UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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 Number 0-16886
SEMELE GROUP INC.
-------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 36-3465422
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 NYALA FARMS, WESTPORT, CONNECTICUT 06880
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (203) 341-0555
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.
---
Shares of common stock outstanding as of November 14, 2001: 2,078,718
Transitional Small Business Disclosure Format: YES. NO X.
---
SEMELE GROUP INC.
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2001 and 2000 4
Consolidated Statement of Stockholders' Deficit for the nine months
ended September 30, 2001 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
PART II. OTHER INFORMATION:
Items 1 - 6 24
------
SEMELE GROUP INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
September 30, December 31,
2001 2000
ASSETS
Cash and cash equivalents $ 19,208,549 $ 27,830,365
Restricted cash 375,430 -
Rents and other receivables 796,052 1,231,871
Due from affiliates 4,724,260 4,718,511
Equipment held for lease, net of accumulated depreciation
of $50,022,290 and $53,615,656 at September 30, 2001 and
December 31, 2000, respectively 66,386,037 73,577,695
Real estate held for development and sale 10,273,897 11,388,698
Land 1,929,000 1,929,000
Buildings, net of accumulated depreciation of $1,796,238 and $1,530,263
at September 30, 2001 and December 31, 2000, respectively 10,136,759 10,402,734
Ownership interests in affiliated companies 41,918,585 21,685,891
Other assets 4,607,461 3,070,215
Goodwill, net of accumulated amortization of $145,071 at
September 30, 2001 1,208,929 -
Total assets $ 161,564,959 $ 155,834,980
--------------- --------------
LIABILITIES
Accounts payable and accrued expenses $ 8,499,597 $ 2,799,086
Distributions declared and payable 52,063 52,063
Deferred rental income 86,375 77,771
Other liabilities 3,083,475 3,013,206
Indebtedness 54,430,684 60,220,752
Indebtedness and other obligations to affiliates 39,348,839 36,609,567
Deferred income taxes 1,692,000 -
Total liabilities 107,193,033 102,772,445
--------------- --------------
Minority interests 70,387,652 66,398,578
STOCKHOLDERS' DEFICIT
Common stock, $0.10 par value; 5,000,000 shares authorized;
2,916,647 shares issued at September 30, 2001 and December 31, 2000 291,665 291,665
Additional paid in capital 144,680,487 144,680,487
Accumulated deficit (146,754,872) (144,075,189)
Deferred compensation, 164,279 shares at September 30, 2001
and December 31, 2000 (816,767) (816,767)
Treasury stock at cost, 837,929 shares at September 30, 2001 and
December 31, 2000 (13,416,239) (13,416,239)
Total stockholders' deficit (16,015,726) (13,336,043)
--------------- --------------
Total liabilities, minority interests and stockholders' deficit $ 161,564,959 $ 155,834,980
Book value per share, 2,078,718 shares outstanding at both
September 30, 2001 and December 31, 2000 $ (7.70) $ (6.42)
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
2001 2000 2001 2000
REVENUES
Rental income $ 3,669,404 $4,135,428 $11,385,910 $13,924,792
Fee income 2,497,000 - 5,852,000 -
Interest income 180,688 538,275 757,599 1,531,472
Interest income from affiliates 65,434 65,435 196,304 183,481
Gain on sales of marketable securities - - - 215,198
(Loss) gain on sales of equipment (852) 2,261,342 630,438 3,347,580
Loss from real estate held for development and
sale - (20,120) - (161,351)
Equity income (loss) in affiliated companies (1,423,772) (174,710) 434,188 (174,710)
Other income 256,934 97,556 1,226,382 811,187
Total revenues 5,244,836 6,903,206 20,482,821 19,677,649
--------------------------------------------------------------
EXPENSES
Depreciation and amortization expense 2,556,242 2,655,925 7,980,683 8,388,358
Provision for impaired assets 2,525,962 - 2,525,962 -
Interest on indebtedness 916,482 1,354,091 3,529,857 4,356,575
Interest on indebtedness and other obligations
to affiliates 421,148 684,105 1,291,625 2,180,741
General and administrative expenses 2,111,654 616,454 6,420,359 2,057,726
Fees and expenses to affiliates 92,207 216,871 472,513 726,304
Total expenses 8,623,695 5,527,446 22,220,999 17,709,704
--------------------------------------------------------------
(Loss) income before income taxes and
minority interest (3,378,859) 1,375,760 (1,738,178) 1,967,945
Income taxes 882,000 - 1,304,000 -
Elimination of consolidated subsidiaries'
minority interests (675,702) 1,431,084 (362,495) 1,830,268
Net (loss) income $(3,585,157) $ (55,324) $(2,679,683) $ 137,677
Basic earnings per share
Net (loss) income $ (1.72) $ (0.03) $ (1.29) $ 0.09
Basic weighted average number of common shares outstanding 2,078,718 1,728,344 2,078,718 1,512,046
============ =========== ============ ============
Fully diluted earnings per share
Net (loss) income $ (1.72) $ (0.03) $ (1.29) $ 0.09
Diluted weighted average number of common shares outstanding 2,078,718 1,728,344 2,078,718 1,512,046
============ =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Additional
Common Paid in Accumulated Deferred Treasury
Stock Capital Deficit Compensation Stock Total
Balance at December 31, 2000 $291,665 $144,680,487 $(144,075,189) $ (816,767) $(13,416,239) $(13,336,043)
Net loss - - (2,679,683) - - (2,679,683)
Balance at September 30, 2001 $291,665 $144,680,487 $(146,754,872) $ (816,767) $(13,416,239) $(16,015,726)
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net (loss) income $ (2,679,683) $ 137,677
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization expense 7,980,683 8,388,358
Provision for impaired assets 2,525,962 -
Amortization of goodwill related to PLM investment programs 1,845,000 -
Compensation expense related to variable stock options 315,000 -
Loss on disposition of assets, net 104,000 -
Equity income from PLM investment programs (1,304,000) -
Accretion of bond discount - (16,260)
Gain on sale of marketable securities - (215,198)
Gain on sale of equipment (630,438) (3,347,580)
Equity (income) loss in affiliated companies (434,188) 174,710
Elimination of consolidated subsidiaries minority interest (362,495) 1,845,128
Changes in assets and liabilities:
Restricted cash 2,154,570 -
Rents and other receivables 1,480,819 1,439,806
Other assets 1,340,730 (525,437)
Due from affiliates 1,201,251 6,396,029
Accounts payable, accrued expenses and other liabilities (12,769,222) (105,023)
Distributions declared and payable - (9,374,323)
Deferred income taxes (152,000) -
Deferred rental income 8,604 (600,481)
Net cash provided by operating activities 624,593 4,197,406
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 1,175,269 6,834,947
Proceeds from assets held for sale 10,250,000 -
Cash distribution from PLM investment programs 1,432,000 -
Purchase of property, plant and equipment (71,000) -
Proceeds from sale of marketable securities - 536,520
Purchase of PLM, net of cash acquired (15,901,721) -
Ownership interests in affiliated companies - (2,006,844)
Costs capitalized to real estate held for development and sale (1,411,161) (206,985)
Net cash provided by (used in) investing activities (4,526,613) 5,157,638
-------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Redemption of stock options (919,000) -
Proceeds from indebtedness 1,884,140 6,091,738
Principal payments on indebtedness (7,674,208) (29,789,413)
Indebtedness and other obligations to affiliates 1,989,272 (10,416,549)
Net cash used in financing activities (4,719,796) (34,114,224)
-------------
Net decrease in cash and cash equivalents (8,621,816) (24,759,180)
Cash and cash equivalents at beginning of period 27,830,365 54,568,088
Cash and cash equivalents at end of period $ 19,208,549 $ 29,808,908
------------- -------------
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 4,182,766 $ 6,242,051
Cash paid during the period for income taxes $ 6,245,000 $ -
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements presented herein are prepared in
conformity with generally accepted accounting principles and the instructions
for preparing Form 10-QSB under Rule 10-01 of Regulation S-B of the Securities
and Exchange Commission and are unaudited. Item 310 provides that footnote
disclosures that would substantially duplicate those contained in the most
recent annual report to shareholders may be omitted from interim financial
statements. The accompanying consolidated financial statements have been
prepared on that basis and, therefore, should be read in conjunction with the
footnotes presented in the 2000 Annual Report. Except as disclosed herein,
there have been no material changes 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 consolidated
financial position at September 30, 2001 and December 31, 2000 and its
consolidated results of operations for each of the three and nine month periods
ended September 30, 2001 and 2000 have been made and are reflected. Reference
to "Semele" or the "Company" in these financial statements means Semele Group
Inc., its subsidiaries and consolidated affiliates. The Company's consolidated
Statements of Operations for the three and nine months ended September 30, 2000
and Cash Flows for the nine months ended September 30, 2000 have been restated
to reflect the combination with Equis II Corporation. The restatement resulted
in a reduction of the Company's net loss of $1,007,492 ($0.58 per share) and
$3,551,957 ($2.35 per share) during the three and nine months ended September
30, 2000, respectively.
Certain amounts previously reported in the September 30, 2000 financial
statements have been reclassified to conform to the September 30, 2001
presentation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
----------------------------
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. Generally, excess cash is invested
in either (i) reverse repurchase agreements with overnight maturities at large
institutional banks or (ii) domestic money market funds that invest in
high-quality U.S. dollar denominated securities, including U.S. government
securities. At September 30, 2001, the Company and its consolidated affiliates
had invested approximately $17.9 million in cash equivalents. The composition
of the Company's consolidated cash position at September 30, 2001 and December
31, 2000 is summarized in the table below. The availability of cash held by the
AFG Trusts and AFG International to Semele is subject to terms and conditions
over the use and disbursement of cash and other matters contained in the trust
and partnership agreements that govern the AFG Trusts and AFG International.
The Company has voting control over most matters concerning these entities,
including the declaration, authorization, and amount of cash distributions.
September 30, December 31,
2001 2000
-------------- -------------
Semele Group Inc. and wholly-owned subsidiaries $ 884,507 $ 1,797,445
AFG Investment Trust A 586,762 2,764,972
AFG Investment Trust B 899,817 5,126,793
AFG Investment Trust C 1,659,295 8,848,816
AFG Investment Trust D 1,917,608 9,042,889
AFG International Limited Partnership 311,560 249,450
PLM International, Inc. 12,949,000 -
-------------- -------------
Total $ 19,208,549 $ 27,830,365
============== =============
Approximately, $4.4 million of cash within the AFG Trusts may be expended to
complete the purchase of PLM International, Inc. (See Note 3).
Revenue Recognition
--------------------
The Company earns rental income from a diversified portfolio of equipment held
for lease and from two special-purpose commercial buildings. Rents are due
monthly, quarterly or semi-annually and no significant amounts are earned based
on factors other than the passage of time. Substantially all of the Company's
leases are triple net, non-cancelable leases and are accounted for as operating
leases in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 13, "Accounting for Leases." Rents received prior to their due dates are
deferred. At September 30, 2001 and December 31, 2000, deferred rental income
was $86,375 and $77,771, respectively.
Goodwill
--------
Goodwill was recorded in connection with the acquisition of PLM International,
Inc. ("PLM") in February 2001. (See Note 3.) The amount of goodwill represents
the excess of the purchase price and related costs incurred to purchase PLM over
the value assigned its net tangible assets, including certain identifiable
management contracts and partnership interests of PLM. Goodwill is being
amortized on a straight-line basis over seven years.
Income Taxes
-------------
The Company 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. The deferred income tax obligation
and income tax expense on the accompanying financial statements result from the
consolidation of PLM.
NOTE 3 - ACQUISITIONS
PLM International, Inc.
-------------------------
On December 22, 2000, an affiliate of the Company, MILPI Acquisition Corp.,
entered into an agreement and plan of merger to acquire PLM, a San Francisco
based equipment leasing and asset management company. The plan of merger
involved a tender offer by MILPI Acquisition Corp. to purchase all of the
outstanding common stock of PLM for cash.
MILPI Acquisition Corp. is a wholly-owned subsidiary of MILPI Holdings LLC,
which was formed by four Delaware business trusts (collectively referred to as
the "AFG Trusts" or the "Trusts") on December 22, 2000. MILPI Acquisition Corp.
then entered into a definitive agreement with PLM to acquire 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 Corp. commenced a tender offer to purchase any and all of PLM's
outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition Corp. acquired 83% of PLM's
common stock in February 2001 for a total purchase price of approximately $21.7
million. Under the terms of the agreement, MILPI Acquisition Corp. will merge
into PLM, with PLM becoming the surviving entity, upon the approval of the
holders of 50.1% of PLM's outstanding common stock. PLM filed preliminary proxy
materials with the Securities and Exchange Commission on February 9, 2001
relating to a special meeting of its shareholders to vote on the merger
proposal. Because MILPI Acquisition Corp. owns 83% of PLM's common stock, its
vote alone would be sufficient to assure the approval of the merger proposal at
the special meeting, as MILPI Holdings has agreed to vote all of its shares in
favor of the merger proposal. Once the merger is approved, the AFG Trusts would
then jointly own 100% of the outstanding common stock of PLM through their 100%
interest in MILPI Holdings. In connection with its review of the preliminary
proxy materials, the staff of the SEC has informed the AFG Trusts that it
believes certain of the Trusts may be unregistered investment companies within
the meaning of the Investment Company Act of 1940 (the "Act"). The managing
trustee of the Trusts is engaged in discussions with the staff regarding this
matter. The AFG Trusts believe that they are not investment companies; however,
it is possible that the Trusts may have unintentionally engaged in an activity
or activities that may be construed to fall within the scope of the Act. If
necessary, each of the Trusts intends to avoid being deemed an investment
company by means that may include disposing or acquiring certain assets that it
might not otherwise dispose or acquire. The parties do not intend to schedule
the special meeting of stockholders of PLM International pending resolution of
this issue. If the merger is approved, the AFG Trusts may be required to
provide an additional $4.4 million to acquire the remaining 17% of PLM's
outstanding common stock. Mr. Engle and Mr. Coyne are officers and directors of
MILPI Acquisition Corp and PLM.
The Company has accounted for the acquisition of PLM using the purchase method
of accounting. As of September 30, 2001, the allocation of the purchase price
to acquired assets and liabilities is preliminary and subject to further
assessment. The following table summarizes the pro forma consolidated results
of operations of the Company, including PLM, for the nine month period ended
September 30, 2001 and the nine month period ended September 30, 2000, assuming
the purchase had been effected prior to January 1, 2000.
For the nine months For the nine months
ended ended
September 30, 2001 September 30, 2000
Total revenues $ 20,482,819 $ 27,485,649
Net loss from continuing operations $ (2,475,505) $ (317,222)
Loss from discontinued operations, net of
income tax $ -- $ (164,000)
Gain on disposition of discontinued
operations, net of tax $ -- $ 4,785,000
Net income (loss) $ (2,475,505) $ 4,303,778
Per share information:
Net loss from continuing operations $ (1.19) $ (0.21)
Loss from discontinued operations, net of
income tax $ -- $ (0.11)
Gain on disposition of discontinued
operations, net of tax $ -- $ 3.16
Net income (loss) $ (1.19) $ 2.84
NOTE 4 - REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The Company owns 274 acres of undeveloped land north of Malibu, California
called Rancho Malibu. Approximately 40 acres of the property is zoned for
development of a 46-unit residential community. The remainder is divided as
follows: (i) 167 acres are dedicated to a public agency, (ii) 47 acres are deed
restricted within privately-owned lots, and (iii) 20 acres are preserved as
private open space. During the nine months ended September 30, 2001, the
Company capitalized $1,411,161 of costs, including $25,000 paid for transfer
development credits required under California statute and $673,540 for interest.
During the nine months ended September 30, 2000, the Company capitalized
$206,985 of costs, including $20,700 paid for transfer development credits. At
September 30, 2001, the Company had obtained all transfer development credits
required for the project.
During the nine months ended September 30, 2000, the Company incurred and
expensed pre-development costs of approximately $161,000. These costs consisted
principally of property taxes and professional expenses, involving legal and
other services, in connection with the zoning and entitlement processes at the
state and local levels.
At September 30, 2001, the Company recorded an impairment of $2,525,962 in
connection with the Malibu property that reduced the carrying value of this
asset to $10,273,897. Consistent with SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed of," it is the
Company's policy to reduce the carrying value of real estate held for
development and sale when future undiscounted cash flows are estimated to be
insufficient to recover carrying value. The amount of the write-down is
equivalent to the difference between estimated future discounted cash flows of
the property and its unadjusted carrying value. Estimated future cash flows
were based on management's current development plans and assessment of the
current real estate market. Actual values could differ from management's
estimates.
NOTE 5 - LAND AND BUILDINGS
The Company has ownership interests in two commercial buildings that are leased
to a major university. The buildings are used in connection with the
university's international education programs and include both classroom and
dormitory space. The combined cost of both buildings, one located in
Washington, D.C. and one located in Sydney, Australia, is $11,932,997. At
September 30, 2001 and December 31, 2000, the buildings had a net book value of
$10,136,759 and $10,402,734, respectively. The combined land cost associated
with the buildings is $1,929,000. Indebtedness associated with the buildings is
summarized in Note 10.
Future minimum rental payments due in connection with the leases for both
buildings are scheduled as follows:
For the year ending September 30, 2002 $1,150,504
2003 313,084
----------
Total $1,463,588
==========
NOTE 6 - EQUIPMENT HELD FOR LEASE
The following is a summary of all equipment in which the Company has an interest
at September 30, 2001. Substantially all of the equipment is leased under
triple net lease agreements meaning that the lessees are responsible for
maintaining, insuring and operating the equipment in accordance with the terms
of the respective lease agreements. Remaining lease term (months), as used
below, represents the number of months remaining under contracted lease terms
and is presented as a range when more than one lease agreement is contained in
the stated equipment category. In the opinion of management, the acquisition
cost of the equipment did not exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) Cost
------------------------------------------- ----------- -------------
Aircraft 9-45 $ 79,628,529
Locomotives 0-30 12,886,831
Manufacturing 0-23 9,095,342
Materials handling 0-20 7,544,546
Construction and mining 0-15 3,744,859
Computers and peripherals 0-2 3,000,613
Research and test 0 338,749
Tractors & heavy duty trucks 22 105,350
Trailers/intermodal containers 0 56,976
Communications 0 6,532
-------------
Total equipment cost 116,408,327
Accumulated depreciation (50,022,290)
-------------
Equipment, net of accumulated depreciation $ 66,386,037
=============
The cost of the equipment is owned by the Company's consolidated affiliates as
follows:
AFG Investment Trust A $ 2,521,479
AFG Investment Trust B 3,691,378
AFG Investment Trust C 51,739,388
AFG Investment Trust D 58,456,082
------------
Total $116,408,327
============
The preceding summary of equipment includes leveraged equipment having an
original cost of approximately $92 million and a net book value of approximately
$63 million at September 30, 2001. Indebtedness associated with the equipment
is summarized in Note 10. Generally, indebtedness on leveraged equipment will
be amortized by the rental streams derived from the corresponding lease
contracts, although certain aircraft have balloon debt obligations that will not
be amortized by scheduled lease payments. Such obligations may result in future
refinancings to extend the repayment periods or the sale of the associated
assets to retire the indebtedness.
Future minimum rental payments due in connection with all equipment are
scheduled as follows:
For the year ending September 30, 2002 $10,450,787
. 2003 8,836,301
2004 1,396,482
2005 368,576
-----------
Total $21,052,146
===========
NOTE 7 - OTHER ASSETS
Other assets, at September 30, 2001, primarily consist of the following: (i)
cash surrender value of PLM's officers' life insurance policies totaling
approximately $2.3 million (ii) deposits totaling approximately $674,000, (iii)
equity holdings in third-party companies totaling $602,164, and (iv) deferred
financing costs, net of accumulated amortization, totaling $441,152. At
December 31, 2000, other assets had the following principal components: (i)
membership interests totaling $1.2 million in a limited liability company
established to facilitate the acquisition of PLM, (ii) deposits totaling
approximately $764,000, (iii) equity holdings in third-party companies totaling
$602,164, and (iv) deferred financing costs, net of accumulated amortization,
totaling $482,700. Deferred financing costs are amortized over the terms of the
loans to which they pertain on a straight-line basis. For the nine months ended
September 30, 2001 and 2000, amortization expense resulting from deferred
financing costs was $48,311 and $44,906, respectively.
NOTE 8 - GUARANTY OBLIGATIONS
On March 8, 2000, the AFG Trusts entered into a guaranty 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. Echelon Commercial
LLC is controlled by Gary D. Engle. 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. Effective December 8, 2000, the
guaranty of lease payments by the AFG Trusts was capped at a maximum of $7
million (reduced by agreement from $34.5 million at inception of the guaranty
due to principal reductions of the guaranty amount). The guaranty amount was
reduced according to a prescribed formula as payments under the master lease
agreement were collected by Heller. In consideration for their guaranty, the
AFG Trusts collectively received an upfront cash fee equal to $500,000 and
receive an additional annualized fee equal to 4% of the average guaranty amount
outstanding during each quarterly period. Accrued but unpaid fees accrue and
compound interest quarterly at an annualized interest rate of 7.5% until paid.
During the quarter ended September 30, 2001, the requirements of the guaranty
agreement were met and the AFG Trusts received payment for all amounts
outstanding under the guaranty agreement and have no further guarantee
obligations under the guarantee agreement. During the nine months ended
September 30, 2001, the AFG Trusts collectively recognized income from the
guaranty agreement of approximately $250,000 as compared to approximately
$685,000 (including the upfront fee) during the period March 8, 2000 to
September 30, 2000. These amounts are included in other income on the
accompanying consolidated Statement of Operations for the nine months ended
September 30, 2001 and 2000, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
Administrative Services
------------------------
A number of the Company's administrative functions are performed by Equis
Financial Group Limited Partnership ("EFG"), a Massachusetts limited
partnership, pursuant to the terms of a services agreement dated May 7, 1997.
EFG is controlled by Gary D. Engle, the Company's Chairman and Chief Executive
Officer. Administrative expenses consist primarily of professional and clerical
salaries and certain rental expenses for which EFG is reimbursed at actual cost.
The Company incurred total administrative costs of $118,297 and $116,220 during
the nine months ended September 30, 2001 and 2000, respectively.
EFG also provides asset management and other services to the AFG Trusts and is
compensated for those services based upon the nature of the underlying
transactions. For equipment reinvestment acquisition services, EFG is paid an
acquisition fee equal to 1% of base purchase price. For management services,
EFG is paid a management fee equal to 5% of lease revenues earned from operating
leases and 2% of lease revenues earned from full-payout leases. Operating
expenses incurred by the Trusts are paid by EFG on their behalf 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 Trusts to EFG or its affiliates, are as follows:
2001 2000
---------- ----------
Equipment management fees $ 354,216 $ 610,084
Acquisition fees -- 23,916
Administrative charges 397,017 450,452
Reimbursable operating expenses
due to third parties 2,807,896 815,211
---------- ----------
Total $3,559,129 $1,899,663
========== ==========
Summary of Consolidated Operations
-------------------------------------
Total revenues and net income (loss) generated by the Company and its principal
subsidiaries for the nine months ended September 30, 2001 and 2000 are
summarized below:
Total Net
Revenues Income (Loss)
------------ --------------
Nine months ended September 30, 2001:
Semele Group Inc. $ 2,033,088 $ (3,361,886)
Equis II Corporation 10,829,315 (1,559,576)
PLM International, Inc. 7,655,000 2,425,201
Intercompany eliminations (34,582) (183,422)
------------ --------------
Combined $20,482,821 $ (2,679,683)
============ ==============
Nine months ended September 30, 2000:
Semele Group Inc. $ 3,758,969 $ (3,414,280)
Equis II Corporation 18,596,329 1,929,472
Intercompany eliminations (2,677,649) 1,622,485
------------ --------------
Combined $19,677,649 $ 137,677
============ ==============
Due From Affiliates
---------------------
Amounts due from affiliates are summarized below:
September 30, December 31,
2001 2000
-------------- -------------
Loan obligations due from Mr. Engle and
Mr. Coyne $ 2,937,205 $ 2,937,205
Interest receivable on loan obligations due from
Mr. Engle and Mr. Coyne 464,986 257,029
Due from affiliates of PLM International, Inc. (1) 914,000 --
Guaranty fee receivable -- 364,925
Rents receivable from EFG escrow (2) 255,790 1,007,073
Advances to Kettle Valley Development LP 152,279 152,279
-------------- -------------
Total $ 4,724,260 $ 4,718,511
============== =============
(1) Consists primarily of management fees receivable due from investment
programs managed by PLM.
(2) All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account and remits such amounts to the Company
or its affiliates on a monthly basis.
Indebtedness and Other Obligations to Affiliates
-----------------------------------------------------
A summary of the Company's indebtedness and other obligations to affiliates
appears below.
September 30, December 31,
2001 2000
------------- -------------
Principal balance of indebtedness to affiliates $ 34,949,392 $ 34,949,392
Accrued interest due to affiliates 3,238,186 1,457,597
Other (1) 1,161,261 202,578
-------------- -------------
Total $ 39,348,839 $ 36,609,567
============== =============
(1) Consists primarily of amounts due to EFG for administrative services and
operating expenses.
In connection with a transaction in 1997, the Company borrowed $4,419,500 from
certain affiliates controlled by Mr. Engle, including $462,353 from AFG
Investment Trust A. The corresponding note obligations bear interest at an
annualized rate of 10% and require mandatory principal repayments to the extent
the Company realizes any net cash proceeds from the sale or refinancing of
Rancho Malibu. The notes mature on April 30, 2003. During the each of the nine
months ended September 30, 2001 and 2000, the Company incurred interest expense
of $330,554 in connection with this indebtedness. The obligation to AFG
Investment Trust A ($462,353) and related interest expense ($34,582 in each of
2001 and 2000) have been eliminated in consolidation.
In November 1999, the Company purchased certain equity interests in the AFG
Trusts, referred to as Special Beneficiary Interests. The Special Beneficiary
Interests were purchased from EFG and consist of an 8.25% non-voting carried
interest in each of the trusts. The Company purchased the interests for
$9,652,500 under the terms of a non-recourse note, payable over 10 years and
bearing interest at 7% per year. Amortization of principal and payment of
interest are required only to the extent of cash distributions paid to the
Company as owner of the Special Beneficiary Interests. To date, the Company has
received cash distributions of $3,145,584 from the Special Beneficiary Interests
and has paid EFG an equal amount consisting of principal and accrued interest.
At September 30, 2001 and December 31, 2000, the note had an outstanding
principal balance of $6,634,544. The Special Beneficiary Interests have been
eliminated in consolidation.
Guaranty of Affiliate's Lease Obligations
---------------------------------------------
On March 8, 2000, the AFG Trusts became guarantors of the lease payment
obligations of Echelon Commercial LLC under a certain master lease agreement.
Echelon Commercial LLC is an affiliate of the Company and the AFG Trusts and is
controlled by Gary D. Engle. As of September 30, 2001, the AFG Trusts have no
further obligations under the guaranty agreement (See Note 8.)
Ownership Interests in Affiliated Companies
-----------------------------------------------
The Company has equity interests in the following affiliates:
September 30, 2001 December 31, 2000
------------------- -------------------
PLM International, Inc. equity interests in
investment programs $ 19,896,005 $ --
EFG Kirkwood LLC 10,866,180 10,224,163
EFG/Kettle Development LLC 7,398,508 8,527,542
Equity Interests in Partnerships 3,757,892 2,934,186
------------------- ------------------
Total $ 41,918,585 $ 21,685,891
=================== ==================
Asset Management - PLM International, Inc.
In February 2001, the AFG Trusts, through MILPI Acquisition Corp., acquired
approximately 83% of the common stock of PLM. MILPI Acquisition Corp. was
formed by the AFG Trusts on December 22, 2000 to acquire PLM's common stock.
PLM specializes in transportation equipment leasing and manages several
syndicated investment programs (generally organized as or similar to limited
partnerships) that are engaged in the business of leasing transportation
equipment. (See Note 3.) The carrying basis of PLM's equity interests in
certain of its investment programs was $19,896,005 at September 30, 2001.
Winter Resorts - EFG Kirkwood LLC
On May 1, 1999, the Company and the AFG Trusts formed a joint venture, EFG
Kirkwood LLC, for the purpose of acquiring preferred and common stock interests
in Kirkwood Associates, Inc. The AFG Trusts collectively purchased 100% of the
Class A membership interests in EFG Kirkwood and the Company purchased 100% of
the 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 AFG 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 the Class A
and Class B membership interests.
On April 30, 2000, Kirkwood Associates' 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
interests in Kirkwood Associates for membership interests in Mountain Resort,
thereby obtaining 37.9% of the membership interests in Mountain Resort.
Mountain Resort, through four wholly-owned subsidiaries, owns and operates
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.
Subsequent to acquiring its 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
Purgatory Ski resort in Durango, Colorado. The Company's ownership interest in
EFG Kirkwood had an original cost of $10,735,380, including an acquisition fee
of $98,865 that was paid to EFG. The Company's ownership interest in EFG
Kirkwood is accounted for using the equity method. The Company recorded net
income of $642,022 from its interest in EFG Kirkwood for the nine months ended
September 30, 2001.
Residential Community - EFG/Kettle Development LLC
On March 1, 1999, the Company and two of the AFG Trusts formed EFG/Kettle
Development LLC, a Delaware limited liability company, for the purpose of
acquiring a 49.9% indirect ownership interest in a real estate development
project in Kelowna, British Columbia, Canada called Kettle Valley. The project,
which is being developed by Kettle Valley Development Limited Partnership,
consists of approximately 280 acres of land that is zoned for 1,120 residential
units in addition to commercial space. To date, 108 residential units have been
constructed and sold and 10 additional units are under construction. A
subsidiary of the Company became general partner of Kettle Valley Development
Limited Partnership on March 1, 1999. The remaining equity interests in the
project are owned by a third party.
The Company's ownership interest had a cost of $8,837,500 that was funded with
cash of $6,204,347 and a non-recourse installment note of $2,633,153. The note
matures on December 1, 2001 and bears interest at an annualized rate of 7.5%.
The outstanding principal balance of the note was $175,457 and $938,513 at
September 30, 2001 and December 31, 2000, respectively. The cost of the
Company's ownership interest exceeded its equity interest in the underlying net
assets of Kettle Valley Development Limited Partnership by approximately
$1,300,000. This difference is being amortized on a straight-line basis over
the estimated project development period of 10 years, resulting in amortization
expense of $97,500 during each of the nine month periods ended September 30,
2001 and 2000. The Company accounts for its ownership interest using the equity
method of accounting. During the nine months ended September 30, 2001, the
Company decreased its investment in Kettle Valley by $1,031,534 to reflect its
share of the project's net loss.
Equity Interests in Partnerships
On August 31, 1998, the Company acquired Ariston Corporation for $12.45 million,
consisting of cash of $2 million and a purchase-money note of $10.45 million.
Ariston was purchased from EFG and owns equity interests in (i) a real estate
limited partnership called AFG International Limited Partnership, which owns two
commercial buildings leased to a major educational institution (See Note 5), and
(ii) a 98% limited partner interest in Old North Capital Limited Partnership,
which owns equity interests in each of the AFG Trusts and 11 other limited
partnerships established by EFG's predecessor. The remaining 2% equity
interests in Old North Capital, including those of the general partner, are
owned by Mr. Engle, Mr. Coyne, and a third party and controlled by Mr. Engle.
The acquisition of Ariston was accounted for under the purchase method of
accounting and the balance sheets and statements of operations of Ariston were
consolidated effective September 1, 1998. The purchase-money note bears
interest at an annualized rate of 7%, but requires principal amortization and
payment of interest only to the extent of cash distributions paid to the Company
in connection with the partnership interests owned by Ariston. The note matures
on August 31, 2003 and is recourse to the common stock of Ariston. In October
1998, Ariston declared and paid a cash distribution of $2,020,000 to the
Company; however, future cash distributions by Ariston require the consent of
EFG until such time that the Company's obligation to EFG under the note is
repaid. On January 26, 2000, the Company made principal and interest payments
of $2,031,504 and $50,798, respectively, in connection with this note. The
outstanding principal balance of this obligation at September 30, 2001 and
December 31, 2000 was $8,418,496. Ariston's ownership interests in limited
partnerships (11 in total) are accounted for using the equity method. During
the nine months ended September 30, 2001, the Company recorded net income of
$823,706 related to these interests. Ariston's equity interests in the AFG
Trusts are eliminated in consolidation.
NOTE 10 - NOTES PAYABLE TO THIRD PARTIES
At September 30, 2001, the Company had aggregate indebtedness to third parties
of $54,430,684, including two note obligations totaling $5,767,730 associated
with the Company's two commercial buildings. (See Note 5.) One loan, with a
balance of $5,290,969, matures on June 1, 2010 and carries a fixed annual
interest rate of 7.86% and the other loan, with a balance of $476,761, matures
on December 31, 2002 and carries a variable annual interest rate equal to prime
plus 1.5% (7.5% at September 30, 2001). The remainder of the Company's
indebtedness to third parties is non-recourse installment debt pertaining to
equipment held on operating leases. (See Note 6.) Generally, this debt is
secured by the equipment and will be fully amortized over the terms of the lease
agreements corresponding to each asset. However, in certain instances
(involving principally aircraft), retirement of the debt obligations is
partially dependent upon the residual value of the equipment. The Company has
balloon debt obligations due at the expiration of certain equipment leases of
$36,594,449. Interest rates on equipment debt obligations range from 6.76% to
9.95% at September 30, 2001.
Management believes that the carrying amount of the Company's notes payable to
third parties 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 Company's indebtedness to third parties is
summarized below:
Buildings Equipment Total
-----------
For the year ending September 30, 2002 $ 590,236 $ 5,695,859 $ 6,286,095
2003 686,404 9,532,850 10,219,254
2004 449,467 33,097,313 33,546,780
2005 486,096 336,932 823,028
2006 620,793 -- 620,793
Thereafter 2,934,734 -- 2,934,734
---------- ----------- -----------
Total $5,767,730 $48,662,954 $54,430,684
========== =========== ===========
The Company's indebtedness to third parties is divided among the Company's
consolidated affiliates as follows:
AFG Investment Trust A $ 444,967
AFG Investment Trust B 444,967
AFG Investment Trust C 23,332,484
AFG Investment Trust D 24,440,536
Old North Capital Limited Partnership 476,761
AFG International Limited Partnership 5,290,969
-----------
Total $54,430,684
===========
NOTE 11 - DEFERRED STOCK COMPENSATION
In 1997, the Company established a deferred compensation plan for Mr. Engle and
Mr. Coyne. Pursuant to terms of the plan, both Mr. Engle and Mr. Coyne may
receive shares of the Company's common stock instead of cash compensation. The
number of shares allocated to them is determined at the end of each month by
dividing the average closing price of the Company's stock for the last ten
trading days of the month into the dollar amount that otherwise would have been
paid to them as cash compensation for the month. The shares (which are fully
vested) are held in a rabbi trust established for the benefit of Mr. Engle and
Mr. Coyne, but are not expected to be transferred to them until termination of
their employment. The Company treats the issuance of shares under the plan as
compensation and, therefore, recognizes an expense equal to the amount of cash
compensation that would have been paid to each individual. During the nine
months ended September 30, 2001, the Company did not issue shares under the plan
but accrued compensation expense for both officers. During the nine months
ended September 30, 2000, the Company issued 37,574 shares under the plan.
During each of the nine month periods ended September 30, 2001 and 2000, the
Company recorded aggregate compensation expense of $180,000. These expenses are
included in general and administrative expenses on the accompanying consolidated
Statements of Operations for each of the nine month periods ended September 30,
2001 and 2000.
NOTE 12 - LITIGATION
PLM International, Inc. and various of its wholly owned subsidiaries are
defendants in a class action lawsuit filed in January 1997 and which is pending
in the United States District Court for the Southern District of Alabama,
Southern Division (Civil Action No. 97-0177-BH-C) (the court). The named
plaintiffs are six individuals who invested in PLM Equipment Growth Fund IV, PLM
Equipment Growth Fund V (Fund V), PLM Equipment Growth Fund VI, and PLM
Equipment Growth & Income Fund VII (the Partnerships), each a California limited
partnership for which the PLM's wholly owned subsidiary, PLM Financial Services,
Inc. (FSI) acts as the General Partner.
The complaint asserts causes of action against all defendants for fraud and
deceit, suppression, negligent misrepresentation, negligent and intentional
breaches of fiduciary duty, unjust enrichment, conversion, and conspiracy.
Plaintiffs allege that each defendant owed plaintiffs and the class certain
duties due to their status as fiduciaries, financial advisors, agents, and
control persons. Based on these duties, plaintiffs assert liability against
defendants for improper sales and marketing practices, mismanagement of the
Partnerships, and concealing such mismanagement from investors in the
Partnerships. Plaintiffs seek unspecified compensatory damages, as well as
punitive damages.
In June 1997, PLM and the affiliates who are also defendants in the Koch action
were named as defendants in another purported class action filed in the San
Francisco Superior Court, San Francisco, California, Case No. 987062 (the Romei
action). The plaintiff is an investor in Fund V, and filed the complaint on her
own behalf and on behalf of all class members similarly situated who invested in
the Partnerships. The complaint alleges the same facts and the same causes of
action as in the Koch action, plus additional causes of action against all of
the defendants, including alleged unfair and deceptive practices and violations
of state securities law. In July 1997, defendants filed a petition (the
petition) in federal district court under the Federal Arbitration Act seeking to
compel arbitration of plaintiff's claims. In October 1997, the district court
denied the Company's petition, but in November 1997, agreed to hear the
Company's motion for reconsideration. Prior to reconsidering its order, the
district court dismissed the petition pending settlement of the Romei action, as
discussed below. The state court action continues to be stayed pending such
resolution.
In February 1999 the parties to the Koch and Romei actions agreed to settle the
lawsuits, with no admission of liability by any defendant, and filed a
Stipulation of Settlement with the court. The settlement is divided into two
parts, a monetary settlement and an equitable settlement. The monetary
settlement provides for a settlement and release of all claims against
defendants in exchange for payment for the benefit of the class of up to $6.6
million. The final settlement amount will depend on the number of claims filed
by class members, the amount of the administrative costs incurred in connection
with the settlement, and the amount of attorneys' fees awarded by the court to
plaintiffs' attorneys. PLM will pay up to $0.3 million of the monetary
settlement, with the remainder being funded by an insurance policy. For
settlement purposes, the monetary settlement class consists of all investors,
limited partners, assignees, or unit holders who purchased or received by way of
transfer or assignment any units in the Partnerships between May 23, 1989 and
August 30, 2000. The monetary settlement, if approved, will go forward
regardless of whether the equitable settlement is approved or not.
The equitable settlement provides, among other things, for: (a) the extension
(until January 1, 2007) of the date by which FSI must complete liquidation of
the Partnerships' equipment, (b) the extension (until
December 31, 2004) of the period during which FSI can reinvest the Partnerships'
funds in additional equipment, (c) an increase of up to 20% in the amount of
front-end fees (including acquisition and lease negotiation fees) that FSI is
entitled to earn in excess of the compensatory limitations set forth in the
North American Securities Administrator's Association's Statement of Policy; (d)
a one-time repurchase by each of Funds V, VI and VII of up to 10% of that
partnership's outstanding units for 80% of net asset value per unit; and (e) the
deferral of a portion of the management fees paid to an affiliate of FSI until,
if ever, certain performance thresholds have been met by the Partnerships.
Subject to final court approval, these proposed changes would be made as
amendments to each Partnership's limited partnership agreement if less than 50%
of the limited partners of each Partnership vote against such amendments. The
equitable settlement also provides for payment of additional attorneys' fees to
the plaintiffs' attorneys from Partnership funds in the event, if ever, that
certain performance thresholds have been met by the Partnerships. The equitable
settlement class consists of all investors, limited partners, assignees or unit
holders who on August 30, 2000 held any units in Funds V, VI, and VII, and their
assigns and successors in interest.
The court preliminarily approved the monetary and equitable settlements in
August 2000, and information regarding each of the settlements was sent to class
members in September 2000. A final fairness hearing was held on November 29,
2000, and on April 25, 2001, the federal magistrate judge assigned to the case
entered a Report and Recommendation recommending final approval of the monetary
and equitable settlements to the federal district court judge. On July 24,
2001, the federal district court judge adopted the Report and Recommendation,
and entered a final judgment approving both settlements. No appeal has been
filed and the time for filing an appeal has run. Therefore, monetary class
members who submitted claims will be paid their settlement amount out of the
monetary fund by the third-party claims administrator once the final settlement
amounts are calculated pursuant to the formula set forth in the settlement
agreement and court order. Similarly the equitable settlement will be
implemented promptly. For those equitable class members who submitted timely
requests for the repurchase of their limited partnership units, the respective
partnerships will repurchase such units by December 31, 2001.
PLM is involved as 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
PLM.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued 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.
In October 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("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 Company will apply the new rules on accounting for the goodwill and other
intangible assets and for the impairment or disposal of long-lived assets
beginning the first quarter of 2002, which is not anticipated to have an impact
on the Company's earnings or financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION
Certain statements in this quarterly report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limiting the foregoing, words
such as "anticipates," "expects," "intends," "plans," and similar expressions
are intended to identify forward-looking statements. These statements are
subject to a number of risks and uncertainties including the Company's ability
to successfully implement a growth-oriented business plan. Actual results could
differ materially from those described in any forward-looking statements.
GENERAL
Semele Group Inc. (the "Company") is a Delaware corporation that was organized
on April 14, 1987 as Banyan Strategic Land Fund II to invest primarily in
short-term, junior, pre-development, and construction mortgage loans.
Subsequently, the Company became owner of various real estate assets through
foreclosure proceedings in connection with its mortgages. For the years 1993,
1994 and 1995, the Company elected to be treated as a real estate investment
trust ("REIT") for income tax purposes. Effective January 1, 1996, the Company
revoked its REIT status and became a taxable "C" corporation. Since then, the
Company has attempted to seek out ways to maximize shareholder value and take
advantage of investment opportunities where its significant loss carryforwards
for federal income tax purposes (approximately $99 million at December 31, 2000)
could make it a value-added buyer. In recent years, the Company made certain
investments with affiliated parties where its income tax loss carryforwards
could be utilized and which permitted the Company to diversify its asset mix
beyond its principal real estate asset, consisting of 274 acres of land located
in Southern California known as Rancho Malibu. Today, the Company is engaged in
various real estate activities, including residential property development, and
holds investments in other companies operating in niche financial markets,
principally involving real estate and equipment leasing.
In April 2001, the Company received a letter from the Nasdaq Stock Market, Inc.
wherein the staff determined that the Company had failed to meet certain minimum
standards for continued listing on the Nasdaq SmallCap Market. The Company
appealed this decision and requested an oral hearing before the Nasdaq Listing
Qualifications Panel, which was held on June 28, 2001. On August 7, 2001,
Nasdaq notified the Company of the panel's decision to de-list the Company's
stock from The Nasdaq SmallCap Market effective at the opening of business on
August 8, 2001. As a result of the foregoing, the Company's securities are
traded on the OTC Bulletin Board, commonly referred to as the "over-the-counter"
market. The Company's trading symbol on that exchange is "VSLF.OB." This
change could have an adverse affect on the Company's share price and
stockholders' liquidity.
RECENT ACQUISITIONS
PLM International, Inc.
-------------------------
On December 22, 2000, an affiliate of the Company, MILPI Acquisition Corp.,
entered into an agreement and plan of merger to acquire PLM International, Inc.
("PLM"), a San Francisco based equipment leasing and asset management company.
The plan of merger involved a tender offer by MILPI Acquisition Corp. to
purchase all of the outstanding common stock of PLM for cash.
MILPI Acquisition Corp. is a wholly-owned subsidiary of MILPI Holdings LLC,
which was formed by four Delaware business trusts (collectively referred to as
the "AFG Trusts" or the "Trusts") on December 22, 2000. The AFG Trusts are
consolidated affiliates of the Company engaged in the equipment leasing and real
estate businesses. MILPI Acquisition Corp. entered into a definitive agreement
with PLM to acquire 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 Corp. commenced a tender
offer to purchase any and all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MILPI Acquisition Corp. acquired 83% of PLM's
common stock in February 2001 for a total purchase price of approximately $21.7
million. Under the terms of the agreement, MILPI Acquisition Corp. will merge
into PLM, with PLM becoming the surviving entity, upon the approval of the
holders of 50.1% of PLM's outstanding common stock. PLM filed preliminary
proxy materials with the Securities and Exchange Commission on February 9, 2001
relating to a special meeting of its shareholders to vote on the merger
proposal. Because MILPI Acquisition Corp. owns 83% of PLM's common stock, its
vote alone would be sufficient to assure the approval of the merger proposal at
the special meeting, as MILPI Holdings has agreed to vote all of its shares in
favor of the merger proposal. Once the merger is approved, the AFG Trusts would
then jointly own 100% of the outstanding common stock of PLM through their 100%
interest in MILPI Holdings. In connection with its review of the preliminary
proxy materials, the staff of the SEC has informed the AFG Trusts that it
believes certain of the Trusts may be unregistered investment companies within
the meaning of the Investment Company Act of 1940 (the "Act"). The managing
trustee of the Trusts is engaged in discussions with the staff regarding this
matter. The AFG Trusts believe that they are not investment companies; however,
it is possible that the Trusts may have unintentionally engaged in an activity
or activities that may be construed to fall within the scope of the Act. If
necessary, each of the Trusts intends to avoid being deemed an investment
company by means that may include disposing or acquiring certain assets that it
might not otherwise dispose or acquire. The parties do not intend to schedule
the special meeting of stockholders of PLM International pending resolution of
this issue. If the merger is approved, the AFG Trusts may be required to
provide an additional $4.4 million to acquire the remaining 17% of PLM's
outstanding common stock. Mr. Engle and Mr. Coyne are officers and directors of
MILPI Acquisition Corp and PLM.
Equis II Corporation
----------------------
During the fourth quarter of 1999, the Company issued $19.586 million of
promissory notes to acquire an 85% equity interest in Equis II Corporation
("Equis II"), a Massachusetts corporation having a controlling interest in the
AFG Trusts. During the first quarter of 2000, the Company sought and obtained
shareholder approval for the issuance of 510,000 shares of common stock to
purchase the remaining 15% equity interest of Equis II. On April 20, 2000, the
Company issued 510,000 shares of common stock for that purpose. The market
value of the shares issued was $2,358,750 ($4.625 per common share) based upon
the closing price of the Company's common stock on April 20, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's acquisition of Equis II Corporation and the resulting
consolidation of the AFG Trusts significantly changed the nature of the
Company's consolidated operations. In addition, the Company's 2001 consolidated
financial statements have been further affected by the AFG Trusts' collective
purchase of approximately 83% of the common stock of PLM. The acquisition of
PLM has been accounted for using the purchase method of accounting. The
financial position and results of operations of PLM have been consolidated in
the accompanying financial statements commencing at the date of acquisition;
and, therefore, the Company's consolidated results of operations are not fully
comparable between the first nine months of 2001 and the first nine months of
2000.
Each of the AFG Trusts is a Delaware business trust whose form of organization
and management is similar to that of a limited partnership. The Trusts are
limited-life entities that have scheduled dissolution dates. The AFG Trusts
were organized to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The net capital of the Trusts was raised
initially from a series of offerings in the public marketplace. These equity
interests are referred to as Class A Interests, the majority of which are owned
by approximately 5,300 third-party investors. In 1997, the capital structure of
the Trusts was expanded to include a new form of equity interest referred to as
the Class B Interests, the majority of which are owned by Equis II Corporation.
In addition, the investment objectives of the Trusts were expanded in 1998 to
permit business activities other than equipment leasing. The Class B Interests
owned by Equis II represent approximately 62% of the aggregate voting interests
in each of the Trusts. Accordingly, the Company's purchase of Equis II
Corporation resulted in the Company obtaining voting control over the AFG
Trusts; and, as a result, the accompanying financial statements consolidate the
operating results and financial positions of the Trusts. The Company's
consolidated financial statements contain a significant minority interest
component that reflects that portion of the Company's consolidated net assets
and results of operations attributable to the economic interests of other
parties in the AFG Trusts and PLM or in certain other consolidated affiliates in
which the Company does not own a 100% economic interest.
A significant portion of the Trusts' equipment was financed under note
agreements that are secured by the equipment and associated lease streams.
Rental income generated by the Trusts' lease agreements is used to repay the
Trusts' debt obligations and to fund the Trusts' operating expenses, including
management fees. Certain management fees are paid to AFG ASIT Corporation, a
wholly-owned subsidiary of the Company, which functions as managing trustee of
the Trusts. These fees are eliminated in consolidation. All other management
fees are paid to Equis Financial Group Limited Partnership ("EFG"), an affiliate
of the Company. The Trusts' debt obligations at September 30, 2001 are
expected to be retired through the collection of contracted rents, with the
exception of balloon payment obligations totaling $36,594,449 associated with
the Trusts' SAS and Emery aircraft. (See additional discussion of aircraft
matters under Results of Operations.) Repayment of the balloon debt obligations
will be dependent upon the negotiation of future lease contracts, future
refinancing arrangements or sales or, alternatively, the use of working capital.
At September 30, 2001, the Trusts were due future contracted lease payments from
third-party lessees totaling $21,052,146 and owed third-party lenders
$12,068,505 of principal debt obligations, excluding balloon payment
obligations.
The Trusts' lease agreements are triple net lease agreements whereby the lessees
are responsible for all costs of operating, maintaining and insuring the
equipment. The leases expire on an intermittent basis and equipment held
pursuant to each lease is renewed, re-leased or sold at lease expiration,
depending on prevailing market conditions and the assessment of such conditions
by AFG ASIT Corporation, as managing trustee, and EFG, as adviser, to obtain the
most advantageous economic benefit. As the original lease agreements of the
Trusts expire and their equipment portfolios are disposed of, the cash flow
streams of the Trusts will become increasingly irregular. This will occur
partly because the portfolio of equipment within the Trusts will continue to
diminish and partly because the timing and extent of remarketing activities will
be subject, as always, to 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.
Generally, the lessees of the Trusts are of sound credit quality. Since their
inception, the AFG Trusts have not experienced significant collection problems
and have not considered it necessary to provide an allowance for doubtful
accounts. However, there is no assurance that the Trusts' positive collection
histories will continue or that the composition of their lessee customers from a
credit quality perspective will not deteriorate. Collection risk could increase
in the future, particularly as the Trusts' sell their equipment and enter
re-lease agreements with different lessees. AFG ASIT Corporation, as managing
trustee, will continue to evaluate the Trusts' experiences in collecting rents
to determine whether a future allowance for doubtful accounts may become
appropriate.
Since 1997, the Company has effected several highly leveraged purchase
transactions with related parties. Most significantly, the Company purchased
Equis II Corporation for $21.945 million from the Company's Chief Executive
Officer, Gary D. Engle, certain Trusts established for the benefit of Mr.
Engle's children, and James A. Coyne, the Company's President. A significant
portion of the purchase price, or $19.586 million, was financed under
installment debt owed to the sellers. In 2000, a portion of this indebtedness
was retired by issuing 326,462 shares of common stock, as permitted by the
authorization of shareholders obtained on November 2, 2000. The Company's other
principal purchase transactions with related parties since 1997, involving
Ariston Corporation, the Special Beneficiary Interests, and AFG ASIT Corporation
were acquired from EFG, a limited partnership that is controlled by Mr. Engle.
At September 30, 2001 and December 31, 2000, the Company owed Mr. Engle, Mr.
Coyne or their affiliates approximately $35 million plus accrued interest
thereon. The Company expects that all of the purchase price indebtedness for
Equis II Corporation, Ariston Corporation, and the Special Beneficiary Interests
will be repaid through the collection of future cash distributions generated in
connection with these assets and the collection of amounts due from Mr. Engle
and Mr. Coyne in connection with their respective debt obligations to certain
subsidiaries of the Company. The purchase price indebtedness for AFG ASIT
Corporation was repaid in 1999. One of the Company's debt obligations to
related parties, totaling approximately $4 million, is due to several limited
partnerships controlled by Mr. Engle. The Company expects to repay this debt
using a portion of the proceeds generated by Rancho Malibu.
Mr. Engle controls the timing and authorization of cash distributions to be paid
from all of the affiliates upon which amortization of the Company's related
party debt obligations is predominantly dependent. Moreover, as a result of the
issuance of common stock in connection with the Equis II acquisition, voting
control of the Company is vested in Mr. Engle and Mr. Coyne. At September 30,
2001, Mr. Engle owns or controls 40.3% and Mr. Coyne owns or controls 17.6% of
the Company's outstanding common stock.
Looking forward, the Company does not anticipate any near term incremental free
cash flow as a result of its recent purchases from related parties.
Substantially all of the net cash flow generated by these acquisitions will be
used to repay corresponding purchase price indebtedness. The Company's cash and
cash equivalents balance declined from approximately $27.8 million at December
31, 2000 to approximately $19.2 million at September 30, 2001 principally as a
result of the PLM acquisition in February 2001. The Company's near-term
liquidity will be significantly influenced by the completion of the PLM
acquisition which may require additional cash of approximately $4.4 million to
acquire the remaining 17% of PLM's outstanding stock. (See Note 3 to the
accompanying consolidated financial statements.) In addition, the Company is
evaluating its plans to develop the Rancho Malibu property. The Company is
considering potential joint venture partners to develop the property or may seek
buyers to purchase the project.
RESULTS OF OPERATIONS
At September 30, 2001, the AFG Trusts collectively held approximately $116.4
million of equipment assets having a net book value of approximately $66.4
million. Approximately 68% of those assets consisted of three commercial jet
aircraft on lease to Scandinavian Airlines System ("SAS"), Emery Worldwide, and
Aerovias de Mexico, S.A. de C.V. The latter aircraft, which is owned jointly
between the AFG Trusts and certain affiliated limited partnerships, had been
leased to Reno Air until June 2001. The AFG Trusts collectively received
approximately $298,000 of early-termination rents from Reno in June 2001 and
Reno further agreed to pay a negotiated sum for aircraft maintenance. The
balloon debt obligation, previously scheduled to be paid after the expiration of
the Reno lease in January 2003, was refinanced in connection with the re-lease
to Aerovias de Mexico. As a result, the AFG Trusts' share of the balloon debt,
which was approximately $1,130,000, will be amortized by the future rents from
the re-lease agreement. The AFG Trusts' collective ownership interest in this
aircraft is approximately 35%. Lease revenues from all three aircraft
collectively represented 57% of the Company's consolidated lease revenues during
both the three and nine month periods ended September 30, 2001 compared to 54%
and 48%, respectively, for the same periods in 2000. Lease revenues from SAS
represented 45% and 43% of the Company's consolidated rental income during the
three and nine months ended September 30, 2001, respectively, compared to 43%
and 39% for the same periods in 2000. The growing significance of aircraft
rents in relation to other rents reflected between 2000 and 2001 is the result
of lease expirations and equipment sales involving assets other than aircraft.
The events of September 11, 2001 adversely affected market demand for both new
and used commercial aircraft and weakened the financial position of several
airlines. No direct damage occurred to any of the Company's assets as a result
of these events and while it currently is not possible for the Company to
determine the ultimate long-term economic consequences of these events to the
AFG Trusts or to the Company, management expects that the resulting decline in
air travel will suppress market prices for used aircraft in the short-term and
could inhibit the viability of some airlines. In the event of a lease default
by an aircraft lessee, the Company could experience material losses. At
September 30, 2001, the AFG Trusts have collected all rents owed to them from
aircraft lessees. In addition, its membership interest in two ski resorts could
be aversely affected by potential declines in vacation travel resulting from the
events of September 11, 2001. The Company is monitoring developments in the
airline and resort industries and will continue to evaluate potential
implications to the Company's financial position and future liquidity.
Fee income results from the Company's acquisition of PLM and consists
principally of management fees and acquisition and lease negotiation fees earned
in connection with the investment programs managed by PLM.
Interest income decreased from $538,275 and $1,531,472 for the three and nine
month periods ended September 30, 2000 to $180,688 and $757,599 for the three
and nine month periods ended September 30, 2001. The decline was caused
principally from the disbursement of approximately $21.7 million of cash to
acquire 83% of PLM. Interest income is generated from the temporary investment
of rental receipts and equipment sales proceeds in short-term instruments.
Generally, future interest income will fluctuate as a result of changing
interest rates, the collection of rental income and the proceeds generated from
equipment sales, among other factors.
During the three months ended September 30, 2001, the Company recognized a net
loss of $852 on the sale of equipment compared to a net gain of $2,261,342 for
the three months ended September 30, 2000. For the nine months ended September
30, 2001, the Company recognized a net gain of $630,438 on the sale of equipment
compared to a net gains of $3,347,580 for the same period in 2000. The ultimate
economic performance of the Company's consolidated equipment portfolio is and
will continue to be dependent upon many factors, including market conditions,
industry trends, technological advances and many other events that can converge
to enhance or detract from asset values at any given time. The gross yield on
each equipment asset is a function of its primary-term rents and its residual
value in relation to cost. Residual value consists of cash proceeds realized
from the sale of an asset in addition to all other cash receipts obtained from
renting the asset on a re-lease, renewal or month-to-month basis. These
payments are classified as rental income. Consequently, the amount of net gains
reported in the Company's financial statements is not necessarily indicative of
the total residual value achieved from leasing the equipment.
During the three month period ended September 30, 2001, the Company recognized
equity losses in affiliated companies of $1,423,772. Those losses partially
offset prior equity income in affiliated companies, resulting in net equity
income from affiliated companies of $434,188 for the nine months ended September
30, 2001. The loss reported during the three months ended September 30, 2001
was caused by the Company's ownership interests in EFG Kirkwood LLC, which has
equity interests in two ski resorts. The resorts are located in the western
United States and experienced good operating conditions during the past winter
season which contributed to first quarter earnings. However, the operating
results of ski resorts are highly seasonal and losses generally are expected
during the summer and autumn months. Accordingly, the Company does not expect
positive operating results from EFG Kirkwood LLC prior to the commencement of
the 2001-2002 winter season. During the three and nine month periods ended
September 30, 2000, the Company recognized equity losses in affiliated companies
of $174,710. The loss reported during the three and nine month periods ended
September 30, 2000 was caused by the Company's ownership interests in EFG/Kettle
Development LLC.
During the nine months ended September 30, 2001 and 2000, the AFG Trusts
collectively recorded income of approximately $250,000 and $685,000,
respectively, for fees relating to their guaranty of certain lease obligations
of an affiliate, Echelon Commercial LLC. These fees are included in other
income on the Company's 2001 and 2000 consolidated Statement of Operations.
Approximately $266,000 of the Company's depreciation expense in each of the nine
months ended September 30, 2001 and 2000 pertains to its two commercial
buildings. The remainder of depreciation expense pertains mostly to equipment
held for lease. For financial reporting purposes, to the extent that an asset is
held on primary lease term, depreciation is computed by allocating the
difference between (i) the cost of each 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 value represents an estimate of equipment value
at the date of primary lease term expiration. To the extent that an asset is
held beyond its primary lease term, depreciation is computed by allocating the
then remaining net book value of each asset on a straight-line basis over the
asset's remaining economic life.
Interest expense on indebtedness to third parties decreased from $1,354,091 and
$4,356,575 for the three and nine month periods ended September 30, 2000 to
$916,482 and $3,529,857 for the three and nine month periods ended September 30,
2001. The decline in consolidated interest expense to third parties reflects
the retirement of debt obligations attributable mostly to equipment on lease.
Interest expense on indebtedness and other obligations to affiliates decreased
from $684,105 and $2,180,741 for the three and nine month periods ended
September 30, 2000 to $421,148 and $1,291,625 for the three and nine month
periods ended September 30, 2001. The decline was caused by the capitalization
of interest costs in connection with real estate held for development and sale,
$234,990 and $673,540 during the three and nine month periods ended September
30, 2001, respectively, and from the repayment of a portion of the Company's
purchase-price indebtedness for Equis II Corporation and the Special Beneficiary
Interests. (See Note 4 to the consolidated financial statements concerning the
Company's real estate held for development and sale.)
During the three months ended September 30, 2001, the Company recorded a pre-tax
charge to earnings of $2,525,962. The provision relates to the write-down of
the Malibu property to fair value in accordance with SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". (See Note 4 to the consolidated financial statements).
General and administrative expenses increased principally due to the
consolidation of PLM's operating and administrative expenses and higher overall
operating costs within the AFG Trusts. Fees and expenses to affiliates
principally represent equipment management fees paid to EFG for services
rendered. Equipment management fees are based upon a percentage of rental
income. The decline in fees from $726,304 in 2000 to $472,513 in 2001 is
primarily a function of lower rental income within the AFG Trusts.
Per Share Results
For the three months ended September 30, 2001, the Company reported a
consolidated net loss of $3,585,157 ($1.72 per share) compared to a consolidated
net loss of $55,324 ($0.03 per share) for the same period in 2000. Net income
per share for the three months ended September 30, 2001 is based on the weighted
average number of shares outstanding during the period of 2,078,718 compared to
1,728,344 for 2000.
For the nine months ended September 30, 2001, the Company reported a
consolidated net loss of $2,679,683 ($1.29 per share) compared to consolidated
net income of $137,677 ($0.09 per share) for the same period in 2000. Net
income (loss) per share for the nine months ended September 30, 2001 and 2000 is
based on the weighted average number of shares outstanding during the period of
2,078,718 and 1,512,046, respectively.
PART II - OTHER INFORMATION
-------------------------------
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there-unto duly authorized.
SEMELE GROUP INC.
By: /s/ Gary D. Engle Date: November 14, 2001
------------------------------------------
Gary D. Engle, Chairman, Chief Executive
Officer and Director
By: /s/ James A. Coyne Date: November 14, 2001
------------------------------------------
James A. Coyne, President, Chief Operating
Officer and Director
By: /s/ Michael J. Butterfield Date: November 14, 2001
------------------------------------------
Michael J. Butterfield, Vice President and
Chief Financial Officer