EXHIBIT 13
AFG INVESTMENT TRUST
AFG INVESTMENT TRUST C
ANNUAL REPORT TO THE PARTICIPANTS, DECEMBER 31, 2001
AFG Investment Trust C
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page
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SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.. . . . . . . . . . . . . 34
Statement of Financial Position
at December 31, 2001 (Restated) and 2000 (Restated). . . . . . . . . . . . . 35
Statement of Operations
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999 . 36
Statement of Changes in Participants' Capital
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999.. 37
Statement of Cash Flows
for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999.. 38
Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . 39
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed. . . . . . . . . . . . . . . . . . . 61
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings (Restated) . . . . . . . . . . . . . 62
Schedule of Costs Reimbursed to the Managing Trustee
and its Affiliates as Required by Section 10.4 of the
Second Amended and Restated Declaration of Trust . . . . . . . . . . . . . . 63
Schedule of Reimbursable Operating Expenses Due to Third Parties . . . . . . 64
Schedule of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements.
For each of the five years in the period ended December 31, 2001:
Summary of Operations 2001 2000 1999 1998 1997
- -------------------------------- ------------- ------------- ----------- ----------- ------------
Restated (1) Restated (1)
Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635 $15,201,411 $16,912,628
Total income $ 6,985,008 $ 10,785,068 $15,453,298 $19,153,506 $17,455,773
Net income (loss) $ (5,599,193) $ 2,050,016 $ 5,802,601 $ 4,999,220 $ 877,213
Per Beneficiary Interest:
Net income (loss)
Class A Interests $ (2.84) $ 0.66 $ 1.13 $ 1.17 $ 0.49
Class B Interests $ (0.10) $ 0.18 $ 0.75 $ 0.39 $ (0.12)
Cash distributions declared
Class A Interests $ - $ - $ 4.56 $ 1.64 $ 3.11
Class B Interests $ - $ - $ 3.66 $ 2.10 $ 0.30
Financial Position
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Total assets $ 42,170,719 $ 51,641,436 $71,090,942 $72,908,929 $82,036,778
Total long-term obligations $ 22,382,964 $ 26,220,794 $32,573,152 $35,072,883 $39,928,173
Participants' capital $ 17,589,367 $ 23,188,560 $21,158,711 $36,360,494 $41,159,172
(1) See Note 1 to the financial statements, regarding the restatement of
the Trust's 2001 and 2000 financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 2001 compared to the year
ended December 31, 2000 and the year ended December 31, 2000
compared to the year ended December 31, 1999
Subsequent to the issuance of the financial statements of AFG Investment Trust C
(the "Trust") as of and for the year ended December 31, 2001, the Trust restated
the amount recorded as its share of loss on its interest in EFG Kirkwood LLC
("EFG Kirkwood") under the equity method of accounting for the years ended
December 31, 2001 and 2000. As a result, the financial statements as of and for
the years ended December 31, 2001 and 2000 have been restated from amounts
previously reported. The effects of the restatements are presented in Note 1 to
the accompanying financial statements and have been reflected herein. The
following should be read in conjunction with the restated 2001 and 2000
Financial Statements, including notes thereto. The following discussion
compares the restated December 31, 2001 financial condition and results of
operations to the restated December 31, 2000 financial condition and results of
operations and the restated December 31, 2000 results of operations to the
results of operations for the year ended December 31, 1999.
Certain statements in this annual report of the Trust that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to a variety of risks
and uncertainties. There are a number of important factors that could cause
actual results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
collection of the Trust's contracted rents, the realization of residual proceeds
for the Trust's equipment, the performance of the Trust's non-equipment assets,
and future economic conditions.
Overview
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The Trust was organized in 1992 for the purpose of acquiring and leasing to
third parties a diversified portfolio of capital equipment. In 1998, the Trust
Agreement was modified to permit the Trust to invest in assets other than
equipment. Subsequently, the Trust has made certain non-equipment investments.
During 2001, the Trust and three affiliated trusts (collectively, the "Trusts"),
through a jointly owned entity, acquired 83% of the outstanding common stock of
PLM International, Inc. ("PLM"). PLM is an equipment management company
specializing in the leasing of transportation equipment. See further discussion
of PLM and other acquisitions below. Pursuant to the Trust Agreement, the Trust
is scheduled to be dissolved by December 31, 2004.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interests in EFG Kirkwood and EFG/Kettle Development LLC ("Kettle Valley"). The
Trust does not intend to engage in investment activities in a manner or to an
extent that would require the Trust to register as an investment company under
the Act. However, it is possible that the Trust unintentionally may have
engaged, or may engage in an activity or activities that may be construed to
fall within the scope of the Act. If the Trust were determined to be an
investment company, its business would be adversely affected. The Managing
Trustee is engaged in discussions with the staff of the Securities and Exchange
Commission regarding whether or not the Trust may be an inadvertent investment
company by virtue of its recent acquisition activities. If necessary, the Trust
intends to avoid being deemed an investment company by disposing of or acquiring
certain assets that it might not otherwise dispose of or acquire.
The events of September 11, 2001 and the slowing U.S. economy could have an
adverse effect on market values for the Trust's assets and the Trust's ability
to negotiate future lease agreements. Notwithstanding the foregoing, it
currently is not possible for the Managing Trustee to determine the long-term
effects, if any, that these events may have on the economic performance of the
Trust's equipment portfolio. Approximately 62% of the Trust's equipment
portfolio consists of commercial jet aircraft. The events of September 11, 2001
adversely affected market demand for both new and used commercial aircraft and
weakened the financial position of most airlines. No direct damage occurred to
any of the Trust's assets as a result of these events and while it is currently
not possible for the Managing Trustee to determine the ultimate long-term
economic consequences of these events to the Trust, the Managing Trustee expects
that the resulting decline in air travel will suppress market prices for used
aircraft in the short term and could inhibit the viability of the airline
industry. In the event of a default by an aircraft lessee, the Trust could
suffer material losses. At December 31, 2001, the Trust has collected
substantially all rents owed from aircraft lessees. The Managing Trustee is
monitoring the situation and will continue to evaluate potential implications to
the Trust's financial position and future liquidity.
Critical Accounting Policies and Estimates
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The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Managing Trustee to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the Managing Trustee reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, impairment of long-lived assets and contingencies. These
estimates are based on the Managing Trustee's historical experience and on
various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. The Managing Trustee believes, however, that the estimates,
including those for the above-listed items, are reasonable.
The Managing Trustee believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
Revenue Recognition: Rents are payable to the Trust monthly or quarterly and no
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significant amounts are calculated on factors other than the passage of time.
The majority of the Trust's leases are accounted for as operating leases and are
noncancellable. Rents received prior to their due dates are deferred.
Asset lives and depreciation method: The Trust's primary business involves the
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purchase and subsequent lease of long-lived equipment. The Trust's depreciation
policy is intended to allocate the cost of equipment over the period during
which it produces economic benefit. The principal period of economic benefit is
considered to correspond to each asset's primary lease term, which generally
represents the period of greatest revenue potential for each asset.
Accordingly, to the extent that an asset is held on primary lease term, the
Trust depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Impairment of long-lived assets: On a regular basis, the Managing Trustee
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reviews the net carrying value of equipment and equity investments to determine
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whether it can be recovered from undiscounted future cash flows. Adjustments to
reduce the net carrying value of long-lived assets are recorded in those
instances where estimated net realizable value is considered to be less than net
carrying value and are reflected separately on the accompanying Statement of
Operations as write-down of equipment. Inherent in the Trust's estimate of net
realizable value are assumptions regarding estimated future cash flows. If
these assumptions or estimates change in the future, the Trust could be required
to record impairment charges for these assets.
Contingencies and litigation: The Trust is subject to legal proceedings
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involving ordinary and routine claims related to its business when quantifiable,
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estimates for losses from litigation are made after consultation with outside
counsel. If estimates of potential losses increase or the related facts and
circumstances change in the future, the Trust may be required to adjust amounts
recorded in its financial statements.
Segment Reporting
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The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment lease portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp.,
which owns the majority interest in PLM, an equipment leasing and asset
management company. The Real Estate segment includes the ownership, management
and development of commercial properties, recreational properties, condominiums,
interval ownership units, townhomes, single family homes and land sales through
its ownership interests in EFG Kirkwood and Kettle Valley. There are no
material intersegment sales or transfers.
Segment information for the years ended December 31, 2001, 2000 and 1999 is
summarized below.
2001 2000 1999
------------- ------------- -----------
Restated (1) Restated (1)
Total Income: (2)
Equipment leasing $ 6,985,008 $ 10,785,068 $15,453,298
Real estate - - -
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Total $ 6,985,008 $ 10,785,068 $15,453,298
============= ============= ===========
Operating Expenses, Management Fees
and Other Expenses:
Equipment leasing $ 1,501,130 $ 944,491 $ 1,106,068
Real estate 75,737 80,460 250,214
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Total $ 1,576,867 $ 1,024,951 $ 1,356,282
============= ============= ===========
Interest Expense:
Equipment leasing $ 2,037,067 $ 2,404,830 $ 2,412,127
Real estate 17,996 58,433 66,623
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Total $ 2,055,063 $ 2,463,263 $ 2,478,750
============= ============= ===========
Depreciation, Writedown of Equipment
and Amortization Expense:
Equipment leasing $ 9,437,264 $ 4,189,657 $ 5,815,665
Real estate 75,495 65,800 -
------------- ------------- -----------
Total $ 9,512,759 $ 4,255,457 $ 5,815,665
============= ============= ===========
Equity Interests:
Equipment leasing $ 984,280 $ - $ -
Real estate (423,792) (991,381) -
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Total $ 560,488 $ (991,381) $ -
============= ============= ===========
Net Income (Loss): $ (5,599,193) $ 2,050,016 $ 5,802,601
============= ============= ===========
Capital Expenditures:
Equipment leasing $ 7,162,123 $ 696,892 $ 412,529
Real estate - 1,287,350 5,846,448
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Total $ 7,162,123 $ 1,984,242 $ 6,258,977
============= ============= ===========
Assets:
Equipment leasing $ 35,251,213 $ 44,232,338 $63,912,013
Real estate 6,919,506 7,409,098 7,178,929
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Total $ 42,170,719 $ 51,641,436 $71,090,942
============= ============= ===========
(1) See Note 1 to the accompanying financial statements, regarding the
restatement of the Trust's 2001 and 2000 financial statements.
(2) Includes equipment leasing revenue of $6,519,899, $7,733,941 and
$10,286,635 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Results of Operations
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Equipment Leasing
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For the year ended December 31, 2001, the Trust recognized lease revenue of
$6,519,899 compared to $7,733,941 and $10,286,635 for the years ended December
31, 2000 and 1999, respectively. The decrease in lease revenue is due to lease
term expirations and the sale of equipment. The level of lease revenue to be
recognized by the Trust in the future may be impacted by future reinvestment;
however, the extent of such impact cannot be determined at this time. Future
lease term expirations and equipment sales will result in a reduction in lease
revenue recognized.
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
owned by an affiliated equipment leasing program sponsored by Equis Financial
Group Limited Partnership ("EFG"). Proportionate equipment ownership enables
the Trust to further diversify its equipment portfolio by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could result from a concentration in any single equipment type, industry or
lessee. The Trust and each affiliate individually report, in proportion to
their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the year ended December 31, 2001 and its share of the
maintenance payment was $35,440, which is accrued as a maintenance obligation at
December 31, 2001. Coincident with the termination of the Reno lease, the
aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four
years. The Reno Programs are to receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864. During the years ended December
31, 2001, 2000 and 1999, the Trust recognized lease revenue including the early
termination fee discussed above of $219,210, $159,904 and $153,980,
respectively, related to its interest in this aircraft.
Interest income for the year ended December 31, 2001 was $157,725 compared to
$666,975 and $1,217,855 for the years ended December 31, 2000 and 1999,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. The amount of future interest income is expected to fluctuate as a
result of changing interest rates and the amount of cash available for
investment, among other factors. The Trust distributed $15,200,000 in January
2000 that resulted in a reduction of cash available for investment.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor ("Heller"). During the year ended December 31, 2001, the requirements
of the guarantee agreement were met and the Trust received payment for all
outstanding amounts totaling $224,513, including $89,583 of income related to
the guarantee agreement recognized during the year ended December 31, 2001.
During the year ended December 31, 2001, the Trust received an upfront cash fee
of $175,400 and recognized a total of $301,400 in income related from the
guarantee. The guarantee fee is reflected as Other Income in the accompanying
Statement of Operations. The Trust has no further obligations under the
guarantee agreement.
The Trust received $261,116 in 1999 as a breakage fee from a third-party seller
in connection with a transaction for new investments that was canceled by the
seller in the first quarter of 1999. This amount is reflected as Other Income
on the accompanying Statement of Operations for the year ended December 31,
1999.
During the three years ended December 31, 2001, the Trust sold equipment having
a net book value of $60,151, $1,412,158 and $5,163,109, respectively, to
existing lessees and third parties, which resulted in net gains, for financial
statement purposes, of $124,658, $2,012,657 and $3,687,692, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or net loss to the Trust, as such transactions will be dependent upon the
condition and type of equipment being sold and its marketability at the time of
sale. In addition, the amount of gain or loss reported for financial statement
purposes is partly a function of the amount of accumulated depreciation
associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities, which may be advantageous to the Trust, and to maximize total
cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
During the year ended December 31, 2000, the Trust sold investment securities
having a book value of $420,513, resulting in a gain, for financial reporting
purposes of $70,095.
Depreciation expense was $3,811,250, $4,189,657, and $5,815,665 for the years
ended December 31, 2001, 2000 and 1999, respectively. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the Trust
depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
During the year ended December 31, 2001, the Trust recorded a write-down of
equipment, representing an impairment to the carrying value of the Trust's
interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was
based on a comparison of estimated fair value and carrying value of the Trust's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
Interest expense on equipment related debt was $2,037,067, $2,404,830, and
$2,412,127 for the years ended December 31, 2001, 2000 and 1999, respectively.
Interest expense will continue to decrease in the future as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees related to equipment leasing were $357,510, $350,618 and
$460,805 during the years ended December 31, 2001, 2000 and 1999, respectively.
Management fees are based on 5% of gross lease revenue generated by operating
leases and 2% of gross lease revenue generated by full payout leases, subject to
certain limitations.
Operating expenses - affiliate were $1,143,620, $543,363, and $843,263 for the
years ended December 31, 2001, 2000 and 1999, respectively. Operating expenses
- - affiliate in 2001 included approximately $293,000 of remarketing costs related
to the re-lease of an aircraft in June 2001 and $140,000 for ongoing legal costs
associated with the Trust's ongoing discussions with the Securities and Exchange
Commission regarding its investment company status. Operating expenses -
affiliate also included approximately $114,000 of costs reimbursed to EFG as a
result of the successful acquisition of the PLM common stock. In conjunction
with the acquisition of the PLM common stock, EFG became entitled to recover
certain out of pocket expenses which it had previously incurred. Operating
expenses consist principally of administrative charges, professional service
costs, such as audit, insurance and legal fees, as well as printing,
distribution and remarketing expenses. The amount of future operating expenses
cannot be predicted with certainty; however, such expenses are usually higher
during the acquisition and liquidation phases of a trust. Other fluctuations
typically occur in relation to the volume and timing of remarketing activities.
In addition, the Trust wrote-down other investments $50,510 during the year
ended December 31, 2000.
For the year ended December 31, 2001, the Trust recorded income of $984,280 and
amortization expense of $9,695, in connection with its ownership interest in
MILPI. This income represents the Trust's share of the net income of MILPI
recorded under the equity method of accounting. The Trust's income from MILPI
results from MILPI's indirect ownership of PLM common stock acquired in February
2001.
MILPI
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During the period February 7, 2001 (date of inception) through December 31,
2001, MILPI recognized operating revenues of approximately $10,376,000,
consisting primarily of $5,217,000 of management fees, $2,032,000 of
acquisition and lease negotiation fees, $1,716,000 of equity income in
partnership interests and $472,000 of operating lease income. In addition,
MILPI recognized other income of approximately $467,000, consisting primarily of
interest income earned on investments.
During the same period, MILPI incurred total operating expenses of $5,856,000,
consisting primarily of $3,290,000 of general and administrative expenses,
$1,255,000 of depreciation and amortization, $511,000 from impairment of its
investment in managed programs and $800,000 of operations support expenses,
which include salary and office-related expenses for operational activities. In
addition, MILPI also incurred income tax expense of $1,611,000 and recorded
minority interest expense of $429,000.
Real Estate
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Management fees for non-equipment investments were $75,737, $80,460 and $52,214
for the years ended December 31, 2001, 2000 and 1999, respectively. The
management fees on non-equipment assets, excluding cash, were based on 1% of
such assets under management.
For the year ended December 31, 1999, operating expenses included legal fees of
$198,000 related to the Trust's ownership interests in Kettle Valley and EFG
Kirkwood.
The Trust has an approximately 51% ownership interest in Kettle Valley (see
further discussion below). For the years ended December 31, 2001 and 2000, the
Trust recorded losses of $332,692 and $91,066, respectively, from its interest
in Kettle Valley. The losses represent the Trust's share of the losses of
Kettle Valley recorded under the equity method of accounting. In each of the
years ended December 31, 2001 and 2000, the Trust recorded amortization expense
of $65,800, in connection with its ownership interest in Kettle Valley.
Interest expense on a note payable related to the Trust's acquisition of its
interest in Kettle Valley was $17,996, $58,433 and $66,623 for the years ended
December 31, 2001, 2000, and 1999, respectively. The note was repaid as of
December 31, 2001.
The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT
Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also
is the manager of EFG Kirkwood.
EFG Kirkwood owns membership interests in:
Mountain Resort Holdings LLC ("Mountain Resort") and
Mountain Springs Resort LLC ("Mountain Springs").
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development.
Mountain Springs, through a wholly owned subsidiary, owns a controlling interest
in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails. Purgatory receives the majority of its revenues from winter
ski operations, primarily ski, lodging, retail, and food and beverage services,
with the remainder of its revenues generated from summer outdoor activities,
such as alpine sliding and mountain biking.
For the year ended December 31, 2001, the Trust recorded a loss of $91,100 on
its ownership interest in EFG Kirkwood, compared to a loss of $900,315 for the
year ended December 31, 2000. The loss in 2000 was caused principally by losses
reported by Purgatory for the period May 1, 2000 to December 31, 2000. Mountain
Springs, through a wholly owned subsidiary, became an equity participant in
Purgatory on May 1, 2000. Consequently, Mountain Springs did not participate in
the operating results of Purgatory for the period from January 1, 2000 to April
30, 2000, generally the period of Purgatory's peak income activity.
Accordingly, the losses incurred in 2000 do not reflect a full year's operating
activities for Purgatory. See Note 6 to the accompanying financial statements.
Through its ownership of 40% of the Class A membership interests in EFG
Kirkwood, the Trust indirectly owns interests in two ski resort operating
companies, Purgatory and Mountain Resort. EFG Kirkwood owns 50% of the
membership interests in Mountain Springs which, through a wholly-owned
subsidiary, owns 80% of the common member interests and 100% of the Class B
preferred member interests of Purgatory. EFG Kirkwood also owns approximately
38% of the membership interests in Mountain Resort which, through four
wholly-owned subsidiaries, owns Kirkwood Mountain Resort. The Trust accounts
for its ownership interests using the equity method of accounting.
Mountain Resort
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Mountain Resort is primarily a ski and mountain recreation resort with more than
2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The
resort receives approximately 70% of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services with the remainder
of the revenues generated from summer outdoor activities, including mountain
biking, hiking and other activities. Other operations include a real estate
development division, which has developed and is managing a 40-unit condominium
residential and commercial building, an electric and gas utility company, which
operates as a regulated utility company and provides electric and gas services
to the Kirkwood community, and a real estate brokerage company.
During the year ended December 31, 2001, Mountain Resort recorded total revenues
of approximately $29,597,000 compared to approximately $27,741,000 for the same
period in 2000. The increase in total revenues from 2000 to 2001 of $1,856,000
is primarily the result of an increase in ski-related revenues offset by a
decrease in residential-related revenues.
Ski-related revenues increased approximately $4,078,000 for the year ended
December 31, 2001 compared to 2000. The increase in ski-related revenues
resulted from improved weather conditions during the winter season, which
attracted more skiers. Improved weather conditions resulted in the resort
supporting approximately 336,000 skiers for the year ended December 31, 2001 as
compared to approximately 291,000 skiers in 2000.
Residential-related revenues and other operations revenues decreased
approximately $2,222,000 for the year ended December 31, 2001 as compared to
2000. The decrease primarily reflects the completion of a 40-unit condominium
residential and commercial building in December 1999 resulting in a significant
number of condominium sales closing in January 2000.
During the year ended December 31, 2001, Mountain Resort recorded total expenses
of approximately $30,117,000 compared to approximately $27,464,000 in 2000. The
increase in total expenses of $2,653,000 from 2000 to 2001 is the result of
increases in ski-related expenses and residential-related and other operations
expenses.
Ski-related expenses in 2001 increased approximately $2,425,000 compared to 2000
as a result of an increase in ski-related revenue, as discussed above.
Residential-related expenses and other operations expenses increased
approximately $228,000 in the year end December 31, 2001 compared to 2000, as a
result of an increase in other operations expenses largely offset by a decrease
in cost of sales from condominium units sold during the year ended December 31,
2001 compared to 2000, as discussed above.
Mountain Springs
- -----------------
Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated
on 40 miles of terrain with 75 ski trails located near Durango, Colorado.
Purgatory receives the majority of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services, with the
remainder of revenues generated from summer outdoor activities, such as alpine
sliding and mountain biking.
Mountain Springs became an equity participant in Purgatory on May 1, 2000 and
therefore did not have an interest in Purgatory during the three months ended
March 31, 2000. For comparative purposes, the following discussion of
Purgatory's operating results includes the operating results for the three
months ended March 31, 2000.
During the year ended December 31, 2001, Purgatory recorded total revenues of
approximately $15,250,000 compared to approximately $13,507,000 for the same
period of 2000. The increase in total revenues from 2000 to 2001 of
approximately $1,743,000 is the result of improved weather conditions during the
winter season, which attracted more skiers. Improved weather conditions
resulted in the resort supporting approximately 306,000 skiers for the year
ended December 31, 2001 compared to 286,000 skiers in the same period of 2000.
Total expenses were approximately $15,648,000 for the year ended December 31,
2001 compared to approximately $16,163,000 for the same period in 2000. The
decrease in total expenses for the year ended December 31, 2001 compared to the
same period in 2000 of approximately $515,000 is a result of decreases in
operating expenses of approximately $75,000, non-operating costs of
approximately $100,000 and financing costs of approximately $340,000.
Kettle Valley
- --------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. The project, which is being developed by Kettle Valley
Development Limited Partnership, consists of approximately 280 acres of land
that is zoned for 1,120 residential units in addition to commercial space. To
date, 108 residential units have been constructed and sold and 10 additional
units are under construction.
During the twelve months ended December 31, 2001, Kettle Valley recorded
revenues of $4,596,837 compared to $6,250,711 for the same period in 2000. The
decrease in revenues is the result of a decrease in the number of lot and home
sales.
Kettle Valley incurred total expenses of $5,967,703 during the twelve months
ended December 31, 2001 compared to $7,118,553 for the same period in 2000. The
decrease in expenses is the result of a decrease in the number of lot and home
sales discussed above.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Trust by its nature is a limited life entity. The Trust's principal
operating activities have been derived from asset rental transactions.
Accordingly, the Trust's principal source of cash from operations is provided by
the collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated net cash inflows of
$3,682,916, $5,546,026 and $6,918,949 for the years ended December 31, 2001,
2000 and 1999, respectively. Future renewal, re-lease and equipment sale
activities will continue to cause a decline in the Trust's primary-term lease
revenue and corresponding sources of operating cash. Expenses associated with
rental activities, such as management fees, will also decline as the Trust
experiences a higher frequency of remarketing events. The amount of future
interest income is expected to fluctuate as a result of changing interest rates
and the level of cash available for investment, among other factors.
At lease inception, the Trust's equipment was leased by a number of
creditworthy, investment-grade companies and, to date, the Trust has not
experienced any material collection problems and has not considered it necessary
to provide an allowance for doubtful accounts. Notwithstanding a positive
collection history, there is no assurance that all future contracted rents will
be collected or that the credit quality of the Trust's lessee will be
maintained. The credit quality of an individual lease may deteriorate after the
lease is entered into. Collection risk could increase in the future,
particularly as the Trust remarkets its equipment and enters re-lease agreements
with different lessees. The Managing Trustee will continue to evaluate and
monitor the Trust's experience in collecting accounts receivable to determine
whether a future allowance for doubtful accounts may become appropriate.
At December 31, 2001, the Trust was due aggregate future minimum lease payments
of $9,923,959 from contractual lease agreements, a portion of which will be used
to amortize the principal balance of notes payable of $22,382,964. Additional
cash inflows will be realized from future remarketing activities, such as lease
renewals and equipment sales, the timing and extent of which cannot be predicted
with certainty. This is because the timing and extent of equipment sales is
often dependent upon the needs and interests of the existing lessees. Some
lessees may choose to renew their lease contracts, while others may elect to
return the equipment. In the latter instances, the equipment could be re-leased
to another lessee or sold to a third party. Accordingly, the cash flows of the
Trust will become less predictable as the Trust remarkets its equipment.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows.
In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp.
("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts
collectively paid $1.2 million for their membership interests in MILPI ($408,000
for the Trust) and MILPI purchased the shares of MILPI Acquisition for an
aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition
entered into a definitive agreement (the "Agreement") with PLM International,
Inc. ("PLM"), an equipment leasing and asset management company, for the purpose
of acquiring up to 100% of the outstanding common stock of PLM, for an
approximate purchase price of up to $27 million. In connection with the
acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to
purchase any and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of PLM's outstanding common stock in February 2001 for a total purchase price of
approximately $21.8 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition would merge into PLM, with PLM being the surviving entity. The
merger was completed when MILPI obtained approval of the merger from PLM's
shareholders pursuant to a special shareholders' meeting on February 6, 2002.
The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
was contributed by the Trust. The funds were obtained from existing resources
and internally generated funds and by means of a 364 day, unsecured loan from
PLM evidenced by a promissory note in the principal amount of $719,760 that
bears interest at LIBOR plus 200 basis points (subject to an interest rate cap).
At December 31, 2001, the Trust has a 34% membership interest in MILPI having an
original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects
MILPI Acquisition's cost of acquiring the common stock of PLM, including the
amount paid for the shares tendered of $7,403,746, capitalized transaction costs
of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele
of $74,037. The acquisition fees were capitalized by the Trust and are being
amortized over a period of 7 years beginning March 1, 2001. The Trust's
ownership in MILPI subsequent to the merger was increased from 34% to 37.5%.
The Trust expended $1,287,350 in 2000 and $2,706,800 in 1999 to acquire its
ownership interest in EFG Kirkwood. During 1999, the Trust expended $3,139,648
to acquire its ownership interest in Kettle Valley. In connection with the
acquisition of its ownership interest in Kettle Valley, the Trust was paid
$1,524,803 for a residual interest in an aircraft
In 2001, 2000 and 1999, the Trust expended $26,131, $288,892 and $412,529,
respectively, to acquire certain other investments and investment securities.
The Trust also realized proceeds from the disposition of investment securities
of $490,608, during the year ended December 31, 2000.
During 2001, 2000 and 1999, the Trust realized net cash proceeds from equipment
disposals of $184,809, $3,424,815, and $8,850,801, respectively. Sales proceeds
in 2000 include $2,717,790 related to the Trust's 66% interest in certain rail
equipment, which was sold in July 2000. Sales proceeds in 1999 included
$4,997,297 related to the Trust's interest in a McDonnell Douglas MD-82
aircraft, which was sold in January 1999.
Future inflows of cash from equipment disposals will vary in timing and amount
and will be influenced by many factors including, but not limited to, the
frequency and timing of lease expirations, the type of equipment being sold, its
condition and age, and future market conditions.
The risks generally associated with real estate include, without limitation, the
existence of senior financing or other liens on the properties, general or local
economic conditions, property values, the sale of properties, interest rates,
real estate taxes, other operating expenses, the supply and demand for
properties involved, zoning and environmental laws and regulations, and other
governmental rules.
The Trust's involvement in real estate development also introduces financials
risks, including the potential need to borrow funds to develop the real estate
projects. While the Trust's management presently does not foresee any unusual
risks in this regard, it is possible that factors beyond the control of the
Trust, its affiliates and joint venture partners, such as a tightening credit
environment, could limit or reduce its ability to secure adequate credit
facilities at a time when they might be needed in the future. Alternatively, the
Trust could establish joint ventures with other parties to share participation
in its development projects.
Ski resorts are subject to a number of risks, including weather-related risks.
The ski resort business is seasonal in nature and insufficient snow during the
winter season can adversely affect the profitability of a given resort. Many
operators of ski resorts have greater resources and experience in the industry
than the Trust, its affiliates and its joint venture partners.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, investment
securities classified as available-for-sale are required to be carried at fair
value. During the year ended December 31, 1999, the Trust recorded an
unrealized gain on available-for-sale securities of $20,167. This gain was
recorded as a component of comprehensive income included in the Statement of
Changes in Participants' capital. These available-for-sale securities were sold
in 2000 resulting in a realized gain of $70,095.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities. During 1999, the
Trust leveraged $1,332,481 of its ownership interest in Kettle Valley. The
Kettle Valley debt was repaid as of December 31, 2001. Generally, each note
payable is recourse only to the specific equipment financed and to the minimum
rental payments contracted to be received during the debt amortization period,
which period generally coincides with the lease rental term. The amount of cash
used to repay debt obligations may fluctuate in the future due to the financing
of assets, which may be acquired. In addition, the Trust has a balloon payment
obligation of $16,193,280 at the expiration of the lease term related to an
aircraft leased to Scandinavian Airlines System ("SAS").
In July 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per
interest. Class A Beneficiaries purchased 5,520 Class B Interests, generating
$27,600 of such aggregate capital contributions, and EFG, as Special
Beneficiary, purchased 3,019,220 Class B Interests. Subsequently, EFG
transferred its Class B Interests to a special-purpose company, Equis II
Corporation. EFG also transferred its ownership of AFG ASIT Corporation, the
Managing Trustee of the Trust, to Equis II Corporation. In December 1999, an
affiliate of the Trust, Semele, purchased 85% of the common stock of Equis II
Corporation, subject to certain voting restrictions with respect to the Class B
Interests of the Trust owned by Equis II Corporation. In May 2000, Semele
acquired the remaining 15% of the common stock of Equis II Corporation and, in
November 2000, the voting restrictions with respect to the Class B Interests
were terminated. As a result, Semele has voting control over the Trust. The
former majority stockholders of Equis II Corporation, Gary D. Engle and James A.
Coyne, are both members of the Board of Directors of, and collectively own a
majority of the stock in, Semele. Mr. Engle is Semele's Chairman and Chief
Executive Officer and Mr. Coyne is Semele's President and Chief Operating
Officer.
The proceeds from the Class B offering were intended to be used principally to
repurchase a portion of the Trust's Class A Beneficiary Interests and to pay a
one-time special cash distribution of $2,960,865 ($1.47 per Class A Interest) to
the Trust's Class A Beneficiaries. That distribution was paid on August 15,
1997. The remainder of the offering proceeds was classified as restricted cash
pending its use for the repurchase of Class A Interests or its return to the
Class B Interest holders. On August 7, 1997, the Trust commenced an offer to
purchase up to 45% of the outstanding Class A Beneficiary Interests of the
Trust. On October 10, 1997, the Trust used $2,291,567 of the net proceeds
realized from the issuance of the Class B Interests to purchase 218,661 of the
Class A Interests tendered as a result of the offer. On April 28, 1998, the
Trust purchased 5,200 additional Class A Interests at a cost of $46,800. On July
6, 1998, the Trust used $4,646,862 of the Class B offering proceeds to pay a
capital distribution to the Class B Beneficiaries. In July 1999, the Trust
distributed $1,513,639, including legal fees of $81,360 paid to Plaintiffs'
counsel, as a special cash distribution ($0.80 per unit, net of legal fees). In
addition, Equis II Corporation agreed to commit $3,405,688 of the Class B
Capital Contributions (the remaining balance of the restricted cash) to the
Trust for the Trust's investment purposes.
After the amendment of the Trust Agreement in 1998, the Managing Trustee
evaluated and pursued a number of potential new investments, several of which
the Managing Trustee concluded had market returns that it believed were less
than adequate given the potential risks. Most transactions involved the
equipment leasing, business finance and real estate development industries.
Although the Managing Trustee intended to continue to evaluate additional new
investments, it anticipated that the Trust would be able to fund these new
investments with cash on hand or from other sources, such as the proceeds from
future asset sales or refinancings and new indebtedness. As a result, in 1999,
the Trust declared a special cash distribution to the Trust Beneficiaries
totaling $15,200,000, which was paid in January 2000.
After the special distribution in January 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. Looking forward, the Managing Trustee presently does not expect
to reinstate cash distributions until expiration of the Trust's reinvestment
period in December 2002; however, the Managing Trustee periodically will review
and consider other one-time distributions. In addition to maintaining sale
proceeds for reinvestment, the Managing Trustee expects that the Trust will
retain cash from operations to pay down debt and for the continued maintenance
of the Trust's assets. The Managing Trustee believes that this change in policy
is in the best interests of the Trust over the long term.
The payment of distributions is presented as a component of financing activities
on the accompanying Statement of Changes of Cash Flows. No cash distributions
were declared during the years ended December 31, 2001 or 2000. In any given
year, it is possible that Beneficiaries will be allocated taxable income in
excess of distributed cash. This discrepancy between tax obligations and cash
distributions may or may not continue in the future, and cash may or may not be
available for distribution to the Beneficiaries adequate to cover any tax
obligation. The Trust Agreement requires that sufficient distributions be made
to enable the Beneficiaries to pay any state and federal income taxes arising
from any sale or refinancing transactions, subject to certain limitations.
Cash distributions paid to the Participants consist of both a return of and a
return on capital. Cash distributions do not represent and are not indicative
of yield on investment. Actual yield on investment cannot be determined with
any certainty until conclusion of the Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, the residual value realized for each asset at its disposal date,
and the performance of the Trust's non-equipment assets. Future market
conditions, technological changes, the ability of EFG to manage and remarket the
equipment, and many other events and circumstances, could enhance or detract
from individual yields and the collective performance of the Trust's equipment
portfolio. The ability of the Managing Trustee and its affiliates to develop
and profitably manage its non-equipment assets and the return from its interest
in MILPI will impact the Trust's overall performance.
In the future, the nature of the Trust's operations and principal cash flows
will continue to shift from rental receipts to equipment sale proceeds. As this
occurs, the Trust's cash flows resulting from equipment investments may become
more volatile in that certain of the Trust's equipment leases will be renewed
and certain of its assets will be sold. In some cases, the Trust may be
required to expend funds to refurbish or otherwise improve the equipment being
remarketed in order to make it more desirable to a potential lessee or
purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to
monitor and manage these events in order to maximize the residual value of the
Trust's equipment and will consider these factors, in addition to the collection
of contractual rents, the retirement of scheduled indebtedness, and the Trust's
future working capital requirements, in establishing the amount and timing of
future cash distributions.
In accordance with the Trust Agreement, upon the dissolution of the Trust, the
Managing Trustee will be required to contribute to the Trust an amount equal to
any negative balance, which may exist in the Managing Trustee's tax capital
account. At December 31, 2001, the Managing Trustee had a negative tax capital
account balance of $55,893. No such requirement exists with respect to the
Special Beneficiary.
New Accounting Pronouncements
- -------------------------------
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Trust believes the adoption of SFAS No. 141
has not had a material impact on its financial statements.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Trust to complete a
transitional goodwill impairment test six months from the date of adoption. The
Trust believes the adoption of SFAS No. 142 will not have a material impact on
its financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Trust believes that the adoption
of SFAS No. 144 will not have a material impact on its financial statements.
Report of Independent Certified Public Accountants
We have audited the accompanying statements of financial position of AFG
Investment Trust C as of December 31, 2001 and 2000, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of MILPI Holdings, LLC, and subsidiary for
2001 and the financial statements of EFG Kirkwood, LLC for 2000, limited
liability companies in which the Trust has a 34% and 37.2% interest,
respectively, have been audited by other auditors whose reports have been
furnished to us; insofar as our opinion on the financial statements relates to
data included for MILPI Holdings, LLC, and subsidiary for 2001 and EFG Kirkwood,
LLC for 2000, it is based solely on their reports.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AFG Investment Trust C at December 31, 2001 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to the Annual Report is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
The accompanying financial statements for the year ended December 31, 2001 and
2000 have been restated as discussed in Note 1.
/S/ ERNST & YOUNG LLP
Tampa, Florida
May 10, 2002
AFG INVESTMENT TRUST C
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
2001 2000
ASSETS Restated Restated
------------- -------------
(See Note 1) (See Note 1)
Cash and cash equivalents $ 1,716,588 $ 8,848,816
Rents receivable 124,627 257,399
Accounts receivable - affiliate 103,602 424,853
Guarantee fee receivable - 126,000
Interest receivable - 8,930
Loan receivable - EFG/Kettle Development LLC 176,070 77,059
Interest in EFG/Kettle Development LLC 3,916,771 4,315,263
Interest in EFG Kirkwood LLC 3,002,735 3,093,835
Interest in MILPI Holdings, LLC 8,518,577 408,000
Investments - other 264,513 238,382
Other assets, net of accumulated amortization
of $47,039 at December 31, 2001 433,506 478,793
Equipment at cost, net of accumulated depreciation
of $27,813,022 and $20,018,229 at December 31, 2001
and 2000, respectively 23,913,730 33,364,106
------------- -------------
Total assets $ 42,170,719 $ 51,641,436
============= =============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 22,382,964 $ 26,220,794
Accrued interest 38,807 344,871
Accrued liabilities 135,019 284,691
Accrued liabilities - affiliates 150,695 47,835
Deferred rental income 277,357 29,882
Other liabilities 1,596,510 1,524,803
------------- -------------
Total liabilities 24,581,352 28,452,876
------------- -------------
Participants' capital (deficit):
Managing Trustee (56,972) 16,285
Special Beneficiary - 134,353
Class A Beneficiary Interests (1,787,153 Interests;
initial purchase price of $25 each) 19,984,706 25,062,188
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) - 314,101
Treasury Interests (223,861 Class A Interests at Cost) (2,338,367) (2,338,367)
------------- -------------
Total participants' capital 17,589,367 23,188,560
------------- -------------
Total liabilities and participants' capital $ 42,170,719 $ 51,641,436
============= =============
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
Restated Restated
------------ ------------ ------------
INCOME
Lease revenue $ 6,519,899 $ 7,733,941 $10,286,635
Interest income 157,725 666,975 1,217,855
Gain on sale of equipment 124,658 2,012,657 3,687,692
Gain on sale of investment securities - 70,095 -
Other income 182,726 301,400 261,116
------------ ------------ -----------
Total income 6,985,008 10,785,068 15,453,298
------------ ------------ -----------
EXPENSES
Depreciation and amortization 3,933,784 4,255,457 5,815,665
Write-down of equipment 5,578,975 - -
Interest expense 2,055,063 2,463,263 2,478,750
Management fees - affiliates 433,247 431,078 513,019
Operating expenses - affiliate 1,143,620 543,363 843,263
Write-down of other investment - 50,510 -
------------ ------------ -----------
Total expenses 13,144,689 7,743,671 9,650,697
------------ ------------ -----------
EQUITY INTERESTS
Equity in net loss of EFG/Kettle Development LLC (332,692) (91,066) -
Equity in net loss of EFG Kirkwood LLC (91,100) (900,315) -
Equity in net income of MILPI Holdings, LLC 984,280 - -
------------ ------------ -----------
Total income (loss) from equity interests 560,488 (991,381) -
------------ ------------ -----------
Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601
============ ============ ===========
Net income (loss)
per Class A Beneficiary Interest $ (2.84) $ 0.66 $ 1.13
============ ============ ===========
per Class B Beneficiary Interest $ (0.10) $ 0.18 $ 0.75
============ ============ ===========
Cash distributions declared
per Class A Beneficiary Interest $ - $ - $ 4.56
============ ============ ===========
per Class B Beneficiary Interest $ - $ - $ 3.66
============ ============ ===========
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Managing Special
Trustee Beneficiary Class A Beneficiaries Class B Beneficiaries
Amount Amount Interests Amount Interests
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 1998 $ 12,631 $ 104,209 1,787,153 $30,022,170 3,024,740
Net income - 1999 162,815 1,343,220 - 2,015,010 -
Unrealized gain on investment
securities 202 1,663 - 14,919 -
---------- ------------- --------------------- ------------ ---------------------
Comprehensive income 163,017 1,344,883 - 2,029,929 -
Cash distributions declared (195,923) (1,616,362) - (8,153,693) -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 1999 (20,275) (167,270) 1,787,153 23,898,406 3,024,740
Net income - 2000 (Restated) 36,762 303,287 - 1,178,700 -
Less: Reclassification adjustment
for unrealized gain on investment
securities (202) (1,664) - (14,918) -
---------- ------------- --------------------- ------------ ---------------------
Comprehensive income (Restated) 36,560 301,623 - 1,163,782 -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 2000 (Restated) 16,285 134,353 1,787,153 25,062,188 3,024,740
Net loss - 2001 (Restated) (73,257) (134,353) - (5,077,482) -
---------- ------------- --------------------- ------------ ---------------------
Balance at December 31, 2001 (Restated) $ (56,972) $ - 1,787,153 $19,984,706 3,024,740
========== ============= ===================== ============ =====================
Treasury
Amount Interests Total
------------- ------------ -------------
Balance at December 31, 1998 $ 8,559,851 $(2,338,367) $ 36,360,494
Net income - 1999 2,281,556 - 5,802,601
Unrealized gain on investment
securities 3,383 - 20,167
------------- ------------ -------------
Comprehensive income 2,284,939 - 5,822,768
Cash distributions declared (11,058,573) - (21,024,551)
------------- ------------ -------------
Balance at December 31, 1999 (213,783) (2,338,367) 21,158,711
Net income - 2000 (Restated) 531,267 - 2,050,016
Less: Reclassification adjustment
for unrealized gain on investment
securities (3,383) - (20,167)
------------- ------------ -------------
Comprehensive income (Restated) 527,884 - 2,029,849
------------- ------------ -------------
Balance at December 31, 2000 (Restated) 314,101 (2,338,367) 23,188,560
Net loss - 2001 (Restated) (314,101) - (5,599,193)
------------- ------------ -------------
Balance at December 31, 2001 (Restated) $ - $(2,338,367) $ 17,589,367
============= ============ =============
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------- ------------
Restated Restated
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,933,784 4,255,457 5,815,665
Write-down of equipment 5,578,975 - -
Accretion of bond discount - (6,504) (1,480)
Gain on sale of equipment (124,658) (2,012,657) (3,687,692)
Gain on sale of investment securities - (70,095) -
(Income) loss from equity interests (560,488) 991,381 -
Write-down of other investment - 50,510 -
Changes in assets and liabilities:
Rents receivable 132,772 (42,709) 126,421
Accounts receivable - affiliate 321,251 515,674 (261,854)
Accounts receivable - other - - -
Guarantee fee receivable 126,000 (126,000) -
Interest receivable 8,930 5,792 (14,722)
Loan receivable - EFG/Kettle Development LLC (99,011) - (77,059)
Other assets (1,752) (137,842) (340,951)
Accrued interest (306,064) 173,087 (57,331)
Accrued liabilities (149,672) 187,887 (214,696)
Accrued liabilities - affiliates 102,860 (668) (5,699)
Deferred rental income 247,475 (287,303) (164,254)
Other liabilities 71,707 - -
------------ ------------- ------------
Net cash provided by operating activities 3,682,916 5,546,026 6,918,949
------------ ------------- ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 184,809 3,424,815 8,850,801
Investments - other (26,131) (288,892) -
Interest in EFG/Kettle Development LLC - - (3,139,648)
Interest in EFG Kirkwood LLC - (1,287,350) (2,706,800)
Interest in MILPI Holdings, LLC (7,135,992) (408,000) -
Other liabilities - - 1,524,803
Purchase of investment securities - - (412,529)
Proceeds from sale of investment securities - 490,608 -
------------ ------------- ------------
Net cash provided by (used in) investing activities (6,977,314) 1,931,181 4,116,627
------------ ------------- ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Restricted cash - - 4,919,327
Proceeds from notes payable 471,032 25,302 -
Principal payments - notes payable (4,308,862) (6,377,660) (3,832,212)
Distributions paid - (15,200,000) (6,223,847)
------------ ------------- ------------
Net cash used in financing activities (3,837,830) (21,552,358) (5,136,732)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (7,132,228) (14,075,151) 5,898,844
Cash and cash equivalents at beginning of year 8,848,816 22,923,967 17,025,123
------------ ------------- ------------
Cash and cash equivalents at end of year $ 1,716,588 $ 8,848,816 $22,923,967
============ ============= ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 2,361,127 $ 2,290,176 $ 2,536,081
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
See Note 5 to the financial statements.
The accompanying notes are an integral part of these financial statements
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
- --------------------------------------------------
After AFG Investment Trust C (the "Trust") filed its Annual Report on Form 10-K
for the year ended December 31, 2001 with the United States Securities and
Exchange Commission, the Trust determined that the amounts recorded as its share
of income (loss) on its interest in EFG Kirkwood LLC ("EFG Kirkwood") for the
years ended December 31, 2001 and 2000 in its financial statements contained
therein required revision. The Trust had previously recorded income of $6,826
and a loss of $726,159 from its interest in EFG Kirkwood for the years ended
December 31, 2001 and 2000, respectively. The Trust determined that it should
have recorded losses from its interest in EFG Kirkwood LLC of $91,100 and
$900,315 for the years ended December 31, 2001 and 2000, respectively.
Accordingly, for the year ended December 31, 2001, the Trust recorded an
additional loss on its interest in EFG Kirkwood of $97,926, resulting in an
increase in the net loss for the year ended December 31, 2001 of $97,926, or
$(0.08) per Class A Beneficiary Interest and a decrease in net loss of $0.01 per
Class B Beneficiary Interest, respectively. For the year ended December 31,
2000, the Trust recorded an additional loss on its interest in EFG Kirkwood of
$174,156, resulting in a decrease in the net income for the year ended December
31, 2000 of $174,156, or $(0.07) per Class A Beneficiary Interest and $(0.01)
per Class B Beneficiary Interest, respectively. As a result, the accompanying
financial statements for the years ended December 31, 2001 and 2000 have been
restated from the amounts previously reported.
NOTE 2 - ORGANIZATION AND TRUST MATTERS
- ---------------------------------------------
The Trust was organized as a Delaware business trust in August 1992.
Participants' capital initially consisted of contributions of $1,000 from the
Managing Trustee, AFG ASIT Corporation, $1,000 from the Special Beneficiary,
Equis Financial Group Limited Partnership (formerly known as American Finance
Group), a Massachusetts limited partnership ("EFG" or the "Advisor"), and $100
from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate
of EFG. The Trust issued an aggregate of 2,011,014 Beneficiary Interests
(hereinafter referred to as Class A Interests) at a subscription price of $25.00
each ($50,275,350 in total) through 9 serial closings commencing December 1992
and ending September 1993. In July 1997, the Trust issued 3,024,740 Class B
Interests at $5.00 each ($15,123,700 in total), of which (i) 3,019,220 interests
are held by Equis II Corporation, an affiliate of EFG, and a wholly owned
subsidiary of Semele Group Inc. ("Semele"), and (ii) 5,520 interests are held by
10 other Class A investors. The Trust repurchased 218,661 Class A Interests in
October 1997 at a cost of $2,291,567. In April 1998, the Trust repurchased
5,200 additional Class A Interests at a cost of $46,800. Accordingly, there are
1,787,153 Class A Interests currently outstanding. The Class A and Class B
Interest holders are collectively referred to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, Semele. Semele purchased the Special
Beneficiary Interests from EFG during the fourth quarter of 1999. EFG continues
to act as Advisor to the Trust and provides services in connection with the
acquisition and remarketing of the Trust's equipment assets. The Managing
Trustee is responsible for the general management and business affairs of the
Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II Corporation
and an affiliate of EFG. Except with respect to "interested transactions", Class
A Interests and Class B Interests have identical voting rights and, therefore,
Equis II Corporation generally has control over the Trust on all matters on
which the Beneficiaries may vote. With respect to interested transactions,
holders of those Class B Interests that are the Managing Trustee or any of its
affiliates must vote their interests as a majority of the Class A Interests have
been voted. The Managing Trustee and the Special Beneficiary are not required to
make any additional capital contributions except as may be required under the
Second Amended and Restated Declaration of Trust, as amended (the "Trust
Agreement").
Significant operations commenced coincident with the Trusts initial purchase of
equipment and the associated lease commitments in December 1992. Pursuant to
the Trust Agreement, each distribution of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings of the Trust is made 90.75% to the
Beneficiaries, 8.25% to the Special Beneficiary and 1% to the Managing Trustee.
Under the terms of a management agreement between the Trust and EFG, management
services are provided by EFG to the Trust for fees, as stated in the agreement.
EFG is a Massachusetts limited partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Trust and several other
direct-participation equipment leasing programs sponsored or co-sponsored by AFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily to
the business of originating new leases, and the name "American Finance Group,"
and its acronym, to a third party. AFG changed its name to Equis Financial
Group Limited Partnership after the sale was concluded. Pursuant to terms of the
sale agreements, EFG specifically reserved the rights to continue using the name
American Finance Group and its acronym in connection with the Trust and certain
Other Investment Programs and to continue managing all assets owned by the Trust
and the Other Investment Programs.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Cash Equivalents and Investment Securities
- ----------------------------------------------
The Trust classifies any amounts on deposits in banks and all highly liquid
investments purchased with an original maturity of three months or less as cash
and cash equivalents.
Revenue Recognition
- --------------------
Effective January 1, 2000, the Trust adopted the provisions of Securities
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the
recognition, presentation and disclosure of revenue in financial statements. The
adoption of SAB No. 101 had no impact on the Trust's financial statements.
Rents are payable to the Trust monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements, which expire beyond the
Trust's anticipated dissolution, date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of $9,923,959 are due as follows:
For the year ending December 31, 2002 $5,298,286
2003 4,283,058
2004 285,025
2005 57,590
----------
Total $9,923,959
==========
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the year ended December 31, 2001 and its share of the
maintenance payment was $35,440, which was accrued as a maintenance obligation
at December 31, 2001. Coincident with the termination of the Reno lease, the
aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four
years. The Reno Programs are to receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864.
======
Revenue from major individual lessees, which accounted for 10% or more of lease
revenue during the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
---------- ---------- ----------
Scandinavian Airlines System. . . $3,321,309 $3,620,348 $3,630,432
Hyundai Electronics America, Inc. $1,146,949 $1,146,949 $1,146,949
Use of Estimates
- ------------------
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Equipment on Lease
- --------------------
All equipment was acquired from EFG, one of its Affiliates or from third-party
sellers. Equipment Cost means the actual cost paid by the Trust to acquire the
equipment, including acquisition fees. Where equipment was acquired from EFG or
an Affiliate, Equipment Cost reflects the actual price paid for the equipment by
EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate
while carrying the equipment, including all liens and encumbrances, less the
amount of all primary term rents earned by EFG or the Affiliate prior to selling
the equipment. Where the seller of the equipment was a third party, Equipment
Cost reflects the seller's invoice price.
Depreciation and Amortization
- -------------------------------
The Trust's depreciation policy is intended to allocate the cost of equipment
over the period during which it produces economic benefit. The principal period
of economic benefit is considered to correspond to each asset's primary lease
term, which term generally represents the period of greatest revenue potential
for each asset. Accordingly, to the extent that an asset is held on primary
lease term, the Trust depreciates the difference between (i) the cost of the
asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of the primary lease
expiration. To the extent that an asset is held beyond its primary lease term,
the Trust continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life. Periodically, the
Managing Trustee evaluates the net carrying value of equipment to determine
whether it exceeds undiscounted future cash flows. For purposes of this
comparison, "net carrying value" represents, at a given date, the net book value
(equipment cost less accumulated depreciation for financial reporting purposes)
of the Trust's equipment and "net realizable value" represents, at the same
date, the aggregate undiscounted cash flows resulting from future contracted
lease payments plus the estimated residual value of the Trust's equipment. The
Managing Trustee evaluates significant equipment assets, such as aircraft,
individually. All other assets are evaluated collectively by equipment type
unless the Managing Trustee learns of specific circumstances, such as a lessee
default, technological obsolescence, or other market developments, which could
affect the net realizable value of particular assets. Adjustments to reduce the
net carrying value of equipment are recorded in those instances where estimated
net realizable value is considered to be less than net carrying value and are
reflected separately on the accompanying Statement of Operations as write-down
of equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Impairment of Long-Lived Assets
- ----------------------------------
The carrying values of long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value may not be
recoverable. If this review results in an impairment, as determined based on
the estimated undiscounted cash flow, the carrying value of the related
long-lived asset is adjusted to fair value.
Accrued Liabilities - Affiliates
- -----------------------------------
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliates.
Contingencies
- -------------
The Trust's policy is to recognize a liability for goods and services during the
period when the goods or services are received. To the extent that the Trust
has a contingent liability, meaning generally a liability the payment of which
is subject to the outcome of a future event, the Trust recognizes a liability in
accordance with Statement of Financial Accounting Standards No. 5 "Accounting
for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of
contingent liabilities when the amount of liability can be reasonably estimated
and the liability is probable.
Allocation of Net Income or Loss
- -------------------------------------
Net income is allocated quarterly first, to eliminate any Participant's negative
capital account balance and second, 1% to the Managing Trustee, 8.25% to the
Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period (excluding
$1,432,279 Class A special cash distributions paid in 1999). Net losses are
allocated quarterly first, to eliminate any positive capital account balance of
the Managing Trustee, the Special Beneficiary and the Class B Beneficiaries;
second, to eliminate any positive capital account balances of the Class A
Beneficiaries; and third, any remainder to the Managing Trustee.
The allocation of net income or loss pursuant to the Trust Agreement for income
tax purposes differs from the foregoing and is based upon government rules and
regulations for federal income tax reporting purposes and assumes, for each
income tax reporting period, the liquidation of all of the Trust's assets and
the subsequent distribution of all available cash to the Participants. For
income tax purposes, the Trust adjusts its allocations of income and loss to the
Participants so as to cause their tax capital account balances at the end of the
reporting period to be equal to the amount that would be distributed to them in
the event of a liquidation and dissolution of the Trust. This methodology does
not consider the costs attendant to liquidation or whether the Trust intends to
have future business operations.
The unaudited table below includes detail of the allocation of income (loss) in
each of the quarters for the years ended December 31, 2001, 2000 and 1999.
Managing Special Class A Class B
Trustee Beneficiary Beneficiaries Beneficiaries Treasury
Amount Amount Amount Amount Interests Total
---------- ------------- --------------- --------------- ------------ -------------
December 31, 1998 $ 12,631 $ 104,209 $ 30,022,170 $ 8,559,851 $(2,338,367) $ 36,360,494
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 8,367 69,025 511,150 248,122 - 836,664
---------- ------------- --------------- --------------- ------------ -------------
March 31, 1999 9,019 74,408 29,801,482 8,452,726 (2,338,367) 35,999,268
Special distribution - Class A - - (1,432,279) - - (1,432,279)
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 13,991 115,427 673,949 327,147 - 1,130,514
Unrealized gain 127 1,048 7,760 3,767 - 12,702
---------- ------------- --------------- --------------- ------------ -------------
June 30, 1999 11,158 92,057 28,319,074 8,428,393 (2,338,367) 34,512,315
Distributions (11,979) (98,826) (731,838) (355,247) - (1,197,890)
Net income 14,405 118,838 829,911 402,853 - 1,366,007
Unrealized gain 154 1,269 9,399 4,563 - 15,385
---------- ------------- --------------- --------------- ------------ -------------
September 30, 1999 13,738 113,338 28,426,546 8,480,562 (2,338,367) 34,695,817
Distributions (159,986) (1,319,884) (4,525,900) (9,992,832) - (15,998,602)
Net income 126,052 1,039,930 - 1,303,434 - 2,469,416
Unrealized gain (loss), net (79) (654) (2,240) (4,947) - (7,920)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 1999 (20,275) (167,270) 23,898,406 (213,783) (2,338,367) 21,158,711
Net income (Restated) 27,314 225,338 503,205 349,322 - 1,105,179
Unrealized losses (Restated) (285) (1,373) (25,620) (1,184) - (28,462)
---------- ------------- --------------- --------------- ------------ -------------
March 31, 2000 (Restated) 6,754 56,695 24,375,991 134,355 (2,338,367) 22,235,428
Net income (Restated) 740 6,109 52,936 14,258 - 74,043
Unrealized gain (Restated) 64 523 4,536 1,222 - 6,345
---------- ------------- --------------- --------------- ------------ -------------
June 30, 2000 (Restated) 7,558 63,327 24,433,463 149,835 (2,338,367) 22,315,816
Net income (Restated) 7,474 61,661 534,347 143,927 - 747,409
Unrealized gain (Restated) 40 327 2,835 764 - 3,966
---------- ------------- --------------- --------------- ------------ -------------
September 30, 2000 (Restated) 15,072 125,315 24,970,645 294,526 (2,338,367) 23,067,191
Net income (Restated) 1,234 10,179 88,212 23,760 - 123,385
Unrealized gain (loss) (Restated) (21) (1,141) 3,331 (4,185) - (2,016)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 2000 (Restated) 16,285 134,353 25,062,188 314,101 (2,338,367) 23,188,560
Net income (Restated) 12,758 105,250 912,084 245,671 - 1,275,763
---------- ------------- --------------- --------------- ------------ -------------
March 31, 2001 (Restated) 29,043 239,603 25,974,272 559,772 (2,338,367) 24,464,323
Net loss (Restated) (29,043) (239,603) (349,340) (559,772) - (1,177,758)
---------- ------------- --------------- --------------- ------------ -------------
June 30, 2001 (Restated) - - 25,624,932 - (2,338,367) 23,286,565
Net loss (Restated) (3,045) - (301,421) - - (304,466)
---------- ------------- --------------- --------------- ------------ -------------
September 30, 2001 (Restated) (3,045) - 25,323,511 - (2,338,367) 22,982,099
Net loss (Restated) (53,927) - (5,338,805) - - (5,392,732)
---------- ------------- --------------- --------------- ------------ -------------
December 31, 2001 (Restated) $ (56,972) $ - $ 19,984,706 $ - $(2,338,367) $ 17,589,367
========== ============= =============== =============== ============ =============
Reclassification
- -----------------
Certain amounts previously reported have been reclassified to conform to the
December 31, 2001 presentation.
Accumulated Other Comprehensive Income
- -----------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", effective in 1998, requires the disclosure of comprehensive income
(loss) to reflect changes in participants' capital that result from transactions
and economic events from non-owner sources. Accumulated other comprehensive
income (loss) for the years ended December 31, 2001 and 2000 represents the
Trust's unrealized gains (losses) on investment securities:
2001 2000 1999
----- --------- -------
Beginning Balance. . . . . . . . . . . . . . . . $ -- $ 20,167 $ --
Adjustments related to unrealized gains (losses)
on investment securities . . . . . . . . . . . . -- (20,167) 20,167
----- --------- -------
Ending Balance . . . . . . . . . . . . . . . . . $ -- $ -- $20,167
===== ========= =======
Net Income and Cash Distributions Per Beneficiary Interest
- -----------------------------------------------------------------
Net income and cash distributions per Class A Interest are based on 1,787,153
Class A Interests outstanding. Net income and cash distributions per Class B
Beneficiary Interest are based on 3,024,740 Class B Interests outstanding during
the years ended December 31, 2001, 2000 and 1999. Net income and cash
distributions per Beneficiary Interest are computed after allocation of the
Managing Trustee's and Special Beneficiary's shares of net income and cash
distributions.
Provision for Income Taxes
- -----------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their separate tax returns.
New Accounting Pronouncements
- -------------------------------
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Trust believes the adoption of SFAS No. 141
has not had a material impact on its financial statements.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective
January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Trust to complete a
transitional goodwill impairment test six months from the date of adoption. The
Trust believes the adoption of SFAS No. 142 will not have a material impact on
its financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in
October 2001 and replaces Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of Accounting Principles Bulletin Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business", for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Trust believes that the
adoption of SFAS No. 144 will not have a material impact on its financial
statements.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Trust at December 31, 2001.
Remaining Lease Term (Months), as used below, represents the number of months
remaining from December 31, 2001 under contracted lease terms and is presented
as a range when more than one lease agreement is contained in the stated
equipment category. A Remaining Lease Term equal to zero reflects equipment
either held for sale or re-lease or being leased on a month-to-month basis.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- --------------------------------------------- ----------- ------------------------ -----------------------
Aircraft 24-42 $ 32,134,911 Foreign
Manufacturing 0-20 9,053,648 CA/MI
Locomotives 27 4,574,489 NE
Materials handling 0-14 3,161,465 AR/FL/IL/IN/KY/MA/MI/OH
- OR/PA/SC/WI/WV/Foreign
Computer and peripherals 0-17 1,716,673 FL/IN/MI/OH/WI
Construction and mining 0 1,085,566 NV/Foreign
------------------------
Total equipment cost - 51,726,752
Accumulated depreciation - (27,813,022)
------------------------
Equipment, net of accumulated depreciation - $ 23,913,730
========================
In certain cases, the cost of the Trust's equipment represents a proportionate
ownership interest. The remaining interests are owned by EFG or an affiliated
equipment leasing program sponsored by EFG. The Trust and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment. Proportionate equipment ownership enables the
Trust to further diversify its equipment portfolio by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could result from a concentration in any single equipment type, industry or
lessee. At December 31, 2001, the Trust's equipment portfolio included equipment
having a proportionate original cost of $38,342,258, representing approximately
74% of total equipment cost.
Certain of the equipment and related lease payment streams were used to secure
term loans with third-party lenders. The preceding summary of equipment includes
leveraged equipment having an original cost of approximately $44,000,000 and a
net book value of approximately $24,000,000 at December 31, 2001. See Note 9 -
Notes Payable.
Generally, the costs associated with maintaining, insuring and operating the
Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust. However, the
Partnership has purchased supplemental insurance coverage to for its aircraft to
reduce the economic risk arising from certain losses. Specifically, the
Partnership is insured under supplemental policies for "Aircraft Hull Total Loss
Only" and "Aircraft Hull Total Loss Only War and Other Perils."
As equipment is sold to third parties, or otherwise disposed of, the Trust
recognizes a gain or loss equal to the difference between the net book value of
the equipment at the time of sale or disposition and the proceeds realized upon
sale or disposition. The ultimate realization of estimated residual value in
the equipment will be dependent upon, among other things, EFG's ability to
maximize proceeds from selling or re-leasing the equipment upon the expiration
of the primary lease terms. The summary above includes fully depreciated
equipment held for sale or re-lease with an original cost of approximately
$1,788,000 at December 31, 2001. The Managing Trustee is actively seeking the
sale or re-lease of all equipment not on lease. In addition, the summary above
includes equipment being leased on a month-to-month basis.
The Trust accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. During the year ended December 31, 2001, the Trust recorded
a write-down of equipment, representing an impairment to the carrying value of
the Trust's interest in a Boeing 767-300ER aircraft. The resulting charge of
$5,578,975 was based on a comparison of estimated fair value and carrying value
of the Trust's interest in the aircraft.
NOTE 5 - INTEREST IN EFG/KETTLE DEVELOPMENT LLC
- ------------------------------------------------------
On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers")
formed EFG/Kettle Development LLC, a Delaware limited liability company, for the
purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a
real estate development in Kelowna, British Columbia in Canada called Kettle
Valley. EFG/Kettle Development LLC, upon receiving the Buyers' contributions for
their membership interests, purchased the Interest from a special purpose
company ("SPC") whose subsidiaries own a 99.9% limited partnership interest in
Kettle Valley Development Limited Partnership ("KVD LP"). The SPC and its
subsidiaries were established by the seller, in part, for income tax purposes
and have no business interests other than the development of Kettle Valley. KVD
LP is a Canadian Partnership that owns the property, consisting of approximately
280 acres of land. The project is zoned for 1,120 residential units in addition
to commercial space. To date, 108 residential units have been constructed and
sold and units are under construction. The seller is an unaffiliated
third-party company and has retained the remaining 50.1% ownership interest in
the SPC. A newly organized Canadian affiliate of EFG replaced the original
general partner of KVD LP on March 1, 1999.
The Trust's ownership share in EFG/Kettle Development LLC is 50.604% and had a
cost of $4,472,129, including a 1% acquisition fee of $44,729 paid to EFG. The
acquisition was funded with cash of $3,139,648 and a non-recourse note for
$1,332,481, which was repaid as of December 31, 2001. The Trust's cost basis in
this joint venture was approximately $658,000 greater than its equity interest
in the underlying net assets at December 31, 1999. This difference is being
amortized over a period of 10 years beginning January 1, 2000. The amount
amortized is included in amortization expense as an offset to Interest in EFG /
Kettle Valley Development LLC and was $65,800 in each of the years ended
December 31, 2001 and 2000.
The Trust accounts for its interest in Kettle Valley using the equity method of
accounting. Under the equity method of accounting, the Trust's interest is (i)
increased (decreased) to reflect the Trust's share of income (loss) of the joint
venture and (ii) decreased to reflect any distributions the Trust received from
the joint venture. The Trust's interest was decreased by $332,692 and $91,066,
respectively, during the years ended December 31, 2001 and 2000, reflecting its
share of loss from Kettle Valley.
In addition, the seller purchased a residual sharing interest in a Boeing
767-300 aircraft owned by the Buyers and leased to Scandinavian Airlines System
("SAS"). The seller paid $3,013,206 to the Buyers ($1,524,803, or 50.604% to the
Trust) for the residual interest, which is subordinate to certain preferred
payments to be made to the Buyers in connection with the aircraft. Payment of
the residual interest is due only to the extent that the Trust receives net
residual proceeds from the aircraft. The residual interest is non-recourse to
the Buyers and is reflected as Other Liabilities on the accompanying Statement
of Financial Position at both December 31, 2001 and 2000.
The table below provides comparative summarized income statement data for KVD
LP. KVD LP has a January 31 fiscal year end. The Trust has a December 31 fiscal
year end. The operating results of KVD LP shown below have been conformed to
the year ended December 31, 2001 and 2000, respectively.
Year ended Year ended
December 31, December 31,
2001 2000
-------------- --------------
Total revenues $ 4,596,837 $ 6,250,711
Total expenses (5,967,703) (7,118,553)
-------------- --------------
Net loss $ (1,370,866) ($867,842)
============== ==============
NOTE 6 - INTEREST IN EFG KIRKWOOD LLC
- --------------------------------------------
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and Semele formed a joint venture, EFG Kirkwood LLC ("EFG Kirkwood"),
for the purpose of acquiring preferred and common stock interests in Kirkwood
Associates Inc. ("KAI"). The Trusts collectively own 100% of the Class A
membership interests in EFG Kirkwood and Semele owns 100% of the Class B
membership interests in EFG Kirkwood. The Class A interest holders are entitled
to certain preferred returns prior to distribution payments to the Class B
interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of the
voting securities of that entity under the operating agreement for the LLC,
which gives equal voting rights to Class A and Class B membership interests.
The Managing Trustee is the manager of EFG Kirkwood.
On April 30, 2000, KAI's ownership interests in certain assets and substantially
all of its liabilities were transferred to Mountain Resort Holdings LLC
("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in
KAI's common and preferred stock for corresponding pro-rata membership interests
in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership
interests in Mountain Resort. Mountain Resort, through four wholly owned
subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort
located in northern California, a public utility that services the local
community, and land that is held for residential and commercial development. The
Trust holds 40% of EFG Kirkwood's Class A membership interests.
On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in
Mountain Springs Resort LLC ("Mountain Springs"). Mountain Springs, through a
wholly owned subsidiary, owns 80% of the common membership interests and 100% of
the Class B Preferred membership interests in an entity that owns the Purgatory
Ski Resort ("Purgatory") in Durango, Colorado.
The Trust's ownership interest in EFG Kirkwood had an original cost of
$3,994,150; including a 1% acquisition fee of $39,546 paid to EFG. The Trust's
ownership interest in EFG Kirkwood is accounted for on the equity method and the
Trust recorded a loss of $91,100 and $900,315 for the years ended December 31,
2001 and 2000, respectively, representing its pro-rata share of the net loss of
EFG Kirkwood.
The following table summarizes the selected financial data pertaining to the
Trust's membership interests in EFG Kirkwood LLC and the summarized results of
the operations of the ski resorts.
Mountain Resort has a April 30th fiscal year end and the operating results shown
below have been conformed to the twelve months ended December 31, 2001 and 2000,
respectively.
Purgatory has a May 31st fiscal year end. The operating results shown below
have been conformed to the twelve months ended December 31, 2001. The Trust
purchased their interest in Purgatory on May 1, 2000 and as such the operating
results below have been conformed to reflect the eight months ended December 31,
2000.
2001 2000
------------ ------------
(Restated) (Restated)
EFG Kirkwood LLC
- ------------------------------------------------
Total assets (primarily real estate and plant) $ 7,424,797 $ 7,851,180
Total liabilities (primarily borrowings) -- 206,263
------------ ------------
Net equity of EFG Kirkwood LLC $ 7,424,797 $ 7,644,917
============ ============
Net equity of EFG Kirkwood LLC $ 7,424,797 $ 7,644,917
Unamortized capitalized acquisition fees (2) 82,043 89,675
------------ ------------
Aggregate net equity and fees $ 7,506,840 $ 7,734,592
============ ============
Trust's share of net equity and fees $ 3,002,735 $ 3,093,835
============ ============
2001 2000 1999 (1)
------------ ------------ ----------
(Restated) (Restated)
Equity in loss $ (215,838) $(2,764,141) $(218,890)
Total expenses (4,282) (8,567) --
------------ ------------ ----------
Net loss of EFG Kirkwood LLC $ (220,120) $(2,772,708) $(218,890)
============ ============ ==========
Net loss of EFG Kirkwood LLC $ (220,120) $(2,772,708) $(218,890)
Amortization of capitalized acquisition fees (2) (7,632) (6,626) (2,564)
------------ ------------ ----------
Aggregate net loss $ (227,752) $(2,779,334) $(221,454)
============ ============ ----------
Trust's share of net loss $ (91,100) $ (900,315) $ --
============ ============ ==========
Summarized Operating Results - Ski Resorts:
- ------------------------------------------------
Revenues
Mountain Resort $29,597,000 $27,741,000
============ ============
Purgatory $15,250,000 $ 5,008,000
============ ============
Expenses
Mountain Resort $30,117,000 $27,464,000
============ ============
Purgatory $15,648,000 $ 9,725,000
============ ============
(1) EFG Kirkwood LLC commenced operations on June 10, 1999; therefore,
amounts in this column correspond to the period June 10, 1999 to December 31,
1999.
(2) Unamortized capitalized acquisition fees represent expenses incurred by
the four Trusts in the acquisition of the membership interests in EFG Kirkwood
LLC.
EFG Kirkwood is a guarantor of a note payable to a bank of DSC/Purgatory LLC,
the entity which owns Purgatory. The guarantee is for $3,500,000, the original
principal balance of the note. The balance of the note is $1,075,000 at
December 31, 2001. The note is also guaranteed in the same amount by another
investor of DSC/Purgatory LLC.
NOTE 7 -INTEREST IN MILPI HOLDINGS, LLC
- ---------------------------------------------
In December 2000, the Trusts formed MILPI, which formed MILPI Acquisition Corp.
("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts
collectively paid $1.2 million for their membership interests in MILPI ($408,000
for the Trust) and MILPI purchased the shares of MILPI Acquisition for an
aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition
entered into a definitive agreement (the "Agreement") with PLM International,
Inc. ("PLM"), an equipment leasing and asset management company, for the purpose
of acquiring up to 100% of the outstanding common stock of PLM, for an
approximate purchase price of up to $27 million. In connection with the
acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to
purchase any and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83%
of PLM's outstanding common stock in February 2001 for a total purchase price of
approximately $21.8 million. Under the terms of the Agreement, with the approval
of the holders of 50.1% of the outstanding common stock of PLM, MILPI
Acquisition would merge into PLM, with PLM being the surviving entity. The
merger was completed when MILPI obtained approval of the merger from PLM's
shareholders pursuant to a special shareholders' meeting on February 6, 2002.
The Trust and AFG Investment Trust D ("Trust D") provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
was contributed by the Trust. The funds were obtained from existing resources
and internally generated funds and by means of a 364 day, unsecured loan from
PLM evidenced by a promissory note in the principal amount of $719,760 that
bears interest at LIBOR plus 200 basis points (subject to an interest rate cap).
At December 31, 2001, the Trust has a 34% membership interest in MILPI having an
original cost of $7,543,992. The cost of the Trust's interest in MILPI reflects
MILPI Acquisition's cost of acquiring the common stock of PLM, including the
amount paid for the shares tendered of $7,403,746, capitalized transaction costs
of $66,209 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele
of $74,037. The acquisition fees were capitalized by the Trust and are being
amortized over a period of 7 years beginning March 1, 2001. The amount
amortized is included in amortization expense and was $9,695 during the year
ended December 31, 2001.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr.
Coyne, who are a director and an officer of the Trust, respectively, are also
officers and directors of, and own significant stock in, Semele. In addition,
Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition.
The Trust's ownership interest in MILPI is accounted for on the equity method
and the Trust recorded income of $984,280 during the year ended December 31,
2001, representing its pro-rata share of the net income of MILPI.
The table below provides summarized consolidated balance sheet data as of
December 31, 2001 and income statement data for MILPI for the period February 7,
2001 (date of inception) through December 31, 2001.
Total assets $43,399,000
Total liabilities $15,453,000
Minority interest $ 3,029,000
Total equity $24,917,000
Total revenues $10,376,000
Total operating expenses, minority interest
And other income and expenses $ 5,818,000
Provision for income taxes $ 1,611,000
Net income $ 2,947,000
See discussion of the PLM acquisition included in Note 15 - Subsequent Events.
NOTE 8 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Trust are paid by EFG on behalf of the
Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and
other costs, both expensed and capitalized, during the years ended December 31,
2001, 2000 and 1999, which were paid or accrued by the Trust to EFG or its
Affiliates, are as follows:
2001 2000 1999
---------- -------- ----------
Acquisition fees $ 74,037 $ 15,484 $ 75,281
Management fees 433,247 431,078 513,019
Administrative charges 178,158 197,789 192,348
Reimbursable operating costs
due to third parties 965,462 345,574 650,915
---------- -------- ----------
Total $1,650,904 $989,925 $1,431,563
========== ======== ==========
As provided under the terms of the Trust Agreement, EFG is compensated for its
services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 2, 1997, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In connection with a Solicitation Statement and consent of Beneficiaries in
1998, the Trust's reinvestment provisions were reinstated through December 31,
2002 and the Trust was permitted to invest in assets other than equipment.
Acquisition fees paid to EFG in connection with such equipment reinvestment
assets are equal to 1% of Asset Base Price paid by the Trust. For management
services, EFG is compensated by an amount equal to (i) 5% of gross operating
lease rental revenue and 2% of gross full payout lease rental revenue received
by the Trust with respect to equipment acquired on or prior to March 31, 1998.
For management services earned in connection with equipment acquired on or after
April 1, 1998, EFG is compensated by an amount equal to 2% of gross lease rental
revenue received by the Trust. For non-equipment investments other than cash,
the Managing Trustee receives an annualized management fee of 1% of such assets
under management. Compensation to EFG for services connected to the remarketing
of equipment is calculated as the lesser of (i) 3% of gross sale proceeds or
(ii) one-half of reasonable brokerage fees otherwise payable under arm's length
circumstances. Payment of the remarketing fee is subordinated to Payout and this
fee and the other fees described above are subject to certain limitations
defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at actual cost.
All equipment was purchased from EFG, one of its Affiliates or directly from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 3, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid by the lessee
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account prior to remittance to the Trust.
At December 31, 2001, the Trust was owed $103,602 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2002.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and
Chief Executive Officer of Semele.
In 1997, the Trust issued 3,024,740 Class B Interests at $5.00 per interest,
thereby generating $15,123,700 in aggregate Class B capital contributions. Class
A Beneficiaries purchased 5,520 Class B Interests, generating $27,600 of such
aggregate capital contributions, and then Special Beneficiary, EFG, purchased
3,019,220 Class B Interests, generating $15,096,100 of such aggregate capital
contributions.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of a majority of all of the Trust's outstanding
voting interests, as well as its ownership of AFG ASIT Corporation. See Item 1
(a) of this report regarding certain voting restrictions related to the Class B
Interests. Equis II Corporation is owned by Semele. Gary D. Engle is Chairman
and Chief Executive Officer of Semele. James A. Coyne is Semele's President and
Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board
of Directors of, and own significant stock in, Semele.
See the acquisition of the outstanding stock of PLM and subsequent merger by the
Trusts included in Note 7 - Interest in MILPI Holdings, LLC. See the formation
of a joint venture in March 2002 by the Trust and Trust D discussed below in
Note 15 - Subsequent Events.
NOTE 9 - NOTES PAYABLE
- --------------------------
Notes payable at December 31, 2001 consisted of installment notes of $22,382,964
payable to banks and institutional lenders. The notes bear fixed interest rates
ranging between 6.76% and 9.176%. All of the installment notes are non-recourse
and are collateralized by the Trust's equipment and assignment of the related
lease payments, as discussed below. Generally, the equipment-related
installments notes will be fully amortized by noncancellable rents. However,
the Trust has a balloon payment obligation of $16,193,280 at the expiration of
the lease term related to its interest in an aircraft leased to SAS in December
2003.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003.
Coincident with the termination of the Reno lease, the aircraft was re-leased to
Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 3 -
Revenue Recognition). The Reno Programs executed a debt agreement with a new
lender collateralized by the aircraft and assignment of the Aerovias de Mexico,
S.A. de C.V. lease payments. The Reno Programs received debt proceeds of
$5,316,482, of which the Trust's share was $471,032. The Trust used the new
debt proceeds and a portion of certain other receipts from Reno to repay the
outstanding balance of the existing indebtedness related to the aircraft of
$493,137 and accrued interest and fees of $7,347.
Management believes that the carrying amount of the notes payable approximates
fair value at December 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of notes payable are as follows:
For the year ending December 31, 2002 $ 3,223,028
2003 18,827,727
2004 273,318
2005 58,891
-----------
Total $22,382,964
===========
NOTE 10 - INCOME TAXES
- --------------------------
The Trust is not a taxable entity for federal income tax purposes. Accordingly,
no provision for income taxes has been recorded in the accounts of the Trust.
For financial statement purposes, the Trust allocates net income quarterly
first, to eliminate any Participant's negative capital account balance and
second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75%
collectively to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period (excluding $1,432,279 Class A special cash
distributions paid in 1999). Net losses are allocated quarterly first, to
eliminate any positive capital account balance of the Managing Trustee, the
Special Beneficiary and the Class B Beneficiaries; second, to eliminate any
positive capital account balances of the Class A Beneficiaries; and third, any
remainder to the Managing Trustee. This convention differs from the income or
loss allocation requirements for income tax and Dissolution Event purposes as
delineated in the Trust Agreement. For income tax purposes, the Trust allocates
net income or net loss in accordance with the provisions of such agreement.
Pursuant to the Trust Agreement, upon dissolution of the Trust, the Managing
Trustee will be required to contribute to the Trust an amount equal to any
negative balance, which may exist in the Managing Trustee's tax capital account.
At December 31, 2001, the Managing Trustee had a negative tax capital account
balance of $55,893.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
------------ ------------ ------------
(Restated) (Restated)
Net income (loss) $(5,599,193) $ 2,050,016 $ 5,802,601
Financial statement depreciation less
than tax depreciation (740,333) (2,343,210) (3,482,896)
Recognize pass through income (571,344) 710,114 -
Reverse income from corporate investment (651,588) - -
Tax gain (loss) in excess of book
gain (loss) on sale - (765,343) (23,049)
Deferred rental income 247,475 (287,303) (164,254)
Write-down of equipment 5,578,975 - -
Other (190,174) 163,292 62,400
------------ ------------ ------------
Net income (loss) for federal income tax
reporting purposes $(1,926,182) $ (472,434) $ 2,194,802
============ ============ ============
The following is a reconciliation between participants' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2001 and 2000:
2001 2000
------------- -------------
(Restated) (Restated)
Participants' capital $ 17,589,367 $ 23,188,560
Add back selling commissions and organization
and offering costs 4,922,397 4,922,397
Deduct deferred step-down of capital basis (689,869) (689,869)
Cumulative difference between federal income tax
and financial statement income (loss) (16,317,182) (19,990,193)
------------- -------------
Participants' capital for federal income tax reporting purposes $ 5,504,713 $ 7,430,895
============= =============
The cumulative difference between federal income tax and financial statement
income (loss) represents timing differences.
NOTE 11 - GUARANTEE AGREEMENT
- ---------------------------------
On March 8, 2000, the Trusts entered into a guarantee agreement whereby the
Trusts, jointly and severally, guaranteed the payment obligations under a master
lease agreement between Echelon Commercial LLC, a newly-formed Delaware company
that is controlled by Gary D. Engle, President and Chief Executive Officer of
EFG, as lessee, and Heller Affordable Housing of Florida, Inc., and two other
entities, as lessor ("Heller"). The lease payments of Echelon Commercial LLC to
Heller are supported by lease payments to Echelon Commercial LLC from various
sub-lessees who are parties to commercial and residential lease agreements under
the master lease agreement. The guarantee of lease payments by the Trusts was
capped at a maximum of $34,500,000, excluding expenses that could result in the
event that Echelon Commercial LLC defaulted under the terms of the master lease
agreement.
As a result of principal reductions on the average guarantee amount, an amended
and restated agreement was entered into in December 2000, that reduced the
guaranteed amount among the Trusts. During the year ended December 31, 2001, the
requirements of the guarantee agreement were met and the Trust received payment
for all outstanding amounts totaling $224,513, including $89,583 of income
related to the guarantee agreement recognized during the year ended December 31,
2001. During the year ended December 31, 2001, the Trust received an upfront
cash fee of $175,400 and recognized a total of $301,400 in income related from
the guarantee. The guarantee fee is reflected as Other Income on the
accompanying Statement of Operations. The Trust has no further obligations
under the guarantee agreement.
NOTE 12 - LEGAL PROCEEDINGS
- -------------------------------
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
------------------------------------
Financial Group Limited Partnership, et al., in the United States District Court
------------------------------------
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
-----------------------------------
Financial Group Limited Partnership, et al., in the Superior Court of the
------------------------------------------
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
-
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs asserted, among other things, claims against the Defendants on
behalf of the Nominal Defendants for violations of the Securities Exchange Act
of 1934, common law fraud, breach of contract, breach of fiduciary duty, and
violations of the partnership or trust agreements that govern each of the
Nominal Defendants. The Defendants denied, and continue to deny, that any of
them have committed or threatened to commit any violations of law or breached
any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit was intended to be achieved and which, among other
things, was expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement."
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an
amended Stipulation of Settlement (the "Amended Stipulation") which was filed
with the Court on March 15, 1999. The Amended Stipulation was preliminarily
approved by the Court by its "Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 22, 1999. The Amended
Stipulation, among other things, divided the Class Action Lawsuit into two
separate sub-classes that could be settled individually. The second sub-class,
which does not include the Trust, remains pending.
On April 5, 1999, the Trust mailed a notice to all Class A and Class B
Beneficiaries describing, among other things, the Class Action Lawsuit and the
proposed settlement terms for the Trust. In addition, the notice advised the
Beneficiaries that the Court would conduct a fairness hearing on May 21, 1999
and described the rights of the Beneficiaries and the procedures they should
follow if they wished to object to the settlement.
On May 26, 1999, the Court issued its Order and Final Judgment approving
settlement of the Class Action Lawsuit with respect to claims asserted by the
Plaintiffs on behalf of the sub-class that included the Trust. As a result of
the settlement, the Trust declared a special cash distribution of $1,513,639,
including legal fees for Plaintiffs' counsel of $81,360, that was paid in July
1999 ($0.80 per Class A Interest, net of legal fees). In addition, the parent
company of the Managing Trustee, Equis II Corporation, agreed to commit
$3,405,688 of its Class B Capital Contributions (paid in connection with its
purchase of Class B Interests in July 1997) to the Trust for the Trust's
operating and investment purposes. In the absence of this commitment, Equis II
Corporation would have been entitled to receive a Class B Capital Distribution
for this amount pursuant to the Trust Agreement because the proceeds from the
offering of the Class B Interests were intended to be used for approximately a
two-year period to re-purchase outstanding Class A Interests for the benefit of
each Trust. Subsequently, any Class B capital not so expended was required to
be returned to the Class B Interest holders. The settlement required that Equis
II Corporation forego this Class B Capital Distribution. The settlement
effectively caused Equis II Corporation to remain at risk as a long-term
investor in the Trust.
NOTE 13 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
Three Months Ended
--------------------
March 31, June 30, September 30, December 31, Total
---------- ------------ --------------- -------------- ------------
2001 (as restated)
- ---------------------------------
Lease revenue . . . . . . . . . . $1,607,494 $ 1,642,867 $ 1,690,959 $ 1,578,579 $ 6,519,899
Net income (loss) . . . . . . . . $1,275,763 $(1,177,758) $ (304,466) $ (5,392,732) $(5,599,193)
Net income (loss) per
Beneficiary Interest:
Class A Interests . . . . . . . $ 0.51 $ (0.20) $ (0.17) $ (2.99) $ (2.84)
Class B Interests . . . . . . . $ 0.08 $ (0.19) $ -- $ -- $ (0.10)
2001 (as previously reported)
- ---------------------------------
Lease revenue . . . . . . . . . . $1,607,494 $ 1,642,867 $ 1,690,959 $ 1,578,579 $ 6,519,899
Net income (loss) . . . . . . . . $1,067,698 $(1,132,155) $ (115,773) $ (5,321,037) $(5,501,267)
Net income (loss) per
Beneficiary Interest:
Class A Interests . . . . . . . $ 0.43 $ (0.09) $ (0.06) $ (3.03) $ (2.76)
Class B Interests . . . . . . . $ 0.07 $ (0.18) $ -- $ -- $ (0.11)
2000 (as restated)
- ---------------------------------
Lease revenue . . . . . . . . . . $2,145,097 $ 2,035,590 $ 1,768,284 $ 1,784,970 $ 7,733,941
Net income. . . . . . . . . . . . $1,105,179 $ 74,043 $ 747,409 $ 123,385 $ 2,050,016
Net income per
Beneficiary Interest:
Class A Interests . . . . . . . $ 0.28 $ 0.03 $ 0.30 $ 0.05 $ 0.66
Class B Interests . . . . . . . $ 0.12 $ -- $ 0.05 $ 0.01 $ 0.18
2000 (as previously reported)
- ---------------------------------
Lease revenue . . . . . . . . . . $2,145,097 $ 2,035,590 $ 1,768,284 $ 1,784,970 $ 7,733,941
Net income. . . . . . . . . . . . $1,085,484 $ 80,518 $ 913,658 $ 144,512 $ 2,224,172
Net income per
Beneficiary Interest:
Class A Interests . . . . . . . $ 0.27 $ 0.03 $ 0.37 $ 0.06 $ 0.73
Class B Interests . . . . . . . $ 0.11 $ 0.01 $ 0.06 $ 0.01 $ 0.19
Net loss for the three months ended June 30, 2001 includes a $449,031 loss on
interest in EFG/Kettle Development LLC and a $584,110 loss on interest in EFG
Kirkwood LLC.
Net loss for the three months ended December 31, 2001 includes a $5,578,975
write-down of equipment.
NOTE 14 - SEGMENT REPORTING
- -------------------------------
The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment lease portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp.,
which owns the majority interest in PLM, an equipment leasing and asset
management company. The Real Estate segment includes the ownership, management
and development of commercial properties, recreational properties, condominiums,
interval ownership units, townhomes, single family homes and land sales through
its ownership interests in EFG Kirkwood and Kettle Valley. There are no
material intersegment sales or transfers.
Segment information for the years ended December 31, 2001, 2000 and 1999 is
summarized below.
2001 2000 1999
------------- ------------- -----------
Restated (1) Restated (1)
Total Income: (2)
Equipment leasing $ 6,985,008 $ 10,785,068 $15,453,298
Real estate - - -
------------- ------------- -----------
Total $ 6,985,008 $ 10,785,068 $15,453,298
============= ============= ===========
Operating Expenses, Management Fees
and Other Expenses:
Equipment leasing $ 1,501,130 $ 944,491 $ 1,106,068
Real estate 75,737 80,460 250,214
------------- ------------- -----------
Total $ 1,576,867 $ 1,024,951 $ 1,356,282
============= ============= ===========
Interest Expense:
Equipment leasing $ 2,037,067 $ 2,404,830 $ 2,412,127
Real estate 17,996 58,433 66,623
------------- ------------- -----------
Total $ 2,055,063 $ 2,463,263 $ 2,478,750
============= ============= ===========
Depreciation, Writedown of Equipment
and Amortization Expense:
Equipment leasing $ 9,437,264 $ 4,189,657 $ 5,815,665
Real estate 75,495 65,800 -
------------- ------------- -----------
Total $ 9,512,759 $ 4,255,457 $ 5,815,665
============= ============= ===========
Equity Interests:
Equipment leasing $ 984,280 $ - $ -
Real estate (423,792) (991,381) -
------------- ------------- -----------
Total $ 560,488 $ (991,381) $ -
============= ============= ===========
Net Income (Loss): $ (5,599,193) $ 2,050,016 $ 5,802,601
============= ============= ===========
Capital Expenditures:
Equipment leasing $ 7,162,123 $ 696,892 $ 412,529
Real estate - 1,287,350 5,846,448
------------- ------------- -----------
Total $ 7,162,123 $ 1,984,242 $ 6,258,977
============= ============= ===========
Assets:
Equipment leasing $ 35,251,213 $ 44,232,338 $63,912,013
Real estate 6,919,506 7,409,098 7,178,929
------------- ------------- -----------
Total $ 42,170,719 $ 51,641,436 $71,090,942
============= ============= ===========
(3) See Note 1 to the accompanying financial statements, regarding the
restatement of the Trust's 2001 and 2000 financial statements.
(4) Includes equipment leasing revenue of $6,519,899, $7,733,941 and
$10,286,635 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the year ended December 31, 2001, the Trust recognized lease revenue of
$6,519,899 compared to $7,733,941 and $10,286,635 for the years ended December
31, 2000 and 1999, respectively. The decrease in lease revenue is due to lease
term expirations and the sale of equipment. The level of lease revenue to be
recognized by the Trust in the future may be impacted by future reinvestment;
however, the extent of such impact cannot be determined at this time. Future
lease term expirations and equipment sales will result in a reduction in lease
revenue recognized.
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
owned by an affiliated equipment leasing program sponsored by Equis Financial
Group Limited Partnership ("EFG"). Proportionate equipment ownership enables
the Trust to further diversify its equipment portfolio by participating in the
ownership of selected assets, thereby reducing the general levels of risk, which
could result from a concentration in any single equipment type, industry or
lessee. The Trust and each affiliate individually report, in proportion to
their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
In June 2001, the Trust and certain affiliated investment programs
(collectively, the "Reno Programs") executed an agreement with the existing
lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell
Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The
Reno Programs received an early termination fee of $840,000 and a payment of
$400,000 for certain maintenance required under the existing lease agreement.
The Trust's share of the early termination fee was $74,424, which was recognized
as lease revenue during the year ended December 31, 2001 and its share of the
maintenance payment was $35,440, which is accrued as a maintenance obligation at
December 31, 2001. Coincident with the termination of the Reno lease, the
aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four
years. The Reno Programs are to receive rents of $6,240,000 over the lease
term, of which the Trust's share is $552,864. During the years ended December
31, 2001, 2000 and 1999, the Trust recognized lease revenue including the early
termination fee discussed above of $219,210, $159,904 and $153,980,
respectively, related to its interest in this aircraft.
Interest income for the year ended December 31, 2001 was $157,725 compared to
$666,975 and $1,217,855 for the years ended December 31, 2000 and 1999,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. The amount of future interest income is expected to fluctuate as a
result of changing interest rates and the amount of cash available for
investment, among other factors. The Trust distributed $15,200,000 in January
2000 that resulted in a reduction of cash available for investment.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and Heller Affordable Housing of Florida, Inc., and two other entities,
as lessor ("Heller"). During the year ended December 31, 2001, the requirements
of the guarantee agreement were met and the Trust received payment for all
outstanding amounts totaling $224,513, including $89,583 of income related to
the guarantee agreement recognized during the year ended December 31, 2001.
During the year ended December 31, 2001, the Trust received an upfront cash fee
of $175,400 and recognized a total of $301,400 in income related from the
guarantee. The guarantee fee is reflected as Other Income in the accompanying
Statement of Operations. The Trust has no further obligations under the
guarantee agreement.
The Trust received $261,116 in 1999 as a breakage fee from a third-party seller
in connection with a transaction for new investments that was canceled by the
seller in the first quarter of 1999. This amount is reflected as Other Income
on the accompanying Statement of Operations for the year ended December 31,
1999.
During the three years ended December 31, 2001, the Trust sold equipment having
a net book value of $60,151, $1,412,158 and $5,163,109, respectively, to
existing lessees and third parties, which resulted in net gains, for financial
statement purposes, of $124,658, $2,012,657 and $3,687,692, respectively.
It cannot be determined whether future sales of equipment will result in a net
gain or net loss to the Trust, as such transactions will be dependent upon the
condition and type of equipment being sold and its marketability at the time of
sale. In addition, the amount of gain or loss reported for financial statement
purposes is partly a function of the amount of accumulated depreciation
associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities, which may be advantageous to the Trust, and to maximize total
cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Trust classifies such
residual rental payments as lease revenue. Consequently, the amount of gain or
loss reported in the financial statements is not necessarily indicative of the
total residual value the Trust achieved from leasing the equipment.
During the year ended December 31, 2000, the Trust sold investment securities
having a book value of $420,513, resulting in a gain, for financial reporting
purposes of $70,095.
Depreciation expense was $3,811,250, $4,189,657, and $5,815,665 for the years
ended December 31, 2001, 2000 and 1999, respectively. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the Trust
depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
During the year ended December 31, 2001, the Trust recorded a write-down of
equipment, representing an impairment to the carrying value of the Trust's
interest in a Boeing 767-300ER aircraft. The resulting charge of $5,578,975 was
based on a comparison of estimated fair value and carrying value of the Trust's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
Interest expense on equipment related debt was $2,037,067, $2,404,830, and
$2,412,127 for the years ended December 31, 2001, 2000 and 1999, respectively.
Interest expense will continue to decrease in the future as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees related to equipment leasing were $357,510, $350,618 and
$460,805 during the years ended December 31, 2001, 2000 and 1999, respectively.
Management fees are based on 5% of gross lease revenue generated by operating
leases and 2% of gross lease revenue generated by full payout leases, subject to
certain limitations.
Operating expenses - affiliate were $1,143,620, $543,363, and $843,263 for the
years ended December 31, 2001, 2000 and 1999, respectively. Operating expenses
- - affiliate in 2001 included approximately $293,000 of remarketing costs related
to the re-lease of an aircraft in June 2001 and $140,000 for ongoing legal costs
associated with the Trust's ongoing discussions with the Securities and Exchange
Commission regarding its investment company status. Operating expenses -
affiliate also included approximately $114,000 of costs reimbursed to EFG as a
result of the successful acquisition of the PLM common stock. In conjunction
with the acquisition of the PLM common stock, EFG became entitled to recover
certain out of pocket expenses which it had previously incurred. Operating
expenses consist principally of administrative charges, professional service
costs, such as audit, insurance and legal fees, as well as printing,
distribution and remarketing expenses. The amount of future operating expenses
cannot be predicted with certainty; however, such expenses are usually higher
during the acquisition and liquidation phases of a trust. Other fluctuations
typically occur in relation to the volume and timing of remarketing activities.
In addition, the Trust wrote-down other investments $50,510 during the year
ended December 31, 2000.
For the year ended December 31, 2001, the Trust recorded income of $984,280 and
amortization expense of $9,695, in connection with its ownership interest in
MILPI. This income represents the Trust's share of the net income of MILPI
recorded under the equity method of accounting. The Trust's income from MILPI
results from MILPI's indirect ownership of PLM common stock acquired in February
2001.
MILPI
- -----
During the period February 7, 2001 (date of inception) through December 31,
2001, MILPI recognized operating revenues of approximately $10,376,000,
consisting primarily of $5,217,000 of management fees, $2,032,000 of
acquisition and lease negotiation fees, $1,716,000 of equity income in
partnership interests and $472,000 of operating lease income. In addition,
MILPI recognized other income of approximately $467,000, consisting primarily of
interest income earned on investments.
During the same period, MILPI incurred total operating expenses of $5,856,000,
consisting primarily of $3,290,000 of general and administrative expenses,
$1,255,000 of depreciation and amortization, $511,000 from impairment of its
investment in managed programs and $800,000 of operations support expenses,
which include salary and office-related expenses for operational activities. In
addition, MILPI also incurred income tax expense of $1,611,000 and recorded
minority interest expense of $429,000.
Real Estate
- ------------
Management fees for non-equipment investments were $75,737, $80,460 and $52,214
for the years ended December 31, 2001, 2000 and 1999, respectively. The
management fees on non-equipment assets, excluding cash, were based on 1% of
such assets under management.
For the year ended December 31, 1999, operating expenses included legal fees of
$198,000 related to the Trust's ownership interests in Kettle Valley and EFG
Kirkwood.
The Trust has an approximately 51% ownership interest in Kettle Valley (see
further discussion below). For the years ended December 31, 2001 and 2000, the
Trust recorded losses of $332,692 and $91,066, respectively, from its interest
in Kettle Valley. The losses represent the Trust's share of the losses of
Kettle Valley recorded under the equity method of accounting. In each of the
years ended December 31, 2001 and 2000, the Trust recorded amortization expense
of $65,800, in connection with its ownership interest in Kettle Valley.
Interest expense on a note payable related to the Trust's acquisition of its
interest in Kettle Valley was $17,996, $58,433 and $66,623 for the years ended
December 31, 2001, 2000, and 1999, respectively. The note was repaid as of
December 31, 2001.
The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT
Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also
is the manager of EFG Kirkwood.
EFG Kirkwood owns membership interests in:
Mountain Resort Holdings LLC ("Mountain Resort") and
Mountain Springs Resort LLC ("Mountain Springs").
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development.
Mountain Springs, through a wholly owned subsidiary, owns a controlling interest
in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails. Purgatory receives the majority of its revenues from winter
ski operations, primarily ski, lodging, retail, and food and beverage services,
with the remainder of its revenues generated from summer outdoor activities,
such as alpine sliding and mountain biking.
For the year ended December 31, 2001, the Trust recorded a loss of $91,100 on
its ownership interest in EFG Kirkwood, compared to a loss of $900,315 for the
year ended December 31, 2000. The loss in 2000 was caused principally by losses
reported by Purgatory for the period May 1, 2000 to December 31, 2000. Mountain
Springs, through a wholly owned subsidiary, became an equity participant in
Purgatory on May 1, 2000. Consequently, Mountain Springs did not participate in
the operating results of Purgatory for the period from January 1, 2000 to April
30, 2000, generally the period of Purgatory's peak income activity.
Accordingly, the losses incurred in 2000 do not reflect a full year's operating
activities for Purgatory. See Note 6 to the accompanying financial statements.
Through its ownership of 40% of the Class A membership interests in EFG
Kirkwood, the Trust indirectly owns interests in two ski resort operating
companies, Purgatory and Mountain Resort. EFG Kirkwood owns 50% of the
membership interests in Mountain Springs which, through a wholly-owned
subsidiary, owns 80% of the common member interests and 100% of the Class B
preferred member interests of Purgatory. EFG Kirkwood also owns approximately
38% of the membership interests in Mountain Resort which, through four
wholly-owned subsidiaries, owns Kirkwood Mountain Resort. The Trust accounts
for its ownership interests using the equity method of accounting.
Mountain Resort
- ----------------
Mountain Resort is primarily a ski and mountain recreation resort with more than
2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The
resort receives approximately 70% of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services with the remainder
of the revenues generated from summer outdoor activities, including mountain
biking, hiking and other activities. Other operations include a real estate
development division, which has developed and is managing a 40-unit condominium
residential and commercial building, an electric and gas utility company, which
operates as a regulated utility company and provides electric and gas services
to the Kirkwood community, and a real estate brokerage company.
During the year ended December 31, 2001, Mountain Resort recorded total revenues
of approximately $29,597,000 compared to approximately $27,741,000 for the same
period in 2000. The increase in total revenues from 2000 to 2001 of $1,856,000
is primarily the result of an increase in ski-related revenues offset by a
decrease in residential-related revenues.
Ski-related revenues increased approximately $4,078,000 for the year ended
December 31, 2001 compared to 2000. The increase in ski-related revenues
resulted from improved weather conditions during the winter season, which
attracted more skiers. Improved weather conditions resulted in the resort
supporting approximately 336,000 skiers for the year ended December 31, 2001 as
compared to approximately 291,000 skiers in 2000.
Residential-related revenues and other operations revenues decreased
approximately $2,222,000 for the year ended December 31, 2001 as compared to
2000. The decrease primarily reflects the completion of a 40-unit condominium
residential and commercial building in December 1999 resulting in a significant
number of condominium sales closing in January 2000.
During the year ended December 31, 2001, Mountain Resort recorded total expenses
of approximately $30,117,000 compared to approximately $27,464,000 in 2000. The
increase in total expenses of $2,653,000 from 2000 to 2001 is the result of
increases in ski-related expenses and residential-related and other operations
expenses.
Ski-related expenses in 2001 increased approximately $2,425,000 compared to 2000
as a result of an increase in ski-related revenue, as discussed above.
Residential-related expenses and other operations expenses increased
approximately $228,000 in the year end December 31, 2001 compared to 2000, as a
result of an increase in other operations expenses largely offset by a decrease
in cost of sales from condominium units sold during the year ended December 31,
2001 compared to 2000, as discussed above.
Mountain Springs
- -----------------
Purgatory is a ski and mountain recreation resort covering 2,500 acres, situated
on 40 miles of terrain with 75 ski trails located near Durango, Colorado.
Purgatory receives the majority of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services, with the
remainder of revenues generated from summer outdoor activities, such as alpine
sliding and mountain biking.
Mountain Springs became an equity participant in Purgatory on May 1, 2000 and
therefore did not have an interest in Purgatory during the three months ended
March 31, 2000. For comparative purposes, the following discussion of
Purgatory's operating results includes the operating results for the three
months ended March 31, 2000.
During the year ended December 31, 2001, Purgatory recorded total revenues of
approximately $15,250,000 compared to approximately $13,507,000 for the same
period of 2000. The increase in total revenues from 2000 to 2001 of
approximately $1,743,000 is the result of improved weather conditions during the
winter season, which attracted more skiers. Improved weather conditions
resulted in the resort supporting approximately 306,000 skiers for the year
ended December 31, 2001 compared to 286,000 skiers in the same period of 2000.
Total expenses were approximately $15,648,000 for the year ended December 31,
2001 compared to approximately $16,163,000 for the same period in 2000. The
decrease in total expenses for the year ended December 31, 2001 compared to the
same period in 2000 of approximately $515,000 is a result of decreases in
operating expenses of approximately $75,000, non-operating costs of
approximately $100,000 and financing costs of approximately $340,000.
Kettle Valley
- --------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. The project, which is being developed by Kettle Valley
Development Limited Partnership, consists of approximately 280 acres of land
that is zoned for 1,120 residential units in addition to commercial space. To
date, 108 residential units have been constructed and sold and 10 additional
units are under construction.
During the twelve months ended December 31, 2001, Kettle Valley recorded
revenues of $4,596,837 compared to $6,250,711 for the same period in 2000. The
decrease in revenues is the result of a decrease in the number of lot and home
sales.
Kettle Valley incurred total expenses of $5,967,703 during the twelve months
ended December 31, 2001 compared to $7,118,553 for the same period in 2000. The
decrease in expenses is the result of a decrease in the number of lot and home
sales discussed above.
NOTE 15 - SUBSEQUENT EVENT
------------------------------
On February 6, 2002, MILPI completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common shares by
effecting a merger of PLM into MILPI Acquisition Corp. The merger was completed
when MILPI obtained approval of the merger from PLM's shareholders pursuant to a
special shareholders' meeting. The Trust and Trust D provided $4.4 million to
acquire the remaining 17% of PLM's outstanding common stock of which $2,399,199
million was contributed by the Trust. The funds were obtained from existing
resources and internally generated funds and by means of a 364 day, unsecured
loan to the Trust from PLM evidenced by a promissory note in the principal
amount of $719,760 that bears interest at LIBOR plus 200 basis points (subject
to an interest rate cap). The Trust's ownership interest in MILPI subsequent to
the merger was increased from 34% to 37.5%. On March 12, 2002, PLM declared and
paid a cash dividend of approximately $2.7 million, of which the Trust's share
was $1,000,092.
In March 2002, the Trust and Trust D formed C & D IT LLC, a Delaware limited
liability company, as a 50%/50% owned joint venture that is co-managed by each
of the Trust and Trust D (the "C & D Joint Venture") to which each Trust
contributed $1 million. The C & D Joint Venture was formed for the purpose of
making a conditional contribution of $2.0 million to the Rancho Malibu Limited
Partnership in exchange for 25% of the interests in the Rancho Malibu
partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture
was admitted to the Rancho Malibu partnership as a co-managing general partner
pursuant to the terms of an amendment to the Rancho Malibu Limited Partnership
Agreement. The other partners in the Rancho Malibu Limited Partnership are
Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other
co-managing general partner.
Rancho Malibu Limited Partnership owns the 274-acre parcel of land near Malibu,
California and is developing it as a single-family luxury residential
subdivision. The conditional C & D Joint Venture Contribution was made to assure
participation in the future development of the parcel. It was made subject to
the future solicitation of the consent of the beneficiaries of each of the Trust
and Trust D. The C & D Joint Venture Contribution is conditioned upon the
consummation of a transaction pursuant to which Semele and Rancho Malibu Corp.
will contribute all of the partnership interests that they hold in Rancho Malibu
Limited Partnership along with 100% of the membership interests Semele holds in
RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM International
Inc., a corporation that is jointly owned by the Trust and three affiliated
Trusts, in exchange for $5.5 million in cash, a $2.5 million promissory note and
182 shares of common stock of RMLP, Inc. (The sole asset of RM Financing LLC is
a Note dated December 31, 1990 (the Note"). The Note was held by Semele's
predecessor when it took a deed in lieu of foreclosure on the property from the
original owner. The unpaid principal balance of the Note is $14,250,000 plus
accrued interest as of December 31, 2001.
The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture
Contribution from the Rancho Malibu partnership if the transactions have not
taken place within ninety (90) days of the receipt by the Rancho Malibu
partnership of notice from the C & D Joint Venture that the requisite consents
of the beneficiaries of the Trust and Trust C have been received. This right of
the C & D Joint Venture is secured by a pledge of 50% of the capital stock of
Rancho Malibu Corp. and 50% of the interests in the Rancho Malibu partnership
held by Semele and Rancho Malibu Corp.
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The Trust classifies all rents from leasing equipment as lease revenue. Upon
expiration of the primary lease terms, equipment may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Trust for such equipment. Expenses, such as management fees, and
interest earned on cash generated are not included below.
The following is a summary of cash excess associated with equipment dispositions
occurring in the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
---------- ----------- -----------
Rents earned prior to disposal of
Equipment, net of interest charges $2,135,202 $ 7,830,529 $30,130,592
Sale proceeds realized upon
Disposition of equipment 184,809 3,424,815 8,850,801
---------- ----------- -----------
Total cash generated from rents
and equipment sale proceeds 2,320,011 11,255,344 38,981,393
Original acquisition cost of equipment disposed 1,655,583 8,258,489 30,545,847
---------- ----------- -----------
Excess of total cash generated to cost
of equipment disposed $ 664,428 $ 2,996,855 $ 8,435,546
========== =========== ===========
AFG INVESTMENT TRUST C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 2001
(RESTATED)
Sales and
Operations Refinancings Total
------------ -------------- ------------
Net income (loss) $(5,723,851) $ 124,658 $(5,599,193)
Add:
Depreciation and amortization 3,933,784 - 3,933,784
Write-down of equipment 5,578,975 - 5,578,975
Management fees 433,247 - 433,247
Income from equity interests (560,488) - (560,488)
Book value of disposed equipment - 60,151 60,151
Less:
Principal reduction of notes payable (4,308,862) - (4,308,862)
------------ -------------- ------------
Cash from operations, sales and refinancings (647,195) 184,809 (462,386)
Less:
Management fees (433,247) - (433,247)
------------ -------------- ------------
Distributable cash from operations,
sales and refinancings (1,080,442) 184,809 (895,633)
Other sources and uses of cash:
Cash and cash equivalents at beginning of year 3,748,267 5,100,549 8,848,816
Other assets - (1,752) (1,752)
Interest in MILPI Holdings, LLC (1) (1,405,733) (5,730,259) (7,135,992)
Net proceeds from note payable refinancing - 471,032 471,032
Net change in receivables and accruals 454,496 - 454,496
------------ -------------- ------------
Cash and cash equivalents at end of year $ 1,716,588 $ - $ 1,716,588
============ ============== ============
(1) To the extent available, cash generated from sales and refinancings is used
for reinvestment, in
accordance with the Trust Agreement.
AFG INVESTMENT TRUST C
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED AND
RESTATED DECLARATION OF TRUST
FOR THE YEAR ENDED DECEMBER 31, 2001
For the year ended December 31, 2001, the Trust reimbursed the Managing Trustee
and its Affiliates for the following costs:
Operating expenses $1,190,432
AFG INVESTMENT TRUST C
SCHEDULE OF REIMBURSABLE OPERATING EXPENSES DUE TO THIRD PARTIES
FOR THE YEAR ENDED DECEMBER 31, 2001
Operating expenses due to third parties for the year ended December 31, 2001
consisted of the following:
Legal $344,086
Selling & Remarketing 290,762
Accounting and Tax 147,132
Investor Services 60,621
Printing & Document Services 40,740
Insurance 32,523
Travel & Entertainment 23,370
Bank Charges 16,453
Office 9,525
Equipment Maintenance 250
--------
Total $965,462
========
AFG INVESTMENT TRUST C
SCHEDULE OF EQUIPMENT
AS OF DECEMBER 31, 2001
Lease
Rental Expiration Net Book
Lessee Schedule Date Cost Value Debt
- ---------------------------------- --------- ---------- ----------- ----------- -----------
Advanced Micro Devices, Inc. 006-RN2 - $ 1,274,733 $ - $ -
Aerovias De Mexico, S.A. de C.V. N753RARL1 6/21/05 1,239,941 900,959 420,027
A.O. Smith Corporation A-17RN1 - 36,817 - -
Chrysler Corporation A-3 - 56,663 - -
Chrysler Corporation B-2 - 97,860 - -
Chrysler Corporation B-2B - 15,446 - -
Chrysler Corporation E-11 1/31/02 196,487 56,449 -
Chrysler Corporation G-2 2/28/02 858,310 166,822 77,501
GE Aircraft Engines 3RN3 - 51,390 - -
GATX Logistics, Inc. E-11 - 148,148 - -
General Electric Company 4 - 1,339 - -
General Electric Company 5 - 335 - -
General Motors Corporation H-6 - 75,771 - -
General Motors Corporation C-1 - 124,214 - -
General Motors Corporation C-2 - 28,782 - -
General Motors Corporation C-4 - 815,215 - -
General Motors Corporation C-5 - 1,317,467 - -
General Motors Corporation B-16RN1 - 46,957 - -
Hyundai Electronics America, Inc. 1AO 8/31/03 6,513,220 1,809,228 1,785,134
Owens-Corning Fiberglass Corp. A-35 - 16,507 394 -
Owens-Corning Fiberglass Corp. A-38 - 453 - -
Scandinavian Airlines System LN-RCGRN1 12/29/03 30,895,170 18,166,569 18,884,089
Temple-Inland Forest Product Group A1RN2 12/31/02 21,485 2,692 -
Tenneco Packaging B-75RN1 - 30,500 - -
Tenneco Packaging B-76RN1 - 16,887 - -
Tenneco Packaging B-77 - 47,991 - -
Tenneco Packaging B-81 - 13,089 - -
Union Pacific Railroad Company 11011991 3/31/04 4,574,486 2,524,087 1,216,213
USX Corporation A-4 - 503 - -
Western Bulk Carriers A-2 - 493,702 53,588 -
Western Bulk Carriers A-3 - 591,861 115,084 -
Western Bulk Carriers A-4 2/28/03 336,738 117,858 -
Warehouse - - 1,788,485 - -
----------- ----------- -----------
Total $51,726,952 $23,913,730 $22,382,964
=========== =========== ===========