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, 2001
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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
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AFG INVESTMENT TRUST C
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(Exact name of registrant as specified in its charter)
Delaware 04-3157232
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
2,011,014 Class A Trust Beneficiary Interests
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 2001 (Part I and II)
64
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 7
PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Trust 43
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
Annual Report to Participants 22
PART I
Item 1. Business.
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(a) General Development of Business
AFG Investment Trust C (the "Trust") was organized as a Delaware business trust
in August 1992. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special
Beneficiary, Equis Financial Group Limited Partnership (formerly known as
American Finance Group), a Massachusetts limited partnership ("EFG" or the
"Advisor"), and $100 from the Initial Beneficiary, AFG Assignor Corporation, a
wholly-owned affiliate of EFG. The Trust issued an aggregate of 2,011,014
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($50,275,350 in total) through 9 serial
closings commencing December 1992 and ending September 1993. In July 1997, the
Trust issued 3,024,740 Class B Interests at $5.00 each ($15,123,700 in total),
of which (i) 3,019,220 interests are held by Equis II Corporation, an affiliate
of EFG, and a wholly owned subsidiary of Semele Group Inc. ("Semele"), and (ii)
5,520 interests are held by 10 other Class A investors. The Trust repurchased
218,661 Class A Interests in October 1997 at a cost of $2,291,567. In April
1998, the Trust repurchased 5,200 additional Class A Interests at a cost of
$46,800. Accordingly, there are 1,787,153 Class A Interests currently
outstanding. The Class A and Class B Interest holders are collectively referred
to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, Semele. Semele purchased the Special
Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues
to act as Advisor to the Trust and provides services in connection with the
acquisition and remarketing of the Trust's equipment assets. The Managing
Trustee is responsible for the general management and business affairs of the
Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation
and an affiliate of EFG. Except with respect to "interested transactions", Class
A Interests and Class B Interests have identical voting rights and, therefore,
Equis II Corporation generally has control over the Trust on all matters on
which the Beneficiaries may vote. With respect to interested transactions,
holders of those Class B Interests that are the Managing Trustee or any of its
affiliates must vote their interests as a majority of the Class A Interests have
been voted. The Managing Trustee and the Special Beneficiary are not required to
make any additional capital contributions except as may be required under the
Second Amended and Restated Declaration of Trust, as amended (the "Trust
Agreement").
EFG is a Massachusetts limited partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Trust and several other
direct-participation equipment leasing programs sponsored or co-sponsored by AFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily to
the business of originating new leases, and the name "American Finance Group,"
and its acronym, to a third party. AFG changed its name to Equis Financial Group
Limited Partnership after the sale was concluded. Pursuant to terms of the sale
agreements, EFG specifically reserved the rights to continue using the name
American Finance Group and its acronym in connection with the Trust and the
Other Investment Programs and to continue managing all assets owned by the Trust
and the Other Investment Programs.
(b) Financial Information About Industry Segments
The Trust is engaged in two industry segments: equipment leasing and real estate
ownership, development and management. Historically, the Trust has acquired
capital equipment and leased the equipment to creditworthy lessees on a
full-payout or operating lease basis. Full-payout leases are those in which
aggregate undiscounted, noncancellable rents equal or exceed the purchase price
of the leased equipment. Operating leases are those in which the aggregate
undiscounted, noncancellable rental payments are less than the purchase price of
the leased equipment. With the consent of the Beneficiaries in 1998, the Trust
Agreement was modified to permit the Trust to invest in assets other than
equipment. During 1999 and 2000, the Trust made real estate acquisitions that
the Managing Trustee believes have the potential to enhance the Trust's overall
economic performance. During 2001, the Trust and three affiliated trust's
(collectively, the "Trusts"), through a jointly owned entity, acquired 83% of
the outstanding common stock of PLM International, Inc. ("PLM"). PLM is an
equipment management company specializing in the leasing of transportation
equipment. See further discussion below.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated herein by reference to the 2001 Annual Report.
(c) Narrative Description of Business
The Trust was organized to acquire a diversified portfolio of capital equipment
subject to various full-payout and operating leases and to lease the equipment
to third parties as income-producing investments. Significant operations
commenced coincident with the Trust's initial purchase of equipment and
associated lease commitments in December 1992. Pursuant to the Trust Agreement,
the Trust is scheduled to be dissolved by December 31, 2004.
The Trust has no employees; however, it entered into a Advisory Agreement with
EFG. EFG's role, among other things, is to (i) evaluate, select, negotiate and
consummate the acquisition of equipment, (ii) manage the leasing, re-leasing,
financing and refinancing of equipment, and (iii) arrange the resale of
equipment. The Advisor is compensated for such services as described in the
Trust Agreement. In addition, the Managing Trustee is compensated for services
provided related to the Trust's non-equipment investment other than cash. See
Item 13 herein.
The Trust's investment in equipment is, and will continue to be, subject to
various risks, including physical deterioration, technological obsolescence, and
credit quality and defaults by lessees. A principal business risk of owning and
leasing equipment is the possibility that aggregate lease revenues and equipment
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
Another risk is that the credit quality of the lease may deteriorate after a
lease is made. In addition, the leasing industry is very competitive. The Trust
is subject to considerable competition when equipment is re-leased or sold at
the expiration of primary lease terms. The Trust must compete with lease
programs offered directly by manufacturers and other equipment leasing
companies, many of which have greater resources, including business trusts and
limited partnerships organized and managed similarly to the Trust and including
other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
equipment within their own portfolios to the same customers as the Trust. In
addition, default by a lessee under a lease agreement may cause equipment to be
returned to the Trust at a time when the Managing Trustee or the Advisor is
unable to arrange the sale or re-lease of such equipment. This could result in
the loss of a portion of potential lease revenues and weaken the Trust's ability
to repay related indebtedness. In addition, a significant portion of the Trust's
equipment portfolio consists of used passenger jet aircraft. Aircraft condition,
age, passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
The Trust has an interest in two aircraft, which based on equipment cost,
account for approximately 62% of the Trust's equipment portfolio at December 31,
2001. These aircraft currently operate in international markets. All rents due
under the aircrafts' leases are denominated in U.S. dollars. However, the
operation of these aircraft in international markets exposes the Trust to
certain political, credit and economic risks. Regulatory requirements of other
countries governing aircraft registration, maintenance, liability of lessors and
other matters may apply. Political instability, changes in national policy,
competitive pressures, fuel shortages, recessions and other political and
economic events adversely affecting world or regional trading markets or a
particular foreign lessee could also create the risk that a foreign lessee would
be unable to perform its obligations to the Trust. The recognition in foreign
courts of judgments obtained in United States courts may be difficult or
impossible to obtain and foreign procedural rules may otherwise delay such
recognition. It may be difficult for the Trust to obtain possession of an
aircraft used outside the United States in the event or default by the lessee or
to enforce its rights under the related lease. Moreover, foreign jurisdictions
may confiscate or expropriate aircraft without paying adequate compensation.
Notwithstanding the foregoing, the ultimate realization of residual value for
any aircraft is dependent upon many factors, including EFG's ability to sell and
re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Trust and which will maximize total cash returns for each
aircraft.
The Trust has a 50.6% ownership interest in EFG/Kettle Development LLC ("Kettle
Valley"). Kettle Valley is a joint venture among the Trust and an affiliated
trust, formed for the purpose of acquiring a 49.9% indirect ownership interest
in a real estate development in Kelowna, British Columbia in Canada. The real
estate development consists of approximately 280 acres of land under
development. The project is zoned for 1,000 residential units in addition to
commercial space. To date, 108 residential units have been constructed and sold
and 10 additional units are under construction. An unaffiliated third party has
retained the remaining 50.1% indirect ownership interest in the development. AFG
ASIT Corporation manages Kettle Valley and the development is managed by a
Canadian affiliate of EFG.
The Trust also has an ownership interest in EFG Kirkwood. EFG Kirkwood is a
joint venture among the Trust, certain affiliated Trusts and Semele and is
managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures,
Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC
("Mountain Springs").
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development. Mountain Springs, through a wholly owned subsidiary,
owns a controlling interest in the Purgatory Ski resort in Durango, Colorado.
The risks generally associated with real estate include, without limitation, the
existence of senior financing or other liens on the properties, general or local
economic conditions, property values, the sale of properties, interest rates,
real estate taxes, other operating expenses, the supply and demand for
properties involved, zoning and environmental laws and regulations, and other
governmental rules.
The Trust's involvement in real estate development also introduces financials
risks, including the potential need to borrow funds to develop the real estate
projects. While the Trust's management presently does not foresee any unusual
risks in this regard, it is possible that factors beyond the control of the
Trust, its affiliates and joint venture partners, such as a tightening credit
environment, could limit or reduce its ability to secure adequate credit
facilities at a time when they might be needed in the future. Alternatively, the
Trust could establish joint ventures with other parties to share participation
in its development projects.
Ski resorts are subject to a number of risks, including weather-related risks.
The ski resort business is seasonal in nature and insufficient snow during the
winter season can adversely effect the profitability of a given resort. Many
operators of ski resorts have greater resources and experience in the industry
than the Trust, its affiliates and its joint venture partners.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interests in EFG Kirkwood and Kettle Valley. The Trust does not intend to engage
in investment activities in a manner or to an extent that would require the
Trust to register as an investment company under the Act. However, it is
possible that the Trust unintentionally may have engaged, or may engage in an
activity or activities that may be construed to fall within the scope of the
Act. If the Trust was determined to be an investment company, its business would
be adversely affected. The Managing Trustee is engaged in discussions with the
staff of the Securities and Exchange Commission regarding whether or not the
Trust may be an inadvertent investment company by virtue of its recent
acquisition activities. The Trust, after consulting with counsel, does not
believe that it is an unregistered investment company. If necessary, the Trust
intends to avoid being deemed an investment company by disposing of or acquiring
certain assets that it might not otherwise dispose of or acquire.
Revenue from major individual lessees which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 is incorporated
herein by reference to Note 2 to the financial statements in Item 14. Refer to
Item 14(a)(3) for lease agreements filed with the Securities and Exchange
Commission.
The Trust Agreement originally provided for the reinvestment of "Cash From Sales
or Refinancings", as defined in the Trust Agreement, in additional equipment
until September 1997. In the 1998 amendment to the Trust Agreement, the Trust's
reinvestment provisions were reinstated until December 31, 2002 and the Trust
was permitted to invest in assets other than equipment. Upon the expiration of
each lease term, the Managing Trustee will determine whether to sell or re-lease
the Trust's equipment, depending on the economic advantages of each alternative.
Over time, the Trust will begin to liquidate its portfolio of equipment.
Similarly, any non-equipment investments will be liquidated as the Trust nears
its scheduled dissolution date.
In December 2000, the Trusts formed MILPI Holdings, LLC ("MILPI"), which formed
MILPI Acquisition Corp. ("MILPI Acquisition"), a wholly owned subsidiary of
MILPI. The Trusts collectively paid $1.2 million for their membership interests
in MILPI and MILPI purchased the common stock of MILPI Acquisition for an
aggregate purchase price of $1.2 million. MILPI Acquisition entered into a
definitive agreement (the "Agreement") with PLM, an equipment leasing and asset
management company, for the purpose of acquiring up to 100% of the outstanding
common stock of PLM, for an approximate purchase price of up to $27 million. In
connection with the acquisition, on December 29, 2000, MILPI Acquisition
commenced a tender offer to purchase any and all of PLM's outstanding common
stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired 83% of PLM's
outstanding common stock in February 2001 for a total purchase price of
approximately $21.8 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition would merge into PLM, with PLM being the surviving entity. After a
special meeting of the PLM stockholders approved the merger, the merger was
consummated on February 6, 2002. The Trust and AFG Investment Trust D ("Trust
D") provided $4.4 million to acquire the remaining 17% of PLM's outstanding
common stock of which $2,399,199 was contributed by the Trust. The funds were
obtained from existing resources and internally generated funds and by means of
a 364 day, unsecured loan to the Trust from PLM evidenced by a promissory note
in the principal amount of $719,760 that bears interest at LIBOR plus 200 basis
points (subject to an interest rate cap). As a result of the merger, the
Trusts own 100% of the outstanding common stock of PLM through their 100%
interest in MILPI.
As of December 31, 2001, the Trust has a 34% membership interest in MILPI and
its share of the aggregate membership interests in MILPI was $8,518,577. The
Trust's ownership in MILPI subsequent to the merger increased to 37.5%. This
membership interest is recorded under the equity method of accounting. Equis II
Corporation has voting control of the Trusts and owns the Managing Trustee of
the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne are
officers and directors of, and own significant stock in, Semele. Mr. Engle and
Mr. Coyne are officers and directors of MILPI Acquisition.
In March 2002 the Trust and Trust D formed C & D IT LLC, a Delaware limited
liability company, as a 50%/50% owned joint venture that is co-managed by each
of the Trust and Trust D (the "C & D Joint Venture") to which each Trust
contributed $1 million. The C & D Joint Venture was formed for the purpose of
making a conditional contribution of $2.0 million to the Rancho Malibu Limited
Partnership in exchange for 25% of the interests in the Rancho Malibu
partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture
was admitted to the Rancho Malibu partnership as a co-managing general partner
pursuant to the terms of an amendment to the Rancho Malibu Limited Partnership
Agreement. The other partners in the Rancho Malibu Limited Partnership are
Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other
co-managing general partner.
Rancho Malibu Limited Partnership owns the 274-acre parcel of land near Malibu,
California and is developing it as a single-family luxury residential
subdivision. The conditional C & D Joint Venture Contribution was made to assure
participation in the future development of the parcel. It was made subject to
the future solicitation of the consent of the beneficiaries of each of the Trust
and Trust D. The C & D Joint Venture Contribution is conditioned upon the
consummation of a transaction pursuant to which Semele and Rancho Malibu Corp.
will contribute all of the partnership interests that they hold in Rancho Malibu
Limited Partnership along with 100% of the membership interests Semele holds in
RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM, a corporation
that is jointly owned by the Trust and three affiliated Trusts, in exchange for
$5.5 million in cash, a $2.5 million promissory note and 182 shares of common
stock of RMLP, Inc. (The sole asset of RM Financing LLC is a Note dated
December 31, 1990 (the Note"). The Note was held by Semele's predecessor when
it took a deed in lieu of foreclosure on the property from the original owner.
The unpaid principal balance of the Note is $14,250,000 plus accrued interest.
The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture
Contribution from the Rancho Malibu partnership if the transactions have not
taken place within 90 days of the receipt by the Rancho Malibu partnership of
notice from the C & D Joint Venture that the requisite consents of the
beneficiaries of the Trust and Trust D have been received. This right of the C
& D Joint Venture is secured by a pledge of 50% of the capital stock of Rancho
Malibu Corp. and 50% of the interests in the Rancho Malibu partnership held by
Semele and Rancho Malibu Corp.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Not applicable.
Item 2. Properties.
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None.
Item 3. Legal Proceedings.
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On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
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Financial Group Limited Partnership, et al., in the United States District Court
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for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
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Financial Group Limited Partnership, et al., in the Superior Court of the
------------------------------------------
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
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Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs asserted, among other things, claims against the Defendants on
behalf of the Nominal Defendants for violations of the Securities Exchange Act
of 1934, common law fraud, breach of contract, breach of fiduciary duty, and
violations of the partnership or trust agreements that govern each of the
Nominal Defendants. The Defendants denied, and continue to deny, that any of
them have committed or threatened to commit any violations of law or breached
any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit was intended to be achieved and which, among other
things, was expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement."
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an
amended Stipulation of Settlement (the "Amended Stipulation") which was filed
with the Court on March 15, 1999. The Amended Stipulation was preliminarily
approved by the Court by its "Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 22, 1999. The Amended
Stipulation, among other things, divided the Class Action Lawsuit into two
separate sub-classes that could be settled individually. The second sub-class,
which does not include the Trust, remains pending.
On April 5, 1999, the Trust mailed a notice to all Class A and Class B
Beneficiaries describing, among other things, the Class Action Lawsuit and the
proposed settlement terms for the Trust. In addition, the notice advised the
Beneficiaries that the Court would conduct a fairness hearing on May 21, 1999
and described the rights of the Beneficiaries and the procedures they should
follow if they wished to object to the settlement.
On May 26, 1999, the Court issued its Order and Final Judgment approving
settlement of the Class Action Lawsuit with respect to claims asserted by the
Plaintiffs on behalf of the sub-class that included the Trust. As a result of
the settlement, the Trust declared a special cash distribution of $1,513,639,
including legal fees for Plaintiffs' counsel of $81,360, that was paid in July
1999 ($0.80 per Class A Interest, net of legal fees). In addition, the parent
company of the Managing Trustee, Equis II Corporation, agreed to commit
$3,405,688 of its Class B Capital Contributions (paid in connection with its
purchase of Class B Interests in July 1997) to the Trust for the Trust's
operating and investment purposes. In the absence of this commitment, Equis II
Corporation would have been entitled to receive a Class B Capital Distribution
for this amount pursuant to the Trust Agreement because the proceeds from the
offering of the Class B Interests were intended to be used for approximately a
two-year period to re-purchase outstanding Class A Interests for the benefit of
each Trust. Subsequently, any Class B capital not so expended was required to
be returned to the Class B Interest holders. The settlement required that Equis
II Corporation forego this Class B Capital Distribution. The settlement
effectively caused Equis II Corporation to remain at risk as a long-term
investor in the Trust.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters.
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(a) Market Information
There is no public market for the resale of the Interests and it is not
anticipated that a public market for resale of the Interests will develop.
(b) Approximate Number of Security Holders
At December 31, 2001, there were 1,948 record holders (1,939 of Class A
Interests and 9 of Class B Interests) in the Trust.
(c) Dividend History and Restrictions
Historically, cash distributions had been declared and paid within 45 days after
the completion of each calendar month and described in a statement sent to the
Beneficiaries. Distributions prior to Class B Payout (defined below) were
allocated to the Class A and Class B Beneficiaries as follows: first, 100% to
the Class A Beneficiaries up to $0.41 per Class A Interest; second, 100% to the
Class B Beneficiaries up to $0.164 per Class B Interest, reduced by the Class B
Distribution Reduction Factor (defined below); third, 100% to the Class A
Beneficiaries up to an additional $0.215 per Class A Interest; and fourth, until
Class B Payout was attained, 80% to the Class B Beneficiaries and 20% to the
Class A Beneficiaries.
After the amendment of the Trust Agreement in 1998, the Managing Trustee
evaluated and pursued a number of potential new investments, several of which
the Managing Trustee concluded had market returns that it believed were less
than adequate given the potential risks. Most transactions involved the
equipment leasing, business finance and real estate development industries.
Although the Managing Trustee intended to continue to evaluate additional new
investments, it anticipated that the Trust would be able to fund these new
investments with cash on hand or from other sources, such as the proceeds from
future asset sales or refinancings and new indebtedness. As a result, in 1999,
the Trust declared a special cash distribution to the Trust Beneficiaries
totaling $15,200,000, which was paid in January 2000.
After the special distribution in January 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. It is currently expected that, the Managing Trustee will not
reinstate cash distributions until expiration of the Trust's reinvestment period
in December 2002; however, the Managing Trustee periodically will review and
consider other one-time distributions. In addition to maintaining sale proceeds
for reinvestment, the Managing Trustee expects that the Trust will retain cash
from operations to pay down debt and for the continued maintenance of the
Trust's assets. The Managing Trustee believes that this change in policy is in
the best interests of the Trust over the long term.
Class A Payout means the first time when the aggregate amount of all
distributions actually made to the Class A Beneficiaries equals $25 per Class A
Interest (minus all uninvested capital contributions returned to the Class A
Beneficiaries) plus a cumulative annual distribution of 10% compounded quarterly
and calculated beginning with the last day of the month of the Trust's initial
Class A Closing.
Class B Payout means the first time when the aggregate amount of all
distributions actually made to the Class B Beneficiaries equals $5 per Class B
Interest plus a cumulative annual return of 8% per annum compounded quarterly
with respect to capital contributions returned to them as a Class B Capital
Distribution and 10% per annum, compounded quarterly, with respect to the
balance of their capital contributions calculated beginning August 1, 1997, the
first day of the month following the Class B Closing. Class B Payout occurred in
January 2000 in conjunction with the special cash distribution paid on that
date.
As Class B Payout has been attained, all further distributions will be made to
the Class A Beneficiaries and the Class B Beneficiaries in amounts so that each
Class A Beneficiary receives, with respect to each Class A Interest, an amount
equal to 400%, divided by the difference between 100% and the Class B
Distribution Reduction Factor, of the amount so distributed with respect to each
Class B Interest. The Class B Distribution Reduction Factor means the percentage
determined as a fraction, the numerator of which is the aggregate amount of any
cash distributions paid to the Class B Beneficiaries as a return of their
original capital contributions (on a per Class B Interest basis), discounted at
8% per annum (commencing August 1, 1997, the first day of the month following
the Class B Closing) and the denominator of which is $5.00.
In any given year, it is possible that Beneficiaries will be allocated taxable
income in excess of distributed cash. This discrepancy between tax obligations
and cash distributions may or may not continue in the future, and cash may or
may not be available for distribution to the Beneficiaries adequate to cover any
tax obligation. The Trust Agreement requires that sufficient distributions be
made to enable the Beneficiaries to pay any state and federal income taxes
arising from any sale or refinancing transactions, subject to certain
limitations.
There were no distributions declared in either 2001 or 2000. Distributions of
$15,200,000 declared in December 1999 were paid in January 2000.
Item 6. Selected Financial Data.
- ------------------------------------
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 2001 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
2001 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------------
Incorporated herein by reference to the financial statements and supplementary
data included in the 2001 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ----------------------
None.
PART III
Item 10. Directors and Executive Officers of the Trust.
- ---------------------------------------------------------------
(a-b) Identification of Directors and Executive Officers
The Trust has no Directors or Officers. As indicated in Item 1 of this report,
AFG ASIT Corporation is the Managing Trustee of the Trust. Under the Trust
Agreement, the Managing Trustee is solely responsible for the operation of the
Trust's properties and the Beneficiaries have no right to participate in the
control of such operations. The names, titles and ages of the Directors and
Executive Officers of the Managing Trustee as of March 15, 2002 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING TRUSTEE (See Item 13)
- --------------------------------------------------------------------------------
Name Title Age Term
- ---------------------- ------------------------------------------- --- ---------
Gary D. Engle President and Chief Executive . Until a
. Officer of the general partner of EFG and . successor
. President and Director of the Managing . is duly
. Trustee 53 elected
. . . and
James A. Coyne Executive Vice President of the . qualified
. general partner of EFG and Senior Vice
. President of the Managing Trustee 42
Michael J. Butterfield Executive Vice President and Chief
. Operating Officer of the general partner of
. EFG and Treasurer of the Managing
. Trustee 42
Gail D. Ofgant Senior Vice President, Lease Operations
. of the general partner of EFG
. and Senior Vice President of the
. Managing Trustee 36
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Directors or Executive
Officers.
(e) Business Experience
Mr. Engle, age 53, is Director and President of the Managing Trustee and sole
shareholder, Director, President and Chief Executive Officer of Equis
Corporation, EFG's general partner. Mr. Engle is also Chairman and Chief
Executive Officer of Semele Group Inc. ("Semele") and is President and a
Director of Equis II Corporation. Mr. Engle controls the general partners of
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Mr. Engle is also a member of the Board of Managers of
Echelon Development Holdings LLC. Mr. Engle joined EFG in 1990 and acquired
control of EFG and its subsidiaries in December 1994. Mr. Engle co-founded Cobb
Partners Development, Inc., a real estate and mortgage banking company, where he
was a principal from 1987 to 1989. From 1980 to 1987, Mr. Engle was Senior Vice
President and Chief Financial Officer of Arvida Disney Company, a large-scale
community development organization owned by Walt Disney Company. Prior to 1980,
Mr. Engle served in various management consulting and institutional brokerage
capacities. Mr. Engle has an M.B.A. degree from Harvard University and a B.S.
degree from the University of Massachusetts (Amherst).
Mr. Coyne, age 42, became Vice President of the Managing Trustee in 1997 and has
been Senior Vice President of the Managing Trustee since 1998. Mr. Coyne is
Executive Vice President of Equis Corporation, the general partner of EFG, and
President and Chief Operating Officer of Semele. He is also a Director and
President of Equis II Corporation. Mr. Coyne joined EFG in 1989 and remained
with the company until May 1993 when he resigned to join the Raymond Company, a
private investment firm, where he was responsible for financing corporate and
real estate acquisitions. Mr. Coyne remained with the Raymond Company until
November 1994 when he re-joined EFG. From 1985 to 1989, Mr. Coyne was employed
by Ernst & Whinney (now known as Ernst & Young LLP). Mr. Coyne holds a Masters
degree in accounting from Case Western Reserve University and a B.S. in Business
Administration from John Carroll University and is a Certified Public
Accountant.
Mr. Butterfield, age 42, has been Treasurer of the Managing Trustee since 1996.
Joining EFG in June 1992, Mr. Butterfield currently serves as Executive Vice
President, Chief Operating Officer, Treasurer and Clerk of the general partner
of EFG. Mr. Butterfield is also Chief Financial Officer and Treasurer of
Semele. Prior to joining EFG, Mr. Butterfield was an audit manager with Ernst &
Young LLP, which he joined in 1987. Mr. Butterfield was also employed in public
accounting and industry positions in New Zealand and London (UK) prior to coming
to the United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has completed
his C.P.A. requirements in the United States. Mr. Butterfield holds a Bachelor
of Commerce degree from the University of Otago, Dunedin, New Zealand.
Ms. Ofgant, age 36, has served as Senior Vice President of Managing Trustee
since 1998. Ms. Ofgant joined EFG in July 1989 and held various positions in
the organization before becoming Senior Vice President of the general partner of
EFG in 1998. From 1987 to 1989, Ms. Ofgant was employed by Security Pacific
National Trust Company. Ms. Ofgant holds a B.S. degree from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
Not applicable.
Item 11. Executive Compensation.
- -----------------------------------
(a) Cash Compensation
Currently, the Trust has no employees. However, under the terms of the Trust
Agreement, the Trust is obligated to pay all costs of personnel employed full or
part-time by the Trust, including officers or employees of the Managing Trustee
or its Affiliates. There is no plan at the present time to make any officers or
employees of the Managing Trustee or its Affiliates employees of the Trust. The
Trust has not paid and does not propose to pay any options, warrants or rights
to the officers or employees of the Managing Trustee or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Trust has no employees, as discussed in Item 11(a), pursuant to
section 10.4(c) of the Trust Agreement, the Trust incurs a monthly charge for
personnel costs of EFG for persons engaged in providing administrative services
to the Trust. A description of the remuneration paid by the Trust to the
Managing Trustee and its Affiliates for such services is included in Item 13,
herein and in Note 8 to the financial statements included in Item 14, herein.
(d) Stock Options and Stock Appreciation Rights.
Not applicable.
(e) Long-Term Incentive Plan Awards Table.
Not applicable.
(f) Defined Benefit or Actuarial Plan Disclosure.
Not applicable.
(g) Compensation of Directors
None.
(h) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the Managing Trustee or
its Affiliates which results or may result from their resignation, retirement or
any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- --------------------------------------------------------------------------------
By virtue of its organization as a trust, the Trust has no outstanding
securities possessing traditional voting rights. However, as provided in Section
11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a majority interest
of the Beneficiaries have voting rights with respect to:
1. Amendment of the Trust Agreement;
2. Termination of the Trust;
3. Removal of the Managing Trustee; and
4. Approval or disapproval of the sale of all, or substantially all, of the
assets of the Trust (except in the orderly liquidation of the Trust upon its
termination and dissolution).
As of March 15, 2001, the following person or group owns beneficially more than
5% of the Trust's outstanding Beneficiary interests:
. Name and Amount Percent
Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
--------- ----------------- --------- -----
Class B Beneficiary Equis II Corporation
Interests 88 Broad Street 3,019,221 Interests 99.82%
. Boston, MA 02110
Equis II Corporation is a wholly owned subsidiary of Semele. Gary D. Engle is
Chairman and Chief Executive Officer of Semele and President, Chief Executive
Officer, sole shareholder and Director of EFG's general partner. James A. Coyne,
Executive Vice President of the general partner of EFG, is Semele's President
and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the
Board of Directors of, and own significant stock in, Semele.
No person or group is known by the Managing Trustee to own beneficially more
than 5% of the Trust's 1,787,153 outstanding Class A Interests as of March 15,
2002.
The ownership and organization of EFG is described in Item 1 of this report.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------------
The Managing Trustee of the Trust is AFG ASIT Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Trust are paid by EFG on behalf of the
Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and
other costs incurred during the years ended December 31, 2001, 2000 and 1999,
which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
2001 2000 1999
---------- -------- ----------
Acquisition fees . . . . . . . . . . . . . . . . . . . $ 74,037 $ 15,484 $ 75,281
Management fees. . . . . . . . . . . . . . . . . . . . 433,247 431,078 513,019
Administrative charges . . . . . . . . . . . . . . . . 178,158 197,789 192,348
Reimbursable operating expenses
due to third parties. . . . . . . . . . . . . . . . . 965,462 345,574 650,915
---------- -------- ----------
Total . $1,650,904 $989,925 $1,431,563
========== ======== ==========
As provided under the terms of the Trust Agreement, EFG is compensated for its
services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 2, 1997, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In the 1998 Amendment to the Trust Agreement, the Trust's reinvestment
provisions were reinstated through December 31, 2002 and the Trust was permitted
to invest in assets other than equipment. Acquisition fees paid to EFG in
connection such equipment reinvestment assets are equal to 1% of Asset Base
Price paid by the Trust.
For management services, EFG is compensated by an amount equal to (i) 5% of
gross operating lease rental revenue and 2% of gross full payout lease rental
revenue received by the Trust with respect to equipment acquired on or prior to
March 31, 1998. For management services earned in connection with equipment
acquired on or after April 1, 1998, EFG is compensated by an amount equal to 2%
of gross lease rental revenue received by the Trust. For non-equipment
investments other than cash, the Managing Trustee receives an annualized
management fee of 1% of such assets under management. Compensation to EFG for
services connected to the remarketing of equipment is calculated as the lesser
of (i) 3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees
otherwise payable under arm's length circumstances. Payment of the remarketing
fee is subordinated to Payout and this fee and the other fees described above
are subject to certain limitations defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at actual cost.
All equipment was purchased from EFG or directly from external vendors. The
Trust's Purchase Price is determined by the method described in Note 3 to the
Trust's financial statements included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid by the lessee
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account prior to remittance to the Trust.
At December 31, 2001, the Trust was owed $103,602 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2002.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and
CEO of Semele and President, CEO, sole shareholder and Director of EFG's general
partner.
In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest,
thereby generating $15,123,700 in aggregate Class B capital contributions. Class
A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such
aggregate capital contributions, and then Special Beneficiary, EFG, purchased
3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital
contributions.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of a majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. See Item 1
(a) of this report regarding certain voting restrictions related to the Class B
Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman
and Chief Executive Officer of Semele. James A. Coyne is Semele's President and
Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board
of Directors of, and own significant stock in, Semele.
See discussion of the MILPI acquisition of PLM included in Item 1.
See discussion of the C & D IT LLC joint venture entity included in Item 1.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Trust
None.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Certified Public Accountants. *
Statement of Financial Position
at December 31, 2001 and 2000 *
Statement of Operations
for the years ended December 31, 2001, 2000 and 1999. *
Statement of Changes in Participants' Capital
for the years ended December 31, 2001, 2000 and 1999. *
Statement of Cash Flows
for the years ended December 31, 2001, 2000 and 1999. *
Notes to the Financial Statements *
* Incorporated herein by reference to the appropriate portion of the 2001 Annual
Report to security holders for the year ended December 31, 2001 (see Part II).
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601
of Regulation S-K, are not applicable.
Exhibit
Number
- ------
2 Agreement and Plan of Merger, dated as of December 22, 2000,
between
MILPI Acquisition Corp. and PLM International, Inc. was filed in the
Registrant's Form 8-K dated December 28, 2000 as Exhibit 2.1 and is
incorporated by reference.
4 Second Amended and Restated Declaration of Trust was filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998 as Exhibit 4 and is incorporated herein by reference.
4.1 Amendment No. 2 to Second Amended and Restated Declaration of
Trust
is filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 as Exhibit 4.1 and is incorporated herein by
reference.
10.1 Guarantee Agreement dated March 8, 2000 between AFG Investment
Trust
A, AFG Investment Trust B, AFG Investment Trust C, and AFG
Investment Trust D (each a Guarantor) and Heller Affordable Housing
of Florida, Inc. (among others as Beneficiaries) was filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999 as Exhibit 10.1 and is incorporated herein by reference.
10.2 Guarantee Fee Agreement dated March 8, 2000 between AFG
Investment
Trust A, AFG Investment Trust B, AFG Investment Trust C, and AFG
Investment Trust D (each a Guarantor) and Echelon Commercial LLC was
filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 as Exhibit 10.2 and is incorporated herein
by reference.
10.3 Guarantors' Contribution Agreement dated March 8, 2000 by and
among
AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust
C, and AFG Investment Trust D (each a Guarantor) was filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999 as Exhibit 10.3 and is incorporated herein by reference.
10.4 Amended and Restated Guarantee Agreement dated December 2000
between
AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust
C, and AFG Investment Trust D (each a Guarantor) and Heller
Affordable Housing of Florida, Inc. (among others as Beneficiaries)
is filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 as Exhibit 10.4 and is incorporated herein by
reference.
13 The 2001 Annual Report to security holders, a copy of which is
furnished for the information of the Securities and Exchange
Commission. Such Report, except for those portions thereof which are
incorporated herein by reference, is not deemed "filed" with the
Commission.
23 Consent of Independent Certified Public Accountants.
99(a) Lease agreement with Hyundai Electronics America, Inc. was filed
in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 99 (a) and is incorporated herein by
reference.
99(b) Lease agreement with Scandinavian Airlines System was filed in
the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998 as Exhibit 99 (a) and is incorporated herein by reference.
99(c) Lease agreement with Scandinavian Airlines System Amendment No. 3
is
filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 as Exhibit 99 (c) and is incorporated herein by
reference.
99(d) Operating Agreement of MILPI Holdings, LLC dated as of December
13,
2000 by and among the persons identified on Schedule A thereto was
filed in the Registrant's Amendment No. 1 as Schedule TO dated
January 29, 2001 ("Schedule TO/A No. 1") as Exhibit (b)(1) and is
incorporated herein by reference.
99(e) Subscription Agreement dated as of December 15, 2000 by and
among
MILPI Holdings, LLC and MILPI Acquisition Corp. was filed in the
Registrant's Schedule TO/A No. 1 as Exhibit (b)(2) and is
incorporated herein by reference.
99(f) Lease agreement with Aerovias De Mexico, S.A. de C.V. was
filed in the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2001 as Exhibit 1 and is incorporated
herein by reference.
99(g) Promissory Note, dated as of January 7, 2002, between AFG
Investment
Trust C and PLM International, Inc. was filed on Form 8-K as Exhibit 99.1
and is
incorporated herein by reference.
99(h) C&T IT LLC Operating Agreement, dated March 1, 2002 between
AFG Investment Trust C and AFG Investment Trust D is included herein.
(b) Reports on Form 8-K
Form 8-K dated January 7, 2002 regarding the funding to complete the acquisition
of PLM International, Inc. ("PLM") and the promissory note issued to PLM
International, Inc. for a loan to fund a portion of the cost of acquiring the
outstanding PLM common stock in the merger of MILPI Acquisition Corp. into PLM.
(c) Other Exhibits
None
(d) Financial Statement Schedules
(i) Consolidated Financial Statements for MILPI Holdings, LLC and Subsidiary
as of December 31, 2001 and for
the period February 7, 2001 (Date of Inception) through December 31, 2001
and Independent Auditors'
Report
(ii) Unaudited Financial Statements for EFG Kirkwood LLC as of December 31,
2000 and for the year then ended
(iii) Consolidated Financial Statements for DSC/Purgatory, LLC as of May
31, 2001, 2000 and 1999 together
with Report of Independent Public Accountants
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: April 1, 2002
---------------
By: /s/ Michael J. Butterfield
--- ------------------------
Michael J. Butterfield
Executive Vice President and
Chief Operating Officer of the general partner of EFG
and Treasurer of the Managing Trustee
(Principal Financial and Accounting Officer)
Date: April 1, 2002
---------------
Exhibit
- -------
13 The 2001 Annual Report.
23 Consent of Independent Certified Public Accountants.
99(h) C&T IT LLC Operating Agreement
EXHIBIT 13
AFG INVESTMENT TRUST
AFG INVESTMENT TRUST C
ANNUAL REPORT TO THE PARTICIPANTS, DECEMBER 31, 2001
AFG Investment Trust C
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
. Page
----
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 3
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.. . . . . . . 10
Statement of Financial Position
at December 31, 2001 and 2000. . . . . . . . . . . . . . . . . . 11
Statement of Operations
for the years ended December 31, 2001, 2000 and 1999 . . . . . . 12
Statement of Changes in Participants' Capital
for the years ended December 31, 2001, 2000 and 1999.. . . . . . 13
Statement of Cash Flows
for the years ended December 31, 2001, 2000 and 1999.. . . . . . 14
Notes to the Financial Statements. . . . . . . . . . . . . . . . 15
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed. . . . . . . . . . . . . 29
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings. . . . . . . . . . . . . 30
Schedule of Costs Reimbursed to the Managing Trustee
and its Affiliates as Required by Section 10.4 of the
Second Amended and Restated Declaration of Trust . . . . . . . . 31
Schedule of Reimbursable Operating Expenses Due to Third Parties 32
Schedule of Equipment. . . . . . . . . . . . . . . . . . . . . . 33
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements.
For each of the five years in the period ended December 31, 2001:
Summary of Operations 2001 2000 1999 1998 1997
- -------------------------------- ------------ ------------- ----------- ----------- ------------
.r . Restated (1)
Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635 $15,201,411 $16,912,628
Total income $ 6,985,008 $ 10,785,068 $15,453,298 $19,153,506 $17,455,773
Net income (loss) $(5,501,267) $ 2,224,172 $ 5,802,601 $ 4,999,220 $ 877,213
Per Beneficiary Interest:
Net income (loss)
Class A Interests $ (2.76) $ 0.73 $ 1.13 $ 1.17 $ 0.49
Class B Interests $ (0.11) $ 0.19 $ 0.75 $ 0.39 $ (0.12)
Cash distributions declared
Class A Interests $ - $ - $ 4.56 $ 1.64 $ 3.11
Class B Interests $ - $ - $ 3.66 $ 2.10 $ 0.30
Financial Position
- --------------------------------
Total assets $42,442,801 $ 51,815,592 $71,090,942 $72,908,929 $82,036,778
Total long-term obligations $22,382,964 $ 26,220,794 $32,573,152 $35,072,883 $39,928,173
Participants' capital $17,861,449 $ 23,362,716 $21,158,711 $36,360,494 $41,159,172
(1) See Note 1 to the financial statements, regarding the restatement of
the Trust's 2000 financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 2001 compared to the year
ended December 31, 2000 and the year ended December 31, 2000
compared to the year ended December 31, 1999
Subsequent to the issuance of the financial statements of AFG Investment Trust C
(the "Trust") as of and for the year ended December 31, 2000, the Trust restated
the amount recorded as its share of loss on its interest in EFG Kirkwood LLC
("EFG Kirkwood") under the equity method of accounting. As a result, the
financial statements as of and for the year ended December 31, 2000 have been
restated from amounts previously reported. The effects of the restatement are
presented in Note 1 to the accompanying financial statements and have been
reflected herein. The following should be read in conjunction with the restated
2000 Financial Statements, including notes thereto. The following discussion
compares the December 31, 2001 financial condition and results of operations to
the restated December 31, 2000 financial condition and results of operations and
the restated December 31, 2000 results of operations to the results of
operations for the year ended December 31, 1999.
Certain statements in this annual report of the Trust that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
collection of the Trust's contracted rents, the realization of residual proceeds
for the Trust's equipment, the performance of the Trust's non-equipment assets,
and future economic conditions.
Overview
- --------
The Trust was organized in 1992 for the purpose of acquiring and leasing to
third parties a diversified portfolio of capital equipment. In 1998, the Trust
Agreement was modified to permit the Trust to invest in assets other than
equipment. Subsequently, the Trust has made certain non-equipment investments.
During 2001, the Trust and three affiliated trusts (collectively, the "Trusts"),
through a jointly owned entity, acquired 83% of the outstanding common stock of
PLM International, Inc. ("PLM"). PLM is an equipment management company
specializing in the leasing of transportation equipment. See further discussion
of PLM and other acquisitions below. Pursuant to the Trust Agreement, the Trust
is scheduled to be dissolved by December 31, 2004.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interests in EFG Kirkwood and EFG/Kettle Development LLC ("Kettle Valley"). The
Trust does not intend to engage in investment activities in a manner or to an
extent that would require the Trust to register as an investment company under
the Act. However, it is possible that the Trust unintentionally may have
engaged, or may engage in an activity or activities that may be construed to
fall within the scope of the Act. If the Trust were determined to be an
investment company, its business would be adversely affected. The Managing
Trustee is engaged in discussions with the staff of the Securities and Exchange
Commission regarding whether or not the Trust may be an inadvertent investment
company by virtue of its recent acquisition activities. If necessary, the Trust
intends to avoid being deemed an investment company by disposing of or acquiring
certain assets that it might not otherwise dispose of or acquire.
The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Trust's assets and the Trust's ability
to negotiate future lease agreements. Notwithstanding the foregoing, it
currently is not possible for the Managing Trustee to determine the long-term
effects, if any, that these events may have on the economic performance of the
Trust's equipment portfolio. Approximately 62% of the Trust's equipment
portfolio consists of commercial jet aircraft. The events of September 11, 2001
adversely affected market demand for both new and used commercial aircraft and
weakened the financial position of most airlines. No direct damage occurred to
any of the Trust's assets as a result of these events and while it is currently
not possible for the Managing Trustee to determine the ultimate long-term
economic consequences of these events to the Trust, the Managing Trustee expects
that the resulting decline in air travel will suppress market prices for used
aircraft in the short term and could inhibit the viability of the airline
industry. In the event of a default by an aircraft lessee, the Trust could
suffer material losses. At December 31, 2001, the Trust has collected
substantially all rents owed from aircraft lessees. The Managing Trustee is
monitoring the situation and will continue to evaluate potential implications to
the Trust's financial position and future liquidity.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Managing Trustee to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the Managing Trustee reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, impairment of long-lived assets and contingencies. These
estimates are based on the Managing Trustee's historical experience and on
various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. The Managing Trustee believes, however, that the estimates,
including those for the above-listed items, are reasonable.
The Managing Trustee believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
Revenue Recognition: Rents are payable to the Trust monthly or quarterly and no
- --------------------
significant amounts are calculated on factors other than the passage of time.
The majority of the Trust's leases are accounted for as operating leases and are
noncancellable. Rents received prior to their due dates are deferred.
Asset lives and depreciation method: The Trust's primary business involves the
- --------------------------------------
purchase and subsequent lease of long-lived equipment. The Trust's depreciation
policy is intended to allocate the cost of equipment over the period during
which it produces economic benefit. The principal period of economic benefit is
considered to correspond to each asset's primary lease term, which generally
represents the period of greatest revenue potential for each asset.
Accordingly, to the extent that an asset is held on primary lease term, the
Trust depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment and equity investments to determine
- ------
whether it can be recovered from undiscounted future cash flows. Adjustments to
reduce the net carrying value of long-lived assets are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value and are reflected separately on the accompanying Statement of
Operations as write-down of equipment. Inherent in the Trust's estimate of net
realizable value are assumptions regarding estimated future cash flows. If
these assumptions or estimates change in the future, the Trust could be required
to record impairment charges for these assets.
Contingencies and litigation: The Trust is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business when quantifiable,
- -------
estimates for losses from litigation are made after consultation with outside
counsel. If estimates of potential losses increase or the related facts and
circumstances change in the future, the Trust may be required to adjust amounts
recorded in its financial statements.
Segment Reporting
- ------------------
The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment lease portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp.,
which owns the majority interest in PLM, an equipment leasing and asset
management company. The Real Estate segment includes the ownership, management
and development of commercial properties, recreational properties, condominiums,
interval ownership units, townhomes, single family homes and land sales through
its ownership interests in EFG Kirkwood and Kettle Valley. There are no
material intersegment sales or transfers.
Segment information for the years ended December 31, 2001, 2000 and 1999 is
summarized below.
2001 2000 1999
------------ ------------- -----------
. . Restated (1)
Total Income: (2)
Equipment leasing $ 6,985,008 $ 10,785,068 $15,453,298
Real estate - - -
------------ ------------- -----------
Total $ 6,985,008 $ 10,785,068 $15,453,298
============ ============= ===========
Operating Expenses, Management Fees
and Other Expenses:
Equipment leasing $ 1,501,130 $ 944,491 $ 1,106,068
Real estate 75,737 80,460 250,214
------------ ------------- -----------
Total $ 1,576,867 $ 1,024,951 $ 1,356,282
============ ============= ===========
Interest Expense:
Equipment leasing $ 2,037,067 $ 2,404,830 $ 2,412,127
Real estate 17,996 58,433 66,623
------------ ------------- -----------
Total $ 2,055,063 $ 2,463,263 $ 2,478,750
============ ============= ===========
Depreciation, Writedown of equipment
and Amortization Expense:
Equipment leasing $ 9,437,264 $ 4,189,657 $ 5,815,665
Real estate 75,495 65,800 -
------------ ------------- -----------
Total $ 9,512,759 $ 4,255,457 $ 5,815,665
============ ============= ===========
Equity Interests:
Equipment leasing $ 984,280 $ - $ -
Real estate (325,866) (817,225) -
------------ ------------- -----------
Total $ 658,414 $ (817,225) $ -
============ ============= ===========
Net Income (Loss): $(5,501,267) $ 2,224,172 $ 5,802,601
============ ============= ===========
Capital Expenditures:
Equipment leasing $ 7,162,123 $ 696,892 $ 412,529
Real estate - 1,287,350 5,846,448
------------ ------------- -----------
Total $ 7,162,123 $ 1,984,242 $ 6,258,977
============ ============= ===========
Assets:
Equipment leasing $35,251,213 $ 44,232,338 $63,912,013
Real estate 7,191,588 7,583,254 7,178,929
------------ ------------- -----------
Total $42,442,801 $ 51,815,592 $71,090,942
============ ============= ===========
(1) See Note 1 to the accompanying financial statements, regarding the
restatement of the Trust's 2000 financial statements.
(2) Includes equipment leasing revenue of $6,519,899, $7,733,941 and
$10,286,635 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the year ended December 31, 2001, the Trust recognized lease revenue of
$6,519,899 compared to $7,733,941 and $10,286,635 for the years ended December
31, 2000 and 1999, respectively. The decrease in lease revenue is due to lease
term expirations and the sale of equipment. The level of lease revenue to be
recognized by the Trust in the future may be impacted by future reinvestment;
however, the extent of such impact cannot be determined at this time. Future
lease term expirations and equipment sales will result in a reduction in lease
revenue recognized.
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
owned by an affiliated equipment leasing program sponsored by Equis Financial
Group Limited Partnership ("EFG"). Proportionate equipment ownership enables
the Trust to further diversify its equipment portfolio by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could result from a concentration in any single equipment type, industry or
lessee. The Trust and each affiliate individually report, in proportion to
their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the year ended December 31, 2001 and its share of the
maintenance payment was $35,440, which is accrued as a maintenance obligation at
December 31, 2001. Coincident with the termination of the Reno lease, the
aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four
years. The Reno Programs are to receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864. During the years ended December
31, 2001, 2000 and 1999, the Trust recognized lease revenue including the early
termination fee discussed above of $219,210, $159,904 and $153,980,
respectively, related to its interest in this aircraft.
Interest income for the year ended December 31, 2001 was $157,725 compared to
$666,975 and $1,217,855 for the years ended December 31, 2000 and 1999,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. The amount of future interest income is expected to fluctuate as a
result of changing interest rates and the amount of cash available for
investment, among other factors. The Trust distributed $15,200,000 in January
2000 that resulted in a reduction of cash available for investment.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor ("Heller"). During the year ended December 31, 2001, the requirements
of the guarantee agreement were met and the Trust received payment for all
outstanding amounts totaling $224,513, including $89,583 of income related to
the guarantee agreement recognized during the year ended December 31, 2001.
During the year ended December 31, 2001, the Trust received an upfront cash fee
of $175,400 and recognized a total of $301,400 in income related from the
guarantee. The guarantee fee is reflected as Other Income in the accompanying
Statement of Operations. The Trust has no further obligations under the
guarantee agreement.
The Trust received $261,116 in 1999 as a breakage fee from a third-party seller
in connection with a transaction for new investments that was canceled by the
seller in the first quarter of 1999. This amount is reflected as Other Income
on the accompanying Statement of Operations for the year ended December 31,
1999.
During the three years ended December 31, 2001, the Trust sold equipment having
a net book value of $60,151, $1,412,158 and $5,163,109, respectively, to
existing lessees and third parties, which resulted in net gains, for financial
statement purposes, of $124,658, $2,012,657 and $3,687,692, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or net loss to the Trust, as such transactions will be dependent upon the
condition and type of equipment being sold and its marketability at the time of
sale. In addition, the amount of gain or loss reported for financial statement
purposes is partly a function of the amount of accumulated depreciation
associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities, which may be advantageous to the Trust, and to maximize total
cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
During the year ended December 31, 2000, the Trust sold investment securities
having a book value of $420,513, resulting in a gain, for financial reporting
purposes of $70,095.
Depreciation expense was $3,811,250, $4,189,657, and $5,815,665 for the years
ended December 31, 2001, 2000 and 1999, respectively. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the Trust
depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
During the year ended December 31, 2001, the Trust recorded a write-down of
equipment, representing an impairment to the carrying value of the Trust's
interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was
based on a comparison of estimated fair value and carrying value of the Trust's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
Interest expense on equipment related debt was $2,037,067, $2,404,830, and
$2,412,127 for the years ended December 31, 2001, 2000 and 1999, respectively.
Interest expense will continue to decrease in the future as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees related to equipment leasing were $357,510, $350,618 and
$460,805 during the years ended December 31, 2001, 2000 and 1999, respectively.
Management fees are based on 5% of gross lease revenue generated by operating
leases and 2% of gross lease revenue generated by full payout leases, subject to
certain limitations.
Operating expenses - affiliate were $1,143,620, $543,363, and $843,263 for the
years ended December 31, 2001, 2000 and 1999, respectively. Operating expenses
- - affiliate in 2001 included approximately $293,000 of remarketing costs related
to the re-lease of an aircraft in June 2001 and $140,000 for ongoing legal costs
associated with the Trust's ongoing discussions with the Securities and Exchange
Commission regarding its investment company status. Operating expenses -
affiliate also included approximately $114,000 of costs reimbursed to EFG as a
result of the successful acquisition of the PLM common stock. In conjunction
with the acquisition of the PLM common stock, EFG became entitled to recover
certain out of pocket expenses which it had previously incurred. Operating
expenses consist principally of administrative charges, professional service
costs, such as audit, insurance and legal fees, as well as printing,
distribution and remarketing expenses. The amount of future operating expenses
cannot be predicted with certainty; however, such expenses are usually higher
during the acquisition and liquidation phases of a trust. Other fluctuations
typically occur in relation to the volume and timing of remarketing activities.
In addition, the Trust wrote-down other investments $50,510 during the year
ended December 31, 2000.
For the year ended December 31, 2001, the Trust recorded income of $984,280 and
amortization expense of $9,695, in connection with its ownership interest in
MILPI. This income represents the Trust's share of the net income of MILPI
recorded under the equity method of accounting. The Trust's income from MILPI
results from MILPI's indirect ownership of PLM common stock acquired in February
2001.
MILPI
- -----
During the period February 7, 2001 (date of inception) through December 31,
2001, MILPI recognized operating revenues of approximately $10,376,000,
consisting primarily of $5,217,000 of management fees, $2,032,000 of
acquisition and lease negotiation fees, $1,716,000 of equity income in
partnership interests and $472,000 of operating lease income. In addition,
MILPI recognized other income of approximately $467,000, consisting primarily of
interest income earned on investments.
During the same period, MILPI incurred total operating expenses of $5,856,000 ,
consisting primarily of $3,290,000 of general and administrative expenses,
$1,255,000 of depreciation and amortization, $511,000 from impairment of its
investment in managed programs and $800,000 of operations support expenses,
which include salary and office-related expenses for operational activities. In
addition, MILPI also incurred income tax expense of $1,611,000 and recorded
minority interest expense of $429,000.
Real Estate
- ------------
Management fees for non-equipment investments were $75,737, $80,460 and $52,214
for the years ended December 31, 2001, 2000 and 1999, respectively. The
management fees on non-equipment assets, excluding cash, were based on 1% of
such assets under management.
For the year ended December 31, 1999, operating expenses included legal fees of
$198,000 related to the Trust's ownership interests in Kettle Valley and EFG
Kirkwood.
The Trust has an approximately 51% ownership interest in Kettle Valley (see
further discussion below). For the years ended December 31, 2001 and 2000, the
Trust recorded losses of $332,692 and $91,066, respectively, from its interest
in Kettle Valley. The losses represent the Trust's share of the losses of
Kettle Valley recorded under the equity method of accounting. In each of the
years ended December 31, 2001 and 2000, the Trust recorded amortization expense
of $65,800, in connection with its ownership interest in Kettle Valley.
Interest expense on a note payable related to the Trust's acquisition of its
interest in Kettle Valley was $17,996, $58,433 and $66,623 for the years ended
December 31, 2001, 2000, and 1999, respectively.
The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT
Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also
is the manager of EFG Kirkwood.
EFG Kirkwood owns membership interests in:
Mountain Resort Holdings LLC ("Mountain Resort") and
Mountain Springs Resort LLC ("Mountain Springs").
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development. Mountain Springs, through a wholly owned subsidiary,
owns a controlling interest in the Purgatory Ski resort in Durango, Colorado.
Mountain Springs, through a wholly owned subsidiary, owns a controlling interest
in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails. Purgatory receives the majority of its revenues from winter
ski operations, primarily ski, lodging, retail, and food and beverage services,
with the remainder of its revenues generated from summer outdoor activities,
such as alpine sliding and mountain biking.
For the year ended December 31, 2001, the Trust recorded income of $6,826 on its
ownership interest in EFG Kirkwood, compared to a loss of $726,159 for the year
ended December 31, 2000. The loss in 2000 was caused principally by losses
reported by Purgatory for the period May 1, 2000 to December 31, 2000.
Mountain Springs, through a wholly owned subsidiary, became an equity
participant in Purgatory on May 1, 2000. Consequently, Mountain Springs did
not participate in the operating results of Purgatory for the period from
January 1, 2000 to April 30, 2000, generally the period of Purgatory's peak
income activity. Accordingly, the losses incurred in 2000 do not reflect a full
year's operating activities for Purgatory. See Note 6 to the accompanying
financial statements.
Through its ownership of 40% of the Class A membership interests in EFG
Kirkwood, the Trust indirectly owns interests in two ski resort operating
companies, DSC/Purgatory LLC and Mountain Resort. EFG Kirkwood owns 50% of the
membership interests in Mountain Springs which, through a wholly-owned
subsidiary, owns 80% of the common member interests and 100% of the Class B
preferred member interests of DSC/Purgatory LLC. EFG Kirkwood also owns
approximately 38% of the membership interests in Mountain Resort which, through
four wholly-owned subsidiaries, owns Kirkwood Mountain Resort. The Trust
accounts for its ownership interests using the equity method of accounting.
Mountain Resort
- ----------------
Mountain Resort is primarily a ski and mountain recreation resort with more than
2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The
resort receives approximately 70% of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services with the remainder
of the revenues generated from summer outdoor activities, including mountain
biking, hiking and other activities. Other operations include a real estate
development division, which has developed and is managing a 40-unit condominium
residential and commercial building, an electric and gas utility company, which
operates as a regulated utility company and provides electric and gas services
to the Kirkwood community, and a real estate brokerage company.
During the year ended December 31, 2001, Mountain Resort recorded total revenues
of approximately $30,195,000 compared to approximately $28,338,000 for the same
period in 2000. The increase in total revenues from 2000 to 2001 of $1,857,000
is primarily the result of an increase in ski-related revenues offset by a
decrease in residential-related revenues.
Ski-related revenues and other operations revenues increased approximately
$3,097,000 for the year ended December 31, 2001 compared to the same period in
2000. The increase in ski-related revenues resulted from improved weather
conditions during the winter season, which attracted more skiers. Improved
weather conditions resulted in the resort supporting approximately 336,000
skiers for the year ended December 31, 2001 as compared to approximately 291,000
skiers in 2000.
Residential-related revenues decreased approximately $1,240,000 for the year
ended December 31, 2001 as compared to 2000. Construction was completed on a
40-unit condominium residential and commercial building in December 1999 and as
a result, a significant number of condominium sales closed in January 2000.
During the year ended December 31, 2001, Mountain Resort recorded total expenses
of approximately $30,034,000 compared to approximately $26,914,000 in 2000. The
increase in total expenses of $3,120,000 from 2000 to 2001 is primarily the
result of an increase in ski-related expenses offset by a decrease in
residential-related expenses.
Ski-related expenses and other operations expenses in 2001 increased
approximately $2,424,000 and approximately $1,696,000, respectively, compared to
2000 as a result of an increase in ski-related revenue and other operation
revenues, as discussed above.
Residential-related expenses decreased approximately $1,000,000 as a result of a
decrease in cost of sales from condominium units sold during the year ended
December 31, 2001 compared to 2000, as discussed above.
Mountain Springs
- -----------------
Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated
on 40 miles of terrain with 75 ski trails located near Durango, Colorado.
Purgatory receives the majority of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services, with the
remainder of revenues generated from summer outdoor activities, such as alpine
sliding and mountain biking.
During the year ended December 31, 2001, Purgatory recorded total revenues of
$15,250,393 compared to $13,506,976 for the same period of 2000. The increase
in total revenues from 2000 to 2001 of $1,743,417 is the result of improved
weather conditions during the winter season, which attracted more skiers.
Improved weather conditions resulted in the resort supporting approximately
306,000 skiers for the year ended December 31, 2001 compared to 286,000 skiers
in the same period of 2000.
Total expenses were approximately $15,346,000 for the year ended December 31,
2001 compared to approximately $16,163,000 for the same period in 2000. The
decrease in total expenses for the year ended December 31, 2001 compared to the
same period in 2000 of approximately $817,000 is a result of an increase in
operating expenses of approximately $115,000, due to an increase in the number
of skiers, discussed above, offset by a decrease in non-operating costs of
approximately $365,000 and financing costs of approximately $340,000.
Kettle Valley
- --------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. The project, which is being developed by Kettle Valley
Development Limited Partnership, consists of approximately 280 acres of land
that is zoned for 1,120 residential units in addition to commercial space. To
date, 108 residential units have been constructed and sold and 10 additional
units are under construction.
During the twelve months ended December 31, 2001, Kettle Valley recorded
revenues of $4,596,837 compared to $6,250,711 for the same period in 2000. The
decrease in revenues is the result of a decrease in the number of lot and home
sales.
Kettle Valley incurred total expenses of $5,967,703 during the twelve months
ended December 31, 2001 compared to $7,118,553 for the same period in 2000. The
decrease in expenses is the result of a decrease in the number of lot and home
sales discussed above.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Trust by its nature is a limited life entity. The Trust's principal
operating activities have been derived from asset rental transactions.
Accordingly, the Trust's principal source of cash from operations is provided by
the collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated net cash inflows of
$3,682,916, $5,546,026 and $6,918,949 for the years ended December 31, 2001,
2000 and 1999, respectively. Future renewal, re-lease and equipment sale
activities will continue to cause a decline in the Trust's primary-term lease
revenue and corresponding sources of operating cash. Expenses associated with
rental activities, such as management fees, will also decline as the Trust
experiences a higher frequency of remarketing events. The amount of future
interest income is expected to fluctuate as a result of changing interest rates
and the level of cash available for investment, among other factors.
At lease inception, the Trust's equipment was leased by a number of
creditworthy, investment-grade companies and, to date, the Trust has not
experienced any material collection problems and has not considered it necessary
to provide an allowance for doubtful accounts. Notwithstanding a positive
collection history, there is no assurance that all future contracted rents will
be collected or that the credit quality of the Trust's lessee will be
maintained. The credit quality of an individual lease may deteriorate after the
lease is entered into. Collection risk could increase in the future,
particularly as the Trust remarkets its equipment and enters re-lease agreements
with different lessees. The Managing Trustee will continue to evaluate and
monitor the Trust's experience in collecting accounts receivable to determine
whether a future allowance for doubtful accounts may become appropriate.
At December 31, 2001, the Trust was due aggregate future minimum lease payments
of $9,923,959 from contractual lease agreements, a portion of which will be used
to amortize the principal balance of notes payable of $22,382,964. Additional
cash inflows will be realized from future remarketing activities, such as lease
renewals and equipment sales, the timing and extent of which cannot be predicted
with certainty. This is because the timing and extent of equipment sales is
often dependent upon the needs and interests of the existing lessees. Some
lessees may choose to renew their lease contracts, while others may elect to
return the equipment. In the latter instances, the equipment could be re-leased
to another lessee or sold to a third party. Accordingly, the cash flows of the
Trust will become less predictable as the Trust remarkets its equipment.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows.
In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp.
("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts
collectively paid $1.2 million for their membership interests in MILPI ($408,000
for the Trust) and MILPI purchased the shares of MILPI Acquisition for an
aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition
entered into a definitive agreement (the "Agreement") with PLM International,
Inc. ("PLM"), an equipment leasing and asset management company, for the purpose
of acquiring up to 100% of the outstanding common stock of PLM, for an
approximate purchase price of up to $27 million. In connection with the
acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to
purchase any and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of PLM's outstanding common stock in February 2001 for a total purchase price of
approximately $21.8 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition would merge into PLM, with PLM being the surviving entity. The
merger was completed when MILPI obtained approval of the merger from PLM's
shareholders pursuant to a special shareholders' meeting on February 6, 2002.
The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
was contributed by the Trust. The funds were obtained from existing resources
and internally generated funds and by means of a 364 day, unsecured loan from
PLM evidenced by a promissory note in the principal amount of $719,760 that
bears interest at LIBOR plus 200 basis points (subject to an interest rate cap).
At December 31, 2001, the Trust has a 34% membership interest in MILPI having an
original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects
MILPI Acquisition's cost of acquiring the common stock of PLM, including the
amount paid for the shares tendered of $7,403,746, capitalized transaction costs
of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele
of $74,037. The acquisition fees were capitalized by the Trust and are being
amortized over a period of 7 years beginning March 1, 2001. The Trust's
ownership in MILPI subsequent to the merger was increased from 34% to 37.5%.
The Trust expended $1,287,350 in 2000 and $2,706,800 in 1999 to acquire its
ownership interest in EFG Kirkwood. During 1999, the Trust expended $3,139,648
to acquire its ownership interest in Kettle Valley. In connection with the
acquisition of its ownership interest in Kettle Valley, the Trust was paid
$1,524,803 for a residual interest in an aircraft
In 2001, 2000 and 1999, the Trust expended $26,131, $288,892 and $412,529,
respectively, to acquire certain other investments and investment securities.
The Trust also realized proceeds from the disposition of investment securities
of $490,608, during the year ended December 31, 2000.
During 2001, 2000 and 1999, the Trust realized net cash proceeds from equipment
disposals of $184,809, $3,424,815, and $8,850,801, respectively. Sales proceeds
in 2000 include $2,717,790 related to the Trust's 66% interest in certain rail
equipment, which was sold in July 2000. Sales proceeds in 1999 included
$4,997,297 related to the Trust's interest in a McDonnell Douglas MD-82
aircraft, which was sold in January 1999.
Future inflows of cash from equipment disposals will vary in timing and amount
and will be influenced by many factors including, but not limited to, the
frequency and timing of lease expirations, the type of equipment being sold, its
condition and age, and future market conditions.
The risks generally associated with real estate include, without limitation, the
existence of senior financing or other liens on the properties, general or local
economic conditions, property values, the sale of properties, interest rates,
real estate taxes, other operating expenses, the supply and demand for
properties involved, zoning and environmental laws and regulations, and other
governmental rules.
The Trust's involvement in real estate development also introduces financials
risks, including the potential need to borrow funds to develop the real estate
projects. While the Trust's management presently does not foresee any unusual
risks in this regard, it is possible that factors beyond the control of the
Trust, its affiliates and joint venture partners, such as a tightening credit
environment, could limit or reduce its ability to secure adequate credit
facilities at a time when they might be needed in the future. Alternatively, the
Trust could establish joint ventures with other parties to share participation
in its development projects.
Ski resorts are subject to a number of risks, including weather-related risks.
The ski resort business is seasonal in nature and insufficient snow during the
winter season can adversely affect the profitability of a given resort. Many
operators of ski resorts have greater resources and experience in the industry
than the Trust, its affiliates and its joint venture partners.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, investment
securities classified as available-for-sale are required to be carried at fair
value. During the year ended December 31, 1999, the Trust recorded an
unrealized gain on available-for-sale securities of $20,167. This gain was
recorded as a component of comprehensive income included in the Statement of
Changes in Participant's Capital. These available-for-sale securities were sold
in 2000 resulting in a realized gain of $70,095.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. During 1999, the
Trust leveraged $1,332,481 of its ownership interest in Kettle Valley that is
being amortized over 34 months. Generally, each note payable is recourse only
to the specific equipment financed and to the minimum rental payments contracted
to be received during the debt amortization period, which period generally
coincides with the lease rental term. The amount of cash used to repay debt
obligations may fluctuate in the future due to the financing of assets, which
may be acquired. In addition, the Trust has a balloon payment obligation of
$16,193,280 at the expiration of the lease term related to an aircraft leased to
Scandinavian Airlines System ("SAS").
In July 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per
interest. Class A Beneficiaries purchased 5,520 Class B Interests, generating
$27,600 of such aggregate capital contributions, and EFG, as Special
Beneficiary, purchased 3,019,220 Class B Interests. Subsequently, EFG
transferred its Class B Interests to a special-purpose company, Equis II
Corporation. EFG also transferred its ownership of AFG ASIT Corporation, the
Managing Trustee of the Trust, to Equis II Corporation. In December 1999, an
affiliate of the Trust, Semele, purchased 85% of the common stock of Equis II
Corporation, subject to certain voting restrictions with respect to the Class B
Interests of the Trust owned by Equis II Corporation. In May 2000, Semele
acquired the remaining 15% of the common stock of Equis II Corporation and, in
November 2000, the voting restrictions with respect to the Class B Interests
were terminated. As a result, Semele has voting control over the Trust. The
former majority stockholders of Equis II Corporation, Gary D. Engle and James A.
Coyne, are both members of the Board of Directors of, and collectively own a
majority of the stock in, Semele. Mr. Engle is Semele's Chairman and Chief
Executive Officer and Mr. Coyne is Semele's President and Chief Operating
Officer.
The proceeds from the Class B offering were intended to be used principally to
repurchase a portion of the Trust's Class A Beneficiary Interests and to pay a
one-time special cash distribution of $2,960,865 ($1.47 per Class A Interest) to
the Trust's Class A Beneficiaries. That distribution was paid on August 15,
1997. The remainder of the offering proceeds was classified as restricted cash
pending its use for the repurchase of Class A Interests or its return to the
Class B Interest holders. On August 7, 1997, the Trust commenced an offer to
purchase up to 45% of the outstanding Class A Beneficiary Interests of the
Trust. On October 10, 1997, the Trust used $2,291,567 of the net proceeds
realized from the issuance of the Class B Interests to purchase 218,661 of the
Class A Interests tendered as a result of the offer. On April 28, 1998, the
Trust purchased 5,200 additional Class A Interests at a cost of $46,800. On July
6, 1998, the Trust used $4,646,862 of the Class B offering proceeds to pay a
capital distribution to the Class B Beneficiaries. In July 1999, the Trust
distributed $1,513,639, including legal fees of $81,360 paid to Plaintiffs'
counsel, as a special cash distribution ($0.80 per unit, net of legal fees). In
addition, Equis II Corporation agreed to commit $3,405,688 of the Class B
Capital Contributions (the remaining balance of the restricted cash) to the
Trust for the Trust's investment purposes.
After the amendment of the Trust Agreement in 1998, the Managing Trustee
evaluated and pursued a number of potential new investments, several of which
the Managing Trustee concluded had market returns that it believed were less
than adequate given the potential risks. Most transactions involved the
equipment leasing, business finance and real estate development industries.
Although the Managing Trustee intended to continue to evaluate additional new
investments, it anticipated that the Trust would be able to fund these new
investments with cash on hand or from other sources, such as the proceeds from
future asset sales or refinancings and new indebtedness. As a result, in 1999,
the Trust declared a special cash distribution to the Trust Beneficiaries
totaling $15,200,000, which was paid in January 2000.
After the special distribution in January 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. Looking forward, the Managing Trustee presently does not expect
to reinstate cash distributions until expiration of the Trust's reinvestment
period in December 2002; however, the Managing Trustee periodically will review
and consider other one-time distributions. In addition to maintaining sale
proceeds for reinvestment, the Managing Trustee expects that the Trust will
retain cash from operations to pay down debt and for the continued maintenance
of the Trust's assets. The Managing Trustee believes that this change in policy
is in the best interests of the Trust over the long term.
The payment of distributions is presented as a component of financing activities
on the accompanying Statement of Changes of Cash Flows. No cash distributions
were declared during the years ended December 31, 2001 or 2000. In any given
year, it is possible that Beneficiaries will be allocated taxable income in
excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Beneficiaries adequate to cover any tax
obligation. The Trust Agreement requires that sufficient distributions be made
to enable the Beneficiaries to pay any state and federal income taxes arising
from any sale or refinancing transactions, subject to certain limitations.
Cash distributions paid to the Participants consist of both a return of and a
return on capital. Cash distributions do not represent and are not indicative
of yield on investment. Actual yield on investment cannot be determined with
any certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, the residual value realized for each asset at its disposal date,
and the performance of the Trust's non-equipment assets. Future market
conditions, technological changes, the ability of EFG to manage and remarket the
equipment, and many other events and circumstances, could enhance or detract
from individual yields and the collective performance of the Trust's equipment
portfolio. The ability of the Managing Trustee and its affiliates to develop
and profitably manage its non-equipment assets and the return from its interest
in MILPI will impact the Trust's overall performance.
In the future, the nature of the Trust's operations and principal cash flows
will continue to shift from rental receipts to equipment sale proceeds. As this
occurs, the Trust's cash flows resulting from equipment investments may become
more volatile in that certain of the Trust's equipment leases will be renewed
and certain of its assets will be sold. In some cases, the Trust may be
required to expend funds to refurbish or otherwise improve the equipment being
remarketed in order to make it more desirable to a potential lessee or
purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to
monitor and manage these events in order to maximize the residual value of the
Trust's equipment and will consider these factors, in addition to the collection
of contractual rents, the retirement of scheduled indebtedness, and the Trust's
future working capital requirements, in establishing the amount and timing of
future cash distributions.
In accordance with the Trust Agreement, upon the dissolution of the Trust, the
Managing Trustee will be required to contribute to the Trust an amount equal to
any negative balance, which may exist in the Managing Trustee's tax capital
account. At December 31, 2001, the Managing Trustee had a negative tax capital
account balance of $55,893. No such requirement exists with respect to the
Special Beneficiary.
New Accounting Pronouncements
- -------------------------------
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Trust believes the adoption of SFAS No. 141
has not had a material impact on its financial statements.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Trust to complete a
transitional goodwill impairment test six months from the date of adoption. The
Trust believes the adoption of SFAS No. 142 will not have a material impact on
its financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Trust believes that the adoption
of SFAS No. 144 will not have a material impact on its financial statements.
Report of Independent Certified Public Accountants
We have audited the accompanying statements of financial position of AFG
Investment Trust C as of December 31, 2001 and 2000, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of MILPI Holdings LLC, a limited liability
company in which the Trust has a 34% interest, have been audited by other
auditors whose report has been furnished to us; insofar as our opinion on the
financial statements relates to data included for MILPI Holdings LLC, it is
based solely on their report.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AFG Investment Trust C at December 31, 2001 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to the Annual Report is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
The accompanying financial statements for the year ended December 31, 2000 have
been restated as discussed in Note 1.
/S/ ERNST & YOUNG LLP
Tampa, Florida
March 26, 2002
AFG INVESTMENT TRUST C
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
2001 2000
ASSETS . Restated
- ------------
Cash and cash equivalents $ 1,716,588 $ 8,848,816
Rents receivable 124,627 257,399
Accounts receivable - affiliate 103,602 424,853
Guarantee fee receivable - 126,000
Interest receivable - 8,930
Loan receivable - EFG/Kettle Development LLC 176,070 77,059
Interest in EFG/Kettle Development LLC 3,916,771 4,315,263
Interest in EFG Kirkwood LLC 3,274,817 3,267,991
Interest in MILPI Holdings, LLC 8,518,577 408,000
Investments - other 264,513 238,382
Other assets, net of accumulated amortization
of $47,039 at December 31, 2001 433,506 478,793
Equipment at cost, net of accumulated depreciation
of $27,813,022 and $20,018,229 at December 31, 2001
and 2000, respectively 23,913,730 33,364,106
------------ ------------
Total assets $42,442,801 $51,815,592
============ ============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $22,382,964 $26,220,794
Accrued interest 38,807 344,871
Accrued liabilities 135,019 284,691
Accrued liabilities - affiliates 150,695 47,835
Deferred rental income 277,357 29,882
Other liabilities 1,596,510 1,524,803
------------ ------------
Total liabilities 24,581,352 28,452,876
------------ ------------
Participants' capital (deficit):
Managing Trustee (54,368) 18,027
Special Beneficiary - 148,721
Class A Beneficiary Interests (1,787,153 Interests;
initial purchase price of $25 each) 20,254,184 25,186,697
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) - 347,638
Treasury Interests (223,861 Class A Interests at Cost) (2,338,367) (2,338,367)
------------ ------------
Total participants' capital 17,861,449 23,362,716
------------ ------------
Total liabilities and participants' capital $42,442,801 $51,815,592
============ ============
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
. . Restated
------------ ------------
INCOME
Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635
Interest income 157,725 666,975 1,217,855
Gain on sale of equipment 124,658 2,012,657 3,687,692
Gain on sale of investment securities - 70,095 -
Other income 182,726 301,400 261,116
------------ ------------ -----------
Total income 6,985,008 10,785,068 15,453,298
------------ ------------ -----------
EXPENSES
Depreciation and amortization 3,933,784 4,255,457 5,815,665
Write-down of equipment 5,578,975 - -
Interest expense 2,055,063 2,463,263 2,478,750
Management fees - affiliates 433,247 431,078 513,019
Operating expenses - affiliate 1,143,620 543,363 843,263
Write-down of other investment - 50,510 -
------------ ------------ -----------
Total expenses 13,144,689 7,743,671 9,650,697
------------ ------------ -----------
EQUITY INTERESTS
Equity in net loss of EFG/Kettle Development LLC (332,692) (91,066) -
Equity in net income (loss) of EFG Kirkwood LLC 6,826 (726,159) -
Equity in net income of MILPI Holdings, LLC 984,280 - -
------------ ------------ -----------
Total income (loss) from equity interests 658,414 (817,225) -
------------ ------------ -----------
Net income (loss) $(5,501,267) $ 2,224,172 $ 5,802,601
============ ============ ===========
Net income (loss)
per Class A Beneficiary Interest $ (2.76) $ 0.73 $ 1.13
============ ============ ===========
per Class B Beneficiary Interest $ (0.11) $ 0.19 $ 0.75
============ ============ ===========
Cash distributions declared
per Class A Beneficiary Interest $ - $ - $ 4.56
============ ============ ===========
per Class B Beneficiary Interest $ - $ - $ 3.66
============ ============ ===========
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Managing Special
Trustee Beneficiary Class A Beneficiaries - Class B Beneficiaries
--------------------- ---------------------
Amount Amount Interests Amount Interests
Balance at December 31, 1998 $ 12,631 $ 104,209 1,787,153 $30,022,170 3,024,740
Net income - 1999 162,815 1,343,220 - 2,015,010 -
Unrealized gain on investment
securities 202 1,663 - 14,919 -
---------- ------------- --------------------- ------------ ---------------------
Comprehensive income 163,017 1,344,883 - 2,029,929 -
Cash distributions declared (195,923) (1,616,362) - (8,153,693) -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 1999 (20,275) (167,270) 1,787,153 23,898,406 3,024,740
Net income - 2000 (Restated) 38,504 317,655 - 1,303,209 -
Less: Reclassification adjustment
for unrealized gain on investment
securities (202) (1,664) - (14,918) -
---------- ------------- --------------------- ------------ ---------------------
Comprehensive income (Restated) 38,302 315,991 - 1,288,291 -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 2000 (Restated) 18,027 148,721 1,787,153 25,186,697 3,024,740
Net loss - 2001 (73,920) (148,721) - (4,930,988) -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 2001 $ (55,893) $ - 1,787,153 $20,255,709 3,024,740
========== ============= ===================== ============ =====================
- Treasury
Amount Interests Total
Balance at December 31, 1998 $ 8,559,851 $(2,338,367) $ 36,360,494
Net income - 1999 2,281,556 - 5,802,601
Unrealized gain on investment
securities 3,383 - 20,167
------------- ------------ -------------
Comprehensive income 2,284,939 - 5,822,768
Cash distributions declared (11,058,573) - (21,024,551)
------------- ------------ -------------
Balance at December 31, 1999 (213,783) (2,338,367) 21,158,711
Net income - 2000 (Restated) 564,804 - 2,224,172
Less: Reclassification adjustment
for unrealized gain on investment
securities (3,383) - (20,167)
------------- ------------ -------------
Comprehensive income (Restated) 561,421 - 2,204,005
------------- ------------ -------------
Balance at December 31, 2000 (Restated) 347,638 (2,338,367) 23,362,716
Net loss - 2001 (347,638) - (5,501,267)
------------- ------------ -------------
Balance at December 31, 2001 $ - $(2,338,367) $ 17,861,449
============= ============ =============
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
. . Restated
- --------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(5,501,267) $ 2,224,172 $ 5,802,601
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,933,784 4,255,457 5,815,665
Write-down of equipment 5,578,975 - -
Accretion of bond discount - (6,504) (1,480)
Gain on sale of equipment (124,658) (2,012,657) (3,687,692)
Gain on sale of investment securities - (70,095) -
(Income) loss from equity interests (658,414) 817,225 -
Write-down of other investment - 50,510 -
Changes in assets and liabilities:
Rents receivable 132,772 (42,709) 126,421
Accounts receivable - affiliate 321,251 515,674 (261,854)
Guarantee fee receivable 126,000 (126,000) -
Interest receivable 8,930 5,792 (14,722)
Loan receivable - EFG/Kettle Development LLC (99,011) - (77,059)
Other assets (1,752) (137,842) (340,951)
Accrued interest (306,064) 173,087 (57,331)
Accrued liabilities (149,672) 187,887 (214,696)
Accrued liabilities - affiliates 102,860 (668) (5,699)
Deferred rental income 247,475 (287,303) (164,254)
Other liabilities 71,707 - -
------------ ------------- ------------
Net cash provided by operating activities 3,682,916 5,546,026 6,918,949
------------ ------------- ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 184,809 3,424,815 8,850,801
Investments - other (26,131) (288,892) -
Interest in EFG/Kettle Development LLC - - (3,139,648)
Interest in EFG Kirkwood LLC - (1,287,350) (2,706,800)
Interest in MILPI Holdings, LLC (7,135,992) (408,000) -
Other liabilities - - 1,524,803
Purchase of investment securities - - (412,529)
Proceeds from sale of investment securities - 490,608 -
------------ ------------- ------------
Net cash provided by (used in) investing activities (6,977,314) 1,931,181 4,116,627
------------ ------------- ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Restricted cash - - 4,919,327
Proceeds from notes payable 471,032 25,302 -
Principal payments - notes payable (4,308,862) (6,377,660) (3,832,212)
Distributions paid - (15,200,000) (6,223,847)
------------ ------------- ------------
Net cash used in financing activities (3,837,830) (21,552,358) (5,136,732)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (7,132,228) (14,075,151) 5,898,844
Cash and cash equivalents at beginning of year 8,848,816 22,923,967 17,025,123
------------ ------------- ------------
Cash and cash equivalents at end of year $ 1,716,588 $ 8,848,816 $22,923,967
============ ============= ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 2,361,127 $ 2,290,176 $ 2,536,081
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 5 to the financial statements.
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
- --------------------------------------------------
After AFG Investment Trust C (the "Trust") filed its Annual Report on Form 10-K
(the "2000 10-K") for the year ended December 31, 2000 with the United States
Securities and Exchange Commission ("SEC"), the Trust determined that the amount
recorded as its share of loss on its interest in EFG Kirkwood LLC ("EFG
Kirkwood") in its financial statements contained therein required revision, as
discussed below. The Trust determined that the amount previously recorded as
loss on its interest in EFG Kirkwood was understated by $535,958. Accordingly,
the Trust recorded an additional loss on its interest in EFG Kirkwood of
$535,958, resulting in a decrease in the net income for the year ended December
31, 2000 of $535,958, or $0.21 per Class A Beneficiary Interest and $0.03 per
Class B Beneficiary Interest, respectively. As a result, the accompanying
financial statements for the year ended December 31, 2000 have been restated
from the amounts previously reported.
NOTE 2 - ORGANIZATION AND TRUST MATTERS
- ---------------------------------------------
The Trust was organized as a Delaware business trust in August 1992.
Participants' capital initially consisted of contributions of $1,000 from the
Managing Trustee, AFG ASIT Corporation, $1,000 from the Special Beneficiary,
Equis Financial Group Limited Partnership (formerly known as American Finance
Group), a Massachusetts limited partnership ("EFG" or the "Advisor"), and $100
from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate
of EFG. The Trust issued an aggregate of 2,011,014 Beneficiary Interests
(hereinafter referred to as Class A Interests) at a subscription price of $25.00
each ($50,275,350 in total) through 9 serial closings commencing December 1992
and ending September 1993. In July 1997, the Trust issued 3,024,740 Class B
Interests at $5.00 each ($15,123,700 in total), of which (i) 3,019,220 interests
are held by Equis II Corporation, an affiliate of EFG, and a wholly owned
subsidiary of Semele Group Inc. ("Semele"), and (ii) 5,520 interests are held by
10 other Class A investors. The Trust repurchased 218,661 Class A Interests in
October 1997 at a cost of $2,291,567. In April 1998, the Trust repurchased
5,200 additional Class A Interests at a cost of $46,800. Accordingly, there are
1,787,153 Class A Interests currently outstanding. The Class A and Class B
Interest holders are collectively referred to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, Semele. Semele purchased the Special
Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues
to act as Advisor to the Trust and provides services in connection with the
acquisition and remarketing of the Trust's equipment assets. The Managing
Trustee is responsible for the general management and business affairs of the
Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation
and an affiliate of EFG. Except with respect to "interested transactions", Class
A Interests and Class B Interests have identical voting rights and, therefore,
Equis II Corporation generally has control over the Trust on all matters on
which the Beneficiaries may vote. With respect to interested transactions,
holders of those Class B Interests that are the Managing Trustee or any of its
affiliates must vote their interests as a majority of the Class A Interests have
been voted. The Managing Trustee and the Special Beneficiary are not required to
make any additional capital contributions except as may be required under the
Second Amended and Restated Declaration of Trust, as amended (the "Trust
Agreement").
Significant operations commenced coincident with the Trusts initial purchase of
equipment and the associated lease commitments in December 1992. Pursuant to
the Trust Agreement, each distribution of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings of the Trust is made 90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee.
Under the terms of a management agreement between the Trust and EFG, management
services are provided by EFG to the Trust for fees, as stated in the agreement.
EFG is a Massachusetts limited partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Trust and several other
direct-participation equipment leasing programs sponsored or co-sponsored by AFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily to
the business of originating new leases, and the name "American Finance Group,"
and its acronym, to a third party. AFG changed its name to Equis Financial
Group Limited Partnership after the sale was concluded. Pursuant to terms of the
sale agreements, EFG specifically reserved the rights to continue using the name
American Finance Group and its acronym in connection with the Trust and certain
Other Investment Programs and to continue managing all assets owned by the Trust
and the Other Investment Programs.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Cash Equivalents and Investment Securities
- ----------------------------------------------
The Trust classifies any amounts on deposits in banks and all highly liquid
investments purchased with an original maturity of three months or less as cash
and cash equivalents.
Revenue Recognition
- --------------------
Effective January 1, 2000, the Trust adopted the provisions of Securities
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the
recognition, presentation and disclosure of revenue in financial statements. The
adoption of SAB No. 101 had no impact on the Trust's financial statements.
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements, which expire beyond the
Trust's anticipated dissolution, date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of $9,923,959 are due as follows:
For the year ending December 31, 2002 $5,298,286
2003 4,283,058
2004 285,025
2005 57,590
----------
. Total $9,923,959
==========
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the year ended December 31, 2001 and its share of the
maintenance payment was $35,440, which was accrued as a maintenance obligation
at December 31, 2001. Coincident with the termination of the Reno lease, the
aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four
years. The Reno Programs are to receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864.
Revenue from major individual lessees, which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
---------- ---------- ----------
Scandinavian Airlines System. . . $3,321,309 $3,620,348 $3,630,432
Hyundai Electronics America, Inc. $1,146,949 $1,146,949 $1,146,949
Use of Estimates
- ------------------
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Equipment on Lease
- --------------------
All equipment was acquired from EFG, one of its Affiliates or from third-party
sellers. Equipment Cost means the actual cost paid by the Trust to acquire the
equipment, including acquisition fees. Where equipment was acquired from EFG or
an Affiliate, Equipment Cost reflects the actual price paid for the equipment by
EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate
while carrying the equipment, including all liens and encumbrances, less the
amount of all primary term rents earned by EFG or the Affiliate prior to selling
the equipment. Where the seller of the equipment was a third party, Equipment
Cost reflects the seller's invoice price.
Depreciation and Amortization
- -------------------------------
The Trust's depreciation policy is intended to allocate the cost of equipment
over the period during which it produces economic benefit. The principal period
of economic benefit is considered to correspond to each asset's primary lease
term, which term generally represents the period of greatest revenue potential
for each asset. Accordingly, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of the primary lease
expiration. To the extent that an asset is held beyond its primary lease term,
the Trust continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life. Periodically, the
Managing Trustee evaluates the net carrying value of equipment to determine
whether it exceeds undiscounted future cash flows. For purposes of this
comparison, "net carrying value" represents, at a given date, the net book value
(equipment cost less accumulated depreciation for financial reporting purposes)
of the Trust's equipment and "net realizable value" represents, at the same
date, the aggregate undiscounted cash flows resulting from future contracted
lease payments plus the estimated residual value of the Trust's equipment. The
Managing Trustee evaluates significant equipment assets, such as aircraft,
individually. All other assets are evaluated collectively by equipment type
unless the Managing Trustee learns of specific circumstances, such as a lessee
default, technological obsolescence, or other market developments, which could
affect the net realizable value of particular assets. Adjustments to reduce the
net carrying value of equipment are recorded in those instances where estimated
net realizable value is considered to be less than net carrying value and are
reflected separately on the accompanying Statement of Operations as write-down
of equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Impairment of Long-Lived Assets
- ----------------------------------
The carrying values of long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value may not be
recoverable. If this review results in an impairment, as determined based on
the estimated undiscounted cash flow, the carrying value of the related
long-lived asset is adjusted to fair value.
Accrued Liabilities - Affiliates
- -----------------------------------
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliates.
Contingencies
- -------------
The Trust's policy is to recognize a liability for goods and services during the
period when the goods or services are received. To the extent that the Trust
has a contingent liability, meaning generally a liability the payment of which
is subject to the outcome of a future event, the Trust recognizes a liability in
accordance with Statement of Financial Accounting Standards No. 5 "Accounting
for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of
contingent liabilities when the amount of liability can be reasonably estimated
and the liability is probable.
Allocation of Net Income or Loss
- -------------------------------------
Net income is allocated quarterly first, to eliminate any Participant's negative
capital account balance and second, 1% to the Managing Trustee, 8.25% to the
Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period (excluding
$1,432,279 Class A special cash distributions paid in 1999). Net losses are
allocated quarterly first, to eliminate any positive capital account balance of
the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries;
second, to eliminate any positive capital account balances of the Class A
Beneficiaries; and third, any remainder to the Managing Trustee.
The allocation of net income or loss pursuant to the Trust Agreement for income
tax purposes differs from the foregoing and is based upon government rules and
regulations for federal income tax reporting purposes and assumes, for each
income tax reporting period, the liquidation of all of the Trust's assets and
the subsequent distribution of all available cash to the Participants. For
income tax purposes, the Trust adjusts its allocations of income and loss to the
Participants so as to cause their tax capital account balances at the end of the
reporting period to be equal to the amount that would be distributed to them in
the event of a liquidation and dissolution of the Trust. This methodology does
not consider the costs attendant to liquidation or whether the Trust intends to
have future business operations.
The table below includes detail of the allocation of income (loss) in each of
the quarters for the years ended December 31, 2001, 2000 and 1999.
Managing Special Class A Class B Treasury
Trustee Beneficiary Beneficiaries Beneficiaries Interests Total
---------- ------------- --------------- --------------- ------------ -------------
December 31, 1998 $ 12,631 $ 104,209 $ 30,022,170 $ 8,559,851 $(2,338,367) $ 36,360,494
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 8,367 69,025 511,150 248,122 - 836,664
---------- ------------- --------------- --------------- ------------ -------------
March 31, 1999 9,019 74,408 29,801,482 8,452,726 (2,338,367) 35,999,268
Special distribution - Class A - - (1,432,279) - - (1,432,279)
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 13,991 115,427 673,949 327,147 - 1,130,514
Unrealized gain 127 1,048 7,760 3,767 - 12,702
---------- ------------- --------------- --------------- ------------ -------------
June 30, 1999 11,158 92,057 28,319,074 8,428,393 (2,338,367) 34,512,315
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 14,405 118,838 829,911 402,853 - 1,366,007
Unrealized gain 154 1,269 9,399 4,563 - 15,385
---------- ------------- --------------- --------------- ------------ -------------
September 30, 1999 13,738 113,338 28,426,546 8,480,562 (2,338,367) 34,695,817
Distributions (159,986) (1,319,884) (4,525,900) (9,992,832) - (15,998,602)
Net income 126,052 1,039,930 - 1,303,434 - 2,469,416
Unrealized gain (loss), net (79) (654) (2,240) (4,947) - (7,920)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 1999 (20,275) (167,270) 23,898,406 (213,783) (2,338,367) 21,158,711
Net income (Restated) 27,117 223,713 489,124 345,530 - 1,085,484
Unrealized losses (Restated) (285) (1,373) (25,620) (1,184) - (28,462)
---------- ------------- --------------- --------------- ------------ -------------
March 31, 2000 (Restated) 6,557 55,070 24,361,910 130,563 (2,338,367) 22,215,733
Net income (Restated) 805 6,643 57,565 15,505 - 80,518
Unrealized gain (Restated) 64 523 4,536 1,222 - 6,345
---------- ------------- --------------- --------------- ------------ -------------
June 30, 2000 (Restated) 7,426 62,236 24,424,011 147,290 (2,338,367) 22,302,596
Net income (Restated) 9,137 75,377 653,203 175,941 - 913,658
Unrealized gain (Restated) 40 327 2,835 764 - 3,966
---------- ------------- --------------- --------------- ------------ -------------
September 30, 2000 (Restated) 16,603 137,940 25,080,049 323,995 (2,338,367) 23,220,220
Net income (Restated) 1,445 11,922 103,317 27,828 - 144,512
Unrealized loss (Restated) (21) (1,141) 3,331 (4,185) - (2,016)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 2000 (Restated) 18,027 148,721 25,186,697 347,638 (2,338,367) 23,362,716
Net income 10,677 88,085 763,331 205,605 - 1,067,698
---------- ------------- --------------- --------------- ------------ -------------
March 31, 2001 28,704 236,806 25,950,028 553,243 (2,338,367) 24,430,414
Net loss (28,704) (236,806) (313,402) (553,243) - (1,132,155)
---------- ------------- --------------- --------------- ------------ -------------
June 30, 2001 - - 25,636,626 - (2,338,367) 22,298,259
Net loss (1,158) - (114,615) - - (115,773)
---------- ------------- --------------- --------------- ------------ -------------
September 30, 2001 (1,158) - 25,522,011 - (2,338,367) 23,182,486
Net loss (53,210) - (5,267,827) - - (5,321,037)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 2001 $ (54,368) $ - $ 20,254,184 $ - $(2,338,367) $ 17,861,449
========== ============= =============== =============== ============ =============
Reclassification
- ----------------
Certain amounts previously reported have been reclassified to conform to the
December 31, 2001 presentation.
Accumulated Other Comprehensive Income
- -----------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", effective in 1998, requires the disclosure of comprehensive income
(loss) to reflect changes in participants' capital that result from transactions
and economic events from non-owner sources. Accumulated other comprehensive
income (loss) for the years ended December 31, 2001 and 2000 represents the
Trust's unrealized gains (losses) on investment securities:
2001 2000 1999
----- --------- -------
Beginning Balance. . . . . . . . . . . . . . . . $ -- $ 20,167 $ --
Adjustments related to unrealized gains (losses)
on investment securities . . . . . . . . . . . . -- (20,167) 20,167
----- --------- -------
Ending Balance . . . . . . . . . . . . . . . . . $ -- $ -- $20,167
===== ========= =======
Net Income and Cash Distributions Per Beneficiary Interest
- -----------------------------------------------------------------
Net income and cash distributions per Class A Interest are based on 1,787,153
Class A Interests outstanding. Net income and cash distributions per Class B
Beneficiary Interest are based on 3,024,740 Class B Interests outstanding during
the years ended December 31, 2001, 2000 and 1999. Net income and cash
distributions per Beneficiary Interest are computed after allocation of the
Managing Trustee's and Special Beneficiary's shares of net income and cash
distributions.
Provision for Income Taxes
- -----------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their separate tax returns.
New Accounting Pronouncements
- -------------------------------
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Trust believes the adoption of SFAS No. 141
has not had a material impact on its financial statements.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Trust to complete a
transitional goodwill impairment test six months from the date of adoption. The
Trust believes the adoption of SFAS No. 142 will not have a material impact on
its financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Trust believes that the
adoption of SFAS No. 144 will not have a material impact on its financial
statements.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Trust at December 31, 2001.
Remaining Lease Term (Months), as used below, represents the number of months
remaining from December 31, 2001 under contracted lease terms and is presented
as a range when more than one lease agreement is contained in the stated
equipment category. A Remaining Lease Term equal to zero reflects equipment
either held for sale or re-lease or being leased on a month-to-month basis.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- --------------------------------------------- ----------- ------------------------ -----------------------
Aircraft 24-42 $ 32,134,911 Foreign
Manufacturing 0-20 9,053,648 CA/MI
Locomotives 27 4,574,489 NE
Materials handling 0-14 3,161,465 AR/FL/IL/IN/KY/MA/MI/OH
- - OR/PA/SC/WI/WV/Foreign
Computer and peripherals 0-17 1,716,673 FL/IN/MI/OH/WI
Construction and mining 0 1,085,566 NV/Foreign
------------------------
Total equipment cost - 51,726,752
Accumulated depreciation - (27,813,022)
------------------------
Equipment, net of accumulated depreciation - $ 23,913,730
========================
In certain cases, the cost of the Trust's equipment represents a proportionate
ownership interest. The remaining interests are owned by EFG or an affiliated
equipment leasing program sponsored by EFG. The Trust and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment. Proportionate equipment ownership enables the
Trust to further diversify its equipment portfolio by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could result from a concentration in any single equipment type, industry or
lessee. At December 31, 2001, the Trust's equipment portfolio included equipment
having a proportionate original cost of $38,342,258, representing approximately
74% of total equipment cost.
Certain of the equipment and related lease payment streams were used to secure
term loans with third-party lenders. The preceding summary of equipment includes
leveraged equipment having an original cost of approximately $44,000,000 and a
net book value of approximately $24,000,000 at December 31, 2001. See Note 9 -
Notes Payable.
Generally, the costs associated with maintaining, insuring and operating the
Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust. However, the
Partnership has purchased supplemental insurance coverage to for its aircraft to
reduce the economic risk arising from certain losses. Specifically, the
Partnership is insured under supplemental policies for "Aircraft Hull Total Loss
Only" and "Aircraft Hull Total Loss Only War and Other Perils."
As equipment is sold to third parties, or otherwise disposed of, the Trust
recognizes a gain or loss equal to the difference between the net book value of
the equipment at the time of sale or disposition and the proceeds realized upon
sale or disposition. The ultimate realization of estimated residual value in
the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment upon the expiration
of the primary lease terms. The summary above includes fully depreciated
equipment held for sale or re-lease with an original cost of approximately
$1,788,000 at December 31, 2001. The Managing Trustee is actively seeking the
sale or re-lease of all equipment not on lease. In addition, the summary above
includes equipment being leased on a month-to-month basis.
The Trust accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. During the year ended December 31, 2001, the Trust recorded
a write-down of equipment, representing an impairment to the carrying value of
the Trust's interest in a Boeing 767-300ER aircraft. The resulting charge of
$5,578,975 was based on a comparison of estimated fair value and carrying value
of the Trust's interest in the aircraft.
NOTE 5 - INTEREST IN EFG/KETTLE DEVELOPMENT LLC
- ------------------------------------------------------
On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers")
formed EFG/Kettle Development LLC, a Delaware limited liability company, for the
purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a
real estate development in Kelowna, British Columbia in Canada called Kettle
Valley. EFG/Kettle Development LLC, upon receiving the Buyers' contributions for
their membership interests, purchased the Interest from a special purpose
company ("SPC") whose subsidiaries own a 99.9% limited partnership interest in
Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its
subsidiaries were established by the seller, in part, for income tax purposes
and have no business interests other than the development of Kettle Valley. KVD
LP is a Canadian Partnership that owns the property, consisting of approximately
280 acres of land. The project is zoned for 1,120 residential units in addition
to commercial space. To date, 108 residential units have been constructed and
sold 10 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 50.604% and had a
cost of $4,472,129, including a 1% acquisition fee of $44,729 paid to EFG. The
acquisition was funded with cash of $3,139,648 and a non-recourse note for
$1,332,481. The note bears interest at an annualized rate of 7.5% and will be
fully amortized over 34 months commencing April 1, 1999. The note is secured by
the Trust's interest in EFG/Kettle Development LLC. The Trust's cost basis in
this joint venture was approximately $658,000 greater than its equity interest
in the underlying net assets at December 31, 1999. This difference is being
amortized over a period of 10 years beginning January 1, 2000. The amount
amortized is included in amortization expense as an offset to Interest in EFG /
Kettle Valley Development LLC and was $65,800 in each of the years ended
December 31, 2001 and 2000.
The Trust accounts for its interest in Kettle Valley using the equity method of
accounting. Under the equity method of accounting, the Trust's interest is (i)
increased (decreased) to reflect the Trust's share of income (loss) of the joint
venture and (ii) decreased to reflect any distributions the Trust received from
the joint venture. The Trust's interest was decreased by $332,692 and $91,066,
respectively, during the years ended December 31, 2001 and 2000, reflecting its
share of loss from Kettle Valley.
In addition, the seller purchased a residual sharing interest in a Boeing
767-300 aircraft owned by the Buyers and leased to Scandinavian Airlines System
("SAS"). The seller paid $3,013,206 to the Buyers ($1,524,803, or 50.604% to the
Trust) for the residual interest, which is subordinate to certain preferred
payments to be made to the Buyers in connection with the aircraft. Payment of
the residual interest is due only to the extent that the Trust receives net
residual proceeds from the aircraft. The residual interest is non-recourse to
the Buyers and is reflected as Other Liabilities on the accompanying Statement
of Financial Position at both December 31, 2001 and 2000.
The table below provides comparative summarized income statement data for KVD
LP. KVD LP has a January 31 fiscal year end. The Trust has a December 31 fiscal
year end. The operating results of KVD LP shown below have been conformed to
the year ended December 31, 2001 and 2000, respectively.
Year ended Year ended
December 31, December 31,
2001 2000
Total revenues $ 4,596,837 $ 6,250,711
Total expenses (5,967,703) (7,118,553)
-------------- --------------
Net loss $ (1,370,866) ($867,842)
============== ==============
NOTE 6 - INTEREST IN EFG KIRKWOOD LLC
- --------------------------------------------
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and Semele formed a joint venture, EFG Kirkwood LLC ("EFG Kirkwood"),
for the purpose of acquiring preferred and common stock interests in Kirkwood
Associates Inc. ("KAI"). The Trusts collectively own 100% of the Class A
membership interests in EFG Kirkwood and Semele owns 100% of the Class B
membership interests in EFG Kirkwood. The Class A interest holders are entitled
to certain preferred returns prior to distribution payments to the Class B
interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of the
voting securities of that entity under the operating agreement for the LLC,
which gives equal voting rights to Class A and Class B membership interests.
The Managing Trustee is the manager of EFG Kirkwood.
On April 30, 2000, KAI's ownership interests in certain assets and substantially
all of its liabilities were transferred to Mountain Resort Holdings LLC
("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in
KAI's common and preferred stock for corresponding pro-rata membership interests
in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership
interests in Mountain Resort. Mountain Resort, through four wholly owned
subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort
located in northern California, a public utility that services the local
community, and land that is held for residential and commercial development. The
Trust holds 40% of EFG Kirkwood's Class A membership interests.
On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in
Mountain Springs 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 in Durango, Colorado.
The Trust's ownership interest in EFG Kirkwood had an original cost of
$3,994,150; including a 1% acquisition fee of $39,546 paid to EFG. The Trust's
ownership interest in EFG Kirkwood is accounted for on the equity method and the
Trust recorded income of $6,826 and a loss of $726,159 for the years ended
December 31, 2001 and 2000, respectively, representing its pro-rata share of the
net income (loss) of EFG Kirkwood.
The following table summarizes selected the unaudited financial data pertaining
to the Trust's membership interests in EFG Kirkwood LLC and the summarized
unaudited results of the operations of the ski resorts.
Mountain Resort has a April 30th fiscal year end and the operating results shown
below have been conformed to the twelve months ended December 31, 2001 and 2000,
respectively.
Mountain Springs has a May 31st fiscal year end. The operating results shown
below have been conformed to the twelve months ended December 31, 2001. The
Trust purchased their interest on Mountain Springs in May 1, 2000 and as such
the operating results below have been conformed to reflect the eight months
ended December 31, 2000.
2001 2000
------------ -------------
EFG Kirkwood LLC
- ----------------------------------------------
Total assets (primarily real estate and plant) $ 8,105,002 $ 8,286,568
Total liabilities (primarily borrowings) -- 206,263
------------ -------------
Net equity of EFG Kirkwood LLC $ 8,105,002 $ 8,080,305
============ =============
Net equity of EFG Kirkwood LLC $ 8,105,002 $ 8,080,305
Unamortized capitalized acquisition fees (2) 82,043 89,675
------------ -------------
Aggregate net equity and fees $ 8,187,045 $ 8,169,980
============ =============
Trust's share of net equity and fees $ 3,274,817 $ 3,267,991
============ =============
2001 2000 1999 (1)
------------ ------------- ----------
Equity in income (loss) $ 28,979 $ (2,328,753) $(218,890)
Total expenses 4,282 8,567 --
------------ ------------- ----------
Net income (loss) of EFG Kirkwood LLC $ 24,697 $ (2,337,320) $(218,890)
============ ============= ==========
Net income (loss) of EFG Kirkwood LLC $ 24,697 $ (2,337,320) $(218,890)
Amortization of capitalized acquisition fees (7,632) (6,626) (2,564)
------------ ------------- ----------
Aggregate net income (loss) $ 17,065 $ (2,343,946) $(221,454)
============ ============= ----------
Trust's share of net income (loss) $ 6,826 $ (726,159) $ --
============ ============= ==========
Summarized Operating Results - Ski Resorts:
- ----------------------------------------------
Revenues
Mountain Resort $30,195,000 $ 28,338,000
============ =============
Mountain Springs $15,250,000 $ 5,008,000
============ =============
Expenses
Mountain Resort $30,034,000 $ 26,914,000
============ =============
Mountain Springs $15,346,000 $ 9,725,000
============ =============
(1) EFG Kirkwood LLC commenced operations on June 10, 1999; therefore,
amounts in this column correspond to the period June 10, 1999 to December 31,
1999.
(2) Unamortized capitalized acquisition fees represent expenses incurred by
the four Trusts in the acquisition of the membership interests in EFG Kirkwood
LLC.
NOTE 7 -INTEREST IN MILPI HOLDINGS, LLC
- ---------------------------------------------
In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp.
("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts
collectively paid $1.2 million for their membership interests in MILPI ($408,000
for the Trust) and MILPI purchased the shares of MILPI Acquisition for an
aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition
entered into a definitive agreement (the "Agreement") with PLM International,
Inc. ("PLM"), an equipment leasing and asset management company, for the purpose
of acquiring up to 100% of the outstanding common stock of PLM, for an
approximate purchase price of up to $27 million. In connection with the
acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to
purchase any and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of PLM's outstanding common stock in February 2001 for a total purchase price of
approximately $21.8 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition would merge into PLM, with PLM being the surviving entity. The
merger was completed when MILPI obtained approval of the merger from PLM's
shareholders pursuant to a special shareholders' meeting on February 6, 2002.
The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
was contributed by the Trust. The funds were obtained from existing resources
and internally generated funds and by means of a 364 day, unsecured loan from
PLM evidenced by a promissory note in the principal amount of $719,760 that
bears interest at LIBOR plus 200 basis points (subject to an interest rate cap).
At December 31, 2001, the Trust has a 34% membership interest in MILPI having an
original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects
MILPI Acquisition's cost of acquiring the common stock of PLM, including the
amount paid for the shares tendered of $7,403,746, capitalized transaction costs
of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele
of $74,037. The acquisition fees were capitalized by the Trust and are being
amortized over a period of 7 years beginning March 1, 2001. The amount
amortized is included in amortization expense and was $9,695 during the year
ended December 31, 2001.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr.
Coyne, who are a director and an officer of the Trust, respectively, are also
officers and directors of, and own significant stock in, Semele. In addition,
Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition.
The Trust's ownership interest in MILPI is accounted for on the equity method
and the Trust recorded income of $984,280 during the year ended December 31,
2001, representing its pro-rata share of the net income of MILPI.
The table below provides summarized consolidated income statement data for MILPI
for the period February 7, 2001 (date of inception) through December 31, 2001.
Total assets $43,399,000
Total liabilities $15,453,000
Minority interest $ 3,029,000
Total equity $24,917,000
Total revenues $10,376,000
Total operating expenses, minority interest
And other income and expenses $ 5,818,000
Provision for income taxes $ 1,611,000
Net income $ 2,947,000
See discussion of the PLM acquisition included in Note 15 - Subsequent Events.
NOTE 8 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Trust are paid by EFG on behalf of the
Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and
other costs, both expensed and capitalized, during the years ended December 31,
2001, 2000 and 1999, which were paid or accrued by the Trust to EFG or its
Affiliates, are as follows:
2001 2000 1999
---------- -------- ----------
Acquisition fees $ 74,037 $ 15,484 $ 75,281
Management fees 433,247 431,078 513,019
Administrative charges 178,158 197,789 192,348
Reimbursable operating costs
due to third parties 965,462 345,574 650,915
---------- -------- ----------
Total $1,650,904 $989,925 $1,431,563
========== ======== ==========
As provided under the terms of the Trust Agreement, EFG is compensated for its
services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 2, 1997, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In connection with a Solicitation Statement and consent of Beneficiaries in
1998, the Trust's reinvestment provisions were reinstated through December 31,
2002 and the Trust was permitted to invest in assets other than equipment.
Acquisition fees paid to EFG in connection with such equipment reinvestment
assets are equal to 1% of Asset Base Price paid by the Trust. For management
services, EFG is compensated by an amount equal to (i) 5% of gross operating
lease rental revenue and 2% of gross full payout lease rental revenue received
by the Trust with respect to equipment acquired on or prior to March 31, 1998.
For management services earned in connection with equipment acquired on or after
April 1, 1998, EFG is compensated by an amount equal to 2% of gross lease rental
revenue received by the Trust. For non-equipment investments other than cash,
the Managing Trustee receives an annualized management fee of 1% of such assets
under management. Compensation to EFG for services connected to the remarketing
of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or
(ii) one-half of reasonable brokerage fees otherwise payable under arm's length
circumstances. Payment of the remarketing fee is subordinated to Payout and this
fee and the other fees described above are subject to certain limitations
defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at actual cost.
All equipment was purchased from EFG, one of its Affiliates or directly from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 3, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid by the lessee
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account prior to remittance to the Trust.
At December 31, 2001, the Trust was owed $103,602 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2002.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and
Chief Executive Officer of Semele.
In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest,
thereby generating $15,123,700 in aggregate Class B capital contributions. Class
A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such
aggregate capital contributions, and then Special Beneficiary, EFG, purchased
3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital
contributions.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of a majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. See Item 1
(a) of this report regarding certain voting restrictions related to the Class B
Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman
and Chief Executive Officer of Semele. James A. Coyne is Semele's President and
Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board
of Directors of, and own significant stock in, Semele.
See the acquisition of the outstanding stock of PLM and subsequent merger by the
Trusts included in Note 7 - Interest in MILPI Holdings, LLC. See the formation
of a joint venture in March 2002 by the Trust and Trust D discussed below in
Note 15 - Subsequent Events.
NOTE 9 - NOTES PAYABLE
- --------------------------
Notes payable at December 31, 2001 consisted of installment notes of $22,382,964
payable to banks and institutional lenders. The notes bear fixed interest rates
ranging between 6.76% and 9.176%. All of the installment notes are non-recourse
and are collateralized by the Trust's equipment and assignment of the related
lease payments, as discussed below. Generally, the equipment-related
installments notes will be fully amortized by noncancellable rents. However,
the Trust has a balloon payment obligation of $16,193,280 at the expiration of
the lease term related to its interest in an aircraft leased to SAS in December
2003.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 3 -
Revenue Recognition). The Reno Programs executed a debt agreement with a new
lender collateralized by the aircraft and assignment of the Aerovias de Mexico,
S.A. de C.V. lease payments. The Reno Programs received debt proceeds of
$5,316,482, of which the Trust's share was $471,032. The Trust used the new
debt proceeds and a portion of certain other receipts from Reno to repay the
outstanding balance of the existing indebtedness related to the aircraft of
$493,137 and accrued interest and fees of $7,347.
Management believes that the carrying amount of the notes payable approximates
fair value at December 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of notes payable are as follows:
For the year ending December 31, 2002 $ 3,223,028
2003 18,827,727
2004 273,318
2005 58,891
-----------
. Total $22,382,964
===========
NOTE 10 - INCOME TAXES
- --------------------------
The Trust is not a taxable entity for federal income tax purposes. Accordingly,
no provision for income taxes has been recorded in the accounts of the Trust.
For financial statement purposes, the Trust allocates net income quarterly
first, to eliminate any Participant's negative capital account balance and
second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75%
collectively to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period (excluding $1,432,279 Class A special cash
distributions paid in 1999). Net losses are allocated quarterly first, to
eliminate any positive capital account balance of the Managing Trustee, the
Special Beneficiary and the Class B Beneficiaries; second, to eliminate any
positive capital account balances of the Class A Beneficiaries; and third, any
remainder to the Managing Trustee. This convention differs from the income or
loss allocation requirements for income tax and Dissolution Event purposes as
delineated in the Trust Agreement. For income tax purposes, the Trust allocates
net income or net loss in accordance with the provisions of such agreement.
Pursuant to the Trust Agreement, upon dissolution of the Trust, the Managing
Trustee will be required to contribute to the Trust an amount equal to any
negative balance, which may exist in the Managing Trustee's tax capital account.
At December 31, 2001, the Managing Trustee had a negative tax capital account
balance of $55,893.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
------------ ------------ ------------
Net income (loss) $(5,501,267) $ 2,224,172 $ 5,802,601
Financial statement depreciation less
than tax depreciation (740,333) (2,343,210) (3,482,896)
Recognize pass through income (669,270) 535,958 -
Reverse income from corporate investment (651,588) - -
Tax gain (loss) in excess of book
gain (loss) on sale - (765,343) (23,049)
Deferred rental income 247,475 (287,303) (164,254)
Write-down of equipment 5,578,975 - -
Other (190,174) 163,292 62,400
------------ ------------ ------------
Net income (loss) for federal income tax
reporting purposes $(1,926,182) $ (472,434) $ 2,194,802
============ ============ ============
The following is a reconciliation between participants' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2001 and 2000:
2001 2000
------------- -------------
Participants' capital $ 17,861,449 $ 23,362,716
Add back selling commissions and organization
and offering costs 4,922,397 4,922,397
Deduct deferred step-down of capital basis (689,869) (689,869)
Cumulative difference between federal income tax
and financial statement income (loss) (16,589,264) (20,164,349)
------------- -------------
Participants' capital for federal income tax reporting purposes $ 5,504,713 $ 7,430,895
============= =============
The cumulative difference between federal income tax and financial statement
income (loss) represents timing differences.
NOTE 11 - GUARANTEE AGREEMENT
- ---------------------------------
On March 8, 2000, the Trusts entered into a guarantee agreement whereby the
Trusts, jointly and severally, guaranteed the payment obligations under a master
lease agreement between Echelon Commercial LLC, a newly-formed Delaware company
that is controlled by Gary D. Engle, President and Chief Executive Officer of
EFG, as lessee, and Heller Affordable Housing of Florida, Inc., and two other
entities, as lessor ("Heller"). The lease payments of Echelon Commercial LLC to
Heller are supported by lease payments to Echelon Commercial LLC from various
sub-lessees who are parties to commercial and residential lease agreements under
the master lease agreement. The guarantee of lease payments by the Trusts was
capped at a maximum of $34,500,000, excluding expenses that could result in the
event that Echelon Commercial LLC defaulted under the terms of the master lease
agreement.
As a result of principal reductions on the average guarantee amount, an amended
and restated agreement was entered into in December 2000, that reduced the
guaranteed amount among the Trusts. During the year ended December 31, 2001, the
requirements of the guarantee agreement were met and the Trust received payment
for all outstanding amounts totaling $224,513, including $89,583 of income
related to the guarantee agreement recognized during the year ended December 31,
2001. During the year ended December 31, 2001, the Trust received an upfront
cash fee of $175,400 and recognized a total of $301,400 in income related from
the guarantee. The guarantee fee is reflected as Other Income on the
accompanying Statement of Operations. The Trust has no further obligations
under the guarantee agreement.
NOTE 12 - LEGAL PROCEEDINGS
- -------------------------------
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
------------------------------------
Financial Group Limited Partnership, et al., in the United States District Court
------------------------------------
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
-----------------------------------
Financial Group Limited Partnership, et al., in the Superior Court of the
------------------------------------------
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
-
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs asserted, among other things, claims against the Defendants on
behalf of the Nominal Defendants for violations of the Securities Exchange Act
of 1934, common law fraud, breach of contract, breach of fiduciary duty, and
violations of the partnership or trust agreements that govern each of the
Nominal Defendants. The Defendants denied, and continue to deny, that any of
them have committed or threatened to commit any violations of law or breached
any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit was intended to be achieved and which, among other
things, was expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement."
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an
amended Stipulation of Settlement (the "Amended Stipulation") which was filed
with the Court on March 15, 1999. The Amended Stipulation was preliminarily
approved by the Court by its "Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 22, 1999. The Amended
Stipulation, among other things, divided the Class Action Lawsuit into two
separate sub-classes that could be settled individually. The second sub-class,
which does not include the Trust, remains pending.
On April 5, 1999, the Trust mailed a notice to all Class A and Class B
Beneficiaries describing, among other things, the Class Action Lawsuit and the
proposed settlement terms for the Trust. In addition, the notice advised the
Beneficiaries that the Court would conduct a fairness hearing on May 21, 1999
and described the rights of the Beneficiaries and the procedures they should
follow if they wished to object to the settlement.
On May 26, 1999, the Court issued its Order and Final Judgment approving
settlement of the Class Action Lawsuit with respect to claims asserted by the
Plaintiffs on behalf of the sub-class that included the Trust. As a result of
the settlement, the Trust declared a special cash distribution of $1,513,639,
including legal fees for Plaintiffs' counsel of $81,360, that was paid in July
1999 ($0.80 per Class A Interest, net of legal fees). In addition, the parent
company of the Managing Trustee, Equis II Corporation, agreed to commit
$3,405,688 of its Class B Capital Contributions (paid in connection with its
purchase of Class B Interests in July 1997) to the Trust for the Trust's
operating and investment purposes. In the absence of this commitment, Equis II
Corporation would have been entitled to receive a Class B Capital Distribution
for this amount pursuant to the Trust Agreement because the proceeds from the
offering of the Class B Interests were intended to be used for approximately a
two-year period to re-purchase outstanding Class A Interests for the benefit of
each Trust. Subsequently, any Class B capital not so expended was required to
be returned to the Class B Interest holders. The settlement required that Equis
II Corporation forego this Class B Capital Distribution. The settlement
effectively caused Equis II Corporation to remain at risk as a long-term
investor in the Trust.
NOTE 13 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
Three Months Ended
--------------------
March 31, June 30, September 30, December 31, Total
---------- ------------ --------------- -------------- ------------
2001
----------
Lease revenue. . . . . . $1,607,494 $ 1,642,867 $ 1,690,959 $ 1,578,579 $ 6,519,899
Net income (loss). . . . $1,067,698 $(1,132,155) $ (115,773) $ (5,321,037) $(5,501,267)
Net income (loss) per
Beneficiary Interest:
Class A Interests. . . $ 0.43 $ (0.09) $ (0.06) $ (3.03) $ (2.76)
Class B Interests. . . $ 0.07 $ (0.18) $ -- $ -- $ (0.11)
2000 (Restated)
- ------------------------
Lease revenue. . . . . . $2,145,097 $ 2,035,590 $ 1,768,284 $ 1,784,970 $ 7,733,941
Net income . . . . . . . $1,085,484 $ 80,518 $ 913,658 $ 144,512 $ 2,224,172
Net income per
Beneficiary Interest:
Class A Interests. . . $ 0.27 $ 0.03 $ 0.37 $ 0.06 $ 0.73
Class B Interests. . . $ 0.11 $ 0.01 $ 0.06 $ 0.01 $ 0.19
Net loss for the three months ended June 30, 2001 includes a $449,031 loss on
interest in EFG/Kettle Development LLC and a $538,507 loss on interest in EFG
Kirkwood LLC.
Net loss for the three months ended December 31, 2001 includes a $5,578,975
write-down of equipment.
NOTE 14 - SEGMENT REPORTING
- -------------------------------
CUT FROM MDA, AND DO A SEARCH ON "IN THE ACCOMPANYING FINANCIAL STATEMENTS)" AND
REPLACE WITH ")" FOR THIS SECTION ONLY.
NOTE 15 - SUBSEQUENT EVENT
- ------------------------------
On February 6, 2002, MILPI completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common shares by
effecting a merger of PLM into MILPI Acquisition Corp. The merger was completed
when MILPI obtained approval of the merger from PLM's shareholders pursuant to a
special shareholders' meeting. The Trust and Trust D provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
million was contributed by the Trust. The funds were obtained from existing
resources and internally generated funds and by means of a 364 day, unsecured
loan to the Trust from PLM evidenced by a promissory note in the principal
amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject
to an interest rate cap). The Trust's ownership interest in MILPI subsequent to
the merger was increased from 34% to 37.5%. On March 12, 2002, PLM declared and
paid a cash dividend of approximately $2.7 million, of which the Trust's share
was $1,000,092.
In March 2002 the Trust and Trust D formed C & D IT LLC, a Delaware limited
liability company, as a 50%/50% owned joint venture that is co-managed by each
of the Trust and Trust D (the "C & D Joint Venture") to which each Trust
contributed $1 million. The C & D Joint Venture was formed for the purpose of
making a conditional contribution of $2.0 million to the Rancho Malibu Limited
Partnership in exchange for 25% of the interests in the Rancho Malibu
partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture
was admitted to the Rancho Malibu partnership as a co-managing general partner
pursuant to the terms of an amendment to the Rancho Malibu Limited Partnership
Agreement. The other partners in the Rancho Malibu Limited Partnership are
Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other
co-managing general partner.
Rancho Malibu Limited Partnership owns the 274-acre parcel of land near Malibu,
California and is developing it as a single-family luxury residential
subdivision. The conditional C & D Joint Venture Contribution was made to assure
participation in the future development of the parcel. It was made subject to
the future solicitation of the consent of the beneficiaries of each of the Trust
and Trust D. The C & D Joint Venture Contribution is conditioned upon the
consummation of a transaction pursuant to which Semele and Rancho Malibu Corp.
will contribute all of the partnership interests that they hold in Rancho Malibu
Limited Partnership along with 100% of the membership interests Semele holds in
RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM International
Inc., a corporation that is jointly owned by the Trust and three affiliated
Trusts, in exchange for $5.5 million in cash, a $2.5 million promissory note and
182 shares of common stock of RMLP, Inc. (The sole asset of RM Financing LLC is
a Note dated December 31, 1990 (the Note"). The Note was held by Semele's
predecessor when it took a deed in lieu of foreclosure on the property from the
original owner. The unpaid principal balance of the Note is $14,250,000 plus
accrued interest as of December 31, 2001.
The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture
Contribution from the Rancho Malibu partnership if the transactions have not
taken place within ninety (90) days of the receipt by the Rancho Malibu
partnership of notice from the C & D Joint Venture that the requisite consents
of the beneficiaries of the Trust and Trust C have been received. This right of
the C & D Joint Venture is secured by a pledge of 50% of the capital stock of
Rancho Malibu Corp. and 50% of the interests in the Rancho Malibu partnership
held by Semele and Rancho Malibu Corp.
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The Trust classifies all rents from leasing equipment as lease revenue. Upon
expiration of the primary lease terms, equipment may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Trust for such equipment. Expenses, such as management fees, and
interest earned on cash generated are not included below.
The following is a summary of cash excess associated with equipment dispositions
occurring in the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
---------- ----------- -----------
Rents earned prior to disposal of
Equipment, net of interest charges $2,135,202 $ 7,830,529 $30,130,592
Sale proceeds realized upon
Disposition of equipment 184,809 3,424,815 8,850,801
---------- ----------- -----------
Total cash generated from rents
and equipment sale proceeds 2,320,011 11,255,344 38,981,393
Original acquisition cost of equipment disposed 1,655,583 8,258,489 30,545,847
---------- ----------- -----------
Excess of total cash generated to cost
of equipment disposed $ 664,428 $ 2,996,855 $ 8,435,546
========== =========== ===========
AFG INVESTMENT TRUST C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 2001
. Sales and
Operations Refinancings Total
------------ -------------- ------------
Net income (loss) $(5,625,925) $ 124,658 $(5,501,267)
Add:
Depreciation and amortization 3,933,784 - 3,933,784
Write-down of equipment 5,578,975 - 5,578,975
Management fees 433,247 - 433,247
Income from equity interests (658,414) - (658,414)
Book value of disposed equipment - 60,151 60,151
Less:
Principal reduction of notes payable (4,308,862) - (4,308,862)
------------ -------------- ------------
Cash from operations, sales and refinancings (647,195) 184,809 (462,386)
Less:
Management fees (433,247) - (433,247)
------------ -------------- ------------
Distributable cash from operations,
sales and refinancings (1,080,442) 184,809 (895,633)
Other sources and uses of cash:
Cash and cash equivalents at beginning of year 3,748,267 5,100,549 8,848,816
Other assets - (1,752) (1,752)
Interest in MILPI Holdings, LLC (1) (1,405,733) (5,730,259) (7,135,992)
Net proceeds from note payable refinancing - 471,032 471,032
Net change in receivables and accruals 454,496 - 454,496
------------ -------------- ------------
Cash and cash equivalents at end of year $ 1,716,588 $ - $ 1,716,588
============ ============== ============
(1) To the extent available, cash generated from sales and refinancings is used
for reinvestment, in
accordance with the Trust Agreement.
AFG INVESTMENT TRUST C
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED AND
RESTATED DECLARATION OF TRUST
FOR THE YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2001, the Trust reimbursed the Managing Trustee
and its Affiliates for the following costs:
Operating expenses $1,190,432
AFG INVESTMENT TRUST C
SCHEDULE OF REIMBURSABLE OPERATING EXPENSES DUE TO THIRD PARTIES
FOR THE YEAR ENDED DECEMBER 31, 2001
Operating expenses due to third parties for the year ended December 31, 2001
consisted of the following:
Legal $344,086
Selling & Remarketing 290,762
Accounting and Tax 147,132
Investor Services 60,621
Printing & Document Services 40,740
Insurance 32,523
Travel & Entertainment 23,370
Bank Charges 16,453
Office 9,525
Equipment Maintenance 250
--------
Total $965,462
========
AFG INVESTMENT TRUST C
SCHEDULE OF EQUIPMENT
AS OF DECEMBER 31, 2001
. Lease
Rental Expiration . Net Book
Lessee Schedule Date Cost Value Debt
- ---------------------------------- --------- ---------- ----------- ----------- -----------
Advanced Micro Devices, Inc. 006-RN2 - $ 1,274,733 $ - $ -
Aerovias De Mexico, S.A. de C.V. N753RARL1 6/21/05 1,239,941 900,959 420,027
A.O. Smith Corporation A-17RN1 - 36,817 - -
Chrysler Corporation A-3 - 56,663 - -
Chrysler Corporation B-2 - 97,860 - -
Chrysler Corporation B-2B - 15,446 - -
Chrysler Corporation E-11 1/31/02 196,487 56,449 -
Chrysler Corporation G-2 2/28/02 858,310 166,822 77,501
GE Aircraft Engines 3RN3 - 51,390 - -
GATX Logistics, Inc. E-11 - 148,148 - -
General Electric Company 4 - 1,339 - -
General Electric Company 5 - 335 - -
General Motors Corporation H-6 - 75,771 - -
General Motors Corporation C-1 - 124,214 - -
General Motors Corporation C-2 - 28,782 - -
General Motors Corporation C-4 - 815,215 - -
General Motors Corporation C-5 - 1,317,467 - -
General Motors Corporation B-16RN1 - 46,957 - -
Hyundai Electronics America, Inc. 1AO 8/31/03 6,513,220 1,809,228 1,785,134
Owens-Corning Fiberglass Corp. A-35 - 16,507 394 -
Owens-Corning Fiberglass Corp. A-38 - 453 - -
Scandinavian Airlines System LN-RCGRN1 12/29/03 30,895,170 18,166,569 18,884,089
Temple-Inland Forest Product Group A1RN2 12/31/02 21,485 2,692 -
Tenneco Packaging B-75RN1 - 30,500 - -
Tenneco Packaging B-76RN1 - 16,887 - -
Tenneco Packaging B-77 - 47,991 - -
Tenneco Packaging B-81 - 13,089 - -
Union Pacific Railroad Company 11011991 3/31/04 4,574,486 2,524,087 1,216,213
USX Corporation A-4 - 503 - -
Western Bulk Carriers A-2 - 493,702 53,588 -
Western Bulk Carriers A-3 - 591,861 115,084 -
Western Bulk Carriers A-4 2/28/03 336,738 117,858 -
Warehouse - - 1,788,485 - -
----------- ----------- -----------
Total - - $51,726,952 $23,913,730 $22,382,964
=========== =========== ===========
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 26, 2002, on the financial
statements of AFG Investment Trust C, included in the 2001 Annual Report to the
Participants of AFG Investment Trust C.
/s/ ERNST & YOUNG LLP
Tampa, Florida
March 26, 2002
SCHEDULE 14 D (i)
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page
- -------------------------------------------------------------------------------- ----
Independent Auditors' Report 2
Consolidated Balance Sheet as of December 31, 2001 3
Consolidated Statement of Operations for the period February 7, 2001
(Date of Inception) through December 31, 2001 4
Consolidated Statement of Shareholders' Equity for the period February 7, 2001
(Date of Inception) through December 31, 2001 5
Consolidated Statement of Cash Flows for the period February 7, 2001
(Date of Inception) through December 31, 2001 6
Notes to Consolidated Financial Statements 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
MILPI Holdings, LLC:
We have audited the accompanying consolidated balance sheet of MILPI Holdings,
LLC, a Delaware limited liability company, and subsidiary (the "Company") as of
December 31, 2001 and the related statements of operations, shareholders' equity
and cash flows for the period February 7, 2001 (date of inception) through
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001, and the results of its operations and its cash flows for the period
February 7, 2001 (date of inception) through December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 12, 2002
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
(in thousands of dollars, except share amounts)
ASSETS
Cash and cash equivalents $14,037
Receivables, net of allowance for doubtful accounts of $45 39
Receivables from affiliates 951
Equity interest in affiliates 20,948
Assets Held for Sale -
Restricted cash and cash equivalents 75
Other assets, net 2,759
Goodwill, net of accumulated amortization of $765 4,590
-------
Total assets $43,399
========
LIABILITIES
Payables and other liabilities $ 5,702
Deferred income taxes 9,751
-------
Total liabilities 15,453
-------
Minority interest 3,029
-------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value, 20 shares authorized and outstanding) -
Paid-in capital, in excess of par 21,970
Retained earnings 2,947
-------
Total shareholders' equity 24,917
-------
Total liabilities, minority interest and shareholders' equity $43,399
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
REVENUES
Operating lease income $ 472
Management fees 5,217
Partnership interests and other fees 1,716
Acquisition and lease negotiation fees 2,032
Loss on disposition of assets, net (91)
Other 1,030
-------
Total revenues 10,376
-------
EXPENSES
Operations support 800
Impairment of investment in managed programs 511
Depreciation and amortization 1,255
General and administrative 3,290
-------
Total costs and expenses 5,856
-------
Operating Income 4,520
Interest expense (6)
Interest income 384
Other income, net 89
-------
Income before income taxes 4,987
Provision for income taxes 1,611
Minority interest 429
-------
Net income $ 2,947
========
Net income per weighted-average common share
outstanding $ 147
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
Common Additional Retained
Stock Paid in Capital Earnings Total
------- ---------------- --------- -------
Balance at February 7, 2001 $ - $ 21,776 $ - $21,776
Capital contribution - 194 - 194
Net income - - 2,947 2,947
------- ---------------- --------- -------
Balance at December 31, 2001 $ - $ 21,970 $ 2,947 $24,917
======== =============== ========= ========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 2,947
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,255
Compensation expense related to variable stock options 315
Loss on disposition of assets, net 91
Partnership interests and other fees (1,716)
Impairment of investment in managed programs 511
Minority interest 429
Changes in assets and liabilities:
Increase in deferred income taxes 867
Decrease in payables and other liabilities (9,484)
Decrease in receivables and receivables from affiliates 1,576
Increase in other assets (176)
--------
Net cash used in operating activities (3,385)
--------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash distribution from managed programs 1,591
Loans made to affiliates (5,500)
Repayment of loans made to affiliates 5,500
Purchase of property, plant and equipment (71)
Proceeds of sale of equipment for lease 313
Proceeds from the sale of assets held for sale 10,250
Decrease in restricted cash 1,673
--------
Net cash provided by investing activities 13,756
--------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Capital contribution 194
Redemption of stock options (919)
--------
Net cash used in financing activities (725)
--------
Net increase in cash and cash equivalents 9,646
Cash and cash equivalents at beginning of period 4,391
--------
Cash and cash equivalents at end of period $14,037
========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 6
========
Cash paid during the period for income taxes $ 6,216
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
MILPI Holdings, LLC ("MILPI" or the "Company") was formed on December 12, 2000,
under the laws of the state of Delaware and is governed by its Operating
Agreement, dated December 13, 2000. There were no activities of MILPI from
December 12, 2000 through February 7, 2001. MILPI was created by four separate
trusts (AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C
and AFG Investment Trust D, collectively the "Trusts") for the purpose of
acquiring PLM International, Inc. and subsidiaries ("PLM"). PLM is an equipment
management company and operates in one business segment, the leasing of
transportation equipment and the creation of equipment-leasing solutions for
domestic and international customers.
On February 7, 2001 ("Date of Inception"), MILPI Acquisition Corp. ("MAC"), a
wholly-owned subsidiary of MILPI, closed on a Tender Offer ("Tender Offer") to
purchase all of the outstanding shares of PLM for a cash price of approximately
$21.8 million, resulting in goodwill of approximately $5.8 million. The $21.8
million of cash used in the Tender Offer was contributed by the Trusts and
represents their initial capital contribution. MAC acquired 83% of the common
shares outstanding of PLM through the Tender Offer. On February 6, 2002, MAC
completed its acquisition of PLM through the acquisition of the remaining 17% of
the outstanding PLM common shares and by effecting a merger of MAC into PLM,
under Delaware law. Concurrent with the completion of the merger, PLM ceased to
be publicly traded. PLM's shareholders approved the merger pursuant to a special
shareholders' meeting.
The acquisition of the stock of PLM was accounted for as a business combination
in accordance with Accounting Principles Board Opinion No. 16 ("APB No. 16").
In accordance with APB No. 16, the Company allocated the total purchase price to
the assets acquired and liabilities assumed based on the estimated fair market
values at the date of acquisition. There are no contingencies or other matters
that could materially affect the allocation of the purchase cost.
The Company's consolidated balance sheet, reflecting the above business
combination, as of February 7, 2001 was as follows (in thousands of dollars):
ASSETS
Cash and cash equivalents $ 4,391
Restricted cash and cash equivalents 1,748
Receivables 1,222
Receivables from affiliates 1,344
Equity interest in affiliates 21,334
Assets held for sale 10,250
Other assets 3,406
Goodwill 5,840
-------
Total assets $49,535
=======
LIABILITIES
Payables and other liabilities $16,275
Deferred income taxes 8,884
-------
Total liabilities 25,159
Minority interest 2,600
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value, 20 shares authorized and outstanding) -
Paid-in capital, in excess of par 21,776
-------
Total liabilities, minority interest and shareholders' equity $49,535
=======
The Company's fiscal year end is December 31.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Investments for which the Company has less than a 50% ownership interest are
accounted for using the equity method. All significant intercompany transactions
among the consolidated group have been eliminated.
The Company has recorded a minority interest in the Company's consolidated
balance sheet as of December 31, 2001 to reflect the ownership of PLM's common
shares that were not tendered.
ESTIMATES
These consolidated financial statements have been prepared on the accrual basis
of accounting in accordance with accounting principles generally accepted in the
United States of America. This requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVESTMENT IN AND MANAGEMENT OF EQUIPMENT GROWTH FUNDS, OTHER LIMITED
PARTNERSHIPS, PRIVATE PLACEMENT PROGRAMS AND LIMITED LIABILITY COMPANY
PLM earns revenues in connection with the management of limited partnerships and
private placement programs. Equipment acquisition and lease negotiation fees
are earned through the purchase and initial lease of equipment, and are
recognized as revenue when PLM completes all of the services required to earn
the fees, typically when binding commitment agreements are signed.
Management fees are earned for managing the equipment portfolios and
administering investor programs as provided for in various agreements, and are
recognized as revenue over time as they are earned.
As compensation for organizing a partnership investment program, PLM was granted
an interest (between 1% and 5%) in the earnings and cash distributions of the
program, in which PLM Financial Services, Inc. ("FSI"), a wholly owned
subsidiary of PLM, is the General Partner. PLM recognizes as partnership
interests its equity interest in the earnings of the partnerships, after
adjusting such earnings to reflect the effect of special allocations of the
programs' gross income allowed under the respective partnership agreements.
From May 1995 through May 1996, Professional Lease Management Income Fund I, LLC
("Fund I"), a limited liability company with a no front-end fee structure, was
offered as an investor program. FSI serves as the manager for the program. No
compensation was paid to PLM for the organization and syndication of interests,
the acquisition of equipment, the negotiation of leases for equipment, or the
placement of debt. PLM funded the costs of organization, syndication, and
offering through the use of operating cash and has capitalized these costs as
its investment in Fund I. PLM has equity interest of 15% for its contribution to
the program. Costs funded in excess of its 15% interest are considered goodwill
and are amortized through the end of the program.
In return for its investment, PLM is entitled to a 15% interest in the cash
distributions and earnings of Fund I, subject to certain allocation provisions.
PLM's interest in the cash distributions and earnings of Fund I will increase to
25% after the investors have received distributions equal to their invested
capital. PLM is entitled to monthly fees for equipment management services and
reimbursement for providing certain administrative services.
The Company is entitled to reimbursement from the investment programs for
providing certain administrative services.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
("SFAS No. 121"), the Company reviews the carrying value of its investments
whenever circumstances indicate that the carrying value may not be recoverable.
If projected undiscounted future cash flows are lower than the carrying value of
its equity interest in affiliates, a loss on revaluation is recorded. During
the period February 7, 2001 (Date of Inception) through December 31, 2001, the
Company recorded an impairment of $511,000 on its equity interest in affiliates
due to a change in market conditions, primarily in the airline industry, after
the events of September 11, 2001.
RESTRICTED CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments readily convertible into known
amounts of cash with original maturities of 90 days or less as cash equivalents.
Restricted cash consists of bank accounts and short-term investments that are
primarily subject to withdrawal restrictions per loan and other legally binding
agreements.
OTHER ASSETS
Other assets include loan fees, which are amortized under the effective interest
method over the life of the related loan.
GOODWILL
Goodwill of approximately $5.8 million was originally recorded in conjunction
with the acquisition of 83% of the common stock of PLM. This goodwill included
approximately $2.0 million of total costs estimated for severance of PLM
employees and relocation costs in accordance with management's formal plan to
involuntarily terminate employees, which plan was developed in conjunction with
the acquisition. During the fourth quarter of 2001, the estimates for
severance and relocation costs were reduced by $0.5 million based on actual
costs incurred related to these activities and, therefore, total goodwill was
reduced by $0.5 million. Goodwill is amortized using the straight-line method
over the estimated life of PLM, which is 7 years.
INCOME TAXES
MILPI is a partnership for tax purposes and as such is not taxed on its
operations. MAC and PLM are C corporations, which recognize income tax expense
using the asset and liability method. Deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Deferred income taxes arise primarily because of differences in the timing of
reporting equipment depreciation, partnership income, and certain accruals for
financial statement and income tax reporting purposes.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141"), was
approved by the FASB. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill and certain intangible assets with indefinite lives will remain on the
balance sheet and not be amortized. The Company implemented SFAS No. 141 on
July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the
results of operations or financial position of the Company.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142), was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill and other intangible assets determined to have an indefinite useful
life from an amortization method to an impairment-only approach. Amortization
of applicable intangible assets will cease upon adoption of this statement. The
Company is required to implement SFAS No. 142 on January 1, 2002 and has not yet
determined the impact, if any, this statement will have on its financial
position or results of operations.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which replaces SFAS No. 121.
SFAS No. 144 provides updated guidance concerning the recognition and
measurement of an impairment loss for certain types of long-lived assets,
expands the scope of a discontinued operation to include a component of an
entity, and eliminates the current exemption to consolidation when control over
a subsidiary is likely to be temporary. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company will apply the new rules on
accounting for the impairment or disposal of long-lived assets beginning in the
first quarter of 2002, and they are not anticipated to have an impact on the
Company's earnings or financial position.
2. ASSETS HELD FOR SALE
As of February 7, 2001, the Company had $10.3 million in marine containers
classified as assets held for sale. During 2001, the Company sold these marine
containers to affiliated programs at cost, which approximated their fair market
value.
As of December 31, 2001, the Company had no assets held for sale.
3. EQUITY INTEREST IN AFFILIATES
FSI is the General Partner or manager of 10 investment programs. Distributions
of the programs are allocated as follows: 99% to the limited partners and 1% to
the General Partner in PLM Equipment Growth Fund (EGF) I and PLM Passive Income
Investors 1988-II; 95% to the limited partners and 5% to the General Partner in
EGFs II, III, IV, V, VI, and PLM Equipment Growth & Income Fund VII (EGF VII);
and 85% to the members and 15% to the manager in Fund I. PLM's interest in the
cash distributions of Fund I will increase to 25% after the investors have
received distributions equal to their invested capital. Net income is allocated
to the General Partner subject to certain allocation provisions. FSI also
receives a management fee on a per car basis at a fixed rate each month, plus an
incentive management fee equal to 15% of "Net Earnings" over $750 per car per
quarter from Covered Hopper Program 1979-1.
Most of the investment program agreements contain provisions for special
allocations of the programs' gross income.
While none of the partners or members, including the General Partner and
manager, are liable for program borrowings, and while the General Partner or
manager maintains insurance against liability for bodily injury, death, and
property damage for which an investment program may be liable, the General
Partner or manager may be contingently liable for nondebt claims against the
program that exceed asset values.
The summarized combined financial data for FSI's affiliates, in which FSI is the
General Partner or manager, as of and for the period February 7, 2001 (date of
inception) through December 31, 2001 is as follows (in thousands of dollars):
Total assets $229,358
Total liabilities $ 67,579
Partners' equity $161,779
Total revenues $ 91,085
Total expenses $ 70,688
Net income $ 20,397
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER ASSETS, NET
Other assets, net, consists of the following as of December 31, 2001 (in
thousands of dollars):
Cash surrender value of officers' life insurance policies $2,343
Commercial and industrial equipment, net 178
Prepaid expenses, deposits and other 153
Furniture, fixtures, and equipment, net of accumulated
depreciation of $1,071 85
------
Total other assets, net $2,759
======
5. WAREHOUSE CREDIT FACILITY
In April 2001, PLM entered into a $15.0 million warehouse facility, which is
shared with PLM Equipment Growth Fund VI, PLM Equipment Growth & Income Fund
VII, and Fund I, LLC, that allows PLM to purchase equipment prior to its
designation to a specific program. Borrowings under this facility by the other
eligible borrowers reduce the amount available to be borrowed by PLM. All
borrowings under this facility are guaranteed by PLM. This facility provides
for financing up to 100% of the cost of the asset. Interest accrues at prime or
LIBOR plus 200 basis points, at the option of PLM. Borrowings under this
facility may be outstanding up to 270 days. This facility was amended in
December 2001 to lower the amount available to be borrowed to $10.0 million.
This facility expires in April 2002. All borrowings must be repaid upon the
expiration of this facility. PLM believes it will be able to extend the facility
with similar terms upon the facility's expiration. As of December 31, 2001, PLM
had no borrowings outstanding under this facility and there were no borrowings
outstanding under this facility by any other eligible borrower.
6. INCOME TAXES
The provision for income taxes attributable to income from operations consists
of the following (in thousands of dollars):
Federal State Total
-------- ------ ------
Current $ 551 $ 193 $ 744
Deferred 705 162 867
-------- ------ ------
Total $ 1,256 $ 355 $1,611
======== ====== ======
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns ultimately filed.
The difference between the effective rate and the expected federal statutory
rate is reconciled below:
Federal statutory tax expense rate 34%
State income tax rate 5
Income reportable at the partnership level (7)
---
Effective tax expense rate 32%
===
There are no net operating loss carryforwards for federal income tax purposes of
alternative minimum tax credit carryforwards as of December 31, 2001.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities as of December 31 are presented below (in
thousands of dollars):
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets from continuing operations:
Partnership Organization and Syndication costs $ 8,300
Federal benefit of state taxes 735
Other 329
--------
Total gross deferred tax assets 9,364
--------
Less valuation allowance (8,594)
--------
Net deferred tax assets 770
Deferred tax liabilities:
Partnership interests 10,520
Other 1
--------
Total deferred tax liabilities 10,521
--------
Net deferred tax liabilities 9,751
Total net deferred tax liabilities 9,751
========
Management has reviewed all established interpretations of items reflected in
its consolidated tax returns and believes that these interpretations require
valuation allowances as described in SFAS No. 109, "Accounting for Income
Taxes". The valuation allowance contained in the 2001 deferred tax account
includes items that may result in future capital losses.
See discussion in Note 7 relative to an Internal Revenue Service audit.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Two class action lawsuits which were filed against PLM and various of its wholly
owned subsidiaries in January 1997 in the United States District Court for the
Southern District of Alabama, Southern Division (the court), Civil Action No.
97-0177-BH-C (the Koch action), and June 1997 in the San Francisco Superior
Court, San Francisco, California, Case No. 987062 (the Romei action), were fully
resolved during the fourth quarter 2001.
The named plaintiffs were individuals who invested in PLM Equipment Growth Fund
IV, PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI, and PLM
Equipment Growth & Income Fund VII (the Partnerships), each a California limited
partnership for which FSI acts as the General Partner. The complaints asserted
causes of action against all defendants for fraud and deceit, suppression,
negligent misrepresentation, negligent and intentional breaches of fiduciary
duty, unjust enrichment, conversion, conspiracy, unfair and deceptive practices
and violations of state securities law. Plaintiffs alleged that each defendant
owed plaintiffs and the class certain duties due to their status as fiduciaries,
financial advisors, agents, and control persons. Based on these duties,
plaintiffs asserted liability against defendants for improper sales and
marketing practices, mismanagement of the Partnerships, and concealing such
mismanagement from investors in the Partnerships. Plaintiffs sought unspecified
compensatory damages, as well as punitive damages.
In February 1999, the parties to the Koch and Romei actions agreed to monetary
and equitable settlements of the lawsuits, with no admission of liability by any
defendant, and filed a Stipulation of Settlement with the court. The court
preliminarily approved the settlement in August 2000, and information regarding
the settlement was sent to class members in September 2000. A final fairness
hearing was held on November 29, 2000, and on April 25, 2001, the federal
magistrate judge assigned to the case entered a Report and Recommendation
recommending final approval of the monetary and equitable settlements to the
federal district court judge. On July 24, 2001, the federal district court
judge adopted the Report and Recommendation, and entered a final judgment
approving the settlements. No appeal has been filed and the time for filing an
appeal has run.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The monetary settlement provides for a settlement and release of all claims
against defendants in exchange for payment for the benefit of the class of up to
$6.6 million, consisting of $0.3 million deposited by PLM and the remainder
funded by an insurance policy. The final settlement amount of $4.9 million (of
which PLM's share was approximately $0.3 million) was paid out in the fourth
quarter of 2001 and was determined based upon the number of claims filed by
class members, the amount of attorneys' fees awarded by the court to plaintiffs'
attorneys, and the amount of the administrative costs incurred in connection
with the settlement.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, except for Fund IV, (b) the extension (until December 31,
2004) of the period during which FSI can reinvest the Funds' funds in additional
equipment, except for Fund IV, (c) an increase of up to 20% in the amount of
front-end fees (including acquisition and lease negotiation fees) that FSI is
entitled to earn in excess of the compensatory limitations set forth in the
North American Securities Administrator's Association's Statement of Policy;
except for Fund IV, (d) a one-time purchase by each of Funds V, VI and VII of up
to 10% of that partnership's outstanding units for 80% of net asset value per
unit at September 30, 2000; and (e) the deferral of a portion of the management
fees paid to an affiliate of FSI until, if ever, certain performance thresholds
have been met by the Funds. The equitable settlement also provides for payment
of additional attorneys' fees to the plaintiffs' attorneys from Fund funds in
the event, if ever, that certain performance thresholds have been met by the
Funds. Following a vote of limited partners resulting in less than 50% of the
limited partners of each of Funds V, VI and VII voting against such amendments
and after final approval of the settlement, each of such Fund's limited
partnership agreement was amended to reflect these changes. During the fourth
quarter of 2001, the respective Funds repurchased limited partnership units from
those equitable class members who submitted timely requests for repurchase.
PLM is involved as plaintiff or defendant in various other legal actions
incidental to its business. Management does not believe that any of these
actions will be material to the financial condition or results of operations of
the Company.
LEASE AGREEMENTS
PLM and its subsidiaries have entered into operating leases for office space.
PLM's total net rent expense was $0.4 million in 2001. The portion of rent
expense related to its principal office, net of sublease income of $0.4 million
was $0.3 million in 2001. The remaining rent expense was related to other
office space and rental yard operations.
Annual lease commitments for all of PLM's locations total $0.3 million in 2002
and 2003, $0.2 million in 2004 and $0.1 million in 2005.
CORPORATE GUARANTEE
As of December 31, 2001, PLM had guaranteed certain obligations up to $0.4
million of a Canadian railcar repair facility, in which PLM has a 10% ownership
interest.
EMPLOYMENT AGREEMENTS
PLM entered into employment agreements with five individuals that require PLM to
pay severance to these individuals up to two years of their base salaries and
benefits if their employment is terminated after a change in control as defined
in the employment agreement. As of December 31, 2001, the total future
contingent liability for
these payments was $0.2 million.
WAREHOUSE CREDIT FACILITY
See Note 5 for discussion of PLM's credit warehouse facility.
INTERNAL REVENUE SERVICE AUDIT
In March 2001, the Internal Revenue Service notified PLM that it would conduct
an audit of certain Forms 1042, Annual Withholding Tax Return for U.S. Source
Income of Foreign Persons. The audit relates to payments to unrelated foreign
entities made by two partnerships in which PLM formerly held interests as the
100% direct and
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indirect owner. One partnership's audit relates to Forms 1042 for the years
1997, 1998 and 1999, while the other partnership's audit relates to Forms 1042
for the years 1998 and 1999. The audits remain pending, with the Internal
Revenue Service presently reviewing documents and information provided to it by
PLM. The Internal Revenue Service has not proposed any adjustments to the Forms
1042,and management believes that the withholding tax returns will be accepted
as filed. If the withholding tax returns are not accepted as filed by the
Internal Revenue Service, the recipient foreign entities are legally obligated
to indemnify PLM for any losses. If the withholding tax returns are not
accepted as filed by the Internal Revenue Service, and the recipient foreign
entities do not honor the indemnification, the Company's financial condition,
results of operations, and liquidity would be materially impacted.
OTHER
PLM has life insurance policies on certain current and former employees, which
had a $2.3 million cash surrender value as of December 31, 2001 and are included
in other assets.
8. PROFIT SHARING, 401(K) PLAN AND STOCK OPTION PLANS
The PLM Profit Sharing and 401(k) Plan (the "Plan") provides for deferred
compensation as described in Section 401(k) of the Internal Revenue Code. The
Plan is a contributory plan available to essentially all full-time employees of
PLM in the United States. In 2001, PLM employees who participated in the Plan
could elect to defer and contribute to the trust established under the Plan up
to 9% of pretax salary or wages up to $10,500. PLM matched up to a maximum of
$4,000 of PLM employees' 401(k) contributions in 2001 to vest in four equal
installments over a four-year period. The Company's total 401(k) contributions,
net of forfeitures, were $0.1 million for 2001.
Profit-sharing contributions are allocated equally among the number of eligible
Plan participants. There was no profit-sharing contributions accrued in 2001.
PLM had two nonqualified stock option plans that reserved up to 780,000 shares
of PLM's common stock for key employees and directors. Under these plans, the
price of the shares issued under an option must be at least 85% of the fair
market value of the PLM common stock at the date of grant. Vesting of the
options granted under these plans occurred in three equal installments of 33.3%
per year, initiating from the date of the grant. Prior to the completion of the
Tender Offer by MAC, PLM's Board of Directors voted to immediately vest all
options outstanding under these plans. As of December 31, 2001, grants could no
longer be made under either the employee or directors' plan.
In May 1998, PLM's Board of Directors adopted the 1998 Management Stock
Compensation Plan, which reserved 800,000 shares (in addition to the 780,000
shares above) of PLM's common stock for issuance to certain management and key
employees of PLM upon the exercise of stock options. The completion of the
Tender Offer by MAC in February 2201 was deemed a change in control in
accordance with the terms of the 1998 Management Stock Compensation Plan and all
options that had been granted immediately vested.
In February 2000, PLM's Board of Directors adopted the 2000 Management Stock
Compensation Plan, which reserved 70,000 shares with respect to which options
may be granted under the 2000 Directors' Plan. In February 2000, each
non-employee director of PLM was granted an option to purchase 8,000 shares of
common stock under this Plan. Prior to completion of the Tender Offer by MAC,
PLM's Board of Directors voted to immediately vest all options outstanding under
this plan.
Concurrent with the completion of the Tender Offer by MAC in February 2001, PLM
redeemed all vested options currently outstanding. PLM paid the difference
between the grant price of the option and $3.46 (the amount offered for PLM
shares in the Tender Offer). The total cash paid to redeem all outstanding
options was $0.9 million.
As of December 31, 2001, the 1998 Management Stock Compensation Plan and the
2000 Management Stock Compensation Plan continued to be in effect. There were no
options outstanding under either of these plans at December 31, 2001.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TRANSACTIONS WITH AFFILIATES
In addition to various fees payable to PLM or its subsidiaries, the affiliated
programs reimburse PLM for certain expenses, as allowed in the program
agreements. Reimbursed expenses totaling $1.8 million in 2001 have been
recorded as reductions of operations support or general and administrative
expenses. Outstanding amounts are paid under normal business terms. As of
December 31, 2001, the Company had receivables from affiliates of $1.0 million,
which represented unpaid management fees.
10. RISK MANAGEMENT
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables
from affiliated entities.
The Company places its temporary cash investments with financial institutions
and other creditworthy issuers and limits the amount of credit exposure to any
one party. The Company's involvement with the management of the receivables
from affiliated entities limits the credit exposure from affiliated entities.
In 2001, Professional Lease Management Fund 1, LLC, PLM Equipment Growth Fund VI
and PLM Equipment Growth and Income Fund VII, accounted for 26% of total
revenues. No other customer accounted for over 10% of revenue in 2001.
As of December 31, 2001, management believes the Company had no other
significant concentrations of credit risk that could have a material adverse
effect on the Company's business, financial condition, or results of operations.
11. GEOGRAPHIC INFORMATION
All of the Company's revenues for the period from February 7, 2001 (date of
inception) through December 31, 2001 were recognized from entities domiciled in
the United States and all of the Company's long-lived assets are located in the
United States.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current assets
and current liabilities approximates fair value because of their short-term
nature.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations of the Company
for the period February 7, 2001 (date of inception) through December 31, 2001(in
thousands of dollars):
March June September December Total
31, 30, 30, 31,
------ ------ ---------- --------- -------
Revenue $2,077 $2,406 $ 3,600 $ 2,293 $10,376
Net income $ 775 $ 824 $ 1,275 $ 73 $ 2,947
Net income per weighted-average common share outstanding: $ 39 $ 40 $ 64 $ 4 $ 147
In the third quarter of 2001, PLM earned acquisition and lease negotiation fees
of $1.8 million, which resulted in after-tax net income of $1.1 million.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS
On February 6, 2002, MILPI completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common shares and by
effecting a merger of PLM into MAC. The merger was completed when MILPI
obtained approval of the merger from PLM's shareholders pursuant to a special
shareholders' meeting. The remaining interest was purchased for approximately
$4.4 million. Concurrent with the completion of the merger, PLM ceased to be
publicly traded.
On February 11, 2002, the Company entered into separate promissory notes with
AFG Investment Trusts C and D, both shareholders in MILPI, loaning those
entities an aggregate of $1.3 million. The loans are unsecured and have a term
of 364 days. Interest accrues at LIBOR plus 200 basis points.
On March 12, 2002, the Company declared and paid a cash dividend of
approximately $2.7 million to its shareholders, the Trusts.
SCHEDULE 14 D (ii)
EFG KIRKWOOD LLC
Financial Statements as of and for the year ended December 31, 2000
(Unaudited)
12
EFG KIRKWOOD LLC
Index to Financial Statements
(Unaudited)
Page
----
Statement of Financial Position at December 31, 2000 . . . . 3
Statement of Operations for the year ended December 31, 2000 4
Statement of Changes in Members' Capital for the year ended
December 31, 2000. . . . . . . . . . . . . . . . . . . . . 5
Statement of Cash Flows for the year ended December 31, 2000 6
Notes to the financial statements. . . . . . . . . . . . . . 7
Supplemental information . . . . . . . . . . . . . . . . . . 13
EFG KIRKWOOD LLC
STATEMENT OF FINANCIAL POSITION
December 31, 2000
(Unaudited)
ASSETS
Advances to and membership interests in:
Mountain Resort Holdings LLC . . . . . $7,278,091
Mountain Springs Resort LLC. . . . . . 1,008,477
----------
Total assets . . . . . . . . . . . . . $8,286,568
==========
LIABILITIES AND MEMBERS' EQUITY
Interest payable . . . . . . . . . . . . $ 8,567
Note payable . . . . . . . . . . . . . . 197,696
----------
Total liabilities. . . . . . . . . . . 206,263
----------
Members' equity:
Class A. . . . . . . . . . . . . . . . 8,080,305
Class B. . . . . . . . . . . . . . . . --
----------
Total members' equity. . . . . . . . . 8,080,305
----------
Total liabilities and members' equity. $8,286,568
==========
The accompanying notes are an integral part of the financial statements.
EFG KIRKWOOD LLC
STATEMENT OF OPERATIONS
For the year ended December 31, 2000
(Unaudited)
Income (loss) from membership interests in:
Mountain Resort Holdings LLC. . . . . . . $ 45,197
Mountain Springs Resort LLC . . . . . . . (2,373,950)
------------
Loss from equity membership interests . . . (2,328,753)
Interest expense. . . . . . . . . . . . . . 8,567
------------
Net loss. . . . . . . . . . . . . . . . . . $(2,337,320)
============
The accompanying notes are an integral part of the financial statements.
EFG KIRKWOOD LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
For the year ended December 31, 2000
(Unaudited)
Class A Class B Total
------------ ---------- ------------
Members' capital at January 1, 2000 . . . . . $ 6,700,000 $ 531,110 $ 7,231,110
Members' capital contributions. . . . . . . . 3,186,515 -- 3,186,515
Net loss for the year ended December 31, 2000 (1,806,210) (531,110) (2,337,320)
------------ ---------- ------------
Members' capital at December 31, 2000 . . . . $ 8,080,305 $ -- $ 8,080,305
============ ========== ============
The accompanying notes are an integral part of the financial statements.
EFG KIRKWOOD LLC
STATEMENT OF CASH FLOWS
For the year ended December 31, 2000
(Unaudited)
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,337,320)
Adjustments to reconcile net loss to net cash from operations:
(Income) loss from membership interests in:
Mountain Resort Holdings LLC. . . . . . . . . . . . . . . . (45,197)
Mountain Springs Resort LLC . . . . . . . . . . . . . . . . 2,373,950
Changes in assets and liabilities:
Increase in interest payable, net . . . . . . . . . . . . . 8,567
------------
Net cash from operations. . . . . . . . . . . . . . . . . . . . --
------------
Cash flows used in investing activities:
Purchase of membership interests in:
Mountain Resort Holdings LLC. . . . . . . . . . . . . . . . (894,756)
Mountain Springs Resort LLC . . . . . . . . . . . . . . . . (1,700,000)
Advances to Mountain Springs Resort LLC . . . . . . . . . . . (1,000,000)
------------
Net cash used in investing activities . . . . . . . . . . . (3,594,756)
------------
Cash flows provided by (used in) financing activities:
Distributions . . . . . . . . . . . . . . . . . . . . . . . . 210,545
Increase in note payable. . . . . . . . . . . . . . . . . . . 408,241
Payment of note payable . . . . . . . . . . . . . . . . . . . (210,545)
Members' capital contributions. . . . . . . . . . . . . . . . 3,186,515
------------
Net cash provided by financing activities . . . . . . . . . 3,594,756
------------
Net change in cash and cash equivalents . . . . . . . . . . . . --
Cash and cash equivalents at beginning of year. . . . . . . . . --
------------
Cash and cash equivalents at end of year. . . . . . . . . . . . $ --
============
Other non-cash activities:
- ---------------------------------------------------------------
Interest earned on convertible debentures (Note 3). . . . . . . $ 26,278
Principal on convertible debentures (Note 3). . . . . . . . . . $ 1,000,000
Conversion of principal and accrued, but unpaid,
interest on convertible debentures to equity interests
in Mountain Resort Holdings LLC (Note 3). . . . . . . . . . . $(1,059,125)
Interest earned on notes receivable (Note 4). . . . . . . . . . $ 19,259
The accompanying notes are an integral part of the financial statements.
EFG KIRKWOOD LLC
Notes to the financial statements
December 31, 2000
(Unaudited)
NOTE 1 - ORGANIZATION
EFG Kirkwood LLC (the Company) was formed on December 2, 1998, as a Delaware
limited liability company. The Company's operations commenced on June 10, 1999.
The Company has two classes of membership interests identified as Class A and
Class B. The Class A members consist of AFG Investment Trust A, AFG Investment
Trust B, AFG Investment Trust C, and AFG Investment Trust D (collectively, the
AFG Trusts). The Class B member is Semele Group Inc. The collective voting
interests of the Class A members are equal to the voting interests of the Class
B member; however, the Class A interest holders are entitled to certain
preferred returns prior to the payment of Class B cash distributions. The
manager of the Company is AFG ASIT Corporation, which also is the Managing
Trustee of the AFG Trusts. (See "Note 5 - Related Party Transactions" herein
for additional information concerning the equity relationships of the Company's
members.)
At December 31, 2000, the Company owned approximately 38% of the Series B
preferred member interests and the Series A common member interests of Mountain
Resort Holdings LLC, and 50% of the common member interests of Mountain Springs
Resort LLC. The Company has no business activities other than through its
membership interests in Mountain Resort Holdings LLC and Mountain Springs Resort
LLC (hereinafter, collectively referred to as the Resorts).
Mountain Resort Holdings LLC
- -------------------------------
Mountain Resort Holdings LLC, through four wholly owned subsidiaries, owns and
operates the Kirkwood Mountain Resort, a ski resort located in northern
California, a public utility that services the local community, and land that is
held for residential and commercial development. (See Note 4.)
Mountain Springs Resort LLC
- ------------------------------
Mountain Springs Resort LLC, through its wholly owned subsidiary, Durango Resort
LLC, owns 80% of the common member interests and 100% of the Class B preferred
member interests of DSC/Purgatory LLC, which owns and operates the Purgatory Ski
resort in Durango, Colorado. (See Note 4.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures contained in the financial
statements. Actual results could differ from those estimates and changes in
such estimates could affect amounts reported in future periods and could be
material.
Cash and Cash Equivalents
- ----------------------------
The Company does not maintain a cash account at any bank or financial
institution. All cash transactions involving the Company were funded directly
by the Company's members on the Company's behalf.
Revenue Recognition
- --------------------
The Company accounts for its membership interests in the Resorts using the
equity method of accounting. Under the equity method of accounting, the carrying
value of the Company's membership interests are (i) increased or decreased to
reflect the Company's share of income or loss from the Resorts and (ii)
decreased to reflect any cash distributions paid by the Resorts to the Company.
Allocation of Profits and Losses
- ------------------------------------
Profits and losses of the Company are allocated consistent with the economic
priorities of the Company's members relative to one another. The Company's
operating agreement provides that cash distributions to the Class B member are
subordinate to Class A Payout. (Class A Payout means the first time that the
Class A members shall have been paid a cash return equal to all of their
original capital contributions plus a yield of 12% per annum, subject to certain
adjustments, compounded annually.) Accordingly, the Company's cumulative losses
have been allocated first to the Class B member up to the amount of the its
original capital contribution of $750,000. Cumulative losses in excess of
$750,000 have been allocated to the Class A members in proportion to their
respective interests in aggregate Class A equity.
Future net income or net loss, as the case may be, will be allocated first to
the Class A members until they reach Payout, as defined. Neither the Class B
nor the Class A members are required to make any additional capital
contributions to the Company under the terms of the Company's operating
agreement.
Income Taxes
- -------------
No provision for federal or state income taxes has been provided for the
Company, as the liability for such income taxes is the obligation of the
Company's members.
NOTE 3 - CONVERTIBLE DEBENTURES
On June 10, 1999, the Company purchased $1,000,000 of convertible debentures
from Kirkwood Associates, Inc. The debentures earned interest at the annual
rate of 6.5%, compounded quarterly, and permitted the Company to convert both
principal and accrued, but unpaid, interest into shares of common stock in
Kirkwood Associates, Inc. at a defined conversion rate. On April 30, 2000, the
Company elected to convert all of the principal and accrued, but unpaid,
interest under the debentures ($1,059,125) into 962,841 shares of common stock
in Kirkwood Associates, Inc. (See Note 4.)
NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS LLC
AND MOUNTAIN SPRINGS RESORT LLC
Mountain Resort Holdings LLC
- -------------------------------
The Company's membership interests in Mountain Resort Holdings LLC were obtained
as a result of the recapitalization of Kirkwood Associates, Inc. on April 30,
2000. Under the recapitalization plan, the net assets of Kirkwood Associates,
Inc., excluding certain tax liabilities, were contributed to Mountain Resort
Holdings LLC and the stockholders of Kirkwood Associates, Inc. exchanged their
capital stock for membership interests in Mountain Resort Holdings LLC.
At December 31, 2000, the Company owned approximately 38% of the Series A common
membership interests and the Series B preferred membership interests of Mountain
Resort Holdings LLC. At December 31, 1999, the Company owned approximately 16%
of the common equity and 71% of the preferred equity of Kirkwood Associates,
Inc. The increase in the Company's common equity interests from 16% in 1999 to
38% in 2000 resulted from: (i) additional common equity purchases made by the
Company in 2000, (ii) the exchange of certain of the Company's preferred equity
interests for additional common interests in 2000, and (iii) equity interests
obtained from converting the debentures discussed in Note 3 herein. The
decrease in the Company's preferred equity interests from 71% in 1999 to 38% in
2000 resulted from the exchange of a portion of the Company's preferred equity
interests for common equity interests, as just described. These purchase and
exchange transactions were made in connection with the recapitalization of
Kirkwood Associates, Inc. and were intended to result in the Company owning
approximately equal percentages of common and preferred equity interests in
Mountain Resort Holdings LLC immediately following the recapitalization.
The Company purchased its initial equity interests in Kirkwood Associates, Inc.
on June 10, 1999 at a discount to book value of approximately $3,329,000. On
April 30, 2000, the Company completed certain additional equity transactions in
connection with the recapitalization of Kirkwood Associates, Inc. These
transactions caused the net purchase discount to be reduced to approximately
$2,812,000, such amount representing the net amount by which the Company's share
of the net equity reported by Mountain Resort Holdings LLC exceeded the purchase
price paid by the Company for such interests. This difference is being treated,
over an amortization period of 13 years, as a reduction to the depreciation
expense recorded by Mountain Resort Holdings LLC. The amortization period
represents the weighted average estimated useful life of the long-term assets
owned by Mountain Resort Holdings LLC. For the year ended December 31, 2000,
the Company recognized net income of $45,197 from Mountain Resort Holdings LLC,
including $227,629 of depreciation expense reduction.
A summary of the Company's membership interest in Mountain Resort Holdings LLC
at December 31, 2000 is presented in the table below.
Membership interests at January 1, 2000 . . . . . . $ 6,548,683
Capital contributions 486,515
Purchase of additional member interest 408,241
Net income for the year ended December 31, 2000 (1) 45,197
Distributions (April 30, 2000). . . . . . . . . . . (210,545)
-------------
Membership interests at December 31, 2000 . . . . . $ 7,278,091
=============
The table below provides summarized financial data for Mountain Resort Holdings
LLC as of December 31, 2000 and for the year then ended.
Amounts presented in thousands (000's omitted):
Total assets . . . . . . . . . . . . . . . . . $48,622
Total liabilities. . . . . . . . . . . . . . . $23,045
Total equity . . . . . . . . . . . . . . . . . $25,577
Total revenues . . . . . . . . . . . . . . . . $28,338
Total operating and other income and expenses. $26,914
Net income (1) . . . . . . . . . . . . . . . . $ 1,424
(1) The Company's allocated share of the net income of Mountain Resort Holdings
LLC for 2000 was determined based upon its common and preferred equity interests
in Mountain Resort Holdings LLC during the year. From January 1, 2000 to April
30, 2000, the Company owned approximately 71% of the outstanding preferred
equity interests and 16% of the outstanding common equity interests of Mountain
Resort Holdings LLC. After the recapitalization on April 30, 2000, discussed
above, the Company held approximately 38% of both the outstanding preferred and
common equity interests of Mountain Resort Holdings LLC. The Company's
allocated share of the net income or loss of the resort is influenced
principally by the Company's percentage share of the outstanding common
interests of the resort. Consequently, the Company was allocated a larger
share of the net income or loss of Mountain Resort Holdings LLC during the
period May 1, 2000 to December 31, 2000 (approximately 38%) compared to the
period January 1, 2000 to April 30, 2000 (approximately 16%). The period from
January 1 to April 30 is generally considered peak season for U.S. based ski
resorts. During the period January 1, 2000 to April 30, 2000, Mountain Resort
Holdings LLC reported net income of approximately $3.5 million compared to a net
loss of approximately $2.1 million during the period May 1, 2000 to December 31,
2000.
Mountain Springs Resort LLC
- ------------------------------
The Company and a third party established Mountain Springs Resort LLC as a 50/50
joint venture for the purpose of acquiring certain common and preferred equity
interests in DSC/Purgatory LLC. The Company and its joint venture partner
provided cash funds totaling $6,800,000 to Mountain Springs Resort LLC, each
member having contributed $2,400,000 of equity and $1,000,000 in the form of a
loan. The loans earn interest at the rate of 11.5% annually and mature on
November 1, 2001. (See Note 6.)
A wholly owned subsidiary of Mountain Springs Resort LLC, Durango Resort LLC,
was established to acquire 80% of the common membership interests and 100% of
the Class B preferred membership interests of DSC/Purgatory LLC at a cost of
$6,311,194, including transaction costs of $311,194. The assets, liabilities and
equity of DSC/Purgatory LLC were contributed at estimated fair value. The May 1,
2000 acquisition of DSC/Purgatory was accounted for using the purchase method of
accounting. Accordingly, the excess of the purchase price over the net
identifiable assets of DSC/Purgatory, or $311,194, has been allocated to
goodwill and is being amortized over a period of 13 years. For the year ended
December 31, 2000, the Company recognized a net loss of $2,373,950 from Mountain
Springs Resort LLC, including $6,983 of amortization expense for goodwill.
The remaining equity interests of DSC/Purgatory LLC, consisting of 20% of the
common membership interests and 100% of the Class A preferred membership
interests, are owned by a third party. The Class A membership interests are
senior to the other equity interests in DSC/Purgatory LLC. Consequently, the
Company's economic interests in DSC/Purgatory LLC are subordinate to the Class A
member and have resulted in the Company recognizing a larger share of the net
losses reported by DSC/Purgatory LLC than would be the case if all equity
interests were pari passu.
A summary of the Company's advances to and membership interests in Mountain
Springs Resort LLC at December 31, 2000 is presented in the table below.
Advances and membership interests at January 1, 2000 . $ 682,427
Capital contributions. . . . .. . . . .. . . . .. . . 2,700,000
Net loss for the year ended December 31, 2000. . . . . (2,373,950)
------------
Advances and membership interests at December 31, 2000 $ 1,008,477
============
The table below provides summarized financial data for DSC/Purgatory LLC as of
December 31, 2000 and for the period May 1, 2000 through December 31, 2000.
Amounts presented in thousands (000's omitted):
Total assets. . . . . . . . . . . . . . . . . . . $27,971
Total liabilities . . . . . . . . . . . . . . . . $19,188
Net equity. . . . . . . . . . . . . . . . . . . . $ 8,783
Total revenues (1). . . . . . . . . . . . . . . . $ 5,008
Total operating and other income and expenses (1) $ 9,725
Net loss (1). . . . . . . . . . . . . . . . . . . $ 4,717
_______________
(1) The Company became a member of DSC/Purgatory on May 1, 2000. Accordingly,
the amounts reflected are for the period May 1, 2000 through December 31, 2000.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company's Class A and Class B members and its manager are affiliated.
Semele Group Inc., through a wholly owned subsidiary, owns and controls the
Company's manager, AFG ASIT Corporation, as well as a controlling voting
interest in each of the AFG Trusts. A different subsidiary of Semele owns Class
A Beneficiary interests that collectively represent approximately 0.4% of the
outstanding Class A Beneficiary interests of the AFG Trusts.
The membership interests of the Company are owned as follows:
Percentage
-----------
Class A membership interests
- --------------------------------------
AFG Investment Trust A 10%
AFG Investment Trust B 20%
AFG Investment Trust C 40%
AFG Investment Trust D 30%
-----------
Total Class A membership interests 100%
===========
Class B membership interests
- --------------------------------------
Semele Group Inc. 100%
===========
NOTE 6 - SUBSEQUENT EVENTS
- ------------------------------
On June 1, 2001, Mountain Springs Resort LLC contributed additional equity
totaling $302,400 to DSC/Purgatory LLC to fund costs involving the entitlement
of land surrounding the resort property.
Both the Company and its joint venture partner converted their respective loan
principal and accrued, but unpaid, interest ($1,121,260 each) into equity
interests in Mountain Springs Resort LLC effective November 1, 2001. (See Note-
4.)
- ------
SUPPLEMENTAL INFORMATION
------------------------
- ------
EFG KIRKWOOD LLC
----------------
Supplemental Information
------------------------
December 31, 2000
-----------------
(Unaudited)
-----------
The operating results of Mountain Springs Resort LLC are significant to the
operating results of the Company for the year 2000. Mountain Springs Resort LLC
has no significant operating activities other than through its membership
interests in DSC/Purgatory LLC.
The fiscal year end of DSC/Purgatory LLC ends on May 31 whereas the Company and
Mountain Springs Resort LLC each operate on a calendar year end. Accordingly,
the table below reconciles the net loss reported by DSC/Purgatory LLC for its
most recent fiscal year ended May 31, 2001 and the net loss reported by Mountain
Springs Resort LLC and by the Company for the year ended December 31, 2000.
Net loss reported by DSC/Purgatory LLC for the fiscal year ended
May 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527,870
Less net income for the period January 1, 2001 to May 31, 2001 . . . 3,323,029
Plus net loss for the period May 1, 2000 to May 31, 2000 (1) . . . . 865,756
----------
Net loss conformed to the period May 1, 2000 to December 31, 2000. . 4,716,655
Net loss reported by Mountain Springs Resort LLC for the year ended
December 31, 2000, excluding the results of DSC/Purgatory LLC. . . 31,244
----------
Aggregate net loss reported by Mountain Springs Resort LLC for
the year ended December 31, 2000 . . . . . . . . . . . . . . . . . $4,747,899
==========
Portion of net loss recognized by the Company (50%). . . . . . . . . $2,373,950
==========
_____________
- -------------
(1) The Company became a member of DSC/Purgatory LLC on May 1, 2000.
- --------------------------------------------------------------------------------
SCHEDULE 14 D (iii)
DSC/PURGATORY, LLC
(DBA DURANGO MOUNTAIN RESORT)
Consolidated Financial Statements
As Of May 31, 2001, 2000 And 1999
Together With Report Of Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
DSC/Purgatory, LLC:
We have audited the accompanying consolidated balance sheets of DSC/Purgatory,
LLC (a Colorado limited liability company dba Durango Mountain Resort) as of May
31, 2001 and 2000, and the related consolidated statements of operations,
members' capital (deficit) and cash flows for the year ended May 31, 2001, the
one-month period ended May 31, 2000 (post-acquisition - see Note 1), the
eleven-month period ended April 30, 2000 (pre-acquisition - see Note 1) and the
year ended May 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
sold a majority voting interest effective May 1, 2000. Accordingly, the assets,
liabilities and members' capital have been recorded to reflect the purchase
price. The assets and liabilities were recorded based upon the estimated fair
market values at the date of acquisition. Accordingly, the pre-acquisition and
post-acquisition financial statements are not comparable in all material
respects since these financial statements report the financial position, results
of operations and cash flows on two separate accounting bases.
In our opinion, the balance sheets and related statements of operations,
members' capital (deficit) and cash flows as of and for the year ended May 31,
2001, and for the one-month period ended May 31, 2000, referred to above present
fairly, in all material respects, the financial position of DSC/Purgatory, LLC
as of May 31, 2001 and 2000, and the results of its operations and its cash
flows for the year and one-month period then ended in conformity with accounting
principles generally accepted in the United States.
Also, in our opinion, the statements of operations, members' capital (deficit)
and cash flows for the eleven-month period ended April 30, 2000, and the year
ended May 31, 1999, referred to above present fairly, in all material respects,
the results of operations and cash flows of DSC/Purgatory, LLC for the
eleven-month period ended April 30, 2000, and the year ended May 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 31, 2001.
Page 1 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
CONSOLIDATED BALANCE SHEETS
---------------------------
(See Notes 1 and 2)
May 31,
ASSETS 2001 2000
- ---------------------------------------------------- ---------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,039,348 $ 3,268,448
Restricted cash and investments 493,405 226,708
Accounts receivable, net of allowance for doubtful
accounts of $13,200 and $13,000, respectively 587,237 466,631
Inventory and supplies, at cost 395,448 430,230
Prepaid expenses 252,968 229,117
-------------- ----------
Total current assets 3,768,406 4,621,134
-------------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land, buildings and improvements 9,122,056 8,874,174
Ski lifts and trails 8,382,687 4,795,139
Machinery and equipment 3,596,764 2,782,788
Construction-in-progress 14,023 430,079
-------------- ----------
21,115,530 16,882,180
Less- accumulated depreciation (2,031,602) (158,035)
-------------- ----------
Total property and equipment, net 19,083,928 16,724,145
-------------- ----------
REAL ESTATE DEVELOPMENT 859,331 -
RESTRICTED CASH AND INVESTMENTS 963,626 991,879
SPECIAL USE PERMIT, net of accumulated amortization
of $32,849 and $1,968, respectively 1,178,491 1,209,372
OTHER ASSETS, net of accumulated amortization
of $25,712 and $5,560, respectively 704,043 467,983
-------------- ----------
Total assets $ 26,557,825 $24,014,513
================ ============
The accompanying notes to consolidated financial statements
-----------------------------------------------------------
are an integral part of these consolidated balance sheets.
----------------------------------------------------------
Page 2 of 2
-----------
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
CONSOLIDATED BALANCE SHEETS
---------------------------
(See Notes 1 and 2)
May 31,
LIABILITIES AND MEMBERS' CAPITAL 2001 2000
- ----------------------------------------------------- --------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 278,127 $ 556,331
Accrued expenses 1,191,941 1,145,223
Related party payable 120,670 115,428
Deferred revenue 525,399 -
Current portion of long-term debt 1,409,289 587,260
Current portion of obligations under capital leases 79,424 -
Notes payable to related party - 2,500,000
-------------- ----------
Total current liabilities 3,604,850 4,904,242
-------------- ----------
LONG-TERM DEBT:
Bonds, including unamortized premium 8,360,310 8,980,524
Notes payable 1,741,734 495,503
Obligation under capital leases 240,357 -
-------------- ----------
10,342,401 9,476,027
-------------- ----------
Total liabilities 13,947,251 14,380,269
-------------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 200 -
MEMBERS' CAPITAL:
Duncan interests 7,422,875 7,326,849
Durango Resort, LLC 5,187,499 5,307,395
Contribution receivable - (3,000,000)
-------------- ----------
Total members' capital 12,610,374 9,634,244
-------------- ----------
Total liabilities and members' capital $ 26,557,825 $24,014,513
=============== ============
The accompanying notes to consolidated financial statements
-----------------------------------------------------------
are an integral part of these consolidated balance sheets.
----------------------------------------------------------
------
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(See Notes 1 and 2)
(Post- (Pre-
Acquisition) Acquisition)
For the For the
For the One-Month Eleven-Month For the
Year Ended Period Ended Period Ended Year Ended
May 31, May 31, April 30, May 31,
2001 2000 2000 1999
-------------- ----------------- ----------------- --------------
REVENUES:
Lift operations $ 7,994,983 $ - $ 5,629,682 $ 7,997,607
Commercial and other mountain operations 6,714,538 61,620 4,832,342 5,712,669
Other 1,045,362 30,412 771,072 1,001,829
----------- --------------- --------------- -----------
Total Revenues 15,754,883 92,032 11,233,096 14,712,105
----------- --------------- --------------- -----------
OPERATING EXPENSES:
Lift operations 3,066,098 133,988 2,642,962 2,801,565
Commercial and other mountain operations 4,839,228 252,568 3,443,490 4,178,591
General, administrative and marketing 4,168,772 241,490 3,683,346 3,919,263
Depreciation and amortization 1,908,077 160,135 1,620,168 1,797,611
Other 1,404,234 86,181 955,106 1,034,802
----------- --------------- --------------- -----------
Total Operating Expenses 15,386,409 874,362 12,345,072 13,731,832
----------- --------------- --------------- -----------
Income (loss) from operations 368,474 (782,330) (1,111,976) 980,273
OTHER (EXPENSE) INCOME:
Interest expense (1,127,539) (104,278) (1,703,228) (1,843,548)
Interest income 231,195 20,852 135,776 124,537
----------- --------------- --------------- -----------
Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738)
============== ================= ================= ==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (DEFICIT)
-----------------------------------------------------
FOR THE YEAR ENDED MAY 31, 2001,
--------------------------------
THE ONE-MONTH PERIOD ENDED MAY 31, 2000,
----------------------------------------
THE ELEVEN-MONTH PERIOD ENDED APRIL 30, 2000,
---------------------------------------------
AND THE YEAR ENDED MAY 31, 1999
-------------------------------
(See Notes 1 and 2)
Duncan Durango Resort, LLC
Class A Total Class B
Preferred Common Duncan Preferred Common
- ------------------------------------ ------------- ---------------- --------------- -------------- ---------------
BALANCES, at May 31, 1998 $ (4,107,760) $ - (4,107,760) $ - $ -
Net loss (738,738) - (738,738) - -
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 1999 (4,846,498) - (4,846,498) - -
Net loss (2,679,428) - (2,679,428) - -
----------- -------------- ------------- ------------- -------------
BALANCES, at April 30, 2000 (7,525,926) - (7,525,926) - -
Conversion of related party debt 9,030,899 - 9,030,899 - -
Acquisition of membership interest - - - 6,000,000 -
Contributions of property and
equipment 5,995,027 - 5,995,027 - -
Contribution receivable - - - - -
Net loss - (173,151) (173,151) - (692,605)
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 2000 7,500,000 (173,151) 7,326,849 6,000,000 (692,605)
Cash contribution - 201,600 201,600 - 302,400
Payment of contribution receivable - - - - -
Net loss - (105,574) (105,574) - (422,296)
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 2001 $ 7,500,000 $ (77,125) $ 7,422,875 $ 6,000,000 $ (812,501)
============= ================ =============== ============== ===============
Total
Contribution Durango
Receivable Resort, LLC Total
- ------------------------------------ --------------- ----------------- ------------
BALANCES, at May 31, 1998 $ - $ - $(4,107,760)
Net loss - - (738,738)
------------- --------------- ------------
BALANCES, at May 31, 1999 - - (4,846,498)
Net loss - - (2,679,428)
------------- --------------- ------------
BALANCES, at April 30, 2000 - - (7,525,926)
Conversion of related party debt - - 9,030,899
Acquisition of membership interest - 6,000,000 6,000,000
Contributions of property and
equipment - - 5,995,027
Contribution receivable (3,000,000) (3,000,000) (3,000,000)
Net loss - (692,605) (865,756)
------------- --------------- ------------
BALANCES, at May 31, 2000 (3,000,000) 2,307,395 9,634,244
Cash contribution - 302,400 504,000
Payment of contribution receivable 3,000,000 3,000,000 3,000,000
Net loss - (422,296) (527,870)
------------- --------------- ------------
BALANCES, at May 31, 2001 $ - $ 5,187,499 $12,610,374
=============== ================= ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 1 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(See Notes 1 and 2)
(Post- (Pre-
Acquisition) Acquisition)
For the For the
For the One-Month Eleven-Month For the
Year Ended Period Ended Period Ended Year Ended
May 31, May 31, April 30, May 31,
2001 2000 2000 1999
- ------------------------------------------------- --------------- --------------- --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization 1,895,379 163,579 1,657,634 1,840,018
(Gain) loss on sale of assets (5,518) 14,937 - 10,890
(Increase) decrease in-
Accounts receivable (120,606) (25,489) (62,927) (136,713)
Inventory and supplies 34,782 (55,324) 205,172 (143,216)
Prepaid expenses (23,851) 9,073 (51,142) 34,543
Other assets (256,212) (14,248) 54,887 10,206
(Decrease) increase in-
Accounts payable (278,204) (321,833) 186,386 181,102
Related party payable 5,242 41,193 (339,034) (125,028)
Deferred revenue 525,399 - - -
Accrued expenses 46,718 802,065 788,441 (41,488)
------------- ------------- ------------- ----------
Net cash provided by (used in) operating
activities, excluding real estate
investment activities 1,295,259 (251,803) (240,011) 891,576
------------- ------------- ------------- ----------
Real estate investment activities-
Expenditures on real estate development (859,331) - - -
------------- ------------- ------------- ----------
Net cash provided by (used in)
operating activities, including
real estate investment activities 435,928 (251,803) (240,011) 891,576
------------- ------------- ------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,857,379) (510,900) (1,018,356) (694,851)
Proceeds from sale of property and equipment 17,159 8,603 - 9,272
Payments received on notes receivable - - 12,548 1,963
------------- ------------- ------------- ----------
Net cash used in investing activities (3,840,220) (502,297) (1,005,808) (683,616)
------------- ------------- ------------- ----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
Page 2 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(See Notes 1 and 2)
. . (Post- (Pre-
. . Acquisition) Acquisition)
. . For the For the
. For the One-Month Eleven-Month For the
. Year Ended Period Ended Period Ended Year Ended
. May 31, May 31, April 30, May 31,
. 2001 2000 2000 1999
- ------------------------------------------------- --------------- --------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party line of credit $ - $ - $ 1,950,000 $ 3,275,000
Proceeds from notes payable 2,089,920 - - -
Payments on notes payable (71,655) - - -
Cash received in purchase transaction - 1,800,000 1,200,000 -
Payments on related party notes payable (2,500,000) - - (2,650,000)
Payment of bond principal (539,050) - (496,250) (450,950)
Payments on capital leases (69,779) - - -
Cash received from contribution receivable 3,000,000 - - -
Capital contributions 504,000 - - -
(Increase) decrease in restricted cash and
investments (238,444) (99,279) 476,575 (119,178)
Minority interest investment 200 - - -
------------- ------------- ------------- ----------
Net cash provided by financing activities 2,175,192 1,700,721 3,130,325 54,872
------------- ------------- ------------- ----------
Net (decrease) increase in cash and
cash equivalents (1,229,100) 946,621 1,884,506 262,832
CASH AND CASH EQUIVALENTS,
beginning of period 3,268,448 2,321,827 437,321 174,489
------------- ------------- ------------- ----------
CASH AND CASH EQUIVALENTS,
end of period $ 2,039,348 $ 3,268,448 $ 2,321,827 $ 437,321
=============== =============== =============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest, net of amounts
capitalized $ 1,088,832 $ 56,322 $ 818,096 $ 1,794,188
=============== =============== =============== =============
Property and equipment acquired under
capital lease $ 389,560 $ - $ - $ -
=============== =============== =============== =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF MAY 31, 2001 AND 2000
---------------------------
1. BUSINESS AND ORGANIZATION:
----------------------------
Operations and Ownership
- --------------------------
DSC/Purgatory, LLC is a Colorado limited liability company doing business as
("dba") Durango Mountain Resort (the "Company"). The Company is the owner and
operator of a resort formerly known as the Purgatory Resort which is primarily a
ski resort. The Company also has related real estate holdings and is located
near Durango, Colorado. As of May 31, 2001, the Company is owned by
collectively the "Members", as follows:
- - Durango Resort, LLC, a Delaware limited liability company ("Durango").
Durango owns 100% of the Class B preferred interest and 80% of the common
interest, and the following entities which are related through common ownership
(referred to hereinafter collectively as "Duncan"); Duncan owns 100% of the
Class A preferred interest and 20% of the common interest, as follows:
- - Hermosa Partners, LLP, a Colorado limited liability partnership
("Hermosa") - 5%,
- - Duncan Mountain, Inc. ("DMI", fka Durango Ski Corporation ("DSC")), a
Colorado "S" corporation - 2%, and
- - T-H Land Company, LLP, a Colorado limited liability partnership
("T-H Land") - 13%.
Purchase Transaction
- ---------------------
As part of the purchase agreement among the Members, dated November 24, 1999,
(the "Purchase Transaction") effective May 1, 2000, Durango acquired 80% of the
common interest of the Company and committed to acquire $6 million of Class B
preferred interests of the Company, of which $3 million cash was received as of
May 31, 2000 and $3 million was received during the year ended May 31, 2001.
During the year ended May 31, 2001, Durango and Duncan contributed to the
Company an additional $302,400 and $201,600, respectively, to pay for the
respective share of costs associated with planning for the real estate
development. In addition, as part of the Purchase Transaction, Duncan converted
approximately $9 million of debt and related interest and contributed commercial
real estate holdings located at the base of the ski resort valued at
approximately $6 million. The Purchase Transaction was accounted for under the
purchase method of accounting and the financial statements have been adjusted to
reflect the acquisition cost of Durango based upon the estimated fair value of
the assets acquired and liabilities assumed. As a result, the assets and
liabilities were recorded at the estimated fair value as of May 1, 2000.
In conjunction with the Purchase Transaction, the following assets were
contributed and liabilities assumed by the Members:
Fair value of assets acquired $ 25,600,607
Contribution receivable 3,000,000
Fair value of liabilities assumed (15,100,607)
---------------
Net assets acquired $ 13,500,000
=============
Durango $ 6,000,000
Duncan 7,500,000
---------------
Net assets acquired $ 13,500,000
=============
As a result of the Purchase Transaction and the related purchase accounting
adjustments, the results of operations and the financial position of the Company
are not comparable between pre- and post-acquisition periods.
Prior to the Purchase Transaction, the Company had no employees and functioned
under a management agreement with DSC, whereby DSC employees provided operating
and management services to the Company in exchange for a management fee (Note
5). In conjunction with the Purchase Transaction, the employees of DSC were
transferred to the Company and the May 1, 1996 management agreement between the
Company and DSC was terminated.
Concurrent with the Purchase Transaction, Durango signed an option agreement
with T-H Land to purchase a 51% interest in approximately 500 acres of
unentitled real estate surrounding Purgatory Village. The option expires on May
1, 2002. Durango and T-H Land have further agreed to share entitlement costs up
to $500,000 incurred prior to the exercise date. These costs will be paid 60%
by Durango and 40% by T-H Land.
The ski resort operations of the Company have historically generated net losses
and working capital deficits. Such losses and working capital deficits, as well
as amounts required to fund its capital expenditures, have historically been
funded through borrowings from related parties or through capital contributions
from Members. Management believes that the cash contributions as well as cash
on hand will provide adequate working capital to fund its fiscal 2002
operations. If the estimated cash flows from operations are not achieved,
additional capital contributions or borrowings may be necessary during fiscal
2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------
Basis of Presentation
- -----------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
During the year ended May 31, 2001, the Company formed Elk Point Development,
LLC ("Elk Point"), a wholly owned subsidiary of the Company. Elk Point is
primarily engaged in real estate development and maintenance activities.
During the year ended May 31, 2001, the Company and an unrelated third party
formed Durango Mountain Realty, LLC ("Realty"), an 80% owned subsidiary of the
Company. All profits and losses of Realty are allocated 100% to the Company,
after deducting employment compensation of the other member. Realty is
primarily engaged in the purchase, sale and development of real estate in the
Durango area.
Estimates and Assumptions
- ---------------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Estimates have been prepared on the basis of the most current
and best available information, actual results could differ from those
estimates.
Allocation of Profits, Losses and Cash Distributions
- ----------------------------------------------------------
For financial reporting purposes, the profits and losses of the Company are
allocated to the Members based upon their respective common ownership interests.
Under the terms of the operating agreement between the Members, if any cash
distributions are declared, the Class A preferred interests are entitled to a
priority cash distribution of $7,500,000, followed by the Class B preferred
interest, which is entitled to a priority cash distribution of $6,000,000.
After the priority distributions have been made, the Class A and Class B
preferred interests will share pari passu distributions until each has received
a 6% compounded, cumulative preferred return. After the priority and preferred
distributions, any additional distributions shall be based upon the common
ownership interests, which is 80% to Durango and 20% to Duncan.
Inventory
- ---------
Inventory consists primarily of retail clothing, ski equipment and food and
beverage inventories. Inventories are valued at the lower of cost or market
value, generally using the average cost method, on a first-in, first-out basis.
- ------
Property, Equipment and Other Assets
- ----------------------------------------
The Company owns approximately one hundred acres of the base area land including
approximately 35,000 square feet of commercial facilities in Purgatory Village.
The Company also has a significant investment in ski trails, lifts and related
assets located on land leased from the United States Forest Service ("USFS")
under a Special Use Permit (including two restaurant facilities on USFS land
containing an aggregate of approximately 15,000 square feet of commercial
space).
Property and equipment is depreciated by the Company using the straight-line
method over the estimated useful lives of the related assets as follows:
Asset Useful Lives
- ---------------------------- --------------
Buildings and improvements 5 to 40 years
Ski lifts and trails 10 to 40 years
Machinery and equipment 3 to 15 years
Special Use Permit
- --------------------
The Special Use Permit was previously held by DSC, as part of the Purchase
Transaction, a new forty year Special Use Permit was issued to the Company in
January 2000, which expires in 2039. The Special Use Permit is included in
other assets in the accompanying consolidated balance sheet as of May 31, 2001
at $1,178,000, net of accumulated amortization.
Deferred Loan Costs
- ---------------------
Costs and fees incurred in connection with the financing activities of the
Company have been capitalized and are being amortized to interest expense over
the terms of the related loans. Deferred loan costs of $318,000 and $172,000,
net of accumulated amortization, are included in other assets in the
accompanying consolidated balance sheets as of May 31, 2001 and 2000,
respectively.
- ------
Accrued Expenses
- -----------------
Obligations of the Company are accrued as incurred. Included in accrued
expenses are:
2001 2000
- -------------------------------- -------------- ----------
USFS Special Use Permit fees $ 52,000 $ 93,000
Accrued payroll obligations 486,000 400,000
Property taxes 23,000 146,000
Bond refinance costs 120,000 -
Pending litigation 136,000 92,000
Accrued interest expense 166,000 146,000
Other 209,000 268,000
------------- ----------
Total accrued expenses $ 1,192,000 $1,145,000
============== ==========
Revenue Recognition
- --------------------
Resort revenues are derived from a wide variety of sources, including sales of
lift tickets, ski school tuition, dining, retail stores, equipment rentals,
hotel management operations, travel reservation commissions, and commercial
property rentals, and are recognized as services are performed.
Deferred Revenue
- -----------------
The Company records deferred revenue related to the sale of season ski passes
and certain daily lift ticket products. The number of season pass holder visits
is estimated based on historical data, and the deferred revenue is recognized
throughout the season based on this estimate. During the ski season the
estimated visits are compared to the actual visits and adjustments are made if
necessary.
Income Taxes
- -------------
As the Company is a limited liability company, the income tax results and
activities flow directly to, and are the responsibility of the Members. As a
result, the accompanying consolidated financial statements do not reflect a
provision for federal or state income taxes.
- ------
Statements of Cash Flows
- ---------------------------
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents.
Asset Impairment
- -----------------
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the long-lived
assets may not be recoverable. For long-lived assets which are held and used in
operations, the long-lived asset would be impaired if the undiscounted future
cash flows related to the long-lived asset did not exceed net book value. The
amount of the impairment would then be determined by discounting the cash flows
or by using some other measure of fair value.
Capitalization Policies
- ------------------------
Capitalized development costs include costs associated with the development of
land, interest expense and property taxes on land under development and general
and administrative expenses to the extent they benefit the development of land.
Interest expense of $37,000 has been capitalized by the Company during fiscal
2001. No interest was capitalized relating to the development of land during
fiscal 2000.
Fair Value of Financial Instruments
- ---------------------------------------
The recorded amounts for cash and cash equivalents, accounts receivable, other
current assets, and accounts payable, accrued expenses and other current
liabilities approximate fair value due to the short-term nature of these
financial instruments. The fair value of the Company's notes payable
approximates fair value due to the variable nature of the interest rate
associated with that debt. The fair value of the Company's bonds approximate
fair value at May 31, 2000, due to the premium assigned to the bonds on May 1,
2000 associated with the Purchase Transaction. The fair value of the Company's
bonds at May 31, 2001 has been estimated using discounted cash flow analyses
based on current borrowing rates for debt with similar maturities and ratings.
The estimated fair value of the bonds at May 31, 2001 is presented below:
May 31, 2001
------------
Carrying Fair
Value Value
- --------------------------------------
Bonds, including unamortized premium $8,984,000 $9,078,000
Earnings Per Share
- --------------------
Due to the Company's capital structure, the presentation of net income or loss
per share is not considered meaningful and has not been presented herein.
New Accounting Pronouncements
- -------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed of." SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation which resulted
in two accounting models for long-lived assets to be disposed of. SFAS No. 144,
establishes a single accounting model for long-lived assets to be disposed of by
sale and requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not believe that the
adoption of SFAS No. 144 will have a material impact on its financial position
or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". These statements prohibit
pooling-of-interests accounting for transactions initiated after June 30, 2001,
require the use of the purchase method of accounting for all combinations after
June 30, 2001, and establish new standards for accounting for goodwill and other
intangibles acquired in business combinations. Goodwill will continue to be
recognized as an asset, but will not be amortized as previously required by APB
Opinion No. 17 "Intangible Assets." Certain other intangible assets with
indefinite lives, if present, may also not be amortized. Instead, goodwill and
other intangible assets will be subject to periodic (at least annual) tests for
impairment and recognition of impairment losses in the future could be required
based on a fair value approach as prescribed by these pronouncements. The
revised standards include transition rules and requirements for identification,
valuation and recognition of a much broader list of intangibles as part of
business combinations than prior practice, most of which will continue to be
amortized. The Company will adopt the following standard on June 1, 2002 and
does not believe that the adoption of SFAS No. 141 and SFAS No. 142 will have a
material impact on its financial position or results of operation.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operations of a long-lived asset,
except for certain obligations of leases. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company has not assessed the impact of adopting SFAS No. 143 on its financial
position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued its
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. The adoption of SAB No. 101 did not
have a material effect on the Company's financial position or results of
operations.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as subsequently amended by SFAS No. 137. SFAS No. 133
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under SFAS No. 133, accounting
for changes in fair value of a derivative depends on its intended use and
designation. SFAS No. 133 as amended by SFAS No. 137 was adopted in the first
quarter of fiscal year 2001. The adoption of SFAS No. 133 as amended by SFAS
No. 137 did not have a material impact on the Company's financial position or
results of operations.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform to the current
year presentation.
3. RESTRICTED CASH AND INVESTMENTS:
-----------------------------------
The Company maintains reserve funds to secure future bond service obligations as
required under the bond agreements. Amounts on deposit in the reserve funds
will be transferred to the bond trustee, as needed, to cover any deficiencies in
required bond service payments. Reserve funds held are invested in U.S.
Governmental Securities. The Company has the positive intent and ability to
hold all of its investment securities to maturity and does not engage in trading
or sales activity relating to these investments. These investments are
classified as held to maturity and are recorded at amortized cost, which
approximates their fair value.
Other amounts held as current restricted cash represent reserves required under
various insurance and purchase contracts.
4. LONG-TERM DEBT:
----------------
Long-term debt consists of the following as of May 31, 2001 and 2000:
May 31,
-----------------------------
2001 2000
--------------- -----------
Series 1989A Industrial Development Revenue Refunding
Bonds, interest at 9%; principal and interest payable in
quarterly installments to Trustee with unpaid principal due
on maturity, February 1, 2010. Secured in parity by certain
assets and agreements of the Company. (Including
unamortized premium of $280,524 and $311,693 as of May
31, 2001 and 2000, respectively). $ 8,983,974 $ 9,554,193
Note payable to a third party, interest at prime plus 1%, (8%
at May 31, 2001); principal and interest payable in
December, January, February, March and April each year
with unpaid principal due on maturity, April 1, 2008.
Secured by certain assets of the Company. 2,031,866 -
May 31,
2001 2000
--------------- ------------
Mortgage payable, interest at 9.4%; principal and interest
payable monthly with unpaid principal due on maturity,
October 1, 2001. Secured by the underlying real estate. $ 495,493 $ 509,094
Notes payable to Duncan, paid in full in April 2001. - 2,500,000
--------------- ------------
11,511,333 12,563,287
Less: Current portion 1,409,289 3,087,260
--------------- ------------
$ 10,102,044 $ 9,476,027
=============== ============
Bond Covenants
- ---------------
The bond agreements include various covenants and restrictions, the most
restrictive of which relate to limits on the payment of dividends, capital
expenditures, financial ratios, and the incurrence or guarantee of additional
debt.
Debt Maturities
- ----------------
Annual maturities for all long-term notes and bonds payable, net of bond premium
are as follows:
Year ending May 31-
2002 $ 1,378,263
2003 935,270
2004 995,270
2005 1,057,770
2006 1,127,770
Thereafter 5,736,466
--------------
$ 11,230,809
====================
5. MANAGEMENT AGREEMENT:
----------------------
DSC entered into a management agreement with the Company effective May 1, 1996
that was terminated on April 30, 2000 in connection with the Purchase
Transaction discussed in Note 1. Under the terms of the management agreement,
DSC was responsible for operating, managing and maintaining the resort as a
full-service ski and summer destination resort. The Company was required to
reimburse DSC for the total compensation and employment related expenses of any
DSC employee who performed services under the agreement. Also, the Company
reimbursed DSC for amounts used to purchase and maintain equipment and supplies
to be utilized by the resort up to a budgeted amount. The total amount
reimbursed to DSC was $5,536,774 and $6,096,095 for the eleven-month period
ended April 30, 2000 and the year ended May 31, 1999, respectively, and has been
allocated to the various expense categories in the statements of operations
based upon actual services provided as follows.
For the
Eleven-
Month For the
Period year
Ended Ended
April 30, May 31,
2000 1999
------------ ----------
Lift operations $ 1,576,836 $1,741,760
Commercial and other mountain operations 1,872,245 2,046,510
Other 519,860 504,122
General, administrative and marketing 1,567,833 1,803,703
------------ ----------
Total $ 5,536,774 $6,096,095
============= ==========
DSC was also entitled to a management fee from 2% to 5% of earnings before
interest, income taxes, depreciation (and amortization), ("EBITDA") based on
annual budget versus actual EBITDA, provided that actual EBITDA is at least 100%
of budget. No such amounts were earned for the eleven-month period ended April
30, 2000 or the year ended May 31, 1999.
6. RELATED PARTY TRANSACTIONS:
-----------------------------
The Company leased land, retail sales locations and equipment from certain
affiliates prior to the Purchase Transaction. In connection with the Purchase
Transaction the leased land, retail sales locations and equipment were
contributed to the Company (Note 1). Lease payments made by the Company totaled
approximately $101,000 and $320,000 for the eleven-month period ended April 30,
2000 and the year ended May 31, 1999, respectively.
Insurance coverage is purchased through an insurance agency in which Duncan has
a financial interest. Payments under such insurance contracts were
approximately $222,000, $3,000, $188,000 and $160,000 for the year ended May 31,
2001, the one-month period ended May 31, 2000, the eleven-month period ended
April 30, 2000, and the year ended May 31, 1999, respectively.
During the year ended May 31, 2001, the Company repaid the note payable to
Duncan in the amount of $2,500,000. The Company also paid interest of $216,000
to Duncan associated with this note payable.
As of May 31, 2001 and 2000, certain affiliates of the Members owed the Company
approximately $162,000 and $124,000, respectively, for services provided, which
is included in accounts receivable in the accompanying consolidated balance
sheets. In addition, the Company owed certain affiliates
approximately $121,000 and $115,000, as of May 31, 2001 and 2000, respectively,
for services provided by the affiliates. The amounts receivable and payable are
as follows:
Year Ended May 31, 2001 Year Ended May 31, 2000
Receivable Payable Net Receivable Payable Net
- -------------------- ----------- ------------ ------------ ----------- ----------- ----------
Durango $ 7,000 $ - $ 7,000 $ 1,500 $ - $ 1,500
Duncan 30,000 113,000 (83,000) 87,000 115,000 (28,000)
Other affiliates 125,000 8,000 117,000 35,500 - 35,500
---------- ---------- ----------- ---------- ---------- ----------
$ 162,000 $ 121,000 $ 41,000 $ 124,000 $ 115,000 $ 9,000
=========== ============ ============ =========== =========== ==========
7. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
During the normal course of its operations, the Company is a defendant in
several ski-related lawsuits which the Company and its insurance carriers are
actively contesting. In management's opinion, the outcome of these disputes,
net of insurance recoveries will not have a significant effect on the Company's
financial position or results of operations.
The Company finances a portion of its machinery and equipment under capital
lease obligations at interest rates ranging from 6.9% to 10.7%. The future
minimum lease payments under capitalized lease obligations at May 31, 2001 are
as follows:
Year Ending May 31-
2002 $ 91,808
2003 91,808
2004 91,808
2005 120,258
---------------------
Total payments 395,682
Less: amounts representing interest (75,901)
---------------------
Present value of future minimum
lease payments 319,781
Less: current portion of capital
lease obligations (79,424)
---------------------
Long-term capital lease obligations $ 240,357
=====================
The Company leases office and other facilities and certain equipment under
long-term operating leases.
The majority of the leased office and other facilities and equipment was
contributed to the Company in the Purchase Transaction (Note 1). Total rent
expense for all operating leases for the year ended May 31, 2001, the one-month
period ended May 31, 2000, the eleven-month period ended April 30, 2000, and the
year ended May 31, 1999, was approximately $65,000, $9,000, $168,000 and
$402,000, respectively.
Aggregate future minimum annual rental commitments under noncancellable
operating leases as of May 31, 2001, are as follows:
Year Ending May 31-
2002 $ 3,592
2003 2,676
2004 2,676
2005 2,676
2006 2,230
- --------
. $ 13,850
====================
The Company has an agreement with two airlines to provide direct flights into
the Durango - La Plata County Airport, where one agreement expires March 31,
2002 and the other agreement is indefinite. The agreements require the Company
to guarantee specified minimum airline revenue. Any guaranteed obligations are
expected to be off-set, in part, by reimbursements from local businesses. The
guaranteed amounts expensed for the year ended May 31, 2001, one-month period
ended May 31, 2000, the eleven-month period ended April 30, 2000, and the year
ended May 31, 1999, totaled approximately $185,000, $0, $118,000 and $150,000,
respectively, and are included in general, administrative, and marketing on the
accompanying statements of operations.
8. SUBSEQUENT EVENTS:
-------------------
Subsequent to yearend the Company entered into a $3.5 million revolving line of
credit with a local bank, (the "Revolving Line"). The Revolving Line bears
interest based upon Prime and matures on August 1, 2002.
Unaudited Subsequent Events
- -----------------------------
The Company also refinanced its mortgage payable. The refinanced mortgage bears
interest at 8% per annum, which could change on October 1, 2006 and October 1,
2011.
On November 29, 2001, the Company issued $8,845,000 of La Plata County, Colorado
Recreational Facilities Refunding Revenue Bonds, Series 2001A (the "Series 2001A
Bonds"), which will refund the outstanding Series 1989A Industrial Development
Revenue Refunding Bonds. The Series 2001A Bonds bear interest at 6.875% and are
due February 1, 2012. On November 29, 2001, the Company also issued $3,000,000
of La Plata County, Colorado Taxable Recreational Facilities Revenue Bonds,
Series 2001B, which bear interest at 9.0% and are due February 1, 2006.