UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------
Commission File No. 0-21390
AFG INVESTMENT TRUST B
----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3157230
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1050 Waltham Street, Suite 310, Lexington, MA 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 676-0009
-------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
AFG INVESTMENT TRUST B
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statements of Financial Position
at September 30, 2002 and December 31, 2001 3
Statements of Operations
for the Three and Nine Months Ended September 30, 2002 and 2001 4
Statement of Changes in Participants' Capital
for the Nine Months Ended September 30, 2002 5
Statements of Cash Flows
for the Nine Months Ended September 30, 2002 and 2001 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION:
Item 1 - 6 28
AFG INVESTMENT TRUST B
STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
September 30, December 31,
2002 2001
--------------- --------------
ASSETS
Cash and cash equivalents $ 897,784 $ 899,569
Accounts receivable - affiliate 2,818 24,446
Interest in EFG Kirkwood LLC 1,478,666 1,501,368
Interest in MILPI Holdings, LLC 4,831,555 5,010,928
Investments - other 99,392 99,135
Other assets 5,090 857
Equipment at cost, net of accumulated depreciation
of $2,594,357 and $2,175,686 at September 30, 2002
and December 31, 2001, respectively 374,244 903,653
--------------- --------------
Total assets $ 7,689,549 $ 8,439,956
=============== ==============
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 336,772 $ 420,027
Accrued liabilities 210,744 106,329
Accrued liabilities - affiliates 17,117 117,348
Deferred rental income 8,062 8,313
--------------- --------------
Total liabilities 572,695 652,017
--------------- --------------
Participants' capital (deficit):
Managing Trustee (14,704) 735
Special Beneficiary - 6,066
Class A Beneficiary interests (582,017 interests;
initial purchase price of $25 each) 7,922,933 8,556,689
Class B Beneficiary interests (1,000,961 interests;
initial purchase price of $5 each) - 15,824
Treasury interests (83,477 Class A interests at cost) (791,375) (791,375)
--------------- --------------
Total participants' capital 7,116,854 7,787,939
--------------- --------------
Total liabilities and participants' capital $ 7,689,549 $ 8,439,956
=============== ==============
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST B
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------- -------------- ----------------- -------------
REVENUES
Lease revenue $ 68,158 $ 123,472 $ 207,999 $ 407,245
Interest income 2,562 10,267 11,219 64,400
Gain on sale of equipment - 5,382 400 75,620
Other income - 5,074 - 33,149
----------------- -------------- ----------------- -------------
Total revenues 70,720 144,195 219,618 580,414
- ------------------------------------------------
EXPENSES
Depreciation and amortization 15,253 23,051 45,761 82,476
Write-down of equipment - - 483,648 -
Interest expense 6,283 8,482 20,518 19,803
Management fees - affiliates 19,619 17,983 58,508 59,644
Operating expenses 239,878 - 365,987 -
Operating expenses - affiliate 55,229 194,356 158,517 632,147
----------------- -------------- ----------------- -------------
Total expenses 336,262 243,872 1,132,939 794,070
- ------------------------------------------------
EQUITY INTERESTS
Equity in net income (loss) of EFG Kirkwood LLC (400,166) (387,303) (22,702) 106,316
Equity in net income of MILPI Holdings, LLC 17,630 278,974 264,938 343,714
----------------- -------------- ----------------- -------------
Total income (loss) from equity interests (382,536) (108,329) 242,236 450,030
- ------------------------------------------------
Net income (loss) $ (648,078) $ (208,006) $ (671,085) $ 236,374
----------------- -------------- ----------------- -------------
Net income (loss)
per Class A Beneficiary Interest $ (1.10) $ (0.35) $ (1.09) $ 0.42
per Class B Beneficiary Interest $ - $ - $ (0.02) $ -
================= ============== ================= =============
Cash distributions declared
per Class A Beneficiary Interest $ - $ - $ - $ -
per Class B Beneficiary Interest $ - $ - $ - $ -
================= ============== ================= =============
Weighted Average Class A
Beneficiary Interests Outstanding 582,017 582,017 582,017 582,017
Weighted Average Class B Beneficiary
Interests Outstanding 1,000,961 1,000,961 1,000,961 1,000,961
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST B
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Managing Special
Trustee Beneficiary Class A Beneficiaries
---------------------
Amount Amount Interests Amount
--------------- --------------- --------------- ---------------
Balance at December 31, 2001 $ 735 $ 6,066 582,017 $ 8,556,689
Net income (loss) (15,439) (6,066) - (633,756)
----------------- ----------------- --------------------- -----------------
Balance at September 30, 2002 $ (14,704) $ - 582,017 $ 7,922,933
================= ================= ===================== =================
Class B Beneficiaries Treasury
---------------------
Interests Amount Interests Total
--------------- --------------- --------------- ---------------
Balance at December 31, 2001 1,000,961 $ 15,824 $ (791,375) $ 7,787,939
Net income (loss) - (15,824) - (671,085)
--------------------- ----------------- ----------------- -----------------
Balance at September 30, 2002 1,000,961 $ - $ (791,375) $ 7,116,854
===================== ================= ================= =================
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST B
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
.. ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $ (671,085) $ 236,374
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 45,761 82,476
Write-down of equipment 483,648 -
Gain on sale of equipment (400) (75,620)
Income from equity interests (242,236) (450,030)
Changes in assets and liabilities:
Rents receivable - 621
Accounts receivable - affiliate 21,628 90,111
Guarantee fee receivable - 41,593
Interest receivable - 2,438
Other assets (4,233) (8,355)
Accrued liabilities 104,415 (76,290)
Accrued liabilities - affiliates (100,231) 51,765
Deferred rental income (251) 1,758
-------------- --------------
Net cash used in operating activities (362,984) (103,159)
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 400 143,641
Interest in investment - other (257) -
Dividends received from MILPI Holdings, LLC 444,311 -
Acquisition fees paid to affiliate - (43,551)
Interest in MILPI Holdings, LLC - (4,115,145)
-------------- --------------
Net cash provided by (used in) investing activities 444,454 (4,015,055)
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable - 471,038
Principal payments - notes payable (83,255) (579,800)
-------------- --------------
Net cash used in financing activities (83,255) (108,762)
-------------- --------------
Net decrease in cash and cash equivalents (1,785) (4,226,976)
Cash and cash equivalents at beginning of period 899,569 5,126,793
-------------- --------------
Cash and cash equivalents at end of period $ 897,784 $ 899,817
============== ==============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 20,406 $ 20,903
============== ==============
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST B
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the 2001 Annual Report (Form 10-K/A) of AFG
Investment Trust B (the "Trust"). Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the 2001 Annual
Report included in Form 10-K/A.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 2002 and December 31, 2001, results of operations for
the three and nine month periods ended September 30, 2002 and 2001 and the
statement of changes in participants capital and statements of cash flows for
the nine months ended September 30, 2002 have been made and are reflected.
These reclassifications did not have any effect on total assets, total
liabilities, participants' capital, or net income (loss).
The table below details the allocation of income (loss) in each of the quarters
for the nine months ended September 30, 2002:
Managing Special Class A Class B Treasury
Trustee Beneficiary Beneficiaries Beneficiaries Interests Total
---------- ------------- --------------- --------------- ----------- -----------
Participants' capital at
December 31, 2001 $735 $6,066 $8,556,689 $15,824 $(791,375) $7,787,939
Net income 7,993 65,942 553,348 172,016 - 799,299
---------- ------------- --------------- --------------- ----------- -----------
Participants' capital at
March 31, 2002 8,728 72,008 9,110,037 187,840 (791,375) 8,587,238
Net loss (16,951) (72,008) (545,507) (187,840) - (822,306)
---------- ------------- --------------- --------------- ----------- -----------
Participants' capital at
June 30, 2002 (8,223) - 8,564,530 - (791,375) 7,764,932
Net loss (6,481) - (641,597) - - (648,078)
---------- ------------- --------------- --------------- ----------- -----------
Participants' capital at
September 30, 2002 $(14,704) $- $7,922,933 $- $(791,375) $7,116,854
========== ============= =============== =============== =========== ===========
NOTE 2 - REVENUE RECOGNITION
- --------------------------------
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 being earned 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 AFG ASIT
Corporation, the managing trustee of the Trust (the "Managing Trustee") and the
Trust's advisor would seek to sell the then-remaining equipment assets either to
the lessee or to a third party, taking into consideration the amount of future
noncancellable rental payments associated with the attendant lease agreements.
Future minimum rents of $371,601 are due as follows:
For the year ending September 30, 2003 $141,066
2004 138,391
2005 92,144
--------
.. Total $371,601
========
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Trust at September 30,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from September 30, 2002 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost
- --------------------------------------------- ----------- ------------
Aircraft 33 $ 1,239,741
Computer and peripherals 0 1,026,842
Materials handling 0-3 603,348
Trailers/intermodal containers 0 56,976
Manufacturing 0 41,694
------------
Total equipment cost 2,968,601
Accumulated depreciation (2,594,357)
------------
Equipment, net of accumulated depreciation $ 374,244
============
Equipment with an approximate original cost of $2,120,000 is proportionately
owned with other affiliated entities.
The aircraft and related lease payment streams were used to secure the Trust's
loan with a third party lender. The preceding summary of equipment includes
leveraged equipment having an original cost of approximately $1,240,000 and a
net book value of approximately $374,000 at September 30, 2002.
At September 30, 2002, the cost of fully depreciated equipment held for sale or
re-lease was approximately $1,270,000. 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. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" which was issued in August
2001. SFAS No. 144 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 nine months ended September 30, 2002, the Trust recorded a write-down of
equipment, representing an impairment to the carrying value of the Trust's
interest in a McDonnell Douglas MD-87 aircraft. The resulting charge of
$483,648 was based on a comparison of estimated fair value and carrying value of
the Trust's interest in the aircraft. The estimate of the fair value was based
on a current offer to purchase the aircraft and the assessment by the Trust's
management of prevailing market conditions for similar aircraft. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors influence market demand and market values for passenger jet
aircraft. The events of September 11, 2001, along with a recession in the
United States have continued to adversely affect the market demand for both new
and used commercial aircraft.
NOTE 4 - INTEREST IN EFG KIRKWOOD LLC
- --------------------------------------------
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and an affiliated corporation, Semele Group Inc. ("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 20% of EFG Kirkwood's Class A membership interests.
On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in
Mountain Springs Resorts LLC ("Mountain Springs"). Mountain Springs, through a
wholly owned subsidiary, owns 80% of the common membership interests and 100% of
the Class B Preferred membership interests in an entity that owns the Purgatory
Ski Resort ("Purgatory") in Durango, Colorado.
The Trust's ownership interest in EFG Kirkwood had an original cost of
$1,997,076; including a 1% acquisition fee of $19,773 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 $400,166 and $22,702 for the three and nine months
ended September 30, 2002, respectively, compared to a loss of $387,303 and
income of $106,316, respectively, for the same periods in 2001,representing its
pro-rata share of the net income (loss) of EFG Kirkwood. The operating results
of EFG Kirkwood for the nine months ended September 30, 2002 included additional
equity income of $106,700 related to the difference between the purchase price
and the fair value of EFG Kirkwood's investment in Mountain Resort. No
distributions were received from EFG Kirkwood in the three and nine months ended
September 30, 2002
The table below provides comparative summarized income statement data for
Mountain Resort and the Purgatory Ski Resort for the three and nine months ended
September 30, 2002 and 2001. The operating companies have different fiscal year
end dates than the Trust. Therefore, the operating results shown below have
been conformed to the three and nine months ended September 30, 2002 and 2001.
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Mountain Resort
- ----------------------
Total revenues $ 2,081,696 $ 1,843,196 $ 22,557,778 $ 22,412,384
Total expenses (4,583,163) (4,395,043) (21,147,362) (21,793,819)
--------------- --------------- --------------- ---------------
Net income (loss) $ (2,501,467) $ (2,551,847) $ 1,410,416 $ 618,565
--------------- --------------- --------------- ---------------
Purgatory Ski Resort
- ----------------------
Total revenues $ 1,166,268 $ 868,486 $ 11,048,152 $ 12,014,674
Total expenses 3,271,373 2,966,166 12,555,719 11,542,289
--------------- --------------- --------------- ---------------
Net income (loss) $ (2,105,105) $ (2,097,680) $ (1,507,567) $ 472,385
--------------- --------------- --------------- ---------------
NOTE 5 - INTEREST IN MILPI HOLDINGS, LLC
- -----------------------------------------------
In December 2000, the Trusts formed MILPI Holdings, LLC ("MILPI"), which formed
MILPI Acquisition Corp. ("MILPI Acquisition), a wholly owned subsidiary of
MILPI. The Trusts collectively paid $1.2 million for their membership interest
in MILPI ($240,000 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. The Trust had a 20% membership interest in MILPI
prior to MILPI's acquisition of the remaining 17% of PLM's outstanding common
stock in February 2002, as described below. 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. Since the Trust and another of the Trusts have determined to liquidate
their assets, the two other trusts provided the funds necessary to acquire the
remaining 17% of PLM's outstanding common stock.
At September 30, 2002, the Trust has a 16.67% membership interest in MILPI
having an original cost of $4,437,644. The cost of the Trust's interest in MILPI
reflects MILPI's cost of acquiring the common stock of PLM, including the amount
paid for the shares tendered of $4,355,145, capitalized transaction costs of
$38,948 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of
$43,551. The Trust capitalized these transaction costs, of which $16,595 was
amortized during the nine months ended September 30, 2001. Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") was effective for the Trust as of January 1, 2002 and requires
the discontinuance of goodwill amortization as of January 1, 2002. SFAS No. 142
also requires the Trust to complete a transitional goodwill impairment test
within six months from January 1, 2002, the date of adoption. The Trust
completed the goodwill impairment analysis during the quarter ended September
30, 2002. There was no impact on the Trust's financial statements as a result
of this analysis.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr.
Coyne, who are directors and officers of the Trust, respectively, are also
officers and directors of, and own significant stock in Semele. In addition,
Mr. Engle and Mr. Coyne are officers and directors of MILPI.
The Trust's ownership interest in MILPI is accounted for on the equity method
and the Trust recorded income $17,630 and $264,938, respectively, during the
three and nine months ended September 30, 2002, compared to income of $278,974
and $343,714, respectively, for the same periods in 2001, which represented its
pro-rata share of the net income of MILPI. On March 12, 2002, PLM declared and
paid a cash dividend to MILPI of approximately $2.7 million. MILPI then
declared and paid a cash dividend of approximately $2.7 million, of which the
Trust's share was $444,311.
The table below provides summarized income statement data for MILPI for the
three and nine months ended September 30, 2002 and 2001. As discussed above,
approximately 83% of PLM's common stock was acquired in February 2001 with the
remaining interest acquired in February 2002.
.. Three Months Three Months Nine Months Nine Months
.. Ended Ended Ended Ended
.. September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------- ------------------- ------------------- -------------------
Total revenues $ 978,111 $ 3,600,074 $ 4,356,689 $ 9,212,864
Total costs and expenses 588,073 1,442,123 1,956,162 4,751,908
Provision for taxes 286,324 882,565 935,913 1,304,000
------------------- ------------------- ------------------- -------------------
Net income $ 103,714 $ 1,275,386 $ 1,464,614 $ 3,156,956
=================== =================== =================== ===================
NOTE 6 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
Various operating expenses incurred by the Trust are paid by Equis Financial
Group ("EFG") on behalf of the Trust and EFG is reimbursed at its actual cost
for such expenditures. Fees and other costs incurred during the nine month
periods ended September 30, 2002 and 2001, which were paid or accrued by the
Trust to EFG or its affiliates, are as follows:
2002 2001
-------- --------
Acquisition fees $ - $ 43,551
Management fees 58,508 59,644
Administrative charges 158,517 78,120
Reimbursable operating expenses
due to third parties - 554,027
-------- --------
Total $217,025 $735,342
======== ========
All rents and proceeds from the sale of equipment are paid directly to either
EFG or to a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Trust. At September
30, 2002, the Trust was owed $2,818 by EFG for such funds and the interest
thereon. These funds were remitted to the Trust in October 2002.
NOTE 7 - NOTES PAYABLE
- --------------------------
Notes payable at September 30, 2002 consisted of a 7.03% fixed interest rate
installment note of $336,772 payable to an institutional lender. The
installment note is non-recourse and is collateralized by the Trust's interest
in an aircraft leased to Aerovias de Mexico, S.A. de C.V. and the assignment of
the related lease payments. The Trust makes monthly debt and interest payments
and the debt will be fully amortized at the expiration of the related lease term
in June 2005.
The annual maturities of the note are as follows:
For the year ending September 30, 2003 $118,087
2004 126,680
2005 92,005
-------
Total $336,772
========
NOTE 8 - CONTINGENCIES
- -------------------------
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interest in EFG Kirkwood. The Trust does not intend to engage in investment
activities in a manner or to an extent that would require the Trust to register
as an investment company under the Act. However, it is possible that the Trust
unintentionally may have engaged, or may engage in an activity or activities
that may be construed to fall within the scope of the Act. If the Trust were
determined to be an investment company, its business would be adversely
affected. The Managing Trustee has been engaged in discussions with the staff of
the Securities and Exchange Commission ("SEC") regarding whether or not the
Trust may be an inadvertent investment company by virtue of its recent
acquisition activities. The staff has informed the Trust that it believes that
it may be an unregistered investment company within the meaning of the Act.
Although the Trust, after consulting with counsel, does not believe that it is
an unregistered investment company, the Trust has agreed to liquidate its assets
in order to resolve the matter with the staff at the SEC. Accordingly, as of
December 6, 2001, the Managing Trustee of the Trust resolved to cause the Trust
to dispose of its assets prior to December 31, 2003. Upon consummation of the
sale of its assets, the Trust will be dissolved and the proceeds thereof will be
applied and distributed in accordance with the terms of the Trust Agreement.
NOTE 9 - OPERATING SEGMENTS
- -------------------------------
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 portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"), which owns 100% of PLM International,
Inc., ("PLM") an equipment leasing and asset management company. From February
2001 to February 6, 2002, MILPI, through a wholly owned subsidiary, owned
approximately 83% of PLM. Effective February 7, 2002, MILPI Acquisition was
merged into PLM and MIPLI owns 100% of PLM. The Real Estate segment includes
the ownership, management and development of commercial properties, recreational
properties, condominiums, interval ownership units, townhomes, single family
homes and land sales through the Trust's ownership interests in EFG Kirkwood,
LLC.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
Segment information for the three and nine months ended September 30, 2002 and
2001 is summarized below.
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
--------------- -------------- ---------- ----------
Total Revenues (1):
Equipment leasing $ 70,720 $ 144,195 $ 219,618 $ 580,414
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 70,720 $ 144,195 $ 219,618 $ 580,414
=============== ============== ========== ==========
Operating Expenses, Management
Fees and Other Expenses
Equipment leasing $ 309,491 $ 196,127 $ 567,478 $ 648,107
Real estate 5,235 16,212 15,534 43,684
--------------- -------------- ---------- ----------
Total $ 314,726 $ 212,339 $ 583,012 $ 691,791
=============== ============== ========== ==========
Interest Expense:
Equipment leasing $ 6,283 $ 8,482 $ 20,518 $ 19,803
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 6,283 $ 8,482 $ 20,518 $ 19,803
=============== ============== ========== ==========
Depreciation, Write-down of
Equipment
and Amortization Expense:
Equipment leasing $ 15,253 $ 23,051 $ 529,409 $ 82,476
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 15,253 $ 23,051 $ 529,409 $ 82,476
=============== ============== ========== ==========
Equity Interests:
Equipment leasing $ 17,630 $ 278,974 $ 264,938 $ 343,714
Real estate (400,166) (387,303) (22,702) 106,316
--------------- -------------- ---------- ----------
Total $ (382,536) $ (108,329) $ 242,236 $ 450,030
=============== ============== ========== ==========
Net Income (Loss): $ (648,078) $ (208,006) $(671,085) $ 236,374
=============== ============== ========== ==========
Capital Expenditures:
Equipment leasing $ - $ - $ - $4,158,696
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ - $ - $ - $4,158,696
=============== ============== ========== ==========
.. As of As of
.. September 30, December 31,
.. 2002 2001
Assets:
Equipment leasing $ 6,210,883 $ 6,938,588
Real estate 1,478,666 1,501,368
--------------- --------------
Total $ 7,689,549 $ 8,439,956
=============== ==============
(1) Includes equipment leasing revenue of $68,158 and $207,999, respectively,
for the three and nine months ended September 30, 2002, compared to $123,472 and
$407,245, respectively, for the same periods in 2001.
Three and Nine Months Ended September 30, 2002 Compared to the Three and Nine
- --------------------------------------------------------------------------------
Months Ended September 30, 2001:
- ------------------------------------
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the three and nine month periods ended September 30, 2002, the Trust
recognized lease revenue of $68,158 and $207,999, respectively, compared to
$123,472 and $407,245, respectively, for the same periods in 2001. The decrease
in lease revenue from 2001 to 2002 resulted primarily from a $74,424 early lease
termination fee received during the nine months ended September 30, 2001(a
similar fee was not earned in 2002) and approximately $125,000 decrease in
revenues resulting from the sale of equipment.
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.
Interest income for the three and nine month periods ended September 30, 2002
was $2,562 and $11,219, respectively, compared to $10,267 and $64,400,
respectively, for the same periods in 2001. Generally interest income is
generated from the temporary investment of rental receipts and equipment sales
proceeds in short-term instruments and decreased for the three and nine months
ended September 30, 2002 in comparison to the same periods in 2001 due to a
decrease in cash balances in 2002.
During the nine months ended September 30, 2002, the Trust sold fully
depreciated equipment to existing lessees and third parties. These sales
resulted in a gain of $400. No equipment was sold in the three months ended
September 30, 2002. During the three and nine months ended September 30, 2001,
the Trust sold equipment having a net book value of $739 and $68,021,
respectively to existing lessees and third parties. These sales resulted in
gains of $5,382 and $75,620, respectively.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and several third party entities, as lessor. During the year ended
December 31, 2001, the requirements of the guarantee agreement were met, the
Trust received payment for all outstanding amounts due thereunder and the Trust
has no further obligations under the guarantee agreement. During the nine
months ended September 30, 2001, the Trust recognized income of $29,571 related
to the guarantee fee. The guarantee fee is reflected as Other Income on the
accompanying Statement of Operations.
Depreciation and amortization expense was $15,253 and $45,761, respectively, for
the three and nine months ended September 30, 2002 compared to $23,051 and
$82,476, respectively, for the same periods of 2001. Depreciation and
amortization expense decreased due to asset dispositions. During the three
months ended June 30, 2002, the Trust also recorded a write-down of equipment,
representing an impairment to the carrying value of the Trust's interest in a
McDonnell Douglas MD-87 aircraft. The resulting charge of $483,648 was based on
a comparison of estimated fair value and carrying value of the Trust's interest
in the aircraft. The estimate of the fair value was based on a current offer to
purchase the aircraft and the assessment by the management of the Trusts of
prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
events of September 11, 2001, along with a recession in the United States have
continued to adversely affect the market demand for both new and used commercial
aircraft.
Interest expense was $6,283 and $20,518 for the three and nine months ended
September 30, 2002, respectively, compared to $8,482 and $19,803, respectively,
for the same periods of 2001. The decrease in interest expense in 2002
compared to 2001 resulted from the refinancing of debt in June 2001 and debt
repayments.
Management fees related to equipment leasing were $14,384 and $42,974,
respectively, for the three and nine months ended September 30, 2002 compared to
$1,771 and $15,960, respectively, for same periods in 2001. Management fees
related to equipment 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. Management fees related to the Trust's
interest in MILPI are based on 1% of the cost of such interest. Management fees
related to equipment leasing increased in 2002 primarily due to an increase in
the carrying value of the Trust's interest in MILPI.
Operating expenses were $295,107 and $524,504, respectively, for the three and
nine month periods ended September 30, 2002, compared to $194,356 and $632,147,
respectively, for the same periods in 2001. In the nine months ended September
30, 2002 and 2001, operating expenses included approximately $164,000 and
$113,000, respectively, for ongoing legal matters. Operating expenses incurred
during the nine months ended September 30, 2001 also included approximately
$66,000 of costs reimbursed to EFG as a result of the successful acquisition of
PLM common stock by MILPI Acquisition and approximately $151,000 of costs
related to aircraft maintenance and the re-lease of an aircraft in June 2001.
In conjunction with the acquisition of the PLM common stock, EFG became entitled
to recover from the Trust certain out of pocket expenses which it had previously
incurred. Other operating expenses consist primarily of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses.
During the three and nine months ended September 30, 2002, the Trust recorded
income of $17,630 and $264,938, respectively, compared to income of $278,974 and
$343,714, respectively, for the same periods in 2001, representing the Trust's
share of net income of MILPI recorded under the equity method of accounting.
See below for a discussion of the operating results of MILPI during the
respective periods. The Trust's income from MILPI results from MILPI's
ownership of PLM common stock acquired in February 2001. PLM is an equipment
leasing and asset management company. The Trust recorded $7,484 and $16,595,
respectively, of amortization expense for the three and nine months ended
September 30, 2001, which related to the goodwill recorded at the time of the
acquisition of the PLM common stock by MILPI Acquisition. Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), was effective for the Trust as of January 1, 2002 and requires
the discontinuance of goodwill amortization as of January 1, 2002. SFAS No. 142
also requires the Trust to complete a transitional goodwill impairment test
within six months from January 1, 2002, the date of adoption. The Trust
completed the goodwill impairment analysis during the quarter ended September
30, 2002. There was no impact on the Trust's financial statements as a result
of this analysis.
MILPI Operating Results
- -------------------------
During the three and nine months ended September 30, 2002, MILPI recognized
revenues of approximately $978,000 and $4,357,000, respectively, compared to
approximately $3,600,000 and $9,213,000, respectively, for the same periods in
2001. Revenues for the three and nine months ended September 30, 2002 are
comprised primarily of management fees of approximately $881,000 and $3,619,000,
respectively. Revenues for the three and nine months ended September 30, 2001
are comprised primarily of management fees of approximately $3,222,000 and
$6,394,000, respectivelyThe decrease in management fees of MILPI from 2002 to
2001 is due to the disposition of equipment managed by MILPI. Acquisition and
lease negotiation fees decreased in 2002 by $2,031,000 due to less equipment
being placed in PLM managed programs.
During the three and nine months ended September 30, 2002, MILPI incurred total
costs and expenses of approximately $588,000 and $1,956,000, respectively,
compared to $1,442,000 and $4,752,000, respectively, for the same periods in
2001. Operating expenses for the three months ended September 30, 2002 are
comprised of general and administrative expenses of approximately $587,000 and
depreciation and amortization expense of approximately $1,000. For the nine
months ended September 30, 2002, operating expenses are comprised of general and
administrative expenses of approximately $1,856,000 and depreciation and
amortization expense of approximately $100,000. Operating expenses for the three
months ended September 30, 2001 are comprised of general and administrative
expenses of approximately $1,337,000 and depreciation and amortization expense
of approximately $105,000. For the nine months ended September 30, 2001,
operating expenses are comprised primarily of general and administrative
expenses of approximately $4,233,000 and depreciation and amortization expense
of approximately $519,000. The $2,367,000 decrease in general and administrative
expenses in the nine months ended September 30, 2002 compared to the same period
of 2001 is primarily due to the relocation and consolidation of the corporate
service functions of MILPI during May 2001. The $419,000 decrease in
depreciation and amortization expense during the nine months ended September 30,
2002 compared to 2001 is the result of the sale of equipment owned by MILPI
during the second half of 2001.
During the three and nine months ended September 30, 2002, MILPI incurred income
tax expense of approximately $286,000 and $936,000, respectively, compared to
approximately $883,000 and $1,304,000 for the same periods in 2001.
Real Estate
- ------------
Management fees for non-equipment assets were $5,235 and $15,534, respectively,
for the three and nine months ended September 30, 2002 compared to $16,212 and
$43,684, respectively, for the same periods in 2001. Management fees for
non-equipment assets, excluding cash, are 1% of such assets under management.
Management fees decreased for the three and nine months ended September 30, 2002
compared to the same period in 2001 due to the decrease in the carrying value of
the assets.
The Trust owns 20% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and an affiliated
corporation, Semele Group Inc. ("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.
For the three and nine months ended September 30, 2002, the Trust recorded a
loss of $400,166 and $22,702, respectively, compared to a loss of $387,303 and
income of $106,316, respectively, for the same periods in 2001, from its
ownership interest in EFG Kirkwood. This income and loss represents the Trust's
share of the net income (loss) of EFG Kirkwood recorded under the equity method
of accounting. Due to the seasonal nature of EFG Kirkwood's operations, the
financial results of the three months and nine months ended September 30, 2002
and 2001 are not indicative of future periods. The three months ended March 31
of each year include the periods of peak income activity for the resorts. See
below for a discussion of the operating results of the resorts.
Mountain Resort Operating Results
- ------------------------------------
Mountain Resort's primary operating asset is Kirkwood Mountain Resort, 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 three and nine months ended September 30, 2002, Mountain Resort
recorded total revenues of approximately $2,082,000 and $22,558,000,
respectively, compared to revenues of approximately $1,844,000 and $22,412,000
for the same periods in 2001. The increase in total revenues from 2001 to 2002
for the three and nine month periods ended September 30, 2002 compared to 2001
of approximately $239,000 and $145,000, respectively, is the result of an
increase in ski-related revenues offset by a decrease in residential-related and
other operations revenues. Ski-related revenues increased approximately
$2,509,000 in the nine months ended September 30, 2002 compared to the same
period of 2001. The increase in ski-related revenues resulted from improved
weather conditions during the winter season, which attracted more skiers.
Residential-related and other operations revenues decreased approximately
$2,364,000 for the nine months ended 2002 as compared to 2001. The decrease in
residential-related and other operations revenues was primarily attributable to
a reduction in the number of condominium sales during 2002 compared to 2001.
During the three and nine months ended September 30, 2002, Mountain Resort
recorded total expenses of approximately $4,583,000 and $21,147,000
respectively, compared to expenses of approximately $4,395,000 and $21,794,000,
respectively for the same periods of 2001. The decrease in total expenses of
$647,000 for the nine months ended September 30, 2002 compared to the same
periods in 2001 is the result of a decrease in residential-related and other
non-operating expenses largely offset by an increase in ski-related expenses.
Ski-related expenses increased approximately $1,751,000 as a result of the
increase in ski-related revenues, as discussed above. Residential-related and
other operations expenses decreased approximately $2,398,000 primarily as a
result of a decrease in cost of sales from condominium units sold in the nine
months ended September 30, 2002 as compared to the same period in 2001, as also
discussed above.
Mountain Springs Operating Results
- -------------------------------------
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 located near Durango, Colorado. Purgatory receives the
majority of its revenues from winter ski operations, primarily ski, lodging,
retail and food and beverage services, with the remainder of revenues generated
from summer outdoor activities, such as alpine sliding and mountain biking.
During the three and nine months ended September 30, 2002, Purgatory recorded
total revenues of approximately $1,166,000 and $11,048,000, respectively,
compared to revenues of approximately $868,000 and $12,015,000 for the same
periods of 2001. Revenues increased by $298,000 for the three months ended
September 30, 2002 as compared to the same period in 2001 due to additional
summer programs offered at the resort. Revenue decreased by $967,000 for the
nine months ended September 30, 2002 as compared to the same period in 2001 due
to unfavorable weather conditions during the winter season, which attracted
fewer skiers.
Total expenses were approximately $3,271,000 and $12,556,000 for the three and
nine months ended September 30, 2002, respectively, compared to expenses of
approximately $2,966,000 and $11,542,000 for the same periods in 2001. The
increase in total expenses for the three and nine months ended September 30,
2002 compared to the same periods in 2001 of approximately $305,000 and
$1,014,000 is primarily the result of costs incurred related to increased
airline subsidies, which are used to attract visitors to the resort.
NOTE 10 - SUBSEQUENT EVENT
- ------------------------------
In October 2002, an existing member and an unrelated third party contributed
approximately $2,500,000 to Mountain Springs (See note 8). As a result of the
capital contribution, EFG Kirkwood's membership interest in Mountain Springs
decreased from 50% to 33%. Proceeds from the capital contribution were used to
exercise an existing option to purchase 51% of Durango Mountain Land Company,
LLC, a real estate development company owning land in adjacent to Purgatory.
- ------
AFG INVESTMENT TRUST B
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Certain statements in this quarterly report of AFG Investment Trust B (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. The
cautionary statements made in the Form 10-Q should be read as being applicable
to all related forward-looking statements wherever they appear in this Form
10-Q.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interest in EFG Kirkwood LLC ("EFG Kirkwood"). The Trust does not intend to
engage in investment activities in a manner or to an extent that would require
the Trust to register as an investment company under the Act. However, it is
possible that the Trust unintentionally may have engaged, or may engage in an
activity or activities that may be construed to fall within the scope of the
Act. If the Trust was determined to be an investment company, its business would
be adversely affected. The Managing Trustee has been engaged in discussions with
the staff of the Securities and Exchange Commission ("SEC") regarding whether or
not the Trust may be an inadvertent investment company by virtue of its recent
acquisition activities. The staff has informed the Trust that it believes that
it may be an unregistered investment company within the meaning of the Act.
Although the Trust, after consulting with counsel, does not believe that it is
an unregistered investment company, the Trust has agreed to liquidate its assets
in order to resolve the matter with the staff at the SEC. Accordingly, as of
December 6, 2001, the Managing Trustee of the Trust resolved to cause the Trust
to dispose of its assets prior to December 31, 2003. Upon consummation of the
sale of its assets, the Trust will be dissolved and the proceeds thereof will be
applied and distributed in accordance with the terms of the Trust Agreement.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Managing Trustee to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the Managing Trustee reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, impairment of long-lived assets and contingencies and litigation.
These estimates are based on the Managing Trustee's historical experience and on
various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. The Managing Trustee believes, however, that the estimates,
including those for the above-listed items, are reasonable.
The Managing Trustee believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
Revenue Recognition: Rents are payable to the Trust monthly or quarterly and no
- --------------------
significant amounts are calculated on factors other than the passage of time.
The Trust's leases are accounted for as operating leases and are noncancellable.
Rents received prior to being earned are deferred.
Asset Lives and Depreciation Method: The Trust's business includes the purchase
- -------------------------------------
and subsequent lease of long-lived equipment. The Trust's depreciation policy
is intended to allocate the cost of equipment over the period during which it
produces economic benefit. The principal period of economic benefit is
considered to correspond to each asset's primary lease term, which generally
represents the period of greatest revenue potential for each asset.
Accordingly, to the extent that an asset is held on primary lease term, the
Trust depreciates the difference between (i) the cost of the asset and (ii) the
estimated residual value of the asset on a straight-line basis over such term.
For purposes of this policy, estimated residual values represent estimates of
equipment values at the date of the primary lease expiration. To the extent
that an asset is held beyond its primary lease term, the Trust continues to
depreciate the remaining net book value of the asset on a straight-line basis
over the asset's remaining economic life.
Impairment of Long-Lived Assets: In accordance with Statement of Financial
- -----------------------------------
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
- ----
Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company evaluates
- ----
long-lived assets for impairment whenever events or circumstances indicate that
- ----
the carrying bases of such assets may not be recoverable. Losses for impairment
are recognized when the estimated undiscounted cash flows estimated to be
realized from a long-lived asset are determined to be less than the carrying
basis of the asset. The determination of net realizable value for a given
investment requires several considerations, including but not limited to, income
expected to be earned from the asset, estimated sales proceeds, and holding
costs excluding interest.
Contingencies and Litigation: The Trust is subject to legal proceedings
- -------------------------------
involving ordinary and routine claims related to its business. Estimates for
- -------
losses from litigation are made after consultation with outside counsel. If
- --
estimates of potential losses increase or the related facts and circumstances
- --
change in the future, the Trust may be required to adjust amounts recorded in
- --
its financial statements.
- --
Segment Reporting
- ------------------
The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real
Estate Ownership, Development & Management. The Equipment Leasing segment
includes the management of the Trust's equipment portfolio and the Trust's
interest in MILPI Holdings, LLC ("MILPI"), which owns 100% of PLM International,
Inc., ("PLM") an equipment leasing and asset management company. From February
2001 to February 6, 2002, MILPI, through a wholly owned subsidiary, owned
approximately 83% of PLM. Effective February 7, 2002, MILPI Acquisition was
merged into PLM and MIPLI owns 100% of PLM. The Real Estate segment includes
the ownership, management and development of commercial properties, recreational
properties, condominiums, interval ownership units, townhomes, single family
homes and land sales through the Trust's ownership interests in EFG Kirkwood,
LLC.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
Segment information for the three and nine months ended September 30, 2002 and
2001 is summarized below.
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
--------------- -------------- ---------- ----------
Total Revenues (1):
Equipment leasing $ 70,720 $ 144,195 $ 219,618 $ 580,414
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 70,720 $ 144,195 $ 219,618 $ 580,414
=============== ============== ========== ==========
Operating Expenses, Management
Fees and Other Expenses
Equipment leasing $ 309,491 $ 196,127 $ 567,478 $ 648,107
Real estate 5,235 16,212 15,534 43,684
--------------- -------------- ---------- ----------
Total $ 314,726 $ 212,339 $ 583,012 $ 691,791
=============== ============== ========== ==========
Interest Expense:
Equipment leasing $ 6,283 $ 8,482 $ 20,518 $ 19,803
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 6,283 $ 8,482 $ 20,518 $ 19,803
=============== ============== ========== ==========
Depreciation, Write-down of
Equipment
and Amortization Expense:
Equipment leasing $ 15,253 $ 23,051 $ 529,409 $ 82,476
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ 15,253 $ 23,051 $ 529,409 $ 82,476
=============== ============== ========== ==========
Equity Interests:
Equipment leasing $ 17,630 $ 278,974 $ 264,938 $ 343,714
Real estate (400,166) (387,303) (22,702) 106,316
--------------- -------------- ---------- ----------
Total $ (382,536) $ (108,329) $ 242,236 $ 450,030
=============== ============== ========== ==========
Net Income (Loss): $ (648,078) $ (208,006) $(671,085) $ 236,374
=============== ============== ========== ==========
Capital Expenditures:
Equipment leasing $ - $ - $ - $4,158,696
Real estate - - - -
--------------- -------------- ---------- ----------
Total $ - $ - $ - $4,158,696
=============== ============== ========== ==========
.. As of As of
.. September 30, December 31,
.. 2002 2001
Assets:
Equipment leasing $ 6,210,883 $ 6,938,588
Real estate 1,478,666 1,501,368
--------------- --------------
Total $ 7,689,549 $ 8,439,956
=============== ==============
(1) Includes equipment leasing revenue of $68,158 and $207,999, respectively,
for the three and nine months ended September 30, 2002, compared to $123,472 and
$407,245, respectively, for the same periods in 2001.
Three and Nine Months Ended September 30, 2002 Compared to the Three and Nine
- --------------------------------------------------------------------------------
Months Ended September 30, 2001:
- ------------------------------------
Results of Operations
- -----------------------
Equipment Leasing
- ------------------
For the three and nine month periods ended September 30, 2002, the Trust
recognized lease revenue of $68,158 and $207,999, respectively, compared to
$123,472 and $407,245, respectively, for the same periods in 2001. The decrease
in lease revenue from 2001 to 2002 resulted primarily from a $74,424 early lease
termination fee received during the nine months ended September 30, 2001(a
similar fee was not earned in 2002) and approximately $125,000 decrease in
revenues resulting from the sale of equipment.
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.
Interest income for the three and nine month periods ended September 30, 2002
was $2,562 and $11,219, respectively, compared to $10,267 and $64,400,
respectively, for the same periods in 2001. Generally interest income is
generated from the temporary investment of rental receipts and equipment sales
proceeds in short-term instruments and decreased for the three and nine months
ended September 30, 2002 in comparison to the same periods in 2001 due to a
decrease in cash balances in 2002.
During the nine months ended September 30, 2002, the Trust sold fully
depreciated equipment to existing lessees and third parties. These sales
resulted in a gain of $400. No equipment was sold in the three months ended
September 30, 2002. During the three and nine months ended September 30, 2001,
the Trust sold equipment having a net book value of $739 and $68,021,
respectively to existing lessees and third parties. These sales resulted in
gains of $5,382 and $75,620, respectively.
On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and several third party entities, as lessor. During the year ended
December 31, 2001, the requirements of the guarantee agreement were met, the
Trust received payment for all outstanding amounts due thereunder and the Trust
has no further obligations under the guarantee agreement. During the nine
months ended September 30, 2001, the Trust recognized income of $29,571 related
to the guarantee fee. The guarantee fee is reflected as Other Income on the
accompanying Statement of Operations.
Depreciation and amortization expense was $15,253 and $45,761, respectively, for
the three and nine months ended September 30, 2002 compared to $23,051 and
$82,476, respectively, for the same periods of 2001. Depreciation and
amortization expense decreased due to asset dispositions. During the three
months ended June 30, 2002, the Trust also recorded a write-down of equipment,
representing an impairment to the carrying value of the Trust's interest in a
McDonnell Douglas MD-87 aircraft. The resulting charge of $483,648 was based on
a comparison of estimated fair value and carrying value of the Trust's interest
in the aircraft. The estimate of the fair value was based on a current offer to
purchase the aircraft and the assessment by the management of the Trusts of
prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
events of September 11, 2001, along with a recession in the United States have
continued to adversely affect the market demand for both new and used commercial
aircraft.
Interest expense was $6,283 and $20,518 for the three and nine months ended
September 30, 2002, respectively, compared to $8,482 and $19,803, respectively,
for the same periods of 2001. The decrease in interest expense in 2002
compared to 2001 resulted from the refinancing of debt in June 2001 and debt
repayments.
Management fees related to equipment leasing were $14,384 and $42,974,
respectively, for the three and nine months ended September 30, 2002 compared to
$1,771 and $15,960, respectively, for same periods in 2001. Management fees
related to equipment 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. Management fees related to the Trust's
interest in MILPI are based on 1% of the cost of such interest. Management fees
related to equipment leasing increased in 2002 primarily due to an increase in
the carrying value of the Trust's interest in MILPI.
Operating expenses were $295,107 and $524,504, respectively, for the three and
nine month periods ended September 30, 2002, compared to $194,356 and $632,147,
respectively, for the same periods in 2001. In the nine months ended September
30, 2002 and 2001, operating expenses included approximately $164,000 and
$113,000, respectively, for ongoing legal matters. Operating expenses incurred
during the nine months ended September 30, 2001 also included approximately
$66,000 of costs reimbursed to EFG as a result of the successful acquisition of
PLM common stock by MILPI Acquisition and approximately $151,000 of costs
related to aircraft maintenance and the re-lease of an aircraft in June 2001.
In conjunction with the acquisition of the PLM common stock, EFG became entitled
to recover from the Trust certain out of pocket expenses which it had previously
incurred. Other operating expenses consist primarily of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses.
During the three and nine months ended September 30, 2002, the Trust recorded
income of $17,630 and $264,938, respectively, compared to income of $278,974 and
$343,714, respectively, for the same periods in 2001, representing the Trust's
share of net income of MILPI recorded under the equity method of accounting.
See below for a discussion of the operating results of MILPI during the
respective periods. The Trust's income from MILPI results from MILPI's
ownership of PLM common stock acquired in February 2001. PLM is an equipment
leasing and asset management company. The Trust recorded $7,484 and $16,595,
respectively, of amortization expense for the three and nine months ended
September 30, 2001, which related to the goodwill recorded at the time of the
acquisition of the PLM common stock by MILPI Acquisition. Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), was effective for the Trust as of January 1, 2002 and requires
the discontinuance of goodwill amortization as of January 1, 2002. SFAS No. 142
also requires the Trust to complete a transitional goodwill impairment test
within six months from January 1, 2002, the date of adoption. The Trust
completed the goodwill impairment analysis during the quarter ended September
30, 2002. There was no impact on the Trust's financial statements as a result
of this analysis.
MILPI Operating Results
- -------------------------
During the three and nine months ended September 30, 2002, MILPI recognized
revenues of approximately $978,000 and $4,357,000, respectively, compared to
approximately $3,600,000 and $9,213,000, respectively, for the same periods in
2001. Revenues for the three and nine months ended September 30, 2002 are
comprised primarily of management fees of approximately $881,000 and $3,619,000,
respectively. Revenues for the three and nine months ended September 30, 2001
are comprised primarily of management fees of approximately $3,222,000 and
$6,394,000, respectivelyThe decrease in management fees of MILPI from 2002 to
2001 is due to the disposition of equipment managed by MILPI. Acquisition and
lease negotiation fees decreased in 2002 by $2,031,000 due to less equipment
being placed in PLM managed programs.
During the three and nine months ended September 30, 2002, MILPI incurred total
costs and expenses of approximately $588,000 and $1,956,000, respectively,
compared to $1,442,000 and $4,752,000, respectively, for the same periods in
2001. Operating expenses for the three months ended September 30, 2002 are
comprised of general and administrative expenses of approximately $587,000 and
depreciation and amortization expense of approximately $1,000. For the nine
months ended September 30, 2002, operating expenses are comprised of general and
administrative expenses of approximately $1,856,000 and depreciation and
amortization expense of approximately $100,000. Operating expenses for the three
months ended September 30, 2001 are comprised of general and administrative
expenses of approximately $1,337,000 and depreciation and amortization expense
of approximately $105,000. For the nine months ended September 30, 2001,
operating expenses are comprised primarily of general and administrative
expenses of approximately $4,233,000 and depreciation and amortization expense
of approximately $519,000. The $2,367,000 decrease in general and administrative
expenses in the nine months ended September 30, 2002 compared to the same period
of 2001 is primarily due to the relocation and consolidation of the corporate
service functions of MILPI during May 2001. The $419,000 decrease in
depreciation and amortization expense during the nine months ended September 30,
2002 compared to 2001 is the result of the sale of equipment owned by MILPI
during the second half of 2001.
During the three and nine months ended September 30, 2002, MILPI incurred income
tax expense of approximately $286,000 and $936,000, respectively, compared to
approximately $883,000 and $1,304,000 for the same periods in 2001.
Real Estate
- ------------
Management fees for non-equipment assets were $5,235 and $15,534, respectively,
for the three and nine months ended September 30, 2002 compared to $16,212 and
$43,684, respectively, for the same periods in 2001. Management fees for
non-equipment assets, excluding cash, are 1% of such assets under management.
Management fees decreased for the three and nine months ended September 30, 2002
compared to the same period in 2001 due to the decrease in the carrying value of
the assets.
The Trust owns 20% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and an affiliated
corporation, Semele Group Inc. ("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.
For the three and nine months ended September 30, 2002, the Trust recorded a
loss of $400,166 and $22,702, respectively, compared to a loss of $387,303 and
income of $106,316, respectively, for the same periods in 2001, from its
ownership interest in EFG Kirkwood. This income and loss represents the Trust's
share of the net income (loss) of EFG Kirkwood recorded under the equity method
of accounting. Due to the seasonal nature of EFG Kirkwood's operations, the
financial results of the three months and nine months ended September 30, 2002
and 2001 are not indicative of future periods. The three months ended March 31
of each year include the periods of peak income activity for the resorts. See
below for a discussion of the operating results of the resorts.
Mountain Resort Operating Results
- ------------------------------------
Mountain Resort's primary operating asset is Kirkwood Mountain Resort, 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 three and nine months ended September 30, 2002, Mountain Resort
recorded total revenues of approximately $2,082,000 and $22,558,000,
respectively, compared to revenues of approximately $1,844,000 and $22,412,000
for the same periods in 2001. The increase in total revenues from 2001 to 2002
for the three and nine month periods ended September 30, 2002 compared to 2001
of approximately $239,000 and $145,000, respectively, is the result of an
increase in ski-related revenues offset by a decrease in residential-related and
other operations revenues. Ski-related revenues increased approximately
$2,509,000 in the nine months ended September 30, 2002 compared to the same
period of 2001. The increase in ski-related revenues resulted from improved
weather conditions during the winter season, which attracted more skiers.
Residential-related and other operations revenues decreased approximately
$2,364,000 for the nine months ended 2002 as compared to 2001. The decrease in
residential-related and other operations revenues was primarily attributable to
a reduction in the number of condominium sales during 2002 compared to 2001.
During the three and nine months ended September 30, 2002, Mountain Resort
recorded total expenses of approximately $4,583,000 and $21,147,000
respectively, compared to expenses of approximately $4,395,000 and $21,794,000,
respectively for the same periods of 2001. The decrease in total expenses of
$647,000 for the nine months ended September 30, 2002 compared to the same
periods in 2001 is the result of a decrease in residential-related and other
non-operating expenses largely offset by an increase in ski-related expenses.
Ski-related expenses increased approximately $1,751,000 as a result of the
increase in ski-related revenues, as discussed above. Residential-related and
other operations expenses decreased approximately $2,398,000 primarily as a
result of a decrease in cost of sales from condominium units sold in the nine
months ended September 30, 2002 as compared to the same period in 2001, as also
discussed above.
Mountain Springs Operating Results
- -------------------------------------
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 located near Durango, Colorado. Purgatory receives the
majority of its revenues from winter ski operations, primarily ski, lodging,
retail and food and beverage services, with the remainder of revenues generated
from summer outdoor activities, such as alpine sliding and mountain biking.
During the three and nine months ended September 30, 2002, Purgatory recorded
total revenues of approximately $1,166,000 and $11,048,000, respectively,
compared to revenues of approximately $868,000 and $12,015,000 for the same
periods of 2001. Revenues increased by $298,000 for the three months ended
September 30, 2002 as compared to the same period in 2001 due to additional
summer programs offered at the resort. Revenue decreased by $967,000 for the
nine months ended September 30, 2002 as compared to the same period in 2001 due
to unfavorable weather conditions during the winter season, which attracted
fewer skiers.
Total expenses were approximately $3,271,000 and $12,556,000 for the three and
nine months ended September 30, 2002, respectively, compared to expenses of
approximately $2,966,000 and $11,542,000 for the same periods in 2001. The
increase in total expenses for the three and nine months ended September 30,
2002 compared to the same periods in 2001 of approximately $305,000 and
$1,014,000 is primarily the result of costs incurred related to increased
airline subsidies, which are used to attract visitors to the resort.
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 derive 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 used cash of $362,984 during the nine
months ended September 30, 2002.
The events of September 11, 2001, along with a recession in the United States,
have continued to adversely affect the 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.
Management of the Trust 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 some airlines. At September 30, 2002, the Trust had collected all
rents owed from aircraft lessees. The Trust is monitoring developments in the
airline industry and will continue to evaluate potential implications to the
Trust's financial position and future liquidity.
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 leases will be
maintained. The credit quality of an individual lease may deteriorate after the
lease is entered into. Collection risk could increase in the future,
particularly as the Trust remarkets its equipment and enters re-lease agreements
with different lessees. The Managing Trustee will continue to evaluate and
monitor the Trust's experience in collecting accounts receivable to determine
whether a future allowance for doubtful accounts may become appropriate.
At September 30, 2002, the Trust was due aggregate future minimum lease payments
of $371,601 from contractual lease agreements, a portion of which will be used
to amortize the principal balance of notes payable of $336,772. 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 Trust and three affiliated trusts (the "Trusts") formed
MILPI, which formed MILPI Acquisition, a wholly owned subsidiary of MILPI. The
Trusts collectively paid $1.2 million for their membership interest in MILPI
($240,000 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, 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. The Trust had a 20% membership interest in MILPI
prior to MILPI's acquisition of the remaining 17% of PLM's outstanding common
stock in February 2002, as described below. 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. Since the Trust and another of the Trusts have determined to liquidate
their assets, the two other Trusts provided the funds necessary to acquire the
remaining 17% of PLM's outstanding common stock.
Effective February 2002, the Trust has a 16.67% membership interest in MILPI
having an original cost of $4,437,644. The cost of the Trust's interest in MILPI
reflects MILPI's cost of acquiring the common stock of PLM, including the amount
paid for the shares tendered of $4,355,145, capitalized transaction costs of
$38,948 and a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of
$43,551.
On March 12, 2002, PLM declared and paid a cash dividend to MILPI of
approximately $2.7 million. MILPI then declared and paid a cash dividend of
approximately $2.7 million, of which the Trust's share was $444,311.
During the nine months ended September 30, 2002, the Trust realized net cash
proceeds from equipment disposals of $400. 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 Trust has an ownership interest in EFG Kirkwood. EFG Kirkwood is a joint
venture among the Trust, certain affiliated Trusts and Semele and is managed by
AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures, Mountain
Resort and Mountain Springs.
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development. Mountain Springs, through a wholly owned subsidiary,
owns a controlling interest in the Purgatory Ski resort in Durango, Colorado.
The Trust obtained long-term financing in connection with certain equipment
leases. The origination of such indebtedness and subsequent repayments of
principal are reported as components of financing activities on the accompanying
Statements of Cash Flow. At September 30, 2002 the Trust had one debt
obligation outstanding pertaining to its ownership interest in an aircraft
leased to Aerovias de Mexico, S.A. de C.V. The note is recourse only to the
Trust's interest in the aircraft and to the minimum rental payments to be
received during the debt amortization period. The Trust makes monthly debt and
interest payments and the debt will be fully amortized at the expiration of the
related lease term in June 2005.
No cash distributions have been declared or paid since January 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 when paid to the Participants generally 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 positive tax capital
account balance. No such requirement exists with respect to the Special
Beneficiary.
Outlook for the Future
- -------------------------
Pursuant to the Trust Agreement, the Trust is scheduled to be dissolved by
December 31, 2003. Upon consummation of the sale of its assets, the Trust will
be dissolved and the proceeds thereof will be applied and distributed in
accordance with the terms of the Trust Agreement. Reasonable reserves may be
withheld to pay any liabilities of the Trust.
The events of September 11, 2001, along with a recession in the United States,
have continued to adversely affect the market demand for both new and used
commercial aircraft and weakened the financial position of several airlines.
Management of the Trust believes that there is a significant oversupply of
commercial aircraft available and that this oversupply will continue for some
time. In addition, management expects that the resulting decline in air travel
will suppress market prices for used aircraft and could inhibit the viability of
some airlines. The Trust is monitoring developments in the airline industry and
will continue to evaluate potential implications to the Trust's financial
position and future liquidity.
The Trust's involvement in real estate development also introduces financial
risks, including the potential need to joint venture and/or borrow funds to
develop the real estate projects. While the Trust 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.
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 interests in 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. The events of September 11, 2001 have also continued to
adversely affect the travel industry, which has decreased the number of visitors
to the ski resorts.
Several other factors may affect the Trust's operating performance during the
remainder of 2002 and through the dissolution date including:
changes in the markets for the Trust's equipment,
changes in the regulatory environment in which that equipment operates, and
changes in the real estate markets in which the Trust's has ownership interests.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including the condition and type of equipment being
sold and its marketability at the time of sale. Changing market conditions,
industry trends, technological advances, and many other events can converge to
enhance or detract from asset values at any given time. EFG attempts to monitor
these changes in order to identify opportunities which may be advantageous to
the Trust and which will maximize total cash returns for each asset.
The ultimate economic return from the sale of the Trust's real estate interests
is dependent upon may factors, including, without limitation, the 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 Advisor, EFG, and the Managing Trustee will continue to monitor and
manage these events in order to maximize the residual value of the Trust's
equipment and the return from the Trust's real estate interests, 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.
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 the future, the nature of the Trust's operations and principal cash flows
will continue to shift from rental receipts to equipment and non-equipment sale
proceeds. As this occurs, the Trust's cash flows may become more volatile.
As of December 31, 2001, the Trust began to liquidate its portfolio of
equipment. Similarly, any non-equipment investments will be liquidated as the
Trust nears is scheduled dissolution date.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The Trust's financial statements include financial instruments that are exposed
to interest rate risks.
Approximately 50% of the Trust's lease revenues earned during the nine months
ended September 30, 2002 were from lessees located outside of the United States.
All of the Trust's leases require payment in United States (US) currency. If
the lessees' currency devalues against the US dollar, the lessees could
potentially encounter difficulty in making the US dollar denominated lease
payments.
Item 4. Controls and Procedures
- -----------------------------------
Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, the Trust's Principal Executive Officer and Chief Financial Officer have
concluded that the Trust's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Trust
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Trust's internal controls or in other factors that
could significantly affect those controls subsequent to the date of their
evaluation.
AFG INVESTMENT TRUST B
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
. Response:
Exhibit 99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Item 6(b). Reports on Form 8-K
Response: None
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFG Investment Trust B
By: AFG ASIT Corporation, a Massachusetts
corporation and the Managing Trustee of
the Registrant.
By: /s/ Richard K Brock
----------------------
Richard K Brock
Chief Financial Officer and Treasurer of AFG ASIT Corp.
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: November 14, 2002
CERTIFICATION:
I, Gary D. Engle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AFG Investment
Trust B;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Gary D. Engle
--------------------
Gary D. Engle
President of AFG ASIT Corporation,
the Managing Trustee of the Trust
(Principal Executive Officer)
November 14, 2002
- ------
CERTIFICATION:
I, Richard K Brock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AFG Investment
Trust B;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
f) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
g) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
h) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
i) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
j) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Richard K Brock
----------------------
Richard K Brock
Chief Financial Officer and Treasurer of AFG ASIT Corp.,
the Managing Trustee of the Trust
(Principal Financial and Accounting Officer)
November 14, 2002
Exhibit Index
99.1 Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes
- - Oxley Act
99.2 Certificate of Chief Financial Officer pursuant to Section 906 of Sarbanes
- - Oxley Act