10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 ----------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . -------- Commission File No. 0-21390 AFG INVESTMENT TRUST B ---------------------- (Exact name of registrant as specified in its charter) Delaware 04-3157230 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 88 Broad Street, Boston, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 ------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- AFG INVESTMENT TRUST B FORM 10-Q INDEX

AFG INVESTMENT TRUST B STATEMENT OF FINANCIAL POSITION SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST B STATEMENT OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST B STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)

The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST B STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)

See Note 7 to the financial statements regarding the Trust's acquisition of interests in MILPI during the nine months ended September 30, 2001. The accompanying notes are an integral part of these financial statements. AFG INVESTMENT TRUST B NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) NOTE 1 - RESTATEMENT OF SEPTEMBER 30, 2000 FINANCIAL STATEMENTS ------------------------------------------------------------------------ After AFG Investment Trust B ("the Trust") filed its Form 10-Q for the quarter ended September 30, 2000 (the "September 30, 2000 Form 10-Q) with the United States Securities and Exchange Commission ("SEC"), the Trust received addition information related to the underlying operations of its interest in EFG Kirkwood LLC ("EFG Kirkwood LLC"). Consistent with the Trust's accounting policy of recording the equity income (loss) of its underlying interest when as the financial information becomes available, the Trust recorded its equity income (loss) for EFG Kirkwood for the year ended December 31, 2000 in the fourth quarter of 2000. As a result, the Trust's financial results reported in its Annual Report on Form 10-K (the "2000 10-K") for the year ended December 31, 2000 filed with the SEC properly reflect the entire year's operations. The Trust has restated its Statement of Operations for the three and nine months ended September 30, 2000 to properly reflect the equity (loss) from EFG Kirkwood for these periods and to facilitate a more meaningful analysis of Management's Discussion and Analysis of Financial Condition and Results of Operations. These adjustments resulted in a net decrease in earnings for the three and nine months ended September 30, 2000 of $286,560 ($0.27 and $0.09 per Class A beneficiary interest and Class B beneficiary interest, respectively) and $64,101($0.01 and $0.04 per Class A beneficiary interest and Class B beneficiary interest, respectively). As a result, the accompanying financial statements for the three and nine months ended September 30, 2000 have been restated from the amounts previously reported. NOTE 2 - BASIS OF PRESENTATION ----------------------------------- The financial statements presented herein are prepared in conformity with accounting principles generally accepted in the United States for interim financial reporting and the instructions for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the SEC and are unaudited. As such, these financial statements do not include all information and footnote disclosures required under accounting principles generally accepted in the United States for complete financial statements and, accordingly, the accompanying financial statements should be read in conjunction with the footnotes presented in the 2000 Annual Report. Except as disclosed herein, there has been no material change to the information presented in the footnotes to the 2000 Annual Report. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary to present fairly the financial position at September 30, 2001 and December 31, 2000 and results of operations for the three and nine months ended September 30, 2001 and 2000 have been made and are reflected. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire year. Certain amounts previously reported in the December 31, 2000 financial statements have been reclassified to conform to the September 30, 2001 presentation. The table below details the allocation of income (loss) in each of the quarters for the nine months ended September 30, 2001.

NOTE 3 - CASH EQUIVALENTS AND INVESTMENT SECURITIES ---------------------------------------------------------- The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Investment securities consisted of equity securities and debt securities that were classified as available-for-sale. Available-for-sale securities were carried at fair value, with unrealized gains and losses reported as a separate component of participants' capital. The amortized cost of debt securities was adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income on the accompanying Statement of Operations. At September 30, 2001, the Trust had $730,584 invested in federal agency discount notes, repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities, or other highly liquid overnight investments. NOTE 4 - REVENUE RECOGNITION -------------------------------- Rents are payable to the Trust monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Trust may enter primary-term, renewal or re-lease agreements, which expire beyond the Trust's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Trust's business activities as the Managing Trustee and the Advisor would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. Future minimum rents of $510,542 are due as follows:

In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as lease revenue during the three months ended June 30, 2001 and its share of the maintenance payment was $35,440, which was accrued as a maintenance obligation at September 30, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs will receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. NOTE 5 - EQUIPMENT --------------------- The following is a summary of equipment owned by the Trust at September 30, 2001. Remaining Lease Term (Months), as used below, represents the number of months remaining from September 30, 2001 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of Equis Financial Group Limited Partnership ("EFG"), the acquisition cost of the equipment did not exceed its fair market value.

At September 30, 2001, the Trust's equipment portfolio included equipment having a proportionate original cost of approximately $2,120,000, representing approximately 57% of total equipment cost. Certain of the equipment and related lease payment streams were used to secure the Trust's loan with a third party lender. The preceding summary of equipment includes leveraged equipment having an original cost of approximately $1,240,000 and a net book value of $915,000 at September 30, 2001 (see Note 9). At September 30, 2001, the cost of fully depreciated equipment held for sale or re-lease was approximately $859,000. The Managing Trustee is actively seeking the sale or re-lease of all equipment not on lease. In addition, the summary above includes equipment being leased on a month-to-month basis. NOTE 6 - INTEREST IN EFG KIRKWOOD --------------------------------------- On May 1, 1999, the Trust and three affiliated trusts (collectively the "Trusts") and Semele Group Inc. ("Semele") formed a joint venture, EFG Kirkwood, for the purpose of acquiring preferred and common stock interests in Kirkwood Associates Inc. ("KAI"). The Trusts purchased Class A membership interests in EFG Kirkwood and Semele purchased Class B membership interests in EFG Kirkwood. Generally, the Class A interest holders are entitled to certain preferred returns prior to distribution payments to the Class B interest holder. The Trusts collectively own 100% of the Class A membership interests in EFG Kirkwood and Semele owns 100% of the Class B membership interests. The Trusts' interests in EFG Kirkwood constitute 50% of the voting securities of that entity under the operating agreement for the LLC, which gives equal voting rights to Class A and Class B membership interests. The Managing Trustee is the manager of EFG Kirkwood. On April 30, 2000, KAI's ownership interests in certain assets and substantially all of its liabilities were transferred to Mountain Resort Holdings LLC ("Mountain Resort"). On May 1, 2000, EFG Kirkwood exchanged its interest in KAI's common and preferred stock for corresponding pro-rata membership interests in Mountain Resort. EFG Kirkwood holds approximately 37.9% of the membership interests in Mountain Resort. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. The Trust holds a 18.6% membership interest in EFG Kirkwood and correspondingly holds 20% of EFG Kirkwood's Class A voting rights. Subsequent to making its ownership interest in Mountain Resort, 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 stock and 100% of the Class B Preferred stock in an entity that owns the Purgatory Ski resort in Durango, Colorado. The Trust's ownership interest in EFG Kirkwood had an original cost of $1,997,076; including a 1% acquisition fee ($19,773) paid to EFG. The Trust's ownership interest in EFG Kirkwood is accounted for on the equity method and the Trust recorded a loss of $292,956 and income of $119,433, respectively, for the three and nine months ended September 30, 2001, representing its pro-rata share of the net income of EFG Kirkwood. During the three and nine months September 30, 2000, the Trust recorded a loss of $286,560 and $64,101, respectively, from its interest in EFG Kirkwood. The table below provides comparative summarized income statement data for Mountain Resort and the Purgatory Ski Resort for the three and nine month periods ended September 30, 2001 and 2000, respectively. The operating companies have different fiscal year end dates than the Trust. Therefore, the operating results shown below have been conformed to the three and nine month periods ended September 30, 2001 and 2000, respectively.

NOTE 7 - INTEREST IN MILPI ------------------------------- In December 2000, the Trust and three affiliated Trusts (collectively, the "Trusts") formed MILPI Holdings, LLC ("MILPI"), which formed MILPI Acquisition Corp. ("MILPI Acquisition"), a wholly owned subsidiary of MILPI. The Trusts collectively paid $1.2 million for their membership interest in MILPI and MILPI purchased the shares of MILPI Acquisition for an aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition entered into a definitive agreement (the "Agreement") with PLM International, Inc. ("PLM"), an equipment leasing and asset management company, for the purpose of acquiring up to 100% of the outstanding common stock of PLM, for an approximate purchase price of up to $27 million. In connection with the acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any and all of PLM's outstanding common stock. Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83% of the PLM common stock in February 2001 for a total purchase price of approximately $21.7 million. Under the terms of the Agreement, with the approval of the holders of 50.1% of the outstanding common stock of PLM, MILPI Acquisition will merge into PLM, with PLM being the surviving entity. PLM filed a proxy statement with the Securities and Exchange Commission (the "SEC") on February 9, 2001 for a special meeting of its shareholders to vote on the merger proposal. Because MILPI Acquisition owns approximately 83% of the PLM common stock, its vote alone would be sufficient to assure the approval of the merger proposal at the special meeting and MILPI has agreed to vote all of its shares in favor of the merger proposal. Once the merger is approved, the Trusts would then jointly own 100% of the outstanding common stock of PLM through their 100% interest in MILPI. However, completion of the SEC staff's review of the proxy statement for approval of the merger is dependent in part on the satisfactory resolution of the Trust's discussions with the staff regarding its possible status as an inadvertent investment company. If the merger is approved, the Trusts may be required to provide an additional $4.4 million to acquire the remaining approximate 17% of PLM's outstanding common stock. The Trust has a 20% membership interest in MILPI having an original cost of $4,548,696. The cost of the Trust's interest in MILPI reflects MILPI Acquisition's cost of acquiring the common stock of PLM, including the amount paid for the shares tendered of $4,355,145, a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of $43,551 and capitalized transaction costs of $150,000. The capitalized transaction costs will be reimbursed by the Trust to MILPI and are included in Accrued Liabilities - Affiliates on the accompanying Statement of Financial Position at September 30, 2001. During the quarter ended June 30, 2001, the Trusts obtained additional information to refine the estimate of the fair values of the underlying net assets of MILPI at February 9, 2001. The Trust's cost basis in its interest in MILPI was determined to be approximately $210,000 greater than its equity interest in the underlying net assets of MILPI at February 9, 2001. This difference is being amortized over a period of 7 years beginning March 1, 2001. The amount amortized is included as an offset to Interest in MILPI and was $16,595 during the nine months ended September 30, 2001. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne, who are a director and an officer of the Trust, respectively, are also officers and directors of, and own significant stock in, Semele. Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition. The Trust's ownership interest in MILPI is accounted for on the equity method and the Trust recorded income of $278,974 and $343,714, respectively, during the three and nine months ended September 30, 2001, representing its pro-rata share of the income of MILPI. The table below provides summarized income statement data for PLM for the three and nine month period ended September 30, 2001. The acquisition of PLM occurred in February 2001.

NOTE 8 - RELATED PARTY TRANSACTIONS ---------------------------------------- All operating expenses incurred by the Trust are paid by EFG on behalf of the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the nine months ended September 30, 2001 and 2000, which were paid or accrued by the Trust to EFG or its Affiliates, are as follows:

All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Trust. At September 30, 2001, the Trust was owed $23,726 by EFG for such funds and the interest thereon. These funds were remitted to the Trust in October 2001. NOTE 9 - NOTE PAYABLE ------------------------- Notes payable at September 30, 2001 consisted of a 7.03% fixed interest rate installment note of $444,967 payable to an institutional lender. The installment note is non-recourse and is collateralized by the Trust's interest in an aircraft leased to Aerovias de Mexico, S.A. de C.V. and the assignment of the related lease payments. The Trust makes monthly debt and interest payments and the debt will be fully amortized at the expiration of the related lease term in June 2005. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 4 - Revenue Recognition). The Reno Programs executed a debt agreement with a new lender collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of which the Trust's share was $471,038. The Trust used the new debt proceeds and a portion of certain other receipts from Reno to repay the outstanding balance of the existing indebtedness related to the aircraft of $493,137 and accrued interest and fees of $7,347. Management believes that the carrying amount of the note payable approximates fair value at September 30, 2001 based on its experience and understanding of the market for instruments with similar terms. The annual maturities of the note are as follows:

NOTE 10 - GUARANTEE AGREEMENT --------------------------------- On March 8, 2000, the Trust and three affiliated trusts (collectively, the "Trusts") entered into a guarantee agreement whereby the Trusts, jointly and severally, guaranteed the payment obligations under a master lease agreement between Echelon Commercial LLC, a newly-formed Delaware company that is controlled by Gary D. Engle, President and Chief Executive Officer of EFG, as lessee, and Heller Affordable Housing of Florida, Inc., and two other entities, as lessor ("Heller"). The lease payments of Echelon Commercial LLC to Heller are supported by lease payments to Echelon Commercial LLC from various sub-lessees who are parties to commercial and residential lease agreements under the master lease agreement. The guarantee of lease payments by the Trusts was capped at a maximum of $34,500,000, excluding expenses that could result in the event that Echelon Commercial LLC defaulted under the terms of the master lease agreement. As a result of principal reductions on the average guarantee amount, an amended and restated agreement was entered into in December 2000, that reduced the guaranteed amount among the Trusts. During the quarter ended September 30, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $74,112, including $29,571 of income related to the guarantee agreement recognized during the nine months ended September 30, 2001. During the nine months ended September 30, 2000, the Trust received an upfront cash fee of $57,900 and recognized total income of $79,296 from the guarantee. The guarantee fee is reflected as Other Income on the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. NOTE 11 - CONTINGENCIES -------------------------- The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Trust has active business operations in the financial services industry, primarily equipment leasing, and in the real estate industry through its interest in EFG Kirkwood. The Trust does not intend to engage in investment activities in a manner or to an extent that would require the Trust to register as an investment company under the Act. However, it is possible that the Trust may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. The Managing Trustee is engaged in discussions with the staff of the Securities and Exchange Commission regarding whether or not the Trust may be an inadvertent investment company by virtue of its recent acquisition activities. If the Trust was determined to be an investment company, its business would be adversely affected. The Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business or interstate commerce. The Managing Trustee has consulted counsel and believes that the Trust is not an investment company. 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 12 - OPERATING SEGMENTS -------------------------------- The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes the management of the Trust's equipment lease portfolio and the Trust's interest in MILPI. MILPI owns MILPI Acquisition, which owns the majority interest in PLM an equipment leasing and asset management company (See Note 7). The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales through the Trust's ownership interests in EFG Kirkwood. The Trust's reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers. Segment information for the three and nine months ended September 30, 2001 and 2000 is summarized below.

Three and nine months ended September 30, 2001 compared to the three and nine -------------------------------------------------------------------------------- months ended September 30, 2000: ------------------------------------ Results of Operations ----------------------- Equipment Leasing ------------------ For the three and nine month periods ended September 30, 2001, the Trust recognized lease revenue of $123,472 and $407,245, respectively, compared to $238,160 and $801,568, respectively, for same periods in 2000. The decrease in lease revenue from 2000 to 2001 resulted primarily from lease term expirations and the sale of equipment. Future lease term expirations and equipment sales will result in a reduction in the lease revenue recognized. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk, which could result from a concentration in any single equipment type, industry or lessee. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee to early terminate the lease with Reno Air, Inc. of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as operating lease revenue during the nine months ended September 30, 2001 and its share of the maintenance payment was $35,440, which is accrued as a maintenance obligation at September 30, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs will receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. Interest income for the three and nine month periods ended September 30, 2001 was $10,267 and $64,400, respectively, compared to $94,054 and $272,352, respectively, for the same periods in 2000. Generally interest income is generated from the temporary investment of rental receipts and equipment sales proceeds in short-term instruments. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the amount of cash available for investment, among other factors. During the three and nine month periods ended September 30, 2001, the Trust sold equipment having a net book value of $739 and $68,021, respectively to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $5,382 and $75,620, respectively. During the three and nine month periods ended September 30, 2000, the Trust sold fully depreciated equipment and equipment having a net book value of $91,452, respectively, to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $16,000 and $36,124, respectively. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Trust, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Trust classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Trust achieved from leasing the equipment. During the nine months ended September 30, 2000, the Trust sold investment securities having a book value of $32,132, resulting in a gain, for financial statement purposes, of $21,520. On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the trusts, jointly and severally, guaranteed the payment obligations under a master lease agreement between Echelon Commercial LLC, as lessee, and Heller Affordable Housing of Florida, Inc., and two other entities, as lessor. (See Note 10.) During the quarter ended September 30, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $74,112, including $29,571 of income related to the guarantee agreement recognized during the nine months ended September 30, 2001. During the nine months ended September 30, 2000, the Trust received an upfront cash fee of $57,900 and recognized total income of $79,296 from the guarantee. The guarantee fee is reflected as Other Income on the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. Depreciation expense for the three and nine months ended September 30, 2001 was $15,567 and $65,881, respectively, compared to $32,487 and $103,442, respectively, for the same periods in 2000. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of 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. Interest expense for the three and nine months ended September 30, 2001 was $8,482 and $19,803, respectively, compared to $11,424 and $35,182, respectively, for the same periods in 2000. Interest expense will decrease in the future as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees related to equipment leasing were $1,771 and $15,960, respectively, for the three and nine months ended September 30, 2001 and $11,760 and $43,407, respectively, for the same periods in 2000. 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. In addition, management fees included a fee of 1% of the cost of the MILPI interests. Operating expenses were $194,356 and $632,147 during the three and nine months ended September 30, 2001 compared to $73,407 and $182,106, respectively, for the same periods in 2000. In 2001, operating expenses included approximately $113,000 for ongoing legal matters. Operating expenses also included approximately $66,000 of costs reimbursed to EFG as a result of the successful acquisition of the PLM common stock by MILPI Acquisition and approximately $151,000 of costs related to aircraft maintenance and the re-lease of an aircraft in June 2001. In conjunction with the acquisition of the PLM common stock, EFG became entitled to recover certain out of pocket expenses which it had previously incurred. Other operating expenses consist primarily of administrative charges, professional service costs, such as audit and legal fees, as well as printing, distribution and remarketing expenses. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a trust. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. During the three and nine months ended September 30, 2001, the Trust recorded income of $278,974 and $343,714, respectively, from its ownership interest in MILPI. This income represents the Trust's share of the net income of MILPI recorded under the equity method of accounting. The Trust recorded $7,484 and $16,595, respectively, of amortization expense for the three and nine months ended September 30, 2001, which related to the goodwill recorded at the time of the acquisition of the PLM common stock by MILPI Acquisition. (See Note 7.) The Trust's income from MILPI results from MILPI's indirect ownership of PLM common stock acquired in February 2001. PLM is an equipment leasing and asset management company. During the three and nine months ended September 30, 2001, PLM recognized operating revenues of approximately $3,434,000 and approximately $8,770,000, respectively. Revenues for the three months ended September 30, 2001 are comprised primarily of management fees of approximately $1,375,000 and $1,847,000 of acquisition and lease negotiation fees. Revenues for the nine months ended September 30, 2001 are comprised primarily of management fees of approximately $4,362,000, acquisition and lease negotiation fees of approximately $2,032,000 and operating lease income of approximately $695,000. During the three and nine months ended September, 30, 2001, PLM incurred total operating expenses of approximately $1,216,000 and approximately $5,665,000, respectively. Operating expenses for the three months ended September 30, 2001 are comprised primarily of general and administrative expenses of approximately $658,000 and operations support expenses of approximately $453,000. For the nine months ended September 30, 2001, operating expenses are comprised primarily of general and administrative expenses of approximately $4,054,000 and operations support expenses of approximately $1,092,000, which include salary and office-related expenses for operational activities. During the three and nine months ended September 30, 2001, PLM recognized other income of approximately $101,000 and $270,000, approximately, comprised primarily of interest income earned on investments. During the three and nine months ended September 30, 2001, PLM also incurred income tax expense of approximately $882,000 and $1,304,000, respectively. Real Estate ------------ Management fees for non-equipment assets were $16,212 and $43,684, respectively, for the three and nine months ended September 30, 2001 compared to $4,207 and $7,805, respectively, for the same periods in 2000. Management fees for non-equipment assets, excluding cash, are 1% of such assets under management. The Trust has an ownership interest in EFG Kirkwood. EFG Kirkwood is a joint venture among the Trust, certain affiliated Trusts and Semele and is managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures, Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). See Note 6. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in the Purgatory Ski resort in Durango, Colorado. For the three and nine month periods ended September 30, 2001, the Trust recorded a loss of $292,956 and income of $119,433, respectively, from its ownership interest in EFG Kirkwood. For the three and nine months ended September 30, 2000, the Trust recorded a loss of $286,560 and $64,101, respectively, from its ownership interest in EFG Kirkwood. This income (loss) represents the Trust's share of the net income (loss) of EFG Kirkwood recorded under the equity method of accounting. Due to the seasonal nature of EFG Kirkwood's operations, the financial results of the three and nine months ended September 30, 2001 and may not be indicative of future periods (See Note 6). Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Other operations include a real estate development division, which has developed and is managing a 40-unit condominium residential and commercial building, an electric and gas utility company, which operates as a regulated utility company and provides electric and gas services to the Kirkwood community, and a real estate brokerage company. During the nine months ended September 30, 2001, Mountain Resort recorded total revenues of $22,378,487 compared to $21,649,975 for the same period in 2000. The increase in total revenues from 2000 to 2001 of $728,512 is the result an increase in ski-related revenues offset by a decrease in residential-related revenues. Ski-related revenues and other operations revenues increased approximately $2,350,000 and approximately $927,000, respectively, for the nine months ended September 30, 2001 compared to the same period in 2000. The increase in ski-related revenues resulted from improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 260,000 skiers for the nine months ended in 2001 as compared to 181,000 for the same period in 2000. Residential-related revenues decreased approximately $2,549,000 for the nine months ended 2001 as compared to 2000. Construction was completed on a 40-unit condominium residential and commercial building in December 1999 and as a result, a significant number of condominium sales closed in January 2000. For the nine months ended September 30, 2001, residential revenues were approximately $513,000 compared to residential revenues of approximately $3,062,000 for the same period in 2000. During the nine months ended September 30, 2001, Kirkwood recorded total expenses of $21,535,057 compared to $20,322,407 for the same period in 2000. The increase in total expenses of $1,212,650 from 2000 to 2001 is the result an increase in ski-related expenses offset by a decrease in residential-related expenses. Ski-related expenses and other operations expenses increased approximately $2,392,000 and approximately $555,000, respectively, as a result of an increase in ski-related revenues and other operations revenues, as discussed above. Residential-related expenses decreased approximately $1,734,000 as a result of a decrease in cost of sales from condominium units sold in the nine months ended September 30, 2001 compared to the same period in 2000, as also discussed above. Purgatory Ski Resort ("Purgatory") is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails located near Durango, Colorado. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services, with the remainder of revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. During the nine months ended September 30, 2001, Purgatory recorded total revenues of $12,014,674 compared to $9,693,552 for the same period of 2000. The increase in total revenues from 2000 to 2001 of $2,321,122 is the result of improved weather conditions during the winter season,which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 240,000 skiers for the nine months ended September 30, 2001 compared to 176,000 skiers in the same period of 2000. Total expenses were $11,542,289 for the nine months ended September 30, 2001 compared to $11,388,497 for the same period in 2000. The increase in total expenses for the nine months ended September 30, 2001 compared to the same period in 2000 of $153,792 is a result of an increase in operating expenses of $423,771, due to an increase in the number of skiers, discussed above, offset by a decrease in financing costs of $296,979. NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS -------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", (collectively the "Statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Trust will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of Statements is not anticipated to have a material impact on the Trust's financial statements. During 2002, the Trust will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Trust. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Trust will apply the new rules on accounting for the impairment or disposal of long-lived assets beginning in the first quarter of 2002, which is not anticipated to have an impact on the Trust's earnings or financial position. ------ AFG INVESTMENT TRUST B FORM 10-Q PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations. --------------- Certain statements in this quarterly report of AFG Investment Trust B (the "Trust") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the collection of the Trust's contracted rents, the realization of residual proceeds for the Trust's equipment, the performance of the Trust's non-equipment assets, and future economic conditions. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Trust has active business operations in the financial services industry, primarily equipment leasing, and in the real estate industry through its interest in EFG Kirkwood LLC ("EFG Kirkwood"). The Trust does not intend to engage in investment activities in a manner or to an extent that would require the Trust to register as an investment company under the Act. However, it is possible that the Trust may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. The Managing Trustee is engaged in discussions with the staff of the Securities and Exchange Commission regarding whether or not the Trust may be an inadvertent investment company by virtue of its recent acquisition activities. If the Trust was determined to be an investment company, its business would be adversely affected. The Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business or interstate commerce. The Managing Trustee has consulted counsel and believes that the Trust is not an investment company. If necessary, the Trust intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. The events of September 11, 2001 and the slowing U.S. economy could have an adverse effect on market values for the Trust's assets and the Trust's ability to negotiate future lease agreements. Notwithstanding the foregoing, it currently is not possible for the Managing Trustss to determine the long-term effects, if any, that these events may have on the economic performance of the Trust's equipment portfolio. Approximately 34% of the Trust's equipment portfolio consists of commercial jet aircraft. The events of September 11, 2001 adversely affected market demand for both new and used commercial aircraft and weakened the financial position of most airlines. While it is currently not possible for the Managing Trustee to determine the ultimate long-term economic consequences of these events to the Trust, the Managing Trustee expects that the resulting decline in air travel will suppress market prices for used aircraft in the short term and could inhibit the viability of the airline industry. At September 30, 2001, the Trust has collected all rents owed to it in connection with its aircraft. In addition, through its membership interest in EFG Kirkwood LLC, the Trust has an interest in two ski resorts that could be adversely affected by potential declines in vacation travel resulting from the events of September 11, 2001. The Managing Trustee is monitoring developments in the airline and resort industries and will continue to evaluate potential implications to the Trust's financial position and future liquidity. Segment Reporting ------------------ The Trust has two principal operating segments: 1) Equipment Leasing and 2) Real Estate Ownership, Development & Management. The Equipment Leasing segment includes the management of the Trust's equipment lease portfolio and the Trust's interest in MILPI Holdings, LLC ("MILPI"). MILPI owns MILPI Acquisition Corp., ("MILPI Acquisition") which owns the majority interest in PLM International, Inc., ("PLM") an equipment leasing and asset management company. The Real Estate segment includes the ownership, management and development of commercial properties, recreational properties, condominiums, interval ownership units, townhomes, single family homes and land sales through the Trust's ownership interests in EFG Kirkwood. The Trust's reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. There are no material intersegment sales or transfers. Segment information for the three and nine months ended September 30, 2001 and 2000 is summarized below.

Three and nine months ended September 30, 2001 compared to the three and nine -------------------------------------------------------------------------------- months ended September 30, 2000: ------------------------------------ Results of Operations ----------------------- Equipment Leasing ------------------ For the three and nine month periods ended September 30, 2001, the Trust recognized lease revenue of $123,472 and $407,245, respectively, compared to $238,160 and $801,568, respectively, for same periods in 2000. The decrease in lease revenue from 2000 to 2001 resulted primarily from lease term expirations and the sale of equipment. Future lease term expirations and equipment sales will result in a reduction in the lease revenue recognized. The Trust's equipment portfolio includes certain assets in which the Trust holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by Equis Financial Group Limited Partnership ("EFG"). Proportionate equipment ownership enables the Trust to further diversify its equipment portfolio by participating in the ownership of selected assets, thereby reducing the general levels of risk, which could result from a concentration in any single equipment type, industry or lessee. The Trust and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee to early terminate the lease with Reno Air, Inc. ("Reno") of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Trust's share of the early termination fee was $74,424, which was recognized as operating lease revenue during the nine months ended September 30, 2001 and its share of the maintenance payment was $35,440, which is accrued as a maintenance obligation at September 30, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs will receive rents of $6,240,000 over the lease term, of which the Trust's share is $552,864. Interest income for the three and nine month periods ended September 30, 2001 was $10,267 and $64,400, respectively, compared to $94,054 and $272,352, respectively, for the same periods in 2000. Generally interest income is generated from the temporary investment of rental receipts and equipment sales proceeds in short-term instruments. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the amount of cash available for investment, among other factors. During the three and nine month periods ended September 30, 2001, the Trust sold equipment having a net book value of $739 and $68,021, respectively to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $5,382 and $75,620, respectively. During the three and nine month periods ended September 30, 2000, the Trust sold fully depreciated equipment and equipment having a net book value of $91,452, respectively, to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $16,000 and $36,124, respectively. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Trust, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Trust and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Trust classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Trust achieved from leasing the equipment. During the nine months ended September 30, 2000, the Trust sold investment securities having a book value of $32,132, resulting in a gain, for financial statement purposes, of $21,520. On March 8, 2000, the Trust and three affiliated trusts entered into a guarantee agreement whereby the trusts, jointly and severally, guaranteed the payment obligations under a master lease agreement between Echelon Commercial LLC, as lessee, and Heller Affordable Housing of Florida, Inc., and two other entities, as lessor. (See Note 10 to the financial statements.) During the quarter ended September 30, 2001, the requirements of the guarantee agreement were met and the Trust received payment for all outstanding amounts totaling $74,112, including $29,571 of income related to the guarantee agreement recognized during the nine months ended September 30, 2001. During the nine months ended September 30, 2000, the Trust received an upfront cash fee of $57,900 and recognized total income of $79,296 from the guarantee. The guarantee fee is reflected as Other Income on the accompanying Statement of Operations. The Trust has no further obligations under the guarantee agreement. Depreciation expense for the three and nine months ended September 30, 2001 was $15,567 and $65,881, respectively, compared to $32,487 and $103,442, respectively, for the same periods in 2000. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Trust depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of 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. Interest expense for the three and nine months ended September 30, 2001 was $8,482 and $19,803, respectively, compared to $11,424 and $35,182, respectively, for the same periods in 2000. Interest expense will decrease in the future as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees related to equipment leasing were $1,771 and $15,960, respectively, for the three and nine months ended September 30, 2001 and $11,760 and $43,407, respectively, for the same periods in 2000. 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. In addition, management fees included a fee of 1% of the cost of the MILPI interests. Operating expenses were $194,356 and $632,147 during the three and nine months ended September 30, 2001 compared to $73,407 and $182,106, respectively, for the same periods in 2000. In 2001, operating expenses included approximately $113,000 for ongoing legal matters. Operating expenses also included approximately $66,000 of costs reimbursed to EFG as a result of the successful acquisition of the PLM common stock by MILPI Acquisition and approximately $151,000 of costs related to aircraft maintenance and the re-lease of an aircraft in June 2001. In conjunction with the acquisition of the PLM common stock, EFG became entitled to recover certain out of pocket expenses which it had previously incurred. Other operating expenses consist primarily of administrative charges, professional service costs, such as audit and legal fees, as well as printing, distribution and remarketing expenses. The amount of future operating expenses cannot be predicted with certainty; however, such expenses are usually higher during the acquisition and liquidation phases of a trust. Other fluctuations typically occur in relation to the volume and timing of remarketing activities. During the three and nine months ended September 30, 2001, the Trust recorded income of $278,974 and $343,714, respectively, from its ownership interest in MILPI. This income represents the Trust's share of the net income of MILPI recorded under the equity method of accounting. The Trust recorded $7,484 and $16,595, respectively, of amortization expense for the three and nine months ended September 30, 2001, which related to the goodwill recorded at the time of the acquisition of the PLM common stock by MILPI Acquisition. (See Note 7 to the financial statements.) The Trust's income from MILPI results from MILPI's indirect ownership of PLM common stock acquired in February 2001. PLM is an equipment leasing and asset management company. During the three and nine months ended September 30, 2001, PLM recognized operating revenues of approximately $3,434,000 and approximately $8,770,000, respectively. Revenues for the three months ended September 30, 2001 are comprised primarily of management fees of approximately $1,375,000 and $1,847,000 of acquisition and lease negotiation fees. Revenues for the nine months ended September 30, 2001 are comprised primarily of management fees of approximately $4,362,000, acquisition and lease negotiation fees of approximately $2,032,000 and operating lease income of approximately $695,000. During the three and nine months ended September, 30, 2001, PLM incurred total operating expenses of approximately $1,216,000 and approximately $5,665,000, respectively. Operating expenses for the three months ended September 30, 2001 are comprised primarily of general and administrative expenses of approximately $658,000 and operations support expenses of approximately $453,000. For the nine months ended September 30, 2001, operating expenses are comprised primarily of general and administrative expenses of approximately $4,054,000 and operations support expenses of approximately $1,092,000, which include salary and office-related expenses for operational activities. During the three and nine months ended September 30, 2001, PLM recognized other income of approximately $101,000 and $270,000, approximately, comprised primarily of interest income earned on investments. During the three and nine months ended September 30, 2001, PLM also incurred income tax expense of approximately $882,000 and $1,304,000, respectively. Real Estate ------------ Management fees for non-equipment assets were $16,212 and $43,684, respectively, for the three and nine months ended September 30, 2001 compared to $4,207 and $7,805, respectively, for the same periods in 2000. Management fees for non-equipment assets, excluding cash, are 1% of such assets under management. The Trust has an ownership interest in EFG Kirkwood. EFG Kirkwood is a joint venture among the Trust, certain affiliated Trusts and Semele Group, Inc. ("Semele") and is managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures, Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). See Note 6 to the financial statements. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in the Purgatory Ski resort in Durango, Colorado. For the three and nine month periods ended September 30, 2001, the Trust recorded a loss of $292,956 and income of $119,433, respectively, from its ownership interest in EFG Kirkwood. For the three and nine months ended September 30, 2000, the Trust recorded a loss of $286,560 and $64,101, respectively, from its ownership interest in EFG Kirkwood. This income (loss) represents the Trust's share of the net income (loss) of EFG Kirkwood recorded under the equity method of accounting. Due to the seasonal nature of EFG Kirkwood's operations, the financial results of the three and nine months ended September 30, 2001 and 2000 may not be indicative of future periods (See Note 6 to the financial statements). Mountain Resort is primarily a ski and mountain recreation resort with more than 2,000 acres of terrain, located approximately 32 miles south of Lake Tahoe. The resort receives approximately 70% of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services with the remainder of the revenues generated from summer outdoor activities, including mountain biking, hiking and other activities. Other operations include a real estate development division, which has developed and is managing a 40-unit condominium residential and commercial building, an electric and gas utility company, which operates as a regulated utility company and provides electric and gas services to the Kirkwood community, and a real estate brokerage company. During the nine months ended September 30, 2001, Mountain Resort recorded total revenues of $22,378,487 compared to $21,649,975 for the same period in 2000. The increase in total revenues from 2000 to 2001 of $728,512 is the result an increase in ski-related revenues offset by a decrease in residential-related revenues. Ski-related revenues and other operations revenues increased approximately $2,350,000 and approximately $927,000, respectively, for the nine months ended September 30, 2001 compared to the same period in 2000. The increase in ski-related revenues resulted from improved weather conditions during the winter season, which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 260,000 skiers for the nine months ended in 2001 as compared to 181,000 for the same period in 2000. Residential-related revenues decreased approximately $2,549,000 for the nine months ended 2001 as compared to 2000. Construction was completed on a 40-unit condominium residential and commercial building in December 1999 and as a result, a significant number of condominium sales closed in January 2000. For the nine months ended September 30, 2001, residential revenues were approximately $513,000 compared to residential revenues of approximately $3,062,000 for the same period in 2000. During the nine months ended September 30, 2001, Kirkwood recorded total expenses of $21,535,057 compared to $20,322,407 for the same period in 2000. The increase in total expenses of $1,212,650 from 2000 to 2001 is the result an increase in ski-related expenses offset by a decrease in residential-related expenses. Ski-related expenses and other operations expenses increased approximately $2,392,000 and approximately $555,000, respectively, as a result of an increase in ski-related revenues and other operations revenues, as discussed above. Residential-related expenses decreased approximately $1,734,000 as a result of a decrease in cost of sales from condominium units sold in the nine months ended September 30, 2001 compared to the same period in 2000, as also discussed above. Purgatory Ski Resort ("Purgatory") is a ski and mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain with 75 ski trails located near Durango, Colorado. Purgatory receives the majority of its revenues from winter ski operations, primarily ski, lodging, retail and food and beverage services, with the remainder of revenues generated from summer outdoor activities, such as alpine sliding and mountain biking. During the nine months ended September 30, 2001, Purgatory recorded total revenues of $12,014,674 compared to $9,693,552 for the same period of 2000. The increase in total revenues from 2000 to 2001 of $2,321,122 is the result of improved weather conditions during the winter season,which attracted more skiers. Improved weather conditions resulted in the resort supporting approximately 240,000 skiers for the nine months ended September 30, 2001 compared to 176,000 skiers in the same period of 2000. Total expenses were $11,542,289 for the nine months ended September 30, 2001 compared to $11,388,497 for the same period in 2000. The increase in total expenses for the nine months ended September 30, 2001 compared to the same period in 2000 of $153,792 is a result of an increase in operating expenses of $423,771, due to an increase in the number of skiers, discussed above, offset by a decrease in financing costs of $296,979. Liquidity and Capital Resources and Discussion of Cash Flows -------------------------------------------------------------------- The Trust by its nature is a limited life entity. The Trust's principal operating activities derive from asset rental transactions. Accordingly, the Trust's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash outflows of $103,159 and net cash inflows of $868,652 for the nine months ended September 30, 2001 and 2000, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Trust's lease revenue and corresponding sources of operating cash. Expenses associated with rental activities, such as management fees, also will decline as the Trust remarkets its equipment. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the level of cash available for investment, among other factors. At lease inception, the Trust's equipment was leased by a number of creditworthy, investment-grade companies and, to date, the Trust has not experienced any material collection problems and has not considered it necessary to provide an allowance for doubtful accounts. Notwithstanding a positive collection history, there is no assurance that all future contracted rents will be collected or that the credit quality of the Trust's leases will be maintained. The credit quality of an individual lease may deteriorate after the lease is entered into. Collection risk could increase in the future, particularly as the Trust remarkets its equipment and enters re-lease agreements with different lessees. The Managing Trustee will continue to evaluate and monitor the Trust's experience in collecting accounts receivable to determine whether a future allowance for doubtful accounts may become appropriate. At September 30, 2001, the Trust was due aggregate future minimum lease payments of $510,542 from contractual lease agreements (see Note 4 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $444,967 (see Note 9 to the financial statements). Additional cash inflows will be realized from future remarketing activities, such as lease renewals and equipment sales, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of equipment sales is often dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as a greater level of the Trust's equipment assets become available for remarketing, the cash flows of the Trust will become less predictable. Cash expended for asset acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. In December 2000, the Trust and three affiliated Trusts (collectively, the "Trusts") formed MILPI, which formed MILPI Acquisition, a wholly owned subsidiary of MILPI. The Trusts collectively paid $1.2 million for their membership interest in MILPI and MILPI purchased the shares of MILPI Acquisition for an aggregate purchase price of $1.2 million at December 31, 2000. MILPI Acquisition entered into a definitive agreement (the "Agreement") with PLM, an equipment leasing and asset management company, for the purpose of acquiring up to 100% of the outstanding common stock of PLM, for an approximate purchase price of up to $27 million. In connection with the acquisition, on December 29, 2000, MILPI Acquisition commenced a tender offer to purchase any and all of PLM's outstanding common stock. Pursuant to the cash tender offer, MILPI Acquisition acquired approximately 83% of the PLM common stock in February 2001 for a total purchase price of approximately $21.7 million. Under the terms of the Agreement, with the approval of the holders of 50.1% of the outstanding common stock of PLM, MILPI Acquisition will merge into PLM, with PLM being the surviving entity. PLM filed a proxy statement with the Securities and Exchange Commission (the "SEC") on February 9, 2001 for a special meeting of its shareholders to vote on the merger proposal. Because MILPI Acquisition owns approximately 83% of the PLM common stock, its vote alone would be sufficient to assure the approval of the merger proposal at the special meeting and MILPI has agreed to vote all of its shares in favor of the merger proposal. Once the merger is approved, the Trusts would then jointly own 100% of the outstanding common stock of PLM through their 100% interest in MILPI. However, completion of the SEC staff's review of the proxy statement for approval of the merger is dependent in part on the satisfactory resolution of the Trust's discussions with the staff regarding its possible status as an inadvertent investment company. If the merger is approved, the Trusts may be required to provide an additional $4.4 million to acquire the remaining approximate 17% of PLM's outstanding common stock. The Trust has a 20% membership interest in MILPI having an original cost of $4,548,696. The cost of the Trust's interest in MILPI reflects MILPI Acquisition's cost of acquiring the common stock of PLM, including the amount paid for the shares tendered of $4,355,145, a 1% acquisition fee paid to a wholly-owned subsidiary of Semele of $43,551 and capitalized transaction costs of $150,000. The capitalized transaction costs will be reimbursed by the Trust to MILPI and are included in Accrued Liabilities - Affiliates on the accompanying Statement of Financial Position at September 30, 2001. During the quarter ended June 30, 2001, the Trusts obtained additional information to refine the estimate of the fair values of the underlying net assets of MILPI at February 9, 2001. The Trust's cost basis in its interest in MILPI was determined to be approximately $210,000 greater than its equity interest in the underlying net assets of MILPI at February 9, 2001. This difference is being amortized over a period of 7 years beginning March 1, 2001. The amount amortized is included as an offset to Interest in MILPI and was $16,595 for the nine months ended September 30, 2001. The Trust's ownership interest in MILPI is accounted for on the equity method, as discussed above. Equis II Corporation has voting control of the Trusts and owns the Managing Trustee of the Trusts. Semele owns Equis II Corporation. Mr. Engle and Mr. Coyne, who are a director and an officer of the Trust, respectively, are also officers and directors of, and own significant stock in, Semele. In addition, Mr. Engle and Mr. Coyne are officers and directors of MILPI Acquisition. During the nine months ended September 30, 2000, the Trust expended $411,376 for its interest in EFG Kirkwood (see Note 6 to the financial statements) and $50,500 on other investments. During the nine months ended September 30, 2001 and 2000, the Trust realized net cash proceeds from equipment disposals of $143,641 and $127,576, respectively. Future inflows of cash from equipment disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. The Trust also realized proceeds from the sale of investment securities of $53,652 during the nine months ended September 30, 2000. The Trust has an ownership interest in EFG Kirkwood. EFG Kirkwood is a joint venture among the Trust, certain affiliated Trusts and Semele and is managed by AFG ASIT Corporation. EFG Kirkwood is a member in two joint ventures, Mountain Resort Holdings LLC ("Mountain Resort") and Mountain Springs Resort LLC ("Mountain Springs"). See Note 6 to the financial statements. Mountain Resort, through four wholly owned subsidiaries, owns and operates the Kirkwood Mountain Resort, a ski resort located in northern California, a public utility that services the local community, and land that is held for residential and commercial development. Mountain Springs, through a wholly owned subsidiary, owns a controlling interest in the Purgatory Ski resort in Durango, Colorado. The risks generally associated with real estate include, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, and other governmental rules. The Trust's involvement in real estate development also introduces financial risks, including the potential need to borrow funds to develop the real estate projects. While the Trust's management presently does not foresee any unusual risks in this regard, it is possible that factors beyond the control of the Trust, its affiliates and joint venture partners, such as a tightening credit environment, could limit or reduce its ability to secure adequate credit facilities at a time when they might be needed in the future. Alternatively, the Trust could establish joint ventures with other parties to share participation in its development projects. Ski resorts are subject to a number of risks, including weather-related risks. The ski resort business is seasonal in nature and insufficient snow during the winter season can adversely effect the profitability of a given resort. Many operators of ski resorts have greater resources and experience in the industry than the Trust, its affiliates and its joint venture partners. Recent changes in economic condition of the airline industry have adversely affected the demand for and market values for commercial jet aircraft. These changes could adversely affect the operations of the Trust and the residual value of the commercial jet aircraft. Currently, the commercial jet aircraft in which the Trust has a proportionate ownership interest is subject to contracted lease agreements. The Trust obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal are reported as components of financing activities on the accompanying Statement of Cash Flows. At September 30, 2001, the Trust had one debt obligation outstanding pertaining to its ownership interest in an aircraft leased to Aerovias de Mexico, S.A. de C.V. The note will be fully amortized by the contracted lease payments at the expiration of the lease agreement in June 2005. In June 2001, the Trust and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno, to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years (see Results of Operations). The Reno Programs executed a debt agreement with a new lender collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of which the Trust's share was $471,038. The Trust used the new debt proceeds and a portion of certain other receipts from Reno to repay the outstanding balance of the existing indebtedness related to the aircraft of $493,137 and accrued interest and fees of $7,347. The Managing Trustee evaluated and pursued a number of potential new acquisitions, several of which the Managing Trustee concluded had market returns that it believed were less than adequate given the potential risks. Most transactions involved the equipment leasing, business finance and real estate development industries. Although the Managing Trustee intends to continue to evaluate additional new investments, it anticipates that the Trust will be able to fund these new investments with cash on hand or other sources, such as the proceeds from future asset sales or refinancing and new indebtedness. As a result, the Trust declared a special cash distribution during the fourth quarter of 1999 to the Trust Beneficiaries totaling $5,300,000, which was paid in January 2000. After the special distribution in January 2000, the Trust adopted a new distribution policy and suspended the payment of regular monthly cash distributions. Looking forward, the Managing Trustee presently does not expect to reinstate cash distributions until expiration of the Trust's reinvestment period in December 2001. In addition to maintaining sale proceeds for reinvestment, the Managing Trustee expects that the Trust will retain cash from operations for the continued maintenance of the Trust's assets. The Managing Trustee believes that this change in policy is in the best interests of the Trust over the long term. Historically, cash distributions to the Managing Trustee, the Special Beneficiary and the Beneficiaries had been declared and generally paid within 45 days following the end of each calendar month. No cash distributions were declared for either of the nine month periods ended September 30, 2001 or 2000. In any given year, it is possible that Beneficiaries will be allocated taxable income in excess of distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Beneficiaries adequate to cover any tax obligation. The Trust Agreement requires that sufficient distributions be made to enable the Beneficiaries to pay any state and federal income taxes arising from any sale or refinancing transactions, subject to certain limitations. Cash distributions when paid to the Participants generally consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Trust and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, the residual value realized for each asset at its disposal date, and the performance of the Trust's non-equipment assets. Future market conditions, technological changes, the ability of EFG to manage and remarket the equipment, and many other events and circumstances, could enhance or detract from individual yields and the collective performance of the Trust's equipment portfolio. The ability of the Managing Trustee and its affiliates to develop and profitably manage its real estate assets and its interest in MILPI will impact the Trust's overall performance. In the future, the nature of the Trust's operations and principal cash flows will continue to shift from rental receipts to equipment sale proceeds. As this occurs, the Trust's cash flows resulting from equipment investments may become more volatile in that certain of the Trust's equipment leases will be renewed and certain of its assets will be sold. In some cases, the Trust may be required to expend funds to refurbish or otherwise improve the equipment being remarketed in order to make it more desirable to a potential lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will attempt to monitor and manage these events in order to maximize the residual value of the Trust's equipment and will consider these factors, in addition to new investment activities, the collection of contractual rents, the retirement of scheduled indebtedness, and the Trust's future working capital requirements, in establishing the amount and timing of future cash distributions. In accordance with the Trust Agreement, upon the dissolution of the Trust, the Managing Trustee will be required to contribute to the Trust an amount equal to any negative balance, which may exist in the Managing Trustee's tax capital account. At December 31, 2000, the Managing Trustee had a positive tax capital account balance. No such requirement exists with respect to the Special Beneficiary. AFG INVESTMENT TRUST B FORM 10-Q PART II. OTHER INFORMATION

SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AFG Investment Trust B By: AFG ASIT Corporation, a Massachusetts corporation and the Managing Trustee of the Registrant. By: ls/ Michael J. Butterfield ----------------------------- Michael J. Butterfield Treasurer of AFG ASIT Corporation (Duly Authorized Officer and Principal Financial and Accounting Officer) Date: November 19, 2001 -------------------

AFG INVESTMENT TRUST B 10-Q