UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-16886
SEMELE GROUP INC.
-------------------
(Name of Small Business Issuer in its charter)
DELAWARE
36-3465422
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
200 NYALA FARMS, WESTPORT, CONNECTICUT 06880
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code : (203) 341-0555
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer 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, 2002: 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, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2002 and 2001 4
Consolidated Statement of Stockholders' Capital (Deficit) for the Nine Months
Ended September 30, 2002 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION:
Items 1 - 6 35
Signatures 37
------
ITEM 1. FINANCIAL STATEMENTS
---------------------
SEMELE GROUP INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
September 30,
2002 December 31,
(Unaudited) 2001
--------------- --------------
ASSETS
Cash and cash equivalents $ 12,982,254 $ 19,953,899
Restricted cash 454,614 452,370
Rents and other receivables 750,563 1,183,127
Due from affiliates 4,464,716 4,624,498
Equipment held for lease, net of accumulated depreciation
of $64,378,391 and $62,491,363 at September 30, 2002 and
December 31, 2001, respectively 42,562,505 53,385,432
Assets held for sale 4,830,380 --
Real estate held for development and sale 12,997,329 11,279,856
Land 1,929,000 1,929,000
Buildings, net of accumulated depreciation of $2,150,870 and $1,884,896
at September 30, 2002 and December 31, 2001, respectively 9,782,127 10,048,101
Interest in affiliated companies 23,045,627 24,321,861
Interest in non-affiliated companies 14,764,266 16,471,490
Other assets 4,076,354 3,648,170
Goodwill, net of accumulated amortization of $764,762 at
September 30, 2002 and December 31, 2001 8,368,826 4,590,299
--------------- --------------
Total assets $ 141,008,561 $ 151,888,103
LIABILITIES
Accounts payable and accrued expenses $ 9,299,211 $ 8,811,499
Other liabilities 3,190,600 3,738,042
Indebtedness 48,736,925 52,918,296
Indebtedness and other obligations to affiliates 40,705,413 39,408,049
Deferred income taxes 12,748,823 9,751,000
--------------- --------------
Total liabilities 114,680,972 114,626,886
Minority interests 45,280,351 55,408,679
Commitments and contingencies
STOCKHOLDERS' CAPITAL (DEFICIT)
Common stock, $0.10 par value; 5,000,000 shares authorized;
2,916,647 shares issued at September 30, 2002 and December 31, 2001 291,665 291,665
Additional paid in capital 144,680,487 144,680,487
Accumulated deficit (149,691,908) (148,886,608)
Deferred compensation, 164,279 shares at September 30, 2002
and December 31, 2001 (816,767) (816,767)
Treasury stock at cost, 837,929 shares at September 30, 2002
and December 31, 2001 (13,416,239) (13,416,239)
Total stockholders' deficit (18,952,762) (18,147,462)
--------------- --------------
Total liabilities, minority interests and stockholders' deficit $ 141,008,561 $ 151,888,103
--------------- --------------
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, 2002 AND 2001
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
REVENUES
Lease revenue $ 3,014,274 $ 3,669,404 $ 9,325,161 $11,385,910
Management fee income from affiliates 965,618 2,497,000 3,486,417 5,852,000
Interest income 65,249 180,688 265,780 757,599
Interest income from affiliates 54,358 65,434 196,756 196,304
Loss on sale of equipment (288,661) (852) (288,661) --
Gain on sales of equipment 307,909 -- 485,797 630,438
Equity income in affiliated companies 141,357 222,469 22,037 868,559
Equity loss in non-affiliated
companies (2,079,934) (1,646,241) (1,060,985) (434,371)
Other revenue 99,268 256,934 489,330 1,226,382
---------- ---------- ---------- ----------
Total revenues 2,279,438 5,244,836 12,921,632 20,482,821
---------- ---------- ---------- ----------
EXPENSES
Depreciation and amortization expense 2,165,668 2,556,242 6,647,216 7,980,683
Provision for impaired assets -- 2,525,962 1,934,592 2,525,962
Interest on indebtedness 1,035,295 916,482 3,392,033 3,529,857
Interest on indebtedness and other obligations-
affiliates 342,545 421,148 1,395,162 1,291,625
General and administrative expenses 2,433,236 1,251,418 5,288,220 3,333,743
Fees and expenses to affiliates 522,564 952,443 1,204,733 3,559,129
---------- ---------- ---------- ----------
Total expenses 6,499,308 8,623,695 19,861,956 22,220,999
Loss before income taxes and
minority interest (4,219,870) (3,378,859) (6,940,324) (1,738,178)
Provision for income taxes 406,824 882,000 935,913 1,304,000
Elimination of consolidated subsidiaries'
minority interests 4,474,303 675,702 7,070,937 362,495
Net loss $ (152,391) $(3,585,157) $ (805,300) $(2,679,683)
Basic loss per share:
Net loss $ (0.07) $ (1.72) $ (0.39) $ (1.29)
Basic weighted average number of
common shares outstanding 2,078,718 2,078,718 2,078,718 2,078,718
============ ============ ============ ============
Fully diluted loss per share:
Net loss $ (0.07) $ (1.72) $ (0.39) $ (1.29)
Diluted weighted average number of
common shares outstanding 2,078,718 2,078,718 2,078,718 2,078,718
============ ============ ============ ============
..
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Common Additional Accumulated Deferred Treasury
Stock Paid in Capital Deficit Compensation Stock Total
Balance at December 31, 2001 $291,665 $ 144,680,487 $(148,886,608) $ (816,767) $(13,416,239) $(18,147,462)
Net loss -- -- (805,300) -- -- (805,300)
Balance at September 30, 2002 $291,665 $ 144,680,487 $(149,691,908) $ (816,767) $(13,416,239) $(18,952,762)
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, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (805,300) $ (2,679,683)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization expense 6,647,216 7,980,683
Provision for impaired assets 1,934,592 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)
Loss on sale of equipment 288,661 --
Gain on sale of equipment (485,797) (630,438)
Equity income in affiliated companies (22,037) (868,559)
Equity income in non-affiliated companies 1,060,985 434,371
Elimination of consolidated subsidiaries' minority interests (7,070,937) (362,495)
Changes in assets and liabilities:
Rents and other receivables 432,564 1,480,819
Other assets (617,553) 1,340,730
Due from affiliates 159,782 1,201,251
Accounts payable and accrued expenses 38,948 (11,429,339)
----------- -------------
Net cash provided by (used in) operating activities 1,561,124 (46,698)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from equipment sales 2,897,682 1,175,269
Proceeds from assets held for sale -- 10,250,000
Purchase of equipment held for sale (4,830,380) (71,000)
Restricted cash -- 2,154,570
Cash distributions from interest in affiliated companies 1,724,383 1,432,000
Cash distributions from interest in non-affiliated companies 639,911 --
Purchase of PLM, net of cash acquired (4,362,885) (17,385,000)
Costs capitalized to real estate held for development or sale (1,717,473) (1,411,161)
----------- -------------
Net cash used in investing activities (5,648,762) (3,855,322)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Redemption of stock options -- (919,000)
Proceeds from indebtedness 1,036,167 1,884,140
Principal payments on indebtedness (5,217,538) (7,674,208)
Indebtedness and other obligations to affiliates 1,297,364 1,989,272
----------- -------------
Net cash used in financing activities (2,884,007) (4,719,796)
Net decrease in cash and cash equivalents (6,971,645) (8,621,816)
Cash and cash equivalents at beginning of period 19,953,899 27,830,365
Cash and cash equivalents at end of period $12,982,254 $ 19,208,549
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest (net of capitalized interest
of $570,000 and $674,000 for the nine months ended September 30,
2002 and 2001, respectively) $ 3,733,552 $ 4,182,766
----------- -------------
Cash paid during the period for taxes $ 657,567 $ 6,245,000
----------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
SEMELE GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 310 of Regulation S-B of the Securities
and Exchange Commission and are unaudited. Rule 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
consolidated financial statements and footnotes presented in the 2001 Annual
Report. Except as disclosed herein, there have been no material changes to the
information presented in the footnotes to the 2001 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly Semele Group
Inc.'s ("Semele" or the "Company") consolidated financial position at September
30, 2002 and December 31, 2001, consolidated results of operations for the three
and nine month periods ended September 30, 2002 and 2001, consolidated
statements of stockholders' capital for the nine months ended September 30, 2002
and consolidated statements of cashflows for the nine months ended September 30,
2002 and 2001 have been made and are reflected.
For accounting purposes, the Company considers affiliates to be persons and/or
entities that directly, or indirectly through one or more intermediaries,
control or are controlled by, or are under the common control of or with, the
Company. All other entities are considered to be non-affiliates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures contained in the financial
statements. Actual results could differ from those estimates and changes in
such estimates could affect amounts reported in future periods and could be
material.
Cash and Cash Equivalents and Restricted Cash
---------------------------------------------------
The Company considers highly liquid investments that are readily convertible to
known amounts of cash with original maturities of three months or less as cash
equivalents. The carrying amount of cash equivalents approximates fair market
value due to the short-term nature of the investments. The availability of cash
held by the four AFG Investment Trusts (the "AFG Trusts" or the "Trusts"), MILPI
Holdings, LLC, EFG Kirkwood LLC and the AFG International Limited Partnerships
to Semele is subject to terms and conditions over the use and disbursement of
cash and other matters contained in respective agreements that govern those
entities. The Company has voting control over most matters concerning these
entities, including the declaration, authorization, and amount of cash
distributions. The composition of the Company's consolidated cash position is
as follows:
SEPTEMBER 30, DECEMBER 31,
2002.. 2001.
-------------- -------------
Semele Group Inc. and wholly-owned subsidiaries $ 1,864,698 $ 479,224
EFG Kirkwood 640,575 --
AFG Investment Trust A 535,342 587,819
AFG Investment Trust B 897,784 899,569
AFG Investment Trust C 857,210 1,716,588
AFG Investment Trust D 198,932 1,887,691
AFG International Limited Partnerships 565,496 346,008
MILPI Holdings, LLC 7,422,217 14,037,000
-------------- -------------
Total $ 12,982,254 $ 19,953,899
============== =============
Restricted cash of $454,614 at September 30, 2002 consists of bank accounts and
short-term investments that are primarily subject to withdrawal restrictions per
legally binding agreements.
Goodwill
--------
Goodwill is calculated as the excess of the aggregate purchase price over the
fair market value of identifiable net assets acquired in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"). In accordance with SFAS No. 141, the Company
allocates the total purchase price to the assets acquired and liabilities
assumed based on the respective fair market values at the date of acquisition.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS. No. 142"). As a result, the
discontinuance of goodwill and other intangible asset amortization was effective
upon adoption of SFAS 142. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test within six months from January 1, 2002,
the date of adoption. The Company completed the goodwill impairment analysis
during the quarter ended June 30, 2002. There was no impact on the Company's
financial statements as a result of this analysis.
The Company recorded goodwill of approximately $3,779,000 in conjunction with
the acquisition of the remaining 17% of the outstanding common stock of PLM
International, Inc. ("PLM") in February 2002 (See Note 3). This goodwill
included approximately $446,000 of total costs estimated for severance of PLM
employees and relocation costs in accordance with management's formal plan to
involuntarily terminate employees, which plan was developed in conjunction with
the acquisition.
Impairment OF Long-Lived Assets
----------------------------------
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), the Company evaluates long-lived assets for
impairment whenever events or circumstances indicate that the carrying bases of
such assets may not be recoverable. Losses for impairment are recognized when
the undiscounted cash flows estimated to be realized from a long-lived asset are
determined to be less than the carrying basis of the asset. The determination
of net realizable value for a given investment requires several considerations,
including but not limited to, income expected to be earned from the asset,
estimated sales proceeds, and holding costs excluding interest (See Note 4).
Reclassification
----------------
Certain amounts shown in the 2001 financial statements have been reclassified to
confirm with 2002 presentation. These reclassifications did not have any effect
on total assets, total liabilities, stockholders' equity or net income.
NOTE 3 - ACQUISITIONS
PLM International, Inc.
-------------------------
On December 22, 2000, an affiliate of the Company, MILPI Acquisition Corp.
("MAC"), 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 MAC to purchase all of the outstanding common
stock of PLM for cash as described below.
MAC is a wholly owned subsidiary of MILPI Holdings, LLC ("MILPI Holdings"),
which was formed by the AFG Trusts on December 22, 2000. The AFG Trusts are
consolidated affiliates of the Company engaged in the equipment leasing and real
estate businesses. The AFG Trusts collectively paid $1,200,000 for their
membership interests in MILPI Holdings and MILPI Holdings purchased the common
stock of MAC for an aggregate purchase price of $1,200,000 at December 31, 2000.
MAC 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
$27,000,000. In connection with the acquisition, on December 29, 2000, MAC
commenced a tender offer to purchase any and all of PLM's outstanding common
stock. Pursuant to the cash tender offer, MAC acquired approximately 83% of
PLM's common stock in February 2001 for a total purchase price of approximately
$21,800,000. The assets of PLM included cash and cash equivalents of
approximately $4,400,000. The acquisition resulted in goodwill of approximately
$5,400,000.
On February 6, 2002, MAC completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common stock and by
effecting a merger of MAC into PLM, with PLM as the surviving entity. The merger
was completed when MAC obtained approval of the merger from PLM's shareholders
pursuant to a special shareholders' meeting. The remaining interest was
purchased for approximately $4,363,000, resulting in additional goodwill of
approximately $3,779,000. Concurrent with the completion of the merger, PLM
ceased to be publicly traded.
The following pro forma consolidated results of operations for the period ended
September 30, 2001 assumes the February 2002 PLM acquisition occurred as of
January 1, 2001. Because the remaining PLM interest was acquired in February of
2002 and consequently PLM operating results were included from February 6, 2002
through September 30, 2002, pro forma information for 2002 was not considered
necessary.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
Total revenues $ 5,352,191 $ 20,804,886
Net loss from continuing operations (3,271,504) (1,416,113)
Net loss (3,477,802) (2,357,618)
Per share information:
Net loss from continuing operations $ ( 1.57) $ (0.68)
Net loss $ (1.67) $ (1.13)
These amounts include PLM's actual results for the nine months ended September
30, 2001 adjusted for various purchase accounting adjustments, including
elimination of minority interest. The amounts are based upon certain
assumptions and estimates, and do not reflect any benefit from economies which
might be achieved from combined operations. The pro forma results do not
necessarily represent results which would have occurred if the acquisition had
taken place on the basis assumed above, nor are they indicative of the results
of future combined operations.
The Company adopted SFAS No. 142 on January 1, 2002. The amortization expense
and net income for the nine months ended 2002 and 2001 are summarized as follow:
FOR THE NINE MONTHS FOR THE NINE MONTHS
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------- ---------------------
Reported net loss $ (805,300) $ (2,679,683)
Add back: goodwill amortization- MILPI Holdings, LLC -- 556,191
--------------------- ---------------------
Adjusted net loss $ (805,300) $ (2,123,492)
--------------------- ---------------------
Basic and fully diluted earnings per share:
Reported net loss $ (0.39) $ (1.29)
Goodwill amortization -- 0.27
--------------------- ---------------------
Adjusted net loss $ (0.39) $ (1.02)
--------------------- ---------------------
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:
Balance as of January 1, 2002 $4,590,299
Add: Goodwill acquired during the year 3,778,527
-----------
Balance at September 30, 2002 $8,368,826
NOTE 4 - EQUIPMENT HELD FOR LEASE
The following is a summary of all equipment in which the Company has an interest
at September 30, 2002. 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. A Remaining Lease Term equal to zero reflects
equipment either held for sale or re-lease or being leased on a month-to-month
basis.
.. Remaining
.. Lease Term Equipment
Equipment Type (Months) Cost
------------------------------------------ ------------- -----------
Aircraft 3-36 $79,628,529
Manufacturing 0-11 8,898,851
Locomotives 0 8,312,342
Materials handling 0-13 5,364,562
Computers and peripherals 0-08 3,000,433
Construction and mining 0-3 1,296,088
Miscellaneous 0-10 440,091
-----------
Total equipment cost 106,940,896
Accumulated depreciation (64,378,391)
-------------
Equipment, net of accumulated depreciation $ 42,562,505
=============
The equipment is owned by the Company's consolidated affiliates as follows:
AFG Investment Trust A $ 2,243,719
AFG Investment Trust B 2,968,601
AFG Investment Trust C 45,753,998
AFG Investment Trust D 55,936,843
MILPI Holdings, LLC 37,735
------------
Total $106,940,896
============
The preceding summary of equipment includes leveraged equipment having an
original cost of approximately $80,903,000 and a net book value of $39,226,000
at September 30, 2002. Indebtedness associated with the equipment is summarized
in Note 11. Indebtedness on leveraged equipment will be amortized by the rental
streams derived from the corresponding lease contracts, and 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.
In April 2002, AFG Investment Trust D ("Trust D") executed an agreement with an
existing lessee, Emery Worldwide ("Emery"), to early terminate the lease of a
McDonnell Douglas DC-8-73 aircraft that had been scheduled to expire in July
2002. Subsequent to the termination of the lease, the aircraft was re-leased to
Cygnus Air, S.A. ("Cygnus") for term of thirty months beginning July 2002. In
conjunction with the new lease, Trust D amended its debt agreement
collateralized by the aircraft and assigned the lease payments to the lender.
Trust D received additional debt proceeds of approximately $316,000. Trust D
used these debt proceeds and a portion of other receipts to perform repairs and
maintenance on the aircraft totaling $773,000 which was expensed during the
three months ended September 30, 2002.
Future minimum rental payments due in connection with all equipment are
scheduled as follows:
For the year ending Sept. 30, 2003 $ 9,841,195
2004 2,543,249
2005 728,576
---------
Total $13,113,020
===========
At September 30, 2002, the cost and net book value of equipment off-lease was
approximately $13,952,000. and $2,095,000 respectively. The Managing Trustee of
the Trusts is actively seeking the sale or re-lease of all equipment not on
lease. In addition, the equipment summary above includes equipment being leased
on a month-to-month basis.
The Company accounts for impairment of long-lived assets in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" which
was issued in August 2001. SFAS No. 144 requires that long lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the net book value of the assets may not be recoverable from undiscounted
future cash flows. The Trusts recorded a write-down of equipment, representing
impairment to the carrying value of the Trust's interests in a McDonnell Douglas
MD-87 aircraft. The resulting charge of $1,935,000 was based on a comparison of
estimated fair value and carrying value of the AFG Trusts' interests in the
aircraft. The estimate of the fair value was based on a current offer to
purchase the aircraft and the assessment by the management of the Trusts of
prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
events of September 11, 2001, along with the change in general economic
conditions in the United States, have continued to adversely affect the market
demand for both new and used commercial aircraft and weakened the financial
position of several airlines.
NOTE 5- 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, 2002, the
Company capitalized $1,717,000 of costs, including $570,000 for interest related
to this asset. During the nine months ended September 30, 2001, the Company
capitalized $1,411,000 of costs, including $674,000 for interest related to this
asset.
At September 30, 2001, the Company recorded an impairment of $2,526,000 in
connection with the Malibu property that reduced the carrying value of this
asset to $10,274,000. 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 6 - ASSETS HELD FOR SALE
In May 2002 , MILPI and its affiliates entered into an agreement for the
purchase or lease of 1,050 pressure tank cars over the next three years, with at
least 350 pressure tank cars to be purchased or leased per year. MILPI and its
affiliates have the ability to select any type or model of pressure tank car.
The purchase price and the applicable 10 year lease rates per type of pressure
tank car are defined in the agreement. For pressure tank cars that are leased,
MILPI and its affiliates have the option to purchase the pressure tank cars at
fair market value at lease maturity. Per the terms of the agreement, MILPI and
its affiliates agree to purchase at least 30% of the total number of pressure
tank cars with the greatest per unit cost, the total purchase commitment would
be approximately $79,000,000. As of September 30, 2002, MILPI Holdings had
purchased $4,830,000 which is available for sale to its affiliated programs.
NOTE 7 - 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.
As of September 30,2002 and December 31, 2001, land and buildings consisted of
the following:
Buildings September 30, December 31,
2002 2001
---------------------------------------- --------------- --------------
Washington, D.C. $ 4,954,739 $ 4,954,740
Sydney, Australia 6,978,258 6,978,257
--------------- --------------
Total cost 11,932,997 11,932,997
Accumulated depreciation (2,150,870) (1,884,896)
--------------- --------------
Buildings, net $ 9,782,127 $ 10,048,101
=============== ==============
Land September 30, December 31,
2002 2001
---------------------------------------- --------------- --------------
Washington, D.C. $ 1,729,000 $ 1,729,000
Sydney, Australia 200,000 200,000
--------------- --------------
Land, total $ 1,929,000 $ 1,929,000
=============== ==============
Indebtedness associated with the land and buildings is summarized in Note 11.
Future minimum rental payments in connection with the leases for both buildings
are due as follows:
For the year ending September 30, 2003 $ 877,504
.. 2004 786,504
.. 2005 786,504
.. 2006 879,123
.. 2007 942,396
Thereafter. 2,572,097
---------
Total $6,844,128
==========
NOTE 8 - INTERESTS IN AFFILIATED COMPANIES
The Company has equity interests in the following affiliates as of September 30,
2002 and December 31, 2001:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
Equity Interests in AFG International Partnerships $ 2,582,159 $ 3,373,933
Equity Interest in Equipment Growth Funds 20,463,468 20,947,928
-------------- -------------
Total $ 23,045,627 $ 24,321,861
============== =============
Equity Interests in Partnerships
-----------------------------------
In 1998, the Company acquired Ariston Corporation ("Ariston") which had an
ownership interest in 11 limited partnerships engaged primarily in the equipment
leasing business. In addition to the partnership interests, Ariston has an
interest in each of the AFG Trusts which is eliminated in consolidation.
Ariston's percentage ownership for each interest varies from less than 1% to
16%. The partnerships are controlled by Equis Financial Group Limited
Partnership, ("EFG"), an affiliated entity controlled by Gary D. Engle. Total
equity income and loss recognized was $271,000 and $191,000, respectively during
the three and nine months ended September 30, 2002 as compared to equity income
of approximately $222,000 and $869,000 recognized during the three and nine
months ended September 30, 2001. During 2002, the Partnerships adopted a formal
plan of liquidation and paid an initial distribution to its investors. For the
three and nine months ended September 30, 2002, Ariston received $600,000 in
distributions from the Partnerships. No distributions were paid during the
three and nine months ended September 30, 2001.
Equity Interests in Equipment Growth Funds
-----------------------------------------------
As compensation for organizing various partnership investment programs, PLM was
granted an interest (between 1% and 15%) in the earnings and cash distributions
of the individual programs, in which PLM Financial Services, Inc. ("FSI"), a
wholly-owned subsidiary of PLM, is the General Partner or Manager. PLM records
as a partnership interest its equity interest in the earnings of the
partnerships, after adjusting such earnings to reflect the effect of special
allocations of the program's gross income allowed under the respective
partnership agreements.
FSI is the manager of 10 investment programs ("EGF Programs"). Distributions of
the programs are allocated as follows: 99% to the limited partners and 1% to the
General Partner in PLM Equipment Growth Fund ("EGF") I and PLM Passive Income
Investors 1988-II; 95% to the limited partners and 5% to the General Partner in
EGF's II, III, IV, V, VI, and PLM Equipment Growth & Income Fund VII ("EGF
VII"); and 85% to the members and 15% to the manager in Professional Lease
Management Income Fund I, LLC ("Fund 1"). PLM's interest in the cash
distributions of Fund I will increase to 25% after the investors have received
distributions equal to their invested capital. Net income is allocated to the
General Partner subject to certain allocation provisions. FSI is entitled to
reimbursement from the equipment growth funds for providing certain
administrative services. During the three and nine months ended September 30,
2002, the Company recorded $130,000 and $213,000 of equity loss and income and
received distributions of $211,000 and $1,114,000 from the EGF Programs,
respectively.
While none of the partners or members, including the General Partner and
Manager, are liable for program borrowings, and while the General Partner or
Manager maintains insurance against liability for bodily injury, death, and
property damage for which an investment program may be liable, the General
Partner or Manager may be contingently liable for nondebt claims against the
program that exceed asset values.
Summarized Financial Information for Equity Interests in Equipment Growth Funds
--------------------------------------------------------------------------------
The Company recorded income and loss from its equity interest in the EGF
Programs based upon its ownership of common stock in PLM during the respective
periods (see Note 3). The summarized combined financial information for the EFG
Programs for the three and nine months ending September 30, 2002 and 2001 is as
follows:
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------- -------------------- -------------------- --------------------
Total revenues $ 17,180,000 $ 19,673,000 $ 55,010,000 $ 70,646,000
Total expenses (18,374,000) (18,161,000) (50,247,000) (52,023,000)
-------------------- -------------------- -------------------- --------------------
Net income $ (1,194,000) $ 1,512,000 $ 4,763,000 $ 18,623,000
-------------------- -------------------- -------------------- --------------------
NOTE 9 - INTERESTS IN NON-AFFILIATED COMPANIES
The Company has equity interests in the following non-affiliated companies as of
September 30, 2002 and December 31, 2001:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
Interest in Mountain Resort Holdings, LLC $ 6,648,535 $ 7,327,997
Interest in EFG/Kettle Development LLC 7,472,830 7,740,101
Interest in other 618,558 626,387
Advances to and interest in Mountain Springs Resort, LLC 24,343 777,005
-------------- -------------
Total $ 14,764,266 $ 16,471,490
============== =============
Mountain Resort Holdings, LLC and Mountain Springs Resort, LLC - Winter Resorts
--------------------------------------------------------------------------------
The Company, through its ownership of EFG Kirkwood LLC ("EFG Kirkwood"), has
equity interests in Mountain Resort Holdings, LLC and Mountain Springs Resort,
LLC. The Company's ownership interest in Mountain Resort Holdings, LLC
("Mountain Resort") and Mountain Springs Resort, LLC ("Mountain Springs") had an
original cost of approximately $7,300,000 and $3,400,000, respectively,
including acquisition fees of $64,865 and $34,000, respectively, paid to EFG, an
affiliated company, by the AFG Trusts. Mountain Resort is primarily a ski and
mountain recreation resort located in California. Mountain Springs has majority
ownership in DCS/Purgatory LLC ("Purgatory"), a ski resort located in Colorado.
The Company's ownership interests in Mountain Resort and Mountain Springs are
accounted for using the equity method. The Company recorded a loss of
approximately $2,001,000 and $794,000, respectively, for the three and nine
months ended September 30, 2002 compared to a loss and income of approximately
$1,620,000 and $597,000, respectively, for the three and nine months ended
September 20, 2001, from its interest in Mountain Resort and Mountain Springs.
The Company also received a preferred stock distribution of approximately
$640,000 from Mountain Resort Holdings, LLC during the nine months ended
September 30, 2002. During the nine months ended September 30, 2002, EFG
Kirkwood recorded additional equity income of $106,700 related to the difference
between the purchase price and the fair value of EFG Kirkwood's investment in
Mountain Resort.
On August 1, 2001, EFG Kirkwood entered into a guarantee agreement whereby EFG
Kirkwood guarantees the payment obligations under a revolving line of credit
between Purgatory and a third party lender. The amount of the guarantee shall
consist of the outstanding balance of the line of credit which cannot exceed the
principal balance of $3,500,000. As of September 30, 2002, Purgatory had an
outstanding balance of approximately $2,858,000 on the line of credit.
The table below provides comparative summarized financial information for
Mountain Resort and the Purgatory ski resort for the three and nine months ended
September 30, 2002 and 2001. Mountain Resort and Purgatory have an April 30th
fiscal year end. The operating results shown below have been conformed to the
three and nine months ended September 30, 2002 and 2001.
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Mountain Resort
----------------------
Total revenues $ 2,081,696 $ 1,843,196 $ 22,557,778 $ 22,412,384
Total expenses (4,583,163) (4,395,043) (21,147,362) (21,793,819)
--------------- --------------- --------------- ---------------
Net income (loss) $ (2,501,467) $ (2,551,847) $ 1,410,416 $ 618,565
--------------- --------------- --------------- ---------------
Mountain Springs
----------------------
Total revenues $ 1,166,268 $ 868,486 $ 11,048,152 $ 12,014,674
Total expenses 3,271,373 2,966,166 12,555,719 11,542,289
--------------- --------------- --------------- ---------------
Net income (loss) $ (2,105,105) $ (2,097,680) $ (1,507,567) $ 472,385
--------------- --------------- --------------- ---------------
Interest in EFG/Kettle Development LLC- Residential Community
-------------------------------------------------------------------
On June 1, 1999, the Company and two of the AFG Trusts formed EFG/Kettle
Development LLC ("Kettle Valley"), a Delaware limited liability company. Kettle
Valley was formed for the purpose of acquiring a 49.9% indirect ownership
interest in a real estate development project in Kelowna, British Columbia,
Canada. The real estate development, which is being developed by Kettle Valley
Development Limited Partnership ("KVD LP"), consists of approximately 280 acres
of land under development. Kettle Valley owns a 49.9% interest in a company
which, through two wholly-owned subsidiaries, owns a 99.9% interest in KVD LP.
The development is zoned for 1,120 residential units in addition to commercial
space. To date, 123 residential units have been constructed and sold . A
subsidiary of the Company is the sole general partner of KVD LP. An unaffiliated
third party has retained the remaining 50.1% indirect ownership interest in the
development.
The Company accounts for its ownership interest in Kettle Valley using the
equity method of accounting. During the three and nine months ended September
30, 2002, the Company recorded equity loss of approximately $79,000 and
$267,000, respectively. During the three and nine months ended September 30,
2001, the Company recorded equity losses of approximately $27,000 and
$1,032,000, respectively.
The table below provides comparative summarized financial information for KVD
LP. KVD LP has a January 31 fiscal year end and the Company has a December 31
fiscal year end. The operating results of KVD LP shown below have been
conformed for the nine months ended September 30, 2002 and 2001.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Total revenues $ 1,004,247 $ 766,593 $ 2,291,218 $ 1,951,907
Total expenses (1,162,948) ( 798,006) (2,662,128) (2,746,612)
--------------- --------------- --------------- ---------------
Net loss $ (158,701) $ (31,413) $ (370,910) $ (794,705)
=============== =============== =============== ===============
For the nine months ended September 30, 2002, in addition to its share of the
loss of KVD LP, the Company's net loss from Kettle Valley includes a loss of
$84,000 reflecting the Company's share of the operating results of one of the
company's wholly-owned subsidiaries.
NOTE 10 - OTHER ASSETS
At September 30, 2002 and December 31, 2001, other assets consisted of the
following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
Cash surrender value of life insurance policies $ 2,638,246 $ 2,343,000
Deposits 673,762 673,762
Deferred financing costs, net 374,402 391,685
Other 319,228 239,723
Prepaid insurance 70,716 --
-------------- -------------
Total $ 4,076,354 $ 3,648,170
-------------- -------------
The Company has capitalized certain costs incurred in connection with long-term
financings and lease contracts. These costs are amortized over the life of the
respective agreement on a straight-line basis. Amortization expense resulting
from deferred financing and leasing costs was approximately $104,000 and
$196,000 for the three and nine months ended September 30, 2002. In July 2002,
Trust D amended its debt collateralized by the aircraft and assigned the lease
payments to the lender. The trust capitalized $179,000 associated with the
amendment during the three months ended September 30, 2002.
PLM has life insurance policies on former employees which had a $2,638,000 and
$2,343,000 cash surrender value as of September 30, 2002 and December 31, 2001,
respectively.
NOTE 11 - NOTES PAYABLE TO THIRD PARTIES
At September 30, 2002, the Company had aggregate indebtedness to third parties
of approximately $48,737,000, including two note obligations totaling
approximately $5,179,000 associated with the Company's two commercial buildings.
One loan, with a balance of approximately $4,909,000, matures on June 1, 2010
and carries a fixed annual interest rate of 7.86% and the other loan, with a
balance of $270,000, matures on December 31, 2002 and carries a variable annual
interest rate equal to prime plus 1.50% (5.675% at September 30, 2002). The
remainder of the Company's indebtedness to third parties is non-recourse
installment debt pertaining to equipment held on operating leases. Generally,
this debt is secured by the equipment and will be amortized over the lease term
with the corresponding lease payments and the residual interest of the
corresponding assets. Interest rates on equipment debt obligations range from
7.93% to 9.176% at September 30, 2002.
PLM has a $10,000,000 warehouse facility, which is shared with PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII, and Fund I, that allows
PLM to purchase equipment prior to its designation to a specific program.
Borrowings under this facility by the other eligible borrowers reduce the amount
available to be borrowed by PLM. All borrowings under this facility are
guaranteed by PLM. This facility provides for financing up to 100% of the cost
of the asset. Interest accrues at prime or LIBOR plus 200 basis points, at the
option of PLM. Borrowings under this facility may be outstanding up to 270 days.
In July 2002, PLM reached an agreement with the lenders of the $10,000,000
warehouse facility to extend the expiration date to June 30, 2003. All
borrowings must be repaid upon the expiration of this facility. As of September
30, 2002, PLM had no borrowings outstanding under this facility and there were
no borrowings outstanding under this facility by any other eligible borrower.
The annual maturities of the Company's indebtedness to third parties is
summarized below:
BUILDINGS EQUIPMENT TOTAL
---------- ----------- -----------
For the year ending September 30, 2003 $ 608,265 $ 5,823,787 $ 6,432,052
.. 2004 337,038 33,945,666 34,282,704
2005 300,409 1,653,449 1,953,858
.. 2006 258,331 2,135,294 2,393,625
2007 205,657 -- 205,657
Thereafter 3,469,029 -- 3,469,029
--------- ---------- -----------
Total $5,178,729 $43,558,196 $48,736,925
========== =========== ===========
The Company's indebtedness to third parties is divided among the Company's
consolidated affiliates as follows:
AFG Investment Trust A $ 336,772
AFG Investment Trust B 336,772
AFG Investment Trust C 19,263,086
AFG Investment Trust D 23,621,566
Ariston 4,909,230
AFG International Limited Partnerships 269,499
-----------
Total $48,736,925
===========
In April 2002, Trust D executed an agreement with the existing lessee, Emery, to
early terminate the lease of a McDonnell Douglas DC-8-73 aircraft that had been
scheduled to expire in July 2002. Subsequent to the termination of the lease,
the aircraft was re-leased to Cygnus for a term of thirty months beginning July
2002. In conjunction with the new lease, the Trust amended its debt agreement
collateralized by the aircraft and assigned the Cygnus lease payments to the
lender. The trust received additional debt proceeds of approximately $316,000.
The trust used these debt proceeds and a portion of certain other receipts from
Emery to perform repairs and maintenance on the aircraft. In conjunction with
the refinancing, the trust was required to pay approximately $485,000 for a
breakage fee on the amended debt and other lender-related legal costs, which was
expensed by the trust in June 2002.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB No. 13, and Technical
Corrections. As permitted by the pronouncement, the Company has elected early
adoption of SFAS No. 145 as of January 1, 2002, and, accordingly, the loss on
extinguishment of long-term debt in January 2002 has been reported in operating
expenses in the Company's June 30, 2002 Statement of Operations.
NOTE 12 - CONTINGENT LIABILITIES
In March 2001, the Internal Revenue Service ("IRS") notified PLM that it would
conduct an audit of certain Forms 1042, Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons. The audit related to payments to unrelated
foreign entities made by two partnerships in which PLM formerly held interests
as the 100% direct and indirect owner. One partnership's audit related to Forms
1042 for the years 1997, 1998 and 1999, while the other partnership's audit
related to Forms 1042 for the years 1998 and 1999. In September 2002, the IRS
notified PLM that they have completed their examination of the related tax
returns and that they have assessed no changes to the reported taxes.
The staff of the SEC has informed the managing trustee of the AFG Trusts that it
believes the AFG Trusts may be unregistered investment companies within the
meaning of the Investment Company Act of 1940 (the "Act"). The AFG managing
trustee is engaged in discussions with the staff regarding this matter. The AFG
Trusts, after consulting with counsel, do not believe that they are unregistered
investment companies. However, it is possible that the AFG Trusts may have
unintentionally engaged in an activity or activities that may be construed to
fall within the scope of the Act. Although the AFG Trusts, after consulting
with counsel, do not believe they are unregistered investment companies, two of
the Trusts agreed to liquidate their assets in order to resolve the matter with
the staff. Accordingly, as of December 6, 2001, the managing trustee of the AFG
Trusts resolved to cause AFG Investment Trust A and AFG Investment Trust B to
dispose of their assets prior to December 31, 2003. Upon consummation of the
sale of their assets, these Trusts will be dissolved and the proceeds thereof
will be applied and distributed in accordance with the terms of their Trust
Agreements. If necessary, AFG Investment Trust C and AFG Investment Trust D
intend to avoid being deemed investment companies by means that may include
disposing or acquiring certain assets that they might not otherwise dispose or
acquire.
NOTE 13 - RELATED PARTY TRANSACTIONS
Administrative Services
------------------------
A number of Semele Group Inc.'s administrative functions are performed by EFG,
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. Semele
Group Inc. incurred total administrative costs of $52,000 and $118,000 during
the three and nine months ended September 30, 2002, respectively as compared to
total administrative costs of $43,000 and $118,000 during the three and nine
months ended September 30 2001, 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 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 Company and its
subsidiaries that were paid to EFG during the nine months ended September 30,
2002 and 2001:
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
-------------- --------------
Administrative charges $ 701,484 $ 397,017
Equipment management fees 385,740 354,216
Reimbursable operating expenses due to
third parties 117,509 2,807,896
-------------- --------------
Total $ 1,204,733 $ 3,559,129
============== ==============
The AFG Trusts are limited-life entities having the following scheduled
dissolution dates:
AFG Investment Trust A - December 31, 2003 (*)
AFG Investment Trust B - December 31, 2003 (*)
AFG Investment Trust C - December 31, 2004
AFG Investment Trust D - December 31, 2006
(*) In December 2001, each of the Trusts filed a Current Report on Form 8-K
with the SEC, stating that the managing trustee of the Trusts had resolved to
cause the Trust to dispose of its assets prior to December 31, 2003. Upon
consummation of the sale of its assets, the Trusts will be dissolved and the
proceeds thereof will be applied and distributed in accordance with the terms of
the Trusts' operating agreements. Reasonable reserves may be withheld to pay
for the liabilities of the Trusts.
Acquisition of Equis II Corporation and Related Financing
----------------------------------------------------------------
During the fourth quarter of 1999, the Company issued $19,586,000 of promissory
notes to acquire an 85% equity interest in Equis II Corporation, a Massachusetts
corporation having a controlling interest in the AFG Trusts. The Trusts were
organized between 1992 and 1995 by the predecessor of EFG. During the first
quarter of 2000, the Company 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
to purchase the remaining 15% equity interest in Equis II. The market value of
the shares issued was approximately $2,400,000 ($4.625 per common share) based
upon the closing price of the Company's common stock on April 20, 2000.
Prior to the Company's acquisition of Equis II Corporation ("Equis II"), Equis
II was owned by Mr. Engle, certain trusts established for the benefit of Mr.
Engle's children, and by James A. Coyne, the Company's President, Chief
Operating Officer. In addition, Mr. Coyne is an officer of Semele Group, Inc.
The Company, through its ownership of Equis II, owns Class B interests in each
of the AFG Trusts: AFG Investment Trust A (822,863 interests), AFG Investment
Trust B (997,373 interests), AFG Investment Trust C (3,019,220 interests), and
AFG Investment Trust D (3,140,683 interests). Through its ownership of the
Class B interests, Equis II controls approximately 62% of the voting interests
in each of the trusts. However, on certain voting matters, principally those
involving transactions with related parties, Equis II is obligated to vote its
Class B interests consistent with the majority of unaffiliated investors. In
addition to the Class B interests, Equis II owns AFG ASIT Corporation, the
managing trustee of the AFG Trusts. AFG ASIT Corporation has a 1% interest in
the AFG Trusts and, as managing trustee, has significant influence over their
operations.
The $19,586,000 of promissory notes issued by the Company to acquire Equis II
Corporation is divided into two groups of notes. The first group totals
$14,600,000 and matures on October 31, 2005. These notes bear interest at a
face rate of 7% annually, but provide for quarterly interest payments based upon
a pay-rate of 3%. The remaining portion, or 4%, is deferred until the maturity
date. The Company paid principal and interest of approximately $1,590,000 and
$99,600, respectively, by issuing 326,462 shares of common stock on November 3,
2000, as permitted by authorization of the Company's shareholders obtained on
November 2, 2000. The next installment on the notes was scheduled for January
2002. In December 2001, the notes were amended. As of September 30, 2002, the
annual maturities of the notes are scheduled to be paid as follows:
For the year ending Sept 30, 2003 $10,002,000
2004 --
2005 --
2006 3,000,000
---------
Total $13,002,000
===========
The second group of promissory notes issued by the Company to acquire Equis II
total $4,986,000 and have payment terms identical to certain debt obligations of
Mr. Engle and Mr. Coyne to the Company by virtue of the acquisition of Equis II
and Ariston Corporation. At the time of the Company's initial 85% investment in
Equis II, Mr. Engle and Mr. Coyne had debt obligations to (i) Equis II
Corporation totaling approximately $1,900,000 and (ii) a subsidiary of Ariston,
ONC totaling approximately $3,100,000. As a result of the Equis II transaction,
the Company became the beneficiary on notes due from Mr. Engle and Mr. Coyne and
the obligor on new notes, having identical terms and for equal amounts, due to
Mr. Engle, or family trusts/corporation controlled by Mr. Engle, and to Mr.
Coyne. On January 26, 2000, Mr. Engle and Mr. Coyne made principal and interest
payments of approximately $2,100,000 to ONC in partial repayment of their
respective obligations. On the same date, the Company made principal and
interest payments to Mr. Engle (and certain family trusts/corporation) and to
Mr. Coyne totaling approximately $2,100,000 in partial repayment of the
Company's obligations to them. The Company intends to make future payments with
respect to these notes using the proceeds from payments made by Mr. Engle and
Mr. Coyne to Equis II and ONC. The terms of the notes provide that the Company
will be relieved of its obligations to make payments during the period of any
default by either Mr. Engle or Mr. Coyne in remitting payments with respect to
their obligations to Equis II or ONC.
In connection with the Equis II transaction, Mr. Engle and Mr. Coyne forfeited,
and the Company canceled, the stock options awarded to each of them to purchase
40,000 shares of common stock at an exercise price of $9.25 per share that were
granted on December 30, 1997. In addition, Mr. Engle retained voting control of
the Class B interests and the common stock of AFG ASIT Corporation through a
voting trust agreement, until the earlier of the Company's repayment of the
$19,586,000 of promissory notes issued to acquire Equis II or Mr. Engle's
express written agreement to terminate the voting trust.
As a result of the termination of the voting trust in November 2000 and due to
the control position of Mr. Engle over the Company and Equis II Corporation, the
Company obtained full ownership and control of Equis II and control of the
Trusts. As such, the acquisition of Equis II has been accounted for as a
combination of businesses under common control, similar to a pooling of
interests. Accordingly, the Company's consolidated financial statements as of
September 30, 2002 and December 31, 2001 and for the nine months ended September
30, 2002 and 2001 include the consolidated financial statements of Equis II
Corporation.
Special Beneficiary Interests
-------------------------------
In November 1999, the Company purchased from EFG, an affiliated entity, certain
equity interests in the AFG Trusts, referred to as Special Beneficiary
Interests. The Special Beneficiary Interests consists of an 8.25% non-voting
interest in each of the trusts. The Company purchased the interests for
approximately $9,700,000 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 approximately $3,200,000 from the
Special Beneficiary Interests and has paid EFG, an affiliate, an equal amount
consisting of principal and accrued interest. At September 30, 2002 and
December 31, 2001, the non-recourse note payable had an outstanding principal
balance of approximately $6,630,000. The Special Beneficiary Interests have
been eliminated in consolidation.
Due From Affiliates
---------------------
Amounts due from affiliates are summarized below as of September 30, 2002 and
December 31, 2001:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
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 715,523 518,766
Management fees receivable from PLM Equipment
Growth Funds 586,984 951,000
Rents receivable from EFG escrow (1) 225,004 217,527
-------------- -------------
Total $ 4,464,716 $ 4,624,498
============== =============
(1) All rents and proceeds from the sale of equipment by the AFG Trusts 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. These amounts were paid in
October 2002.
Indebtedness and Other Obligations to Affiliates
-----------------------------------------------------
A summary of the Company's indebtedness and other obligations to affiliates
appears below as of September 30, 2002 and December 31, 2001:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
Principal balance of indebtedness to affiliates $ 34,949,392 $ 34,949,392
Accrued interest due to affiliates 5,455,025 3,789,586
Other (1) 300,996 669,071
-------------- -------------
Total $ 40,705,413 $ 39,408,049
============== =============
(1) Consists primarily of amounts due to EFG for administrative services and
operating expenses.
Principal Balance of Indebtedness to Affiliates
----------------------------------------------------
The principal balance of the Company's indebtedness to affiliates at September
30, 2002 and December 31, 2001 consists of the obligations listed below.
.. DUE WITHIN
.. ONE YEAR OR
.. BALANCE AT ON DEMAND AS OF BALANCE AT
.. SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
.. 2002 2002 2001.
---------------- ---------------- ----------------
Notes payable to Mr. Engle, or family trusts/corporation
controlled by Mr. Engle, resulting from the purchase of Equis
II Corporation, 7% annual interest; maturing in 2005. (1) (3) $ 8,624,660 $ 6,634,660 $ 8,624,660
Note payable to Mr. Coyne resulting from purchase of Equis II
Corporation; 7% annual interest; maturing in 2005. (1) (3) 4,377,340 3,367,340 4,377,340
---------------- ---------------- ----------------
Sub-total $ 13,002,000 $ 10,002,000 $ 13,002,000
---------------- ---------------- ----------------
Notes payable to Mr. Engle, or family trusts/corporation
controlled by Mr. Engle, resulting from the purchase of Equis
II Corporation; 11.5% annual interest; due on demand. (1) (2) $ 687,349 $ 687,349 $ 687,349
Note payable to Mr. Coyne resulting from purchase of Equis II
Corporation; 11.5% annual interest; due on demand. (1) (2) 348,856 348,856 348,856
---------------- ---------------- ----------------
Sub-total $ 1,036,205 $ 1,036,205 $ 1,036,205
---------------- ---------------- ----------------
Notes payable to Mr. Engle, or family trusts/corporation
controlled by Mr. Engle, resulting from purchase of
Equis II Corporation, 7.5% annual interest; maturing on
Aug. 8, 2007. (1) (2) $ 1,260,997 $ -- $ 1,260,997
Note payable to Mr. Coyne resulting from purchase of
Equis II Corporation; 7.5% annual interest; maturing on
Aug. 8, 2007. (1) (2) 640,003 -- 640,003
---------------- ---------------- ----------------
Sub-total $ 1,901,000 $ -- $ 1,901,000
---------------- ---------------- ----------------
Note payable to EFG for purchase of Ariston Corporation; 7%
annual interest; maturing on Aug. 31, 2003. (5) $ 8,418,496 $ 8,418,496 $ 8,418,496
Non-recourse note payable to EFG for purchase of Special
Beneficiary Interests; 7% annual interest; maturing on
Nov. 18, 2009. $ 6,634,544 $ -- $ 6,634,544
Notes payable to affiliates for 1997 asset purchase; 10% annual
interest; maturing on Apr. 1, 2003. (4) $ 3,957,147 $ 3,957,147 $ 3,957,147
---------------- ---------------- ----------------
Total $ 34,949,392 $ 23,413,848 $ 34,949,392
================ ================ ================
(1) The promissory notes issued to the former Equis II stockholders are
general obligations of the Company secured by a pledge to the former Equis II
stockholders of the shares of Equis II owned by the Company.
(2) These amounts are equal in aggregate to debt obligations of Mr. Engle
and Mr. Coyne to Equis II Corporation and ONC included in amounts due from
affiliates on the accompanying consolidated balance sheets.
(3) The notes to Mr. Engle (and related family trusts/corporation) become
immediately due and payable if Mr. Engle ceases to be the Chief Executive
Officer and a Director of the Company, except if he resigns voluntarily or is
terminated for cause. Similarly, the notes to Mr. Coyne become immediately due
and payable if Mr. Coyne ceases to be the President and a Director of the
Company, except if he resigns voluntarily or is terminated for cause.
(4) In 1997, the Company borrowed $4,419,000 from certain affiliates
controlled by Mr. Engle, including $462,000 from AFG Investment Trust A, a
subsidiary. During the three and nine months ended September 30, 2002 and 2001,
the Company incurred total interest expense of approximately $100,000 and
$296,000, in connection with this indebtedness. The obligation to AFG Investment
Trust A of $462,000 and related annual interest expense has been eliminated in
consolidation.
(5) In 1998, the Company issued a purchase-money note of $10,450,000 to
acquire Ariston Corporation for a total purchase price of $12,450,000. 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 interest
owned by Ariston.
Common Stock Owned by Affiliates
------------------------------------
In connection with a transaction in 1997, the Company issued 198,700 shares of
common stock to certain affiliates controlled by Mr. Engle, including 20,969
shares that are owned indirectly by AFG Investment Trust A. The shares so owned
by AFG Investment Trust A have been eliminated in consolidation.
NOTE 14 - SUBSEQUENT EVENTS
In October 2002, an existing member and an unrelated third party contributed
approximately $2,500,000 to Mountain Springs (See note 9). As a result of the
capital contribution, EFG Kirkwood's membership interest in Mountain Springs
decreased from 50% to 33%. Proceeds from the capital contribution were used to
exercise an existing option to purchase 51% of Durango Mountain Land Company,
LLC, a real estate development company owning land in adjacent to Purgatory.
In October 2002, the Company amended its lease associated with the commercial
land and building located in Sydney, Australia (See note 7). The amendment
extended the lease term through January 15, 2005 and adjusted the monthly lease
payment to $20,000, payable quarterly.
Future minimum rental payments in connection with the leases for both buildings
are due as follows adjusted for the October amendment:
For the year ending September 30, 2003 $1,193,004
.. 2004 1,026,504
.. 2005 846,504
.. 2006 879,123
.. 2007 942,396
Thereafter. 2,572,097
----------
Total $7,459,628
==========
In November 2002, a portion of the Company's $4,419,000 debt to certain
affiliates controlled by Mr. Engle was purchased by another affiliated entity
also controlled by Gary Engle (See note 13). There were no changes to the terms
of the notes.
NOTE 15 - SEGMENT REPORTING
At September 30, 2002, the Company was actively engaged in two industry
segments: i) real estate ownership, development and management and ii)
equipment leasing and management. The real estate segment includes the
ownership, management and development of commercial properties and land. In
addition, the Company owns equity interests in non-affiliated companies that are
engaged in real estate leasing or development activities, as well as winter
resorts (See Note 9). The equipment leasing and management segment consists of
an ownership interest in several limited partnerships, companies and trusts that
are engaged primarily in the business of equipment leasing and management. The
Company's largest equity interest consists of Class B Beneficiary Interests,
representing approximately 62% of the voting interest, in the AFG Trusts, which
were established by an affiliate between 1992 and 1995. The AFG Trusts are
limited life entities that have scheduled dissolution dates ranging from
December 31, 2003 to December 31, 2006. Revenues from equipment leasing
segments consist of lease revenues from a portfolio of assets and management
fees associated with managing several affiliated investment programs.
Segment information for the three and nine months ended September 30, 2002 and
2001 is summarized below:
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPT. 30, 2002 SEPT. 30, 2001 SEPT. 30, 2002 SEPT. 30, 2001
---------------- ---------------- ---------------- ----------------
Operating Revenues: (1)
---------------------------
Equipment leasing $ 3,929,471 $ 6,379,580 $ 13,068,910 $ 19,172,744
Real estate 288,544 289,028 891,670 875,889
---------------- ---------------- ---------------- ----------------
Total 4,218,015 6,668,608 13,960,580 20,048,633
Equity Interests
Income (Loss)
Equipment leasing 141,357 222,469 22,037 868,559
Real estate (2,079,934) (1,646,241) (1,060,985) (434,371)
---------------- ---------------- ---------------- ----------------
Total (1,938,577) (1,423,772) (1,038,948) 434,188
Total Revenues $ 2,279,438 $ 5,244,836 $ 12,921,632 $ 20,482,821
Operating Expenses and
Management Fees:
Equipment leasing 2,904,340 2,187,270 6,296,879 6,842,042
Real estate 51,460 16,591 196,074 50,830
---------------- ---------------- ---------------- ----------------
Total 2,955,800 2,203,861 6,492,953 6,892,872
Interest Expense:
---------------------------
Equipment leasing 1,280,773 1,233,060 4,490,237 4,502,451
Real estate 97,067 104,570 296,958 319,031
---------------- ---------------- ---------------- ----------------
Total 1,377,840 1,337,630 4,787,195 4,821,482
Depreciation, Write-down
of Equipment and
Amortization: (2)
---------------------------
Equipment leasing 2,071,120 2,461,694 8,298,164 7,697,039
Real estate 94,548 2,620,510 283,644 2,809,606
---------------- ---------------- ---------------- ----------------
Total 2,165,668 5,082,204 8,581,808 10,506,645
Total Expenses $ 6,499,308 $ 8,623,695 $ 19,861,956 $ 22,220,999
Provision for income taxes 406,824 882,000 935,913 1,304,000
Elimination of minority
interests 4,474,303 675,702 7,070,937 362,495
---------------- ---------------- ---------------- ----------------
Net loss $ (152,391) $ (3,585,157) $ (805,300) $ (2,679,683)
Capital Expenditures
Equipment leasing $ 4,830,380 $ 16,000 $ 9,193,265 $ 17,456,000
Real estate 402,839 548,945 1,717,473 1,411,161
---------------- ---------------- ---------------- ----------------
Total $ 5,233,219 $ 564,945 $ 10,910,738 $ 18,867,161
---------------- ---------------- ---------------- ----------------
(1) Includes management fee revenue earned from affiliates of approximately
$966,000 and $3,486,000 for the three and nine months ended September 30, 2002,
respectively, as compared to approximately $2,497,000 and $5,852,000 for the
three and nine months ended September 30, 2001, respectively. (See Note 8 for
discussion of management fees).
(2) Includes write-down of equipment and real estate held for development
and sale of $1,935,000 for the nine months ended September 30, 2002 and
$2,526,000 for the three and nine months ended September 30, 2001.
Total assets from each operating segment as of September 30, 2002 and December
21, 2001 is summarized below:
2002 2001
------------ ------------
Equipment leasing $100,370,492 $106,150,058
Real estate 40,638,069 45,738,045
------------ ------------
Total $141,008,561 $151,888,103
------
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
--------------
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. The
cautionary statements made in the form 10-Q should be read in conjunction with
all related forward-looking statements as they appear in the Form 10-Q.
GENERAL
Semele Group Inc. ("Semele" or the "Company") is a Delaware corporation
organized on April 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
though 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 evaluated alternatives ways to maximize shareholder value and take
advantage of investment opportunities where its significant loss carryforwards
for federal income tax purposes (approximately $105,000,000 at September 30,
2002) could make it a value-added buyer. In recent years, the Company has 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 approximately
270 acres of land located in Southern California known as Rancho Malibu.
Currently, the Company is engaged in various real estate activities, including
the residential property development of Rancho Malibu. The Company also holds
investments in other companies operating in niche financial markets, principally
involving real estate and equipment leasing. Semele is a highly leveraged
company and an investment in Semele common stock involves a high degree of risk
to the investor.
The staff of the SEC informed the managing trustee of the trusts controlled by
Semele that it believes the AFG Trusts may be unregistered investment companies
within the meaning of the Investment Company Act of 1940 (the "Act"). The AFG
managing trustee is engaged in discussions with the staff regarding this matter.
The AFG Trusts, after consulting with legal counsel, do not believe that they
are unregistered investment companies. However, it is possible that the AFG
Trusts may have unintentionally engaged in an activity or activities that may be
construed to fall within the scope of the Act. Although the AFG Trusts do not
believe they are unregistered investment companies, two of the Trusts agreed to
liquidate their assets in order to resolve the matter with the staff of the SEC.
Accordingly, as of December 6, 2001, the managing trustee of the Trusts resolved
to cause the AFG Investment Trust A and AFG Investment Trust B to dispose of
their assets prior to December 31, 2003. Upon consummation of the sale of their
assets, these Trusts will be dissolved and the proceeds thereof will be applied
and distributed in accordance with the terms of their Trust Agreements. If
necessary, AFG Investment Trust C and AFG Investment Trust D intend to avoid
being deemed investment companies by means that may include disposing or
acquiring certain assets that they might not otherwise dispose or acquire.
For accounting purposes, the Company considers affiliates to be persons and/or
entities that directly, or indirectly through one or more intermediaries,
control or are controlled by, or are under common control of or with, the
Company. All other entities are considered to be non-affiliates.
RECENT ACQUISITION
PLM International, Inc.
-------------------------
On December 22, 2000, an affiliate of the Company, MILPI Acquisition Corp.
("MAC"), 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 MAC to
purchase all of the outstanding common stock of PLM for cash as described below.
MAC was a wholly owned subsidiary of MILPI Holdings, LLC ("MILPI Holdings"),
which was formed by the AFG Trusts on December 22, 2000. The AFG Trusts are
consolidated affiliates of the Company engaged in the equipment leasing and real
estate businesses. The AFG Trusts collectively paid $1,200,000 for their
membership interests in MILPI Holdings and MILPI Holdings purchased the common
stock of MAC for an aggregate purchase price of $1,200,000 at December 31, 2000.
MAC 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
$27,000,000. In connection with the acquisition, on December 29, 2000, MAC
commenced a tender offer to purchase all of PLM's outstanding common stock.
Pursuant to the cash tender offer, MAC acquired approximately 83% of PLM's
common stock in February 2001 for a total purchase price of approximately
$21,800,000. The assets of PLM included cash and cash equivalents of
approximately $4,400,000. The acquisition resulted in goodwill of approximately
$5,400,000.
On February 6, 2002, MAC completed its acquisition of PLM through the
acquisition of the remaining 17% of the outstanding PLM common stock and by
effecting a merger of MAC into PLM, with PLM as the surviving entity. The
merger was completed when MAC obtained approval of the merger from PLM's
shareholders pursuant to a special shareholders' meeting. The remaining
interest was purchased for $4,363,000, resulting in additional goodwill of
$3,779,000. Concurrent with the completion of the merger, PLM ceased to be
publicly traded.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements. On
a regular basis, the Company reviews these estimates and assumptions including
those related to revenue recognition, asset lives and depreciation, goodwill,
impairment of long-lived assets and contingencies and litigation. These
estimates are based on the Company's historical experience and on various other
assumptions believed to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions. The
Company believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The Company believes the following critical accounting policies, among others,
are subject to significant judgments and estimates used in the preparation of
these financial statements:
Buildings and Equipment for Lease
-------------------------------------
Buildings and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the underlying assets,
generally 40 years for buildings. Expenditures that extend the life of an asset
and that are significant in amount are capitalized and depreciated over the
remaining useful life of the asset.
The Company's depreciation policy for equipment is intended to allocate the cost
of equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Company depreciates the difference between (i)
the cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of the
primary lease expiration. To the extent that an asset is held beyond its
primary lease term, the Company continues to depreciate the remaining net book
value of the asset on a straight-line basis over the asset's remaining economic
life. The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including the ability of Equis Financial Group
Limited Partnership ("EFG") 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 Company and which will maximize total cash returns for each
asset.
Goodwill
--------
Goodwill is calculated as the excess of the aggregate purchase price over the
fair market value of identifiable net assets acquired in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"). In accordance with SFAS No. 141, the Company
allocates the total purchase price to the assets acquired and liabilities
assumed based on the respective fair market values at the date of acquisition.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS.
No. 142"), the discontinuance of goodwill and other intangible asset
amortization was effective as of January 1, 2002. SFAS No. 142 also includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill, and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 requires the Company to
complete a transitional goodwill impairment test within six months from January
1, 2002, the date of adoption. The Company completed the goodwill impairment
analysis during the quarter ended June 30, 2002. There was no impact on the
Company's financial statements as a result of this analysis.
The Company recorded goodwill of $3,779,000 in conjunction with the acquisition
of the remaining 17% of the outstanding common stock of PLM in February 2002.
This goodwill included approximately $446,000 of total costs estimated for
severance of PLM employees and relocation costs in accordance with management's
formal plan to involuntarily terminate employees, which plan was developed in
conjunction with the acquisition.
Impairment of Long-Lived Assets
----------------------------------
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") the Company evaluates long-lived assets for
impairment whenever events or circumstances indicate that the carrying bases of
such assets may not be recoverable. Losses for impairment are recognized when
the undiscounted cash flows estimated to be realized from a long-lived asset are
determined to be less than the carrying basis of the asset. The determination
of net realizable value for a given investment requires several considerations,
including but not limited to, income expected to be earned from the asset,
estimated sales proceeds, and holding costs excluding interest.
Minority Interests
-------------------
Certain equity interests in the Company's consolidated subsidiaries are owned by
third parties or by affiliates of the Company that are not included in the
consolidated financial statements. Such interests are referred to as "minority
interests" on the accompanying consolidated financial statements. The Company's
minority interests consist primarily of the Class A Beneficiaries' investment in
the AFG Trusts. The AFG Trusts' income is allocated quarterly first, to
eliminate any Participant's negative capital account balance and second, 1% to
the AFG Trusts' managing trustee (a wholly-owned subsidiary), 8.25% to the
Special Beneficiary (directly owned by the Company) and 90.75% collectively to
the Class A and Class B Beneficiaries (the Company owns the majority of the
Class B interests while the majority of the Class A interests are owned by
non-affiliated beneficiaries). The latter is allocated proportionately between
Class A and Class B Beneficiaries based upon the ratio of cash distributions
declared and allocated to the Class A and Class B Beneficiaries during the
period. Net losses are allocated quarterly first, to eliminate any positive
capital account balance of the AFG Trusts' managing trustee, the Special
Beneficiary and the Class B Beneficiaries; second, to eliminate any positive
capital account balance of the Class A Beneficiaries; and third, any remainder
to the AFG Trusts' managing trustee.
In 2001 and through February 2002, prior to the completion of the acquisition of
100% of the common stock of PLM, the remaining minority interests primarily
related to approximately 17% of the outstanding common stock of PLM.
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 SFAS No. 13, "Accounting for Leases." Rents received
prior to their due dates are deferred. At September 30, 2002 and December 31,
2001, deferred rental income was approximately $32,000 and $584,000
respectively.
PLM Financial Services, Inc. ("FSI"), a wholly owned subsidiary of PLM, earns
revenues in connection with the management of limited partnerships and private
placement programs. Equipment acquisition and lease negotiation fees are earned
through the purchase and initial lease of equipment, and are recognized as
revenue when FSI completes all of the services required to earn the fees,
typically when binding commitment agreements are signed. Management fee income
is earned by FSI for managing the equipment portfolios and administering
investor programs as provided for in various agreements, and is recognized as
revenue over time as it is earned.
Contingencies and litigation
------------------------------
The Company is subject to legal proceedings involving ordinary and routine
claims related to its business. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Company may be required to adjust amounts recorded in its financial statements.
RESULTS OF OPERATIONS
EQUIPMENT LEASING OPERATIONS
------------------------------
The events of September 11, 2001, along with a change in general economic
conditions in the United States, have continued to adversely affect the market
demand for both new and used commercial aircraft and weakened the financial
position of most airlines. No direct damage occurred to any of the Company's
assets as a result of these events. These events have resulted in a
significant over-supply of commercial aircraft and this over-supply will likely
continue for sometime. These events have had a negative impact on the fair
market value of the Trusts' aircraft. The Company does not expect these
aircraft to return to their pre-September 11, 2001 value. In the event of a
lease default by an aircraft lessee, the Company could experience material
losses. At September 30 2002, the AFG Trusts have collected substantially all
rents owed to them from aircraft lessees. PLM, which has an indirect interest in
a number of aircraft, has experienced significant delinquencies in the receipt
of rents from aircraft lessee and two commuter aircraft leases were early
terminated due to bankruptcy of the lessees. In addition, the credit quality of
many other aircraft lessees has deteriorated. The Company is monitoring
developments in the airline industry and will continue to evaluate potential
implications to the Company's financial position and future liquidity.
LEASE REVENUE. During the nine months ended September 30, 2002 and 2001, the
Company recognized lease revenue of approximately $8,443,000 and $10,510,000,
respectively. Lease revenue represents rental revenue recognized from the
leasing of the equipment owned by the AFG Trusts. The decrease in lease revenue
from 2001 to 2002 resulted primarily from a $298,000 early lease termination fee
received during the nine months ended September 30, 2001 (a similar fee was not
earned in 2002), a decrease of approximately $238,000 related to lease
terminations and approximately $1,541,000 decrease in lease revenues from the
sale of equipment.
MANAGEMENT FEE INCOME FROM AFFILIATES. Management fees were $3,486,000 and
$5,852,000 for the nine months ended September 30, 2002 and 2001. Management
fees consist primarily of fees earned by PLM generated by the equipment under
management of several affiliated investment programs, the EGF Programs. The
decrease in management fees from 2001 to 2002 is due to the disposition of
equipment managed by MILPI Holdings.
NET GAIN (LOSS) ON SALE OF EQUIPMENT. During the nine months ended September
30, 2002, the Company sold equipment to existing lessees and third parties
resulting in a net gain of $197,000 on equipment having a net book value of
$2,701,000. Equipment sales during the nine months ended September 30, 2001
resulted in a net gain of $630,00 on equipment having a net book value of
$545,000.
EQUITY INCOME IN AFFILIATED COMPANIES. Equity income in affiliated companies
consists of PLM's investment in its affiliated equipment leasing programs and
Ariston's ownership interest in the 11 limited partnerships. Equity income
recognized from PLM's leasing programs was $213,000 for the nine months ended
September 30, 2002. As compensation for organizing these programs, PLM was
granted an interest (between 1% and 15%) in the earnings and cash distributions
of the individual investment programs, in which PLM Financial Services, Inc., a
wholly-owned subsidiary of PLM, is the general partner or Manager. PLM records
as a partnership interest its equity interest in the earnings of the
partnerships, after adjusting such earnings to reflect the effect of special
allocation of the program's gross income allowed under the respective
partnership agreements. Equity loss recognized from Ariston's ownership
interest in the 11 limited partnerships was approximately $191,000 as compared
to equity income of approximately $869,000 for the nine months ended September
30, 2002 and 2001, respectively. The decrease in equity income is attributable
to increased operating expenses and decreased revenues attributable to the sale
of equipment in the investment programs.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued an exposure draft of a proposed
statement of position ("SOP") entitled "Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment". The EGF Programs have
historically accrued legally mandated maintenance such as marine vessel
dry-docking and aircraft engine maintenance over the periods prior to the
required maintenance date. If the SOP is adopted as proposed, the EGF Programs
would reverse all previously accrued maintenance reserves. If this proposed
change were in effect at September 30, 2002, the EGF Programs would have been
required to reverse maintenance reserves of approximately $10,000,000.
Accordingly, MILPI would record equity income associated with the adjustment
based on its equity ownership in each of the EGF Programs, ranging from 1% to
15%. Maintenance reserves will change in 2002 as maintenance is performed and
past maintenance reserves are depleted and additional reserves are recorded.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$6,363,000 and $7,697,000 for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in depreciation expense is the result of equipment
sales during fiscal 2001 and the nine months ended September 30, 2002.
WRITE-DOWN OF EQUIPMENT. The Company accounts for impairment of long-lived
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets" which was issued in August 2001. SFAS No. 144
requires that long lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the net book value of the assets may not
be recoverable from undiscounted future cash flows. During the three months
ended June 30, 2002, the Trusts recorded a write-down of equipment representing
an impairment to the carrying value of the Trusts' interests in a McDonnell
Douglas MD-87 aircraft. The resulting charge of $1,935,000 was based on a
comparison of estimated fair value and carrying value of the Trusts' interests
in the aircraft. The estimate of the fair value was based on a current offer to
purchase the aircraft and the assessment of the management of the Trusts of
prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
INTEREST EXPENSE. Interest expense was $4,490,000 and $4,502,000 for the nine
months ended September 30, 2002 and 2001 respectively. Interest expense
associated with equipment leasing consists of interest associated with corporate
debt, equipment leasing debt and indebtedness to affiliates.
OPERATING EXPENSES AND MANAGEMENT FEES. Operating expenses and management fees
decreased by $545,000 from $6,842,000 to $6,297,000 for the nine months ended
September 30, 2001 and 2002, respectively. The decreased in operating expenses
is attributable to a $2,367,000 decrease in general and administrative expenses
at MILPI Holdings for the nine months ended September 30, 2002 compared to the
same period in 2001. MILPI Holdings's $2,367,000 decrease in general and
administrative expenses is primarily due to the relocation and consolidation of
the corporate service functions of MILPI during May 2001. The decrease in
general and administrative costs at MILPI Holdings was offset by an increase in
repairs and maintenance of $773,000 associated with Trust D's re-lease of a
McDonnell Douglas DC-8-73 and $485,000 of noncapitalizable costs incurred in
conjunction with the amendment on the debt agreement for the respective
aircraft. 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.
Fees and other costs paid to affiliates during the nine months ended September
30, 2002 and 2001 are as follows:
2002 2001
---------- ----------
Administrative charges $ 701,484 $ 397,017
Equipment management fees 385,740 354,216
Reimbursable operating expenses due to third parties 117,509 2,807,896
---------- ----------
Total $1,204,733 $3,559,129
========== ==========
ELIMINATION OF MINORITY INTERESTS. Elimination of minority interests increased
by $6,708,000 for the nine months ended September 30, 2002 compared to same
period in 2001. The increase in minority interest expense is primarily due to
the allocation of losses in the AFG Trusts to the Class A Beneficiaries during
the nine months ended September 30, 2002. The Company directly or indirectly
owns the managing trustee, the Special Beneficiary and the majority of the Class
B interest in the AFG Trusts which eliminates in consolidation. The AFG Trusts'
income is allocated quarterly first, to eliminate any Participant's negative
capital account balance and second, 1% to the Managing Trustee, 8.25% to the
Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period. Net
losses are allocated quarterly first, to eliminate any positive capital account
balance of the Managing Trustee, the Special Beneficiary and the Class B
Beneficiaries; second, to eliminate any positive capital account balance of the
Class A Beneficiaries; and third, any remainder to the Managing Trustee. The
remaining minority interests consist of various other consolidated subsidiaries.
REAL ESTATE OPERATIONS
------------------------
LEASE REVENUE. During the nine months ended September 30, 2002 and 2001, the
Company recognized lease revenue of $892,000 and $876,000 from real estate
operations. Lease revenues from real estate operations are earned from the
Company's ownership interest in two commercial properties, consisting of land
and buildings, which 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. One building is located in Washington, D.C.
and the other is located in Sydney, Australia. The increase in lease revenues
is attributable to an increase in lease payments per the long-term lease
contract.
EQUITY INCOME IN NON-AFFILIATED COMPANIES. The Company has an indirect equity
ownership interest in three real estate companies:
Kirkwood Mountain Resort Holdings LLC ("Mountain Resort")
Mountain Springs Resort LLC ("Mountain Springs")
EFG/Kettle Valley Development LLC ("Kettle Valley")
Mountain Resort, through four wholly owned subsidiaries, owns and operates the
Kirkwood Mountain Resort, a ski resort located in northern California, a public
utility that services the local community, and land that is held for residential
and commercial development. Mountain Springs, through a wholly owned subsidiary,
owns a controlling interest in DSC/Purgatory LLC ("Purgatory") in Durango,
Colorado. Kettle Valley is a real estate development company located in British
Columbia, Canada.
For the nine months ended September 30, 2002 and 2001, the Company recorded
equity loss and income of $794,000 and $597,000, respectively from its
ownership interest in Mountain Resort and Mountain Springs. The Company also
recorded equity losses of $267,000 and $1,032,000 from its equity interest in
Kettle Valley for the nine months ended September 30, 2002 and 2001,
respectively. See below for a discussion of the operating results of these real
estate companies.
Kirkwood Mountain Resort Operating Results
----------------------------------------------
Kirkwood 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 three and nine months ended September 30, 2002, Mountain Resort
recorded total revenues of approximately $2,082,000 and $22,558,000,
respectively, compared to revenues of approximately $1,843,000 and $22,412,000
for the same periods in 2001. The increase in total revenues from 2001 to 2002
for the three and nine month periods ended September 30, 2002 compared to 2001
of approximately $239,000 and $146,000, respectively, is the result of an
increase in ski-related revenues offset by a decrease in residential-related and
other operations revenues. Ski-related revenues increased approximately
$2,509,000 in the nine months ended September 30, 2002 compared to the same
period of 2001. The increase in ski-related revenues resulted from improved
weather conditions during the winter season, which attracted more skiers.
Residential-related and other operations revenues decreased approximately
$2,364,000 for the nine months ended 2002 as compared to 2001. The decrease in
residential-related and other operations revenues was primarily attributable to
a reduction in the number of condominium sales during 2002 compared to 2001.
During the three and nine months ended September 30, 2002, Mountain Resort
recorded total expenses of approximately $4,583,000 and $21,147,000
respectively, compared to expenses of approximately $4,395,000 and $21,794,000,
respectively for the same periods of 2001. The decrease in total expenses of
$647,000 for the nine months ended September 30, 2002 compared to the same
periods in 2001 is the result of a decrease in residential-related and other
non-operating expenses largely offset by an increase in ski-related expenses.
Ski-related expenses increased approximately $1,751,000 as a result of the
increase in ski-related revenues, as discussed above. Residential-related and
other operations expenses decreased approximately $2,398,000 primarily as a
result of a decrease in cost of sales from condominium units sold in the nine
months ended September 30, 2002 as compared to the same period in 2001, as also
discussed above.
Mountain Springs Operating Results
-------------------------------------
Mountain Springs, through a wholly owned subsidiary, owns a controlling interest
in DSC/Purgatory LLC ("Purgatory") in Durango, Colorado. Purgatory is a ski and
mountain recreation resort covering 2,500 acres, situated on 40 miles of terrain
with 75 ski trails located near Durango, Colorado. Purgatory receives the
majority of its revenues from winter ski operations, primarily ski, lodging,
retail and food and beverage services, with the remainder of revenues generated
from summer outdoor activities, such as alpine sliding and mountain biking.
During the three and nine months ended September 30, 2002, Purgatory recorded
total revenues of approximately $1,166,000 and $11,048,000, respectively,
compared to revenues of approximately $868,000 and $12,015,000 for the same
periods of 2001. Revenues increased by $298,000 for the three months ended
September 30, 2002 compared to the same period in 2001 due to additional summer
programs offered at the resort. Revenue decreased by $967,000 for the nine
months ended September 30, 2002 as compared to the same period in 2001 due to
unfavorable weather conditions during the winter season, which attracted fewer
skiers.
Total expenses were approximately $3,271,000 and $12,556,000 for the three and
nine months ended September 30, 2002, respectively, compared to expenses of
approximately $2,966,000 and $11,542,000 for the same periods in 2001. The
increase in total expenses for the three and nine months ended September 30,
2002 compared to the same periods in 2001 of approximately $305,000 and
$1,014,000 is primarily the result of costs incurred related to increased
airline subsidies.
EFG/Kettle Valley Operating Results
--------------------------------------
Kettle Valley is a real estate development company located in Kelowna, British
Columbia, Canada. The project, which is being developed by Kettle Valley
Development Limited Partnership ("KVD LP"), consists of approximately 280 acres
of land that is zoned for 1,120 residential units in addition to commercial
space. To date, 123 residential units have been constructed and sold.
During the three and nine months ended September 30, 2002, KVD LP recorded
revenues of approximately $1,004,000 and $2,291,000, respectively, compared to
$767,000 and $1,952,000, respectively, for the same periods in 2001. The
increase in revenues is the result of an increase in the number of lot sales.
KVD LP incurred total expenses of approximately $1,163,000 and $2,662,000 during
the three and nine months ended September 30, 2002, respectively, compared to
expenses of approximately $798,000 and $2,747,000, respectively, for the same
periods in 2001. The decrease in expenses in the nine months ended September
30, 2002 is the result of an increase in real estate cost of sales resulting
from an increase in the number of lot sales, as discussed above, offset by an
impairment in the land carrying value of approximately $500,000 recorded in the
nine months ended September 30, 2001. There was no impairment recorded in the
three and nine months ended September 30, 2002.
Kettle Valley owns a 49.9% interest in a company which, through two wholly-owned
subsidiaries, owns a 99.9% interest in KVD LP. For the nine months ended
September 30, 2002, in addition to its share of the loss of KVD LP, the Trust's
net loss from Kettle Valley includes a loss of $84,000 reflecting the Trust's
share of the operating results of one of the Company's wholly-owned
subsidiaries.
DEPRECIATION EXPENSE. Depreciation expense was $284,000 for the nine months
ended September 30, 2002 and 2001. Depreciation expense results from
depreciation of the two commercial buildings owned by the Company which are
discussed above. The Company also owns 270 acres of undeveloped land near
Malibu, California, called Rancho Malibu. There was no depreciation expense
related to this property as it remains under development at September 30, 2002.
WRITE-DOWN OF IMPAIRED ASSETS. During 2001, the Company recorded a write-down
of $2,526,000 associated with the Malibu property. It is the Company's policy
to reduce the carrying value of real estate held for development and sale when
events or circumstances indicate that future undiscounted cashflows are
estimated to be insufficient to recover the carrying value of the real estate.
The amount of the write-down is equivalent to the difference between the
estimated fair value of the property confirmed less the cost to sell and its
unadjusted carrying value.
OPERATING EXPENSES. Operating expenses were $196,000 and $51,000 for the nine
months ended September 30, 2002 and 2001, respectively. Operating expenses
consist primarily general and administrative expenses, which include salary,
management fees and office related expenses resulting from the Company's
ownership of two commercial leasing buildings located in Washington, DC and
Sydney, Australia. The increase in operating expenses is attributable to tax
expenses recorded associated with international tax payments due on the property
leased in Sydney, Australia.
INTEREST EXPENSE. Interest expense was $297,000 and $319,000, respectively, for
the nine months ended September 30, 2002 and 2001. Interest expense relates to
the interest on indebtedness acquired to finance the original construction of
the Company's two commercial buildings. The decrease in interest expense from
2001 to 2002 is attributable to principal payments made during the year which
decreased the total outstanding balance of the notes payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company owns a controlling interest in several different corporations,
partnerships and trusts including: the AFG Trusts, MILPI Holdings, LLC, EFG
Kirkwood and the AFG International Limited Partnerships. The availability to
Semele of cash held by the AFG Trusts, MILPI Holdings, LLC and the AFG
International Limited Partnerships is subject to terms and conditions over the
use and disbursement of cash and other matters contained in the respective
agreements that govern those entities. Moreover, the Company has voting
control over most matters concerning these entities, including the declaration,
authorization, and amount of cash distributions.
EQUIPMENT LEASING OPERATIONS
------------------------------
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 AFG Trusts are
limited-life entities and have the following scheduled dissolution dates:
AFG Investment Trust A- December 31, 2003 (*)
AFG Investment Trust B- December 31, 2003 (*)
AFG Investment Trust C- December 31, 2004
AFG Investment Trust D- December 31, 2006
(*) In December 2001, Trust A and Trust B filed Form 8-Ks with the Securities
Exchange Commission ("SEC"), stating that the managing trustee of the Trusts had
resolved to cause the Trust to dispose of its assets prior to December 31, 2003.
Upon consummation of the sale of its assets, the Trusts will be dissolved and
the proceeds thereof will be applied and distributed in accordance with the
terms of the Trusts' operating agreements. Reasonable reserves may be withheld
for pay for the liabilities of the Trusts.
ARISTON CORPORATION: In 1998, the Company acquired Ariston which has an
ownership interest in 11 partnerships, (the "Partnerships") engaged in the
equipment leasing business. Ariston's percentage interest for each interest
varies from less than 1% to 16%. During 2002, the Partnerships adopted a formal
plan of liquidation and paid an initial distribution to their investors. For
the three and nine months ended September 30, 2002, Ariston received $600,000 in
distributions from the Partnerships. Money received from the Partnerships will
be distributed to Semele which is required to use it to amortize the principal
and interest balance of the $10,450,000 note payable to EFG.
AFG TRUSTS: The AFG Trusts' principal operating activities have been derived
from asset rental transactions. Accordingly, the AFG Trusts' 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. The AFG
Trusts' operating activities generated net cash inflows of $724,000 for the nine
months ended September 30, 2002. Future renewal, re-lease and equipment sale
activities will continue to cause a decline in the AFG Trusts' lease revenue and
corresponding sources of operating cash. Expenses associated with rental
activities, such as management fees, will also decline as the AFG Trusts
remarket their equipment.
At lease inception, the AFG Trusts' equipment was leased by a number of
creditworthy, investment-grade companies and, to date, the AFG Trusts have not
experienced any material collection problems and have 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 AFG Trusts' lessees
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 AFG Trusts remarket their equipment and enter re-lease
agreements with different lessees. The AFG Trusts' managing trustee will
continue to evaluate and monitor the AFG Trusts' experience in collecting
accounts receivable to determine whether a future allowance for doubtful
accounts may become appropriate.
During the nine months ended September 30, 2002, the AFG Trusts realized net
cash proceeds from equipment sales of $2,772,000.
At September 30, 2002, the AFG Trusts were due aggregate future minimum lease
payments of $13,113,000 from contractual lease agreements, a portion of which
will be used to amortize the principal balance of notes payable of $43,559,000.
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often dependent upon the needs and interests of the existing
lessees. Some lessees may choose to renew their lease contracts, while others
may elect to return the equipment. In the latter instances, the equipment could
be re-leased to another lessee or sold to a third party. Accordingly, the cash
flows of the AFG Trusts will become less predictable as the Trusts remarket
their equipment.
In the future, the nature of the AFG Trusts' operations and principal cash flows
will continue to shift from rental receipts to equipment sale proceeds. As this
occurs, the AFG Trusts' cash flows resulting from equipment investments may
become more volatile in that certain of the AFG Trusts' equipment leases will be
renewed and certain of its assets will be sold. In some cases, the AFG Trusts
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 AFG Trusts' advisor, EFG, and the AFG Trusts' managing trustee
will attempt to monitor and manage these events in order to maximize the
residual value of the Trust's equipment and will consider these factors, in
addition to the collection of contractual rents, the retirement of scheduled
indebtedness, and the AFG Trusts' future working capital requirements, in
establishing the amount and timing of future cash distributions.
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, frequency
and timing of lease expirations, the type of equipment being sold, its condition
and age, and future market conditions.
The AFG Trusts 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 in accompanying
Consolidated Statements of Cash Flows. Generally, each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period, which period
generally coincides with the lease term. The amount of cash used to repay debt
obligations may fluctuate in the future due to the financing of assets, which
may be acquired. The AFG Trusts have balloon payment debt obligations of
$32,000,000 as of September 30, 2002 which is due at the expiration of the lease
terms related to an aircraft leased to Scandanavian Airlines System ("SAS"), in
December 2003 and an aircraft leased to Cygnus Air, S.A. ("Cygnus"), in 2006.
In April 2002, AFG Investment Trust D executed an agreement with an existing
lessee, Emery Worldwide ("Emery"), to early terminate the lease of a McDonnell
Douglas DC-8-73 aircraft that had been scheduled to expire in July 2002.
Subsequent to the termination of the lease, the aircraft was re-leased to
Cygnus. The trust amended its debt agreement collateralized by the aircraft and
assigned the lease payments to the lender. The trust received additional debt
proceeds of $316,000 which were used to perform repairs and maintenance on the
aircraft.
In December 2000, the AFG Trusts formed MILPI Holdings, which formed MAC, a
wholly-owned subsidiary. The Trusts collectively paid $1,200,000 for their
membership interest in MILPI Holdings and MILPI Holdings purchased the shares of
MAC for an aggregate purchase price of $1,200,000 at December 31, 2000. MAC
entered into a definitive agreement with PLM, a publicly traded 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
$27,000,000. In connection with the acquisition, on December 29, 2000, MAC
commenced a tender offer to purchase any and all of PLM's outstanding common
stock.
Pursuant to the cash tender offer, MAC acquired approximately 83% of PLM's
outstanding common stock in February 2001 for a total purchase price of
approximately $21,800,000. The assets of PLM included cash and cash equivalents
of approximately $4,400,000. On February 6, 2002, MAC completed its acquisition
of PLM through the acquisition of the remaining 17% of the outstanding PLM
common stock and by effecting a merger of MAC into PLM, with PLM as the
surviving entity. The merger was completed when MAC obtained approval of the
merger from PLM's shareholders pursuant to a special shareholder's meeting. The
remaining 17% of the outstanding PLM common stock was purchased for
approximately $4,400,000. Concurrent with the completion of the merger, PLM
ceased to be publicly traded. The $4,400,000 of funds were obtained from
existing resources and internally generated funds of AFG Investment Trust C and
AFG Investment Trust D ("Trusts C and D") and by means of two 364 day, unsecured
loans from PLM to Trusts C and D aggregating $1,300,000. The loans have an
interest rate of LIBOR plus 200 basis points.
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,
2002, Mr. Engle owns or controls 35.4% and Mr. Coyne owns or controls 17.6% of
the Company's outstanding common stock.
MILPI HOLDINGS, LLC: As described above, at September 30, 2002, MILPI Holdings
owns 100% of the outstanding common stock of PLM. PLM's cash requirements have
historically been satisfied through cash flow from operations, borrowings, and
the sale of equipment and business segments. The level of liquidity in 2002 and
beyond will depend, in part, on the management of existing sponsored programs
and the effectiveness of cost control programs. Management believes PLM will
have sufficient liquidity and capital resources for the future.
During the nine months ended September 30, 2002, the cash and cash equivalents
of MILPI Holdings decreased by $6,615,000. The decrease during the period
resulted from $9,275,000 used in MILPI Holdings' investment activities offset by
$2,600,000 of net cash provided by operating and financing activities. The net
cash used in investment activities primarily reflects MILPI Holdings'
acquisition of the remaining 17% of the common stock of PLM for $4,363,000 and
the related loans made by PLM to Trusts C and D for $1,345,000 as discussed
above. In addition, investment activities also included the purchase of assets
held for sale during the three months ended September 30, 2002 for $4,830,000
and distributions of $1,274,000 from its managed programs. Cash provided by
operating and financing activities consisted of capital contributions of
$4,363,000 from Trusts C and D, which were utilized to acquire the additional
PLM common stock offset by a dividend of $2,667,000 paid to the AFG Trusts.
PLM has a $10,000,000 warehouse facility, which is shared with PLM Equipment
Growth Fund VI, PLM Equipment Growth & Income Fund VII, and Fund I, that allows
PLM to purchase equipment prior to its designation to a specific program.
Borrowings under this facility by the other eligible borrowers reduce the amount
available to be borrowed by PLM. All borrowings under this facility are
guaranteed by PLM. This facility provides for financing up to 100% of the cost
of the asset. Interest accrues at prime or LIBOR plus 200 basis points, at the
option of PLM. Borrowings under this facility may be outstanding up to 270 days.
In July 2002, PLM reached an agreement with the lenders of the $10,000,000
warehouse facility to extend the expiration date to June 30, 2003. All
borrowings must be repaid upon the expiration of this facility. As of September
30, 2002, PLM had no borrowings outstanding under this facility and there were
no borrowings outstanding under this facility by any other eligible borrower.
In March 2001, the Internal Revenue Service ("IRS") notified PLM that it would
conduct an audit of certain Forms 1042, Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons. The audit related to payments to unrelated
foreign entities made by two partnerships in which PLM formerly held interests
as the 100% direct and indirect owner. One partnership's audit related to Forms
1042 for the years 1997, 1998 and 1999, while the other partnership's audit
related to Forms 1042 for the years 1998 and 1999. In September 2002, the IRS
notified PLM that they have completed their examination of the related tax
returns and that they have assessed no changes to the reported taxes.
During 2001, the lessee of seven Stage II Boeing 737-200 commercial aircraft
owned by three of the EGF Programs notified the PLM of its intention to return
their aircraft. The lessee is located in Brazil, a country experiencing severe
economic difficulty. As of September 30, 2002, the lessee was thirteen lease
payments in arrears to the Programs. The Programs have a security deposit from
this lessee that could be used to pay a portion of the amount due. During
October 2001, PLM sent a notification of default to the lessee. The lease, with
an expiration date of October 2002, has certain return condition requirements
for the aircraft. The program recorded an allowance for bad debts for the
amount due less the security deposit. During October 2002, PLM reached an
agreement with the lessee of this aircraft for the past due lease payments and
agreed to re-lease four of these aircraft to this lessee until March 2003 at a
lower lease rate. In order to give the lessee an incentive to make timely
payments in accordance with the agreement, PLM gave the lessee a discount on the
total amount due. If the lessee fails to comply with the payment schedule in
the agreement, the discount provision will be waived and the full amount again
becomes payable. The lessee made an initial payment during October 2002, to be
followed by 23 equal monthly installments beginning in November 2002. Unpaid
outstanding amounts will accrue interest at a rate of 5%. PLM will record a
management fee related to future cash receipts when received.
A PLM Partnership owns two DHC-8-102 commuter aircraft that were on a lease
through February 2003 to Allegheny Airlines, Inc., a wholly owned subsidiary of
US Airways Inc., both of which declared bankruptcy on August 11, 2002. At
September 30, 2002, Allegheny Airlines, Inc. was three lease payments in arrears
to the Programs. On October 9, 2002, PLM received notification that the leases
for the two aircraft had been rejected and the aircraft would be returned. The
aircraft are currently in storage and are being remarketed for lease or sale.
Given the current oversupply of aircraft, these aircraft may remain off-lease
for the foreseeable future. The General Partner recorded an allowance for bad
debts for the amount due.
REAL ESTATE OPERATIONS
------------------------
RANCHO MALIBU: The Company indirectly owns approximately 274 acres of
undeveloped land north of Malibu, California called Rancho Malibu.
Approximately 40 acres of the property are 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.
The Company capitalized approximately $1,717,000 of costs during the nine months
ended September 30, 2002. In June 2002, the Company has obtained all transfer
development credits and has begun development of the property. The Company
continues to seek joint venture partners to finance the remaining development of
the property. The Company's ability to develop the property is dependent on
obtaining additional financing.
In March 2002, Trusts C and D formed C & D IT LLC, a Delaware limited liability
company, as a 50%/50% owned and managed joint venture. The joint venture made a
conditional contribution of $2,000,000 to BMLF/BSLF II Rancho Malibu Limited
Partnership ("Rancho Malibu Limited Partnership") in exchange for 25% of the
interests in the partnership that holds title to Rancho Malibu. The joint
venture has the right to demand the return of its contribution if certain
conditions are not met including the sale of Semele's interests in Rancho Malibu
limited partnership to a subsidiary of PLM. The C & D Joint Venture was
admitted to Rancho Malibu Limited Partnership as a co-managing general partner
pursuant to the terms of an amendment to Rancho Malibu Limited Partnership
Agreement. The other partners in Rancho Malibu Limited Partnership are Semele
and its wholly-owned subsidiary, Rancho Malibu Corp., the other co-managing
general partner. The trusts ownership in Rancho Malibu is eliminated in
consolidation.
Rancho Malibu Limited Partnership holds title to the 274-acre parcel of land
near Malibu, California and is developing it as a single-family luxury
residential subdivision. The conditional C & D Joint Venture Contribution was
made to assure participation in the future development of the parcel. It was
made subject to obtaining consent of the beneficiaries of each of the Trusts C
and D. The C & D Joint Venture contribution is also conditioned upon the
consummation of a transaction pursuant to which Semele and Rancho Malibu Corp.
will contribute all of the partnership interests that they hold in Rancho Malibu
Limited Partnership along with 100% of the membership interests Semele holds in
RM Financing LLC to RMLP, Inc., a newly formed subsidiary of PLM, in exchange
for $5,500,000 in cash, a $2,500,000 promissory note and 182 shares of common
stock of RMLP, Inc., which is approximately a 21% interest in RMLP, Inc. The
sole asset of RM Financing LLC is a Note dated December 31, 1990 (the "Note").
The Note was held by Semele's predecessor when it took a deed in lieu of
foreclosure on the property from the original owner. The unpaid balance of the
Note is $14,250,000 plus accrued interest as of September 30, 2002.
The C & D Joint Venture possesses the right to withdraw the C & D Joint Venture
Contribution from Rancho Malibu Limited Partnership if the transactions have not
taken place within ninety days of the receipt by Rancho Malibu Limited
Partnership of notice from the C & D Joint Venture that the requisite consents
of the beneficiaries of the Trust and Trust C have been received. This right of
the C & D Joint Venture is secured by a pledge of 50% of the capital stock of
Rancho Malibu Corp. and 50% of the interests in Rancho Malibu Limited
Partnership held by Semele and Rancho Malibu Corp.
The Company's involvement in real estate development also introduces financial
risks, including the potential need to joint venture and/or borrow funds to
develop the real estate projects. While the Company's management presently does
not foresee any unusual risks in this regard, it is possible that factors beyond
the control of the Company, 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.
EFG KIRKWOOD: The AFG Trusts and Semele collectively expended approximately
$10,700,000 to acquire their respective interests in EFG Kirkwood LLC ("EFG
Kirkwood"), a wholly-owned subsidiary which has an indirect ownership interest
in two winter resorts: Mountain Resort and Mountain Springs. Mountain Resort,
through four wholly-owned subsidiaries, owns and operates the Kirkwood Mountain
Resort, a ski resort located in northern California, a public utility that
services the local community, and land that is held for residential and
commercial development. Mountain Springs, through a wholly-owned subsidiary,
owns a controlling interest in Purgatory Ski Resort in Durango, Colorado.
During the nine months ended September 30, 2002, EFG Kirkwood received a
preferred stock distribution of $640,000 from Mountain Resort Holdings, LL.
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 ski resorts are subject to a number of risks, including weather-related
risks. The ski resort business is seasonal in nature and insufficient snow
during the winter season can adversely affect the profitability of a given
resort. Many operators of ski resorts have greater financial resources and
experience in the industry than either the Company or its partners.
The events of September 11, 2001, along with a change in the general economic
conditions in the United States, have continued to adversely affect the tourism
market. The Company is monitoring developments in the tourism market and will
continue to evaluate potential implications to the Company's financial position
and future liquidity.
The Company's real estate activities involve several risks, including, but not
limited to, market factors that could influence the demand for and pricing of
the Company's residential development projects. Rancho Malibu is intended to be
a high-end residential community. Kettle Valley is a large-scale community,
offering single-family homes priced from approximately $160,000 to $220,000.
This project is located in British Columbia, Canada and, therefore, subject to
economic and market factors not necessarily similar to those in the United
States. Adverse developments in general economic conditions could have a
negative affect on the marketability of either Rancho Malibu or Kettle Valley.
OTHER OPERATIONS
-----------------
SEMELE GROUP, INC: Semele Group, Inc. has approximately $34,949,000 in
affiliated debt associated with the acquisition and financing of several
operations. Approximately $23,414,000 of the affiliated debt is due within one
year as of September 30, 2002. The Company plans on extending the term of the
notes each year as the principal portion of the notes become due.
The Company does not anticipate any near term incremental free cash flow as a
result of its acquisitions from related parties described above and the Company
is currently relying on the continued extension of maturity dates of the notes
payable to Gary D. Engle, James A. Coyne and affiliated companies.
Substantially all of the net cash flow generated by these acquisitions will be
used to repay corresponding purchase price indebtedness.
FORWARD OUTLOOK
Several factors may affect the Company's operating performance during the
remainder of 2002 including:
changes in the markets for the Company's leasing equipment,
changes in the regulatory environment in which that equipment operates, and
changes in the real estate markets
The events of September 11, 2001, along with a recession in the United States,
have continued to adversely affect the market demand for both new and used
commercial aircraft and weakened the financial position of several airlines.
Management of the Company believes that there is a significant oversupply of
commercial aircraft available and that this oversupply will continue for some
time. The events have had a negative impact on the fair market value of the
equipment owned by the Trusts and the partnerships managed by PLM.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including the condition and type of equipment being
sold and its marketability at the time of sale. Changing market conditions,
industry trends, technological advances, and many other events can converge to
enhance or detract from asset values at any given time. Management attempts to
monitor these changes in order to identify opportunities which may be
advantageous to the Company and which will maximize total cash returns for each
asset.
The ultimate economic return from the sale of the Company's real estate
interests is dependent upon may factors, include, without limitation, the
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
and other governmental rules.
Management will continue to monitor and manage these events in order to maximize
the residual value of the Company's equipment and the return from the Company's
real estate interests, and will consider these factors, in addition to the
collection of contractual rents, the retirement of scheduled indebtedness, and
the Company's future working capital requirements, in establishing the amount
and timing of future cash distributions.
The amount of future operating expenses cannot be predicted with certainty;
however, such expenses are usually higher during the acquisition or liquidation
of assets. Other fluctuations typically occur in relation to the volume and
timing of remarketing activities.
In addition, Future lease term expirations and equipment sales will result in a
reduction in lease revenue recognized. Management fees are also expected to
decrease as the older investment programs liquidate their equipment portfolios.
It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Company, 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 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, technology 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 Company and which will maximize total cash returns for
each asset.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------
Based on their evaluation as of a date within 90 days of the filing of this Form
10-QSB, the Company's Principal Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of their
evaluation.
PART II - OTHER INFORMATION
-------------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Special Meeting of stockholders was held on October 9, 2002. At
the Special Meeting the following proposals were approved:
1. Election of Directors:
Number of Shares
For Against Abstained
---------------- ------- ---------
Joseph W. Bartlett 1,320,040 28,164 0
Robert M. Ungerleider 1,320,090 28,114 0
2. Approval of Ernst & Young LLP as Independent Auditors for the year ended
December 31, 2002:
Number of Shares
----------------
For 1,341,077
Against 5,180
Abstain 5,180
Item 5. Other Information
None
Item 6. Exhibits:
(b) A list of exhibits filed or incorporated by reference is as follows:
10.20 Operating and Joint Venture Agreement between AFG Investment Trust C
and AFG Investment Trust D dated March 1st, 2002.
10.21 Amendment to partnership agreement of BMIF/BSLF II Rancho Malibu
Limited Partnership dated March 5th, 2002.
10.22 Warehousing Credit Agreement among PLM International, Inc., PLM
Equipment Growth Fund VI, PLM Equipment Growth & Income Fund VII, Professional
Lease Management Income Fund I, LLC, and Imperial Bank and PFF Bank and Trust
dated April 13, 2001 (filed with the Securities and Exchange Commission as
Exhibit No. 10.1 to PLM Equipment Growth Fund V's Report on Form 10-Q dated May
8th, 2002 is incorporated herein by reference).
10.23 First amendment to the Warehousing Credit Agreement dated December 21,
2001 (filed with the Securities and Exchange Commission as Exhibit No. 10.2 to
PLM Equipment Growth Fund V's Report on Form 10-Q dated May 8th, 2002 is
incorporated herein by reference).
10.24 Second amendment to the Warehousing Credit Agreement dated April 12th,
2001 (filed with the Securities and Exchange Commission as Exhibit No. 10.3 to
PLM Equipment Growth Fund V's Report on Form 10-Q dated May 8th, 2002 is
incorporated herein by reference).
10.25 Third amendment to the Warehousing Credit Agreement dated July
11, 2002.
99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed one Form 8-K dated November 19, 2002 with the
Securities and Exchange Commission on November 19, 2002.
SIGNATURES
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 26, 2002
Gary D. Engle, Chairman, Chief Executive
Officer and Director
By: /s/ James A. Coyne Date: November 26, 2002
James A. Coyne, President, Chief Operating
Officer and Director
By: /s/ Rick Brock Date: November 26, 2002
Rick Brock,
Chief Financial Officer and Treasurer
CERTIFICATION:
I, Gary D. Engle, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Semele Group,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Gary D. Engle
--------------------
Gary D. Engle
Chairman, Chief Executive Officer and Director
November 26, 2002
CERTIFICATION:
I, Richard K Brock, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Semele Group,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Richard K Brock
----------------------
Richard K Brock
Chief Financial Officer and Director
November 26, 2002
EXHIBIT INDEX
99.1 Certificate of Chief Executive Officer pursuant to Section 906 of
Sarbanes - Oxley Act
99.2 Certificate of Chief Financial Officer pursuant to Section 906 of
Sarbanes - Oxley Act