10-K 1 doc1.txt PUT IN MILPI F/S UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10- K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2002 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-21390 ------- AFG INVESTMENT TRUST B LIQUIDATING TRUST ---------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3157230 ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1050 Waltham Street, Suite 310, Lexington, MA 02421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (781) 676-0009 -------------- Securities registered pursuant to Section 12(b) of the Act NONE ---- Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: 665,494 Class A Trust Beneficiary Interests ------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes____ No X ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders as of December 31, 2002 (Part I and II) AFG INVESTMENT TRUST B LIQUIDATING TRUST FORM 10-K TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for the Trust's Securities and Related Security Holder Matters 4 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 7a. Quantitative and Qualitative Disclosures about Market Risks 5 Item 8. Financial Statements and Supplementary Data 5 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 5 PART III Item 10. Directors and Executive Officers of the Trust 5 Item 11. Executive Compensation 6 Item 12. Security Ownership of Certain Beneficial Owners and Management 7 Item 13. Certain Relationships and Related Transactions 8 Item 14. Controls and Procedures 8 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8
PART I Item 1. Business. ------------------- (a) General Development of Business The Trust was organized as a Delaware business trust in May 1992. Participant's capital initially consisted of contributions from the Managing Trustee, AFG ASIT Corporation, the Special Beneficiary, Equis Financial Group Limited Partnership and its subsidiaries ("EFG") and from the Initial Beneficiary, AFG Assignor Corporation, a wholly-owned affiliate of EFG. On December 31, 2002, the Trust completed its liquidation and dissolution pursuant to a Plan of Complete Liquidation and Dissolution (the "Plan"), adopted as of that date, in accordance with a proxy solicitation dated November 25, 2002 directing the implementation of the Plan, which provided that the Trust would immediately commence liquidation and dissolution, followed by the termination of its Certification of Trust. On December 31, 2002, AFG Investment Trust B Liquidating Trust (the "Liquidating Trust") was established for the purpose of liquidating the remaining assets and liabilities of AFG Investment Trust B (the "Trust"). Effective December 31, 2002, the Trust also entered into a Liquidating Trust Agreement (the "Liquidating Trust Agreement') with Wilmington Trust Company ("Wilmington Trust" or "Trustee"), as trustee of the Liquidating Trust. In conjunction with the Liquidating Trust Agreement, the Trustee has engaged AFG ASIT Corporation and EFG as managers to assist in the day-to-day management of the Liquidating Trust. AFG ASIT Corporation does not control the assets of the Liquidating Trust. In addition to delegating the managing responsibilities of the Liquidating Trust, Wilmington Trust also holds title to all the property in the Liquidating Trust and controls cash disbursements. As of December 31, 2002, each unitholder of the Trust received a pro rata beneficial interest in the Liquidating Trust in exchange for such holder's Trust units. On December 31, 2002, the Trust filed a Certificate of Cancellation with the Secretary of State of the State of Delaware. The Plan provides that AFG ASIT Corporation, not in its individual capacity but solely as the manager, shall use its best efforts to liquidate and dissolve prior to winding up its affairs, including, but not limited to, the sale of its remaining assets, the collection of any receivables and payment of unsatisfied debts, claims, liabilities, commitments, suits and other obligations, whether contingent or fixed by December 31, 2003, provided, although this date may be extended under certain circumstances. In accordance with the Plan and the Liquidating Trust Agreement, the Trust has transferred all of its remaining cash and non-cash assets and all of its remaining liabilities to the Liquidating Trust, including a cash reserve for contingent liabilities of the Trust and the Liquidating Trust. (b) Financial Information About Industry Segments The Liquidating Trust has no employees; however, it is managed pursuant to the Liquidating Trust Agreement with Wilmington Trust , as Trustee. The Trustee's role, among other things, is to complete the liquidation of the assets and to satisfy or discharge the liabilities of the Trust. The Trustee is compensated for such services as provided for in the Liquidating Trust Agreement. The Liquidating Trust owns assets which are engaged in three industry segments; equipment leasing, equipment management and real estate ownership, development and management. Equipment leasing assets consist of the Liquidating Trust's equipment under lease and its equity interest in MILPI Holdings, LLC, an equipment management company specializing in the leasing of transportation and related equipment. Assets associated with the equipment leasing segment are leased to creditworthy lessees on a full-payout or operating lease basis. Full-payout leases are those in which aggregate undiscounted, noncancellable rents equal or exceed the purchase price of the leased equipment. Operating leases are those in which the aggregate undiscounted, noncancellable rental payments are less than the purchase price of the leased equipment. Real estate assets consist primarily of the Liquidating Trust's equity in EFG Kirkwood, LLC, a holding company, which owns equity interests in two ski resorts, and other miscellaneous equity interest investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated herein by reference to the 2002 Annual Report. (c) Narrative Description of Business The Liquidating Trust was organized for the sole purpose to liquidate and dissolve all of the remaining assets and liabilities of the Trust with no objective to continue or engage in the conduct of trade or business. The Liquidating Trust has no employees; however, it is managed pursuant to the Liquidating Trust Agreement with Wilmington Trust, as Trustee. The Trustee's role, among other things, is to complete the liquidation of the assets and to satisfy or discharge the liabilities of the Trust. The Trustee is compensated for such services as provided for in the Liquidating Trust Agreement. The Trustee has engaged AFG ASIT Corporation and EFG as managers to assist in the day-to-day management of the Liquidating Trust. The Liquidating Trust owns assets operating in three business segments: equipment leasing, equipment management and real estate ownership, development and management. Equipment leasing assets consist of the Liquidating Trust's equipment held for lease, which consists of forklifts, trucks, handling materials and other miscellaneous equipment. Equipment management assets consist of an equity interest in MILPI Holdings, LLC. MILPI Holdings, LLC is an equipment management company specializing in the leasing of transportation and related equipment. The Liquidating Trust's real estate assets consist primarily of an equity ownership interest in EFG Kirkwood LLC. EFG Kirkwood LLC was formed by AFG Investment Trust B and three affiliated Trusts and an affiliated corporation, Semele Group, Inc, for the purpose of acquiring an equity interest in two real estate companies. The companies consist of two ski resorts and related real estate and development assets and operations: Mountain Resort Holdings LLC with operations in Kirkwood, California and Mountain Springs LLC with operations in Durango, Colorado. EFG Kirkwood has no other significant assets other than its interest in the ski resorts. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. Item 2. Properties. --------------------- None. Item 3. Legal Proceedings. ----------------------------- The Liquidating Trust is subject to various claims and proceedings in the normal course of business. The Trustee believes that the disposition of such matters is not expected to have a material adverse effect on the financial position of the Liquidating Trust or its results of operations. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------------------------- None. PART II Item 5. Market for the Trust's Securities and Related Security Holder Matters. -------------------------------------------------------------------------------- (a) Market Information There is no public market for the sale of the beneficial interests of the Liquidating Trust. The Trustee under the terms of the Liquidating Trust Agreement will not allow for the transfer of such ownership except by will, intestate succession or operation of law. (b) Approximate Number of Security Holders At December 31, 2002, there were 690 record holders in the Liquidating Trust. (c) Dividend History and Restrictions As of December 31, 2002, there have been no distributions declared or distributed. Item 6. Selected Financial Data. ------------------------------------ Incorporated herein by reference to the section entitled "Selected Financial Data" in the 2002 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations. --------------- Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2002 Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risks. ----------------------------------------------------------------------------- None. Item 8. Financial Statements and Supplementary Data. ---------------------------------------------------------- Incorporated herein by reference to the financial statements and supplementary data included in the 2002 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and -------------------------------------------------------------------------------- Financial Disclosure. ---------------------- None. PART III Item 10. Directors and Executive Officers of the Liquidating Trust. ---------------------------------------------------------------------------- (a-b) Identification of Directors and Executive Officers The Liquidating Trust has no Directors or Officers. As indicated in Item 1 of this report, Wilmington Trust is the Trustee of the Liquidating Trust. Under the Liquidating Trust Agreement, the Trustee is responsible for the liquidation and dissolution of the Liquidating Trust's assets and the Beneficiaries have no right to participate in the control of such operations. Upon the transfer of assets to the Liquidating Trust, Wilmington Trust was given the power and authority to delegate or re-assign the authority of the Managing Trustee, AFG ASIT Corporation. The Managing Trustee of the Trust does not control the assets of the Liquidating Trust. EFG and AFG ASIT Corporation have been engaged by Wilmington Trust to assist it in the day-to-day management of the activities of the Liquidating Trust as "Managers". In addition to delegating the managing responsibilities of the Liquidating Trust, Wilmington Trust also holds title to all the property in the Liquidating Trust and controls cash disbursements. The names, titles and ages of the Directors and Executive Officers of the Managers as of March 31, 2003 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGER OF THE LIQUIDATING TRUST (See -------------------------------------------------------------------------------- Item 13) ---------
Name Title Age Term --------------- ----------------------------------------- --- ---------------- Gary D. Engle President and Chief Executive Officer of Until a Equis Corporation, the general partner of successor is EFG, and President and Director of AFG duly elected and ASIT Corporation 54 qualified James A. Coyne Executive Vice President of the Equis Corporation, the general partner of EFG, and Senior Vice President of AFG ASIT Corporation 43 Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corporation 40 Gail D. Ofgant Senior Vice President, Lease Operations of Equis Corporation, the general partner of EFG, and Senior Vice President of AFG ASIT Corporation 37
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Directors or Executive Officers. (e) Business Experience Mr. Engle, age 54, is Director and President of AFG ASIT Corporation and principal owner of EFG and sole shareholder, Director, President and Chief Executive Officer of Equis Corporation, EFG's general partner. Mr. Engle is also Chairman and Chief Executive Officer of Semele Group Inc. and is President and a Director of Equis II Corporation. Mr. Engle controls the general partners of Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Mr. Engle is also a member of the Board of Managers of Echelon Development Holdings LLC. Mr. Engle joined EFG in 1990 and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle co-founded Cobb Partners Development, Inc., a real estate and mortgage banking company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development organization owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has an M.B.A. degree from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Coyne, age 43, became Vice President of the AFG ASIT Corporation in 1997 and has been Senior Vice President of AFG ASIT Corporation and an owner of EFG since 1998. Mr. Coyne is Executive Vice President of Equis Corporation, the general partner of EFG, and President and Chief Operating Officer of Semele. He is also a Director and President of Equis II Corporation. Mr. Coyne joined EFG in 1989 and remained with the company until May 1993 when he resigned to join the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. Mr. Coyne remained with the Raymond Company until November 1994 when he re-joined EFG. From 1985 to 1989, Mr. Coyne was employed by Ernst & Whinney (now known as Ernst & Young LLP). Mr. Coyne holds a Masters degree in accounting from Case Western Reserve University and a B.S. in Business Administration from John Carroll University and is a Certified Public Accountant. Mr. Brock, age 40, became the Chief Financial Officer and Treasurer of AFG ASIT Corporation in 2002. Mr. Brock is also the Chief Financial Officer of PLM International Inc. Mr. Brock has been associated with PLM International, Inc. for over twelve years holding positions including Chief Financial Officer and Corporate Controller. Ms. Ofgant, age 37, has served as Senior Vice President of Equis Corporation since 1998. Ms. Ofgant joined EFG in July 1989 and held various positions in the organization before becoming Senior Vice President of the general partner of EFG in 1998. From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons Not applicable. Item 11. Executive Compensation. ----------------------------------- (a) Cash Compensation The Liquidating Trust has no employees; however, it is managed pursuant to the Liquidating Trust Agreement with Wilmington Trust Company as Trustee. The Trustee's role, among other things, is to complete the liquidation of the assets and to satisfy or discharge the liabilities of the Trust. The Trustee is compensated for such services as provided for in the Liquidating Trust Agreement. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Liquidating Trust has no employees, as discussed in Item 11(a), pursuant to section 5.3 of the Liquidating Trust Agreement, the Liquidating Trust incurs a monthly charge for personnel costs of EFG for persons engaged in providing administrative services to the Liquidating Trust. A description of the remuneration paid by the Liquidating Trust to EFG and its Affiliates for such services is included in Item 13 of this report and in Note 6 to the financial statements included in Item 15 herein. (d) Stock Options and Stock Appreciation Rights. Not applicable. (e) Long-Term Incentive Plan Awards Table. Not applicable. (f) Defined Benefit or Actuarial Plan Disclosure. Not applicable. (g) Compensation of Directors None. (h) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the Trustee or the Managers or its Affiliates which results or may result from their resignation, retirement or any other termination. Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------------------------- By virtue of its organization as a liquidating trust, the Liquidating Trust has no outstanding securities possessing traditional voting rights. As Liquidating Trustee, Wilmington Trust has complete control over the liquidation of the assets of the Liquidating Trust as specified in section 6.2 of the Liquidating Trust Agreement. Per the Liquidating Trust Agreement, the assets will be liquidated based on AFG Investment Trust B's beneficial ownership interest, adjusted for taxes. The beneficial ownership interest in AFG Investment Trust B ("Former Beneficial Interest") have no voting control over the liquidation of the assets. As of March 15, 2003, the following person or group owns more than 5% of the Former Beneficial Interest in AFG Investment Trust B:
Title Name and Amount of Percent of Address of Beneficial of Class Beneficial Owner Ownership Class --------------------- -------------------- ----------------- -------- Former Class B Equis II Corporation Beneficiary Interests 200 Nyala Farms 997,373 Interests 99.64% Westport, CT 06880
Equis II Corporation is a wholly-owned subsidiary of Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele, President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of the general partner of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. No person or group is known by the Trustee to own more than 5% of the Former Beneficial Class A Interest as of March 31, 2003. As of December 31, 2002, Semele owns the Former Special Beneficialy Interest of the Trust. See Item 10 and Item 13 of this report. The ownership and organization of EFG is described in Item 1 of this report. Item 13. Certain Relationships and Related Transactions. -------------------------------------------------------------- (a) Transactions with Management and Others All operating expenses incurred by the Liquidating Trust are disbursed by Wilmington Trust on behalf of the Liquidating Trust. The Trustee's role, among other things, is to complete the liquidation of the assets and to satisfy or discharge the liabilities of the Trust. The Trustee is compensated for such services as provided for in the Liquidating Trust Agreement. In accordance with the liquidation basis of accounting, the Liquidating Trust recorded an accrual during the period ended December 31, 2002 for the estimated costs to be incurred to liquidate the Trust. Approximately $30,000 of the accrual will be paid to EFG for salaries and other expenses incurred to liquidate the assets. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Trust None. (d) Transactions with Promoters Not applicable. Item 14. Controls and Procedures ------------------------------------ Based on their evaluation as of a date within 90 days of the filing of this Form 10-K, the Managers' Principal Executive Officer and AFG ASIT Corporation's Chief Financial Officer have concluded that the Liquidating Trust's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Liquidating Trust files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Liquidating Trust's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. -------------------------------------------------------------------------------- (a) Documents filed as part of this report:
(1) Financial Statement: Report of Independent Certified Public Accountants * Statement of Net Assets in Liquidation at December 31, 2002 * Notes to the Financial Statement. *
* Incorporated herein by reference to the appropriate portion of the 2002 Annual Report to security holders for the year ended December 31, 2002 (see Part II). (2) Financial Statement Schedules: None required. (3) Exhibits: 99.3 Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable. Exhibit Number ------ 2 Plan of Complete Liquidation and Dissolution, dated as of December 31, 2002, between AFG ASIT Corporation and AFG Investment Trust B was filed on Form 8-K dated December 31, 2002 as Exhibit 2.1 and is incorporated by reference. 10 Liquidating Trust Agreement dated as of December 31, 2002, between AFG ASIT Corporation and AFG Investment Trust B was filed on Form 8-K dated December 31, 2002 as Exhibit 10.8 and is incorporated by reference. 13 The 2002 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 99(a) Operating Agreement of EFG Kirkwood LLC, dated May 1, 1999 99(b) Amended and Restated Operating Agreement of Mountain Springs, LLC dated October 24, 2002 99.1 Certificate of the Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley 99.2 Certificate of the Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley 99.3 Press Release regarding Proxy Voting Results dated December 31, 2002 was filed in the Registrant's Form 8-K dated December 31, 2002 as Exhibit 99.3 and is incorporated by reference. (b) Reports on Form 8-K None. (c) Other Exhibits None. (d) Financial Statement Schedules (i) Consolidated Financial Statements for MILPI Holdings, LLC and Subsidiaries as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and the period February 7, 2001 through December 31, 2001 and Independent Auditors' Report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. AFG Investment Trust B Liquidating Trust By: Equis Financial Group Limited Partnership, a Massachusetts limited partnership corporation and the Manager of the Registrant. By: /s/ Gary D. Engle ---------------------- Gary D. Engle President and Chief Executive Officer of Equis Corporation, the general partner of EFG, and President and Director of AFG ASIT Corporation (Principal Executive Officer) Date: March 31, 2003 ---------------- By: /s/ Richard K Brock ---------------------- Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corp. (Principal Financial and Accounting Officer) Date: March 31, 2003 ---------------- CERTIFICATION: I, Gary D. Engle, certify that: 1. I have reviewed this annual report on Form 10-K of AFG Investment Trust B Liquidating Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the net assets in liquidation of the registrant as of December 31, 2002; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Gary D. Engle ---------------------- Gary D. Engle President of Equis Corporation, the general partner of EFG, and the President and Director of AFG ASIT Corporation (Principal Executive Officer) March 31, 2003 ------ CERTIFICATION: I, Richard K Brock, certify that: 1. I have reviewed this annual report on Form 10-K of AFG Investment Trust B Liquidating Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the net assets in liquidation of the registrant as of December 31, 2002; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Richard K Brock ----------------------- Richard K Brock Chief Financial Officer and Treasurer of AFG ASIT Corporation (Principal Financial and Accounting Officer) March 31, 2003 13 The 2002 Annual Report 23 Consent of Independent Certified Public Accountants 99(a) Operating Agreement of EFG Kirkwood LLC 99(b) Amended and Restated Operating Agreement of Mountain Springs, LLC 99.1 Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes - Oxley Act 99.2 Certificate of Chief Financial Officer pursuant to Section 906 of Sarbanes - Oxley Act 99.3 Press Release regarding Proxy Voting Results dated December 31, 2002. Schedule 14 D (i) Schedule 14 D (i) MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page ---------------------------------------------------------------------------------------------- ---- Independent Auditors' Report 3 Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 4 Consolidated Statements of Income for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 5 Consolidated Statements of Shareholders' Equity for the year ended December 31, 2002 and for for the period from February 7, 2001 through December 31, 2001 6 Consolidated Statements of Cash Flows for the year ended December 31, 2002 and for the period from February 7, 2001 through December 31, 2001 7 Notes to Consolidated Financial Statements 8
INDEPENDENT AUDITORS' REPORT 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 MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (in thousands of dollars, except share amounts)
2002 2001 ------- ------- ASSETS Cash and cash equivalents $ 6,622 $14,037 Receivables, net of allowance for doubtful accounts of $136 at December 31, 2002 and $45 at December 31, 2001 305 39 Receivables from affiliates 670 951 Equity interest in affiliates 19,361 20,948 Restricted cash and cash equivalents 60 75 Assets held for sale 6,227 - Goodwill, net of accumulated amortization of $765 as of December 31, 2002 and 2001 8,134 4,590 Other assets, net 3,021 2,759 ------- ------- Total assets $44,400 $43,399 ======= ======= LIABILITIES Payables and other liabilities $ 5,899 $ 5,702 Deferred income taxes 12,541 9,751 ------- ------- Total liabilities 18,440 15,453 ------- ------- MINORITY INTERESTS - 3,029 ------- ------- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock ($0.01 par value, 20 shares authorized and outstanding) - - Paid-in capital, in excess of par 21,676 21,970 Retained earnings 4,284 2,947 ------- ------- Total shareholders' equity 25,960 24,917 ------- ------- Total liabilities, minority interests and stockholders' equity $44,400 $43,399 ======= =======
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars)
For the Period For the Year From February 7, Ended 2001 through December 31, December 31, 2002 2001 --------- --------------- REVENUES Management fees $4,494 $5,217 Operating lease income 122 472 Acquisition and lease negotiation fees - 2,032 Gain (loss) on disposition of assets 24 (91) Other 588 1,030 ------ ------ Total revenues 5,228 8,660 ------ ------ EXPENSES Depreciation and amortization 177 1,255 Impairment of investment in managed programs 501 511 General and administrative 2,800 4,090 ------ ------ Total expenses 3,478 5,856 ------ ------ Operating income 1,750 2,804 Equity income in managed programs 133 1,716 Interest income, net 323 378 Other (expense) income, net (55) 89 ------ ------ Income before income taxes and minority interest 2,151 4,987 Provision for income taxes 774 1,611 Minority interest 40 429 Net income $1,337 $2,947 ====== ====== Net income per weighted-average common share outstanding $ 67 $ 147 ====== ======
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEBMER 31, 2002 AND FOR THE PERIOD FROM FEBRUARY 7, 2001 THROUGH DECEMBER 31, 2001 (in thousands of dollars, except shares)
Common Additional Retained Shares Stock Paid in Capital Earnings Total ------- ------ ------------------ --------- ------- Balance at February 7, 2001 20 $ - $ 21,776 $ - $21,776 Capital contribution - - 194 - 194 Net income - - - 2,947 2,947 ------- ------ ------------------ --------- ------- Balance at December 31, 2001 20 - 21,970 2,947 24,917 Capital contribution - - 4,363 - 4,363 Dividends paid - - (4,657) - (4,657) Net income - - - 1,337 1,337 ------- ------ ------------------ --------- ------- Balance at December 31, 2002 20 $ - $ 21,676 $ 4,284 $25,960 ------- ------ ------------------ --------- -------
See accompanying notes to these consolidated financial statements. MILPI HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars)
For the Period from For the Year February 7, 2001 Ended through December 31, December 31, 2002 2001 --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income $ 1,337 $ 2,947 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization expense 177 1,255 Compensation expense related to variable stock options -- 315 (Gain) loss on disposition of assets (24) 91 Equity income in managed programs (133) (1,716) Minority interest 40 429 Impairment of equity Investments 501 511 Deferred income tax provision 561 867 Changes in assets and liabilities: (14)-- -- Receivables and receivables from affiliates 15 1,576 Other assets, net (406) (176) Payables and other liabilities (250) (9,484) --------------------- ------------------ Net cash provided by (used in) operating activities 1,818 (3,385) --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Cash distributions from managed programs 1,645 1,591 Loans made to shareholders (1,345) (5,500) Repayment of loans made to shareholders 1,345 5,500 Purchase of property, plant and equipment (67) (71) Proceeds of sale of equipment for lease 58 313 Proceeds from the sale of assets held for sale -- 10,250 Purchase of the assets held for sale (6,227) -- Purchase of PLM International, Inc. minority interest (4,363) -- Decrease in restricted cash -- 1,673 --------------------- ------------------ Net cash (used in) provided by investing activities (8,954) 13,756 --------------------- ------------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Restricted cash 15 -- Capital contribution 4,363 194 Dividends paid (4,657) -- Redemption of stock options -- (919) --------------------- ------------------ Net cash used in financing activities (279) (725) --------------------- ------------------ Net (decrease) increase in cash and cash equivalents (7,415) 9,646 Cash and cash equivalents at beginning of period 14,037 4,391 --------------------- ------------------ Cash and cash equivalents at end of period $ 6,622 $ 14,037 ===================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for taxes $ 243 $ 6,216 ===================== ================== Cash paid during the period for interest $ 1 $ 6 ===================== ==================
See accompanying notes to these consolidated financial statements. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BACKGROUND MILPI Holdings, LLC and subsidiaries ("MILPI" or the "Company") was formed on December 12, 2000, under the laws of the state of Delaware and is governed by its Operating Agreement, dated December 13, 2000. MILPI had no activities from December 12, 2000 through February 7, 2001. MILPI was created by four separate trusts (AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust D, collectively the "Trusts") for the purpose of acquiring the entire interest in PLM International, Inc. and subsidiaries ("PLM"). PLM is an equipment management company and operates in one business segment, the leasing of transportation equipment. On February 7, 2001, MILPI Acquisition Corp. ("MAC"), a wholly-owned subsidiary of MILPI, closed on its tender offer to purchase any and all of PLM's outstanding common stock for a purchase price of $3.46 per share. The purchase price was determined based on competitive bids and a valuation model using the expected future cash flows of the Company. The Company also hired an investment banking firm to issue a fairness opinion on the purchase price. Pursuant to the cash tender offer, the Trusts through MAC acquired approximately 83% of PLM's common stock in February 2001 for a total purchase price of $21.8 million and contributed the shares to MILPI. Approximately $2.0 million of total costs estimated for severance of PLM employees and relocation costs in accordance with management's formal plan to involuntarily terminate employees, which plan was developed in conjunction with the acquisition, were accrued as acquisition costs. The assets of PLM included cash and cash equivalents of approximately $4.4 million. The acquisition resulted in goodwill of approximately $5.8 million. Goodwill was reduced by approximately $0.5 million later in 2001 due to a revision in the estimates of severance and relocation costs originally recorded as acquisition costs. Amounts paid in 2001 related to the severance of employees and for relocation costs were approximately $1.5 million. The Company's consolidated balance sheet, reflecting the above business combination, as of February 7, 2001 was as follows (in thousands of dollars):
ASSETS Cash and cash equivalents $ 4,391 Restricted cash and cash equivalents 1,748 Receivables 1,222 Receivables from affiliates 1,344 Equity interest in affiliates 21,334 Assets held for sale 10,250 Other assets 3,406 Goodwill 5,840 ------- Total assets $49,535 ======= LIABILITIES Payables and other liabilities $16,275 Deferred income taxes 8,884 ------- Total liabilities 25,159 Minority interest 2,600 SHAREHOLDERS' EQUITY Common stock ($0.01 par value, 20 shares authorized and outstanding) - Paid-in capital, in excess of par 21,776 ------- Total liabilities, minority interest and shareholders' equity $49,535 =======
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 on February 6, 2002. The remaining interest was purchased for $4.4 million at the $3.46 per common share price established in the tender offer. Approximately 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $0.4 million of total costs estimated for severance of PLM employees and property abandonment in accordance with management's formal plan to involuntary terminate employees, which plan was developed in conjunction with this acquisition, were accrued as acquisition costs. Amounts paid related to the severance of employees and for property abandonment in 2002 were approximately $0.1 million. The allocation of the February 6, 2002 purchase price is as follows (in thousands of dollars):
Equity Interest in Affiliates $ 426 Goodwill 3,544 Payables and Other Liabilities (446) Deferred Income Tax Liability (2,230) Minority Interest 3,069 ------- Total $ 4,363 =======
The acquisition of the stock of PLM was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141"). 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. The results of operations of PLM since February 7, 2001 have been included in the consolidated financial statements. Concurrent with the February 7, 2001, acquisition, PLM ceased to be publicly traded. On October 10, 2002, the Company formed a limited liability company under the Delaware Limited Liability Company Act, MILPI Equipment Management, LLC (MILPI EM). MILPI EM is expected to begin earning revenues in connection with the management of limited partnerships and other managed programs sometime in 2003. The Company's fiscal year end is December 31. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of MILPI Holdings, LLC and its wholly-owned subsidiaries. In addition, investments for which the Company acts as manager or general partner, and therefore has significant influence but does not control, are accounted for using the equity method. All significant intercompany balances and transactions among the consolidated group have been eliminated. The Company recognized a minority interest in the Company's consolidated financial statements, until February 6, 2002, the date the Company acquired the minority interest, to reflect PLM's common shares not owned by the Company as of that date. ESTIMATES These consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT IN, AND MANAGEMENT OF, EQUIPMENT GROWTH FUNDS, OTHER LIMITED PARTNERSHIPS, PRIVATE PLACEMENT PROGRAMS AND LIMITED LIABILITY COMPANY The Company earns revenues in connection with the management of limited partnerships and other managed programs. Equipment acquisition and lease negotiation fees are earned through the purchase and initial lease of equipment, and are recognized as revenue when the Company completes all of the services required to earn the fees, typically when binding commitment agreements are signed. Management fees are earned for managing the equipment portfolios and administering investor programs as provided for in various agreements, and are recognized as revenue over time as they are earned. As compensation for organizing a partnership investment program, the Company was granted an interest (between 1% and 5%) in the earnings and cash distributions of the program, in which PLM Financial Services, Inc. ("FSI"), a wholly owned subsidiary of PLM, is the General Partner. The Company recognizes as partnership interests its equity interest in the earnings of the partnerships, after adjusting such earnings to reflect the effect of special allocations of the programs' gross income allowed under the respective partnership agreements. From May 1995 through May 1996, Professional Lease Management Income Fund I, LLC ("Fund I"), a limited liability company with a no front-end fee structure, was offered as an investor program. FSI serves as the manager for the program. No compensation was paid to PLM for the organization and syndication of interests, the acquisition of equipment, the negotiation of leases for equipment, or the placement of debt. PLM funded the costs of organization, syndication, and offering through the use of operating cash. PLM has an equity interest of 15% for its contribution to the program. In return for its investment, PLM is entitled to a 15% interest in the cash distributions and earnings of Fund I, subject to certain allocation provisions. PLM's interest in the cash distributions and earnings of Fund I will increase to 25% after the investors have received distributions equal to their invested capital. The Company is entitled to reimbursement from the investment programs for providing certain administrative services at the lesser of cost or market rates. In accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying values of such assets may not be recoverable. Losses for impairment are recognized when the undiscounted cash flows estimated to be realized from a long-lived asset are determined to be less than the carrying value of the asset and the carrying amount of long-lived assets exceed its fair value. The determination of fair value for a given investment requires several considerations, including but not limited to, income expected to be earned from the asset, estimated sales proceeds, and holding costs excluding interest. OPERATING LEASE INCOME Operating lease income consists of rental revenue generated from assets held for operating leases and assets held for sale that are on lease, which is recognized equally on a straight-line basis over the lease term. RESTRICTED CASH AND CASH EQUIVALENTS The Company considers highly liquid investments readily convertible into known amounts of cash with original maturities of 90 days or less as cash equivalents. Restricted cash consists of bank accounts and short-term investments that are subject to withdrawal restrictions per loan agreements. 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill represents the excess of the aggregate purchase price of PLM over the fair market value of the identifiable net assets acquired in accordance with SFAS No. 141. The Company allocates the total purchase price to the assets acquired and liabilities assumed based on the relative fair market values at the date of acquisition. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS. No. 142") on January 1, 2002. As a result, the discontinuance of goodwill 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 is calculated using several valuation models which utilize the expected future cash flows of the Company. In accordance with SFAS No. 142, the Company performed an evaluation of the fair value of goodwill as of January 1, 2002 and found no indication that goodwill was impaired. Based on an analysis performed as of December 31, 2002, and consideration of events that have occurred and circumstances that have changed since the most recent fair value determination, including the minority interest acquisition, the likelihood that a current fair value determination would be less than the carrying amount of the reporting unit is remote as of December 31, 2002. Goodwill of approximately $5.4 million was recorded in conjunction with the acquisition of 83% of the common stock of PLM. The Company recorded goodwill of approximately $3.5 million in conjunction with the acquisition of the remaining 17% of the outstanding common stock of PLM in February 2002. The comparison of the net income for the year ended December 31, 2002 and the pro forma net income for the period from February 7, 2001 through December 31, 2001, assuming no goodwill amortization, are summarized as follows (in thousands of dollars):
For the For the Period From Year February 7, 2001 Ended Through December 31, 2002 December 31, 2001 ------------------ ------------------ Reported net income $ 1,337 $ 2,947 Add back: goodwill amortization - 765 ------------------ ------------------ Pro forma net income $ 1,337 $ 3,712 ================== ================== Net earnings per share: Reported net income $ 67 $ 147 Add back: Goodwill amortization - 38 ------------------ ------------------ Pro forma net income $ 67 $ 185 ================== ==================
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows (in thousands of dollars):
Balance as of December 31, 2001 $4,590 Add: Goodwill acquired during the year 3,544 ------ Balance at December 31, 2002 $8,134 ======
INCOME TAXES MILPI is a partnership and as such is not taxed on its operations. PLM is a C corporation, which recognizes income tax expense using the asset and liability method. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred income taxes arise primarily because of differences in the timing of reporting equipment depreciation, partnership income, and certain accruals for financial statement and income tax reporting purposes. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("Statement") No. 143, "Accounting for Asset Retirement Obligations". Statement 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 Company adopted Statement No. 143 at the beginning of fiscal 2003 and such adoption had no effect on the Company'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 Company adopted SFAS No. 145 in the second quarter of fiscal 2002. 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 cannot be 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"). The interpretation elaborates on the disclosures to be made by a guarantor in its financial statements. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002. It also requires the guarantor to recognize a liability for the fair value of guarantees entered into after December 31, 2002 at the inception of the guarantee. This interpretation had no effect on the financial position and results of operations of the Company. 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 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Company is required to perform this assessment by September 30, 2003 and consolidate any variable interest entities for which the Company will absorb a majority of the entities' expected losses or receive a majority of the expected residual gains. The Company has determined that it is not reasonably possible that they have any variable interests. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with current year presentation and do not change the results of the prior period financial statements. 2. ASSETS HELD FOR SALE In conjunction with the acquisition of PLM in February 2001, the Company acquired $10.3 million in marine containers that were classified as assets held for sale. The Company sold the marine containers to affiliated programs at cost, which approximated fair value in the first quarter of 2001. The Company has arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) managed programs in which FSI provides management services but does not hold an ownership interest (Non-Program Affiliates). 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 the Company or by the Program Affiliates. The Company will manage the leased and purchased railcars. The Company will not be liable for these railcars. The Company estimates that the total value of purchased railcars will not exceed $26.0 million with approximately one third of the railcars being purchased in each of 2002, 2003 and 2004. As of December 31, 2002, the Company had purchased $6.2 million of these railcars. The Company sold these railcars to a Program Affiliate in the first quarter of 2003 (See Note 16). 3. EQUITY INTEREST IN AFFILIATES FSI is the General Partner or manager of ten investment programs. Distributions of the programs are allocated as follows: 99% to the limited partners and 1% to the General Partner in PLM Equipment Growth Fund (EGF) I and PLM Passive Income Investors 1988-II; 95% to the limited partners and 5% to the General Partner in EGFs II, III, IV, V, VI, and PLM Equipment Growth & Income Fund VII (EGF VII); and 85% to the members and 15% to the manager in Fund I. PLM's interest in the cash distributions of Fund I will increase to 25% after the investors have received distributions equal to their invested capital. Net income is allocated to the General Partner subject to certain allocation provisions. In accordance with SFAS No. 144, the Partnership 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 and compares this amount 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. On December 31, 2002, one of the PLM managed programs in which MILPI has an equity investment adopted a formal plan of liquidation and transferred the remaining assets of this managed program to a liquidating trust. MILPI is actively marketing the equipment in this managed program and is in the process of finalizing the estimated costs of liquidation. 3. EQUITY INTEREST IN AFFILIATES (CONTINUED) Based on a revised liquidation analysis as of December 31, 2002, completed for this managed program on February 7, 2003, MILPI believes its equity investment in this program is impaired. Therefore, for the year ended December 31, 2002, MILPI recorded an impairment loss of $0.5 million on its equity investment in this affiliate. In accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121"), in 2001 the Company reviewed the carrying value of its investments whenever circumstances indicated that the carrying value may not be recoverable. If projected undiscounted future cash flows were lower than the carrying value of its equity interest in affiliates, an impairment was recorded. During the period from February 7, 2001 through December 31, 2001, the Company recorded an impairment of $0.5 million on its equity interest in affiliates due to a change in market conditions, primarily in the airline industry, after the events of September 11, 2001. Most of the investment program agreements contain provisions for special allocations of the programs' gross income. While none of the partners or members, including the General Partner and manager, are liable for program borrowings, and while the General Partner or manager maintains insurance against liability for bodily injury, death, and property damage for which an investment program may be liable, the General Partner or manager may be contingently liable for nondebt claims against the program that exceed asset values. The summarized combined financial data for FSI's affiliates as of and for the year ended December 31, 2002, and as of and for the period from February 7, 2001 through December 31, 2001 is as follows (in thousands of dollars):
2002 2001 -------- -------- Total assets $201,683 $229,358 Total liabilities 53,617 67,579 Partners' equity 148,065 161,779 Total revenues $72,078 $91,085 Total expenses 68,286 70,688 Net income 3,792 20,397
4. OTHER ASSETS, NET Other assets, net, consists of the following as of December 31, 2002, and 2001, respectively (in thousands of dollars):
2002 2001 ------ ----- Cash surrender value of officers' life insurance policies $2,721 2,343 Prepaid expenses, deposits and other 169 153 Furniture, fixtures, and equipment, net 102 85 Commercial and industrial equipment, net 29 178 ------ ----- Total other assets, net $3,021 2,759 ------ -----
5. WAREHOUSE CREDIT FACILITY The Company is a participant in a $10.0 million warehouse facility. In July 2002, the Company reached an agreement with the lenders of the $10.0 million warehouse facility to extend the expiration date of the facility to June 30, 2003. The warehouse facility is shared by the Company, PLM Equipment Growth Fund V, PLM Equipment Growth Fund VI, PLM Equipment Growth and Income Fund VII and Fund I. The facility provides for financing up to 100% of the cost of equipment. Outstanding borrowings by one borrower reduce the amount available to each of the other borrowers under the facility. Individual borrowings may be outstanding for no more than 270 days, with all advances due no later than June 30, 2003. Interest accrues either at the prime rate or LIBOR plus 2.0% at the borrower's option and is set at the time of an advance of funds. All borrowings are guaranteed by PLM. As of December 31, 2002, there were no outstanding borrowings on this facility by any of the eligible borrowers. 6. INCOME TAXES The provision for income taxes attributable to income from operations consists of the following (in thousands of dollars):
2002 2001 ---------------------------- -------------------------- Federal State Total Federal State Total Current $ 64 $ 149 $ 213 $ 551 $ 193 $ 744 Deferred 395 166 561 705 162 867 ------ ------- ------ ------- ----- ------ Total $ 459 $ 315 $ 774 $ 1,256 $ 355 $1,611 ====== ======= ====== ======= ===== ======
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns ultimately filed. The difference between the effective rate and the expected federal statutory rate is reconciled below:
Year Ended Period from February 7, December 31, 2001 through 2002 December 31, 2001 ------------- ------------------------ Federal statutory tax expense rate 34% 34% State income tax rate 5 5 Other (3) (7) ------------- ------------------------ Effective tax expense rate 36% 32% ============= ========================
There are no net operating loss carryforwards for federal income tax purposes or alternative minimum tax credit carryforwards as of December 31, 2002. The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities as of December 31 are presented below (in thousands of dollars):
Year Ended Period from February December 31, 7, 2001 through 2002 December 31, 2001 ----------------- ---------------------- Deferred tax assets from continuing operations: Partnership Organization and Syndication costs $ 8,300 $ 8,300 Federal benefit of state taxes 905 735 Other 126 329 ----------------- ---------------------- Total gross deferred tax assets 9,331 9,364 Less valuation allowance (8,300) (8,594) ----------------- ---------------------- Net deferred tax assets 1,031 770 ----------------- ---------------------- Deferred tax liabilities: Partnership interests 12,685 10,520 Other 887 1 ----------------- ---------------------- Total deferred tax liabilities 13,572 10,521 ----------------- ---------------------- Total net deferred tax liabilities $ 12,541 $ 9,751 ================= ======================
6. INCOME TAXES (CONTINUED) Management has reviewed all established interpretations of items reflected in its consolidated tax returns and believes that these interpretations require valuation allowances as described in SFAS No. 109, "Accounting for Income Taxes". The valuation allowance contained in the 2002 deferred tax account includes items that may result in future capital losses. 7. TRANSACTIONS WITH AFFILIATES In addition to various fees payable to the Company or its subsidiaries, the affiliated programs reimburse the Company for certain expenses, as allowed in the program agreements. Reimbursed expenses totaled $1.3 million and $1.8 million for the year ended December 31, 2002 and the period from February 7, 2001 through December 31, 2001, respectively. Outstanding amounts are paid under normal business terms. On February 11, 2002, the Company loaned $1.3 million to two of the trusts that own MILPI Holdings, LLC. The notes bear interest at LIBOR plus 200 basis points and matured on January 6, 2003. The interest rate charged on the loan is consistent with third party rates. This loan was prepaid in full plus all outstanding interest in December 2002. As of December 31, 2002, the Company had receivables from affiliates of approximately $0.7 million, which represented unpaid management fees. 8. SHAREHOLDERS' EQUITY In February 2002 the four Trusts that own MILPI contributed $4.4 million to the Company. These funds were used to purchase the remaining outstanding stock of PLM. In March and December 2002, the Company declared and paid cash dividends of approximately $2.7 million and $2.0 million, respectively, to the Trusts. 9. MINORITY INTEREST Minority interest is related to the portion of PLM's stock not owned by MILPI Holdings, LLC. The decrease in minority interest is attributable to the Company's purchase of the remaining 17% minority interest in the first quarter of 2002. Because all of the remaining minority interest shares were purchased in the first quarter of 2002, minority interest has been eliminated as of December 31, 2002. 10. RISK MANAGEMENT Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables from affiliated entities. The Company places its temporary cash investments with financial institutions and other creditworthy issuers and limits the amount of credit exposure to any one party. The Company's involvement with the management of the receivables from affiliated entities limits the credit exposure from affiliated entities. In 2002, Professional Lease Management Income Fund 1, LLC, PLM Equipment Growth Fund VI, and PLM Equipment Growth and Income Fund VII accounted for 17%, 17% and 17% of total revenues, respectively. No other customer accounted for over 10% of revenue in 2002. In 2001, Professional Lease Management Income Fund 1, LLC, PLM Equipment Growth Fund VI and PLM Equipment Growth and Income Fund VII, accounted for 26%, 20% and 13% of total revenues, respectively. No other customer accounted for over 10% of revenue in 2001. 10. RISK MANAGEMENT (CONTINUED) As of December 31, 2002, management believes the Company had no other significant concentrations of credit risk that could have a material adverse effect on the Company's business, financial condition, or results of operations. 11. GEOGRAPHIC INFORMATION All of the Company's revenues for the year ended December 31, 2002, and for the period from February 7, 2001 through December 31, 2001 were recognized from entities domiciled in the United States and all of the Company's long-lived assets are located in the United States. 12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations of the Company for the year ended December 31, 2002 (in thousands of dollars, except per share amounts):
2002 ----------------------------------------------- March June September December 31, 30, 30, 31, Total ------ ------ ---------- ---------- ------ Revenue $1,509 $1,334 $ 1,011 $ 1,374 $5,228 Net income $ 553 $ 807 $ 104 $ (127) $1,337 Net income per weighted-average common share outstanding: $ 28 $ 40 $ 5 $ (6) $ 67
During the third quarter ended September 30, 2002, the Company had a decrease in operating lease revenue, management and other fees totaling approximately $0.3 million compared to the quarter ended June 30, 2002. The Company's equity interests in the growth funds decreased approximately $0.4 million. Both decreases contributed to a decline in net income at September 30, 2002, compared to the period ended June 30, 2002. During the quarter ended December 31, 2002, the Company had increased management fee revenue related to forklifts that had not been on lease during the quarter ended September 30, 2002. In addition, management fee revenue was recognized for the payment of receivables that had previously been written off. The Company's equity interests in the growth funds decreased approximately $0.2 million as a result of railcar impairments. Additionally, the Company recorded a $0.5 million impairment loss in conjunction with a managed program that adopted a formal plan of liquidation. The following is a summary of the quarterly results of operations of the Company for the period February 7, 2001 through December 31, 2001 (in thousands of dollars, except per share amounts):
2001 --------------------------------------------- March June September December 31, 30, 30, 31, Total ------ ---------- --------- ------ ------ Revenue $1,648 $ 2,005 $ 3,157 $1,850 $8,660 Net income $ 776 $ 568 $ 1,293 $ 310 $2,947 Net income per weighted-average common share outstanding: $ 39 $ 28 $ 65 $ 16 $ 147
13. QUARTERLY RESULTS OF OPERATIONS (CONTINUED) In the third quarter of 2001, PLM earned acquisition and lease negotiation fees of $1.8 million, which resulted in after-tax net income of $1.1 million. 14. COMMITMENTS AND CONTINGENCIES INTERNAL REVENUE SERVICE AUDIT In March 2001, the Internal Revenue Service ("IRS") notified PLM that it would conduct an audit of certain Forms 1042, "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons." The audit related to payments to unrelated foreign entities made by two partnerships in which PLM formerly held interests as the 100% direct and indirect owner. One partnership's audit related to Forms 1042 for the years 1997, 1998 and 1999, while the other partnership's audit related to Forms 1042 for the years 1998 and 1999. In September 2002, the IRS notified PLM that they had completed their examination of the related tax returns and that they had assessed no changes to the reported taxes. LEASE AGREEMENTS PLM and its subsidiaries have entered into operating leases for office space. PLM's total net rent expense was $0.2 million and $0.4 million for the year ended December 31, 2002 , and for the period from February 7, 2001 through December 31, 2001, respectively. Future payments under lease agreements are $0.3 million in 2003, $0.2 million in 2004, $0.1 million in 2005, $0 in 2006, 2007, and thereafter, respectively. Future receipts under a noncancelable sublease extending through 2004 are $0.1 million as of December 31, 2002. CORPORATE GUARANTEE As of December 31, 2002, PLM had guaranteed certain obligations up to $0.4 million of a Canadian railcar repair facility, in which PLM had a 10% ownership interest. This obligation was accrued at December 31, 2002. EMPLOYMENT AGREEMENTS PLM entered into a severance agreement with an individual that will require PLM to pay severance in the event the employee is terminated after a change in control as defined in the employment agreement. In addition, PLM is under agreement to pay the health benefits of one individual through September 2003. As of December 31, 2002, the total future contingent liability for these payments was $0.2 million. WAREHOUSE CREDIT FACILITY See Note 5 for discussion of PLM's credit warehouse facility. OTHER PLM life insurance policies on certain current and former employees, which had a $2.7 million cash surrender value as of December 31, 2002, are included in other assets. COMMITMENT TO PURCHASE RAILCARS The Company has arranged for the lease or purchase of a total of 1,050 pressurized tank railcars by (i) partnerships and managed programs in which FSI serves as the general partner or manager and holds an ownership interest (Program Affiliates) or (ii) managed programs in which FSI provides management services but does not hold an ownership interest (Non-Program Affiliates). These railcars will be delivered over the next three 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 the Company or by the Program Affiliates. The Company will manage the leased and purchased railcars. The Company will not be liable for these railcars. The Company estimates that the total value of purchased railcars will not exceed $26.0 million with one third of the railcars being purchased in each of 2002, 2003 and 2004. As of December 31, 2002, the Company had purchased $6.2 million of these railcars. The Company sold these railcars to Program Affiliates in the first quarter of 2003 (See Note 16). Commitments and contingencies as of December 31, 2002 are as follows (in thousands of dollars):
Less than 1-3 4-5 After 5 Current Obligations Total 1 year Years Years Years ------- ------- -------- ------ -------- Commitment to purchase railcars $ 19,742 $11,300 $ 8,442 $ - $ - Line of credit - - - - - ------- ------- -------- ------ -------- $19,742 $11,300 $ 8,442 $ - $ - ------- ------- -------- ------ --------
LITIGATION PLM is involved as a plaintiff or defendant in various other legal actions incidental to its business. Management does not believe that any of these actions will be material to the financial condition or results of operations of the Company. 15. PROFIT SHARING, 401(K) PLAN AND STOCK OPTION PLANS The 401(k) Plan (the "Plan") provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code. The Plan is a contributory plan available to essentially all full-time employees of PLM in the United States. In 2002, PLM employees who participated in the Plan could elect to defer and contribute to the trust established under the Plan wages up to $11,000. PLM matched up to a maximum of $4,000 of PLM employees' 401(k) contributions in 2001 to vest in four equal installments over a four-year period. The Company's total 401(k) contributions, net of forfeitures, were $0.1 million for 2002. The Profit Sharing and Stock Option Plans were terminated upon completion of the merger in 2002. 16. SUBSEQUENT EVENTS In the first quarter of 2003, the Company sold its portfolio of railcars to a Program Affiliate for its cost of $6.2 million, which approximated fair market value. This sale resulted in a gain on disposition to the Company of $0.1 million. On February 12, 2003, AFG Investment Trust C and AFG Investment Trust D filed a proxy statement, which was subsequently approved. In March 2003, the shareholders approved the following articles: 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 the reinvestment period for AFG Investment Trust C and AFG Investment Trust D. 2. To approve a transaction whereby a newly 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 Agreements of AFG Investment Trust C and AFG Investment Trust D to approve grants and exercises of rights of first refusal in connection with joint ventures between AFG Investment Trust C and AFG Investment Trust D 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 AFG Investment Trust C and AFG Investment Trust D shared 100% ownership of MILPI. 5. To allow AFG Investment Trust C and AFG Investment Trust D, in the operation of PLM, to enter into business arrangements with affiliates of AFG Investment Trust C and AFG Investment Trust D 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.