EXHIBIT 13
AFG INVESTMENT TRUST C
ANNUAL REPORT TO THE PARTICIPANTS, DECEMBER 31, 2002
AFG Investment Trust C
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
.. Page
----
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 24
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants.. . 39
Report of Deloitte & Touche LLP, Independent Auditors. 40
Statements of Financial Position
at December 31, 2002 and 2001. . . . . . . . . . . . . 41
Statements of Operations
for the years ended December 31, 2002, 2001 and 2000 . 42
Statements of Changes in Participants' Capital
for the years ended December 31, 2002, 2001 and 2000 . 43
Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000 . 44
Notes to the Financial Statements. . . . . . . . . . . 45
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed. . . . . . . . 63
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings. . . . . . . . 64
Schedule of Equipment. . . . . . . . . . . . . . . . . 65
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements.
For each of the five years in the period ended December 31, 2002 (in thousands
of dollars, except per share amounts):
Summary of Operations 2002 2001 2000 1999 1998
- -------------------------------- -------- -------- ------- ------- -------
Lease revenue $ 5,682 $ 6,520 $ 7,734 $10,287 $15,201
Total revenue $ 5,521 $ 6,986 $10,785 $15,453 $19,154
Net income (loss) $(1,451) $(5,599) $ 2,050 $ 5,803 $ 4,999
Per Beneficiary Interest:
Net income (loss)
Class A Interests $ (0.83) $ (2.84) $ 0.66 $ 1.13 $ 1.17
Class B Interests $ - $ (0.10) $ 0.18 $ 0.75 $ 0.39
Cash distributions declared
Class A Interests $ - $ - $ - $ 4.56 $ 1.64
Class B Interests $ - $ - $ - $ 3.66 $ 2.10
Financial Position
- --------------------------------
Total assets $36,524 $42,172 $51,641 $71,091 $72,909
Total long-term obligations $18,151 $22,383 $26,221 $32,573 $35,073
Participants' capital $16,139 $17,590 $23,189 $21,159 $36,360
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001 AND FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2000
FORWARD-LOOKING INFORMATION
Certain statements in this annual report of the AFG Investment Trust C (the,
"Trust") that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to a variety of risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statements made herein. These factors
include, but are not limited to, the collection of the Trust's contracted rents,
the realization of residual proceeds for the Trust's equipment, the performance
of the Trust's non-equipment assets, and future economic conditions.
OVERVIEW
The Trust was organized in 1992 for the purpose of acquiring and leasing to
third parties a diversified portfolio of capital equipment. In 1998, the Trust
Agreement was modified to permit the Trust to invest in assets other than
equipment. Subsequently, the Trust has made certain non-equipment acquisitions.
In 1999, the Company purchased a minority interest in EFG/Kettle Valley
Development LLC "Kettle Valley" and EFG Kirkwood LLC ("EFG Kirkwood"). Kettle
Valley is a real estate development located in Canada. EFG Kirkwood is a
company created by the Trust and three affiliated trusts (collectively, the
"Trusts") that acquired a minority interest in two ski resorts: Mountain Resort
Holdings LLC and Mountain Springs Resort LLC. During 2002 and 2001, the Trusts
acquired PLM International Inc. and subsidiaries ("PLM"). PLM is an equipment
management company and operates in one business segment, the leasing of
transportation equipment and the creation of equipment-leasing solutions for
domestic and international customers. In 2002, the Trust and AFG Investment
Trust D ("Trust D") formed C & D IT LLC, a Delaware limited liability company,
as a 50%/50% owned joint venture that is co-managed by the Trust and Trust C
(the "C & D Joint Venture") to which each Trust contributed $1.0 million. C&D
IT LLC is a limited liability company that owns a minority interest in a real
estate development company located in Malibu, California. Pursuant to the Trust
Agreement, the Trust is scheduled to be dissolved by December 31, 2004.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interests in C&D IT LLC, EFG Kirkwood and Kettle Valley. The Trust does not
intend to engage in investment activities in a manner or to an extent that would
require the Trust to register as an investment company under the Act. However,
it is possible that the Trust unintentionally may have engaged, or may engage in
an activity or activities that may be construed to fall within the scope of the
Act. If the Trust were determined to be an investment company, its business
would be adversely affected. The Managing Trustee, AFG ASIT Corporation, has
engaged in discussions with the staff of the Securities and Exchange Commission
regarding whether or not the Trust may be an inadvertent investment company by
virtue of its recent acquisition activities. The Managing Trustee has consulted
counsel and believes that the Trust is not an investment company. The Act,
among other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business or interstate commerce. If
necessary, the Trust intends to avoid being deemed an investment company by
disposing of or acquiring certain assets that it might not otherwise dispose of
or acquire.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Managing Trustee to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the Managing Trustee reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, impairment of long-lived assets and contingencies. These
estimates are based on the Managing Trustee's historical experience and on
various other assumptions believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. The Managing Trustee believes, however, that the estimates,
including those for the above-listed items, are reasonable.
The Managing Trustee believes the following critical accounting policies are
subject to significant judgments and estimates used in the preparation of these
financial statements:
Revenue Recognition
- --------------------
Rents are payable to the Trust monthly and quarterly and no significant amounts
are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred.
Depreciation and Amortization
- -------------------------------
The Trust's depreciation policy is intended to allocate the cost of equipment
over the period during which it produces economic benefit. The principal period
of economic benefit is each asset's primary lease term, which term generally
represents the period of greatest revenue potential for each asset. Accordingly,
to the extent that an asset is held on primary lease term, the Trust depreciates
the difference between (i) the cost of the asset and (ii) the estimated residual
value of the asset on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of equipment values
at the date of the primary lease expiration. To the extent that an asset is
held beyond its primary lease term, the Trust continues to depreciate the
remaining net book value of the asset on a straight-line basis over the asset's
remaining economic life.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including he Trust's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. The Trust attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The Trust amortizes deferred financing cost over the life of the related debt.
The Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. As a result, the
discontinuance of goodwill and other intangible asset amortization was effective
upon adoption of SFAS No. 142. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The amount of the impairment is the difference between
the carrying amount and the fair value of the asset. The fair value of the
assets should be calculated using several valuation models which utilize the
expected future cash flows of the Trust.
Equity Ownership Investments
- ------------------------------
Equity securities that are not publicly traded are accounted for in accordance
with Accounting Principles Board ("APB") No. 18, "The Equity Method of
Accounting for Investments in Common Stock." If the Trust's ownership interest
in the investment enables the Trust to influence the operating financial
decisions of the investee, the investment is accounted for under the equity
method of accounting. Otherwise, the investment is accounted for under the cost
method of accounting. The equity method of accounting is discontinued when the
investment is reduced to zero and does not provide for additional losses unless
the Trust has guaranteed obligations of the investee or is otherwise committed
to provide further financial support to the investment.
Whenever circumstances indicate an impairment exists, the Trust evaluates the
fair value of the investment. The fair value of the equity investment is based
on current market prices, management's market knowledge and on a valuation
models which include expected future cash flows of the investment. If the fair
value of the investments is below the carrying value, a loss is recorded.
The Company defines control as the ability of an entity or person to direct the
policies and management that guide the ongoing activities of another entity so
as to increase its benefits and limits its losses from that other entity's
activities without the assistance of others.
Impairment of Long-Lived Assets
- ----------------------------------
The Trust accounts for impairment of long-lived assets in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
was issued in August 2001. The Trust adopted SFAS No. 144 on January 1, 2002.
In accordance with SFAS No. 144, the Trust evaluates long-lived assets for
impairment whenever events or circumstances indicate that the carrying bases of
such assets may not be recoverable. Whenever circumstances indicate that an
impairment may exist, the company evaluates future cash flows of the asset to
the carrying value. If projected undiscounted future cash flows are lower than
the carrying value of the asset, a loss is recorded. The loss recorded is equal
to the difference between the carrying amount and the fair value of the asset.
The fair value of the asset is determined based on a valuation model which
includes expected discounted future cash flows of the asset, current market
prices and management's market knowledge. The fair market value of long-lived
assets secured by non-recourse debt is determined based on a valuation model
which includes expected future cash flows and the recoverable value. The
recoverable value is determined based on management's decision to either sell,
re-lease or return the asset to the lender.
The Managing Trustee evaluates the net realizable value of significant equipment
assets, such as aircraft, individually. All other assets are evaluated
collectively by equipment type unless the Managing Trustee learns of specific
circumstances, such as a lessee default, technological obsolescence, or other
market developments, which could affect the net realizable value of particular
assets. Adjustments to reduce the net carrying value of equipment are recorded
in those instances where estimated net realizable value is considered to be less
than net carrying value and are reflected separately on the accompanying
Statement of Operations as write-down of equipment.
Contingencies and Litigation
- ------------------------------
The Trust's policy is to recognize a liability for goods and services during the
period when the goods or services are received. To the extent that the Trust
has a contingent liability, meaning generally a liability the payment of which
is subject to the outcome of a future event, the Trust recognizes a liability in
accordance with SFAS No. 5 "Accounting for Contingencies". SFAS No. 5 requires
the recognition of contingent liabilities when the amount of liability can be
reasonably estimated and the liability is probable.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. SFAS 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. The Trust adopted SFAS 141 on January 1, 2002 and such
adoption had no effect on the Trust's financial position and results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 establishes accounting standards for the recognition
and measurement of legal obligations associated with the retirement of tangible
long-lived assets and requires the recognition of a liability for an asset
retirement obligation in the period in which it is incurred. The Trust adopted
SFAS No. 143 at the beginning of fiscal 2003 and such adoption had no effect on
the Trust's financial position and results of operations.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.4,
44 and 64, Amendment of FASB Statement No.13, and Technical Corrections." As a
result of the rescission of SFAS No. 4, a gain or loss on extinguishment of debt
will no longer be presented as an extraordinary item upon the adoption of SFAS
No. 145. The Trust adopted SFAS No. 145 in the second quarter of fiscal 2002.
This resulted in a charge of approximately $0.4 million classified in operating
income as opposed to an extraordinary item associated with debt refinancing.
In July 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No.146 is based on the general principle that
a liability for a cost associated with an exit or disposal activity should be
recorded when it is incurred and initially measured at fair value. SFAS No.146
applies to costs associated with (1) an exit activity that does not involve an
entity newly acquired in a business combination, or (2) a disposal activity
within the scope of SFAS No.144. These costs include certain termination
benefits, costs to terminate a contract that is not a capital lease, and other
associated costs to consolidate facilities or relocate employees. Because the
provisions of this statement are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002, the effect of adopting this
statement has not been determined.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of the
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 is not expected
to have a material impact on the Company's financial position or results of
operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities ("FIN 46"). This interpretation clarifies existing accounting
principles related to the preparation of consolidated financial statements when
the equity investors in an entity do not have the characteristics of a
controlling financial interest or when the equity at risk is not sufficient for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 requires a company to evaluate all existing
arrangements to identify situations where a company has a "variable interest,"
commonly evidenced by a guarantee arrangement or other commitment to provide
financial support, in a "variable interest entity," commonly a thinly
capitalized entity, and further determine when such variable interest requires a
company to consolidate the variable interest entities financial statement with
its own. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. If it is reasonably possible that an enterprise will
consolidate or disclose information about a variable interest entity when this
interpretation becomes effective, the enterprise shall disclose information
about those entities in all financial statements issued after January 31, 2003.
The interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Based on the recent release of this interpretation, we have not completed our
assessment as to whether or not the adoption of this interpretation will have a
material impact on our financial statements.
RESULTS OF OPERATIONS
The Trust has three principal operating segments: 1) Equipment Leasing 2)
Equipment Management and 2) Real Estate Ownership, Development & Management. The
Equipment Leasing segment includes acquiring and leasing to third parties a
diversified portfolio of capital equipment . The Equipment Management segment
includes the Trust's interest in MILPI Holdings, LLC ("MILPI"), which owns 100%
of PLM an equipment leasing and asset management company. From February 2001 to
February 6, 2002, MILPI, through a wholly owned subsidiary MILPI Acquisition,
owned approximately 83% of PLM. On February 7, 2002, MILPI Acquisition
purchased the remaining 17% of PLM's stock and was merged into PLM. The Real
Estate segment includes the ownership, management and development of commercial
properties, recreational properties, condominiums, interval ownership units,
townhomes, single family homes and land sales included in the Trust's ownership
interests in EFG Kirkwood, C & D IT LLC, and Kettle Valley.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
During the fourth quarter of 2002, the Trust increased its number of reportable
segments to include the Equipment Management segment. Previously, the Company
reported on two operating segments: Equipment Leasing and Real Estate. Segment
information for the years ended December 31, 2001 and 2000 have been revised to
reflect the new operating segment.
Segment information for the years ended December 31, 2002, 2001 and 2000 is
summarized below (in thousands of dollars).
2002 2001 2000
-------- -------- --------
Total Revenue (1):
Equipment leasing $ 5,521 $ 6,803 $10,414
Equipment management - - -
Real estate - 183 371
-------- -------- --------
Total $ 5,521 $ 6,986 $10,785
Operating Expenses, Management Fees
and Other Expenses:
Equipment leasing $ 1,341 $ 1,427 $ 946
Equipment management 98 74 -
Real estate 85 76 80
-------- -------- --------
Total $ 1,524 $ 1,577 $ 1,026
Interest Expense:
Equipment leasing $ 1,814 $ 2,037 $ 2,405
Equipment management 28 - -
Real estate - 18 58
-------- -------- --------
Total $ 1,842 $ 2,055 $ 2,463
Depreciation, Impairment of assets
and Amortization Expense (2):
Equipment leasing $ 3,259 $ 9,438 $ 4,189
Equipment management - - -
Real estate 115 75 66
-------- -------- --------
Total $ 3,374 $ 9,513 $ 4,255
Equity (Loss) Income:
Equipment leasing $ - $ - $ -
Equipment management 493 984 -
Real estate (725) (424) (991)
-------- -------- --------
Total $ (232) $ 560 $ (991)
Net (Loss) Income: $(1,451) $(5,599) $ 2,050
======== ======== ========
Investment in Minority Interest Investments:
Equipment leasing $ - $ 26 $ 289
Equipment management 2,423 7,136 408
Real estate 1,000 - 1,287
-------- -------- --------
Total $ 3,423 $ 7,162 $ 1,984
Assets:
Equipment leasing $19,564 $26,217 $43,824
Equipment management 9,688 8,519 408
Real estate 7,272 7,436 7,409
-------- -------- --------
Total $36,524 $42,172 $51,641
(1) Includes equipment leasing revenue of $5.7 million, $6.5 million and
$7.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.
(2) Includes write-down of equipment leasing assets of $0.5 million and $5.6
million for the fiscal years ended December 31, 2002 and 2001, respectively. In
addition, the real estate segment recorded a $0.1 million impairment on its
minority interest investment in EFG Kirkwood LLC.
EQUIPMENT LEASING
- ------------------
LEASE REVENUE: For the year ended December 31, 2002, the Trust recognized lease
revenue of $5.7 million compared to $6.5 million and $7.7 million for the years
ended December 31, 2001 and 2000, respectively. Lease revenue represents rental
revenue recognized from the leasing of the equipment owned by the Trust.
Approximately $0.2 million of the $0.8 million decrease in lease revenues from
2001 to 2002 was attributable to the sale of equipment. The remaining $0.6
million decrease was the result of lease termination fees received in 2001. No
such fees were earned in 2002. Lease revenue decreased by $1.2 million from
2000 to 2001. This decrease was primarily attributable to the progressive sale
of equipment over the respective periods. Lease revenue is expected to decline
in the future as the Trust's equipment portfolio is sold and not replaced.
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
owned by an affiliated equipment leasing program sponsored by EFG.
Proportionate equipment ownership enables the Trust to further diversify its
equipment portfolio by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could result from a
concentration in any single equipment type, industry or lessee. The Trust and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment.
INTEREST INCOME: Interest income in 2002 was $0.1 million for fiscal 2002
compared to $0.2 million and $0.7 million in fiscal 2001 and 2000, respectively.
The decrease in interest income from 2000 to 2002 is the result of a decrease in
the average cash balance over the respective years. The decrease in the Trust's
average cash balance is attributable to the purchase of MILPI and C & D IT LLC
which utilized $10.9 million of the Trust's cash. Equipment on lease had an
original cost of $43.6 million, $51.7 million and $53.3 million in fiscal 2002,
2001 and 2000, respectively.
GAIN/LOSS ON THE SALE OF EQUIPMENT, NET: During the years ended December 31,
2002, 2001 and 2000, the Trust had net (losses) gains on the sale of equipment
of $(0.2) million, $0.1 million and $2.0 million, respectively. During 2002,
the Trust received cash of $2.7 million associated with the sale of equipment.
During 2002, equipment sales included the sale of an aircraft sold for $0.3
million in cash with a net book value of $0.4 million. The remaining $2.4
million of proceeds from equipment sold consisted of forklifts, cranes and other
miscellaneous equipment. During 2001, the Trust sold assets consisting
primarily of forklifts with a net book value of $0.1 million for approximately
$0.2 million. Total cash from the sale of equipment was $3.4 million for
equipment with a net book value of $1.4 million in 2000. The majority of cash
received on equipment sales during 2000 was associated with a bulk sale of
forklifts to an unrelated third party which the Trust received approximately
$2.8 million of cash related to the bulk sale which resulted in a gain of $1.5
million.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was $2.8
million, $3.9 million and $4.3 million for the years ended December 31, 2002,
2001 and 2000, respectively. Depreciation and amortization is primarily
comprised of depreciation of equipment on lease. Depreciation and amortization
decreased by $1.1 million from 2001 to 2002 and $0.4 million from 2000 to 2001.
The decrease in depreciation for the respective periods is attributable to the
sale of the Trust's leasing equipment. Depreciation and amortization is
expected to continue to decline in the future as the Trust's equipment portfolio
is sold and not replaced.
WRITE-DOWN OF EQUIPMENT: During the year ended December 31, 2002, the Trust
recorded a write-down of equipment, representing an impairment in the carrying
value of the Trust's interest in a McDonnell Douglas MD-87 aircraft resulting
from weakened market conditions including the bankruptcy of two major United
States airlines and a weakened United States economy. The resulting charge of
$0.5 million was based on a comparison of estimated fair value and carrying
value of the Trust's interest in the aircraft which is in the equipment leasing
segment. During the year ended December 31, 2001, the Trust recorded a
write-down of equipment, representing an impairment to the carrying value of the
Trust's interest in Boeing 767-300ER aircraft. The resulting charge of $5.6
million was based on a comparison of estimated fair value and carrying value of
the Trust's interest in the aircraft. The estimate of the fair value was based
on a current offer to purchase the aircraft and the assessment by the management
of the Trusts of prevailing market conditions for similar aircraft. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors influence market demand and market values for passenger jet
aircraft. The decrease in the fair market value of the aircraft are due to the
events of September 11, 2001, along with a recession in the United States, which
have continued to adversely affect the market demand for both new and used
commercial aircraft. Management believes there is a significant oversupply of
commercial aircraft available and that this oversupply will continue for some
time. If the aircraft market continues to deteriorate from its current
condition, the Trust may have additional impairment changes.
INTEREST EXPENSE: Interest expense on third party debt was $1.8 million, $2.0
million and $2.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The decrease in interest expense for each of the respective years
is attributable to lower average outstanding debt balances.
MANAGEMENT FEES- AFFILIATE: Management fees- affiliate from equipment leasing
and non-equipment management was $0.3 million, $0.3 million and $0.4 million for
each of the fiscal years ended 2002, 2001 and 2000, respectively. Management
fees are based on 5% of gross lease revenue generated by operating leases and 2%
of gross lease revenue generated by full payout leases, subject to certain
limitations. During the periods from fiscal 2000 to 2001, management fees
associated with equipment leasing decreased by approximately $0.1 million due to
decreased lease revenues associated with the decrease in the Trust's equipment
portfolio.
OPERATING EXPENSES AND OPERATING EXPENSES-AFFILIATE: Operating expenses and
operating expenses-affiliate were $1.1 million, $1.1 million and $0.6 million
for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. The
increase in operation costs of $0.5 million from 2000 to 2001 is attributable to
several factors. Operating expenses in 2001 included approximately $0.4 million
of remarketing costs related to the re-lease of an aircraft in June 2001 and
$0.1 million for legal costs associated with the Trust's discussions with the
Securities and Exchange Commission regarding its investment company status.
Equipment Management
- ---------------------
EQUITY INTEREST: Equity income from equipment management operations was $0.5
million, $1.0 million and $0 for the fiscal years ended 2002, 2001 and 2000,
respectively. Equity income from equipment leasing operations is the result of
the Trust's interest in MILPI. This equity income represents the Trust's share
of the net income of MILPI recorded under the equity method of accounting. PLM
is an equipment management and asset management company.
In December 2000, the Trusts formed MILPI for the purpose of acquiring PLM
through its wholly-owned subsidiary MILPI Acquisition Corporation ("MAC"). The
Trusts collectively paid $1.2 million of which AFG Investment Trust C
contributed $0.4 million. AFG Investment Trust C's capital contribution gave
the Trust a 34% interest in MILPI. In February 2001, the Trusts through MAC
acquired 83% of PLM's outstanding stock pursuant to a cash tender offer for a
purchase price of $3.46 per share resulting in a total purchase price of $21.8
million and contributed the shares to MILPI. AFG Investment Trust C's portion
of the capital contribution was $7.1 million. In February 6, 2002, MILPI
completed its acquisition of PLM by purchasing the remaining 17% of the
outstanding PLM stock. The remaining interest was purchased for $4.4 million at
the $3.46 per common share price established in the tender offer, which was
financed by AFG Investment Trust C and D. AFG Investment Trust C's portion of
the purchase price was $2.4 million. Concurrent with the February 2002
acquisition, The Trust's ownership interest in MILPI increased from 34% to 38%.
The decrease in equity income of $0.5 million from 2001 to 2002 is attributable
to the decrease in MILPI's net income from 2001 compared to 2002. MILPI
reported net income of $1.3 million and $2.9 million for the fiscal years ended
December 31, 2002 and 2001, respectively. MILPI's total revenues decreased by
$3.4 million in 2002 compared to 2001. The decrease was due to a $2.0 million
decrease in acquisition and lease negotiation fee revenue. The remaining
decrease in revenues is primarily attributable to a $1.1 million decrease in
management fees and operating lease revenue. Management fees are primarily
based on gross revenues generated by equipment under management. Management fee
revenue decreased by approximately $0.7 million due to the reduction in the size
of the managed equipment portfolio. Management fee revenue will continue to
decrease as the investment programs managed by PLM liquidate unless PLM can find
new sources of capital to fund future transactions. Operating lease income
consists of rental revenues generated from assets held for operating leases and
assets held for sale that are on lease. Operating lease revenue decreased by
approximately $0.4 million primarily due to the sale of commercial and
industrial equipment. Operating lease income is expected to decline in the
future as MILPI's commercial and industrial equipment portfolio is sold and not
replaced.
The $3.4 million decrease in revenues was partially offset by a decrease in
expenses of $2.4 million. The decrease was attributable to several factors.
This decrease was partially attributable to $0.8 million in the amortization of
goodwill in 2001 associated with the acquisition of PLM. On January 1, 2002,
MILPI adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
142 requires the Trust to discontinue the amortization of goodwill and other
intangible assets. Depreciation expense decreased by approximately $0.3
million. The decrease in depreciation is associated with the sale of the
Trust's commercial and industrial equipment. Depreciation is expected to
continue to decline in the future as the Trust's commercial and industrial
equipment portfolio is sold and not replaced. The remaining decrease in
expenses of $1.4 million is due to a decrease in general and administrative
costs. This decrease is attributable to the relocation and consolidation of
corporate service functions including staff reductions and lower rent on office
space.
Real Estate
- ------------
OTHER INCOME: Other income from real estate operations was $0, $0.2 million and
$0.4 million for the fiscal years ended 2002, 2001 and 2000, respectively. On
March 8, 2000, the Trust and three affiliated trusts entered into a guarantee
agreement whereby the Trusts, jointly and severally, guaranteed the payment
obligations under a master lease agreement between Echelon Commercial LLC, as
lessee, and several third party entities, as lessor. During the year ended
December 31, 2001, the requirements of the guarantee agreement were met and the
Trust received payment for all outstanding amounts totaling $0.2 million,
including $0.1 million of income related to the guarantee agreement recognized
during the year ended December 31, 2001. During the year ended December 31,
2000, the Trust received an upfront cash fee of $0.2 million and recognized a
total of $0.3 million in income related to this guarantee fee. The guarantee
fee is reflected as Other income on the accompanying Statement of Operations.
The Trust has no further obligations under the guarantee agreement.
MANAGEMENT FEES- AFFILIATE: Management fees for non-equipment assets were $0.1
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
management fees on non-equipment assets, excluding cash, are based on 1% of the
cost of such assets under management. These investments include the Trust's
interest in Kettle Valley and EFG Kirkwood.
EQUITY INTEREST: Equity loss from real estate operations consists of the
Trust's equity interest in Kettle Valley, EFG Kirkwood and C&D IT LLC.
Kettle Valley
- --------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. The project, which is being developed by Kettle Valley
Development Limited Partnership, consists of approximately 280 acres of land
that is zoned for 1,120 residential units in addition to commercial space. To
date, 154 residential units have been constructed. The Trust has a 25%
ownership interest in Kettle Valley through several holding companies.
The Trust recorded equity loss related to Kettle valley of $0.2 million, $0.3
million and $0.1 million for the fiscal years ended 2002, 2001 and 2000,
respectively. Equity loss from Kettle Valley represents the Trust's share of
the net loss from Kettle Valley recorded under the equity method of accounting.
Kettle Valley reported net losses of $0.6 million $1.4 million and $0.9 million
for the fiscal years 2002, 2001 and 2000, respectively. The increase in net
loss from 2000 to 2001 is attributable to a $0.3 million impairment recorded on
the real estate in 2001. The impairment was recorded to reflect the decrease in
the fair market value of the property due to a change in the real estate market.
The decrease in net loss from 2001 to 2002 is attributable to $0.3 million of
professional fees accrued in 2001 that were renegotiated in 2002. As a result
of the renegotiation, the fees were reversed in 2002 and recorded as a reduction
in expenses.
EFG Kirkwood
- -------------
The Trust owns 40% of the Class A membership interests of EFG Kirkwood, a joint
venture between the Trust, certain affiliated trusts, and Semele. AFG ASIT
Corporation, the Managing Trustee of the Trust and a subsidiary of Semele, also
is the manager of EFG Kirkwood. EFG Kirkwood's assets consist of two minority
interest investments accounted for under the equity method of accounting. The
investments consist of an interest in two ski resorts: Mountain Resort Holdings
LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs").
Mountain Springs, through a wholly owned subsidiary, owns a controlling interest
in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails. Purgatory receives the majority of its revenues from winter
ski operations, primarily ski, lodging, retail, and food and beverage services,
with the remainder of its revenues generated from summer outdoor activities,
such as alpine sliding and mountain biking.
Mountain Resort is primarily a ski and mountain recreation resort with more than
2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The
resort receives approximately 70% of its revenues from winter ski operations,
primarily ski, lodging, retail and food and beverage services with the remainder
of the revenues generated from summer outdoor activities, including mountain
biking, hiking and other activities. Other operations at Mountain Resort
include a real estate development division, which has developed and is managing
a 40-unit condominium residential and commercial building, an electric and gas
utility company, which operates as a regulated utility company and provides
electric and gas services to the Kirkwood community, and a real estate brokerage
company.
The Trust recorded a net loss from its equity investment in EFG Kirkwood of $0.5
million, $0.1 million and $0.9 million for the periods ended December 31, 2002,
2001 and 2000, respectively. The increase in net loss from the Trust's equity
investment of $0.4 million from 2001 to 2002 is related to EFG Kirkwood's
increase in net loss.
During the year ended December 31, 2002, EFG Kirkwood recorded net losses of
approximately $1.2 million compared to $0.2 million in 2001. The increase in
net loss of $1.0 million from fiscal 2001 to 2002 is primarily attributable to
EFG Kirkwood's investment in Mountain Springs. Mountain Springs increased its
net loss in 2002 by $2.2 million, from $0.4 million in 2001 to $2.6 million in
2002.
During the twelve months ended December 31, 2002, Mountain Springs recorded
revenues of approximately $15.2 million, a decrease of approximately $0.1
million from $15.3 million for the same period ended December 31 2001. Lift
ticket revenue decreased $0.6 million due to a decrease in visitors, primarily
as a result of poor snowfall levels during the 2001-2002 ski season. As a
result, retail sales also declined $0.3 million. Mountain Springs also
experienced a decline in other revenue sources of $0.2 million including the ski
school, reservations, food and beverage and equipment rentals. Offsetting these
decreases in revenues was an increase of approximately $1.0 million in real
estate commissions earned through the sale of seven townhome units.
Mountain Spring's cost of sales increased approximately $0.4 million, from $1.1
million in 2001 to $1.5 million in 2002. The increase was driven primarily by a
significant increase in the costs related to the seven units.
Variable costs increased at Mountain Springs by approximately $0.7 million, from
$4.8 million in 2001 to $5.5 million in 2002. The increase is a result of
increased payroll and benefit costs. This increase was partially caused by the
early opening of the resort for the 2002-2003 ski season compared to the
2001-2002 season.
Mountain Spring's fixed costs increased approximately $0.7 million during 2002,
to approximately $6.5 million, compared to approximately $5.8 million in 2001.
The increase was due to increased spending in advertising and resort
entertainment. The resort also incurred approximately $0.5 million in costs
related to the Mountain Spring's airline subsidy program. These costs increased
as a result of adding an additional airline carrier to the program, as well as a
decrease in anticipated occupancy levels.
Mountain Springs incurred approximately $0.2 million in additional financing
costs during 2002, from $0.9 million in 2001 to approximately $1.1 million in
2002. The result of the increase was primarily related to additional interest
payments made as a result of debt refinancing of Mountain Spring's notes
payable.
The decrease in net loss from the Trust's equity investment in EFG Kirkwood of
$0.8 million from 2000 to 2001 is due to a decrease in EFG Kirkwood's net loss.
EFG Kirkwood recorded net losses of $0.2 million and $2.7 million in 2001 and
2000, respectively. The decrease in EFG Kirkwood's net loss of $2.5 million is
primarily attributable to its interest in Mountain Springs. EFG Kirkwood
purchased its interest in Mountain Springs on May 1, 2000. Consequently, EFG
Kirkwood did not participate in the operating results of Mountain Springs for
the period from January 1, 2000 to April 30, 2000, generally the period of the
ski resorts peak income activity. Accordingly, the losses incurred in 2000 do
not reflect a full year's operating activities for the resort.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
Cash requirements in 2002 were satisfied through cash flow from operations,
proceeds from equipment sales and dividends from equity investments. Future
inflows of cash from equipment disposals will vary in timing and amount and will
be influenced by many factors including, but not limited to, the frequency and
timing of lease expirations, the type of equipment being sold, its condition and
age, and future market conditions.
Rents receivable increased by $33,000 million from fiscal 2002 to 2001, or 26%.
The increase in rents receivable is attributable the timing of cash receipts.
Accounts receivable-affiliate increased by $18,000, or 17%. Receivable from
affiliates consists of rent or proceeds from the sale of equipment by EFG, an
affiliated entity. All rents and proceeds from the sale of equipment are paid
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account and remits to the Trust on a
monthly basis. The increase in receivables from affiliates is attributable to
proceeds due to the Trust associated with the sale of an aircraft in December
2002, which were collected by EFG.
The loan receivable from Kettle Valley decreased by $0.1 million or 55% from
2001 to 2002. The decrease was attributable to $30,000 of principal payments
received and approximately $0.1 million of the principal balance that was
renegotiated to lower the value of the note.
The Trusts' investment in Kettle Valley decreased by $0.2 million during 2002 or
6%. The decrease in the investment is attributable to the Company equity loss
of $0.2 million recorded during the year from this investment.
Investment in EFG Kirkwood decreased by $0.9 million or 28% from 2001 to 2002.
The decrease is attributable to an equity loss of $0.5 million recorded during
2002. In addition to the equity loss recorded, the investment was also reduced
by a dividend declared and paid in 2002 totaling $0.3 million and an impairment
on the investment of $0.1 million.
The Trust's interest in MILPI increased by $1.2 million or 14% from 2001 to
2002. The increase in the investment was attributable to equity income of $0.5
million recorded during the year and the Trust contributing $2.4 million to
MILPI to finance acquisition of PLM's remaining outstanding stock in February of
2002. This increase was partially offset by a dividend received from the
investment for $1.7 million.
The Trust invested $1.0 million in C&D IT LLC during 2002. In March 2002, the
Trust and AFG Investment Trust D formed C&D IT LLC, a Delaware limited liability
company, as a 50/50% owned joint venture that is co-managed by each of the
trusts to which each Trust contributed $1.0 million. The joint venture was
formed for the purpose of making a conditional contribution of $2.0 million to
BMLF/BSLF II Rancho Malibu Limited Partnership in exchange for 25% of the
interest in the partnership. The partnership owns a 274-acre parcel of land
near Malibu, California which is being developed into a single-family luxury
residential subdivision. C&D IT LLC's only asset consists of its interest in
Rancho Malibu which is accounted for under the equity method of accounting. The
partnership's property is in the development stage. As a result, no income or
loss has been recorded by the entity. Once development is completed, the Trust
will record its equity income or loss in proportion to its investment in the
partnership's net income or loss. Cash distributions from the investments are
not anticipated in the near future since the company is using its cash flow to
complete development of the property.
Equipment held for lease decreased by $6.2 million or 26% during 2002. A
decrease in equipment of $2.8 million is attributable to depreciation expense
recorded during the year. In addition to depreciation, the Trust sold equipment
with a net book value of $2.9 million during the year. The remaining decrease
is attributable to a write-down of $0.5 million recorded associated with a
McDonnell Douglas MD-87 aircraft. The decrease in the fair market value of the
asset is due to the events of September 11, 2001, along with a recession in the
United States. These events have continued to adversely affect the market
demand for both new and used commercial aircraft. Management believes there is
a significant oversupply of commercial aircraft available and that this
oversupply will continue for some time.
The Trusts balance in notes payable decreased by $4.2 million or 19% from 2001
to 2002. The decrease in notes payable is attributable to principal payments
made during the year.
During the first quarter of 2002, the Trust borrowed approximately $0.7 million
from MILPI. The note issued had an interest rate of LIBOR plus 200 basis points
and was scheduled to mature on January 6, 2003. The interest charged on the
loan was consistent with third party rates. In December 2002, the note plus
accrued interest was paid in full.
Accrued liabilities and accrued liabilities-affiliate increased by $24,000 or 7%
from 2001 to 2002. Accrued liabilities- affiliate consists of operating costs
paid by EFG during 2001 on behalf of the Trust. During 2001, Trust's operating
costs were paid by EFG and subsequently reimbursed by the Trust monthly. No
such transactions occurred in 2002. The increase in accrued liabilities and
accrued liabilities-affiliate is attributable to a increase in legal costs
associated with the Trust's proxy statements filed on February 12, 2003. In
addition, the decrease in accrued interest is attributable to decrease in notes
payable and timing of interest on remaining debt at December 31, 2002 compared
to 2001.
MINORITY INTEREST INVESTMENTS
The Trust has a minority interest investment in several equipment management and
real estate operations, which are accounted for under the equity method of
accounting. The financial position and liquidity of these companies could have
a material impact to the Trust. A description of the Trust's minority interest
investments and a brief summary of the financial position are summarized below:
Kettle Valley
- ---------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. Kettle Valley has historically operated at a net loss and has
sustained negative cash flows from operations. As of December 31, 2002, the
company has approximately $6,000 in cash and $1.6 million in debt to third
parties. Because the real estate is in the early phase of development, the net
loss and negative cash flows from operations are expected to continue for some
time. Kettle Valley expects to pay existing obligations with the sales proceeds
from future lot sales. Lot and home sales were 34 and 15, respectively in 2002
compared to 38 lots and 10 homes sold in 2001. Kettle Valley did not pay
dividends in 2002, 2001 or 2000 and does not anticipate paying dividends in the
near future until lots sales and cash flow from home construction and sales are
sufficient to support operations. The Trust's reinvestment phase has ended and
therefore future capital needs that may be required by Kettle Valley are
expected to be financed by the other equity holders or outside investors.
EFG Kirkwood
- -------------
EFG Kirkwood was formed for the purpose of acquiring a minority interest in two
real estate investments. The investments consist of an interest in two ski
resorts: Mountain Resort and Mountain Springs. EFG Kirkwood has no other
significant assets other than its interest in the ski resorts.
MOUNTAIN SPRINGS: Mountain Springs, through a wholly owned subsidiary, owns a
controlling interest in Purgatory in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails. Mountain Spring's primary cash flows come from its ski
operations during the ski season, which is heavily dependent on snowfall.
Additional cash flow is provided by its real estate development activities and
by the resort's summer recreational programs. When out of season, operations are
funded by available cash and through the use of a $3.5 million dollar line of
credit, which is guaranteed by EFG Kirkwood. Mountain Springs did not make any
distributions during 2002 and does not expect to pay any distributions in the
near future. Excess cash flows will be used to finance development on the real
estate surrounding the resort.
At December 31, 2002, Mountain Springs had current assets of $5.6 million, which
consisted of cash of $3.8 million, and accounts receivable of $0.7 million.
Inventories and other assets totaled $1.1 million. Long-term assets consist
primarily of buildings, equipment and real estate totaling approximately $26.0
million.
Liabilities totaled approximately $22.5 million at December 31, 2002 and
consisted primarily of debt and notes outstanding.
MOUNTAIN RESORT: Mountain Resort is primarily a ski and mountain recreation
resort with more than 2,000 acres of terrain, located approximately 32 miles
south of Lake Tahoe. The resort receives approximately 70% of its revenues from
winter ski operations, primarily ski, lodging, retail and food and beverage
services with the remainder of the revenues generated from summer outdoor
activities, including mountain biking, hiking and other activities. Mountain
Resort's primary cash flows come from its ski operations during the ski season,
which is heavily dependent on snowfall. Mountain Resort did not pay any
distributions during 2002 and does not expect to pay any distributions in the
near future. Excess cash flows will be used to finance development on the real
estate surrounding the resort.
At December 31, 2002, Mountain Resort had current assets of approximately $7.0
million, which consisted of cash of $3.6 million, accounts receivable of $2.0
million, and inventory and other assets of $1.4 million. Long-term assets
consisted primarily of buildings, equipment and real estate totaling $42.1
million.
Liabilities were approximately $29.0 million, which consisted primarily of
long-term senior notes and affiliated debt.
Both Mountain Springs and Mountain Resort are subject to a number of risks,
including weather-related risks and the risks associated with real estate
development and resort ownership. The ski resort business is seasonal in nature
and insufficient snow during the winter season can adversely affect the
profitability of a given resort. Many operators of ski resorts have greater
resources and experience in the industry than the Trust, its affiliates and its
joint venture partners.
MILPI Holdings, LLC
- ---------------------
MILPI Holdings, LLC ("MILPI") is an equipment leasing management company that
operates in one business segment, equipment management. As of December 31,
2002, MILPI had approximately $19.4 million of equity investments in several
equipment leasing programs, which comprised approximately 44% of MILPI's total
assets. MILPI is a participant in a $10.0 million warehouse credit facility,
which expires in June 2003. The warehouse credit facility is shared by MILPI
and several of its managed equipment leasing programs. All borrowings are
guaranteed by MILPI. As of December 31, 2002, there were no borrowings
outstanding on the credit facility. MILPI has no other long-term debt
outstanding. At December 31, 2002, MILPI had $6.6 million in cash and cash
equivalents.
MILPI has arranged for the lease or purchase of a total of 1,050 pressurized
tank railcars. These railcars will be delivered over the next three years. A
leasing company affiliated with the manufacturer will acquire approximately 70%
of the railcars and lease them to a non-program affiliate. The remaining 30%
will either be purchased by other third parties to be managed by MILPI or by the
affiliated programs. MILPI will manage the leased and purchased railcars and
will earn management fees from the lease revenue. As of December 31, 2002,
MILPI had purchased $6.2 million of these railcars and expects to sell these
railcars to affiliated entities in the first quarter of 2003.
MILPI had positive cash flows from operations of $1.8 million during 2002. Cash
flows from operations were used to finance operating costs and purchase
additional assets to increase the company's portfolio of managed assets. MILPI
paid approximately $4.7 million in cash dividends in 2002 to the Trusts. The
Trust's share of the dividend was $1.7 million.
MILPI is planning on acquiring AFG Investment Trust A and B Liquidating Trusts'
interest in MILPI during 2003. The acquisition will be financed through
existing cash reserves and cash flows generated from the sale of railcars.
Subsequent to the acquisition, the Trust and AFG Investment Trust D's ownership
interest in MILPI will increase to 50% per trust. MILPI also anticipates
purchasing an interest in Rancho Malibu partnership, a real estate development
company with 274 acres of land in Malibu, California, in exchange for $5.5
million in cash, a $2.5 million promissory note and 182 shares (15%) of the
common stock of RMLP, Inc., a newly formed subsidiary of MILPI. The acquisition
will be financed through existing cash flows and proceeds from the sale of
railcars.
C&D IT LLC
- ------------
In March 2002, the Trust and AFG Investment Trust D formed C&D IT LLC, a
Delaware limited liability company, as a 50/50 % owned joint venture that is
co-managed by each of the investors. The joint venture was capitalized by a
$1.0 million capital contribution from each investor. C&D IT LLC was formed for
the purpose of making a conditional contribution of $2.0 million to BMLF/BSLF II
Rancho Malibu Limited Partnership ("Rancho Malibu") in exchange for 25% of the
interests in Rancho Malibu. The C&D IT LLC joint venture was admitted to the
Rancho Malibu partnership with the other investors which include Semele and its
wholly-owned subsidiary, Rancho Malibu Corp., the other co-managing general
partner.
Rancho Malibu owns a 274-acre parcel of land near Malibu, California, which is
being developed into a single-family luxury residential subdivision. The
conditional C&D joint venture contribution was made to assure participation in
the future development of the parcel. The contribution was made subject to
future solicitation of the consent of the beneficiaries of each of the Trust and
Trust C. The joint venture is conditioned upon the consummation of a
transaction pursuant to which Semele and Rancho Malibu Corp. will contribute all
of the partnership interests that they hold along with 100% of the membership
interests Semele holds in Rancho Malibu to RMLP, Inc., a newly formed subsidiary
of MILPI, in exchange for $5.5 million in cash, a $2.5 million promissory note
and 182 shares of common stock of RMLP, Inc., approximately 15% interest in RMLP
Inc.
C&D IT LLC's only asset consists of its interest in Rancho Malibu, which is
accounted for under the equity method of accounting. Rancho Malibu is in the
development stage. As a result, no income or loss has been recorded by C&D IT
LLC. Once development is completed, the Trust will record its equity income or
loss in proportion to its investment in Rancho Malibu's net income or loss.
Cash distributions from the investments are not anticipated in the near future
since C&D IT LLC is using its cash flow to complete development of the
property.
COMMITMENTS AND CONTINGENCIES
Commitments and contingencies as of December 31, 2002 are as follows (in
thousands of dollars):
Less than 1-3 4-5 After 5
Current Commitments and Contingencies Total 1 year Years Years Years
Long-term Debt $18,151 $18,151 $ - $ - $-
Contingent residual interest
in aircraft 1,597 1,597 - - -
------- ------ -------- -- --
Total $19,748 $19,748 $ - $ - $-
------- ------ -------- -- --
LONG-TERM DEBT: Long-term debt at December 31, 2002 consisted of two
installment notes totaling $18.2 million, payable to banks and institutional
lenders. The notes bears a fixed interest rate of 8% and 9%. Both of the
installment notes are non-recourse and are collateralized by certain of the
Trust's aircraft and assignment of the related lease payments. These notes will
be partially amortized by the remaining contracted lease payments. However, the
Trust has balloon payment obligations on one of the notes of approximately $16.1
million due in November 2003. Management 's plan is to dispose of the aircraft
at the end of the lease term.
COMMITMENT ON RESIDUAL INTEREST IN AIRCRAFT: In conjunction with the Trust's
acquisition of its interest in Kettle Valley, the Trust sold a residual interest
in a Boeing 767-300 aircraft lease to the independent third party from which the
Trust purchased its interest in Kettle Valley. The Trust received $1.5 million
for the residual interest in the aircraft, which is subordinate to certain
preferred payments to be made to the Trust in connection with the aircraft.
Payment of the residual interest is non-recourse and is realizable upon the sale
of the aircraft, the residual interest is included in Other Liabilities on the
Statement of Financial Position at both December 31, 2002 and 2001. As of
December 31, 2002, the net book value of the related aircraft was $0.6 million
below the carrying value of the debt.
OUTLOOK FOR THE FUTURE
Several other factors may affect the Trust's operating performance during the
remainder of 2003 and beyond including:
- -changes in markets for the Trust's equipment;
- -changes in the regulatory environment in which the Trust's equipment operates;
and
- -changes in the real estate markets in which the Trust has ownership interest.
In February 2003, the Trust filed a proxy statement soliciting the shareholders
to vote on several articles proposed by the Managing Trustee. The Managing
Trustee believes that the various proposed articles would increase the value of
MILPI and improve general operations. In March 2003, the Trust's shareholders
approved the following proposals which included:
1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that
they control, to continue to operate their ongoing business making investments
after December 31, 2002, notwithstanding the end of their reinvestment period
for the Trust.
2. To approve a transaction whereby a new formed subsidiary of PLM, RMLP,
Inc., will receive a contribution from Semele Group, Inc., of partnership
interests in Rancho Malibu, a partnership that owns and is developing 274 acres
of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5
million promissory note and 182 shares (15%) of the common stock of RMLP, Inc.
3. To amend Section 7.5 of the Trust Agreement to approve grants and
exercises of rights of first refusal in connection with joint ventures between
the Trust and its affiliates.
4. To approve the purchase by MILPI of the membership interests in MILPI
held by AFG Investment Trust A Liquidating Trust and AFG Investment Trust B
Liquidating Trust, which gave the Trust, together with Trust D, shared 100%
ownership of MILPI.
5. To allow the Trust, in its operation of PLM, to enter into business
arrangements with affiliates of the Trust in the ordinary course of business on
terms no less favorable than those that they would receive if such arrangements
were being entered into with independent third parties.
In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in
Rancho Malibu as indicated in the proposal above.
The future out look for the different operating segments of the Trust is as
follows:
Real Estate
- ------------
The Trust has a minority interest in two ski resorts, which are subject to the
risks of the tourism industry. The economic downturn in the tourism industry
following September 11, 2001, terrorist attacks had an adverse impact on the
operating results of the resorts and the Trust. While management cannot
determine if this event will have a material effect on the operations in future
years, it is monitoring the travel, tourism and real estate industries. There
can be no assurance that the travel and tourism industry will return to its
pre-September 11 levels. The resorts have customers who both fly and drive to
the resort locations. At this time, management does not believe the economic
downturn in the travel industry will recover in the near future.
In addition, the resorts are also subject to a number of other risks, including
weather-related risks. The ski resort business is seasonal in nature and
insufficient snow during the winter season can adversely affect the
profitability of a given resort. Many operators of ski resorts have greater
resources and experience in the industry than the Trust, its affiliates and its
joint venture partners.
The Trust also has a minority interest in several real estate development
companies, some of which are located at the resorts. The risks generally
associated with real estate include, without limitation, the existence of senior
financing or other liens on the properties, general or local economic
conditions, property values, the sale of properties, interest rates, real estate
taxes, other operating expenses, the supply and demand for properties involved,
zoning and environmental laws and regulations, and other governmental rules.
The Trust's involvement in real estate development also introduces financials
risks, including the potential need to borrow funds to develop the real estate
projects. While the Trust's management presently does not foresee any unusual
risks in this regard, it is possible that factors beyond the control of the
Trust, its affiliates and joint venture partners, such as a tightening credit
environment, could limit or reduce its ability to secure adequate credit
facilities at a time when they might be needed in the future. Alternatively,
the Trust could establish joint ventures with other parties to share
participation in its development projects.
Because the investments in the ski resorts include real estate development
companies, the risks and uncertainties associated with the tourism industry can
adversely affect the value of the real estate development companies associated
with these investments. Decrease in tourism, weather-related conditions or
other risks discussed above can permanently decrease the value of the investment
and future operations.
The Trust does not anticipate receiving dividend distributions from the real
estate investments in the near future due to the uncertainty of the current
market conditions.
Equipment Leasing and Equipment Management
- ----------------------------------------------
The events of September 11, 2001 have also adversely affected market demand for
both new and used commercial aircraft and weakened the financial position of
several airline companies. While it currently is not possible for the Trust to
determine the ultimate long-term economic consequences of theses events to the
equipment leasing segment, management anticipates that the resulting decline in
air travel will suppress market prices for used aircraft in the short-term and
nhibit the viability of some airlines. In the event of a lease default by an
aircraft lessee, the Trust could experience material losses. At December 31,
2002, the Trust has collected substantially all rents owed from aircraft
lessees. The Trust is monitoring developments in the airline industry and will
continue to evaluate the potential implications to the Trust's financial
position and future liquidity. Management does not anticipate significant
improvements in the airline industry in the near future.
At lease inception, the Trust equipment was leased by a number of credit worthy,
investment-grade companies. To date, the Trust has not experienced any material
collection problems and has not considered it necessary to provide an allowance
for doubtful accounts. Notwithstanding a positive collection history, there is
no assurance that all future contracted rents will be collected or that the
credit quality of the Trust's leases will be maintained. The credit quality of
an individual lease may deteriorate after the lease is entered into. Collection
risk could increase in the future, particularly as the Trust remarkets its
equipment and enters re-lease agreements with different lessees. The Managing
Trustee will continue to evaluate and monitor the Trust's experience in
collecting accounts receivable to determine whether a future allowance for
doubtful accounts may become appropriate.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including condition and type of equipment being
sold and its marketability at the time of sale. Changing market conditions,
industry trends, technological advances, and many other events can converge to
enhance or detract from asset values at any given time. The Trust attempts to
monitor these change in order to identify opportunities which may be
advantageous to the Trust and which will maximize total cash returns for each
asset.
In the future, the nature of the Trust's operations and principal cash flows
will continue to shift from rental receipts and equipment sale proceeds to
distributions from equity investments. As this occurs, the Trust's cash flows
resulting from equipment investments may become more volatile in that certain of
the Trust's equipment leases will be renewed and certain of its assets will be
sold. In some cases, the Trust may be required to expend funds to refurbish or
otherwise improve the equipment being remarketed in order to make it more
desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the
Managing Trustee will attempt to monitor and manage these events in order to
maximize the residual value of the Trust's equipment and will consider these
factors, in addition to the collection of contractual rents, the retirement of
scheduled indebtedness, and the Trust's future working capital requirements, in
establishing the amount and timing of future cash distributions. As a result,
the Trust does not anticipate declaring any dividend distributions in the near
future.
In accordance with the Trust Agreement, upon the dissolution of the Trust, the
Managing Trustee will be required to contribute to the Trust an amount equal to
any negative balance, which may exist in the Managing Trustee's capital account.
At December 31, 2002, the Managing Trustee had a negative capital account
balance of $0.1 million. No such requirement exists with respect to the Special
Beneficiary.
MILPI's asset base consists of its interest in the management in several
equipment growth funds with limited lives. If MILPI does not find new sources
of capital and revenue, its source of revenues and asset base will decrease and
eventually terminate as the equipment growth funds liquidate.
Report of Independent Certified Public Accountants
To AFG Investment Trust C
We have audited the accompanying statements of financial position of AFG
Investment Trust C as of December 31, 2002 and 2001, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of MILPI Holdings, LLC, and subsidiaries for
2002 and 2001 and the financial statements of EFG Kirkwood, LLC for 2000,
limited liability companies in which the Trust has a 36% and 27.9% interest,
respectively, have been audited by other auditors whose reports have been
furnished to us; insofar as our opinion on the financial statements relates to
data included for MILPI Holdings, LLC, and subsidiaries for 2002 and 2001 and
EFG Kirkwood, LLC for 2000, it is based solely on their reports.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AFG Investment Trust C at December 31, 2002 and 2001,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to the Annual Report is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/S/ ERNST & YOUNG LLP
Tampa, Florida
March 26, 2003
Report of Deloitte & Touche LLP, Independent Auditors
The Board of Directors and Members
MILPI Holdings, LLC:
We have audited the accompanying consolidated balance sheets of MILPI Holdings,
LLC, a Delaware limited liability company, and subsidiaries (the "Company") as
of December 31, 2002 and 2001 and the related statements of income,
shareholders' equity and cash flows for the year ended December 31, 2002 and for
the period from February 7, 2001 through December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2002
and 2001, and the results of its operations and its cash flows for the year
ended December 31, 2002 and for the period from February 7, 2001 through
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets with
the adoption in fiscal 2002 of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 28, 2003
AFG INVESTMENT TRUST C
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
(in thousands of dollars, except share amounts)
2002 2001
-------- --------
ASSETS
Cash and cash equivalents $ 1,168 $ 1,717
Rents receivable 158 125
Accounts receivable - affiliate 122 104
Loan receivable - EFG/Kettle Development LLC 79 176
Interest in EFG/Kettle Development LLC 3,675 3,917
Interest in EFG Kirkwood LLC 2,148 3,003
Interest in MILPI Holdings, LLC 9,688 8,519
Interest in C & D IT, LLC 1,000 -
Investments - other 260 265
Other assets, net of accumulated amortization
of $0.1 million and $47,000 at December 31, 2002 and
December 31, 2001, respectively 470 432
Equipment at cost, net of accumulated depreciation - -
of $25.9 million and $27.8 million at December 31, 2002 - -
and 2001, respectively 17,756 23,914
-------- --------
Total assets $36,524 $42,172
-------- --------
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $18,151 $22,383
Accrued liabilities 349 174
Accrued liabilities - affiliates - 151
Deferred rental income 288 277
Other liabilities 1,597 1,597
Total liabilities 20,385 24,582
-------- --------
Participants' capital (deficit):
Managing Trustee (30) (57)
Special Beneficiary - -
Class A Beneficiary Interests (1,787,153 Interests;
initial purchase price of $25 each) 18,507 19,985
Class B Beneficiary Interests (3,024,740 Interests;
initial purchase price of $5 each) - -
Treasury Interests (223,861 Class A Interests at cost) (2,338) (2,338)
Total participants' capital 16,139 17,590
-------- --------
Total liabilities and participants' capital $36,524 $42,172
-------- --------
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST C
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars, except per share amounts)
2002 2001 2000
------- -------- --------
REVENUE
Lease revenue $ 5,682 $ 6,520 $ 7,734
Interest income 64 158 667
Gain on sale of equipment 1,249 132 2,017
Loss on the sale of equipment (1,474) (7) (4)
Other income - 183 371
------- -------- --------
Total revenue 5,521 6,986 10,785
------- -------- --------
EXPENSES
Depreciation and amortization 2,775 3,934 4,255
Write-down of equipment 599 5,579 -
Interest expense 1,842 2,055 2,463
Management fees - affiliates 434 433 431
Operating expenses 889 - -
Operating expenses - affiliates 201 1,144 595
------- -------- --------
Total expenses 6,740 13,145 7,744
------- -------- --------
EQUITY INTERESTS
Equity in net loss of EFG/Kettle Development LLC (241) (333) (91)
Equity in net loss of EFG Kirkwood LLC (484) (91) (900)
Equity in net income of MILPI Holdings, LLC 493 984 -
------- -------- --------
Total income (loss) from equity interests (232) 560 (991)
------- -------- --------
Net (loss) income $(1,451) $(5,599) $ 2,050
======== ======== ========
Net (loss) income
per Class A Beneficiary Interest $ (0.83) $ (2.84) $ 0.66
======== ======== ========
per Class B Beneficiary Interest $ - $ (0.10) $ 0.18
======== ======== ========
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST C
STATEMENTS OF CHANGES IN PARTICIPANTS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands of dollars, except shares)
Managing Special
Trustee Beneficiary Class A Beneficiaries - Class B Beneficiaries
Amount Amount Interests Amount Interests
---------- ------------- --------- ------- ---------
Balance at December 31, 1999 $ (20) $ (167) 1,787,153 $23,898 3,024,740
Net income - 2000 37 303 - 1,179 -
Less: Reclassification adjustment
for unrealized gain on investment
securities - (2) - (15) -
---------- ------------- --------- ------- ---------
Comprehensive income 37 301 - 1,164 -
---------- ------------- --------- ------- ---------
Balance at December 31, 2000 17 134 1,787,153 25,062 3,024,740
Net loss - 2001 (74) (134) - (5,077) -
---------- ------------- --------- ------- ---------
Balance at December 31, 2001 (57) - 1,787,153 19,985 3,024,740
---------- ------------- --------- ------- ---------
Net income (loss) - 2002 27 - - (1,478) -
---------- ------------- --------- ------- ---------
Balance at December 31, 2002 $ (30) $ - 1,787,153 $18,507 3,024,740
========== ============= ========= ======= =========
- Treasury
Amount Interests Total
-------- ----------- -------
Balance at December 31, 1999 $ (214) $ (2,338) $21,159
Net income - 2000 531 - 2,050
Less: Reclassification adjustment
for unrealized gain on investment
securities (3) - (20)
-------- ----------- -------
Comprehensive income 528 - 2,030
-------- ----------- -------
Balance at December 31, 2000 314 (2,338) 23,189
Net loss - 2001 (314) - (5,599)
-------- ----------- -------
Balance at December 31, 2001 - (2,338) 17,590
-------- ----------- -------
Net income (loss) - 2002 - - (1,451)
-------- ----------- -------
Balance at December 31, 2002 $ - $ (2,338) $16,139
======== =========== =======
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST C
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of dollars)
2002 2001 2000
-------- -------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $(1,451) $(5,599) $ 2,050
Adjustments to reconcile net income (loss) to net - - -
cash provided by (used in) operating activities: - - -
Depreciation and amortization 2,775 3,934 4,255
Write-down of equipment 599 5,579 -
Accretion of bond discount - - (7)
Gain on sale of equipment (1,249) (132) (2,017)
Loss on sale of equipment 1,474 7 4
Gain on sale of investment securities - - (70)
(Income) loss from equity interests 232 (560) 991
Write-down of other investment - - 51
Changes in assets and liabilities: - - -
Rents receivable (33) 133 (43)
Accounts receivable - affiliate (18) 321 516
Accounts receivable - other - 126 -
Guarantee fee receivable - 9 (126)
Other assets 12 (407) (132)
Accrued liabilities 175 (47) 362
Accrued liabilities - affiliates (151) 247 (1)
Deferred rental income 11 72 (287)
-------- -------- ---------
Net cash provided by operating activities 2,376 3,683 5,546
-------- -------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 2,722 185 3,425
Investments - other 5 (26) (289)
Purchase of interest in EFG Kirkwood LLC - - (1,287)
Dividend received from investment in EFG Kirkwood LLC 256 - -
Purchase of interest in MILPI Holdings LLC (2,399) (7,062) (393)
Acquisition fees paid to affiliate (24) (74) (15)
Dividend received from MILPI Holdings, LLC 1,747 - -
Purchase of interest in C & D IT, LLC (1,000) - -
Proceeds from sale of investment securities - - 491
-------- -------- ---------
Net cash provided by (used in) investing activities 1,307 (6,977) 1,932
-------- -------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable - affiliate 720 471 25
Principal payments - notes payable -affiliate (720) - -
Principal payments - notes payable (4,232) (4,309) (6,378)
Distributions paid - - (15,200)
-------- -------- ---------
Net cash used in financing activities (4,232) (3,838) (21,553)
-------- -------- ---------
Net decrease in cash and cash equivalents (549) (7,132) (14,075)
Cash and cash equivalents at beginning of year 1,717 8,849 22,924
-------- -------- ---------
Cash and cash equivalents at end of year $ 1,168 $ 1,717 $ 8,849
======= ======= ========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 1,876 $ 2,361 $ 2,290
======= ======= ========
The accompanying notes are an integral part of these financial statements.
AFG INVESTMENT TRUST C
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND TRUST MATTERS
- ---------------------------------------------
AFG Investment Trust C (the "Trust") was organized as a Delaware business trust
in August 1992. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special
Beneficiary, Equis Financial Group Limited Partnership and its subsidiaries
(formerly known as American Finance Group ("AFG")), a Massachusetts limited
partnership ("EFG") or the "Advisor", and $100 from the Initial Beneficiary, AFG
Assignor Corporation, a wholly-owned affiliate of EFG. The Trust issued an
aggregate of 2,011,014 Beneficiary Interests ("Class A Interests") at a
subscription price of $25.00 each ($50.3 million in total) through 9 serial
closings commencing December 1992 and ending September 1993. In July 1997, the
Trust issued 3,024,740 Class B Interests ("Class B Interests") at $5.00 each
($15.1 million in total), of which (i) 3,019,220 interests are held by Equis II
Corporation, an affiliate of EFG, and a wholly owned subsidiary of Semele Group
Inc. ("Semele", an affiliate of EFG), and (ii) 5,520 interests are held by 10
other Class A investors. The Trust repurchased 218,661 Class A Interests in
October 1997 at a cost of $2.3 million. In April 1998, the Trust repurchased
5,200 additional Class A Interests at a cost of $47,000. Accordingly, there are
1,787,153 Class A Interests currently outstanding. The Class A and Class B
Interest holders are collectively referred to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation and one Special
Beneficiary, Semele. Semele purchased the Special Beneficiary Interests from
EFG during the fourth quarter of 1999. EFG continues to act as Advisor to the
Trust and provides services in connection with the acquisition and remarketing
of the Trust's equipment assets. The Managing Trustee is responsible for the
general management and business affairs of the Trust. AFG ASIT Corporation is a
wholly owned subsidiary of Equis II Corporation and an affiliate of EFG, which
is a wholly owned subsidiary of Semele. Except with respect to "interested
transactions", Class A Interests and Class B Interests have identical voting
rights and, therefore, Equis II Corporation generally has control over the Trust
on all matters on which the Beneficiaries may vote. With respect to interested
transactions, holders of Class B Interests which are the Managing Trustee or any
of its affiliates must vote their interests as a majority of the Class A
Interests have been voted. The Managing Trustee and the Special Beneficiary are
not required to make any other capital contributions except as may be required
under the Second Amended and Restated Declaration of Trust, as amended (the
"Trust Agreement").
Significant operations commenced coincident with the Trust's initial purchase of
equipment and the associated lease commitments in December 1992. Pursuant to
the Trust Agreement, each distribution is made 90.75% to the Beneficiaries,
8.25% to the Special Beneficiary and 1% to the Managing Trustee.
Under the terms of the management agreement between the Trust and EFG,
management services are provided by EFG to the Trust for fees, as stated in the
agreement.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP").
In January 1996, EFG sold certain assets relating primarily to the business of
originating new leases, to a third party. Pursuant to terms of the sale
agreements, EFG specifically reserved the right to continue managing all assets
owned by the Trust and the Other Investment Programs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Cash Equivalents
- -----------------
The Trust classifies any amounts on deposits in banks and all highly liquid
investments purchased with an original maturity of three months or less as cash
and cash equivalents.
Revenue Recognition
- --------------------
Rents are payable to the Trust monthly or quarterly and no significant amounts
are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred. In certain instances, the Trust may enter
primary-term, renewal or re-lease agreements which expire beyond the Trust's
anticipated dissolution date, which is December 31, 2004. This circumstance is
not expected to prevent the orderly wind-up of the Trust's business activities
as AFG ASIT Corporation, the managing trustee of the Trust ("Managing Trustee")
and the Trust's advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. Future minimum rents of approximately $3.7 million are due as
follows (in thousands of dollars):
For the year ending December 31, 2003 $3,594
2004 55
2005 37
------
.. Total $3,686
======
Revenue from individual lessees which accounted for 10% or more of revenue in
the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands of
dollars):
% of % of % of
2002 Revenue 2001 Revenue 2000 Revenue
------ -------- ------ -------- ------ --------
Scandinavian Airlines System $3,358 61% $3,321 48% $3,620 34%
Hyundai Electronics America, Inc. $1,147 21% $1,147 16% $1,147 11%
TTX Company - - - - $1,628 15%
Use of Estimates
- ------------------
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Equipment on Lease
- --------------------
All equipment was acquired from EFG, one of its affiliates, or from third-party
sellers. The Trust has capitalized costs to acquire the equipment which include
acquisition fees. The cost of equipment acquired from EFG, or an affiliate
reflects the actual price paid for the equipment by EFG or the affiliate plus
all actual costs incurred by EFG or the affiliate while carrying the equipment,
including all liens and encumbrances, less the amount of all primary term rents
earned by EFG or the affiliate prior to selling the equipment. The cost of
equipment purchased from a third party is the amount paid to the unaffiliated
third party.
Generally, the costs associated with maintaining, insuring and operating the
Trust's equipment are incurred by the respective lessees pursuant to the terms
specified in their individual lease agreements with the Trust. When the Trust
incurs repairs and maintenance costs, the expenses are charged when incurred.
The estimated residual value of leased assets is determined based on third party
appraisals and valuations, as well as market information, offers for similar
types of assets and overall industry expertise.
Depreciation and Amortization
- -------------------------------
The Trust's depreciation policy is intended to allocate the cost of equipment
over the period during which it produces economic benefit. The principal period
of economic benefit is each asset's primary lease term, which term generally
represents the period of greatest revenue potential for each asset. Accordingly,
to the extent that an asset is held on primary lease term, the Trust depreciates
the difference between (i) the cost of the asset and (ii) the estimated residual
value of the asset on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of equipment values
at the date of the primary lease expiration. To the extent that an asset is
held beyond its primary lease term, the Trust continues to depreciate the
remaining net book value of the asset on a straight-line basis over the asset's
remaining economic life.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trust and which will maximize
total cash returns for each asset.
The Trust amortizes deferred financing costs over the life of the related debt.
The Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. As a result, the
discontinuance of goodwill and other intangible asset amortization was effective
upon adoption of SFAS No. 142. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The amount of the impairment is the difference between
the carrying amount and the fair value of the asset. Fair value of the asset
should be calculated using several valuation models which utilize the expected
future cash flows of the Trust. SFAS No. 142 requires the Trust to complete a
transitional goodwill impairment analysis during the quarter ended June 30,
2002. There was no material impact on the Trust's financial statements as a
result of adopting SFAS No. 142.
Equity Ownership Investments
- ------------------------------
Equity securities that are not publicly traded are accounted for in accordance
with Accounting Principles Board ("APB") No. 18, "The Equity Method of
Accounting for Investments in Common Stock." If the Trust's ownership interest
in the investment enables the Trust to influence the operating financial
decisions of the investee, the investment is accounted for under the equity
method of accounting. Otherwise, the investment is accounted for under the cost
method of accounting. The equity method of accounting is discontinued when the
investment is reduced to zero and does not provide for additional losses unless
the Trust has guaranteed obligations of the investee or is otherwise committed
to provide further financial support to the investment.
Whenever circumstances indicate an impairment exists, the Trust evaluates the
fair value of the investment. The fair value of the equity investment is based
current market prices, management's market knowledge and on a valuation models
which includes expected future cash flows of the investment. If the fair value
of the investments is below the carrying value, a loss is recorded.
The Company defines control as the ability of an entity or person to direct the
policies and management that guide the ongoing activities of another entity so
as to increase its benefits and limits its losses from that other entity's
activities without the assistance of others.
Impairment of Long-Lived Assets
- ----------------------------------
The Trust accounts for impairment of long-lived assets in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
was issued in August 2001. The Trust adopted SFAS No. 144 on January 1, 2002.
In accordance with SFAS No. 144, the Trust evaluates long-lived assets for
impairment whenever events or circumstances indicate that the carrying bases of
such assets may not be recoverable. Whenever circumstances indicate that an
impairment may exist, the company evaluates future cash flows of the asset to
the carrying value. If projected undiscounted future cash flows are lower than
the carrying value of the asset, a loss is recorded. The loss recorded is equal
to the difference between the carrying amount and the fair value of the asset.
The fair value of the asset is determined based on a valuation model which
includes expected future cash flows of the asset, current market prices and
management's market knowledge. The fair market value of long-lived assets
secured by non-recourse debt is determined based on a valuation model which
includes expected future cash flows and the recoverable value. If the Trust
decides to return the asset to the lender, the recoverable value will not be
less than the balance of the non-recourse debt.
The Managing Trustee evaluates the net realizable value of significant equipment
assets, such as aircraft, individually. All other assets are evaluated
collectively by equipment type unless the Managing Trustee learns of specific
circumstances, such as a lessee default, technological obsolescence, or other
market developments, which could affect the net realizable value of particular
assets. Adjustments to reduce the net carrying value of equipment are recorded
in those instances where estimated net realizable value is considered to be less
than net carrying value and are reflected separately on the accompanying
Statement of Operations as write-down of equipment.
Accrued Liabilities -Affiliates
- ---------------------------------
Accrued liabilities -affiliates include various fees due to affiliates and
expenses paid by affiliates on behalf of the Trust that the Trust will reimburse
the affiliate.
Contingencies
- -------------
The Trust recognizes a liability for goods and services during the period when
the goods or services are received. To the extent that the Trust has a
contingent liability, meaning generally a liability the payment of which is
subject to the outcome of a future event, the Trust recognizes a liability in
accordance with SFAS No. 5 "Accounting for Contingencies". SFAS No. 5 requires
the recognition of contingent liabilities when the amount of liability can be
reasonably estimated and the liability is probable.
Allocation of Net Income or Loss
- -------------------------------------
Net income is allocated quarterly, first to eliminate any participant's negative
capital account balance and second, 1% to the Managing Trustee, 8.25% to the
Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period. Net
losses are allocated quarterly first, to eliminate any positive capital account
balance of the Managing Trustee, the Special Beneficiary and the Class B
Beneficiaries; second, to eliminate any positive capital account balances of the
Class A Beneficiaries; and third, any remainder to the Managing Trustee.
However, in no event shall there be allocated to the Managing Trustee less than
1% of the profits or losses of the Trust.
The allocation of net income or loss pursuant to the Trust Agreement for income
tax purposes differs from the foregoing and is based upon government rules and
regulations for federal income tax reporting purposes and assumes, for each
income tax reporting period, the liquidation of all of the Trust's assets and
the subsequent distribution of all available cash to the Participants. For
income tax purposes, the Trust adjusts its allocations of income and loss to the
Participants so as to cause their capital account balances at the end of the
reporting period to be equal to the amount that would be distributed to them in
the event of a liquidation and dissolution of the Trust. This methodology does
not consider the costs attendant to liquidation or whether the Trust intends to
have future business operations.
The unaudited table below includes detail of the allocation of income (loss) in
each of the quarters for the years ended December 31, 2002, 2001 and 2000 (in
thousands of dollars):
Managing Special Class A Class B
Trustee Beneficiary Beneficiaries Beneficiaries Treasury
Amount Amount Amount Amount Interests Total
December 31, 1999 $ (20) $ (167) $ 23,898 $ (214) $ (2,338) $21,159
Net income 28 225 504 349 - 1,106
Unrealized losses - (2) (26) (1) - (29)
March 31, 2000 8 56 24,376 134 (2,338) 22,236
---------- ------------- --------------- --------------- ----------- --------
Net income 1 6 53 14 - 74
Unrealized gain - 1 5 1 - 7
June 30, 2000 9 63 24,434 149 (2,338) 22,317
---------- ------------- --------------- --------------- ----------- --------
Net income 7 62 534 144 - 747
Unrealized gain - - 3 1 - 4
September 30, 2000 16 125 24,971 294 (2,338) 23,068
---------- ------------- --------------- --------------- ----------- --------
Net income 1 10 88 24 - 123
Unrealized loss - (1) 3 (4) - (2)
December 31, 2000 17 134 25,062 314 (2,338) 23,189
---------- ------------- --------------- --------------- ----------- --------
Net income 12 106 912 246 - 1,276
March 31, 2001 29 240 25,974 560 (2,338) 24,465
---------- ------------- --------------- --------------- ----------- --------
Net loss (29) (240) (349) (560) - (1,178)
June 30, 2001 - - 25,625 - (2,338) 23,287
---------- ------------- --------------- --------------- ----------- --------
Net loss (3) - (301) - - (304)
September 30, 2001 (3) - 25,324 - (2,338) 22,983
---------- ------------- --------------- --------------- ----------- --------
Net loss (54) - (5,339) - - (5,393)
December 31, 2001 (57) - 19,985 - (2,338) 17,590
---------- ------------- --------------- --------------- ----------- --------
Net income 72 123 1,066 287 - 1,548
March 31, 2002 15 123 21,051 287 (2,338) 19,138
---------- ------------- --------------- --------------- ----------- --------
Net loss (27) (123) (763) (287) - (1,200)
June 30, 2002 (12) - 20,288 - (2,338) 17,938
---------- ------------- --------------- --------------- ----------- --------
Net loss (11) - (1,111) - - (1,122)
September 30, 2002 (23) - 19,177 - (2,338) 16,816
---------- ------------- --------------- --------------- ----------- --------
Net loss (7) - (670) - - (677)
December 31, 2002 $ (30) $ - $ 18,507 $ - $ (2,338) $16,139
---------- ------------- --------------- --------------- ----------- --------
Reclassification
- ----------------
Certain amounts previously reported have been reclassified to conform to the
December 31, 2002 presentation.
Accumulated Other Comprehensive Income
- -----------------------------------------
SFAS No. 130, "Reporting Comprehensive Income", requires the disclosure of
comprehensive income (loss) to reflect changes in participants' capital that
result from transactions and economic events from non-owner sources.
Accumulated other comprehensive income (loss) for the years ended December 31,
2002, 2001 and 2000 represents the Trust's unrealized gains (losses) on
investment securities (in thousands of dollars):
2002 2001 2000
----- ----- ------
Beginning Balance. . . . . . . . . . . . $ -- $ -- $ 21
Adjustments related to unrealized losses
on investment securities . . . . . . . . -- -- (21)
----- ----- ------
Ending Balance . . . . . . . . . . . . . $ -- $ -- $ --
===== ===== ======
Net Income (Loss) and Cash Distributions Per Beneficiary Interest
- -------------------------------------------------------------------------
Net income (loss) and cash distributions per Class A Interest are based on
1,787,153 Class A Interests outstanding. Net income (loss) and cash
distributions per Class B Interest are based on 3,024,740 Class B Interests
outstanding. Net income and cash distributions per Beneficiary Interest are
computed after allocation of the Managing Trustee's and Special Beneficiary's
shares of net income (loss) and cash distributions.
Provision for Income Taxes
- -----------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their separate tax returns.
New Accounting Pronouncements
- -------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. SFAS 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. The Trust adopted SFAS 141 on January 1, 2002 and such
adoption had no effect on the Trust's financial position and results of
operations.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections." As
a result of the rescission of SFAS No. 4, a gain or loss on extinguishment of
debt will no longer be presented as an extraordinary item upon the adoption of
SFAS No.145. The Trust adopted SFAS No. 145 in the second quarter of fiscal
2002. This resulted in a charge of approximately $0.4 million classified in
operating income during the year ended December 31, 2002, as opposed to an
extraordinary item associated with the debt refinance.
In July 2002 the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No.146 is based on the general principle that
a liability for a cost associated with an exit or disposal activity should be
recorded when it is incurred and initially measured at fair value. SFAS No.146
applies to costs associated with (1) an exit activity that does not involve an
entity newly acquired in a business combination, or (2) a disposal activity
within the scope of SFAS No.144. These costs include certain termination
benefits, costs to terminate a contract that is not a capital lease, and other
associated costs to consolidate facilities or relocate employees. Because the
provisions of this statement are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002, the effect of adopting this
statement has not been determined.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of the
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 is not expected
to have a material impact on the Company's financial position or results of
operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities ("FIN 46"). This interpretation clarifies existing accounting
principles related to the preparation of consolidated financial statements when
the equity investors in an entity do no have the characteristics of a
controlling financial interest or when the equity at risk is not sufficient for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 requires a company to evaluate all existing
arrangements to identify situations where a company has a "variable interest,"
commonly evidenced by a guarantee arrangement or other commitment to provide
financial support, in a "variable interest entity," commonly a thinly
capitalized entity, and further determine when such variable interest requires a
company to consolidate the variable interest entities financial statement with
its own. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. If it is reasonably possible that an enterprise will
consolidate or disclose information about a variable interest entity when this
interpretation becomes effective, the enterprise shall disclose information
about those entities in all financial statements issued after January 31, 2003.
The interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Based on the recent release of this interpretation, we have not completed our
assessment as to whether or not the adoption of this interpretation will have a
material impact on our financial statements.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Trust at December 31, 2002.
Remaining Lease Term (Months), as used below, represents the number of months
remaining from December 31, 2002 under contracted lease terms and is presented
as a range when more than one lease agreement is contained in the stated
equipment category. A Remaining
Lease term equal to zero reflects equipment either held for sale, re-lease or
being leased on a month-to-month basis. Equipment consists of the following at
December 31, 2002 (in thousands of dollars):
Remaining Equipment
Lease Term at Cost
Equipment Type (Months) (in the thousands)
- --------------------------------------------- ----------- -------------------
Aircraft 12 $ 30,896
Manufacturing 2-8 8,857
Locomotives 8 196
Materials handling 0-33 2,003
Other 0-5 1,717
-------------------
Total equipment cost 43,669
Accumulated depreciation (25,913)
-------------------
Equipment, net of accumulated depreciation $ 17,756
===================
The Trust's equipment portfolio includes certain assets in which the Trust holds
a proportionate ownership interest. In such cases, the remaining interests are
owned by an affiliated program sponsored by EFG. Proportionate equipment
ownership enables the Trust to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee. The Trust and each affiliate individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the equipment.
Equipment with an approximate original cost of approximately $30.9 million is
proportionately owned with other affiliated entities.
As of December 31, 2002, the Trust's ownership interest in aircraft and related
lease payment streams are used to secure the term loans with third-party
lenders. The preceding summary of equipment includes leveraged equipment having
an original cost of approximately $37.4 million and a net book value of
approximately $17.6 million at December 31, 2002.
The summary above includes off-lease equipment held for sale or re-lease with an
original cost of approximately $2.0 million and a net book value of
approximately $30,000. The Managing Trustee is actively seeking the sale or
re-lease of all equipment not on lease.
During the year ended December 31, 2002, the Trust recorded a write-down of
equipment, representing an impairment in the carrying value of the Trust's
interest in a McDonnell Douglas MD-87 aircraft resulting from weakened market
conditions including the bankruptcy of two major United States airlines and a
weakened United States economy. The resulting charge of $0.5 million was based
on a comparison of estimated fair value and carrying value of the Trust's
interest in the aircraft which is in the equipment leasing segment. If the
aircraft market continues to deteriorate from its current condition, the Trust
may have additional impairment changes.
During the year ended December 31, 2001, the Trust recorded a write-down of
equipment, representing an impairment to the carrying value of the Trust's
interest in Boeing 767-300ER aircraft. The resulting charge of $5.6 million was
based on a comparison of estimated fair value and carrying value of the Trust's
interest in the aircraft. The estimate of the fair value was based on a current
offer to purchase the aircraft and the assessment by the management of the
Trusts of prevailing market conditions for similar aircraft. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors influence market demand and market values for passenger jet
aircraft. The decrease in the fair market value of the aircraft is due to the
events of September 11, 2001, along with a recession in the United States, which
have continued to adversely affect the market demand for both new and used
commercial aircraft. Management believes there is a significant oversupply of
commercial aircraft available and that this oversupply will continue for some
time. During the year ended December 31, 2002, the Trust evaluated the
aircraft, which is secured by non-recourse debt, in accordance with the Trust's
policy for recording an impairment on long-lived assets (see Note 2). The
recoverable value of the aircraft was determined based on management's
assumption that the asset would not be sold or re-leased. If the Company
anticipated selling or re-leasing the asset, the recoverable value would have
been significantly lower which would have resulted in an impairment.
The aircrafts' fair value was determined by an independent third party
appraiser. The appraiser made several assumptions when calculating the fair
value. The appraiser assumed the aircraft will sell at current market prices
which are based on "today's" market conditions which included a thorough review
of recent market activity and known transaction data involving the subject
aircraft types. In addition, the appraiser considered the perceived current
demand for the asset, its availability on the market, and expressed views of the
industry. The appraiser also considered the most reasonable value on an open
market under conditions requisite to a fair sale, the effects of September 11,
2001.
NOTE 4 - INTEREST IN EFG/KETTLE DEVELOPMENT LLC
- ------------------------------------------------------
On March 1, 1999, the Trust and an affiliated trust (collectively, the "Buyers")
formed EFG/Kettle Development LLC ("Kettle Valley"), a Delaware limited
liability company, for the purpose of acquiring a 49.9% indirect ownership
interest (the "Interest") in a real estate development in Kelowna, British
Columbia in Canada called Kettle Valley. The Trust's cost basis in this joint
venture was approximately $0.7 million greater than its equity interest in the
underlying net assets at December 31, 1999. This difference was amortized using
a period of 10 years. The amount amortized had been included in amortization
expense as an offset to the Interest in Kettle Valley and was approximately
$66,000 during the years ended December 31, 2002 and 2001. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", the discontinuance of goodwill amortization was effective as
of January 1, 2002.
Kettle Valley, upon receiving the Buyers' contributions for their membership
interests, purchased the Interest from a special purpose company ("SPC") whose
subsidiaries own a 99.9% limited partnership interest in Kettle Valley
Development Limited Partnership ("KVD LP"). The SPC and its subsidiaries were
established by the seller, in part, for income tax purposes and have no business
interests other than the development of Kettle Valley. KVD LP is a Canadian
Partnership that owns the property, consisting of approximately 280 acres of
land. The project is zoned for 1,120 residential units in addition to
commercial space. To date, 154 residential units have been constructed and sold
and 13 additional units are under construction. The seller is an unaffiliated
third-party company and has retained the remaining 50.1% ownership interest in
the SPC. A newly organized Canadian affiliate of EFG replaced the original
general partner of KVD LP on March 1, 1999.
The Trust's ownership share in EFG/Kettle Development LLC is 50% and had a cost
of approximately $4.4 million including a 1% acquisition fee of approximately
$45,000 paid to EFG. This acquisition was funded with cash of approximately
$3.1 million and a non-recourse note for approximately $1.3 million, which was
repaid as of December 31, 2001.
The Trust accounts for its interest in Kettle Valley using the equity method of
accounting. Under the equity method of accounting, the Trust's interest is (i)
increased (decreased) to reflect the Trust's share of income (loss) of the joint
venture and (ii) decreased to reflect any distributions the Trust received from
the joint venture. The Trust's interest was decreased by approximately $0.2
million, $0.3 million and $0.1 million, during the years ended December 31,
2002, 2001 and 2000, respectively, reflecting its share of loss from Kettle
Valley.
In addition, the seller of the Trust's interest in Kettle Valley purchased a
residual sharing interest in a Boeing 767-300 aircraft owned by the Buyers and
leased to an independent third party. The seller paid approximately $3.0
million to the Buyers ($1.5 million or 50% to the Trust) for the residual
interest, which is subordinate to certain preferred payments to be made to the
Buyers in connection with the aircraft. Payment of the residual interest is due
only to the extent that the Trust receives net residual proceeds from the
aircraft. The residual interest is non-recourse to the Buyers and is included
as Other Liabilities on the accompanying Statements of Financial Position at
both December 31, 2002 and December 31, 2001.
The table below provides KVD LP's summarized consolidated balance sheet as of
December 31, 2002 and 2001 (in thousands of dollars):
December 31, December 31,
2002 2001
------------- -------------
Total assets $ 15,479 $ 14,752
Total liabilities 4,339 2,337
------------- -------------
Net equity $ 11,140 $ 12,415
============= =============
The table below provides KVD LP's summarized consolidated income statement data
for the twelve months ended December 31, 2002, 2001 and 2000 (in thousands of
dollars):
December 31, December 31, December 31,
2002 2001 2000
-------------- -------------- --------------
Total revenues $ 3,679 $ 4,597 $ 6,251
Total expenses 4,469 5,968 (7,119)
-------------- -------------- --------------
Net loss $ (790) $ (1,371) $ (868)
============== ============== ==============
For the year ended December 31, 2002, in addition to its share of the loss of
KVD LP, the Trust's net loss from Kettle Valley includes a loss of approximately
$42,000 reflecting the Trust's share of the operating results of one of Kettle
Valley's wholly-owned subsidiaries.
NOTE 5 - INTEREST IN EFG KIRKWOOD LLC
- --------------------------------------------
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and an affiliated corporation, Semele, formed a joint venture, EFG
Kirkwood LLC ("EFG Kirkwood"), for the purpose of acquiring preferred and common
stock interests in Kirkwood Associates Inc. ("KAI"). The Trusts collectively
own 100% of the Class A membership interests in EFG Kirkwood and Semele owns
100% of the Class B membership interests in EFG Kirkwood. The Trust holds 40%
of EFG Kirkwood's Class A membership interests. The Class A interest holders are
entitled to certain preferred returns prior to distribution payments to the
Class B interest holder. The Trusts' interests in EFG Kirkwood constitute 50% of
the voting securities of that entity under EFG Kirkwood's operating agreement,
which gives equal voting rights to Class A and Class B membership interests.
The Managing Trustee is the manager of EFG Kirkwood.
On April 30, 2000, KAI's ownership interests in certain assets and substantially
all of its liabilities were transferred to Mountain Resort Holdings LLC
("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in
KAI's common and preferred stock for corresponding pro-rata membership interests
in Mountain Resort. EFG Kirkwood holds approximately 38% of the membership
interests in Mountain Resort. Mountain Resort, through four wholly owned
subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort
located in northern California, a public utility that services the local
community, and land that is held for residential and commercial development.
On May 1, 2000, EFG Kirkwood acquired 50% of the membership interests in
Mountain Springs Resorts LLC ("Mountain Springs"). Mountain Springs, through a
wholly owned subsidiary, owns 80% of the common membership interests and 100% of
the Class B Preferred membership interests in an entity that owns the Purgatory
Ski Resort ("Purgatory") in Durango, Colorado. In October 2002, an existing
owner and an unrelated third party contributed approximately $2.5 million to
Mountain Springs. As a result of the capital contribution, EFG Kirkwood's
membership interest in Mountain Springs decreased from 50% to 33%. Mountain
Springs used the proceeds from the additional capital contribution to exercise
an option to purchase 51% of Durango Mountain Land Company, LLC, a real estate
development company owning land in Durango, Colorado.
On August 1, 2001, EFG Kirkwood entered into a guarantee agreement whereby EFG
Kirkwood guarantees the payment obligations under a revolving line of credit
between Purgatory and a third party lender. The amount of the guarantee shall
consist of outstanding balance of the line of credit which cannot exceed the
principal balance of $3.5 million. As of December 31, 2002, Purgatory had an
outstanding balance of approximately $2.6 million on the line of credit.
The Trusts' ownership interest in EFG Kirkwood had an original cost of $4.0
million; including a 1% acquisition fee of $40,000 paid to EFG. The Trust's
ownership interest in EFG Kirkwood is accounted for on the equity method. The
Trust recorded a loss of $0.5 million, $0.1 million and $0.9 million for the
fiscal years ended December 31, 2002, 2001 and 2000, respectively, which
represented its pro-rata share of the net loss of EFG Kirkwood. On December 20,
2002, EFG Kirkwood declared and paid a dividend of $0.6 million, of which the
Trust received $0.3 million.
The table below provides EFG Kirkwood's summarized consolidated balance sheet as
of December 31, 2002 and 2001 respectively (in thousands of dollars):
December 31, December 31,
2002 2001
------------- -------------
Total assets $ 5,578 $ 7,424
Total liabilities - -
------------- -------------
Net equity $ 5,578 $ 7,424
============= =============
The table below provides EFG Kirkwood's summarized consolidated income statement
data for the years ended December 31, 2002, 2001 and 2000, respectively (in
thousands of dollars):
December 31, December 31, December 31,
2002 2001 2000
------------- ------------- -------------
Equity loss on investments $ 1,210 $ 216 $ 2,764
Other (income) expenses (2). 4 9
------------- ------------- -------------
Net loss $ 1,208 $ 220 $ 2,773
============= ============= =============
The table below provides comparative summarized income statement data for
Mountain Resort and the Mountain Springs for the twelve months ended December
31, 2002, 2001 and 2000. The operating companies have a fiscal year end of
April 30th which is different from the Trust. Therefore, the operating results
shown below have been conformed to the twelve months ended December 31, 2002,
2001 and 2000. The Trust purchased their interest in Purgatory on May 1, 2000
and as such the operating results below have been conformed to reflect the eight
months ended December 31, 2000.
For the Twelve For the Twelve For the Twelve
Months Ended Months Ended Months Ended
December 31, December 31, December 31,
2002 2001 2000
--------------- ---------------- ---------------
Mountain Resorts
Total revenues $ 29,462 $ 29,597 $ 27,741
Total expenses 30,336 30,117 27,464
--------------- ---------------- ---------------
Net income (loss) $ (874) $ (520) $ 277
=============== ================ ===============
Mountain Springs
Total revenues $ 15,198 $ 15,250 $ 5,008
Total expenses 17,834 15,648 9,725
--------------- ---------------- ---------------
Net income (loss) $ (2,636) $ (398) $ (4,717)
=============== ================ ===============
Due to the economic downturn in the tourism industry following September 11,
2001 terrorist attacks, the Trust evaluated the fair value of its investment in
EFG Kirkwood. The Trust hired an independent third party appraiser who valued
the minority interest investment. The appraiser used a valuation model to
determine the fair value of the investment which included expected future cash
flows from the ski resorts. Based on the Company's overall industry knowledge
and the valuation performed by the appraiser, the Company recorded an impairment
on the investment of $0.1 million as of December 31, 2002.
NOTE 6 -INTEREST IN MILPI HOLDINGS, LLC
- ---------------------------------------------
In December 2000, the Trusts formed MILPI Holdings, LLC ("MILPI"), which formed
MILPI Acquisition Corp. ("MAC"), a wholly-owned subsidiary of MILPI, for the
purpose of acquiring PLM International, Inc. and subsidiaries ("PLM"). The
Trusts collectively paid $1.2 million for their membership interests in MILPI
($0.4 million for the Trust which gave the Trust a 34% interest in MILPI). MAC
entered into a definitive agreement (the "Agreement") with PLM, an equipment
leasing and asset management company, for the purpose of acquiring up to 100% of
the outstanding common stock of PLM, for an approximate purchase price of up to
$27.0 million. In connection with the acquisition, on December 29, 2000, MAC
commenced a tender offer to purchase any and all of PLM's outstanding common
stock.
On February 7, 2001, pursuant to the cash tender offer, the Trusts through MAC
acquired approximately 83% of PLM's outstanding common stock for a purchase
price of $3.46 per share resulting in a total purchase price of $21.8 million
and contributed the shares to MILPI. The Trust's portion of the capital
contribution was $7.1 million which included acquisition fees of $0.1 million.
The purchase price was determined based on competitive bids and a valuation
model using the expected future cash flows of PLM. MILPI also hired an
investment banking firm to issue a fairness opinion on the purchase price. The
assets of PLM included cash and cash equivalents of approximately $4.4 million.
The acquisition resulted in goodwill at MILPI of approximately $5.3 million.
On February 6, 2002, the Trusts through MAC, completed their acquisition of PLM
by purchasing the remaining 17% of the outstanding PLM common stock and by
effecting a merger of MAC into PLM, with PLM as the surviving entity. The
merger was completed when MAC obtained approval of the merger from PLM's
shareholders pursuant to a special shareholder's meeting. The remaining
interest was purchased for $4.4 million at the $3.46 per common share price
established in the tender offer which was financed by the Trust and AFG
Investment Trust D. An investment banking firm was hired and issued a fairness
opinion on the purchase price of this transaction. The Trust's portion of the
purchase price was $2.4 million which included transaction costs of $24,000, a
1% acquisition fee paid to a wholly-owned subsidiary of Semele. The acquisition
resulted in goodwill of approximately $3.5 million. No goodwill is expected to
be deducted for tax purposes. Concurrent with the completion of the merger, PLM
ceased to be publicly traded. Due to the February 6, 2002 acquisition, the
Trust's ownership interest in MILPI increased from 34% to 38%.
MILPI accounted for the acquisition of the stock of PLM using the purchase
method of accounting. In accordance with SFAS No. 141, the Company allocates the
total purchase price to the assets acquired and liabilities assumed based on the
respective fair market values at the date of acquisition. There are no
contingencies or other matters that could materially affect the allocation of
the purchase cost.
Equis II Corporation has voting control of the Trusts and owns the Managing
Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr.
Coyne, who are directors and officers of the Trust, respectively, are also
officers and directors of, and own significant stock in Semele. In addition,
Mr. Engle and Mr. Coyne are officers and directors of MILPI.
The Trusts' ownership interest in MILPI is accounted for on the equity method
and the Trust recorded income of approximately $0.5 million and $1.0 million for
the fiscal years ending 2002 and 2001, respectively. During 2002, MILPI
declared and paid a cash dividends totaling $4.7 million. The Trust's share of
the dividend was $1.7 million.
The table below provides summarized consolidated balance sheet data as of
December 31, 2002 and 2001, and income statement data for MILPI for the year
ended December 31, 2002 and for the period February 7, 2001 through December 31,
2001. As discussed above, approximately 83% of PLM's common stock was acquired
in February 2001, with the remaining interest acquired in February 2002. The
table below provides MILPI's summarized consolidated balance sheet as of
December 31, 2002 and 2001 and the income statement data for the year ended
December 31, 2002 and for the period from February 7, 2001 through December 31,
2001 (in thousands of dollars):
December 31, December 31,
2002 2001
============= =============
Total Assets $ 44,400 $ 43,399
Total Liabilities 18,440 15,453
Minority Interests - 3,029
------------- -------------
Equity $ 25,960 $ 24,917
============= =============
For the Period
from
February 7,
Year Ended 2001 through
December 31, December 31,
2002 2001
-------- --------
Total revenues $ 5,228 $ 8,660
Total expenses (3,478) (5,856)
Equity income in managed programs 133 1,716
Other income, net 268 467
Minority interests (40) (429)
Provision for taxes (774) (1,611)
-------- --------
Net income $ 1,337 $ 2,947
======== ========
In February 2003, the Trust filed a proxy statement soliciting the shareholders
on several articles proposed by the Managing Trustee (see Note 15). In March
2003, the Trust's shareholders approved all the articles included in the proxy
statement. One of the articles approved authorized MILPI to purchase Trust A
and B's interest in MILPI at a pre-determined price. MILPI is planning on
acquiring AFG Investment Trust A and B Liquidating Trust's interest in MILPI
during 2003. The acquisition will be financed through MILPI's existing cash
reserves and cash flows generated from the sale of railcars. Subsequent to the
acquisition, the Trust and AFG Investment Trust C's ownership interest in MILPI
will increase to 50% per trust.
NOTE 7 - INTEREST IN C & D IT LLC
- ------------------------------------------
In March 2002, the Trust and AFG Investment Trust D ("Trust D") formed C & D IT
LLC, a Delaware limited liability company, as a 50%/50% owned joint venture that
is co-managed by each of the Trust and Trust D (the "C & D Joint Venture") to
which each Trust contributed $1.0 million. The C & D Joint Venture was formed
for the purpose of making a conditional contribution of $2.0 million to
BMLF/BSLF II Rancho Malibu Limited Partnership ("Rancho Malibu Limited
Partnership") in exchange for 25% of the interests in Rancho Malibu Limited
Partnership (the "C & D Joint Venture Contribution"). The C & D Joint Venture
was admitted to Rancho Malibu Limited Partnership as a co-managing general
partner pursuant to the terms of an amendment to Rancho Malibu Limited
Partnership Agreement. The other partners in Rancho Malibu Limited Partnership
are Semele and its wholly-owned subsidiary, Rancho Malibu Corp., the other
co-managing general partner.
Rancho Malibu Limited Partnership owns a 274-acre parcel of land near Malibu,
California and is developing it as a single-family luxury residential
subdivision. The conditional C & D Joint Venture Contribution was made to assure
participation in the future development of the parcel. It was made subject to
the future solicitation of the consent of the beneficiaries of each of the Trust
and Trust D. The C & D Joint Venture Contribution is conditioned upon the
consummation of a transaction pursuant to which Semele and Rancho Malibu Corp.
will contribute all of the partnership interests that they hold in Rancho Malibu
Limited Partnership along with 100% of the membership interests Semele holds in
RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM, in exchange
for $5.5 million in cash, a $2.5 million promissory note and 182 shares of
common stock of RMLP, Inc., approximately 15% interest in RMLP Inc. In February
2003, the Trust solicited the shareholders, which was subsequently approved, for
several articles including the transaction above (see Note 15).
The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture
Contribution from Rancho Malibu Limited Partnership if the transactions have not
taken place within ninety days of the receipt by Rancho Malibu Limited
Partnership of notice from the C & D Joint Venture that the requisite consents
of the beneficiaries of the Trust and Trust D have been received. This right of
the C & D Joint Venture is secured by a pledge of 50% of the capital stock of
Rancho Malibu Corp. and 50% of the interests in Rancho Malibu Limited
Partnership held by Semele and Rancho Malibu Corp.
NOTE 8 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
Various operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 2002, 2001 and
2000, which were paid or accrued by the Trust to EFG or its affiliates, are as
follows (in thousands of dollars):
2002 2001 2000
----- ------ ------
Acquisition fees $ 24 $ 74 $ 15
Management fees 434 433 431
Administrative charges 201 178 198
Reimbursable operating costs
due to third parties - 966 397
----- ------ ------
Total $ 659 $1,651 $1,041
===== ====== ======
As provided under the terms of the Trust Agreement, EFG is compensated for its
services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For equipment acquisition services, EFG was
compensated by an amount equal to .28% of Asset Base Price paid by the Trust for
each asset acquired for the Trust's initial asset portfolio. For reinvestment
equipment acquisitions completed prior to September 2, 1997, EFG was compensated
by an amount equal to 3% of Asset Base Price paid by the Trust. In connection
with a Solicitation Statement and consent of Beneficiaries in 1998, the Trust's
reinvestment provisions, which were scheduled to expire on September 2, 1997,
were extended through December 31, 2002 and the Trust was permitted to invest in
assets other than equipment. The Trust does not anticipate, nor have there
been, any equipment acquisitions subsequent to September 1997. Acquisition fees
associated with non-equipment acquisitions have been approximately 1% of the
Asset Base Price. For management services, EFG is compensated by an amount
equal to (i) 5% of gross operating lease rental revenue and 2% of gross full
payout lease rental revenue received by the Trust with respect to equipment
acquired on or prior to September 2, 1997. For non-equipment assets other than
cash, the Managing Trustee receives an annualized management fee of 1% of such
assets under management. Compensation to EFG for services connected to the
disposition of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
payout and this fee and the other fees described above are subject to certain
limitations defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust, which
are reimbursed to EFG at actual cost. Prior to June 2002, an affiliated company
supported the administrative function. Subsequently, the administrative
functions were outsourced to an unrelated third party with the exception of some
administrative functions which will continue to be supported by EFG.
During 2001 and 2000, EFG paid the majority of operating costs on behalf of the
Trust. Costs incurred by EFG were subsequently reimbursed by the Trust on a
monthly basis. During 2002, the Trust paid all of its direct costs. Therefore,
there were no reimbursable direct operating costs paid to an affiliate during
the year.
All equipment was purchased from EFG, one of its affiliates, or directly from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
On December 31, 2002, the Trust had a receivable from affiliate of $0.1 million.
The receivable consists of approximately $0.1 million of revenues and other
proceeds received by EFG. All rents and proceeds from the sale of equipment are
paid by the lessee directly to either EFG or to a lender. EFG temporarily
deposits collected funds in a separate interest-bearing escrow account prior to
remittance to the Trust. The Trust's cash proceeds received by EFG are
reimbursed to the Trust on a monthly basis. The remaining balance of the
receivable, approximately $0.1 million, relates to costs incurred by the Trust
associated with the sale of an aircraft in December 2002, on behalf of EFG.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 9,210 Class A Interests
or 1% of the total outstanding Class A Interests of the Trust. The general
partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and
Chief Executive Officer of Semele.
Equis II Corporation has voting control of the Trust through its ownership of
the majority of the Trust's outstanding voting interests, as well as its
ownership of AFG ASIT Corporation. See Item 1 (a) of this report regarding
certain voting restrictions related to the Class B Interests. Equis II
Corporation is owned by Semele. Gary D. Engle is Chairman and Chief Executive
Officer of Semele. James A. Coyne is Semele's President and Chief Operating
Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of,
and own significant stock in, Semele.
During the first quarter of 2002, the Trust borrowed $0.7 million from MILPI
Holdings, LLC. The note issued had an interest rate LIBOR plus 200 basis points
and was scheduled to mature on January 6, 2003. Interest paid to MILPI under
this note was $28,000. In December 2002, the note plus accrued interest was
paid in full.
NOTE 9 - NOTES PAYABLE
- --------------------------
Notes payable at December 31, 2002 consisted of two installment notes totaling
$18.2 million payable to banks and institutional lenders. The notes bear a
fixed interest rate of 8% and 9%. The Trust estimates, based on recent
transactions, that the fair value of the fixed rate notes is approximately $17.5
million. Both of the installment notes are non-recourse and are collateralized
by certain of the Trust's aircraft and assignment of the related lease payments.
These notes will be partially amortized by the remaining contracted lease
payments. However, the Trust has balloon payment obligations of approximately
$16.1 million at the expiration of the debt in November 2003.
NOTE 10 - CONTINGENCIES AND COMMITTMENTS
- ---------------------------------------------
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Trust has active business operations in the financial services industry,
primarily equipment leasing, and in the real estate industry through its
interests in EFG Kirkwood, C & D IT LLC and Kettle Valley. The Trust does not
intend to engage in investment activities in a manner or to an extent that would
require the Trust to register as an investment company under the Act. However,
it is possible that the Trust may unintentionally engage in an activity or
activities that may be construed to fall within the scope of the Act. If the
Trust were determined to be an investment company, its business would be
adversely affected. The Managing Trustee has engaged in discussions with the
staff of the Securities and Exchange Commission regarding whether or not the
Trust may be an inadvertent investment company by virtue of its recent
acquisition activities. The Managing Trustee has consulted counsel and believes
that the Trust is not an investment company. The Act, among other things,
prohibits an unregistered investment company from offering securities for sale
or engaging in any business or interstate commerce. If necessary, the Trust
intends to avoid being deemed an investment company by disposing of or acquiring
certain assets that it might not otherwise dispose of or acquire.
NOTE 11 - INCOME TAXES
- --------------------------
The Trust is not a taxable entity for federal income tax purposes. Accordingly,
no provision for income taxes has been recorded in the accounts of the Trust.
For financial statement purposes, the Trust allocates net income quarterly
first, to eliminate any Participant's negative capital account balance and
second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75%
collectively to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period. Net losses are allocated quarterly first, to
eliminate any positive capital account balance of the Managing Trustee, the
Special Beneficiary and the Class B Beneficiaries; second, to eliminate any
positive capital account balances of the Class A Beneficiaries; and third, any
remainder to the Managing Trustee. This convention differs from the income or
loss allocation requirements for income tax and Dissolution Event purposes as
delineated in the Trust Agreement. For income tax purposes, the Trust allocates
net income or net loss in accordance with the provisions of such agreement.
Pursuant to the Trust Agreement, upon dissolution of the Trust, the Managing
Trustee will be required to contribute to the Trust an amount equal to any
negative balance, which may exist in the Managing Trustee's capital account. At
December 31, 2002, the Managing Trustee had a negative capital account balance
of $0.1 million.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------- -------- --------
..
Net income (loss) $(1,451) $(5,599) $ 2,050
Tax depreciation in excess of (less than)
financial statement depreciation (1,360) (740) (2,343)
Tax gain (loss) in excess of book gain (loss) on sale 1,964 - (765)
Recognize pass through income 1,145 (571) 710
Reverse income from corporate investment 1,367 (652) -
Deferred rental income 10 247 (287)
Write-down of equipment 599 5,579 -
Other - (190) 163
-------- -------- --------
Net income (loss) for federal income tax
reporting purposes $ 2,274 $(1,926) $ (472)
======== ======== ========
The following is a reconciliation between participants' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2002 and 200:
.. 2002 2001
--------- ---------
..
Participants' capital $ 16,139 $ 17,590
Add back selling commissions and organization
and offering costs 4,922 4,922
Deferred step-down of capital basis (690) (690)
Cumulative difference between federal income tax
and financial statement net loss (12,592) (16,318)
--------- ---------
Participants' capital for federal income tax reporting purposes $ 7,779 $ 5,504
========= =========
The cumulative difference between federal income tax and financial statement
income (loss) represents timing differences.
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (in thousands of dollars, except for shares):
March 31, June 30, September 30, December 31, Total
---------- ---------- --------------- -------------- --------
2002
Lease revenue $ 1,501 $ 1,352 $ 1,333 $ 1,496 $ 5,682
Net income (loss) $ 1,548 $ (1,200) $ (1,122) $ (677) $(1,451)
Net income (loss) per
Beneficiary Interest:
Class A Interests $ 0.60 $ (0.43) $ (0.62) $ (0.38) $ (0.83)
Class B Interests $ 0.10 $ (0.10) $ - $ - $ -
2001
Lease revenue $ 1,607 $ 1,643 $ 1,691 $ 1,579 $ 6,520
Net income (loss) $ 1,276 $ (1,178) $ (304) $ (5,393) $(5,599)
Net income (loss) per
Beneficiary Interest:
Class A Interests $ 0.51 $ (0.20) $ (0.17) $ (2.98) $ (2.84)
Class B Interests $ 0.08 $ (0.18) $ - $ - $ (0.10)
In the fourth quarter of fiscal year 2002, the Trust reversed depreciation of
approximately $0.4 million relating to one of its aircraft. Approximately $0.1
million related to each of the three months ended March 31, 2002, June 30, 2002
and September 30, 2002. The respective quarterly results above have been
adjusted to reflect this adjustment.
Net loss for the three months ended September 30, 2002 includes a $0.8 million
loss on the Trust's interest in EFG Kirkwood. In addition, the three months
ended September 30, 2002 includes a $0.2 million of expenses related to the
Trust's proxy statements filed in February 2003.
Net loss for the three months ended June 30, 2002 includes a $0.7 million loss
on the Trust's interest in EFG Kirkwood and $0.4 million loss on interest in
MILPI Holdings LLC.
Net loss for the three months ended December 31, 2001 includes a $5.6 million
write-down of equipment.
Net loss for the three months ended June 30, 2001 includes approximately a $0.4
million loss on interest in Kettle Valley and $0.6 million loss on interest in
EFG Kirkwood.
NOTE 13 - SEGMENT REPORTING
- -------------------------------
The Trust has three principal operating segments: 1) Equipment Leasing 2)
Equipment Management and 2) Real Estate Ownership, Development & Management. The
Equipment Leasing segment includes acquiring and leasing to third parties a
diversified portfolio of capital equipment . The Equipment Management segment
includes the Trust's interest in MILPI Holdings, LLC ("MILPI"), which owns 100%
of PLM an equipment leasing and asset management company. From February 2001 to
February 6, 2002, MILPI, through a wholly owned subsidiary MILPI Acquisition,
owned approximately 83% of PLM. On February 7, 2002, MILPI Acquisition
purchased the remaining 17% of PLM's stock and was merged into PLM. The Real
Estate segment includes the ownership, management and development of commercial
properties, recreational properties, condominiums, interval ownership units,
townhomes, single family homes and land sales included in the Trust's ownership
interests in EFG Kirkwood, C & D IT LLC, and Kettle Valley.
The Trust's reportable segments offer different products or services and are
managed separately because each requires different operating strategies and
management expertise. There are no material intersegment sales or transfers.
During the fourth quarter of 2002, the Trust increased its number of reportable
segments to include the Equipment Management segment. Previously, the Company
reported on two operating segments: Equipment Leasing and Real Estate. Segment
information for the years ended December 31, 2001 and 2000 have been revised to
reflect the new operating segment.
Segment information for the years ended December 31, 2002, 2001 and 2000 is
summarized below (in thousands of dollars).
2002 2001 2000
-------- -------- --------
..
Total Revenue (1):
Equipment leasing $ 5,521 $ 6,803 $10,414
Equipment management - - -
Real estate - 183 371
-------- -------- --------
Total $ 5,521 $ 6,986 $10,785
Operating Expenses, Management Fees
and Other Expenses:
Equipment leasing $ 1,341 $ 1,427 $ 946
Equipment management 98 74 -
Real estate 85 76 80
-------- -------- --------
Total $ 1,524 $ 1,577 $ 1,026
Interest Expense:
Equipment leasing $ 1,814 $ 2,037 $ 2,405
Equipment management 28 - -
Real estate - 18 58
-------- -------- --------
Total $ 1,842 $ 2,055 $ 2,463
Depreciation, Impairment of assets
and Amortization Expense (2):
Equipment leasing $ 3,259 $ 9,438 $ 4,189
Equipment management - - -
Real estate 115 75 66
-------- -------- --------
Total $ 3,374 $ 9,513 $ 4,255
Equity (Loss) Income:
Equipment leasing $ - $ - $ -
Equipment management 493 984 -
Real estate (725) (424) (991)
-------- -------- --------
Total $ (232) $ 560 $ (991)
Net (Loss) Income: $(1,451) $(5,599) $ 2,050
======== ======== ========
Investment in Minority Interest Investments:
Equipment leasing $ - $ 26 $ 289
Equipment management 2,423 7,136 408
Real estate 1,000 - 1,287
-------- -------- --------
Total $ 3,423 $ 7,162 $ 1,984
Assets:
Equipment leasing $19,564 $26,217 $43,824
Equipment management 9,688 8,519 408
Real estate 7,272 7,436 7,409
-------- -------- --------
Total $36,524 $42,172 $51,641
(1) Includes equipment leasing revenue of $5.7 million, $6.5 million and
$7.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.
(2) Includes write-down of equipment leasing assets of $0.5 million and $5.6
million for the fiscal years ended December 31, 2002 and 2001, respectively. In
addition, the real estate segment recorded a $0.1 million impairment on its
minority interest investment in EFG Kirkwood LLC.
NOTE 14 - GEOGRAPHIC INFORMATION
- ------------------------------------
The Trust owns certain leasing equipment and minority interest investments that
either operate internationally or are leased in countries outside the United
States. A limited number of the Trust's transactions are denominated in foreign
currency. Gains or losses resulting from foreign currency transaction are
included in the results of operations and are not material.
Equipment leasing revenues from foreign lessees are generated from aircraft
leases. During 2002, the Trust had three aircraft leases with lessees domiciled
outside the United States in Sweden, Spain and Mexico. During 2002, Equity
income (loss) generated from foreign countries consists of the Trust's interest
in Kettle Valley which is located in Kelowna, British Columbia in Canada.
The table below sets forth total revenues and equity income (loss) by operating
segment and geographic region for the Trust's leasing equipment and minority
interest investments (in thousands of dollars):
Equipment Leasing Equipment Management Real Estate
------------------------------------------------------- -------------------- --------------------
Region 2002 2001 2000 2002 2001 2000 2002 2001 2000
------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
REVENUES
- ------------------------
United States $ 2,024 $ 3,409 $ 6,774 $ - $ - $ - $ - $ 183 $ 371
Sweden 3,358 3,321 3,640 - - - - - -
Mexico 139 73 - - - - - - -
------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
Total revenues $ 5,521 $ 6,803 $ 10,414 $ - $ - $ - $ - $ 183 $ 371
------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
EQUITY INTEREST
United States - - - 493 984 - (484) (91) (900)
Canada - - - - - - (241) (333) (91)
------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
Equity income (loss) $ - $ - $ - $ 493 $ 984 $ - $(725) $(424) $(991)
------------------ --------------------- ------------ ----- ----- ----- ------ ------ ------
The table below sets forth total assets organized by operating segment and
geographic region for the fiscal years ending December 31, 2002 and 2001,
respectively (in thousands of dollars):
Equipment Leasing Equipment Management Real Estate
----------------------------------------- --------------------- --------------
Region 2002 2001 2002 2001 2002 2001
------ ------ ------
United States $ 2,709 $ 6,149 $ 9,688 $8,519 $3,148 $3,003
- ---------------- ------------------ --------------------- ------------ ------ ------ ------
Sweden 16,855 18,167 - - - -
Mexico - 901 - - - -
Canada - - - - 4,124 4,433
Total Assets $ 19,564 $ 26,217 $ 9,688 $8,519 $7,272 $7,436
------------------ --------------------- ------------ ------ ------ ------
NOTE 15 - SUBSEQUENT EVENT
- ------------------------------
On February 12, 2003, the Trust filed a proxy statement, which was subsequently
approved. In March 2003, the shareholders approved the following proposals:
1. To allow PLM, its parent, MILPI, and subsidiaries and affiliates that
they control, to continue to operate their ongoing business making investments
after December 31, 2002, notwithstanding the end of their reinvestment period
for the Trust.
2. To approve a transaction whereby a new formed subsidiary of PLM, RMLP,
Inc., will receive a contribution from Semele Group, Inc., of partnership
interests in Rancho Malibu, a partnership that owns and is developing 274 acres
of land in Malibu, California, in exchange for $5.5 million in cash, a $2.5
million promissory note and 182 shares (15%) of the common stock of RMLP, Inc.
3. To amend Section 7.5 of the Trust Agreement to approve grants and
exercises of rights of first refusal in connection with joint ventures between
the Trust and its affiliates.
4. To approve the purchase by MILPI of the membership interests in MILPI
held by AFG Investment Trust A and AFG Investment Trust B, which gave the Trust,
together with Trust D, shared 100% ownership of MILPI.
5. To allow the Trust, in its operation of PLM, to enter into business
arrangements with affiliates of the Trust in the ordinary course of business on
terms no less favorable than those that they would receive if such arrangements
were being entered into with independent third parties
In March 2003, RMLP, Inc. purchased Semele Group, Inc.'s ownership interest in
Rancho Malibu as indicated in the proposal above.
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The Trust classifies all rents from leasing equipment as lease revenue. Upon
expiration of the primary lease terms, equipment may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Trust for such equipment. Expenses, such as management fees, and
interest earned on cash generated are not included below.
The following is a summary of cash excess associated with equipment dispositions
occurring in the years ended December 31, 2002, 2001 and 2000 (in thousands of
dollars):
2001 2001 2000
------- ------ -------
Rents earned prior to disposal of
equipment, net of interest charges $ 8,417 $2,135 $ 7,831
Sale proceeds realized upon
disposition of equipment 2,722 185 3,425
------- ------ -------
Total cash generated from rents
and equipment sale proceeds 11,139 2,320 11,256
Original acquisition cost of equipment disposed 8,058 1,656 8,259
------- ------ -------
Excess of total cash generated to cost
of equipment disposed $ 3,081 $ 664 $ 2,997
======= ====== =======
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS OF DOLLARS)
Sales and
Operations Refinancings Total
------------ -------------- --------
Net income (loss) $ (2,700) $ 1,249 $(1,451)
Add:
Depreciation and amortization $ 2,775 - 2,775
Write-down of equipment 599 - 599
Loss on sale of equipment 1,474 - 1,474
Management fees 434 - 434
(Income) loss from equity interests 232 - 232
Book value of disposed equipment - 1,473 1,473
Less:
Principal reduction of notes payable (4,952) - (4,952)
------------ -------------- --------
Cash from operations, sales and refinancings (2,138) 2,722 584
Less:
Management fees (434) - (434)
------------ -------------- --------
Distributable cash from operations,
sales and refinancings (2,572) 2,722 150
Other sources and uses of cash:
Cash and cash equivalents at beginning of year 1,717 - 1,717
Investments - other - 5 5
Interest in EFG Kirkwood LLC - 256 256
Interest in MILPI Holdings, LLC 1,723 (2,399) (676)
Intertest in C & D IT, LLC (1,000) - (1,000)
Net proceeds from note payable refinancing 720 - 720
Net change in receivables and accruals (4) - (4)
------------ -------------- --------
Cash and cash equivalents at end of year $ 584 $ 584 $ 1,168
============ ============== ========
ADDITIONAL FINANCIAL INFORMATION
AFG INVESTMENT TRUST C
SCHEDULE OF EQUIPMENT
AS OF DECEMBER 31, 2002
(IN THOUSANDS OF DOLLARS)
Lease
Expiration Net Book
Lessee Date Cost Value Debt
- ---------------------------------- ---------- ------- --------- -------
Advanced Micro Devices, Inc. * $ 1,275 $ - $ -
Chrysler Corporation * 57 - -
Chrysler Corporation 2/28/03 754 79 -
GE Aircraft Engines 5/31/03 51 - -
GATX Logistics, Inc. * 148 - -
General Electric Company * 1 - -
General Electric Company * - - -
General Motors Corporation * 76 - -
General Motors Corporation * 124 - -
General Motors Corporation * 1,317 - -
General Motors Corporation * 47 - -
Hyundai Electronics America, Inc. 8/31/03 6,513 724 742
Owens-Corning Fiberglass Corp. * 17 - -
Owens-Corning Fiberglass Corp. * - - -
Scandinavian Airlines System 12/29/03 30,895 16,856 17,409
Temple-Inland Forest Product Group * 21 - -
Tenneco Packaging * 48 - -
USX Corporation * 1 - -
Western Bulk Carriers 2/28/03 337 67 -
Warehouse 1,987 30 -
---------- ------- ---------
Total $43,669 $ 17,756 $18,151
======= ========= =======
* Currently leased on a month-to-month basis