UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2001
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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 0-21390
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AFG INVESTMENT TRUST B
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(Exact name of registrant as specified in its charter)
Delaware 04-3157230
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(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:
665,494 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)
EXPLANATORY NOTE
After AFG Investment Trust B (the "Trust") filed its Annual Report on Form 10-K
for the year ended December 31, 2001 with the United States Securities and
Exchange Commission, the Trust determined that the amounts recorded as its share
of income (loss) on its interest in EFG Kirkwood LLC ("EFG Kirkwood") for the
years ended December 31, 2001 and 2000 in its financial statements contained
therein required revision. The Trust had previously recorded income of $3,413
and a loss of $363,079 from its interest in EFG Kirkwood for the years ended
December 31, 2001 and 2000, respectively. The Trust determined that it should
have recorded losses from its interest in EFG Kirkwood LLC of $45,552 and
$450,156 for the years ended December 31, 2001 and 2000, respectively.
Accordingly, for the year ended December 31, 2001, the Trust recorded an
additional loss on its interest in EFG Kirkwood of $48,965, resulting in a
decrease in the net income for the year ended December 31, 2001 of $48,965, or
$(0.07) per Class A Beneficiary Interest and $(0.01) per Class B Beneficiary
Interest, respectively. For the year ended December 31, 2000, the Trust
recorded an additional loss on its interest in EFG Kirkwood of $87,077,
resulting in a decrease in the net income for the year ended December 31, 2000
of $87,077, or $(0.14) per Class A Beneficiary Interest and $0.00 per Class B
Beneficiary Interest, respectively. As a result, the accompanying financial
statements for the years ended December 31, 2001 and 2000 have been restated
from the amounts previously reported.
A summary of the significant effects of the restatement is as follows:
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2001
As
Previously As
Reported Restated
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STATEMENT OF OPERATIONS DATA:
Equity in net income (loss)
of EFG Kirkwood LLC $ 3,413 $ (45,552)
Net income $ 360,947 $ 311,982
Net income per Class A Beneficiary Interest $ 0.57 $ 0.50
Net income per Class B Beneficiary Interest $ 0.02 $ 0.01
BALANCE SHEET DATA:
Interest in EFG Kirkwood LLC $ 1,637,410 $1,501,368
Total assets $ 8,575,998 $8,439,956
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Total liabilities $ 652,017 $ 652,017
Participants' capital:
Managing Trustee $ 1,103 $ 735
Special Beneficiary 9,101 6,066
Class A Beneficiary Interests 8,681,410 8,556,689
Class B Beneficiary Interests 23,742 15,824
Treasury interests (791,375) (791,375)
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Total participants' capital $ 7,923,981 $7,787,939
============ ===========
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2000
As
Previously As
Reported Restated
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STATEMENT OF OPERATIONS DATA:
Equity in net loss
of EFG Kirkwood LLC $ (363,079) $ (450,156)
Net income $ 585,994 $ 498,917
Net income (loss) per Class A Beneficiary Interest $ 0.02 $ (0.12)
Net income per Class B Beneficiary Interest $ 0.32 $ 0.32
BALANCE SHEET DATA:
Interest in EFG Kirkwood LLC $ 1,633,997 $1,546,920
Total assets $ 8,313,626 $8,226,549
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Total liabilities $ 750,592 $ 750,592
Participants' capital (deficit):
Managing Trustee $ 240 $ (631)
Special Beneficiary 2,284 1,412
Class A Beneficiary Interests 8,346,284 8,263,223
Class B Beneficiary Interests 5,601 3,328
Treasury interests (791,375) (791,375)
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Total participants' capital $ 7,563,034 $7,475,957
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AFG INVESTMENT TRUST B
FORM 10-K/A
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 8
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8
PART III
Item 10. Directors and Executive Officers of the Trust 9
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 11
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
... Annual Report to Participants 19
PART I
Item 1. Business.
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(a) General Development of Business
AFG Investment Trust B (the "Trust") was organized as a Delaware business trust
in May 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 665,494
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($16,637,350 in total) in September 1992. In
July 1997, the Trust issued 1,000,961 Class B Interests at $5.00 each
($5,004,805 in total), of which (i) 997,373 interests are held by Equis II
Corporation, an affiliate of EFG, and a wholly owned subsidiary of Semele Group
Inc. ("Semele"), and (ii) 3,588 interests are held by 5 other Class A investors.
The Trust repurchased 82,837 Class A Interests in October 1997 at a cost of
$785,295. In December 1997, the Trust repurchased 640 additional Class A
Interests at a cost of $6,080. Accordingly, there are 582,017 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 Equipment Manager or Advisor to the Trust and several
other direct-participation equipment leasing programs sponsored or co-sponsored
by EFG (the "Other Investment Programs"). 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 acquistions that the
Managing Trustee believes have the potential to enhance the Trust's overall
economic performance. 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 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 September 1992. Pursuant to the Trust
Agreement, the Trust is scheduled to be dissolved by December 31, 2003.
The Trust has no employees; however, it entered into an Advisory Agreement with
EFG. EFG's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of equipment, (ii) manage the leasing, re-leasing,
financing, and refinancing of equipment, and (iii) arrange the resale of
equipment. The Advisor is compensated for such services as described in the
Trust Agreement. In addition, the Managing Trustee is compensated for services
provided related to the Trust's non-equipment investment other than cash. See
Item 13 herein.
The Trust's investment in equipment is, and will continue to be, subject to
various risks, including physical deterioration, technological obsolescence,
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.
The Trust has an ownership interest in EFG Kirkwood LLC ("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
interest in EFG Kirkwood. 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 has been 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 staff has informed the Trust that it believes that it may be an
unregistered investment company within the meaning of the Act. Although the
Trust, after consulting with counsel, does not believe that it is an
unregistered investment company, the Trust has agreed to liquidate its assets in
order to resolve the matter with the staff. Accordingly, as of December 6,
2001, the Managing Trustee of the Trust resolved to cause the Trust to dispose
of its assets prior to December 31, 2003. Upon consummation of the sale of its
assets, the Trust will be dissolved and the proceeds thereof will be applied and
distributed in accordance with the terms of the Trust Agreement.
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 3 to the financial statements, included 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 1996. In the 1998 amendment to the Trust Agreement, the Trust's
reinvestment provisions were reinstated until December 31, 2001 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.
The Trust has begun 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 interest
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, the merger was consummated on February
6, 2002. Since the Trust and another of the Trusts have determined to liquidate
their assets, the two other Trusts provided the funds necessary to acquire the
remaining 17% of PLM's outstanding common stock. 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 20% membership interest in MILPI and
its share of the aggregate membership interests in MILPI was $5,010,928. 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.
(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
------------------------------------
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 $500,709,
including legal fees for Plaintiffs' counsel of $26,913, that was paid in July
1999 ($0.81 per Class A Interest, net of legal fees). In addition, the parent
company of the Managing Trustee, Equis II Corporation, agreed to commit
$1,126,595 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 690 record holders (686 of Class A Interest and
4 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 $5,300,000, 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 until expiration of the Trust's reinvestment period through
December 2001. The Managing Trustee periodically will review and consider other
one-time distributions. 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
$5,300,000 declared in December 1999 were paid in January 2000.
Item 6. Selected Financial Data.
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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.
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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 7A. Quantitative and Qualitative Disclosures about Market Risks.
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The Trust's financial statements include financial instruments that are exposed
to interest rate risks.
Notes payable at December 31, 2001 consist of a 7.03% fixed interest rate
installment note of $420,027 payable to an institutional lender. The Trust
makes monthly debt and interest payments and the debt will be fully amortized at
the expiration of the related lease term in June 2005. The fair market value of
fixed interest rate on debt may be adversely impacted due to a decrease in
interest rates. The effect of interest rate fluctuations on the Partnership for
year ended December 31, 2001 was not material.
Item 8. Financial Statements and Supplementary Data.
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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 of
this report and in Note 7 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 outstanding no
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, 2002, 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 997,373 Interests 99.64%
Boston, MA 02110
Equis II Corporation is a wholly owned subsidiary of Semele. Gary D. Engle is
Chairman and Chief Executive Officer of Semele, 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 582,017 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 . . . . . . . . . . . . . . . . . . . $ 43,551 $ 7,869 $ 14,450
Management fees. . . . . . . . . . . . . . . . . . . . 85,830 67,679 72,020
Administrative charges . . . . . . . . . . . . . . . . 130,592 127,891 127,120
Reimbursable operating expenses
due to third parties. . . . . . . . . . . . . . . . . 600,854 174,497 270,157
-------- -------- --------
Total . $860,827 $377,936 $483,747
======== ======== ========
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 8, 1996, 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, 2001 and the Trust was permitted
to invest in assets other than equipment. Acquisition fees paid to EFG in
connection with 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 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 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 $23,936 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 839 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 and 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 1,000,961 Class B Interests at $5.00 per interest,
thereby generating $5,004,805 in aggregate Class B capital contributions. Class
A Beneficiaries purchased 3,588 Class B Interests, generating $17,940 of such
aggregate capital contributions, and then Special Beneficiary, EFG, purchased
997,373 of such Class B Interests, generating $4,986,865 of such aggregate
capital contributions.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of the Trust's outstanding voting
interests, as well as its ownership of AFG ASIT Corporation. See Item 1 (a) of
this report regarding certain voting restrictions related to the Class B
Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman
and Chief Executive Officer of Semele. James A. Coyne is Semele's President and
Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board
of Directors of, and own significant stock in, Semele.
See the discussion of the MILPI acquisition of PLM included in Item 1.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Trust
None.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Certified Public Accountants. *
Statement of Financial Position
at December 31, 2001 (Restated) and 2000 (Restated) *
Statement of Operations
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. *
Statement of Changes in Participants' Capital
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. *
Statement of Cash Flows
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999. *
Notes to the Financial Statements *
* Incorporated herein by reference to the appropriate portion of the 2001
Annual Report to security holders for the year ended December 31, 2001 (see
Part II).
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601
of Regulation S-K, are not applicable.
Exhibit
Number
------
2 Agreement and Plan of Merger, dated as of December 22,
2000, between MILPI Acquisition Corp. and PLM
International, Inc. was filed in the Registrant's Form 8-K
dated December 28, 2000 as Exhibit 2.1 and is incorporated
herein 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 10.3 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 Reno Air, 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 General Motors Corporation 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 Montgomery Ward and Company, Inc. was
filed in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997 as Exhibit 99 (d) 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.
(b) Reports on Form 8-K
Form 8-K dated December 6, 2001 regarding the liquidation of assets and
dissolution of the Trust prior to December 31, 2003.
(c) Other Exhibits
None
(d) Financial Statement Schedules
(i) Consolidated Financial Statements for MILPI Holdings, LLC and Subsidiary as
of December 31, 2001 and for the period February 7, 2001 (Date of Inception)
through December 31, 2001 and Independent Auditors' Report.
(ii) Audited Financial Statements for EFG Kirkwood LLC as of December 31, 2000
and for the year then ended
(iii) Consolidated Financial Statements for DSC/Purgatory, LLC as of May 31,
2001, 2000 and 1999 together with Report of Independent Public Accountants
(iv) Financial Statements for EFG Kirkwood LLC as of and for the year ended
December 31, 2001 and for the period May 1, 1999 (date of inception) through
December 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
AFG Investment Trust B
By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee
of the Registrant.
By: /s/ Gary D. Engle
----- ---------------
Gary D. Engle
President and Chief Executive
Officer of the general partner of EFG and
President and a Director
of the Managing Trustee
(Principal Executive Officer)
Date: May 15, 2002
--------------
By: /s/ Michael J. Butterfield
--- ------------------------
Michael J. Butterfield
Executive Vice President and
Chief Operating Officer of the general partner of EFG
and Treasurer of the Managing Trustee
(Principal Financial and Accounting Officer)
Date: May 15, 2002
--------------
Exhibit
- -------
13 The 2001 Annual Report.
23 Consent of Independent Certified Public Accountants.
SCHEDULE 14 D (i)
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page
- -------------------------------------------------------------------------------- ----
Independent Auditors' Report 2
Consolidated Balance Sheet as of December 31, 2001 3
Consolidated Statement of Operations for the period February 7, 2001
(Date of Inception) through December 31, 2001 4
Consolidated Statement of Shareholders' Equity for the period February 7, 2001
(Date of Inception) through December 31, 2001 5
Consolidated Statement of Cash Flows for the period February 7, 2001
(Date of Inception) through December 31, 2001 6
Notes to Consolidated Financial Statements 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
MILPI Holdings, LLC:
We have audited the accompanying consolidated balance sheet of MILPI Holdings,
LLC, a Delaware limited liability company, and subsidiary (the "Company") as of
December 31, 2001 and the related statements of operations, shareholders' equity
and cash flows for the period February 7, 2001 (date of inception) through
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001, and the results of its operations and its cash flows for the period
February 7, 2001 (date of inception) through December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 12, 2002
(April 12, 2002 as to paragraph 4 of Note 14)
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
(in thousands of dollars, except share amounts)
ASSETS
Cash and cash equivalents $14,037
Receivables, net of allowance for doubtful accounts of $45 39
Receivables from affiliates 951
Equity interest in affiliates 20,948
Restricted cash and cash equivalents 75
Other assets, net 2,759
Goodwill, net of accumulated amortization of $765 4,590
-------
Total assets $43,399
========
LIABILITIES
Payables and other liabilities $ 5,702
Deferred income taxes 9,751
-------
Total liabilities 15,453
-------
Minority interest 3,029
-------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value, 20 shares authorized and outstanding) -
Paid-in capital, in excess of par 21,970
Retained earnings 2,947
-------
Total shareholders' equity 24,917
-------
Total liabilities, minority interest and shareholders' equity $43,399
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
REVENUES
Operating lease income $ 472
Management fees 5,217
Partnership interests and other fees 1,716
Acquisition and lease negotiation fees 2,032
Loss on disposition of assets, net (91)
Other 1,030
-------
Total revenues 10,376
-------
EXPENSES
Operations support 800
Impairment of investment in managed programs 511
Depreciation and amortization 1,255
General and administrative 3,290
-------
Total costs and expenses 5,856
-------
Operating Income 4,520
Interest expense (6)
Interest income 384
Other income, net 89
-------
Income before income taxes 4,987
Provision for income taxes 1,611
Minority interest 429
-------
Net income $ 2,947
========
Net income per weighted-average common share
outstanding $ 147
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
Common Additional Retained
Stock Paid in Capital Earnings Total
------- ---------------- --------- -------
Balance at February 7, 2001 $ - $ 21,776 $ - $21,776
Capital contribution - 194 - 194
Net income - - 2,947 2,947
------- ---------------- --------- -------
Balance at December 31, 2001 $ - $ 21,970 $ 2,947 $24,917
======== =============== ========= ========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 7, 2001 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2001
(in thousands of dollars)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 2,947
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,255
Compensation expense related to variable stock options 315
Loss on disposition of assets, net 91
Partnership interests and other fees (1,716)
Impairment of investment in managed programs 511
Minority interest 429
Changes in assets and liabilities:
Increase in deferred income taxes 867
Decrease in payables and other liabilities (9,484)
Decrease in receivables and receivables from affiliates 1,576
Increase in other assets (176)
--------
Net cash used in operating activities (3,385)
--------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Cash distribution from managed programs 1,591
Loans made to affiliates (5,500)
Repayment of loans made to affiliates 5,500
Purchase of property, plant and equipment (71)
Proceeds of sale of equipment for lease 313
Proceeds from the sale of assets held for sale 10,250
Decrease in restricted cash 1,673
--------
Net cash provided by investing activities 13,756
--------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Capital contribution 194
Redemption of stock options (919)
--------
Net cash used in financing activities (725)
--------
Net increase in cash and cash equivalents 9,646
Cash and cash equivalents at beginning of period 4,391
--------
Cash and cash equivalents at end of period $14,037
========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 6
========
Cash paid during the period for income taxes $ 6,216
========
See accompanying notes to these consolidated financial statements.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
MILPI Holdings, LLC ("MILPI" or the "Company") was formed on December 12, 2000,
under the laws of the state of Delaware and is governed by its Operating
Agreement, dated December 13, 2000. There were no activities of MILPI from
December 12, 2000 through February 7, 2001. MILPI was created by four separate
trusts (AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C
and AFG Investment Trust D, collectively the "Trusts") for the purpose of
acquiring PLM International, Inc. and subsidiaries ("PLM"). PLM is an equipment
management company and operates in one business segment, the leasing of
transportation equipment and the creation of equipment-leasing solutions for
domestic and international customers.
On February 7, 2001 ("Date of Inception"), MILPI Acquisition Corp. ("MAC"), a
wholly-owned subsidiary of MILPI, closed on a Tender Offer ("Tender Offer") to
purchase all of the outstanding shares of PLM for a cash price of approximately
$21.8 million, resulting in goodwill of approximately $5.8 million. The $21.8
million of cash used in the Tender Offer was contributed by the Trusts and
represents their initial capital contribution. MAC acquired 83% of the common
shares outstanding of PLM through the Tender Offer. On February 6, 2002, MAC
completed its acquisition of PLM through the acquisition of the remaining 17% of
the outstanding PLM common shares and by effecting a merger of MAC into PLM,
under Delaware law. Concurrent with the completion of the merger, PLM ceased to
be publicly traded. PLM's shareholders approved the merger pursuant to a special
shareholders' meeting.
The acquisition of the stock of PLM was accounted for as a business combination
in accordance with Accounting Principles Board Opinion No. 16 ("APB No. 16").
In accordance with APB No. 16, the Company allocated the total purchase price to
the assets acquired and liabilities assumed based on the estimated fair market
values at the date of acquisition. There are no contingencies or other matters
that could materially affect the allocation of the purchase cost.
The Company's consolidated balance sheet, reflecting the above business
combination, as of February 7, 2001 was as follows (in thousands of dollars):
ASSETS
Cash and cash equivalents $ 4,391
Restricted cash and cash equivalents 1,748
Receivables 1,222
Receivables from affiliates 1,344
Equity interest in affiliates 21,334
Assets held for sale 10,250
Other assets 3,406
Goodwill 5,840
-------
Total assets $49,535
=======
LIABILITIES
Payables and other liabilities $16,275
Deferred income taxes 8,884
-------
Total liabilities 25,159
Minority interest 2,600
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value, 20 shares authorized and outstanding) -
Paid-in capital, in excess of par 21,776
-------
Total liabilities, minority interest and shareholders' equity $49,535
=======
The Company's fiscal year end is December 31.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Investments for which the Company has less than a 50% ownership interest are
accounted for using the equity method. All significant intercompany transactions
among the consolidated group have been eliminated.
The Company has recorded a minority interest in the Company's consolidated
balance sheet as of December 31, 2001 to reflect the ownership of PLM's common
shares that were not tendered.
ESTIMATES
These consolidated financial statements have been prepared on the accrual basis
of accounting in accordance with accounting principles generally accepted in the
United States of America. This requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVESTMENT IN AND MANAGEMENT OF EQUIPMENT GROWTH FUNDS, OTHER LIMITED
PARTNERSHIPS, PRIVATE PLACEMENT PROGRAMS AND LIMITED LIABILITY COMPANY
PLM earns revenues in connection with the management of limited partnerships and
private placement programs. Equipment acquisition and lease negotiation fees
are earned through the purchase and initial lease of equipment, and are
recognized as revenue when PLM completes all of the services required to earn
the fees, typically when binding commitment agreements are signed.
Management fees are earned for managing the equipment portfolios and
administering investor programs as provided for in various agreements, and are
recognized as revenue over time as they are earned.
As compensation for organizing a partnership investment program, PLM was granted
an interest (between 1% and 5%) in the earnings and cash distributions of the
program, in which PLM Financial Services, Inc. ("FSI"), a wholly owned
subsidiary of PLM, is the General Partner. PLM recognizes as partnership
interests its equity interest in the earnings of the partnerships, after
adjusting such earnings to reflect the effect of special allocations of the
programs' gross income allowed under the respective partnership agreements.
From May 1995 through May 1996, Professional Lease Management Income Fund I, LLC
("Fund I"), a limited liability company with a no front-end fee structure, was
offered as an investor program. FSI serves as the manager for the program. No
compensation was paid to PLM for the organization and syndication of interests,
the acquisition of equipment, the negotiation of leases for equipment, or the
placement of debt. PLM funded the costs of organization, syndication, and
offering through the use of operating cash and has capitalized these costs as
its investment in Fund I. PLM has equity interest of 15% for its contribution to
the program. Costs funded in excess of its 15% interest are considered goodwill
and are amortized through the end of the program.
In return for its investment, PLM is entitled to a 15% interest in the cash
distributions and earnings of Fund I, subject to certain allocation provisions.
PLM's interest in the cash distributions and earnings of Fund I will increase to
25% after the investors have received distributions equal to their invested
capital. PLM is entitled to monthly fees for equipment management services and
reimbursement for providing certain administrative services.
The Company is entitled to reimbursement from the investment programs for
providing certain administrative services.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
("SFAS No. 121"), the Company reviews the carrying value of its investments
whenever circumstances indicate that the carrying value may not be recoverable.
If projected undiscounted future cash flows are lower than the carrying value of
its equity interest in affiliates, a loss on revaluation is recorded. The
Company's projected undiscounted future cash flows are based on the appraised
values less costs to sell. During the period February 7, 2001 (Date of
Inception) through December 31, 2001, the Company recorded an impairment of
$511,000 on its equity interest in affiliates due to a change in market
conditions, primarily in the airline industry, after the events of September 11,
2001.
RESTRICTED CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments readily convertible into known
amounts of cash with original maturities of 90 days or less as cash equivalents.
Restricted cash consists of bank accounts and short-term investments that are
primarily subject to withdrawal restrictions per loan and other legally binding
agreements.
OTHER ASSETS
Other assets include loan fees, which are amortized under the effective interest
method over the life of the related loan.
GOODWILL
Goodwill of approximately $5.8 million was originally recorded in conjunction
with the acquisition of 83% of the common stock of PLM. This goodwill included
approximately $2.0 million of total costs estimated for severance of PLM
employees and relocation costs in accordance with management's formal plan to
involuntarily terminate employees, which plan was developed in conjunction with
the acquisition. During the fourth quarter of 2001, the estimates for
severance and relocation costs were reduced by $0.5 million based on actual
costs incurred related to these activities and, therefore, total goodwill was
reduced by $0.5 million. Goodwill is amortized using the straight-line method
over the estimated life of PLM, which is 7 years.
INCOME TAXES
MILPI is a partnership for tax purposes and as such is not taxed on its
operations. MAC and PLM are C corporations, which recognize income tax expense
using the asset and liability method. Deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Deferred income taxes arise primarily because of differences in the timing of
reporting equipment depreciation, partnership income, and certain accruals for
financial statement and income tax reporting purposes.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141"), was
approved by the FASB. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill and certain intangible assets with indefinite lives will remain on the
balance sheet and not be amortized. The Company implemented SFAS No. 141 on
July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the
results of operations or financial position of the Company.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142), was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill and other intangible assets determined to have an indefinite useful
life from an amortization method to an impairment-only approach. Amortization
of applicable intangible assets will cease upon adoption of this statement. The
Company is required to implement SFAS No. 142 on January 1, 2002 and has not yet
determined the impact, if any, this statement will have on its financial
position or results of operations.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which replaces SFAS No. 121.
SFAS No. 144 provides updated guidance concerning the recognition and
measurement of an impairment loss for certain types of long-lived assets,
expands the scope of a discontinued operation to include a component of an
entity, and eliminates the current exemption to consolidation when control over
a subsidiary is likely to be temporary. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company will apply the new rules on
accounting for the impairment or disposal of long-lived assets beginning in the
first quarter of 2002, and they are not anticipated to have an impact on the
Company's earnings or financial position.
2. ASSETS HELD FOR SALE
As of February 7, 2001, the Company had $10.3 million in marine containers
classified as assets held for sale. During 2001, the Company sold these marine
containers to affiliated programs at cost, which approximated their fair market
value.
As of December 31, 2001, the Company had no assets held for sale.
3. EQUITY INTEREST IN AFFILIATES
FSI is the General Partner or manager of 10 investment programs. Distributions
of the programs are allocated as follows: 99% to the limited partners and 1% to
the General Partner in PLM Equipment Growth Fund (EGF) I and PLM Passive Income
Investors 1988-II; 95% to the limited partners and 5% to the General Partner in
EGFs II, III, IV, V, VI, and PLM Equipment Growth & Income Fund VII (EGF VII);
and 85% to the members and 15% to the manager in Fund I. PLM's interest in the
cash distributions of Fund I will increase to 25% after the investors have
received distributions equal to their invested capital. Net income is allocated
to the General Partner subject to certain allocation provisions. FSI also
receives a management fee on a per car basis at a fixed rate each month, plus an
incentive management fee equal to 15% of "Net Earnings" over $750 per car per
quarter from Covered Hopper Program 1979-1.
Most of the investment program agreements contain provisions for special
allocations of the programs' gross income.
While none of the partners or members, including the General Partner and
manager, are liable for program borrowings, and while the General Partner or
manager maintains insurance against liability for bodily injury, death, and
property damage for which an investment program may be liable, the General
Partner or manager may be contingently liable for nondebt claims against the
program that exceed asset values.
The summarized combined financial data for FSI's affiliates, in which FSI is the
General Partner or manager, as of and for the period February 7, 2001 (date of
inception) through December 31, 2001 is as follows (in thousands of dollars):
Total assets $229,358
Total liabilities $ 67,579
Partners' equity $161,779
Total revenues $ 91,085
Total expenses $ 70,688
Net income $ 20,397
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER ASSETS, NET
Other assets, net, consists of the following as of December 31, 2001 (in
thousands of dollars):
Cash surrender value of officers' life insurance policies $2,343
Commercial and industrial equipment, net 178
Prepaid expenses, deposits and other 153
Furniture, fixtures, and equipment, net of accumulated
depreciation of $1,071 85
------
Total other assets, net $2,759
======
5. WAREHOUSE CREDIT FACILITY
In April 2001, PLM entered into a $15.0 million warehouse facility, which is
shared with PLM Equipment Growth Fund VI, PLM Equipment Growth & Income Fund
VII, and Fund I, LLC, that allows PLM to purchase equipment prior to its
designation to a specific program. Borrowings under this facility by the other
eligible borrowers reduce the amount available to be borrowed by PLM. All
borrowings under this facility are guaranteed by PLM. This facility provides
for financing up to 100% of the cost of the asset. Interest accrues at prime or
LIBOR plus 200 basis points, at the option of PLM. Borrowings under this
facility may be outstanding up to 270 days. This facility was amended in
December 2001 to lower the amount available to be borrowed to $10.0 million.
This facility expired in April 2002 (see Note 14).
6. INCOME TAXES
The provision for income taxes attributable to income from operations consists
of the following (in thousands of dollars):
Federal State Total
-------- ------ ------
Current $ 551 $ 193 $ 744
Deferred 705 162 867
-------- ------ ------
Total $ 1,256 $ 355 $1,611
======== ====== ======
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns ultimately filed.
The difference between the effective rate and the expected federal statutory
rate is reconciled below:
Federal statutory tax expense rate 34%
State income tax rate 5
Income reportable at the partnership level (7)
---
Effective tax expense rate 32%
===
There are no net operating loss carryforwards for federal income tax purposes of
alternative minimum tax credit carryforwards as of December 31, 2001.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities as of December 31 are presented below (in
thousands of dollars):
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets from continuing operations:
Partnership Organization and Syndication costs $ 8,300
Federal benefit of state taxes 735
Other 329
--------
Total gross deferred tax assets 9,364
--------
Less valuation allowance (8,594)
--------
Net deferred tax assets 770
Deferred tax liabilities:
Partnership interests 10,520
Other 1
--------
Total deferred tax liabilities 10,521
--------
Net deferred tax liabilities 9,751
Total net deferred tax liabilities 9,751
========
Management has reviewed all established interpretations of items reflected in
its consolidated tax returns and believes that these interpretations require
valuation allowances as described in SFAS No. 109, "Accounting for Income
Taxes". The valuation allowance contained in the 2001 deferred tax account
includes items that may result in future capital losses.
See discussion in Note 7 relative to an Internal Revenue Service audit.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Two class action lawsuits which were filed against PLM and various of its wholly
owned subsidiaries in January 1997 in the United States District Court for the
Southern District of Alabama, Southern Division (the court), Civil Action No.
97-0177-BH-C (the Koch action), and June 1997 in the San Francisco Superior
Court, San Francisco, California, Case No. 987062 (the Romei action), were fully
resolved during the fourth quarter 2001.
The named plaintiffs were individuals who invested in PLM Equipment Growth Fund
IV, PLM Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI, and PLM
Equipment Growth & Income Fund VII (the Partnerships), each a California limited
partnership for which FSI acts as the General Partner. The complaints asserted
causes of action against all defendants for fraud and deceit, suppression,
negligent misrepresentation, negligent and intentional breaches of fiduciary
duty, unjust enrichment, conversion, conspiracy, unfair and deceptive practices
and violations of state securities law. Plaintiffs alleged that each defendant
owed plaintiffs and the class certain duties due to their status as fiduciaries,
financial advisors, agents, and control persons. Based on these duties,
plaintiffs asserted liability against defendants for improper sales and
marketing practices, mismanagement of the Partnerships, and concealing such
mismanagement from investors in the Partnerships. Plaintiffs sought unspecified
compensatory damages, as well as punitive damages.
In February 1999, the parties to the Koch and Romei actions agreed to monetary
and equitable settlements of the lawsuits, with no admission of liability by any
defendant, and filed a Stipulation of Settlement with the court. The court
preliminarily approved the settlement in August 2000, and information regarding
the settlement was sent to class members in September 2000. A final fairness
hearing was held on November 29, 2000, and on April 25, 2001, the federal
magistrate judge assigned to the case entered a Report and Recommendation
recommending final approval of the monetary and equitable settlements to the
federal district court judge. On July 24, 2001, the federal district court
judge adopted the Report and Recommendation, and entered a final judgment
approving the settlements. No appeal has been filed and the time for filing an
appeal has run.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The monetary settlement provides for a settlement and release of all claims
against defendants in exchange for payment for the benefit of the class of up to
$6.6 million, consisting of $0.3 million deposited by PLM and the remainder
funded by an insurance policy. The final settlement amount of $4.9 million (of
which PLM's share was approximately $0.3 million) was paid out in the fourth
quarter of 2001 and was determined based upon the number of claims filed by
class members, the amount of attorneys' fees awarded by the court to plaintiffs'
attorneys, and the amount of the administrative costs incurred in connection
with the settlement.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Funds' equipment, except for Fund IV, (b) the extension (until December 31,
2004) of the period during which FSI can reinvest the Funds' funds in additional
equipment, except for Fund IV, (c) an increase of up to 20% in the amount of
front-end fees (including acquisition and lease negotiation fees) that FSI is
entitled to earn in excess of the compensatory limitations set forth in the
North American Securities Administrator's Association's Statement of Policy;
except for Fund IV, (d) a one-time purchase by each of Funds V, VI and VII of up
to 10% of that partnership's outstanding units for 80% of net asset value per
unit at September 30, 2000; and (e) the deferral of a portion of the management
fees paid to an affiliate of FSI until, if ever, certain performance thresholds
have been met by the Funds. The equitable settlement also provides for payment
of additional attorneys' fees to the plaintiffs' attorneys from Fund funds in
the event, if ever, that certain performance thresholds have been met by the
Funds. Following a vote of limited partners resulting in less than 50% of the
limited partners of each of Funds V, VI and VII voting against such amendments
and after final approval of the settlement, each of such Fund's limited
partnership agreement was amended to reflect these changes. During the fourth
quarter of 2001, the respective Funds repurchased limited partnership units from
those equitable class members who submitted timely requests for repurchase.
PLM is involved as plaintiff or defendant in various other legal actions
incidental to its business. Management does not believe that any of these
actions will be material to the financial condition or results of operations of
the Company.
LEASE AGREEMENTS
PLM and its subsidiaries have entered into operating leases for office space.
PLM's total net rent expense was $0.4 million in 2001. The portion of rent
expense related to its principal office, net of sublease income of $0.4 million
was $0.3 million in 2001. The remaining rent expense was related to other
office space and rental yard operations.
Annual lease commitments for all of PLM's locations total $0.3 million in 2002
and 2003, $0.2 million in 2004 and $0.1 million in 2005.
CORPORATE GUARANTEE
As of December 31, 2001, PLM had guaranteed certain obligations up to $0.4
million of a Canadian railcar repair facility, in which PLM has a 10% ownership
interest.
EMPLOYMENT AGREEMENTS
PLM entered into employment agreements with five individuals that require PLM to
pay severance to these individuals up to two years of their base salaries and
benefits if their employment is terminated after a change in control as defined
in the employment agreement. As of December 31, 2001, the total future
contingent liability for
these payments was $0.2 million.
WAREHOUSE CREDIT FACILITY
See Note 5 for discussion of PLM's credit warehouse facility.
INTERNAL REVENUE SERVICE AUDIT
In March 2001, the Internal Revenue Service notified PLM that it would conduct
an audit of certain Forms 1042, Annual Withholding Tax Return for U.S. Source
Income of Foreign Persons. The audit relates to payments to unrelated foreign
entities made by two partnerships in which PLM formerly held interests as the
100% direct and
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indirect owner. One partnership's audit relates to Forms 1042 for the years
1997, 1998 and 1999, while the other partnership's audit relates to Forms 1042
for the years 1998 and 1999. The audits remain pending, with the Internal
Revenue Service presently reviewing documents and information provided to it by
PLM. The Internal Revenue Service has not proposed any adjustments to the Forms
1042,and management believes that the withholding tax returns will be accepted
as filed. If the withholding tax returns are not accepted as filed by the
Internal Revenue Service, the recipient foreign entities are legally obligated
to indemnify PLM for any losses. If the withholding tax returns are not
accepted as filed by the Internal Revenue Service, and the recipient foreign
entities do not honor the indemnification, the Company's financial condition,
results of operations, and liquidity would be materially impacted.
OTHER
PLM has life insurance policies on certain current and former employees, which
had a $2.3 million cash surrender value as of December 31, 2001 and are included
in other assets.
8. PROFIT SHARING, 401(K) PLAN AND STOCK OPTION PLANS
The PLM Profit Sharing and 401(k) Plan (the "Plan") provides for deferred
compensation as described in Section 401(k) of the Internal Revenue Code. The
Plan is a contributory plan available to essentially all full-time employees of
PLM in the United States. In 2001, PLM employees who participated in the Plan
could elect to defer and contribute to the trust established under the Plan up
to 9% of pretax salary or wages up to $10,500. PLM matched up to a maximum of
$4,000 of PLM employees' 401(k) contributions in 2001 to vest in four equal
installments over a four-year period. The Company's total 401(k) contributions,
net of forfeitures, were $0.1 million for 2001.
Profit-sharing contributions are allocated equally among the number of eligible
Plan participants. There was no profit-sharing contributions accrued in 2001.
PLM had two nonqualified stock option plans that reserved up to 780,000 shares
of PLM's common stock for key employees and directors. Under these plans, the
price of the shares issued under an option must be at least 85% of the fair
market value of the PLM common stock at the date of grant. Vesting of the
options granted under these plans occurred in three equal installments of 33.3%
per year, initiating from the date of the grant. Prior to the completion of the
Tender Offer by MAC, PLM's Board of Directors voted to immediately vest all
options outstanding under these plans. As of December 31, 2001, grants could no
longer be made under either the employee or directors' plan.
In May 1998, PLM's Board of Directors adopted the 1998 Management Stock
Compensation Plan, which reserved 800,000 shares (in addition to the 780,000
shares above) of PLM's common stock for issuance to certain management and key
employees of PLM upon the exercise of stock options. The completion of the
Tender Offer by MAC in February 2201 was deemed a change in control in
accordance with the terms of the 1998 Management Stock Compensation Plan and all
options that had been granted immediately vested.
In February 2000, PLM's Board of Directors adopted the 2000 Management Stock
Compensation Plan, which reserved 70,000 shares with respect to which options
may be granted under the 2000 Directors' Plan. In February 2000, each
non-employee director of PLM was granted an option to purchase 8,000 shares of
common stock under this Plan. Prior to completion of the Tender Offer by MAC,
PLM's Board of Directors voted to immediately vest all options outstanding under
this plan.
Concurrent with the completion of the Tender Offer by MAC in February 2001, PLM
redeemed all vested options currently outstanding. PLM paid the difference
between the grant price of the option and $3.46 (the amount offered for PLM
shares in the Tender Offer). The total cash paid to redeem all outstanding
options was $0.9 million.
As of December 31, 2001, the 1998 Management Stock Compensation Plan and the
2000 Management Stock Compensation Plan continued to be in effect. There were no
options outstanding under either of these plans at December 31, 2001.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. TRANSACTIONS WITH AFFILIATES
In addition to various fees payable to PLM or its subsidiaries, the affiliated
programs reimburse PLM for certain expenses, as allowed in the program
agreements. Reimbursed expenses totaling $1.8 million in 2001 have been
recorded as reductions of operations support or general and administrative
expenses. Outstanding amounts are paid under normal business terms. As of
December 31, 2001, the Company had receivables from affiliates of $1.0 million,
which represented unpaid management fees.
10. RISK MANAGEMENT
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and receivables
from affiliated entities.
The Company places its temporary cash investments with financial institutions
and other creditworthy issuers and limits the amount of credit exposure to any
one party. The Company's involvement with the management of the receivables
from affiliated entities limits the credit exposure from affiliated entities.
In 2001, Professional Lease Management Fund 1, LLC, PLM Equipment Growth Fund VI
and PLM Equipment Growth and Income Fund VII, accounted for 26% of total
revenues. No other customer accounted for over 10% of revenue in 2001.
As of December 31, 2001, management believes the Company had no other
significant concentrations of credit risk that could have a material adverse
effect on the Company's business, financial condition, or results of operations.
11. GEOGRAPHIC INFORMATION
All of the Company's revenues for the period from February 7, 2001 (date of
inception) through December 31, 2001 were recognized from entities domiciled in
the United States and all of the Company's long-lived assets are located in the
United States.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current assets
and current liabilities approximates fair value because of their short-term
nature. For determination of fair value of equity interest in affiliates see
Note 1.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations of the Company
for the period February 7, 2001 (date of inception) through December 31, 2001(in
thousands of dollars):
March June September December Total
31, 30, 30, 31,
------ ------ ---------- --------- -------
Revenue $2,077 $2,406 $ 3,600 $ 2,293 $10,376
Net income $ 775 $ 824 $ 1,275 $ 73 $ 2,947
Net income per weighted-average common share outstanding: $ 39 $ 40 $ 64 $ 4 $ 147
In the third quarter of 2001, PLM earned acquisition and lease negotiation fees
of $1.8 million, which resulted in after-tax net income of $1.1 million.
MILPI HOLDINGS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS
On February 6, 2002, MILPI completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common shares and by
effecting a merger of PLM into MAC. The merger was completed when MILPI
obtained approval of the merger from PLM's shareholders pursuant to a special
shareholders' meeting. The remaining interest was purchased for approximately
$4.4 million. Concurrent with the completion of the merger, PLM ceased to be
publicly traded.
On February 11, 2002, the Company entered into separate promissory notes with
AFG Investment Trusts C and D, both shareholders in MILPI, loaning those
entities an aggregate of $1.3 million. The loans are unsecured and have a term
of 364 days. Interest accrues at LIBOR plus 200 basis points.
On March 12, 2002, the Company declared and paid a cash dividend of
approximately $2.7 million to its shareholders, the Trusts.
On April 12, 2002, PLM extended the $10.0 million warehouse facility, which is
shared by EGFs V, VI, VII and Fund I and Acquisub LLC, a wholly owned subsidiary
of PLM which is the parent company of FSI. The facility provides for financing
up to 100% of the cost of the equipment. Outstanding borrowings by one borrower
reduce the amount available to each of the other borrowers under the facility.
Individual borrowings may be outstanding for no more than 270 days, with all
advances due no later than July 11, 2002. Interest accrues either at the prime
rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an
advance of funds. Borrowings by the funds are guaranteed by PLM. This facility
expires on July 11, 2002.
SCHEDULE 14 D (ii)
EFG KIRKWOOD LLC
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 2000
- ------
CONTENTS
- --------
PAGE
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance sheet 2
Statement of operations 3
Statement of members' capital 4
Statement of cash flows 5
Notes to financial statements 6 - 13
1
INDEPENDENT AUDITOR'S REPORT
To the Members
EFG Kirkwood LLC
We have audited the accompanying balance sheet of EFG Kirkwood LLC (a limited
liability company) as of December 31, 2000, and the related statements of
operations, members' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EFG Kirkwood LLC at December
31, 2000, and the results of its operations and cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Moss Adams LLP
Stockton, California
April 12, 2002
- ------
EFG KIRKWOOD LLC
----------------
EFG KIRKWOOD LLC
BALANCE SHEET
- --------------
DECEMBER 31, 2000
ASSETS
Advances to and membership interests in:
Mountain Resort Holdings LLC $6,842,703
Mountain Springs Resort LLC 1,008,477
----------
Total assets $7,851,180
==========
LIABILITIES AND MEMBERS' CAPITAL
Interest payable $ 8,567
Note payable 197,696
----------
Total liabilities 206,263
----------
Members' capital:
Class A 7,644,917
Class B -
----------
Total members' capital 7,644,917
----------
Total liabilities and members' capital $7,851,180
==========
2 See accompanying notes
EFG KIRKWOOD LLC
STATEMENT OF OPERATIONS
-----------------------
YEAR ENDED DECEMBER 31, 2000
Loss from advances to and membership interests in:
Mountain Resort Holdings LLC $ (390,191)
Mountain Springs Resort LLC (2,373,950)
-----------
(2,764,141)
Interest expense 8,567
------------
Net loss $(2,772,708)
============
See accompanying notes 3
- ------------------------
EFG KIRKWOOD LLC
STATEMENT OF MEMBERS' CAPITAL
- --------------------------------
YEAR ENDED DECEMBER 31, 2000
Class A Class B
Membership Membership
Interests Interests Total
----------- ----------- -----------
Members' capital at January 1, 2000 $ 6,700,000 $ 531,110 $ 7,231,110
Members' capital contributions 3,186,515 - 3,186,515
Net loss (2,241,598) (531,110) (2,772,708)
----------- ----------- -----------
Members' capital at December 31, 2000 $ 7,644,917 $ - $ 7,644,917
=========== =========== ===========
4 See accompanying notes
EFG KIRKWOOD LLC
STATEMENT OF CASH FLOWS
-----------------------
YEAR ENDED DECEMBER 31, 2000
See accompanying notes 5
- ------------------------
NET LOSS $(2,772,708)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH FROM OPERATIONS:
Loss from advances to and membership interests in:
Mountain Resort Holdings LLC 390,191
Mountain Springs Resort LLC 2,373,950
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest payable, net 8,567
------------
Net cash from operations -
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of membership interests in:
Mountain Resort Holdings LLC (894,756)
Mountain Springs Resort LLC (1,700,000)
Advances to Mountain Springs Resort LLC (1,000,000)
------------
Net cash from investing activities (3,594,756)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in note payable 408,241
Distributions from Mountain Resort Holdings LLC 210,545
Payment on note payable (210,545)
Members' capital contributions 3,186,515
------------
Net cash from financing activities 3,594,756
NET CHANGE IN CASH AND CASH EQUIVALENTS -
CASH AND CASH EQUIVALENTS, beginning of year -
------------
CASH AND CASH EQUIVALENTS, end of year $ -
============
OTHER NON-CASH ACTIVITIES:
- ---------------------------
Interest earned on convertible debentures $ 26,278
Conversion of principal and accrued, but unpaid,
interest on convertible debentures to equity interests
in Mountain Springs Resort LLC $ 1,059,125
Interest earned on notes receivable $ 19,259
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------
DECEMBER 31, 2000
NOTE 1 - ORGANIZATION
EFG Kirkwood LLC (the "Company") was formed as Tandem Capital LLC, a Delaware
limited liability company, on December 2, 1998. On April 6, 1999, the Company
changed its name to EFG Kirkwood LLC. The Company's operations commenced on
June 10, 1999.
The Company has two classes of membership interests identified as Class A and
Class B. The Class A members consist of AFG Investment Trust A, AFG Investment
Trust B, AFG Investment Trust C, and AFG Investment Trust D (collectively, the
"AFG Trusts"). The Class B member is Semele Group Inc. The collective voting
interests of the Class A members are equal to the voting interests of the Class
B member; however, the Class A interest holders are entitled to certain
preferred returns prior to the payment of Class B cash distributions. The
manager of the Company is AFG ASIT Corporation, which also is the Managing
Trustee of the AFG Trusts. (See "Note 5 - Related Party Transactions" herein
for additional information concerning the relationships of the Company's
members.)
At December 31, 2000, the Company owned approximately 38% of each of the Series
B preferred member interests and Series A common member interests of Mountain
Resort Holdings LLC, and 50% of the common member interests of Mountain Springs
Resort LLC. The Company has no business activities other than through its
membership interests in and advances to Mountain Resort Holdings LLC and
Mountain Springs Resort LLC (hereinafter, collectively referred to as the
"Resorts").
Mountain Resort Holdings LLC, through four wholly owned subsidiaries, owns and
operates the Kirkwood Mountain Resort, a ski resort located in northern
California, a public utility that services the local community, and land that is
held for residential and commercial development (see Note 4).
Mountain Springs Resort LLC, through its wholly owned subsidiary, Durango Resort
LLC, owns 80% of the common member interests and 100% of the Class B preferred
member interests of DSC/Purgatory LLC, which owns and operates the Purgatory Ski
resort in Durango, Colorado (see Note 4).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS - The Company does not maintain a cash account at any
bank or financial institution. All cash transactions involving the Company were
funded directly by the Company's members on the Company's behalf.
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 2000
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION - The Company accounts for its membership interests in the
Resorts using the equity method of accounting. Under the equity method of
accounting, the carrying value of the Company's membership interests are (i)
increased or decreased to reflect the Company's share of income or loss from the
Resorts and (ii) decreased to reflect any cash distributions paid by the Resorts
to the Company.
ALLOCATION OF PROFITS AND LOSSES - Profits and losses of the Company are
allocated consistent with the economic priorities of the Company's members
relative to one another. The Company's operating agreement provides that cash
distributions to the Class B member are subordinate to Class A Payout. (Class A
Payout is defined as the first time that the Class A members shall have been
paid a cash return equal to all of their original capital contributions plus a
yield of 12% per annum compounded annually, subject to certain adjustments.)
Accordingly, the Company's cumulative losses have been allocated first to the
Class B member up to the amount of the its original capital contribution of
$750,000. Cumulative losses in excess of $750,000 have been allocated to the
Class A members in proportion to their respective interests in aggregate Class A
capital.
Future net income or net loss will be allocated first to the Class A members
until they reach Payout. Neither the Class B nor the Class A members are
required to make any additional capital contributions to the Company under the
terms of the Company's operating agreement.
INCOME TAXES - No provision for federal or state income taxes has been provided
for the Company, as the liability for such income taxes is the obligation of the
Company's members.
NOTE 3 - CONVERTIBLE DEBENTURES
On June 10, 1999, the Company purchased $1,000,000 of convertible debentures
from Kirkwood Associates, Inc. The debentures earned interest at the annual
rate of 6.5%, compounded quarterly, and permitted the Company to convert both
principal and accrued, but unpaid, interest into shares of common stock in
Kirkwood Associates, Inc. at a defined conversion rate. On April 30, 2000, the
Company elected to convert all of the principal and accrued, but unpaid,
interest under the debentures ($1,059,125) into 962,841 shares of common stock
in Kirkwood Associates, Inc. (see Note 4).
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------
DECEMBER 31, 2000
NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS
LLC AND MOUNTAIN SPRINGS RESORT LLC
MOUNTAIN RESORT HOLDINGS LLC - The Company's membership interests in Mountain
Resort Holdings LLC were obtained as a result of the recapitalization of
Kirkwood Associates, Inc. on April 30, 2000. Under the recapitalization plan,
the net assets of Kirkwood Associates, Inc. were contributed to Mountain Resort
Holdings LLC and the stockholders of Kirkwood Associates, Inc. exchanged their
capital stock for membership interests in Mountain Resort Holdings LLC.
At December 31, 2000, the Company owned approximately 38% of each of the Series
A common membership interests and the Series B preferred membership interests of
Mountain Resort Holdings LLC. The Company purchased its initial equity
interests in Kirkwood Associates, Inc. on June 10, 1999 at a discount to book
value of approximately $3,329,000. On April 30, 2000, the Company completed
certain additional equity transactions in connection with the recapitalization
of Kirkwood Associates, Inc. These transactions caused the net purchase
discount to be reduced to approximately $2,812,000, such amount representing the
net amount by which the Company's share of the net equity reported by Mountain
Resort Holdings LLC exceeded the purchase price paid by the Company for such
interests. This difference is being treated as a reduction to the depreciable
assets recorded by Mountain Resort Holdings LLC and is being amortized over 13
years. The amortization period represents the weighted average estimated useful
life of the long-term assets owned by Mountain Resort Holdings LLC. The
Company's allocated share of the net income (loss) of Mountain Resort Holdings
LLC is adjusted for depreciation expense reductions of $227,629 in 2000.
The Company's allocated share of the net income or loss of Mountain Resort
Holdings LLC for 2000 was determined based upon its common and preferred equity
interests in Mountain Resort Holdings LLC. From June 10, 1999 to April 30,
2000, the Company owned approximately 71% of the outstanding preferred equity
interests and approximately 16% of the outstanding common equity interests of
Mountain Resort Holdings LLC. After the recapitalization on April 30, 2000,
discussed above, the Company held approximately 38% of both the outstanding
preferred and common equity interests of Mountain Resort Holdings LLC. The
Company's allocated share of the net income or loss of the resort is influenced
principally by the Company's percentage share of the outstanding common
interests of the resort during the year ended December 31, 2000. Consequently,
the Company was allocated a larger share of the operating results of Mountain
Resort Holdings LLC during the period May 1, 2000 to December 31, 2000
(approximately 38%) compared to the period January 1, 2000 to April 30, 2000
(approximately 16%). The period from January 1 to April 30 is generally
considered peak season for U.S. based ski resorts. During the period January
1, 2000 to April 30, 2000, Mountain Resort Holdings LLC reported net income of
approximately $3.6 million compared to a net loss of approximately $3.3 million
during the period May 1, 2000 to December 31, 2000.
- ------
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 2000
NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS
LLC AND MOUNTAIN SPRINGS RESORT LLC (CONTINUED)
The table below provides summarized financial data for Mountain Resort Holdings
LLC as of December 31, 2000.
Amounts presented in thousands (000's omitted):
Total assets $49,054
Total liabilities $24,624
Total equity $24,430
Total revenues $27,741
Total operating and other income and expenses $27,464
Net income $ 277
MOUNTAIN SPRINGS RESORT LLC - The Company and a third party established Mountain
Springs Resort LLC as a 50/50 joint venture for the purpose of acquiring certain
common and preferred equity interests in DSC/Purgatory LLC. The Company and its
joint venture partner provided cash funds totaling $6,800,000 to Mountain
Springs Resort LLC, each member having contributed $2,400,000 of equity and
$1,000,000 in the form of a loan. The loans earn interest at the rate of 11.5%
annually and mature on November 1, 2001. Subsequent to December 31, 2000, these
loans and accrued interest thereon were converted to equity.
A wholly owned subsidiary of Mountain Springs Resort LLC, Durango Resort LLC,
was established to acquire 80% of the common membership interests and 100% of
the Class B preferred membership interests of DSC/Purgatory LLC at a cost of
approximately $6,311,000, including transaction costs of approximately $311,000.
Subsequently, Mountain Springs Resort LLC contributed additional equity totaling
$302,400 to DSC/Purgatory LLC to pay its share of costs associated with planning
for the development of Mountain Springs Resort LLC's real estate.
The assets, liabilities and equity of DSC/Purgatory LLC were contributed at
estimated fair value. The acquisition of DSC/Purgatory was accounted for using
the purchase method of accounting. Accordingly, the excess of the purchase
price over the net identifiable assets of DSC/Purgatory, or approximately
$311,000, was allocated to goodwill and is being amortized over a period of 13
years.
The remaining equity interests of DSC/Purgatory LLC, consisting of 20% of the
common membership interests and 100% of the Class A preferred membership
interests, are owned by a third party. The Class A membership interests are
senior to the other equity interests in DSC/Purgatory LLC. Consequently, the
Company's economic interests in DSC/Purgatory LLC are subordinate to the Class A
member and have resulted in the Company recognizing a larger share of the net
losses reported by DSC/Purgatory LLC than its equity interest dictates.
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------
DECEMBER 31, 2000
NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS
LLC AND MOUNTAIN SPRINGS RESORT LLC (CONTINUED)
The operations of Mountain Springs Resort LLC and Durango Resort LLC are
immaterial except for their investments in the entities as described above.
The table below provides summarized financial data for DSC/Purgatory LLC as of
December 31, 2000 and for the period May 1, 2000 through December 31, 2000.
Amounts presented in thousands (000's omitted):
Total assets $28,171
Total liabilities $19,188
Total equity $ 8,983
Total revenues $ 5,008
Total operating and other income and expenses $ 9,725
Net loss $(4,717)
The Company became a member of DSC/Purgatory LLC on May 1, 2000. Accordingly,
amounts reflected for 2000 are for the period May 1, 2000 through December 31,
2000 and therefore exclude what is generally considered peak season for U.S.
based ski resorts.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company's Class A and Class B members and its manager are affiliated.
Semele Group Inc., through a wholly owned subsidiary, owns and controls the
Company's manager, AFG ASIT Corporation, as well as a controlling voting
interest in each of the AFG Trusts. A different subsidiary of Semele owns Class
A Beneficiary interests that collectively represent approximately 0.4% of the
outstanding Class A Beneficiary interests of the AFG Trusts.
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 2000
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
The membership interests of the Company are owned as follows:
Percentage
Class A membership interests
AFG Investment Trust A 10%
AFG Investment Trust B 20%
AFG Investment Trust C 40%
AFG Investment Trust D 30%
----
Total Class A
membership interests 100%
====
Class B membership interests
Semele Group, Inc. 100%
====
NOTE 6 - SUBSEQUENT EVENT - GUARANTEE
On August 1, 2001, the Company became a guarantor of a note payable to a bank of
DSC/Purgatory LLC. The guarantee is for $3,500,000, the original principal
balance of the note. The note is also guaranteed in the same amount by another
investor of DSC/Purgatory LLC.
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------
DECEMBER 31, 2000
NOTE 7 - MOUNTAIN SPRINGS RESORT LLC CONDENSED CONSOLIDATING FINANCIAL
STATEMENTS
The following is the condensed consolidating financial statements of Mountain
Springs Resort LLC at December 31, 2000 included to comply with SEC rules and
regulations:
Consolidated Mountain
DSC/ Durango Durango Springs
Purgatory LLC Resort LLC Eliminations Resort LLC Resort LLC Eliminations
-------------- ----------- -------------- ------------- ----------- --------------
Cash and cash equivalents $ 2,658,275 $ - $ - $ 2,658,275 $ 229,120 $ -
Restricted cash 1,555,767 - - 1,555,767 - -
Accounts receivable 1,597,765 60,635 - 1,658,400 - -
Other current assets 800,188 - - 800,188 - -
Property and equipment, net 19,762,505 - - 19,762,505 - -
Investment in subsidiary - 6,199,200 (6,199,200) - 6,564,986 (6,564,986)
Goodwill - 297,822 - 297,822 - -
Special use permit 1,191,111 - - 1,191,111 - -
Other assets 605,121 7,329 - 612,450 2,328 -
Total assets $ 28,170,732 $ 6,564,986 $ (6,199,200) $ 28,536,518 $ 6,796,434 $ (6,564,986)
Accounts payable and accrued liabilities $ 2,400,511 $ - $ - $ 2,400,511 $ 62,821 $ -
Current portion of long-term debt 3,406,330 - - 3,406,330 2,000,000 -
Other current liabilities 2,447,689 - - 2,447,689 38,518 -
Long-term debt 10,933,648 - - 10,933,648 - -
Total liabilities 19,188,178 - - 19,188,178 2,101,339 -
Minority interest - - 7,500,000 7,500,000 - -
Members' capital 8,982,554 6,564,986 (13,699,200) 1,848,340 4,695,095 (6,564,986)
Total liabilities, minority interest
and members' capital $ 28,170,732 $ 6,564,986 $ (6,199,200) $ 28,536,518 $ 6,796,434 $ (6,564,986)
Consolidated
Mountain
Springs
Resort LLC
--------------
Cash and cash equivalents $ 2,887,395
Restricted cash 1,555,767
Accounts receivable 1,658,400
Other current assets 800,188
Property and equipment, net 19,762,505
Investment in subsidiary -
Goodwill 297,822
Special use permit 1,191,111
Other assets 614,778
Total assets $ 28,767,966
Accounts payable and accrued liabilities $ 2,463,332
Current portion of long-term debt 5,406,330
Other current liabilities 2,486,207
Long-term debt 10,933,648
Total liabilities 21,289,517
Minority interest 7,500,000
Members' capital (21,551)
Total liabilities, minority interest
and members' capital $ 28,767,966
EFG KIRKWOOD LLC
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 2000
NOTE 7 - MOUNTAIN SPRINGS RESORT LLC CONDENSED CONSOLIDATING FINANCIAL
STATEMENTS (CONTINUED)
DSC/ Consolidated Mountain
Purgatory LLC Durango Durango Springs
Eight Months Resort LLC Resort LLC Resort LLC
Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
2000 2000 Eliminations 2000 2000 Eliminations
-------------- -------------- ------------ -------------- -------------- -------------
Total revenues $ 5,007,892 $ 335,383 $ - $ 5,343,275 $ - $ -
Total operating expenses 9,112,600 365,879 - 9,478,479 746 -
Loss from operations (4,104,708) (30,496) - (4,135,204) (746) -
Interest expense (611,946) - - (611,946) (38,518) -
Loss of subsidiary - - - - (30,496) 30,496
Net loss $ (4,716,654) $ (30,496) $ - $ (4,747,150) $ (69,760) $ 30,496
Consolidated
Mountain
Springs
Resort LLC
Year Ended
December 31,
2000
-------------
Total revenues $ 5,343,275
Total operating expenses 9,479,225
Loss from operations (4,135,950)
Interest expense (650,464)
Loss of subsidiary -
Net loss $ (4,786,414)
SCHEDULE 14 D (iii)
DSC/PURGATORY, LLC
(DBA DURANGO MOUNTAIN RESORT)
Consolidated Financial Statements
As Of May 31, 2001, 2000 And 1999
Together With Report Of Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
DSC/Purgatory, LLC:
We have audited the accompanying consolidated balance sheets of DSC/Purgatory,
LLC (a Colorado limited liability company dba Durango Mountain Resort) as of May
31, 2001 and 2000, and the related consolidated statements of operations,
members' capital (deficit) and cash flows for the year ended May 31, 2001, the
one-month period ended May 31, 2000 (post-acquisition - see Note 1), the
eleven-month period ended April 30, 2000 (pre-acquisition - see Note 1) and the
year ended May 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
sold a majority voting interest effective May 1, 2000. Accordingly, the assets,
liabilities and members' capital have been recorded to reflect the purchase
price. The assets and liabilities were recorded based upon the estimated fair
market values at the date of acquisition. Accordingly, the pre-acquisition and
post-acquisition financial statements are not comparable in all material
respects since these financial statements report the financial position, results
of operations and cash flows on two separate accounting bases.
In our opinion, the balance sheets and related statements of operations,
members' capital (deficit) and cash flows as of and for the year ended May 31,
2001, and for the one-month period ended May 31, 2000, referred to above present
fairly, in all material respects, the financial position of DSC/Purgatory, LLC
as of May 31, 2001 and 2000, and the results of its operations and its cash
flows for the year and one-month period then ended in conformity with accounting
principles generally accepted in the United States.
Also, in our opinion, the statements of operations, members' capital (deficit)
and cash flows for the eleven-month period ended April 30, 2000, and the year
ended May 31, 1999, referred to above present fairly, in all material respects,
the results of operations and cash flows of DSC/Purgatory, LLC for the
eleven-month period ended April 30, 2000, and the year ended May 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 31, 2001.
Page 1 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
CONSOLIDATED BALANCE SHEETS
---------------------------
(See Notes 1 and 2)
May 31,
ASSETS 2001 2000
- ---------------------------------------------------- ---------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,039,348 $ 3,268,448
Restricted cash and investments 493,405 226,708
Accounts receivable, net of allowance for doubtful
accounts of $13,200 and $13,000, respectively 587,237 466,631
Inventory and supplies, at cost 395,448 430,230
Prepaid expenses 252,968 229,117
-------------- ----------
Total current assets 3,768,406 4,621,134
-------------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land, buildings and improvements 9,122,056 8,874,174
Ski lifts and trails 8,382,687 4,795,139
Machinery and equipment 3,596,764 2,782,788
Construction-in-progress 14,023 430,079
-------------- ----------
21,115,530 16,882,180
Less- accumulated depreciation (2,031,602) (158,035)
-------------- ----------
Total property and equipment, net 19,083,928 16,724,145
-------------- ----------
REAL ESTATE DEVELOPMENT 859,331 -
RESTRICTED CASH AND INVESTMENTS 963,626 991,879
SPECIAL USE PERMIT, net of accumulated amortization
of $32,849 and $1,968, respectively 1,178,491 1,209,372
OTHER ASSETS, net of accumulated amortization
of $25,712 and $5,560, respectively 704,043 467,983
-------------- ----------
Total assets $ 26,557,825 $24,014,513
================ ============
The accompanying notes to consolidated financial statements
-----------------------------------------------------------
are an integral part of these consolidated balance sheets.
----------------------------------------------------------
Page 2 of 2
-----------
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
CONSOLIDATED BALANCE SHEETS
---------------------------
(See Notes 1 and 2)
May 31,
LIABILITIES AND MEMBERS' CAPITAL 2001 2000
- ----------------------------------------------------- --------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 278,127 $ 556,331
Accrued expenses 1,191,941 1,145,223
Related party payable 120,670 115,428
Deferred revenue 525,399 -
Current portion of long-term debt 1,409,289 587,260
Current portion of obligations under capital leases 79,424 -
Notes payable to related party - 2,500,000
-------------- ----------
Total current liabilities 3,604,850 4,904,242
-------------- ----------
LONG-TERM DEBT:
Bonds, including unamortized premium 8,360,310 8,980,524
Notes payable 1,741,734 495,503
Obligation under capital leases 240,357 -
-------------- ----------
10,342,401 9,476,027
-------------- ----------
Total liabilities 13,947,251 14,380,269
-------------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 200 -
MEMBERS' CAPITAL:
Duncan interests 7,422,875 7,326,849
Durango Resort, LLC 5,187,499 5,307,395
Contribution receivable - (3,000,000)
-------------- ----------
Total members' capital 12,610,374 9,634,244
-------------- ----------
Total liabilities and members' capital $ 26,557,825 $24,014,513
=============== ============
The accompanying notes to consolidated financial statements
-----------------------------------------------------------
are an integral part of these consolidated balance sheets.
----------------------------------------------------------
------
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(See Notes 1 and 2)
(Post- (Pre-
Acquisition) Acquisition)
For the For the
For the One-Month Eleven-Month For the
Year Ended Period Ended Period Ended Year Ended
May 31, May 31, April 30, May 31,
2001 2000 2000 1999
-------------- ----------------- ----------------- --------------
REVENUES:
Lift operations $ 7,994,983 $ - $ 5,629,682 $ 7,997,607
Commercial and other mountain operations 6,714,538 61,620 4,832,342 5,712,669
Other 1,045,362 30,412 771,072 1,001,829
----------- --------------- --------------- -----------
Total Revenues 15,754,883 92,032 11,233,096 14,712,105
----------- --------------- --------------- -----------
OPERATING EXPENSES:
Lift operations 3,066,098 133,988 2,642,962 2,801,565
Commercial and other mountain operations 4,839,228 252,568 3,443,490 4,178,591
General, administrative and marketing 4,168,772 241,490 3,683,346 3,919,263
Depreciation and amortization 1,908,077 160,135 1,620,168 1,797,611
Other 1,404,234 86,181 955,106 1,034,802
----------- --------------- --------------- -----------
Total Operating Expenses 15,386,409 874,362 12,345,072 13,731,832
----------- --------------- --------------- -----------
Income (loss) from operations 368,474 (782,330) (1,111,976) 980,273
OTHER (EXPENSE) INCOME:
Interest expense (1,127,539) (104,278) (1,703,228) (1,843,548)
Interest income 231,195 20,852 135,776 124,537
----------- --------------- --------------- -----------
Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738)
============== ================= ================= ==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (DEFICIT)
-----------------------------------------------------
FOR THE YEAR ENDED MAY 31, 2001,
--------------------------------
THE ONE-MONTH PERIOD ENDED MAY 31, 2000,
----------------------------------------
THE ELEVEN-MONTH PERIOD ENDED APRIL 30, 2000,
---------------------------------------------
AND THE YEAR ENDED MAY 31, 1999
-------------------------------
(See Notes 1 and 2)
Duncan Durango Resort, LLC
Class A Total Class B
Preferred Common Duncan Preferred Common
- ------------------------------------ ------------- ---------------- --------------- -------------- ---------------
BALANCES, at May 31, 1998 $ (4,107,760) $ - (4,107,760) $ - $ -
Net loss (738,738) - (738,738) - -
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 1999 (4,846,498) - (4,846,498) - -
Net loss (2,679,428) - (2,679,428) - -
----------- -------------- ------------- ------------- -------------
BALANCES, at April 30, 2000 (7,525,926) - (7,525,926) - -
Conversion of related party debt 9,030,899 - 9,030,899 - -
Acquisition of membership interest - - - 6,000,000 -
Contributions of property and
equipment 5,995,027 - 5,995,027 - -
Contribution receivable - - - - -
Net loss - (173,151) (173,151) - (692,605)
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 2000 7,500,000 (173,151) 7,326,849 6,000,000 (692,605)
Cash contribution - 201,600 201,600 - 302,400
Payment of contribution receivable - - - - -
Net loss - (105,574) (105,574) - (422,296)
----------- -------------- ------------- ------------- -------------
BALANCES, at May 31, 2001 $ 7,500,000 $ (77,125) $ 7,422,875 $ 6,000,000 $ (812,501)
============= ================ =============== ============== ===============
Total
Contribution Durango
Receivable Resort, LLC Total
- ------------------------------------ --------------- ----------------- ------------
BALANCES, at May 31, 1998 $ - $ - $(4,107,760)
Net loss - - (738,738)
------------- --------------- ------------
BALANCES, at May 31, 1999 - - (4,846,498)
Net loss - - (2,679,428)
------------- --------------- ------------
BALANCES, at April 30, 2000 - - (7,525,926)
Conversion of related party debt - - 9,030,899
Acquisition of membership interest - 6,000,000 6,000,000
Contributions of property and
equipment - - 5,995,027
Contribution receivable (3,000,000) (3,000,000) (3,000,000)
Net loss - (692,605) (865,756)
------------- --------------- ------------
BALANCES, at May 31, 2000 (3,000,000) 2,307,395 9,634,244
Cash contribution - 302,400 504,000
Payment of contribution receivable 3,000,000 3,000,000 3,000,000
Net loss - (422,296) (527,870)
------------- --------------- ------------
BALANCES, at May 31, 2001 $ - $ 5,187,499 $12,610,374
=============== ================= ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 1 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(See Notes 1 and 2)
(Post- (Pre-
Acquisition) Acquisition)
For the For the
For the One-Month Eleven-Month For the
Year Ended Period Ended Period Ended Year Ended
May 31, May 31, April 30, May 31,
2001 2000 2000 1999
- ------------------------------------------------- --------------- --------------- --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (527,870) $ (865,756) $ (2,679,428) $ (738,738)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization 1,895,379 163,579 1,657,634 1,840,018
(Gain) loss on sale of assets (5,518) 14,937 - 10,890
(Increase) decrease in-
Accounts receivable (120,606) (25,489) (62,927) (136,713)
Inventory and supplies 34,782 (55,324) 205,172 (143,216)
Prepaid expenses (23,851) 9,073 (51,142) 34,543
Other assets (256,212) (14,248) 54,887 10,206
(Decrease) increase in-
Accounts payable (278,204) (321,833) 186,386 181,102
Related party payable 5,242 41,193 (339,034) (125,028)
Deferred revenue 525,399 - - -
Accrued expenses 46,718 802,065 788,441 (41,488)
------------- ------------- ------------- ----------
Net cash provided by (used in) operating
activities, excluding real estate
investment activities 1,295,259 (251,803) (240,011) 891,576
------------- ------------- ------------- ----------
Real estate investment activities-
Expenditures on real estate development (859,331) - - -
------------- ------------- ------------- ----------
Net cash provided by (used in)
operating activities, including
real estate investment activities 435,928 (251,803) (240,011) 891,576
------------- ------------- ------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,857,379) (510,900) (1,018,356) (694,851)
Proceeds from sale of property and equipment 17,159 8,603 - 9,272
Payments received on notes receivable - - 12,548 1,963
------------- ------------- ------------- ----------
Net cash used in investing activities (3,840,220) (502,297) (1,005,808) (683,616)
------------- ------------- ------------- ----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements
Page 2 of 2
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(See Notes 1 and 2)
... . (Post- (Pre-
... . Acquisition) Acquisition)
... . For the For the
... For the One-Month Eleven-Month For the
... Year Ended Period Ended Period Ended Year Ended
... May 31, May 31, April 30, May 31,
... 2001 2000 2000 1999
- ------------------------------------------------- --------------- --------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party line of credit $ - $ - $ 1,950,000 $ 3,275,000
Proceeds from notes payable 2,089,920 - - -
Payments on notes payable (71,655) - - -
Cash received in purchase transaction - 1,800,000 1,200,000 -
Payments on related party notes payable (2,500,000) - - (2,650,000)
Payment of bond principal (539,050) - (496,250) (450,950)
Payments on capital leases (69,779) - - -
Cash received from contribution receivable 3,000,000 - - -
Capital contributions 504,000 - - -
(Increase) decrease in restricted cash and
investments (238,444) (99,279) 476,575 (119,178)
Minority interest investment 200 - - -
------------- ------------- ------------- ----------
Net cash provided by financing activities 2,175,192 1,700,721 3,130,325 54,872
------------- ------------- ------------- ----------
Net (decrease) increase in cash and
cash equivalents (1,229,100) 946,621 1,884,506 262,832
CASH AND CASH EQUIVALENTS,
beginning of period 3,268,448 2,321,827 437,321 174,489
------------- ------------- ------------- ----------
CASH AND CASH EQUIVALENTS,
end of period $ 2,039,348 $ 3,268,448 $ 2,321,827 $ 437,321
=============== =============== =============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest, net of amounts
capitalized $ 1,088,832 $ 56,322 $ 818,096 $ 1,794,188
=============== =============== =============== =============
Property and equipment acquired under
capital lease $ 389,560 $ - $ - $ -
=============== =============== =============== =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
DSC/PURGATORY, LLC
------------------
(dba DURANGO MOUNTAIN RESORT)
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF MAY 31, 2001 AND 2000
---------------------------
1. BUSINESS AND ORGANIZATION:
----------------------------
Operations and Ownership
- --------------------------
DSC/Purgatory, LLC is a Colorado limited liability company doing business as
("dba") Durango Mountain Resort (the "Company"). The Company is the owner and
operator of a resort formerly known as the Purgatory Resort which is primarily a
ski resort. The Company also has related real estate holdings and is located
near Durango, Colorado. As of May 31, 2001, the Company is owned by
collectively the "Members", as follows:
- - Durango Resort, LLC, a Delaware limited liability company ("Durango").
Durango owns 100% of the Class B preferred interest and 80% of the common
interest, and the following entities which are related through common ownership
(referred to hereinafter collectively as "Duncan"); Duncan owns 100% of the
Class A preferred interest and 20% of the common interest, as follows:
- - Hermosa Partners, LLP, a Colorado limited liability partnership
("Hermosa") - 5%,
- - Duncan Mountain, Inc. ("DMI", fka Durango Ski Corporation ("DSC")), a
Colorado "S" corporation - 2%, and
- - T-H Land Company, LLP, a Colorado limited liability partnership
("T-H Land") - 13%.
Purchase Transaction
- ---------------------
As part of the purchase agreement among the Members, dated November 24, 1999,
(the "Purchase Transaction") effective May 1, 2000, Durango acquired 80% of the
common interest of the Company and committed to acquire $6 million of Class B
preferred interests of the Company, of which $3 million cash was received as of
May 31, 2000 and $3 million was received during the year ended May 31, 2001.
During the year ended May 31, 2001, Durango and Duncan contributed to the
Company an additional $302,400 and $201,600, respectively, to pay for the
respective share of costs associated with planning for the real estate
development. In addition, as part of the Purchase Transaction, Duncan converted
approximately $9 million of debt and related interest and contributed commercial
real estate holdings located at the base of the ski resort valued at
approximately $6 million. The Purchase Transaction was accounted for under the
purchase method of accounting and the financial statements have been adjusted to
reflect the acquisition cost of Durango based upon the estimated fair value of
the assets acquired and liabilities assumed. As a result, the assets and
liabilities were recorded at the estimated fair value as of May 1, 2000.
In conjunction with the Purchase Transaction, the following assets were
contributed and liabilities assumed by the Members:
Fair value of assets acquired $ 25,600,607
Contribution receivable 3,000,000
Fair value of liabilities assumed (15,100,607)
---------------
Net assets acquired $ 13,500,000
=============
Durango $ 6,000,000
Duncan 7,500,000
---------------
Net assets acquired $ 13,500,000
=============
As a result of the Purchase Transaction and the related purchase accounting
adjustments, the results of operations and the financial position of the Company
are not comparable between pre- and post-acquisition periods.
Prior to the Purchase Transaction, the Company had no employees and functioned
under a management agreement with DSC, whereby DSC employees provided operating
and management services to the Company in exchange for a management fee (Note
5). In conjunction with the Purchase Transaction, the employees of DSC were
transferred to the Company and the May 1, 1996 management agreement between the
Company and DSC was terminated.
Concurrent with the Purchase Transaction, Durango signed an option agreement
with T-H Land to purchase a 51% interest in approximately 500 acres of
unentitled real estate surrounding Purgatory Village. The option expires on May
1, 2002. Durango and T-H Land have further agreed to share entitlement costs up
to $500,000 incurred prior to the exercise date. These costs will be paid 60%
by Durango and 40% by T-H Land.
The ski resort operations of the Company have historically generated net losses
and working capital deficits. Such losses and working capital deficits, as well
as amounts required to fund its capital expenditures, have historically been
funded through borrowings from related parties or through capital contributions
from Members. Management believes that the cash contributions as well as cash
on hand will provide adequate working capital to fund its fiscal 2002
operations. If the estimated cash flows from operations are not achieved,
additional capital contributions or borrowings may be necessary during fiscal
2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------
Basis of Presentation
- -----------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
During the year ended May 31, 2001, the Company formed Elk Point Development,
LLC ("Elk Point"), a wholly owned subsidiary of the Company. Elk Point is
primarily engaged in real estate development and maintenance activities.
During the year ended May 31, 2001, the Company and an unrelated third party
formed Durango Mountain Realty, LLC ("Realty"), an 80% owned subsidiary of the
Company. All profits and losses of Realty are allocated 100% to the Company,
after deducting employment compensation of the other member. Realty is
primarily engaged in the purchase, sale and development of real estate in the
Durango area.
Estimates and Assumptions
- ---------------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Estimates have been prepared on the basis of the most current
and best available information, actual results could differ from those
estimates.
Allocation of Profits, Losses and Cash Distributions
- ----------------------------------------------------------
For financial reporting purposes, the profits and losses of the Company are
allocated to the Members based upon their respective common ownership interests.
Under the terms of the operating agreement between the Members, if any cash
distributions are declared, the Class A preferred interests are entitled to a
priority cash distribution of $7,500,000, followed by the Class B preferred
interest, which is entitled to a priority cash distribution of $6,000,000.
After the priority distributions have been made, the Class A and Class B
preferred interests will share pari passu distributions until each has received
a 6% compounded, cumulative preferred return. After the priority and preferred
distributions, any additional distributions shall be based upon the common
ownership interests, which is 80% to Durango and 20% to Duncan.
Inventory
- ---------
Inventory consists primarily of retail clothing, ski equipment and food and
beverage inventories. Inventories are valued at the lower of cost or market
value, generally using the average cost method, on a first-in, first-out basis.
- ------
Property, Equipment and Other Assets
- ----------------------------------------
The Company owns approximately one hundred acres of the base area land including
approximately 35,000 square feet of commercial facilities in Purgatory Village.
The Company also has a significant investment in ski trails, lifts and related
assets located on land leased from the United States Forest Service ("USFS")
under a Special Use Permit (including two restaurant facilities on USFS land
containing an aggregate of approximately 15,000 square feet of commercial
space).
Property and equipment is depreciated by the Company using the straight-line
method over the estimated useful lives of the related assets as follows:
Asset Useful Lives
- ---------------------------- --------------
Buildings and improvements 5 to 40 years
Ski lifts and trails 10 to 40 years
Machinery and equipment 3 to 15 years
Special Use Permit
- --------------------
The Special Use Permit was previously held by DSC, as part of the Purchase
Transaction, a new forty year Special Use Permit was issued to the Company in
January 2000, which expires in 2039. The Special Use Permit is included in
other assets in the accompanying consolidated balance sheet as of May 31, 2001
at $1,178,000, net of accumulated amortization.
Deferred Loan Costs
- ---------------------
Costs and fees incurred in connection with the financing activities of the
Company have been capitalized and are being amortized to interest expense over
the terms of the related loans. Deferred loan costs of $318,000 and $172,000,
net of accumulated amortization, are included in other assets in the
accompanying consolidated balance sheets as of May 31, 2001 and 2000,
respectively.
- ------
Accrued Expenses
- -----------------
Obligations of the Company are accrued as incurred. Included in accrued
expenses are:
2001 2000
- -------------------------------- -------------- ----------
USFS Special Use Permit fees $ 52,000 $ 93,000
Accrued payroll obligations 486,000 400,000
Property taxes 23,000 146,000
Bond refinance costs 120,000 -
Pending litigation 136,000 92,000
Accrued interest expense 166,000 146,000
Other 209,000 268,000
------------- ----------
Total accrued expenses $ 1,192,000 $1,145,000
============== ==========
Revenue Recognition
- --------------------
Resort revenues are derived from a wide variety of sources, including sales of
lift tickets, ski school tuition, dining, retail stores, equipment rentals,
hotel management operations, travel reservation commissions, and commercial
property rentals, and are recognized as services are performed.
Deferred Revenue
- -----------------
The Company records deferred revenue related to the sale of season ski passes
and certain daily lift ticket products. The number of season pass holder visits
is estimated based on historical data, and the deferred revenue is recognized
throughout the season based on this estimate. During the ski season the
estimated visits are compared to the actual visits and adjustments are made if
necessary.
Income Taxes
- -------------
As the Company is a limited liability company, the income tax results and
activities flow directly to, and are the responsibility of the Members. As a
result, the accompanying consolidated financial statements do not reflect a
provision for federal or state income taxes.
- ------
Statements of Cash Flows
- ---------------------------
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents.
Asset Impairment
- -----------------
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the long-lived
assets may not be recoverable. For long-lived assets which are held and used in
operations, the long-lived asset would be impaired if the undiscounted future
cash flows related to the long-lived asset did not exceed net book value. The
amount of the impairment would then be determined by discounting the cash flows
or by using some other measure of fair value.
Capitalization Policies
- ------------------------
Capitalized development costs include costs associated with the development of
land, interest expense and property taxes on land under development and general
and administrative expenses to the extent they benefit the development of land.
Interest expense of $37,000 has been capitalized by the Company during fiscal
2001. No interest was capitalized relating to the development of land during
fiscal 2000.
Fair Value of Financial Instruments
- ---------------------------------------
The recorded amounts for cash and cash equivalents, accounts receivable, other
current assets, and accounts payable, accrued expenses and other current
liabilities approximate fair value due to the short-term nature of these
financial instruments. The fair value of the Company's notes payable
approximates fair value due to the variable nature of the interest rate
associated with that debt. The fair value of the Company's bonds approximate
fair value at May 31, 2000, due to the premium assigned to the bonds on May 1,
2000 associated with the Purchase Transaction. The fair value of the Company's
bonds at May 31, 2001 has been estimated using discounted cash flow analyses
based on current borrowing rates for debt with similar maturities and ratings.
The estimated fair value of the bonds at May 31, 2001 is presented below:
May 31, 2001
------------
Carrying Fair
Value Value
- --------------------------------------
Bonds, including unamortized premium $8,984,000 $9,078,000
Earnings Per Share
- --------------------
Due to the Company's capital structure, the presentation of net income or loss
per share is not considered meaningful and has not been presented herein.
New Accounting Pronouncements
- -------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed of." SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation which resulted
in two accounting models for long-lived assets to be disposed of. SFAS No. 144,
establishes a single accounting model for long-lived assets to be disposed of by
sale and requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not believe that the
adoption of SFAS No. 144 will have a material impact on its financial position
or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". These statements prohibit
pooling-of-interests accounting for transactions initiated after June 30, 2001,
require the use of the purchase method of accounting for all combinations after
June 30, 2001, and establish new standards for accounting for goodwill and other
intangibles acquired in business combinations. Goodwill will continue to be
recognized as an asset, but will not be amortized as previously required by APB
Opinion No. 17 "Intangible Assets." Certain other intangible assets with
indefinite lives, if present, may also not be amortized. Instead, goodwill and
other intangible assets will be subject to periodic (at least annual) tests for
impairment and recognition of impairment losses in the future could be required
based on a fair value approach as prescribed by these pronouncements. The
revised standards include transition rules and requirements for identification,
valuation and recognition of a much broader list of intangibles as part of
business combinations than prior practice, most of which will continue to be
amortized. The Company will adopt the following standard on June 1, 2002 and
does not believe that the adoption of SFAS No. 141 and SFAS No. 142 will have a
material impact on its financial position or results of operation.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operations of a long-lived asset,
except for certain obligations of leases. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company has not assessed the impact of adopting SFAS No. 143 on its financial
position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued its
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. The adoption of SAB No. 101 did not
have a material effect on the Company's financial position or results of
operations.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as subsequently amended by SFAS No. 137. SFAS No. 133
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under SFAS No. 133, accounting
for changes in fair value of a derivative depends on its intended use and
designation. SFAS No. 133 as amended by SFAS No. 137 was adopted in the first
quarter of fiscal year 2001. The adoption of SFAS No. 133 as amended by SFAS
No. 137 did not have a material impact on the Company's financial position or
results of operations.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform to the current
year presentation.
3. RESTRICTED CASH AND INVESTMENTS:
-----------------------------------
The Company maintains reserve funds to secure future bond service obligations as
required under the bond agreements. Amounts on deposit in the reserve funds
will be transferred to the bond trustee, as needed, to cover any deficiencies in
required bond service payments. Reserve funds held are invested in U.S.
Governmental Securities. The Company has the positive intent and ability to
hold all of its investment securities to maturity and does not engage in trading
or sales activity relating to these investments. These investments are
classified as held to maturity and are recorded at amortized cost, which
approximates their fair value.
Other amounts held as current restricted cash represent reserves required under
various insurance and purchase contracts.
4. LONG-TERM DEBT:
----------------
Long-term debt consists of the following as of May 31, 2001 and 2000:
May 31,
-----------------------------
2001 2000
--------------- -----------
Series 1989A Industrial Development Revenue Refunding
Bonds, interest at 9%; principal and interest payable in
quarterly installments to Trustee with unpaid principal due
on maturity, February 1, 2010. Secured in parity by certain
assets and agreements of the Company. (Including
unamortized premium of $280,524 and $311,693 as of May
31, 2001 and 2000, respectively). $ 8,983,974 $ 9,554,193
Note payable to a third party, interest at prime plus 1%, (8%
at May 31, 2001); principal and interest payable in
December, January, February, March and April each year
with unpaid principal due on maturity, April 1, 2008.
Secured by certain assets of the Company. 2,031,866 -
May 31,
2001 2000
--------------- ------------
Mortgage payable, interest at 9.4%; principal and interest
payable monthly with unpaid principal due on maturity,
October 1, 2001. Secured by the underlying real estate. $ 495,493 $ 509,094
Notes payable to Duncan, paid in full in April 2001. - 2,500,000
--------------- ------------
11,511,333 12,563,287
Less: Current portion 1,409,289 3,087,260
--------------- ------------
$ 10,102,044 $ 9,476,027
=============== ============
Bond Covenants
- ---------------
The bond agreements include various covenants and restrictions, the most
restrictive of which relate to limits on the payment of dividends, capital
expenditures, financial ratios, and the incurrence or guarantee of additional
debt.
Debt Maturities
- ----------------
Annual maturities for all long-term notes and bonds payable, net of bond premium
are as follows:
Year ending May 31-
2002 $ 1,378,263
2003 935,270
2004 995,270
2005 1,057,770
2006 1,127,770
Thereafter 5,736,466
--------------
$ 11,230,809
====================
5. MANAGEMENT AGREEMENT:
----------------------
DSC entered into a management agreement with the Company effective May 1, 1996
that was terminated on April 30, 2000 in connection with the Purchase
Transaction discussed in Note 1. Under the terms of the management agreement,
DSC was responsible for operating, managing and maintaining the resort as a
full-service ski and summer destination resort. The Company was required to
reimburse DSC for the total compensation and employment related expenses of any
DSC employee who performed services under the agreement. Also, the Company
reimbursed DSC for amounts used to purchase and maintain equipment and supplies
to be utilized by the resort up to a budgeted amount. The total amount
reimbursed to DSC was $5,536,774 and $6,096,095 for the eleven-month period
ended April 30, 2000 and the year ended May 31, 1999, respectively, and has been
allocated to the various expense categories in the statements of operations
based upon actual services provided as follows.
For the
Eleven-
Month For the
Period year
Ended Ended
April 30, May 31,
2000 1999
------------ ----------
Lift operations $ 1,576,836 $1,741,760
Commercial and other mountain operations 1,872,245 2,046,510
Other 519,860 504,122
General, administrative and marketing 1,567,833 1,803,703
------------ ----------
Total $ 5,536,774 $6,096,095
============= ==========
DSC was also entitled to a management fee from 2% to 5% of earnings before
interest, income taxes, depreciation (and amortization), ("EBITDA") based on
annual budget versus actual EBITDA, provided that actual EBITDA is at least 100%
of budget. No such amounts were earned for the eleven-month period ended April
30, 2000 or the year ended May 31, 1999.
6. RELATED PARTY TRANSACTIONS:
-----------------------------
The Company leased land, retail sales locations and equipment from certain
affiliates prior to the Purchase Transaction. In connection with the Purchase
Transaction the leased land, retail sales locations and equipment were
contributed to the Company (Note 1). Lease payments made by the Company totaled
approximately $101,000 and $320,000 for the eleven-month period ended April 30,
2000 and the year ended May 31, 1999, respectively.
Insurance coverage is purchased through an insurance agency in which Duncan has
a financial interest. Payments under such insurance contracts were
approximately $222,000, $3,000, $188,000 and $160,000 for the year ended May 31,
2001, the one-month period ended May 31, 2000, the eleven-month period ended
April 30, 2000, and the year ended May 31, 1999, respectively.
During the year ended May 31, 2001, the Company repaid the note payable to
Duncan in the amount of $2,500,000. The Company also paid interest of $216,000
to Duncan associated with this note payable.
As of May 31, 2001 and 2000, certain affiliates of the Members owed the Company
approximately $162,000 and $124,000, respectively, for services provided, which
is included in accounts receivable in the accompanying consolidated balance
sheets. In addition, the Company owed certain affiliates
approximately $121,000 and $115,000, as of May 31, 2001 and 2000, respectively,
for services provided by the affiliates. The amounts receivable and payable are
as follows:
Year Ended May 31, 2001 Year Ended May 31, 2000
Receivable Payable Net Receivable Payable Net
- -------------------- ----------- ------------ ------------ ----------- ----------- ----------
Durango $ 7,000 $ - $ 7,000 $ 1,500 $ - $ 1,500
Duncan 30,000 113,000 (83,000) 87,000 115,000 (28,000)
Other affiliates 125,000 8,000 117,000 35,500 - 35,500
---------- ---------- ----------- ---------- ---------- ----------
$ 162,000 $ 121,000 $ 41,000 $ 124,000 $ 115,000 $ 9,000
=========== ============ ============ =========== =========== ==========
7. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
During the normal course of its operations, the Company is a defendant in
several ski-related lawsuits which the Company and its insurance carriers are
actively contesting. In management's opinion, the outcome of these disputes,
net of insurance recoveries will not have a significant effect on the Company's
financial position or results of operations.
The Company finances a portion of its machinery and equipment under capital
lease obligations at interest rates ranging from 6.9% to 10.7%. The future
minimum lease payments under capitalized lease obligations at May 31, 2001 are
as follows:
Year Ending May 31-
2002 $ 91,808
2003 91,808
2004 91,808
2005 120,258
---------------------
Total payments 395,682
Less: amounts representing interest (75,901)
---------------------
Present value of future minimum
lease payments 319,781
Less: current portion of capital
lease obligations (79,424)
---------------------
Long-term capital lease obligations $ 240,357
=====================
The Company leases office and other facilities and certain equipment under
long-term operating leases.
The majority of the leased office and other facilities and equipment was
contributed to the Company in the Purchase Transaction (Note 1). Total rent
expense for all operating leases for the year ended May 31, 2001, the one-month
period ended May 31, 2000, the eleven-month period ended April 30, 2000, and the
year ended May 31, 1999, was approximately $65,000, $9,000, $168,000 and
$402,000, respectively.
Aggregate future minimum annual rental commitments under noncancellable
operating leases as of May 31, 2001, are as follows:
Year Ending May 31-
2002 $ 3,592
2003 2,676
2004 2,676
2005 2,676
2006 2,230
- --------
... $ 13,850
====================
The Company has an agreement with two airlines to provide direct flights into
the Durango - La Plata County Airport, where one agreement expires March 31,
2002 and the other agreement is indefinite. The agreements require the Company
to guarantee specified minimum airline revenue. Any guaranteed obligations are
expected to be off-set, in part, by reimbursements from local businesses. The
guaranteed amounts expensed for the year ended May 31, 2001, one-month period
ended May 31, 2000, the eleven-month period ended April 30, 2000, and the year
ended May 31, 1999, totaled approximately $185,000, $0, $118,000 and $150,000,
respectively, and are included in general, administrative, and marketing on the
accompanying statements of operations.
8. SUBSEQUENT EVENTS:
-------------------
Subsequent to yearend the Company entered into a $3.5 million revolving line of
credit with a local bank, (the "Revolving Line"). The Revolving Line bears
interest based upon Prime and matures on August 1, 2002.
Unaudited Subsequent Events
- -----------------------------
The Company also refinanced its mortgage payable. The refinanced mortgage bears
interest at 8% per annum, which could change on October 1, 2006 and October 1,
2011.
On November 29, 2001, the Company issued $8,845,000 of La Plata County, Colorado
Recreational Facilities Refunding Revenue Bonds, Series 2001A (the "Series 2001A
Bonds"), which will refund the outstanding Series 1989A Industrial Development
Revenue Refunding Bonds. The Series 2001A Bonds bear interest at 6.875% and are
due February 1, 2012. On November 29, 2001, the Company also issued $3,000,000
of La Plata County, Colorado Taxable Recreational Facilities Revenue Bonds,
Series 2001B, which bear interest at 9.0% and are due February 1, 2006.
SCHEDULE 14 D (iv)
EFG KIRKWOOD LLC
Financial Statements as of and for the year ended December 31, 2001
and for the period May 1, 1999 (date of inception) through December 31, 1999
(Unaudited)
1
EFG KIRKWOOD LLC
Index to Financial Statements
(Unaudited)
Page
----
Statement of Financial Position at December 31, 2001 . . . . . . . . . 3
Statement of Operations for the year ended December 31, 2001
and for the period May 1, 1999 (date of inception) through
December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Changes in Members' Capital for the year ended
December 31, 2001 and for the period May 1, 1999 (date of inception)
through December 31, 1999. . . . . . . . . . . . . . . . . . . . . . 5
Statement of Cash Flows for the year ended December 31, 2001
and for the period May 1, 1999 (date of inception) through
December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to the financial statements. . . . . . . . . . . . . . . . . . . 7
2
EFG KIRKWOOD LLC
STATEMENT OF FINANCIAL POSITION
December 31, 2001
(Unaudited)
2001
----------
ASSETS
Advances to and membership interests in:
Mountain Resort Holdings, LLC. . . . . $6,647,792
Mountain Springs Resort, LLC . . . . . 777,005
----------
Total assets . . . . . . . . . . . . . $7,424,797
==========
MEMBERS' CAPITAL
Members' capital:
Class A. . . . . . . . . . . . . . . . $7,424,797
Class B. . . . . . . . . . . . . . . . --
----------
Total members' capital . . . . . . . . $7,424,797
==========
The accompanying notes are an integral part of the financial statements.
3
EFG KIRKWOOD LLC
STATEMENT OF OPERATIONS
For the year ended December 31, 2001
and the period from May 1, 1999 (date of inception) through December 31, 1999
(Unaudited)
Period
May 1, 1999
through
December 31,
2001 1999
---------- --------------
Income (loss) from advances to and
membership interests in:
Mountain Resort Holdings, LLC. . . $ 15,634 $ (201,317)
Mountain Springs Resort, LLC . . . (231,472) (17,573)
---------- --------------
Loss from advances to and membership
interests. . . . . . . . . . . . . . (215,838) (218,890)
Interest expense . . . . . . . . . . 4,282 --
---------- --------------
Net loss . . . . . . . . . . . . . . $(220,120) $ (218,890)
========== ==============
The accompanying notes are an integral part of the financial statements.
4
EFG KIRKWOOD LLC
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
For the year ended December 31, 2001
and the period from May 1, 1999 (date of inception) through December 31, 1999
(Unaudited)
Class A Class B
Membership Membership
Interests Interests Total
------------ ------------ -----------
Members' capital at May 1, 1999 $ -- $ -- $ --
Members' capital contributions. . . . . . . . 6,700,000 750,000 7,450,000
Net loss for the period May 1, 1999 through
December 31, 1999 . . . . . . . . . . . . . -- (218,890) (218,890)
------------ ------------ -----------
Members' capital at December 31, 1999 . . . . $ 6,700,000 $ 531,110 $7,231,110
============ ============ ===========
Members' capital at January 1, 2001 . . . . . $ 7,644,917 -- $7,644,917
Net loss for the year ended December 31, 2001 (220,120) -- (220,120)
------------ ------------ -----------
Members' capital at December 31, 2001 . . . . $ 7,424,797 $ -- $7,424,797
============ ============ ===========
The accompanying notes are an integral part of the financial statements.
5
EFG KIRKWOOD LLC
STATEMENT OF CASH FLOWS
For the year ended December 31, 2001
and the period from May 1, 1999 (date of inception) through December 31, 1999
(Unaudited)
Period
May 1, 1999
through
December 31,
2001 1999
------------ --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (220,120) $ (218,890)
Adjustments to reconcile net loss to net
cash used in operations:
(Income) loss from advances to and membership interests in:
Mountain Resort Holdings, LLC. . . . . . . . . . . . . . . (15,634) 201,317
Mountain Springs Resort, LLC . . . . . . . . . . . . . . . 231,472 17,573
Changes in assets and liabilities:
Decrease in interest payable, net. . . . . . . . . . . . . . (8,567) --
------------ --------------
Net cash used in operations. . . . . . . . . . . . . . . . . . . (12,849) --
------------ --------------
Cash flows used in investing activities:
Purchase of convertible debentures . . . . . . . . . . . . . . -- (1,000,000)
Purchase of membership interests in:
Mountain Resort Holdings, LLC. . . . . . . . . . . . . . . . -- (5,750,000)
Mountain Springs Resort, LLC . . . . . . . . . . . . . . . . -- (700,000)
------------ --------------
Net cash used in investing activities. . . . . . . . . . . . -- (7,450,000)
------------ --------------
Cash flows provided by (used in) financing activities:
Distribution from Mountain Resort Holdings, LLC. . . . . . . . 210,545 --
Payment of note payable. . . . . . . . . . . . . . . . . . . . (197,696) --
Members' capital contributions . . . . . . . . . . . . . . . . -- 7,450,000
------------ --------------
Net cash provided by financing activities. . . . . . . . . . 12,849 7,450,000
------------ --------------
Net change in cash and cash equivalents. . . . . . . . . . . . . -- --
Cash and cash equivalents at beginning of year/period. . . . . . -- --
------------ --------------
Cash and cash equivalents at end of year/period. . . . . . . . . $ -- $ --
============ ==============
Other non-cash activities:
- --------------------------
Interest earned on convertible debentures (Note 3) . . . . . . . -- $ 32,847
Interest earned on note receivable (Note 4). . . . . . . . . . . $ 102,001 --
Recovery of principal on note receivable (Note 4). . . . . . . . $ 1,000,000 --
Exchange of principal and accrued, but unpaid,
interest on note receivable for equity interests in
Mountain Springs Resort, LLC (Note 4). . . . . . . . . . . . . $(1,121,260) --
.
.
The accompanying notes are an integral part of the financial statements.
6
EFG KIRKWOOD LLC
Notes to the financial statements
December 31, 2001
(Unaudited)
NOTE 1 - ORGANIZATION
EFG Kirkwood LLC (the "Company") was formed as Tandem Capital LLC, a Delaware
limited liability company, on December 2, 1998. On April 6, 1999, the Company
changed its name to EFG Kirkwood LLC. The Company's operations commenced on
June 10, 1999.
The Company has two classes of membership interests identified as Class A and
Class B. The Class A members consist of AFG Investment Trust A, AFG Investment
Trust B, AFG Investment Trust C, and AFG Investment Trust D (collectively, the
"AFG Trusts"). The Class B member is Semele Group Inc. The collective voting
interests of the Class A members are equal to the voting interests of the Class
B member; however, the Class A interest holders are entitled to certain
preferred returns prior to the payment of Class B cash distributions. The
manager of the Company is AFG ASIT Corporation, which also is the Managing
Trustee of the AFG Trusts. (See "Note 5 - Related Party Transactions" herein
for additional information concerning the relationships of the Company's
members.)
At December 31, 2001, the Company owned approximately 38% of each of the Series
B preferred member interests and the Series A common member interests of
Mountain Resort Holdings, LLC, and 50% of the common member interests of
Mountain Springs Resort, LLC. The Company has no business activities other than
through its membership interests in Mountain Resort Holdings, LLC and Mountain
Springs Resort, LLC (hereinafter, collectively referred to as the "Resorts").
Mountain Resort Holdings, LLC
- --------------------------------
Mountain Resort Holdings, LLC, through four wholly owned subsidiaries, owns and
operates the Kirkwood Mountain Resort, a ski resort located in northern
California, a public utility that services the local community, and land that is
held for residential and commercial development. (See Note 4.)
Mountain Springs Resort, LLC
- -------------------------------
Mountain Springs Resort, LLC, through its wholly owned subsidiary, Durango
Resort, LLC, owns 80% of the common member interests and 100% of the Class B
preferred member interests of DSC/Purgatory, LLC, which owns and operates the
Purgatory Ski resort in Durango, Colorado. (See Note 4.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures contained in the financial
statements. Actual results could differ from those estimates and changes in
such estimates could affect amounts reported in future periods and could be
material.
7
Cash and Cash Equivalents
- ----------------------------
The Company does not maintain a cash account at any bank or financial
institution. All cash transactions involving the Company were funded directly
by the Company's members on the Company's behalf.
Revenue Recognition
- --------------------
The Company accounts for its membership interests in the Resorts using the
equity method of accounting. Under the equity method of accounting, the
carrying value of the Company's membership interests are (i) increased or
decreased to reflect the Company's share of income or loss from the Resorts and
(ii) decreased to reflect any cash distributions paid by the Resorts to the
Company.
Allocation of Profits and Losses
- ------------------------------------
Profits and losses of the Company are allocated consistent with the economic
priorities of the Company's members relative to one another. The Company's
operating agreement provides that cash distributions to the Class B member are
subordinate to Class A Payout. (Class A Payout is defined as the first time
that the Class A members shall have been paid a cash return equal to all of
their original capital contributions plus a yield of 12% per annum compounded
annually, subject to certain adjustments.) Accordingly, the Company's
cumulative losses have been allocated first to the Class B member up to the
amount of its original capital contribution of $750,000. Cumulative losses in
excess of $750,000 have been allocated to the Class A members in proportion to
their respective interests in aggregate Class A equity.
Future net income or net loss, as the case may be, will be allocated first to
the Class A members until they reach Class A Payout. Neither the Class B nor
the Class A members are required to make any additional capital contributions to
the Company under the terms of the Company's operating agreement.
Income Taxes
- -------------
No provision for federal or state income taxes has been provided for the
Company, as the liability for such income taxes is the obligation of the
Company's members.
NOTE 3 - CONVERTIBLE DEBENTURES
On June 10, 1999, the Company purchased $1,000,000 of convertible debentures
from Kirkwood Associates, Inc. The debentures earned interest at the annual
rate of 6.5%, compounded quarterly, and permitted the Company to convert both
principal and accrued, but unpaid, interest into shares of common stock in
Kirkwood Associates, Inc. at a defined conversion rate. On April 30, 2000, the
Company elected to convert all of the principal and accrued, but unpaid,
interest under the debentures ($1,059,125) into 962,841 shares of common stock
in Kirkwood Associates, Inc. (See Note 4.)
8
NOTE 4 - ADVANCES TO AND MEMBERSHIP INTERESTS IN MOUNTAIN RESORT HOLDINGS, LLC
AND MOUNTAIN SPRINGS RESORT, LLC
Mountain Resort Holdings, LLC
- --------------------------------
The Company's membership interests in Mountain Resort Holdings, LLC were
obtained as a result of the recapitalization of Kirkwood Associates, Inc. on
April 30, 2000. Under the recapitalization plan, the net assets of Kirkwood
Associates, Inc., excluding certain tax liabilities, were contributed to
Mountain Resort Holdings, LLC and the stockholders of Kirkwood Associates, Inc.
exchanged their capital stock for membership interests in Mountain Resort
Holdings, LLC.
At December 31, 2001, the Company owned approximately 38% of each of the Series
A common membership interests and the Series B preferred membership interests of
Mountain Resort Holdings, LLC. The Company purchased its initial equity
interests in Kirkwood Associates, Inc. on June 10, 1999 at a discount to book
value of approximately $3,329,000. On April 30, 2000, the Company completed
certain additional equity transactions in connection with the recapitalization
of Kirkwood Associates, Inc. These transactions caused the net purchase
discount to be reduced to approximately $2,812,000, such amount representing the
net amount by which the Company's share of the net equity reported by Mountain
Resort Holdings, LLC exceeded the purchase price paid by the Company for such
interests. This difference is being treated as a reduction to the depreciable
assets recorded by Mountain Resort Holdings, LLC and is being amortized as a
reduction of depreciation expense over 13 years. The amortization period
represents the weighted average estimated useful life of the long-term assets
owned by Mountain Resort Holdings, LLC. The Company's allocated share of the net
income (loss) of Mountain Resort Holdings, LLC detailed below is adjusted for
depreciation expense reductions of $213,398 and $142,274 in 2001 and 1999,
respectively.
A summary of the Company's membership interest in Mountain Resort Holdings, LLC
from inception through December 31, 1999 and for the year ended December 31,
2001 is presented in the table below.
Initial capital contribution and advances . . . . . . . $6,750,000
Net loss from inception through December 31, 1999 (1) (201,317)
-----------
Membership interests and advances at December 31, 1999. $6,548,683
===========
Membership interests at January 1, 2001 . . . . . . . . $6,842,703
Net income for the year ended December 31, 2001 . . . 15,634
Distributions . . . . . . . . . . . . . . . . . . . . (210,545)
-----------
Membership interests at December 31, 2001 . . . . . . . $6,647,792
===========
9
___________
(1) The Company's allocated share of the net income (loss) of Mountain Resort
Holdings, LLC for 2001 and 1999 was determined based upon its common and
preferred equity interests in Mountain Resort Holdings, LLC during the
respective years/periods. From June 10, 1999 to April 30, 2000, the Company
owned approximately 71% of the outstanding preferred equity interests and
approximately 16% of the outstanding common equity interests of Mountain Resort
Holdings, LLC. After the recapitalization on April 30, 2000, discussed above,
the Company held approximately 38% of both the outstanding preferred and common
equity interests of Mountain Resort Holdings, LLC. The Company's allocated
share of the net income or loss of the resort is influenced principally by the
Company's percentage share of the outstanding common interests of the resort
during the respective periods.
The table below provides summarized financial data for Mountain Resort Holdings,
LLC as of December 31, 2001 and 1999, for the year ended December 31, 2001, and
for the period June 10, 1999 through December 31, 1999.
Amounts presented in thousands (000's omitted):
2001 1999
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . $51,420 $47,584
Total liabilities . . . . . . . . . . . . . . . . $28,392 $22,995
Total equity. . . . . . . . . . . . . . . . . . . $23,028 $24,589
Total revenues (1). . . . . . . . . . . . . . . . $29,597 $ 6,144
Total operating and other income and expenses (1) $30,117 $ 9,094
Net income (loss) (1) ((2 . . . . . . . . . . . $ (520) $(2,950)
___________
(1) The Company's ownership interest was acquired on June 10, 1999.
Accordingly, amounts presented for 1999 are for the period June 10, 1999 through
December 31, 1999.
Mountain Springs Resort, LLC
- -------------------------------
The Company and a third party established Mountain Springs Resort, LLC as a
50/50 joint venture for the purpose of acquiring certain common and preferred
equity interests in DSC/Purgatory, LLC. The Company and its joint venture
partner provided cash funds totaling $6,800,000 to Mountain Springs Resort, LLC,
each member having contributed $2,400,000 of equity and $1,000,000 in the form
of a loan. The loans earned interest at the rate of 11.5% annually until their
maturity on November 1, 2001 whereupon both the Company and its joint venture
partner converted their respective loan principal and accrued, but unpaid,
interest ($1,121,260 each) into equity interests in Mountain Springs Resort,
LLC.
10
A wholly owned subsidiary of Mountain Springs Resort, LLC, Durango Resort, LLC,
was established to acquire 80% of the common membership interests and 100% of
the Class B preferred membership interests of DSC/Purgatory, LLC at a cost of
approximately $6,311,000, including transaction costs of approximately $311,000.
Subsequently, Mountain Springs Resort, LLC contributed additional equity
totaling $302,400 to DSC/Purgatory LLC to pay its share of costs associated with
planning for the development of Mountain Springs Resort, LLC's real estate.
The assets, liabilities and equity of DSC/Purgatory, LLC were contributed at
estimated fair value. The acquisition of DSC/Purgatory, LLC was accounted for
using the purchase method of accounting. Accordingly, the excess of the
purchase price over the net identifiable assets of DSC/Purgatory, LLC, or
approximately $311,000, was allocated to goodwill and is being amortized over a
period of 13 years. The Company's allocated share of the net loss of Mountain
Springs Resort, LLC includes amortization expense for goodwill of $11,970 in
2001.
The remaining equity interests of DSC/Purgatory, LLC, consisting of 20% of the
common membership interests and 100% of the Class A preferred membership
interests, are owned by a third party. The Class A preferred membership
interests are senior to the other equity interests in DSC/Purgatory, LLC.
Consequently, the Company's economic interests in DSC/Purgatory, LLC are
subordinate to the Class A member and have resulted in the Company recognizing a
larger share of the net losses reported by DSC/Purgatory, LLC than would be the
case if all equity interests were pari passu.
A summary of the Company's advances to and membership interests in Mountain
Springs Resort, LLC from inception through December 31, 1999 and for the year
ended December 31, 2001 is presented in the table below.
Initial capital contribution. . . . . . . . . . . . . . $ 700,000
Net loss from inception through December 31, 1999 (1) (17,573)
-----------
Membership interests and advances at December 31, 1999. $ 682,427
===========
Membership interests and advances at January 1, 2001. . $1,008,477
Net loss for the year ended December 31, 2001 . . . . (231,472)
-----------
Membership interests at December 31, 2001 . . . . . . . $ 777,005
===========
____________
(1) Mountain Springs Resort, LLC purchased its interest in DSC/Purgatory, LLC
effective May 1, 2000. The Company's allocated share of net loss of Mountain
Springs Resort, LLC prior to May 1, 2000 does not include any share of the
income or loss from DSC/Purgatory, LLC.
11
The Company owns 50% of Mountain Springs Resort, LLC, which through a wholly
owned subsidiary, Durango Resorts, LLC, owns 80% of the common membership
interests and 100% of the Class B preferred membership interests of
DSC/Purgatory, LLC. The operations of Mountain Springs Resort, LLC and Durango
Resort, LLC are immaterial except for their investments in the entities as
described above.
The table below provides summarized financial data for DSC/Purgatory, LLC as of
and for the year ended December 31, 2001.
Amounts presented in thousands (000's omitted):
2001
--------
Total assets. . . . . . . . . . . . . . . . . $29,793
Total liabilities . . . . . . . . . . . . . . $20,904
Total equity. . . . . . . . . . . . . . . . . $ 8,889
Total revenues. . . . . . . . . . . . . . . . $15,250
Total operating and other income and expenses $15,648
Net loss. . . . . . . . . . . . . . . . . . . $ (398)
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company's Class A and Class B members and its manager are affiliated.
Semele Group Inc., through a wholly owned subsidiary, owns and controls the
Company's manager, AFG ASIT Corporation, as well as a controlling voting
interest in each of the AFG Trusts. A different subsidiary of Semele owns Class
A Beneficiary interests that collectively represent approximately 0.4% of the
outstanding Class A Beneficiary interests of the AFG Trusts.
The membership interests of the Company are owned as follows:
Percentage
-----------
Class A membership interests
- --------------------------------------
AFG Investment Trust A 10%
AFG Investment Trust B 20%
AFG Investment Trust C 40%
AFG Investment Trust D 30%
-----------
Total Class A membership interests 100%
===========
Class B membership interests
- --------------------------------------
Semele Group Inc. 100%
===========
12
NOTE 6 - GUARANTEE
The Company is a guarantor of a note payable to a bank of DSC/Purgatory, LLC.
The guarantee is for $3,500,000, the original principal balance of the note.
The balance of the note is $1,075,000 as of December 31, 2001. The note is also
guaranteed in the same amount by another investor of DSC/Purgatory, LLC.
NOTE 7 - SUBSEQUENT EVENT
In May 2002, the Company received approximately $427,900 from Mountain Resort
Holdings, LLC representing the Company's share of a scheduled redemption of a
portion of the Series B preferred member interests of Mountain Resort Holdings,
LLC.
13