Alternate Manager who shall be a substitute for such Manager and shall not be in addition to the number of Managers on the Board. An Alternate Manager designated as Alternate Manager by a Manager may not serve as an alternate to another Manager, unless also designated an Alternate Manager by such other Manager. The Board shall meet no less often than annually. (b) Board actions shall be valid only if made (i) at a meeting held in person or by conference telephone upon at least ten (10) business days' prior notice unless waived (by telephone, courier or electronic mail confirmed by courier), at which at least a majority of all Managers (including any then serving as an Alternate Manager) then in office are present and a majority of those Managers (including any then serving as an Alternate Manager) present at the meeting approve the Board action; or (ii) by a writing signed by a majority of the Managers. Such actions, when evidenced in a writing certified by any person appointed to serve as Secretary or Chairman of the Board of the Company may be relied upon by third parties for all purposes with respect to their dealings with the Company. 11.2 Control by Board3.2 Control by Board. Subject to the ------------------ ------------------ provisions of this Agreement, and except as may be otherwise expressly stated in this Agreement, the Board shall have full and exclusive responsibility and authority for the management, supervision and conduct of the business and affairs of the Company and the Board is hereby granted the right, power and authority to do on behalf of the Company all things determined thereby to be necessary or desirable to carry out such duties and responsibilities, including (without limitation) the right, power and authority from time to time to do the following: (a) to borrow money in the name and on behalf of the Company, and to secure any such loans by a mortgage, pledge or other encumbrance upon any assets of the Company; (b) to cause to be paid all amounts due and payable by the Company to any person or entity; (c) to employ such agents, employees, managers, accountants, attorneys, consultants and other persons necessary or appropriate to carry out the business and affairs of the Company, to delegate by express Board action any powers of the Board enumerated herein, and to pay to such persons such fees, expenses, salaries, wages and other compensation as it shall in its sole discretion determine; (d) to pay, extend, renew, modify, adjust, subject to arbitration, prosecute, defend or compromise, upon such terms as it may determine and upon such evidence as it may deem sufficient, any obligation, suit, liability, cause of action or claim, including taxes, either in favor of or against the Company; (e) to pay any and all fees and to make any and all expenditures which it deems necessary or appropriate in connection with the organization of the Company, the management of the affairs of the Company and the carrying out of its obligations and responsibilities under this Agreement; (f) to the extent that funds of the Company are, in the Board's judgment, not immediately required for the conduct of the Company's business, temporarily to deposit the excess funds in such bank account or accounts, or invest such funds in such interest-bearing taxable or nontaxable investments, as the Board shall deem appropriate; (g) to acquire, prosecute, maintain, protect and defend or cause to be protected and defended all patents, patent rights, trade names, trademarks, copyrights and service marks, all applications with respect thereto and all proprietary information which may be held by the Company; (h) to enter into, execute, acknowledge and deliver any and all con-tracts, agreements or other instruments necessary or appropriate to carry on the business of the Company as set forth herein; (i) to acquire interests in such other entities as the Board may deem appropriate to conduct the planned business activities of the Company on such terms as the Board deems in the Company's interests; (j) to cause to be paid any and all taxes, charges and assessments that may be levied, assessed or imposed upon any of the assets of the Company, unless the same are contested by the Company; (k) to make all elections and decisions of a tax and accounting nature required or permitted on behalf of the Company, including without limitation the election provided for by Section 754 of the Code; and (l) to exercise all other powers conferred by the Act or other applicable law on, or not prohibited to, a "Manager" of the Company from time to time (as such term in defined in the Act). 11.3 Extent of Manager's Obligations3.4 Extent of Manager's ---------------------------------- --------------------- Obligations. Each Manager shall devote such time and attention to the ---- activities of the Company as are reasonably necessary and appropriate to carry -- out the Manager's duties hereunder. It is expressly acknowledged and understood that the Managers may also devote time to the affairs of other entities and to other business activities. 11.4 Standard of Care; Indemnification3.5 Standard of Care; ------------------------------------ ------------------- Indemnification. No Manager shall be liable, in damages or otherwise, to the ------ Company or to any of the Members for any act or omission performed or omitted by such Manager pursuant to the authority granted by this Agreement, except if such act or omission results from gross negligence, willful misconduct or bad faith. The Company shall save, indemnify, defend and hold harmless each Manager to the fullest extent permitted by the Act, including without limitation, from and against any and all claims or liabilities of any nature whatsoever, including, but not limited to, reasonable attorneys' fees, arising out of or in connection with any action taken or omitted by such Manager pursuant to the authority granted by this Agreement, except where attributable to the gross negligence, willful misconduct or bad faith of such Manager or such Manager's agents. Each Manager shall be entitled to rely on the advice of counsel, public accountants or other independent experts experienced in the matter at issue, and any act or omission of such Manager in reliance on such advice shall in no event subject such Manager to liability to the Company or any Member. Each Member expressly acknowledges and agrees that other Members and Managers may engage in activities competitive with those of the Company, and may pursue business opportunities that may also be available to the Company; and except as otherwise provided herein or any other written agreement among Members, and except for any liability relating to the misuse or improper disclosure of the Company confidential or proprietary information, no Member or Manager shall have any liability as a fiduciary or otherwise in connection with the pursuit of such activities. 11.5 Rights of MembersARTICLE IV - RIGHTS OF MEMBERS ------------------- 11.5.1 No Authority to Manage4.1 No Authority to Manage. It is ------------------------- ----------------------- expressly understood that no Member, in such Member's capacity as such, other than the Managers, shall take part in the management or control of the business, transact any business for the Company, have the right to vote on any Company matter, or have the power to sign for or bind the Company to any agreement or document. Notwithstanding the foregoing, Members may participate in the management of the Company if and to the extent so contemplated by the terms of any employment relationship with the Company. 11.5.2 Approval Rights of Members4.2 Approval Rights of Series A ----------------------------- --------------------------- Members. Notwithstanding any provision of this Agreement, or the Operating ----- Agreements of any Subsidiary, the Company or Board shall not make a Major -- Decision, nor shall it permit any Subsidiary to make a Major Decision, as -- defined herein without first obtaining the Approval (by vote or by written -- consent) of the holders of seventy percent (70%) of the then outstanding -- Percentage Interests. A major decision (a "Major DecisionMajor Decision") is -- one where the Company, or its Subsidiaries, will: (1) amend the Agreement, or permit the amendment of any Subsidiary operating agreement or its equivalent, (2) sell, offer to sell, convey or otherwise dispose of all or any significant portion of its property or business, except for sales, conveyance or other disposals in the ordinary course of business; or effect any merger, consolidation (in each case where it is not the surviving entity) reorganization, recapitalization or similar transaction; (3) register any of its securities under the Securities Act of 1933, as amended, in connection with the public offering of such securities; (4) admit new Members; (5) incur indebtedness in excess of two million Dollars ($2,000,000) on a consolidated basis at any one time or in the aggregate in a fiscal year period or alter any written commitment existing on the date hereof with respect thereto; (6) commit to any capital project requiring an aggregate expenditure for capital projects in excess of two million dollars ($2,000,000) on a consolidated basis (the "Capital Expenditure LimitCapital Expenditure Limit"); (7) enter into any joint venture or partnership agreement, or acquire the securities of any other company, (8) adopt any equity incentive plan for the benefit of directors, officers, managers, employees or consultants or grant any options to acquire equity securities of the Company to such directors, officers, managers, employees or consultants. (9) make any property investments that are not located within the confines of the resort and real estate owned by the Company or its Subsidiaries as of the date of the Agreement. (10) take any action that would change the Board members of any Subsidiary (11) pay compensation to any Member or its Affiliate. 11.5.3 Records of the Company4.4 Records of the Company. The Company ------------------------- ---------------------- shall make available for inspection at its principal place of business, upon reasonable request for purposes reasonably related to the interest of a person as a Member, any of the following records of the Company: (a) a current list of the full name, last known business or residence address, Capital Contribution and Percentage Interests owned by each Member; and (b) such other books and records as may be required to be provided to the Members pursuant to the Act or other applicable law. The Members acknowledge that the records of the Company constitute valuable trade secrets, and any information or records so obtained or copied shall be kept and maintained in strictest confidence and shall in no event be disclosed to any other parties without the written consent of the Company. 11.5.4 Transactions with Affiliates or Related Persons. All ---------------------------------------------------- transactions between the Company, or any of its Subsidiaries, and any Related Person or Affiliate shall be bona fide transactions entered into in good faith and on terms and conditions at least as favorable to the Company, or any of its Subsidiaries, as could be obtained from persons who are not Related Persons or Affiliates. Any Related Person shall mean any Member, Manager or an Affiliate (or any member of a Member's, Manager's or Affiliate's immediate family). 12. Compensation. The Members, Managers or Alternate Managers may ------------ receive compensation for services rendered to the Company as determined by the Board and approved by the Members in accordance with 11.5.2 (12). A Manager or Alternate Manager shall be entitled to reimbursement of reasonable, normal and customary business expenses incurred in attending meetings in the performance of the Manager's or Alternate Manager's duties. 13. Assignments. Any Member may assign all or any part of its ----------- Membership Interest only as set forth herein. 13.1 Limitations on Transfers of Membership Interests7.1 Limitations on ------------------------------------------------- -------------- Transfers of Series A Membership Interests. - ----------------------------------------------- (a) A Member may transfer its Membership Interest at any time to a "Permissible TransfereePermissible Transferees." As used in this Section 13.1, "Permissible Transferee" with respect to a transferor means an entity that succeeds to the Member with substantially similar beneficial owners (including a liquidating trust), spouse, parent, child, brother or sister of such Member, including a trust for the benefit of such persons and Affiliates of such persons. Any such Permissible Transferee shall execute a copy of and agree to be bound by this Agreement. (b) In order that the intention of the parties with respect to the transfer of Membership Interest shall not be frustrated, impaired or restricted by any proceeding resulting from or otherwise in respect of the encumbering of any Membership Interest, except with the prior written consent of holders of seventy percent (70%) of the outstanding Percentage Interests, no Member shall at any time encumber any Membership Interest unless in connection therewith the person to whom such Membership Interest is encumbered (the "Secured PartySecured Party") agrees that upon foreclosure upon such Membership Interest following any default with respect to the indebtedness or other obligation secured thereby, the Secured Party will promptly make or obtain from a third party a bona fide offer for such Membership Interest, and the other Members and the Company shall have the first right to purchase such Membership Interest at the price offered by such third party all of the encumbered Membership Interest upon such terms and conditions as if such third party had made an offer to purchase all of such Membership Interest at such price pursuant to the provisions of Section 13.2. The purchase price for such Membership Interest shall be paid thirty percent (30%) in cash at closing, with the balance being paid in five equal annual installments on the anniversary of the closing. Such outstanding balance shall be represented by a promissory note bearing interest at a variable rate of the 5-Year Treasury Bill rate (as set forth in the Wall Street Journal) plus three percent (3%) and shall be secured by the Membership Interest being acquired. 13.2 Rights of First Offer with Respect to Membership Interests7.2 --------------------------------------------------------------- Rights of First Refusal with Respect to Series A Membership Interests; Take - -------------------------------------------------------------------------------- Along/Bring Along. - ------------------ (a) If any Member (the "OfferorSeries A Offeree") decides to sell any portion of the Membership Interest, either directly or indirectly, the Member shall first offer to sell such Membership Interest to the Members who are not Offerors (the "Offeree Members") by sending a "Notice of Intent to Sell Membership Interests" to the Offeree Members. The Offeree Members shall then have ten (10) business days in which to make a bona fide written offer (the "OfferOffer") Offerorto purchase the Membership Interests owned by the Offeror and if the Offeror proposes to accept the Offer, the Offeror must comply with the provisions of this Section 13.2. Within ten (10) business days of the receipt of the Notice of Intent to Sell Membership Interests, the Offeree shall send to the Offeror a statement in writing addressed to the Offeror and signed by the Offeree in as many counterparts as may be necessary (the "StatementStatement") setting forth (i) the date of the Statement (the "Statement DateStatement Date"); (ii) the amount of Membership Interest covered by the Offer, the price to be paid by the Offeree (the " Offeree PriceThird Party Price") and the terms of payment of such Offeree Price; (iii) the Offeree's willingness to be bound by the terms of this Agreement; (iv) the Offeree's name, address and telephone number; and (v) the Offeree's willingness to supply any additional information about himself or itself as may be reasonably requested by any of the Offeror MembersOther Series A Members. (b) Within five (5) business days following the Statement Date, the Offeror shall give written notice (the "NoticeNotice") to the Company and the Offeree Members stating its intent either to accept the Offer or to decline the Offer. If the Offeror intends to accept the Offer, the Offeror shall deliver written notice thereof together with evidence reasonably satisfactory to the Company as to the Offeror's due authorization to consummate the proposed purchase (the "Acceptance Notice"). (c) If the Offeror intends to accept the Offer, each of the Offeree Members shall have an option ("OptionOption") to purchase its pro rata portion of the Membership Interest that the Offeror has proposed to sell to the Offeree (the "Subject InterestSubject Series A Interest") at the Closing referred to in Section 13.2 (d) below and for the purchase price and on the terms set forth in Section 13.2(e) below; provided that, if such Option is exercised, all but not less than all, of the subject Membership Interest must be purchased by the Offeree Members in the aggregate. To the extent that some, but not all, of the Offeree Members wish to exercise the Option, such Offeree Members wishing to exercise the Option (the "Exercising MembersExercising Series A Members") shall have the option to purchase the unpurchased subject Membership Interest pro rata according to the respective Percentage Interests of the Exercising Members. The Option shall be exercised by the Offeree Members or the Exercising Members, as the case may be, by giving written notice ("Option NoticeOption Notice") to the Offeror within fifteen (15) Business Days following the date of receipt of the Acceptance Notice. Upon giving the Option Notice, the Offeree Members or the Exercising Members, as the case may be, shall have the obligation to purchase the subject Membership Interest on and subject to the terms and conditions hereof. The failure of the Offeree Members or the Exercising Members, as the case may be, to provide an Option Notice pursuant to the foregoing terms shall be deemed an election not to exercise such option. (d) If all subject Membership Interests are purchased by the Offeree Members pursuant to Section 13.2 (c) above, then such purchases shall, unless the parties thereto otherwise agree, be completed at a closing (the "ClosingClosing") to be held at the principal office of the Company at 10:00 a.m. local time or at a mutually agreeable place and time not later than the thirtieth (30th) business day following the exercise of the Option. If the Option is not exercised pursuant to this Section 13.2, the Offeror may market the Membership Interest to others for a period of time not to exceed six months in order to sell the subject Membership Interest to a bona fide buyer (the "Third Party"). (e) The purchase price for any Membership Interest sold pursuant to the Option shall be an amount equal to the Offeree Price. The purchase and sale shall otherwise be on the applicable terms and conditions contained in the Statement. (f) In the event the Offeror does not accept the Offer, the Offeror may market the Membership Interest to others for a period of time not to exceed six months in order to sell the subject Membership Interest to the Third Party at the same price or greater and on the same terms as contained in the Statement. If such sale does not occur within six months after the expiration of the five (5) business day period specified above, or if the Offeror attempts to sell its Membership Interest to a Third Party at a price that is less or on other terms that are less favorable than the Offer, such Membership Interests shall be reoffered to the Offeree Members in accordance with the provisions of Section 13.2 (a). 13.3 Involuntary Transfers7.3 Involuntary Transfers ---------------------- ---------------------- (a) The provisions of this Section 13.3 shall apply to any Membership Interests that at any time become subject to an Involuntary Transfer (the "Transfer InterestTransfer Interest") and the Company, the Member owning the Transfer Interest (the "Affected MemberAffected Member") and any person to whom the Transfer Interest is proposed to be transferred (a "Proposed TransfereeProposed Transferee") shall be bound by the provisions of this Agreement. (b) Promptly upon obtaining knowledge of the occurrence of any Involuntary Transfer or the occurrence of any event that will result in an Involuntary Transfer, the Company, the Affected Member and any Proposed Transferee shall give written notice (the "Involuntary Transfer NoticeInvoluntary Transfer Notice") to the other Members (the "Unaffected MembersUnaffected Members") stating the circumstances allegedly requiring the Involuntary Transfer, when the Involuntary Transfer occurred or is to occur, the number of the Transfer Interest and the name, address and capacity of the Proposed Transferee. (c) Each of the Unaffected Members shall have an option, but not the obligation (the "Second OptionSecond Option"), to purchase any or all of the Transfer Interest at the Closing referred to in Section 13.3 (d) and for the purchase price and on the terms set forth in Section 13.3(e). To the extent that some, but not all, of the Unaffected Members wish to exercise the Second Option, such Unaffected Members wishing to exercise the Second Option (the "Second Exercising MembersSecond Exercising members") shall have the option to purchase the Transfer Interest pro rata according to the Percentage Interests of the Second Exercising Members. The Second Option shall be exercised by an Unaffected Member by the giving of written notice of interest to exercise such Second Option (the "Second Member Option NoticeSecond Member Option Notice") to the Affected Member and any Proposed Transferee with fifteen (15) business days following the date of receipt of the Involuntary Transfer Notice. Upon exercise of the Second Option, each Second Exercising Member shall have the obligation to purchase such Transfer Interest on and subject to the terms and conditions hereof. Failure by any Unaffected Member to give a Second Member Option Notice shall be deemed an election by the Member not to exercise the Second Option. (d) If any Transfer Interest is purchased pursuant to this Section 13.3, then such purchases shall, unless the parties thereto otherwise agree, be completed at a closing (the "Involuntary Transfer ClosingClosing") to be held at the principal office of the Company at 10:00 local time or at a mutually agreeable place and time on the tenth (10th) business day following the earlier to occur of (i) the exercise of the Second Option with respect to the Transfer Interest or (ii) the expiration of the fifteen (15) business day period referred to in Section 13.3 (c). (e) The purchase price to be paid for each Transfer Interest sold pursuant to this Section 13.3 shall be an amount equal to the Fair Market Value of such Transfer Interest as of the end of the most recent fiscal year prior to the Involuntary Transfer, as determined by the Board in its sole and absolute discretion. The purchase price shall be paid thirty percent (30%) in cash at the Involuntary Transfer Closing, with the balance being paid in five equal annual installments on the anniversary of the closing. Such outstanding balance shall be represented by a promissory note bearing interest at a variable rate of the 5-year Treasury Bill rate (as set forth in the Wall Street Journal) plus three percent (3%) and shall be secured by the Transfer Interest being acquired. (f) If on any date specified for an Involuntary Transfer Closing under Section 13.3 (d) the Fair Market Value of the Transfer Interest required to determine the applicable purchase price has not been ascertained, then the Involuntary Transfer Closing to be held pursuant to Section 13.3(d) shall be held on the tenth (10th) business day following the delivery to the parties to the proposed sale of copies of such Fair Market Value. 14. Additional Members. Additional Persons (as defined in the Act) may ------------------ be admitted as members in the Company, without the sale, assignment, transfer or exchange by the Members of all or any part of their Membership Interests, upon the terms and conditions as members holding 70% of the Percentage Interests may provide, from time to time, as this Operating Agreement may be amended by the Members, from time to time. In such event, the Percentage Interests of the Members and such additional members shall be adjusted pro rata, as the case may be, to reflect the capital contribution, if any, of such additional members. If an additional member makes no capital contribution, the existing Members shall assign a Percentage Interest to the additional member and the Percentage Interests of the existing Members shall be adjusted accordingly. 15. Dissolution. Unless otherwise provided herein, upon the determination ----------- of the Board and Approval of the holders of seventy percent (70%) of the outstanding Percentage Interests, the Company will be dissolved and the assets shall either be liquidated forthwith or the property shall be distributed in kind to the Members after payment of the debts of the Company as determined by the Board. The Company shall not dissolve upon the death, incompetence, Bankruptcy, retirement, resignation or expulsion of any Member except as set forth herein. 15.1 Triggering Event. Upon the death of Charles E. Cobb, Jr. so long as (i) ----------------- Cobb Nevada Partners or its Affiliates owns forty percent (40%) or more of the Percentage Interests of the Company and (ii) EFG owns twenty-five percent (25%) or more of the Percentage Interests of the Company (the "Triggering Event"), the Company shall be offered for sale for a period of one year after the occurrence of the Triggering Event (the "Sale Period"). The price for the Company shall be determined in good faith by the Board and the Company shall be marketed aggressively during the Sale Period. In the event an offer (the "Sale Offer") is received for the sale of the Company during the Sale Period that is acceptable to the Board in its good faith discretion, the Company shall be sold at such price and on such terms as are contained in the Sale Offer. In the event a Sale Offer is not received during the Sale Period or a Sale Offer is received during the Sale Period that is not acceptable to the Board in its good faith discretion, the Company shall not be sold. In such an event, CNP shall have thirty (30) days after the expiration of the Sale Period in which to state a price per Percentage Interest at which CNP would be willing to either buy all of the outstanding Percentage Interests of the Company which EFG owns or to sell its Percentage Interests of the Company (the "Cobb Price"). EFG shall then have thirty (30) days in which to elect in writing whether to buy all of the Percentage Interests of the Company held by CNP at the Cobb Price or to sell all of the Percentage Interests owned by EFG to CNP at the Cobb Price. If EFG fails to make an election during such thirty (30) day period as provided above, it shall be conclusively deemed that EFG has elected to sell its Percentage Interests in the Company at the Cobb Price. If CNP fails to state a price during the thirty (30) day period stated above, EFG shall state a price at which EFG would be willing to either buy all of the outstanding Percentage Interests of the Company owned by CNP or to sell its Percentage Interests of the Company (the "EFG Price"). CNP shall then have thirty (30) days in which to elect in writing whether to buy the Percentage Interests of the Company held by EFG at the EFG Price or to sell the Percentage Interests owned by CNP to EFG at the EFG Price. If CNP fails to make an election during such thirty (30) day period as provided above, it shall be conclusively deemed that CNP has elected to sell its Percentage Interests in the Company to EFG at the EFG Price. If EFG fails to state a price during the thirty (30) day period stated above, there shall be no purchase or sale of Percentage Interests and CNP may retain its Percentage Interests in the Company and may transfer them in accordance with the terms of the estate documents. Any party establishing a price pursuant to this Section 15.1 must deposit in escrow thirty percent (30%) of such price at the time of establishing the price which is non-refundable and will be credited to the purchaser toward the Cobb Price or EFG Price, as the case may be. 15.2 Closing13.2 Closing. The closing of the sale of Percentage ------- Interests of the Company described above shall occur as expeditiously as possible but in no event later than twenty (20) Business Days after the expiration of the last thirty (30) day period described above. The purchase price shall be paid thirty percent (30%) in cash at closing, with the balance being paid in five equal annual installments on the anniversary of the closing. Such outstanding balance shall be represented by a promissory note in substantially the form attached hereto as Exhibit 15.2 and shall be secured by all of the purchasers Member Interest pursuant to a pledge agreement in substantially the form attached hereto as Exhibit 15.2. The promissory note shall bear interest at a variable rate of the 5-Year Treasury Bill rate (as set forth in the Wall Street Journal) plus three percent (3%). 15.3 Financial Liquidity. The Company shall exert all reasonable and -------------------- prudent business practices, wherever possible, to improve its operations and develop its assets such that by December 31, 2006, the Company shall either: (i) sell of all its assets or its ownership interests, or (ii) merge with another entity which results in the Members owning shares in a publicly traded company, or (iii) complete a public offering of its ownership interests, or (iv) do such other actions as are necessary, such that, the Members shall receive financial liquidity for the Member's investment in the Company. In furtherance of this obligation, upon receipt of the financial results for the year ended April 30, 2006, the Company shall immediately began marketing the Company with the objective to have received an bona fide written offer from a Third Party (the "Liquidity Offer") to close on or about December 31, 2006. If the Liquidity Offer is for an amount that meets or exceeds a return of the dollar investment by each Member plus a 12% annual return (the "Hurdle Value"), then the Company or all of its assets shall be sold and each Member agrees that they shall take all actions necessary to accomplish such sale, unless by vote of 70% of the outstanding Percentage Interests, the Members decide to not sell the Company. (a) The Liquidity Offer should be in writing containing a statementStatementStatement Date setting forth the amount of assets or Membership Interest covered by the Offer, the price to be paid,Third Party Price and the terms of payment (the "Liquidity Statement")Other Series A Members. If the Liquidity Offer meets the Hurdle Value, but is for less than 100% of all the Members Interest or it is to be paid for with other than cash, then acceptance of the Liquidity Offer shall require approval 70% of the Percentage Interests. (b) If the Company shall be sold pursuant to Section 15.3 (a) above, then such sale shall, unless the parties thereto otherwise agree, be completed at a closing (the "Liquidity ClosingClosing") to be held at the principal office of the Company at 10:00 a.m. local time or at a mutually agreeable place and time not later than the thirtieth (30th) business day following the acceptance of the Liquidity Offer (c) If the Liquidity Offer meets or exceeds the Hurdle Value or if the holders of seventy percent (70%) of the outstanding Percentage Interests determine that it is in the best interest of all the Members to sell the outstanding Membership Interest at the same price and on the same terms as contained in the Liquidity Statement, all of the Members shall sell their Membership Interests at such price and on such terms. 16. Distributions Upon Dissolution. Upon the occurrence of an event -------------------------------- set forth in Section 15 (Dissolution) hereof, the Members shall be entitled to receive, after paying or making reasonable provision for all of the Company's creditors to the extent required by Section 18-804(a)(1) of the Act, the Members' respective positive Capital Account balances until such balances, if any, are reduced to zero and then the balance shall be distributed to each such Member in accordance with their respective Percentage Interests. 17. Withdrawal of Members. ----------------------- (a) No Member may withdraw from the Company and receive a distribution with respect to such Member's Capital Account unless such withdrawal has received the Approval of Members holding seventy percent (70%) of the outstanding Percentage Interests (disregarding for such purpose the Percentage Interest of the withdrawing Member, if applicable) and the approval of the Board. (b) In the event of a withdrawal permitted hereunder, the Membership Interest in the Company of such Member shall terminate as of such date and, subject to the provisions hereof, the former Member's Capital Account (together with such Member's allocable share of Company Profits or less such Member's allocable share of Company Losses through the date of effectiveness of such withdrawal) shall be paid, subject to the provisions of this Agreement, in cash or in kind, to such former Member within thirty (30) days after the effective date of withdrawal. 18. Indemnification. The Company may, and shall have the power to, --------------- indemnify and hold harmless any Member or Manager or other Person from and against any and all claims and demands whatsoever, to the fullest extent permitted by law. 19. Amendment. This Agreement may be amended only in a writing signed by --------- all of the Members in accordance with the terms of this Agreement. 20. Governing Law. This Agreement shall be governed by and construed under -------------- the laws of the state of Delaware, excluding any conflicts of laws rule or principle that might refer the governance or construction of this Agreement to the law of another jurisdiction. 21. Severability. Except as otherwise provided in the succeeding sentence, ------------ every term and provision of this Agreement is intended to be severable, and if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the legality or validity of the remainder of this Agreement. The preceding sentence shall be of no force or effect if the consequence of enforcing the remainder of this Agreement without such illegal or invalid term or provision would be to cause any party to lose the benefit of its economic bargain. 22. Notices. Any notice, payment, demand or communication required or ------- permitted to be given by any provision of this Agreement shall be in writing or by facsimile and shall be deemed to have been delivered, given and received for all purposes (a) if delivered personally to the person or to an officer of the person to whom the same is directed, or (b) when the same is actually received, if sent either by a nationally recognized courier or delivery service or registered or certified mail, postage and charges prepaid, or by facsimile, if such facsimile is followed by a hard copy of the facsimiled communication sent by a nationally recognized courier or delivery service, registered or certified mail, postage and charges prepaid, addressed to the recipient party at the address set forth for such party above. (Signature Page Follows) IN WITNESS WHEREOF, the undersigned the Members have duly executed this Agreement as of October 24, 2002. COBB NEVADA PARTNERS LIMITED PARTNERSHIP, a Nevada limited partnership By: COBB NEVADA PARTNERS, INC., a Nevada corporation Its General Partner /s/ By: Charles E. Cobb, Jr. Title: Chief Executive Officer EFG/KIRKWOOD, LLC, a Delaware limited liability company Its Member By: AFG ASIT Corporation, a Massachusetts corporation, Its Manager /s/ By: Gary D. Engle Title: President /s/ By: John W. Temple Title: Member Exhibit 6.1 Capital Contribution. The Members Capital Contributions to the Company in the -------------------- amounts and on the dates are as follows:
Date CNP EFG Temple Total ----------- ----------- --------- ------------ 1. Upon the signing of the Purchase Agreement between Durango Resort LLC and DSC/Purgatory LLC dated November 24, 1999 (the "Purchase Agreement") $ 300,000 $ 300,000 - $ 600,000 2. Upon the Quasi-closing, December 22, 1999 as defined in the Purchase Agreement 400,000 400,000 - 800,000 3. On or about March 31, 2000 150,000 150,000 - 300,000 4. Upon the Closing, May 1, 2000, as defined in the Purchase Agreement 900,000 900,000 - 1,800,000 5. On August 1, 2000 500,000 500,000 - 1,000,000 6. On or about November 1, 2000 1,150,000 1,150,000 - 2,300,000 7. On April 30, 2002, for Option extension fee 62,500 62,500 - 125,000 ----------- ----------- ------------ Sub-total $3,462,500 $3,462,500 - $ 6,925,000 Percentage Interest prior to 10/7/2002 50% 50% 0% 100% - ------------------------------------------------- ----------- ----------- --------- ------------ 8. On October 15, 2002 2,000,000 - 500,000 2,500,000 - ------------------------------------------------- ----------- ----------- --------- ------------ Total after 10/15/2002 $5,462,500 $3,462,500 $500,000 $ 9,425,000 ----------- ----------- --------- ------------ Adjusted Cost and - ------------------------------------------------- Equivalent Units of Ownership Interests 6,400,379 3,462,500 629,545 10,492,424 Percentage Interest after 10/15/2002 61% 33% 6% 100%
MOUNTAINSPRINGS RESORTS LLC EXHIBIT 6.5 (f)
Dilution formula computations Example 1: ---------- NO INCREASE IN FMV ------------------ A/B=C A B $ 0.89827 Dollars Units Capital Call % ------- ----------- Outstanding $9,425,000 10,492,424 % of total $ Capital Call 17.5055% 2,000,000 4,453,018 29.7952% -------------- ---------- --------- -------- Total after capital call $11,425,000 14,945,442 ----------- ---------- C per unit Capital call divided by $ 0.89827 2,226,509 2x units 4,453,018 29.7952% ----------- Total units after capital call 14,945,442
CNP EFG Temple PROOF (EACH PARTICIPATES IN CAPITAL CALL)
61.000% 33.000% 6.000% ------- ----------- ----------- Before capital call 6,400,379 3,462,500 629,545 Capital call $1,220,000 $ 660,000 $120,000 Units 2,716,341 1,469,496 267,181 After capital call 9,116,720 4,931,996 896,726 ----------- ----------- --------- 61.000% 33.000% 6.000%
EXAMPLE 1: NO INCREASE IN FMV ------------------ CNP EFG Temple ------------ ---------- ----------- 61.000% 33.000% 6.000% ------- ------------ ---------- Before capital call 6,400,379 3,462,500 629,545 Capital call $ 1,820,896 $ 179,104 CNP and Temple Only (prorata) 4,054,241 - 398,777 After capital call 10,454,620 3,462,500 1,028,322 ------------ ---------- ----------- 69.9519% 23.1676% 6.8805%
EXAMPLE 2: $4 MILLION INCREASE IN FMV -------------------------- CNP EFG Temple ----------- ---------- --------- 61.000% 33.000% 6.000% ----------- ---------- --------- Before capital call 6,400,379 3,462,500 629,545 Capital call $1,820,896 $179,104 CNP and Temple Only (prorata) 2,846,273 - 279,961 ----------- ---------- --------- After capital call 9,246,652 3,462,500 909,506 ----------- ---------- --------- 67.8969% 25.4247% 6.6784%
Example 2: ----------- $4 MILLION INCREASE IN FMV -------------------------- D/E=F E $1.27949 Dollars Units Capital Call % ------- ----------- Outstanding $ 9,425,000 10,492,424 Increase in FMV 4,000,000 ----------- D Total FMV 13,425,000 % of total $ Capital Call 12.966% $2,000,000 3,126,234 22.9555% ----------------- ---------- --------- -------- Total after capital call $15,425,000 13,618,658 ----------- ---------- F per unit Capital call divided by $ 1.27949 1,563,117 --------- 2x units 3,126,234 22.9555% ----------- -------- Total units after capital call 13,618,658
Total
PROOF (EACH PARTICIPATES IN CAPITAL CALL) 100.000% -------- Before capital call 10,492,424 Capital call $ 2,000,000 Units 4,453,018 After capital call 14,945,442 ------------ 100.000%
EXAMPLE 1: Total ------------ 100.000% -------- Before capital call 10,492,424 Capital call $ 2,000,000 $ CNP and Temple Only (prorata) 4,453,018 Units After capital call 14,945,442 ------------ 100%
EXAMPLE 2: Total ------------ 100.000% ------------ Before capital call 10,492,424 Capital call $ 2,000,000 $ CNP and Temple Only (prorata) 3,126,234 Units ------------ ------ After capital call 13,618,658 ------------ 100%
EXHIBIT 15.2 FORM OF NOTE BALANCE OF PURCHASE PRICE FOR SALE OF MEMBER INTEREST Mountain Springs Resorts, LLC Note and Pledge Agreement PROMISSORY NOTE ______________, ____ $____________ Durango, Colorado FOR VALUE RECEIVED, the undersigned Borrower promises to pay to _______________, ("Creditor") the principal sum of _____________________________ and __/100 dollars ($_________), together with interest from the date of this Note on the unpaid principal balance, upon the terms and conditions specified below. 1. TERM. The outstanding principal balance of this Note, together with all interest accrued and unpaid to date, shall be due and payable on the date that is five calendar years from the date hereof ("Termination Date"). 2. RATE OF INTEREST. Interest shall accrue under this Note on any unpaid principal balance at a variable rate of 3% plus the 5-Year Treasury Bill rate (as set forth in the Wall Street Journal), compounded annually. 3. PAYMENT. This Note shall be paid in annual installments, amortized on a five-year basis. Payment shall commence on the date which is one calendar year from the date hereof and continue thereafter on the anniversary of such date through and including the Termination Date, at which time the remaining principal balance and all accrued and unpaid interest due hereunder shall be due and payable in full. 4. PREPAYMENT. Prepayment of principal and interest may be made in whole or in part, at any time, without penalty or premium. 5. EVENTS OF ACCELERATION. The entire unpaid principal sum and unpaid interest under this Note shall become immediately due and payable upon: (a) The failure of the Borrower to pay when due the principal balance and accrued interest on this Note and the continuation of such default for more than 30 days; (b) The insolvency of the Borrower, the commission of an act of bankruptcy by the Borrower, the execution by the Borrower of a general assignment for the benefit of creditors, or the filing by or against the Borrower of a petition in bankruptcy or a petition for relief under the provisions of the federal bankruptcy act or another state or federal law for the relief of debtors and the continuation of such petition without dismissal for a period of 90 days or more; or (c) The occurrence of a material event of default under the Pledge Agreement securing this Note. 6. SECURITY. Payment of this Note shall be secured by a Pledge Agreement in the form attached hereto as Exhibit A ("Pledge Agreement"). The Pledge Agreement shall be executed and delivered by Borrower to Creditor on the date hereof and shall cover the Member Interest in Mountain Springs Resorts, LLC a Delaware limited liability company. 7. CONFLICTING AGREEMENTS. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the loan evidenced by the Note, the terms of this Note shall prevail. 8. AMENDMENT. This Note may be modified or amended only by a written agreement executed by and between Creditor and Borrower. 9. ASSIGNMENT. The terms of this Note shall inure to the benefit of and bind Borrower and Creditor to their respective heirs, legal representatives, successors and assigns. 10. TIME OF THE ESSENCE. Time is of the essence with respect to all matters set forth in this Note. 11. GOVERNING LAW. This Note shall be construed in accordance with the laws of the State of Colorado without reference to conflicts of law principles. BORROWER: By: __________________________ Its: __________________________ Mountain Springs Resorts, LLC Note and Pledge Agreement EXHIBIT A --------- PLEDGE AGREEMENT This PLEDGE AGREEMENT ("Agreement") is entered into as of ____________, ____ by and between ______________("Creditor") and ______________ ("Borrower"). BACKGROUND WHEREAS, pursuant to that certain Amended and Restated Operating Agreement dated as of October __, 2002 by and among Mountain Springs Resorts, LLC, a Delaware limited liability company (the "Company"), Cobb Nevada Partners Limited Partnership, a Nevada limited partnership, EFG/Kirkwood, LLC a Delaware limited liability company and John W. Temple, an individual, Borrower has executed and delivered to Creditor a promissory note ("Note") of even date herewith in the original principal amount of _______________ dollars ($__________), which Note Borrower delivered to Creditor in connection with the sale of a Member Interest of the Company to Borrower by Creditor. NOW, THEREFORE, in consideration of the foregoing and the further promises contained herein, Borrower and Creditor agree as follows: 1. GRANT OF SECURITY INTEREST; COLLATERAL. In order to secure payment of the Note, Borrower hereby grants to Creditor a security interest in, and assigns, transfers and pledges to the Creditor, the following securities and other property: (a) _______ Percentage Interest of the Company's Member Interest (the "Member Interest") delivered to and deposited with Creditor as collateral for the Note; and (b) Any and all new, additional or different securities or other property subsequently distributed with respect to the Member Interest identified in Subsection (a) above that are to be delivered to and deposited with the Creditor pursuant to the requirements of Section 3 of this Agreement; and (c) Any and all other property and money that is delivered to or comes into the possession of Creditor pursuant to the terms and provisions of this Agreement; and (d) The proceeds of any sale, exchange or disposition of the property and securities described in Subsections (a), (b) or (c) above. All securities, property and money to be assigned to, transferred to and pledged with the Creditor shall be herein referred to as the "Collateral" and shall be accompanied by one or more Member Interest power assignments properly endorsed by the Borrower. Creditor shall hold the Collateral in accordance with the following terms and provisions: 2. WARRANTIES. Borrower hereby warrants that: (a) Borrower is the owner of the Collateral; (b) Borrower has the right to pledge the Collateral; (c) the Collateral is free from all liens, advance claims and other security interests (other than those created hereby); and (d) the execution, delivery and performance of this Agreement does not conflict with any law or any agreement or undertaking of which Borrower is a party or by which Borrower is bound. 3. RIGHTS AND POWERS. Creditor may, without obligation to do so, exercise one or more of the following rights and powers with respect to the Collateral: (a) Accept in its discretion, but subject to the applicable limitations of Section 8, other property of the Borrower in exchange for all or part of the Collateral and release Collateral to the Borrower to the extent necessary to effect such exchange, and in such event the money, property or securities received in the exchange shall be held by the Creditor as substitute security for the Note and all other indebtedness secured hereunder; (b) Perform such acts as are necessary to preserve and protect the Collateral and the rights, powers and remedies granted with respect to such Collateral by this Agreement; and (c) Transfer record ownership of the Collateral to Creditor or its nominee and receive, endorse and give receipt for, or collect by legal proceedings or otherwise, dividends or other distributions made or paid with respect to the Collateral, but only if there exists at the time an outstanding event of default under Section 9 of this Agreement. Any action by Creditor pursuant to the provisions of this Section 3 may be taken without notice to Borrower. Expenses reasonably incurred in connection with such action shall be payable by the Borrower and form part of the indebtedness secured hereunder, as provided in Section 11. So long as there exists no event of default under Section 9 of this Agreement, Borrower may exercise all Member voting rights and be entitled to receive any and all regular cash distributions paid on the Collateral. Accordingly, until such time as an event of default occurs under this Agreement, all proxy statements and other Member materials pertaining to the Collateral shall be delivered to the Borrower at the address indicated below. Any cash sums that Creditor may receive in the exercise of its rights and powers under this Section 3 shall be applied to the payment of the Note and any other indebtedness secured hereunder, in such order of application, as Creditor deems appropriate. Any remaining cash shall be paid over to the Borrower. 4. DELIVERY OF COLLATERAL. Any new, additional or different securities that may now or hereafter, become distributable with respect to the Collateral by reason of (i) any dividend or distribution, Member split or reclassification of the Member Interests of the Company or (ii) any merger, consolidation or other reorganization affecting the capital structure of the Company shall, upon receipt by the Borrower, be promptly delivered to and deposited with Creditor as part of the Collateral hereunder. Such securities shall be accompanied by one or more properly endorsed Member power assignments. 5. CARE OF COLLATERAL. Creditor shall exercise reasonable care in the custody and preservation of the Collateral but shall have no obligation to initiate any action with respect to, or otherwise inform Borrower of, any conversion, call, exchange right, preemptive right, subscription right, purchase offer or other right or privilege relating to or affecting the Collateral; provided, however, that Creditor will notify Borrower of any such rights of Borrower to protect against adverse claims or to protect the Collateral against the possibility of a decline in market value. Creditor shall not be obligated to take any action with respect to the Collateral requested by the Borrower unless the request is made in writing and Creditor determines that the requested action will not unreasonably jeopardize the value of the Collateral as security for the note and other indebtedness secured hereunder. Creditor may at any time release and deliver all or part of the Collateral to the Borrower, and the receipt thereof by the Borrower shall constitute a complete and full acquittance for the Collateral so released and delivered. Creditor shall accordingly be discharged from any further liability or responsibility for the Collateral, and the released Collateral shall no longer be subject to the provisions of this Agreement. However, any and all releases of the Collateral shall be effected in compliance with the applicable limitations of Section 8(a) and (c). 6. PAYMENT OF TAXES AND OTHER CHARGES. Borrower shall pay, prior to the delinquency date, all taxes, liens, assessments and other charges against the Collateral, and in the event of Borrower's failure to do so, Creditor may at its election pay any or all of such taxes and charges without contesting the validity or legality thereof. The payments so made shall become part of the indebtedness secured hereunder and, until paid, shall bear interest at the minimum per annum rate, compounded annually, required to avoid the imputation of interest income to Creditor and compensation income to Borrower under the federal tax laws. 7. TRANSFER OF COLLATERAL. In connection with the transfer or assignment of the Note (whether by negotiation, discount or otherwise, Creditor may transfer all or any part of the Collateral, and the transferee shall thereupon succeed to all the rights, powers and remedies granted Creditor hereunder with respect to the Collateral so transferred. Upon such transfer, Creditor shall be fully discharged from all liability and responsibility for the transferred Collateral. 8. RELEASE OF COLLATERAL. Provided (i) all indebtedness secured hereunder (other than payments not yet due and payable under the Note) shall at the time have been paid in full or canceled and (ii) there does not otherwise exist any event of default under Section 9, the pledged Member Interest, together with any additional Collateral that may hereafter be pledged and deposited hereunder, shall be released from pledge and returned to the Borrower in accordance with the following provisions: (a) Upon payment or prepayment of principal under the Note, together with payment of all accrued interest to date, one or more Member Interest held as Collateral hereunder shall (subject to the applicable limitations of Subsections (c) and (d) below) be released to the Borrower within three business days after such payment or prepayment. The amount of Member Interest to be so released shall be equal to the whole number obtained by multiplying (i) the total number of Member Interests held under this Agreement at the time of the payment or prepayment by (ii) a fraction, the numerator of which shall be the amount of the principal paid or prepaid and the denominator of which shall be the unpaid principal balance of the Note immediately prior to such payment or prepayment. In no event, however, shall anything less than a whole number Member Interest be released. (b) Any additional Collateral that may hereafter be pledged and deposited with Creditor (pursuant to the requirements of Section 4) with respect to the Member Interests pledged hereunder shall be released at the same time the particular Member Interest to which the additional Collateral relates are to be released in accordance with the applicable provisions of Subsection (a) above. Under no circumstances, however, shall any Member Interest or any other Collateral be released if previously applied to the payment of any indebtedness secured hereunder. (c) In no event shall any member Interest be released pursuant to the provisions of Subsections (a) and (b) above if, and to the extent, the fair market value of the Member Interest and all other Collateral that would otherwise remain in pledge hereunder after such release were affected would be less than the unpaid balance of the Note (principal and accrued interest). 9. EVENTS OF DEFAULT. The occurrence of one or more of the following events shall constitute an event of default under this agreement: (a) The failure of the Borrower to pay the principal and accrued interest when due under the Note; (b) The failure of the Borrower to perform a material obligation imposed upon the Borrower by reason of this Agreement within three days after receipt of notice of such failure to perform; or (c) The breach of any material warranty of the Borrower contained in this Agreement. Upon the occurrence of any such event of default, Creditor may, at its election, declare the Note and all other indebtedness secured hereunder to become immediately due and payable and may exercise any or all of the rights and remedies granted to a secured party under the provisions of the California Uniform Commercial Code (as now or hereafter in effect), including (without limitation) the power to dispose of the Collateral by public or private sale or to accept the Collateral in full payment of the Note and all other indebtedness secured hereunder. Any proceeds realized from the disposition of the Collateral pursuant to the foregoing power of sale shall be applied first to the payment of reasonable expenses incurred by Creditor in connection with the disposition, then to the payment of the Note and finally to any other indebtedness secured hereunder. Any surplus proceeds shall be paid over to Borrower. However, in the event such proceeds prove insufficient to satisfy all obligations of the Borrower under the Note, then Borrower shall remain personally liable for the resulting deficiency. 10. OTHER REMEDIES. The rights, powers and remedies granted to Creditor and Borrower pursuant to the provisions of this Agreement shall be in addition to all rights, powers and remedies granted to Creditor and Borrower under any statute or rule of law. Any forbearance, failure or delay by Creditor or Borrower in exercising any right, power or remedy under this Agreement shall not be deemed to be a waiver of such right, power or remedy. Any single or partial exercise of any right power or remedy under this Agreement shall not preclude the further exercise thereof, and every right, power and remedy of Creditor and Borrower under this Agreement shall continue in full force and effect, unless such right, power or remedy is specifically waived by an instrument executed by Creditor or Borrower, as the case may be. Nothing herein shall be construed to limit Creditor's right to seek a deficiency judgment against Debtor. 11. COSTS AND EXPENSES. All reasonable costs and expenses (including reasonable attorneys fees) incurred by Creditor in the exercise or enforcement of any right, power or remedy granted it under this Agreement shall become part of the indebtedness secured hereunder and shall constitute a personal liability of the Borrower payable immediately upon demand and bearing interest until paid at the rate of interest accruing on unpaid principal under the Note. 12. SUCCESSORS. The terms of this Agreement will inure to the benefit of and bind the parties hereto and their respective successors, assigns, executors, heirs and legal representatives. 13. SEVERABILITY. If any provision of this Agreement is held to be invalid under applicable law, then such provision shall be ineffective only to the extent of such invalidity, and neither the remainder of such provision nor any other provisions of this Agreement shall be affected thereby. 14. AMENDMENT. This Agreement may be modified only by a writing signed by Creditor and Borrower. 15. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado and shall be binding upon the executors, administrators, heirs and assigns of Borrower. 16. ATTORNEYS FEES. In any action brought to enforce the terms of this Agreement, the prevailing party will be reimbursed by the losing party for its reasonable costs and expenses (including reasonable attorneys' fees) incurred in such action, whether or not litigated to final judgment. 17. TIME OF ESSENCE. Time is of the essence of this Agreement. 18. COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, and when so executed shall have the same force and effect as though all signatures appeared on one document. IN WITNESS WHEREOF, this Agreement has been executed as of the date first written above. CREDITOR: BORROWER: By: _________________________________ By: _________________________________ Its: _________________________________ Its: _________________________________ By: _________________________________ By: _________________________________ Its: _________________________________ Its: _________________________________ Address: Address: EX-99 7 doc4.txt EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 In connection with the Annual Report of AFG Investment Trust C (the "Trust"), on Form 10-K for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Principal Executive Officer of the Trust's Managing Trustee, hereby certifies pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report of the Trust filed today fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. /s/ Gary D. Engle ---------------------- Gary D. Engle President of AFG ASIT Corporation, the Managing Trustee of the Trust (Principal Executive Officer) March 31, 2002 EX-99 8 doc5.txt EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 In connection with the Annual Report of AFG Investment Trust D (the "Trust"), on Form 10-K for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Principal Financial and Accounting Officer of the Trust's Managing Trustee, hereby certifies pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (2) the Report of the Trust filed today fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. /s/ Richard K Brock ------------------------ Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corp., the Managing Trustee of the Trust (Principal Financial and Accounting Officer) March 31, 2002 -----END PRIVACY-ENHANCED MESSAGE-----