<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) DECEMBER 22, 1999
SEMELE GROUP INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-16886 36-3465422
-------- ------- ----------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification Number)
ONE CANTERBURY GREEN, STAMFORD, CONNECTICUT 06901
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 363-0849
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
SUMMARY
On December 22, 1999, Semele Group Inc. (the "Company" or the "Registrant"),
acquired an 85% equity interest in Equis II Corporation ("Equis II") that the
Company financed by issuing purchase-money notes totaling $19,586,000 to the
selling Equis II stockholders. In connection with this investment, the Company
also acquired a Special Beneficiary interest in four Delaware Business Trusts
known as AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C,
and AFG Investment Trust D (collectively, the "Trusts") for $9,652,500 that the
Company paid by issuing a non-recourse purchase-money note.
RELATED PARTY CONSIDERATIONS
EQUIS II CORPORATION
The stockholders of Equis II from whom the Company acquired 85% of Equis II
are Gary D. Engle, President, Chief Executive Officer and Chairman of the
Board of Directors of the Company, James A. Coyne, President and Chief
Operating Officer of the Company, and certain trusts established for the
benefit of Mr. Engle's children. Equis II Corporation was organized in the
State of Delaware in 1997 for the purpose of acquiring the Managing Trustee
and holding Class B beneficiary interests in the Trusts, which were sponsored
by an affiliate, Equis Financial Group Limited Partnership ("EFG"). The
operations of Equis II commenced on July 17, 1997. Equis II owns the
following Class B interests: 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) (collectively,
the "Class B Interests"). AFG Investment Trust A owns 20,969 shares of the
Company's common stock and has a note receivable from the Company equal to
$462,353 that matures in April 2000. Through its ownership of the Class B
Interests, Equis II holds approximately 62% of the voting interests in each
of the Trusts, although it is not entitled to vote on certain matters,
principally those involving transactions with related parties. Equis II also
owns AFG ASIT Corporation, the Managing Trustee of the Trusts. As Managing
Trustee of the Trusts, AFG ASIT Corporation has a 1% carried interest in the
Trusts and significant influence over the operations of the Trusts.
In connection with the purchase, the Company entered into a put and call
agreement with Messrs. Engle and Coyne and the Engle family trusts, which gives
the Company a call right to purchase from these Equis II stockholders, and gives
these Equis II stockholders a put right to sell to the Company, the 15% of Equis
II that Messrs. Engle and Coyne and the Engle family trusts continue to own. A
special committee of the Board of Directors of the Company, consisting of
Messrs. Auch, Bartlett and Ungerleider, the Company's independent directors,
unanimously approved the purchase by the Company of 85% of Equis II and the
entering into of the put and call agreement to purchase the remaining 15%
balance.
2
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (CONTINUED)
RELATED PARTY CONSIDERATIONS (CONTINUED)
SPECIAL BENEFICIARY INTERESTS
The Special Beneficiary interests were purchased from EFG for $9,652,500 and
represent an 8.25% non-voting, carried interest in each of the Trusts. The
Special Beneficiary interests were purchased with a non-recourse note having a
10 year term that bears interest at 7% per year. Interest and principal payments
are required to be paid only out of and to the extent of cash distributions paid
to the Company on account of the Special Beneficiary interests.
EQUIS II - TRANSACTION TERMS AND SOURCE OF FUNDS
The Company purchased 85% of the common stock of Equis II by delivering
promissory notes to the selling Equis II stockholders having a total principal
value of $19,586,000. In connection with the acquisition, Messrs. Engle and
Coyne delivered back to the Company, and the Company canceled, the options that
each of them owned to purchase 40,000 shares of Common Stock of the Company at
an exercise price of $9.25 per share that were granted to them on December 30,
1997. A portion of the notes, having an aggregate principal amount of
$14,600,000, mature on October 31, 2005, and bear interest at the annual rate of
7%, of which 3% is due and payable on a current quarterly basis and 4% accrues
to the maturity date. Principal payments of $3,600,000, $4,000,000, $4,000,000
and $3,000,000 are due and payable on May 31, 2000, October 31, 2002, May 31,
2003, and the maturity date, respectively. The $14,600,000 of notes are
prepayable without penalty.
The balance of the promissory notes issued to the Equis II stockholders in
connection with the purchase of 85% of Equis II, which have a total principal
value of $4,986,000, have terms identical to the terms of promissory notes
payable by Messrs. Engle and Coyne to Equis II ($1,901,000) and to Old North
Capital Limited Partnership ($3,085,000). (The Company, through its subsidiary
Ariston Corporation, has a 98% limited partnership interest in Old North Capital
Limited Partnership.) Following the acquisition of 85% of Equis II, therefore,
the Company is effectively the payee of notes and accrued interest from Messrs.
Engle and Coyne of $4,986,000, and it is the payor of notes to Messrs. Engle and
Coyne and the Engle family trusts in the same amount. Of the $4,986,000 of
promissory notes issued by the Company to the selling Equis II stockholders,
promissory notes having a total principal value of $1,901,000 have terms
identical to promissory notes payable to Equis II from Messrs. Engle
($1,262,264) and Coyne ($638,736). These notes bear interest at the annual rate
of 7.5% payable quarterly, and all outstanding principal and interest is due on
August 8, 2007. The $3,085,000 balance of the promissory notes issued by the
Company to the selling Equis II stockholders have terms identical to a
promissory note payable to Old North Capital Limited Partnership from Messrs.
Engle ($2,048,440) and Coyne ($1,036,560), which bears interest at the annual
rate of 11.5% and is payable on demand. The Company intends to make the payments
on the $4,986,000 of promissory notes from the proceeds of payments made by
Messrs. Engle and
3
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (CONTINUED)
EQUIS II - TRANSACTION TERMS AND SOURCE OF FUNDS (CONTINUED)
Coyne on their indebtedness to Equis II and Old North Capital Limited
Partnership. If either individual fails to make timely payments, the Company
will be relieved of its obligations on the $4,986,000 of notes until the default
is cured.
The $19,586,000 of promissory notes are general obligations of the Company
secured by a pledge to the selling Equis II stockholders of the shares of Equis
II owned by the Company. This pledge is currently junior to a prior pledge of
such shares to a third-party financial institution to secure indebtedness owed
by Equis II totaling $19,540,000 at September 30, 1999, but will become a first
priority pledge as soon as the indebtedness of Equis II has been repaid. In the
case of the $14,600,000 of promissory notes, those notes issued to Mr. Engle and
to the Engle family trusts are 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, and those notes issued to Mr.
Coyne are 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, as cause is defined in the executives' employment agreements with the
Company.
The Company may in the future purchase the remaining 15% of the outstanding
shares of common stock of Equis II that it does not currently own by issuing
510,000 shares of common stock of the Company to the selling Equis II
stockholders in payment for the 15% balance, but only if stockholder approval
for payment in shares is obtained. If stockholder approval is not obtained
before December 31, 2000, the put and call agreement with respect to the
purchase of the 15% balance will terminate.
VOTING TRUST
In connection with the transaction, Gary D. Engle became the sole trustee of a
voting trust dated December 16, 1999, which entitles him to vote all of the
Class B Interests owned by Equis II in the four Trusts. The Class B Interests
owned by Equis II represent approximately 62% of the outstanding voting
beneficial interests in each Trust. The voting trust also entitles Mr. Engle to
vote all the shares of AFG ASIT Corporation, the Managing Trustee of each of the
Trusts, owned by Equis II, which are all the shares of AFG ASIT Corporation that
are outstanding. As a result, Mr. Engle has voting control of each of the Trusts
on most matters which require the consent of the beneficiaries of the Trusts and
he has management control of each of the Trusts through his voting control of
AFG ASIT Corporation.
The voting trust may be terminated at any time by the agreement of Equis II and
Mr. Engle. The voting trust will terminate when the $19,586,000 of promissory
notes delivered by the Company in connection with the purchase of 85% of Equis
II have been paid in full. The voting trust will also terminate if Mr. Engle
ceases to be trustee of the voting trust for any reason.
4
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (CONTINUED)
ACCOUNTING TREATMENT
The Company will account for the purchase of the 8.25% Special Beneficiary
interest using the equity method of accounting. As a result of the voting trust
agreement, which vests voting and management control of the Trusts in Mr. Engle,
the Company will treat its investment in Equis II as an investment security
using the equity method of accounting until such time that control is vested in
the Company.
See Item 7 herein for the financial statements of Equis II and pro forma
financial information for the Company.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
5
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Financial Statements of Equis II Corporation
for the nine months ended September 30, 1999 7-19
Audited Financial Statements of Equis II Corporation
for the year ended December 31, 1998 20-35
Pro Forma Financial Statements and Notes 36-40
EXHIBIT 2:
Stock Purchase Agreement dated December 16, 1999 between (i) Gary D. Engle, James
A. Coyne and four trusts for the benefit of Mr. Engle's children and (ii) Semele Group Inc. 42-55
</TABLE>
6
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
The financial statements of Equis II Corporation for the nine months ended
September 30, 1999 are presented below.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS:
Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998 8
Consolidated Statements of Operations
for the nine months ended September 30, 1999 and 1998 9
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the nine months ended September 30, 1999 10
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 11
Notes to the Consolidated Financial Statements 12-19
</TABLE>
7
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 50,015,579 $ 35,941,223
Restricted cash -- 13,000,000
Marketable securities 391,540 --
Marketable securities - affiliate 114,019 86,497
Rents receivable 927,721 3,086,824
Accounts receivable - affiliate 1,027,181 1,300,208
Loan receivable - Kettle Valley 100,000 --
Investment in Kettle Valley 8,837,500 --
Interest receivable - affiliates 150,668 52,500
Notes receivable - affiliates 2,212,353 2,212,353
Investment in Kirkwood 6,060,000 --
Investment - affiliate 668,813 699,626
Equipment at cost, net of accumulated depreciation 97,853,953 120,838,330
Other assets, net 461,766 328,874
----------------- -----------------
$ 168,821,093 $ 177,546,435
================= =================
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable $ 85,729,189 $ 93,179,009
Note payable - affiliate 1,100,000 1,100,000
Accrued interest 663,205 743,813
Accrued interest - affiliates 580,431 321,412
Accrued liabilities 160,092 905,000
Accrued liabilities - affiliate 2,272,775 1,798,734
Deferred rental income 265,066 914,414
Other liabilities 3,013,206 197,950
Cash distributions payable 899,201 899,201
----------------- -----------------
Total liabilities 94,683,165 100,059,533
----------------- -----------------
Minority interest 73,843,537 78,075,183
----------------- -----------------
Stockholders' equity (deficit):
Common stock, $0.01 par value, 3,000 shares authorized,
issued and outstanding 30 30
Additional paid in capital 4,207,129 4,207,129
Accumulated deficit (3,961,144) (4,795,440)
Net unrealized gain on marketable securities 48,376 --
----------------- -----------------
Total stockholders' equity (deficit) 294,391 (588,281)
----------------- -----------------
$ 168,821,093 $ 177,546,435
================= =================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
8
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Income:
Lease revenue $ 21,205,448 $ 30,325,076
Interest income 1,977,186 1,973,700
Interest income - affiliates 132,750 34,582
Gain on sale of equipment 3,618,718 2,590,805
Management fee income 80,238 --
Other income 1,054,759 --
------------------ ------------------
Total income 28,069,099 34,924,163
------------------ ------------------
Expenses:
Depreciation and amortization 11,840,283 19,585,289
Interest expense 5,574,539 7,577,091
Interest expense - affiliates 259,020 176,221
Equipment management fees - affiliate 1,070,079 1,386,624
Operating expenses - affiliate 2,320,079 1,715,433
Minority interest 6,170,803 4,140,232
------------------ ------------------
Total expenses 27,234,803 34,580,890
------------------ ------------------
Net income $ 834,296 $ 343,273
================== ==================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
9
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the nine months ended September 30, 1999
(Unaudited)
<TABLE>
<S> <C>
Common stock:
Balance at beginning of period $ 30
Common stock issued --
------------------
Balance at end of period $ 30
------------------
Additional paid in capital:
Balance at beginning of period $ 4,207,129
Common stock issued --
------------------
Balance at end of period $ 4,207,129
------------------
Accumulated deficit:
Balance at beginning of period $ (4,795,440)
Net income 834,296 834,296
------------------
Balance at end of period $ (3,961,144)
------------------
Net unrealized gain on marketable securities:
Balance at beginning of period $ --
Unrealized gain on marketable securities 48,376 48,376
------------------
Balance at end of period $ 48,376
================== --------------
Comprehensive income for the period $ 882,672
==============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
10
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 834,296 $ 343,273
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 11,840,283 19,585,289
Gain on sale of equipment (3,618,718) (2,590,805)
Minority interest (4,281,010) (2,732,304)
Changes in assets and liabilities:
Decrease (increase) in:
Cash held in escrow -- (56,891)
Rents receivable 2,159,103 2,591,220
Accounts receivable - affiliate 273,027 600,210
Loan receivable - Kettle Valley (100,000) --
Interest receivable - affiliates (98,168) --
Other assets (258,834) --
Increase (decrease) in:
Accrued interest (80,608) (125,678)
Accrued interest - affiliates 259,019 176,221
Accrued liabilities (744,908) 631,583
Accrued liabilities - affiliate 474,041 777,689
Deferred rental income (649,348) 101,375
Other liabilities (197,950) --
Notes receivable - affiliates -- (1,750,000)
---------------- ----------------
Net cash from operating activities 5,810,225 17,551,182
---------------- ----------------
Cash flows from (used in) investing activities:
Investment in Kettle Valley (6,204,347) --
Investment in Kirkwood (6,060,000) --
Purchase of marketable securities (321,322) --
Other liabilities 3,013,206 --
Purchase of equipment -- (194,756)
Proceeds from equipment sales 14,888,754 7,324,856
Investment - affiliate 30,813 (712,313)
---------------- ----------------
Net cash from investing activities 5,347,104 6,417,787
---------------- ----------------
Cash flows from (used in) financing activities:
Principal payments - notes payable (10,082,973) (26,027,586)
Restricted cash 13,000,000 13,082,834
---------------- ----------------
Net cash from (used in) financing activities 2,917,027 (12,944,752)
---------------- ----------------
Net increase in cash and cash equivalents 14,074,356 11,024,217
Cash and cash equivalents at beginning of period 35,941,223 20,357,737
---------------- ----------------
Cash and cash equivalents at end of period $ 50,015,579 $ 31,381,954
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,655,148 $ 7,702,769
================ ================
Supplemental disclosure of non-cash activities:
See Note 3 to the financial statements.
</TABLE>
The accompanying notes are an integral part of
these financial statements.
11
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OWNERSHIP
Equis II Corporation (the "Company") is a special purpose S-corporation
that was organized in the State of Delaware in 1997 for the purpose of acquiring
and holding certain beneficiary interests in four Delaware Business Trusts (the
"Trusts") sponsored by an affiliate, Equis Financial Group Limited Partnership
("EFG"). The operations of the Company commenced on July 17, 1997. On July 18,
1997, EFG purchased newly issued Class B Subordinated Interests in 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) (collectively, the "Interests"). The purchase of
the Interests resulted in EFG having voting control of each of the Trusts. The
Interests were initially purchased by EFG at a cost of $5 per Interest for an
aggregate purchase price of $39,900,695. EFG borrowed all of the funds necessary
to purchase the Interests as follows: $35,910,625 under a Demand Note from an
institutional lender and $3,990,070 under a Demand Note from Old North Capital
Limited Partnership ("ONC"), an affiliate of EFG and the Company. The
acquisition of the Interests was accounted for by EFG under the purchase method
of accounting. On the same day, EFG sold and transferred all of the Interests to
the Company at EFG's cost. The Company also borrowed the funds necessary to
purchase the Interests by entering into an Acquisition Credit Agreement with the
aforementioned institutional lender for $35,910,625 and assuming the ONC Demand
Note. The ONC Demand Note and accrued interest of $3,990,070 and $217,059,
respectively, were assumed by Gary D. Engle and James A. Coyne, partners of ONC
and stockholders of the Company, on December 31, 1997.
On July 17, 1997, the Company acquired AFG ASIT Corporation, the Managing
Trustee of the Trusts, from EFG in exchange for a Demand Note of $1,100,000. The
acquisition, which was between related parties, was recorded at historical cost.
The difference between the face amount of the demand note and the net amount of
assets and liabilities assumed was reflected as a deemed distribution in the
consolidated statement of stockholders' equity for the period ended December 31,
1997. As Managing Trustee of the Trusts, AFG ASIT Corporation has a 1% carried
ownership interest in the Trusts and significant influence over the operations
of the Trusts.
The Company has two stockholders, Gary D. Engle, President, and James A.
Coyne, Vice President.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, AFG ASIT Corporation and the accounts
of the Trusts. The Trusts have been consolidated as a result of the Company's
ownership of the Interests, which represent a majority of the Trusts'
outstanding voting interests. All intercompany balances have been eliminated in
consolidation.
OTHER ASSETS
Other assets, consisting of capitalized borrowing costs, are amortized
using the straight-line method over the related debt amortization period of 5
years. Accumulated amortization at September 30, 1999 and December 31, 1998
amounted to $266,893 and $140,951, respectively.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
12
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Marketable securities
consist of equity securities which are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. The Company
recorded an unrealized gain on available-for-sale securities of $48,376 during
the nine months ended September 30, 1999 that is included as a separate
component of stockholders' equity.
INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The stockholders are responsible for reporting their
proportionate share of the Company's taxable income or loss and other tax
attributes on their individual tax returns.
REVENUE RECOGNITION
Rents are payable to the Trusts monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$33,682,536 are due as follows:
<TABLE>
<S> <C>
For the year ending September 30, 2000 $ 17,954,302
2001 7,753,574
2002 5,850,035
2003 1,831,007
2004 293,618
-------------------
Total $ 33,682,536
===================
</TABLE>
EQUIPMENT ON LEASE
All equipment is owned by the Trusts and was acquired from EFG, one of
its affiliates or from third-party sellers. Equipment at cost means the
actual cost paid by the Trusts to acquire the equipment, including
acquisition fees. Where equipment was acquired from EFG or an affiliate,
equipment at cost reflects the actual price paid for the equipment by EFG or
the affiliate plus all actual costs incurred by EFG or the affiliate while
carrying the equipment, including all liens and encumbrances, less the amount
of all primary term rents earned by EFG or the affiliate prior to selling the
equipment. Where the seller of the equipment was a third party, equipment at
cost reflects the seller's invoice price.
DEPRECIATION AND AMORTIZATION
The Trusts' depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is 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 Trusts depreciate the difference between (i) the
cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Trusts continue to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
13
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trusts and which will maximize
total cash returns for each asset.
ACCRUED LIABILITIES - AFFILIATE
Unpaid fees and operating expenses paid by EFG on behalf of the Company or
its affiliates and accrued but unpaid administrative charges and management fees
are reported as accrued liabilities - affiliate on the accompanying Consolidated
Balance Sheets.
MINORITY INTEREST
The Company owns approximately 60% of the Trusts' outstanding voting
securities in addition to all of the common stock of the Trusts' Managing
Trustee, AFG ASIT Corporation. Accordingly, the accompanying financial
statements consolidate the results of the Trusts. The Company owns approximately
22% and 21% of the Trusts' partners' capital at September 30, 1999 and December
31, 1998, respectively. The outside investors' interests in the Trusts are
reflected on the accompanying Consolidated Balance Sheets as minority interest
and their share of income is reflected as minority interest on the Consolidated
Statements of Operations.
NOTE 2 - EQUIPMENT
At September 30, 1999, the Trusts' historical equipment cost and
accumulated depreciation was $184,715,418 and $86,861,465, respectively.
The Trusts are engaged, among other things, in the business of leasing
equipment to third parties and own a diversified portfolio of assets for such
purpose. Equipment types include, but are not limited to, commercial aircraft,
ocean-going vessels, materials handling, construction and mining, manufacturing,
computers and peripherals, and retail store fixtures. As equipment is sold to
third parties, or otherwise disposed of, the Trusts recognize a gain or loss
equal to the difference between the net book value of the equipment at the time
of sale or disposition and the proceeds realized upon sale or disposition. The
ultimate realization of estimated residual value in the equipment is dependent
upon, among other things, EFG's ability to maximize proceeds from selling or
re-leasing the equipment upon the expiration of the primary lease terms. At
September 30, 1999, approximately 96% of the Trusts' aggregate equipment was
subject to lease agreements and approximately 4% was held for sale or re-lease
or being rented on a month-to-month basis. Equipment held for sale or re-lease
included a SAAB SF340A aircraft formerly leased to Comair, Inc. having a cost
and net book value of $4,421,116 and $1,231,246, respectively. AFG ASIT
Corporation is actively seeking the sale of the SAAB SF340A aircraft and the
sale or re-lease of all other equipment not on lease. In the opinion of EFG, the
acquisition cost of the Trusts' equipment did not exceed its fair market value.
NOTE 3 - INVESTMENT IN KETTLE VALLEY
On March 1, 1999, certain Trusts (collectively, the "Buyers") formed
EFG/Kettle Development LLC, a Delaware limited liability company, for the
purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a
real estate development in Kelowna, British Columbia called Kettle Valley.
EFG/Kettle Development LLC, upon receiving the Buyers' equity investment,
purchased the Interest from a special purpose company ("SPC") whose subsidiaries
own a 99.9% limited partnership interest in Kettle Valley Development Limited
Partnership ("KVD LP"). The SPC and its subsidiaries were established by the
seller, in part, for income tax purposes and have no business interests other
than
14
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
the development of Kettle Valley. KVD LP is a Canadian Partnership that owns the
property, consisting of approximately 280 acres of land. The project, which is
in the early stages of being marketed to home buyers, is zoned for 1,000
residential units in addition to commercial space that, currently, is being
constructed. The seller is an unaffiliated third-party company and has retained
the remaining 50.1% ownership interest in the SPC. A newly organized Canadian
affiliate of EFG replaced the original general partner of KVD LP on March 1,
1999.
The Buyer's ownership share in EFG/Kettle Development LLC had a cost of
$8,750,000, which was funded with cash of $6,116,847 and a non-recourse note for
$2,633,153. The note bears interest at an annualized rate of 7.5% and will be
fully amortized over 34 months commencing April 1, 1999. The note is secured
only by the Buyer's stock interests in the SPC. In addition, the seller
purchased a residual sharing interest in a Boeing 767-300 owned by the Buyers
and leased to Scandinavian Airlines System. The seller paid $3,013,206 to the
Buyers for the residual interest, which is subordinate to certain preferred
payments to be made to the Buyers in connection with the aircraft. Payment of
the residual interest is due only to the extent that the Buyers receive net
residual proceeds from the aircraft. The residual interest is non-recourse to
the Buyers and is reflected as Other Liabilities on the accompanying Balance
Sheet at September 30, 1999. Investment in Kettle Valley at September 30, 1999
represents actual cost paid by the Trusts plus a 1% acquisition fee.
NOTE 4 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
As a result of an asset exchange in 1997, one of the Trusts owns 20,969
common shares of an affiliate, Semele Group Inc. ("Semele"), and has a
beneficial interest in a Note from Semele (the "Semele Note") of $462,353. The
Semele Note matures in April, 2000 and bears an annual interest rate of 10% with
mandatory principal reductions, if and to the extent that net proceeds are
received by Semele from the sale or refinancing of its principal real estate
asset consisting of an undeveloped 274-acre parcel of land near Malibu,
California ("Rancho Malibu"). The Trust recognized interest income of $34,582
related to the Semele Note during the nine months ended September 30, 1999.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the nine months ended September 30, 1999, the Trust increased
the carrying value of its investment in Semele common stock to $5.4375 per share
(the quoted price on the NASDAQ SmallCap market at September 30, 1999),
resulting in an unrealized gain of $27,522.
NOTE 5 - INVESTMENT IN KIRKWOOD
On May 1, 1999, the Trusts and Semele formed EFG/Kirkwood Capital LLC
("EFG/Kirkwood") for the purpose of acquiring preferred and common stock
interests in Kirkwood Associates Inc. ("KAI"). The Trusts purchased Class A
Interests in EFG/Kirkwood and Semele purchased Class B Interests in
EFG/Kirkwood. Generally, the Class A Interest holders are entitled to certain
preferred returns prior to distribution payments to the Class B Interest
holders. KAI owns a ski resort, a local public utility, and land which is held
for development. The resort is located in Kirkwood, California and is
approximately 30 miles from South Lake Tahoe, Nevada. The Trusts' ownership
interest in EFG/Kirkwood had a cost of $6,060,000, including a 1% acquisition
fee ($60,000) paid to EFG.
NOTE 6 - NOTES PAYABLE
To finance the Company's investment in the Interests, the Company borrowed
$35,910,625 under an Acquisition Credit Agreement from an institutional lender
and assumed $3,990,070 under the ONC Demand Note from EFG. The term note with
the institutional lender bears a fluctuating interest rate based on either LIBOR
plus 4.5% or Prime plus
15
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
2%, the applicable rate being selected at the discretion of the Company. At
September 30, 1999, the rate was 10.25%. The term note is secured by the general
assets and stock of the Company. In addition, EFG has pledged its Special
Beneficiary Interests in the Trusts as security for the term loan. Repayment of
principal and interest on the term loan is governed by terms specified in the
Acquisition Credit Agreement. At September 30, 1999, the term loan had a
principal balance outstanding of $19,540,000.
Notes payable at September 30, 1999 also consisted of installment notes of
$66,189,189 payable to banks and institutional lenders. The notes bear interest
rates ranging between 6.76% and 14.46%, except for one note, which bears a
fluctuating interest rate based on LIBOR (5.38% at September 30, 1999) plus a
margin. All of the installment notes are non-recourse, and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trusts have balloon payment obligations of $40,450,000, $4,117,864 and
$1,129,684 at the expiration of certain lease terms (those related to an SAS
Aircraft, certain rail equipment and an MD-87 jet aircraft leased by Reno Air,
Inc., respectively).
Future principal payments due in connection with the above debt obligations
are as follows:
<TABLE>
<S> <C>
For the year ending September 30, 2000 $ 16,311,082
2001 47,857,819
2002 6,487,508
2003 14,786,441
2004 286,339
-------------------
Total $ 85,729,189
===================
</TABLE>
The Company issued a Demand Note in the amount of $1,100,000 (the "EFG
Note") to acquire AFG ASIT Corporation from EFG. The note bears an annual
interest rate of 11.5% and repayments thereof are subordinate to the Company's
institutional indebtedness. The EFG Note is recorded as note payable - affiliate
on the Consolidated Balance Sheet. The carrying amount of the Company's
indebtedness approximates fair value at September 30, 1999.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company purchased the Interests and acquired AFG ASIT Corporation from
EFG (see Note 1). Mr. Engle, a stockholder in the Company, owns and controls the
general partner of EFG and is a limited partner in EFG. Mr. Coyne, also a
stockholder in the Company, is an officer of EFG. EFG holds an 8.25% Special
Beneficiary Interest in each of the Trusts and has deferred collection of
certain distributions it is entitled to receive as Special Beneficiary in the
Trusts until such time as the institutional indebtedness of the Company has been
satisfied. Accordingly, EFG entered into a Pledge and Security Agreement (the
"Pledge Agreement") with the Company's institutional lender. In consideration
for EFG's pledge, the Company created a note in favor of EFG which accrues the
equivalent of all amounts absorbed by the Company as a result of the Pledge
Agreement. The accumulated debt balance to EFG accrues interest at the rate of
11.5% per annum and is subordinate to the Company's institutional indebtedness.
At September 30, 1999, the Company owed EFG principal of $2,096,714 for such
amounts loaned pursuant to the Pledge Agreement.
At September 30, 1999, the Company had accrued interest of $580,431 related
to the EFG Note (see Note 6) and amounts loaned by EFG pursuant to the Pledge
Agreement. This amount is recorded as accrued interest - affiliates on the
accompanying consolidated balance sheet. The collection of such amount is
deferred until such time as the institutional indebtedness of the Company has
been satisfied.
On August 8, 1998, the Company extended a loan of $1,750,000 to Mr. Engle
and Mr. Coyne. The corresponding note receivable bears an interest rate of 7.5%
and is payable on August 8, 2007.
16
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
All operating expenses incurred by the Trusts are paid by EFG on behalf of
the Trusts and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the nine months ended September 30, 1999 and
1998, which were paid or accrued by the Trusts to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Equipment acquisition fees $ 63,212 $ 2,556
Equipment management fees 1,070,079 1,386,624
Administrative charges 481,256 232,299
Reimbursable operating
expenses due to third parties 1,818,916 1,441,218
--------------- ---------------
Total $ 3,433,463 $ 3,062,697
=============== ===============
</TABLE>
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trusts. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trusts for each asset
acquired for the Trusts' initial asset portfolio. For reinvestment acquisitions
during the Trusts' initial reinvestment periods, EFG was compensated by an
amount equal to 3% of Asset Base Price paid by the Trusts. For subsequent
reinvestment activity, EFG is compensated by an amount equal to 1% of asset base
price paid by the Trusts. For management services, EFG is compensated by an
amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross
full payout lease rental revenue received by the Trusts with respect to assets
acquired on or prior to the expiration of their initial reinvestment periods or
(ii) 2% of gross lease rental revenue received by the Trusts for equipment
acquisitions subsequent to the initial reinvestment periods. Both of these fees
are subject to certain limitations defined in the Trust Agreements. For
non-equipment investments other than cash, AFG ASIT Corporation receives an
annualized management fee of 1%.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trusts. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trusts which
are reimbursed to EFG at actual cost. Administrative charges and reimburseable
operating expenses for the nine months ended September 30, 1999 include
adjustments for 1998 actual costs of approximately $133,000 and $96,000,
respectively.
All equipment was purchased from EFG, one of its Affiliates, or directly
from third-party sellers. The Trusts' purchase price is determined by the method
described in Note 1, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid by the lessees
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account prior to remittance to the Trusts.
At September 30, 1999, the Trusts were owed $1,027,181 by EFG for such funds and
the interest thereon. These funds were remitted to the Trusts in October 1999.
During 1998, one of the Trusts purchased limited partnership units (the
"Units") in AFG International Limited Partnership (the "Partnership"), a real
estate limited partnership sponsored by EFG that owns two commercial buildings
leased to an investment-grade educational institution. The Trust purchased 7.25
Units at a cost of $100,000 per unit for an aggregate purchase price of
$725,000. As a result of the purchase of the Units, the Trust owns approximately
22.5% of the Partnership. The Trust accounts for its investment in the
Partnership under the equity method of accounting. As such, the carrying value
of the Trust's investment in the Partnership is increased or decreased by an
amount equal to the Trust's share of the Partnership's income or losses,
respectively, and decreased for any
17
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
distributions received from the Partnership. At September 30, 1999, this
investment had a carrying balance of $668,813 and is reflected as Investment -
affiliate on the accompanying Consolidated Balance Sheet.
NOTE 8 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trusts (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including AFG ASIT Corporation, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit." The Class Action Lawsuit was divided into two sub-classes on
March 22, 1999.
On May 26, 1999, the Court issued its Order and Final Judgment approving
settlement of the Class Action Lawsuit with respect to claims asserted by the
Plaintiffs on behalf of the sub-class that includes the Trusts. Claims involving
the second sub-class, not including the Trusts, remain pending. As a result of
the settlement, the Trusts declared a special cash distribution of $4,000,000,
including legal fees for Plaintiffs' counsel of $215,000, that was paid in July
1999. In addition, the Company agreed to commit $9,000,000 of its Class B
Capital Contributions (paid in connection with its purchase of Class B Interests
in July 1997) to the Trusts for the Trusts' investment purposes. In the absence
of this commitment, the Company would have been entitled to receive a Class B
Capital Distribution for this amount pursuant to the Trust Agreement, as
amended.
In addition to the foregoing, the Trusts are parties to other lawsuits that
have arisen out of the conduct of their business, principally involving disputes
or disagreements with lessees over lease terms and conditions. The following
action was resolved during the nine months ended September 30, 1999:
ACTION INVOLVING NATIONAL STEEL CORPORATION
EFG, on behalf of the Trusts and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Trusts, National Steel Corporation ("National Steel"). The
Complaint sought reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. On May 11, 1999, the
parties executed a comprehensive settlement agreement to resolve all outstanding
issues, including reimbursement to the Trusts for the disputed sales tax items
referenced above. This matter did not have a material effect on the Trusts'
financial position or results of operations.
18
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
NOTE 9 - YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Company uses information systems provided by EFG and has no information systems
of its own. EFG has adopted a plan to address the Year 2000 Issue that consists
of four phases: assessment, remediation, testing, and implementation and has
elected to utilize principally internal resources to perform all phases. EFG has
completed its Year 2000 project at an aggregate cost of less than $50,000 and at
a di minimus cost to the Company. All costs incurred in connection with EFG's
Year 2000 project have been expensed as incurred.
EFG's primary information software was coded by a third party at the point
of original design to use a four digit field to identify calendar year. All of
the Company's and the Trusts' lease billings, cash receipts and equipment
remarketing processes are performed using this proprietary software. In
addition, EFG has gathered information about the Year 2000 readiness of
significant vendors and third party servicers and continues to monitor
developments in this area. All of EFG's peripheral computer technologies, such
as its network operating system and third-party software applications, including
payroll and electronic banking, have been evaluated for potential programming
changes and have required only minor modifications to function properly with
respect to dates in the year 2000 and thereafter. EFG understands that each of
its, the Company's and the Trusts' significant vendors and third-party servicers
are in the process, or have completed the process, of making their systems Year
2000 compliant. Substantially all parties queried indicated that their systems
are Year 2000 compliant.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Company's or Trusts' results of
operations, liquidity, or financial position. The Company's and Trusts'
equipment leases were structured as triple net leases, meaning that the lessees
are responsible for, among other things, (i) maintaining and servicing all
equipment during the lease term, (ii) ensuring that all equipment functions
properly and is returned in good condition, normal wear and tear excepted, and
(iii) insuring the assets against casualty and other events of loss.
Non-compliance with lease terms on the part of a lessee, including failure to
address Year 2000 Issues, could result in lost revenues and impairment of
residual values of the Company's or Trusts' equipment assets under a worst-case
scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its, the
Company's or the Trusts' business operations. However, EFG has no means of
ensuring that all customers, vendors and third-party servicers will conform
ultimately to Year 2000 standards. The effect of this risk to the Company is not
determinable.
NOTE 10 - SUBSEQUENT EVENT
In October 1999, certain Trusts sold a Boeing 747 aircraft formerly leased
to British Airways PLC that had been fully depreciated. The Trusts received sale
proceeds of $2,000,000.
19
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
The audited financial statements of Equis II Corporation for the year ended
December 31, 1998 are presented below.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Auditors 21
Consolidated Balance Sheets
at December 31, 1998 and 1997 22
Consolidated Statements of Operations
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operation) to December 31, 1997 23
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operation) to December 31, 1997 24
Consolidated Statements of Cash Flows
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operation) to December 31, 1997 25
Notes to the Consolidated Financial Statements 26-35
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the stockholders of Equis II Corporation:
We have audited the accompanying consolidated balance sheets of Equis II
Corporation as of December 31, 1998 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the year ended December 31, 1998 and the period from July 17, 1997
(commencement of operations) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equis II Corporation at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for the year ended December 31, 1998 and the period from July 17,
1997 (commencement of operations) to December 31, 1997 in conformity with
generally accepted accounting principles.
As described in Note 1, the accompanying consolidated financial statements of
the Company for the period from inception (July 17, 1997) through December 31,
1997, have been restated to include the accounts of certain Trusts controlled by
the Company.
Ernst & Young LLP
Boston, Massachusetts
June 30, 1999
21
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Restated (See Note 1)
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 35,941,223 $ 20,357,737
Restricted cash 13,000,000 26,006,553
Cash held in escrow -- 3,017,318
Rents receivable 3,086,824 4,162,290
Accounts receivable - affiliate 1,300,208 2,067,853
Interest receivable - affiliates 52,500 --
Notes receivable - affiliates 2,212,353 462,353
Investment securities - affiliate 86,497 157,270
Investment - affiliate 699,626 --
Equipment at cost, net of accumulated depreciation 120,838,330 150,605,602
Other assets, net 328,874 423,592
----------------- -----------------
$ 177,546,435 $ 207,260,568
================= =================
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable $ 93,179,009 $ 122,660,437
Note payable - affiliate 1,100,000 1,100,000
Accrued interest 743,813 976,997
Accrued interest - affiliate 321,412 70,123
Accrued liabilities 905,000 54,700
Accrued liabilities - affiliate 1,798,734 834,549
Deferred rental income 914,414 281,324
Other liabilities 197,950 --
Cash distributions payable 899,201 913,243
----------------- -----------------
Total liabilities 100,059,533 126,891,373
----------------- -----------------
Minority interest 78,075,183 79,869,334
----------------- -----------------
Stockholders' equity (deficit):
Common stock, $0.01 par value, 3,000 shares authorized
and issued 30 30
Additional paid in capital 4,207,129 4,207,129
Accumulated deficit (4,795,440) (3,592,410)
Net unrealized losses -- (114,888)
----------------- -----------------
Total stockholders' equity (deficit) (588,281) 499,861
----------------- -----------------
$ 177,546,435 $ 207,260,568
================= =================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
22
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operations) to December 31, 1997
<TABLE>
<CAPTION>
Restated (See Note 1)
Period from July 17,
1997 (commencement
of operations) to
December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Income:
Lease revenue $ 38,730,887 $ 23,268,420
Interest income 2,561,342 1,402,495
Interest income - affiliates 98,735 --
Gain (loss) on sale/exchange of equipment 2,872,776 (1,397,772)
------------------ ------------------
Total income 44,263,740 23,273,143
------------------ ------------------
Expenses:
Depreciation and amortization 24,052,618 16,495,596
Write-down of investment securities - affiliate 186,105 --
Interest expense 9,676,338 4,915,321
Interest expense - affiliate 251,288 287,212
Equipment management fees
- affiliate 1,772,762 1,052,202
Operating expenses - affiliate 2,241,486 1,334,299
Minority interest 7,286,173 1,413,050
------------------ ------------------
Total expenses 45,466,770 25,497,680
------------------ ------------------
Net loss $ (1,203,030) $ (2,224,537)
================== ==================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
23
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operations) to December 31, 1997
<TABLE>
<CAPTION>
Restated (See Note 1)
Period from July 17,
1997 (commencement
of operations) to
December 31,
1998 1997
-------------------------------- -----------------------------------
<S> <C> <C>
Common Stock:
Balance at beginning of period $ 30 $ --
Common stock issued (3,000 shares in 1997) -- 30
------------------ ------------------
Balance at end of period $ 30 $ 30
------------------ ------------------
Additional Paid in Capital:
Balance at beginning of period $ 4,207,129 $ --
Assumption of debt by stockholders -- 4,207,129
------------------ ------------------
Balance at end of period $ 4,207,129 $ 4,207,129
------------------ ------------------
Accumulated Deficit:
Balance at beginning of period $ (3,592,410) $ --
Net loss (1,203,030) (1,203,030) (2,224,537) (2,224,537)
Deemed distribution to affiliate -- (1,100,000)
Accumulated deficit - ASIT Corp. -- (267,873)
------------------ ------------------
Balance at end of period $ (4,795,440) $ (3,592,410)
------------------ ------------------
Unrealized Loss on Investment Securities - Affiliate:
Balance at beginning of period $ (114,888) $ --
Unrealized loss on investment securities (70,502) (70,502) (114,888) (114,888)
Reclassification adjustment for write-down 185,390 185,390 --
------------------ ------------------
of investment securities - affiliate
Balance at end of period $ -- $ (114,888)
================== -------------- ================== --------------
Comprehensive loss $ (1,088,142) $ (2,339,425)
============== ==============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
24
<PAGE>
EQUIS II CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended December 31, 1998 and the period July 17, 1997
(commencement of operations) to December 31, 1997
<TABLE>
<CAPTION>
Restated (See Note 1)
Period from July 17,
1997 (commencement
of operations) to
December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (1,203,030) $ (2,224,537)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 24,052,618 16,495,596
(Gain) loss on sale/exchange of equipment (2,872,776) 1,397,772
Write-down of investment securities - affiliate 186,105 --
Minority interest (1,808,637) (16,425,013)
Changes in assets and liabilities:
Decrease (increase) in:
Cash held in escrow 3,017,318 (3,017,318)
Rents receivable 1,075,466 3,759,630
Accounts receivable - affiliate 767,645 (660,218)
Interest receivable - affiliates (52,500) --
Notes receivable - affiliates (1,750,000) --
Other assets -- (469,825)
Increase (decrease) in:
Accrued interest (233,184) (123,448)
Accrued interest - affiliates 251,289 70,123
Accrued liabilities 850,300 (6,525)
Accrued liabilities - affiliate 964,185 545,865
Deferred rental income 633,090 (291,770)
Other liabilities 197,950 --
---------------- ----------------
Net cash from (used in) operating activities 24,075,839 (949,668)
---------------- ----------------
Cash flows from (used in) investing activities:
Dividend received -- 41,939
Purchase of equipment (194,756) (68,016,808)
Proceeds from equipment sales 8,876,904 3,348,239
Investment - affiliate (699,626) --
---------------- ----------------
Net cash from (used in) investing activities 7,982,522 (64,626,630)
---------------- ----------------
Cash flows from (used in) financing activities:
Proceeds from capital contributions -- 4,275,744
Restricted cash 13,006,553 (26,006,553)
Proceeds from notes payable -- 92,904,129
Principal payments - notes payable (29,481,428) (19,196,213)
---------------- ----------------
Net cash from (used in) financing activities (16,474,875) 51,977,107
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 15,583,486 (13,599,191)
Cash and cash equivalents at beginning of period 20,357,737 33,956,928
---------------- ----------------
Cash and cash equivalents at end of period $ 35,941,223 $ 20,357,737
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,909,521 $ 5,038,769
================ ================
Supplemental disclosure of non-cash activities:
Purchase of AFG ASIT Corporation by indebtedness to an affiliate of
$1,100,000 in 1997.
During 1997, a Trust sold equipment to third parties which assumed related
debt and interest of $2,624,639 and $13,998, respectively.
See Notes 1, 2 and 3 to the financial statements.
</TABLE>
The accompanying notes are an integral part of
these financial statements.
25
<PAGE>
EQUIS II CORPORATION
Notes to the Consolidated Financial Statements
December 31, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OWNERSHIP
Equis II Corporation (the "Company") is a special purpose S-corporation
that was organized in the State of Delaware in 1997 for the purpose of acquiring
and holding certain beneficiary interests in four Delaware Business Trusts (the
"Trusts") sponsored by an affiliate, Equis Financial Group Limited Partnership
("EFG"). The operations of the Company commenced on July 17, 1997. On July 18,
1997, EFG purchased newly issued Class B Subordinated Interests in 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) (collectively, the "Interests"). The purchase of
the Interests resulted in EFG having voting control of each of the Trusts. The
Interests were initially purchased by EFG at a cost of $5 per Interest for an
aggregate purchase price of $39,900,695. EFG borrowed all of the funds necessary
to purchase the Interests as follows: $35,910,625 under a Demand Note from an
institutional lender and $3,990,070 under a Demand Note from Old North Capital
Limited Partnership ("ONC"), an affiliate of EFG and the Company. The
acquisition of the Interests was accounted for by EFG under the purchase method
of accounting. On the same day, EFG sold and transferred all of the Interests to
the Company at EFG's cost. The Company also borrowed the funds necessary to
purchase the Interests by entering into an Acquisition Credit Agreement with the
aforementioned institutional lender for $35,910,625 and assuming the ONC Demand
Note. The ONC Demand Note and accrued interest of $3,990,070 and $217,059,
respectively, were assumed by Gary D. Engle and James A. Coyne, partners of ONC
and stockholders of the Company, on December 31, 1997.
On July 17, 1997, the Company acquired AFG ASIT Corporation, the Managing
Trustee of the Trusts, from EFG in exchange for a Demand Note of $1,100,000. The
acquisition, which was between related parties, was recorded at historical cost.
The difference between the face amount of the demand note and the net amount of
assets and liabilities assumed was reflected as a deemed distribution in the
consolidated statement of stockholders' equity for the period ended December 31,
1997. As Managing Trustee of the Trusts, AFG ASIT Corporation has a 1% carried
ownership interest in the Trusts and significant influence over the operations
of the Trusts.
The Company has two stockholders, Gary D. Engle, President, and James A.
Coyne, Vice President.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, AFG ASIT Corporation and the accounts
of the Trusts. The Trusts have been consolidated as a result of the Company's
ownership of the Interests, which represent a majority of the Trusts'
outstanding voting interests. All intercompany balances have been eliminated in
consolidation.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and the display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income (loss). At December 31, 1997, the cumulative amount of
other comprehensive losses was $114,888.
PRIOR PERIOD ADJUSTMENT - The accompanying consolidated financial
statements of the Company for the period from inception (July 17, 1997) through
December 31, 1997, have been restated to include the accounts of the Trusts,
which are controlled by the Company, and which were excluded in error from the
previously issued consolidated financial statements of the Company.
26
<PAGE>
EQUIS II CORPORATION
Notes to the Consolidated Financial Statements
(Continued)
OTHER ASSETS
Other assets, consisting of capitalized borrowing costs, are amortized
using the straight-line method over the related debt amortization period of 5
years. Accumulated amortization at December 31, 1998 and 1997 amounted to
$140,951 and $46,983, respectively.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS AND RESTRICTED CASH
The Company and its affiliates consider liquid investment instruments
purchased with a maturity of three months or less to be cash equivalents. From
time to time, the Company and its affiliates invest excess cash with large
institutional banks in federal agency discount notes and reverse repurchase
agreements with overnight maturities. Under the terms of the agreements, title
to the underlying securities passes to the Company or its affiliates. The
securities underlying the agreements are book entry securities. At December 31,
1998, the Company and its affiliates had $43,255,000 invested in federal agency
discount notes and reverse repurchase agreements secured by U.S. Treasury Bills
or interests in U.S. Government securities. Cash of $13,000,000 was restricted
as to its use pending the outcome of the Class Action Lawsuit described in Note
6. See also Note 8 regarding settlement of the Class Action Lawsuit.
INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The stockholders are responsible for reporting their
proportionate share of the Company's taxable income or loss and other tax
attributes on their individual tax returns.
REVENUE RECOGNITION
Rents are payable to the Trusts monthly, quarterly or semi-annually and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$51,858,158 are due as follows:
<TABLE>
<S> <C> <C>
For the year ending December 31, 1999 $ 23,680,520
2000 16,512,899
2001 5,674,087
2002 4,479,006
2003 1,364,837
Thereafter 146,809
---------------
Total $ 51,858,158
===============
</TABLE>
EQUIPMENT ON LEASE
All equipment is owned by the Trusts and was acquired from EFG, one of
its affiliates or from third-party sellers. Equipment at cost means the actual
cost paid by the Trusts to acquire the equipment, including acquisition fees.
Where equipment was acquired from EFG or an affiliate, equipment at cost
reflects the actual price paid for the equipment by EFG or the affiliate plus
all actual costs incurred by EFG or the affiliate while carrying the equipment,
including all liens and encumbrances, less the amount of all primary term rents
earned by EFG or the affiliate prior to
27
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
selling the equipment. Where the seller of the equipment was a third party,
equipment at cost reflects the seller's invoice price.
DEPRECIATION AND AMORTIZATION
The Trusts' depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is 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 Trusts depreciate the difference between (i) the
cost of the asset and (ii) the estimated residual value of the asset on a
straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Trusts continue to depreciate the remaining net book value of the
asset on a straight-line basis over the asset's remaining economic life.
Periodically, the Managing Trustee, AFG ASIT Corporation, evaluates the net
carrying value of equipment to determine whether it exceeds estimated net
realizable value. For purposes of this comparison, "net carrying value"
represents, at a given date, the net book value (equipment cost less accumulated
depreciation for financial reporting purposes) of the Trusts equipment and "net
realizable value" represents, at the same date, the aggregate undiscounted cash
flows resulting from future contracted lease payments plus the estimated
residual value of the Trusts' equipment. AFG ASIT Corporation evaluates
significant equipment assets, such as aircraft and vessels, individually. All
other assets are evaluated collectively by equipment type unless AFG ASIT
Corporation learns of specific circumstances, such as a lessee default,
technological obsolescence, or other market developments, which could affect the
net realizable value of particular assets. Adjustments to reduce the net
carrying value of equipment are recorded in those instances where estimated net
realizable value is considered to be less than net carrying value. To the extent
that such adjustments were recorded, they are reflected separately on the
accompanying Statement of Operations as Write-Down of Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Trusts and which will maximize
total cash returns for each asset.
ACCRUED LIABILITIES - AFFILIATE
Unpaid fees and operating expenses paid by EFG on behalf of the Company or
its affiliates and accrued but unpaid administrative charges and management fees
are reported as accrued liabilities - affiliate on the accompanying Consolidated
Balance Sheets.
MINORITY INTEREST
The Company owns approximately 60% of the Trusts' outstanding voting
securities in addition to all of the common stock of the Trusts' Managing
Trustee, AFG ASIT Corporation. Accordingly, the accompanying financial
statements consolidate the results of the Trusts. The Company owns approximately
21% and 32% of the Trusts' partners' capital at December 31, 1998 and 1997,
respectively. The outside investors' interests in the Trusts are reflected on
the accompanying Consolidated Balance Sheets as minority interest and their
share of the respective income is reflected as minority interest on the
Consolidated Statements of Operations.
28
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
NOTE 2 - EQUIPMENT
At the date of the Company's acquisition of the Interests, July 17, 1997,
the book value of the Trusts' equipment was approximately $104,500,000 and
approximated fair value. At December 31, 1998, the Trusts' historical equipment
cost and accumulated depreciation was $229,925,445 and $109,087,115,
respectively.
The Trusts are engaged in the business of leasing equipment to third
parties and own a diversified portfolio of assets for such purpose. Equipment
types include commercial aircraft, ocean-going vessels, materials handling,
construction and mining, manufacturing, computers and peripherals, and retail
store fixtures, among others. As equipment is sold to third parties, or
otherwise disposed of, the Trusts recognize a gain or loss equal to the
difference between the net book value of the equipment at the time of sale or
disposition and the proceeds realized upon sale or disposition. The ultimate
realization of estimated residual value in the equipment is dependent upon,
among other things, EFG's ability to maximize proceeds from selling or
re-leasing the equipment upon the expiration of the primary lease terms. At
December 31, 1998, approximately 90% of the Trusts' aggregate equipment was
subject to lease agreements and approximately 10% was held for sale or re-lease
or being rented on a month-to-month basis. Equipment held for sale or re-lease
included a McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines,
Inc. having a cost and net book value of $15,275,446 and $9,346,384,
respectively (see Note 8 - Subsequent Events) and a SAAB SF340A aircraft
formerly leased to Comair, Inc. having a cost and net book value of $4,421,116
and $1,415,736, respectively. AFG ASIT Corporation is actively seeking the sale
of the SAAB SF 340A aircraft and the sale or re-lease of all other equipment not
on lease.
During August 1997, one of the Trusts exchanged certain locomotives for a
proportionate interest in certain other locomotives. The Trust's original
locomotives had a cost and a net book value of $4,819,218 and $3,151,503,
respectively, and had associated indebtedness of $1,235,989 at the time of the
exchange. The replacement locomotives were recorded at their estimated fair
value of $4,574,485 and the Trust assumed associated debt of $3,120,127. The
exchange resulted in the recognition of a net loss, for financial statement
purposes, of $461,156.
Certain of the Trusts' equipment and related lease payment streams were
used to secure term loans with third-party lenders. At December 31, 1998, the
Trusts' equipment included leveraged equipment having an original cost of
approximately $138,280,000 and a net book value of approximately $102,306,000.
Generally, the costs associated with maintaining, insuring and operating
the Trusts' equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trusts.
NOTE 3 - INVESTMENT SECURITIES - AFFILIATE / NOTE RECEIVABLE - AFFILIATE
As a result of an asset exchange in 1997, one of the Trusts obtained 20,969
common shares of an affiliate, Semele Group Inc. ("Semele"), and has a
beneficial interest in a Note from Semele (the "Semele Note") of $462,353. The
Semele Note bears an annual interest rate of 10% and will be amortized over
three years with mandatory principal reductions, if and to the extent that net
proceeds are received by Semele from the sale or refinancing of its principal
real estate asset consisting of an undeveloped 274-acre parcel of land near
Malibu, California ("Rancho Malibu"). The Trust recognized interest income of
$46,235 related to the Semele Note during the year ended December 31, 1998.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the year ended December 31, 1998, the Trust decreased the
carrying value of its investment in Semele common stock to $4.125 per share (the
quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an
unrealized loss in 1998 of $70,773. At December 31, 1998, AFG ASIT Corporation
determined that the decline in market value of the Semele common stock was
other-than-temporary. As a result, the Trust wrote down the cost of the
29
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
Semele stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ
at December 31, 1998) for a total realized loss of $186,105 in 1998. At December
31, 1998, the carrying value of the Semele stock was $86,497.
NOTE 4 - NOTES PAYABLE
To finance the Company's investment in the Interests, the Company borrowed
$35,910,625 under an Acquisition Credit Agreement from an institutional lender
and assumed $3,990,070 under the ONC Demand Note from EFG. The term note with
the institutional lender bears a fluctuating interest rate based on either LIBOR
plus 4.5% or Prime plus 2%, the applicable rate being selected at the discretion
of the Company. The term note is secured by the general assets and stock of the
Company. In addition, EFG has pledged its Special Beneficiary Interests in the
Trusts as security for the term loan. Repayment of principal and interest on the
term loan is governed by terms specified in the Acquisition Credit Agreement. At
December 31, 1998, the term loan had a principal balance outstanding of
$21,395,000.
Notes payable at December 31, 1998 also consisted of installment notes of
$71,784,009 payable to banks and institutional lenders. The notes bear interest
rates ranging between 5.69% and 14.46%, except for one note, which bears a
fluctuating interest rate based on LIBOR (5.54% at December 31, 1998) plus a
margin. All of the installment notes are non-recourse, and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Trusts have balloon payment obligations of $40,450,000, $4,117,864 and
$1,129,684 at the expiration of certain lease terms (those related to an SAS
Aircraft, certain rail equipment and an MD-87 jet aircraft leased by Reno Air,
Inc., respectively). During 1998, pursuant to the lease agreement, SAS exercised
its option to extend the term of the existing lease for a period of two years,
beginning December 30, 1998. As a result of SAS exercising the renewal lease
option, the balloon payment has been postponed until the termination of the
two-year extension period.
Future principal payments due in connection with the above debt obligations
are as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1999 $ 14,513,779
2000 52,704,824
2001 6,241,897
2002 17,149,191
2003 2,424,949
2004 and thereafter 144,369
-------------------
Total $ 93,179,009
===================
</TABLE>
The Company issued a Demand Note in the amount of $1,100,000 (the "EFG
Note") to acquire AFG ASIT Corporation from EFG. The note bears an annual
interest rate of 11.5% and repayments thereof are subordinate to the Company's
institutional indebtedness. The EFG Note is recorded as note payable - affiliate
on the consolidated balance sheet. The carrying amount of the Company's
indebtedness approximates fair value at December 31, 1998.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company purchased the Interests and acquired AFG ASIT Corporation from
EFG (see Note 1). Mr. Engle, a stockholder in the Company, owns and controls the
general partner of EFG and is a limited partner in EFG. Mr. Coyne, also a
stockholder in the Company, is an officer of EFG. EFG holds an 8.25% Special
Beneficiary Interest in each of the Trusts and has deferred collection of
distributions it is entitled to receive as Special Beneficiary in the Trusts
until such time as the institutional indebtedness of the Company has been
satisfied. Accordingly, EFG entered into a Pledge and Security Agreement (the
"Pledge Agreement") with the Company's institutional lender. In consideration
for EFG's
30
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
pledge, the Company created a note in favor of EFG which accrues the
equivalent of all amounts absorbed by the Company as a result of the Pledge
Agreement. The accumulated debt balance to EFG accrues interest at the rate of
11.5% per annum and is subordinate to the Company's institutional indebtedness.
At December 31, 1998, the Company owed EFG $1,617,295 for such amounts loaned
pursuant to the Pledge Agreement. In addition, the Company owes EFG $30,014 for
liabilities of AFG ASIT Corporation which existed at the date of the Company's
acquisition of AFG ASIT Corporation. These liabilities are recorded as accrued
liabilities - affiliate on the accompanying Consolidated Balance Sheet.
At December 31, 1998, the Company had accrued interest of $321,412 related
to the EFG Note (see Note 4) and amounts loaned by EFG pursuant to the Pledge
Agreement. This amount is recorded as accrued interest - affiliate on the
Consolidated Balance Sheet. The collection of such amount is deferred until such
time as the institutional indebtedness of the Company has been satisfied.
On August 8, 1998, the Company extended a loan of $1,750,000 to Mr. Engle and
Mr. Coyne. The corresponding note receivable bears an interest rate of 7.5% and
is payable on August 8, 2007.
All operating expenses incurred by the Trusts are paid by EFG on behalf of
the Trusts and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the year ended December 31, 1998 and the period
ended December 31, 1997, which were paid or accrued by the Trusts to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Equipment acquisition fees $ 5,378 $ 1,958,975
Equipment management fees 1,772,762 1,052,202
Offering costs -- 399,693
Administrative charges 309,732 158,698
Reimbursable operating
expenses due to third parties 1,884,662 1,167,051
--------------- ---------------
Total $ 3,972,534 $ 4,736,619
=============== ===============
</TABLE>
EFG and its Affiliates were reimbursed for their out-of-pocket offering
costs incurred on behalf of the Trusts in an amount equal to 1% of the gross
proceeds of the four trusts which sold Class B Interests, pursuant to the
Registration Statement on Form S-1.
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trusts. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trusts for each asset
acquired for the Trusts' initial asset portfolio. For reinvestment acquisitions
during the Trusts' initial reinvestment periods, EFG was compensated by an
amount equal to 3% of Asset Base Price paid by the Trusts. For subsequent
reinvestment activity, EFG is compensated by an amount equal to 1% of asset base
price paid by the Trusts. For management services, EFG is compensated by an
amount equal to (i) 5% of gross operating lease rental revenue and 2% of gross
full payout lease rental revenue received by the Trusts with respect to assets
acquired on or prior to the expiration of their initial reinvestment periods or
(ii) 2% of gross lease rental revenue received by the Trusts for equipment
acquisitions subsequent to the initial reinvestment periods. Both of these fees
are subject to certain limitations defined in the Trust Agreements. For
non-equipment investments other than cash, AFG ASIT Corporation receives an
annualized management fee of 1%.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trusts. Reimbursable operating
31
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
expenses due to third parties represent costs paid by EFG on behalf of the
Trusts which are reimbursed to EFG at actual cost.
All equipment was purchased from EFG, one of its Affiliates, or directly
from third-party sellers. The Trusts' purchase price is determined by the method
described in Note 1, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid by the lessees
directly to either EFG or to a lender. EFG temporarily deposits collected funds
in a separate interest-bearing escrow account prior to remittance to the Trusts.
At December 31, 1998, the Trusts were owed $1,300,208 by EFG for such funds and
the interest thereon. These funds were remitted to the Trusts in January 1999.
During 1998, one of the Trusts purchased limited partnership units (the
"Units") in AFG International Limited Partnership (the "Partnership"), a real
estate limited partnership sponsored by EFG that owns two commercial buildings
leased to an investment-grade educational institution. The Trust purchased 7.25
Units at a cost of $100,000 per unit for an aggregate purchase price of
$725,000. As a result of the purchase of the Units, the Trust owns approximately
22.5% of the Partnership. The Trust accounts for its investment in the
Partnership under the equity method of accounting. As such, the carrying value
of the Trust's investment in the Partnership is increased or decreased by an
amount equal to the Trust's share of the Partnership's income or losses,
respectively, and decreased for any distributions received from the Partnership.
At December 31, 1998, this investment had a carrying balance of $699,626 and is
reflected as Investment - affiliate on the accompanying Consolidated Balance
Sheet.
NOTE 6 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trusts (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including AFG ASIT Corporation, as defendants (collectively, the
"Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed
an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an
amended stipulation of settlement (the "Amended Stipulation") which was filed
with the Court on March 15, 1999. The Amended Stipulation was preliminarily
approved by the Court by its "Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated
32
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other
things, divided the Class Action Lawsuit into two separate sub-classes that can
be settled individually. See Note 8 - Subsequent Events.
In addition to the foregoing, the Trusts are parties to other lawsuits that
have arisen out of the conduct of its business, principally involving disputes
or disagreements with lessees over lease terms and conditions. The following
action had not been finally adjudicated at December 31, 1998:
ACTION INVOLVING NATIONAL STEEL CORPORATION
EFG, on behalf of the Trusts and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Trusts, National Steel Corporation ("National Steel"). The
Complaint seeks reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. In March 1999, the
Plaintiffs obtained payment for certain of the disputed items and have resumed
settlement discussions to resolve remaining issues. AFG ASIT Corporation does
not believe that the resolution of the remaining claims will have a material
effect on the Trusts' financial position or results of operations. See Note 8 -
Subsequent Events.
NOTE 7 - YEAR 2000 (UNAUDITED)
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Company uses information systems provided by EFG and has no information systems
of its own. EFG has adopted a plan to address the Year 2000 Issue that consists
of four phases: assessment, remediation, testing, and implementation and has
elected to utilize principally internal resources to perform all phases. EFG has
completed substantially all of its Year 2000 project at an aggregate cost of
less than $50,000 and at a di minimus cost to the Company. All costs incurred in
connection with EFG's Year 2000 project have been expensed as incurred.
EFG's primary information software was coded by a third party at the point
of original design to use a four digit field to identify calendar year. All of
the Company's and the Trusts' lease billings, cash receipts and equipment
remarketing processes are performed using this proprietary software. In
addition, EFG has gathered information about the Year 2000 readiness of
significant vendors and third party servicers and continues to monitor
developments in this area. All of EFG's peripheral computer technologies, such
as its network operating system and third-party software applications, including
payroll and electronic banking, have been evaluated for potential programming
changes and have required only minor modifications to function properly with
respect to dates in the year 2000 and thereafter. EFG understands that each of
its, the Company's and the Trusts' significant vendors and third-party servicers
are in the process, or have completed the process, of making their systems Year
2000 compliant. Substantially all parties queried indicated that their systems
would be Year 2000 compliant by the end of 1998.
33
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Company's or Trusts' results of
operations, liquidity, or financial position. The Company's and Trusts'
equipment leases were structured as triple net leases, meaning that the lessees
are responsible for, among other things, (i) maintaining and servicing all
equipment during the lease term, (ii) ensuring that all equipment functions
properly and is returned in good condition, normal wear and tear excepted, and
(iii) insuring the assets against casualty and other events of loss.
Non-compliance with lease terms on the part of a lessee, including failure to
address Year 2000 Issues, could result in lost revenues and impairment of
residual values of the Company's equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its, the
Company's or the Trusts' business operations. However, EFG has no means of
ensuring that all customers, vendors and third-party servicers will conform
ultimately to Year 2000 standards. The effect of this risk to the Company is not
determinable.
NOTE 8 - SUBSEQUENT EVENTS
EQUIPMENT
In January 1999, certain Trusts sold a McDonnell Douglas MD-82 aircraft
formerly leased to Alaska Airlines, Inc. The Trusts received sale proceeds of
$10,402,965. At December 31, 1998, the net carrying value of this aircraft to
the Trusts was $9,346,384.
INVESTMENT IN KETTLE VALLEY
On March 1, 1999, certain Trusts (collectively, the "Buyers") formed
EFG/Kettle Development LLC, a Delaware limited liability company, for the
purpose of acquiring a 49.9% indirect ownership interest (the "Interest") in a
real estate development in Kelowna, British Columbia called Kettle Valley.
EFG/Kettle Development LLC, upon receiving the Buyers' equity investment,
purchased the Interest from a special purpose company ("SPC") whose subsidiaries
own a 99.9% limited partnership interest in Kettle Valley Development Limited
Partnership ("KVD LP"). The SPC and its subsidiaries were established by the
seller, in part, for income tax purposes and have no business interests other
than the development of Kettle Valley. KVD LP is a Canadian Partnership that
owns the property, consisting of approximately 280 acres of land. The project,
which is in the early stages of being marketed to home buyers, is zoned for
1,000 residential units in addition to commercial space that, currently, is
being constructed. The seller is an unaffiliated third-party company and has
retained the remaining 50.1% ownership interest in the SPC. A newly organized
Canadian affiliate of EFG replaced the original general partner of KVD LP on
March 1, 1999.
The Trusts' ownership share in EFG/Kettle Development LLC had a cost of
$8,750,000, which was funded with cash of $6,116,847 and a non-recourse note for
$2,633,153. The note bears interest at an annualized rate of 7.5% and will be
fully amortized over 34 months commencing April 1, 1999. The note is secured
only by the Trusts' stock interests in the SPC. In addition, the seller
purchased a residual sharing interest in a Boeing 767-300 owned by the Buyers
and leased to Scandinavian Airlines System. The seller paid $3,013,206 to the
Buyers for the residual interest, which is subordinate to certain preferred
payments to be made to the Buyers in connection with the aircraft. Payment of
the residual interest is due only to the extent that the Trusts receive net
residual proceeds from the aircraft. The residual interest is non-recourse to
the Buyers.
ACTION INVOLVING NATIONAL STEEL
On May 10, 1999, EFG, on behalf of the Trusts and certain affiliated
investment programs, entered into an agreement with National Steel to settle all
outstanding matters of dispute.
34
<PAGE>
EQUIS II CORPORATION
Notes to Consolidated Financial Statements
(Continued)
CLASS ACTION LAWSUIT
On May 26, 1999, the Court entered an Order and Final Judgment approving
settlement of the Trust Class and the transactions contemplated thereby, finding
that the settlement is in all respects, fair, reasonable and adequate. The
second action, not involving the Trusts, remains pending.
35
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
The pro forma financial statements of Semele Group, Inc. are presented below.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pro Forma Consolidated Balance Sheet (Unaudited)
at September 30, 1999 37
Pro Forma Consolidated Statement of Operations (Unaudited) 38
for the nine months ended September 30, 1999
Pro Forma Consolidated Statement of Operations (Unaudited)
for the year ended December 31, 1998 39
Notes to Pro Forma Consolidated Financial Statements 40
</TABLE>
36
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, 1999
SEMELE GROUP INC.
<TABLE>
<CAPTION>
Adjustments Pro Forma
Assets Semele and Eliminations Consolidated
- ------ ------ ---------------- ------------
<S> <C> <C> <C>
Cash and cash equivalents $ 5,198,924 $ -- $ 5,198,924
Rents receivable 89,517 -- 89,517
Accounts receivable - affiliates 11,401 -- 11,401
Interest receivable - affiliates 359,829 -- 359,829
Notes receivable - affiliates 2,725,695 -- 2,725,695
Foreclosed real estate held for sale, net 10,024,793 -- 10,024,793
Investment in Kirkwood 750,000 -- 750,000
Investments in partnerships and trusts 3,603,999 -- 3,603,999
Land 1,929,000 -- 1,929,000
Building, net of accumulated depreciation 10,846,022 -- 10,846,022
Other assets 453,952 -- 453,952
Special Beneficiary interests -- 9,652,500 (2) 9,652,500
Investment in Equis II Corporation -- 19,586,000 (1) 19,586,000
----------------- ----------------- -----------------
Total assets $ 35,993,132 $ 29,238,500 $ 65,231,632
================= ================= =================
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Notes payable $ 6,695,193 $ -- $ 6,695,193
9,652,500 (2)
Notes payable - affiliates 14,869,500 19,586,000 (1) 44,108,000
Accrued interest 58,919 -- 58,919
Accrued liabilities 895,917 -- 895,917
Accrued liabilities - affiliate 71,118 -- 71,118
Deferred rental income 28,614 -- 28,614
Cash distributions payable 45,342 -- 45,342
----------------- ----------------- -----------------
Total liabilities 22,664,603 29,238,500 51,903,103
----------------- ----------------- -----------------
Minority interest 3,779,262 -- 3,779,262
----------------- ----------------- -----------------
Total Minority interest 3,779,262 -- 3,779,262
----------------- ----------------- -----------------
Stockholders' equity (deficit):
Common stock, $0.10 par value,
5,000,000 shares authorized,
2,080,185 issued --
170,663,365 -- 170,663,365
Accumulated deficit (144,905,123) -- (144,905,123)
Deferred compensation, 101,183 shares (1,720,104) -- (1,720,104)
Treasury stock at cost, 901,025 shares (14,488,871) -- (14,488,871)
------------------ ----------------- ------------------
Total stockholders' equity 9,549,267 -- 9,549,267
----------------- ----------------- -----------------
$ 35,993,132 $ 29,238,500 $ 65,231,632
================= ================= =================
Book value per share, 1,179,160 shares outstanding $ 8.10 $ 8.10
=================== =================
</TABLE>
37
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the nine months ended September 30, 1999
SEMELE GROUP INC.
<TABLE>
<CAPTION>
Adjustments Pro Forma
Semele and Eliminations Consoldiated
------ ---------------- ------------
INCOME
<S> <C> <C> <C>
Equipment activities:
Lease revenue $ 895,957 $ -- $ 895,957
Gain on sale of equipment 17,250 -- 17,250
----------------- ----------------- -----------------
Total, equipment activities 913,207 -- 913,207
----------------- ----------------- -----------------
Lending and investing activities:
Income on investments 215,814 -- 215,814
Interest on loans to affiliates 234,447 -- 234,447
----------------- ----------------- -----------------
Total, lending and investing activities 450,261 -- 450,261
----------------- ----------------- -----------------
Income from Equis II Corporation -- 709,152 709,152
Other income 19,132 -- 19,132
----------------- ----------------- -----------------
Total other income 19,132 709,152 728,284
----------------- ----------------- -----------------
Total income 1,382,600 709,152 2,091,752
----------------- ----------------- -----------------
EXPENSES
Net loss from operations of foreclosed real estate
held for sale 473,163 -- 473,163
Depreciation and amortization 405,839 -- 405,839
General and administrative 812,836 -- 812,836
General and administrative - affiliate 113,842 -- 113,842
Interest expense 407,596 -- 407,596
Interest expense - affiliates 879,179 1,646,268 2,525,447
Recovery of losses on loans,
notes and interest receivable (77,120) -- (77,120)
----------------- ----------------- -----------------
Total expenses 3,015,335 1,646,268 4,661,603
----------------- ----------------- -----------------
Net income (loss) $ (1,632,735) $ (937,116) $ (2,569,851)
================= ================== =================
Net loss per share of common stock basic (Based on
the weighted average number of shares outstanding
during the period, 1,156,074) $ (1.41) $ (2.22)
=============== ================
</TABLE>
38
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the year ended December 31, 1998
SEMELE GROUP INC.
<TABLE>
<CAPTION>
Adjustments Pro Forma
Semele and Eliminations Consolidated
------ ---------------- ------------
INCOME
<S> <C> <C> <C>
Equipment activities:
Lease revenue $ 395,163 $ -- $ 395,163
Gain on sale of equipment 7,000 -- 7,000
----------------- ----------------- -----------------
Total, equipment activities 402,163 -- 402,163
----------------- ----------------- -----------------
Lending and investing activities:
Income on investments 382,282 -- 382,282
Interest on loans to third parties 269,000 -- 269,000
Interest on loans to affiliates 104,771 -- 104,771
----------------- ----------------- -----------------
Total, lending and investing activities 756,053 -- 756,053
----------------- ----------------- -----------------
Other income -- -- --
----------------- ----------------- -----------------
Total income 1,158,216 -- 1,158,216
----------------- ----------------- -----------------
EXPENSES
Net loss from operations of foreclosed real
estate held for sale 730,249 -- 730,249
Depreciation and amortization 251,815 -- 251,815
General and administrative 994,185 -- 994,185
General and administrative - affiliate 152,201 -- 152,201
Interest expense 187,006 -- 187,006
Interest expense - affiliates 685,783 2,195,025 2,880,808
Recovery of losses on loans,
notes and interest receivable (383,176) -- (383,176)
Loss from Equis II Corporation -- 1,022,576 1,022,576
----------------- ----------------- -----------------
Total expenses 2,618,063 3,217,601 5,835,664
----------------- ----------------- -----------------
Net loss $ (1,459,847) $ (3,217,601) $ (4,677,448)
================= ================= =================
Net loss per share of common stock basic (Based on
the weighted average number of shares outstanding
during the period, 1,182,810) $ (1.23) $ (3.95)
=============== ===============
</TABLE>
39
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
SEMELE GROUP INC.
The accompanying pro forma consolidated financial statements of Semele Group
Inc. (the "Company") have been prepared to give effect to the Company's purchase
of the Special Beneficiary interests and an 85% interest in Equis II
Corporation. The Special Beneficiary interests will be recorded using the equity
method of accounting and the carrying balance reduced by the amount of future
cash distributions received from the Trusts. Those receipts will be used to pay
down the Company's purchase price indebtedness for this asset. (The debt
obligation is non-recourse to the extent that future cash receipts are
insufficient to amortize the entire debt obligation.) The Company's investment
in Equis II will be recorded at cost and accounted for under the equity method
of accounting until such time that the Voting Trust agreement (referred to under
Item 2 herein) is terminated. In order to prepare the pro forma consolidated
financial statements, certain assumptions and adjustments were made that are
described in the notes below.
For purposes of preparing the pro forma consolidated balance sheet, it was
assumed that the purchase transaction occurred on September 30, 1999.
For purposes of preparing the pro forma consolidated statements of operations,
it was assumed that the purchase transaction occurred on January 1, 1998.
NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND PRO
FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998
1. To record the Company's purchase of an 85% interest in Equis II Corporation.
The purchase of an 85% interest in Equis II Corporation was recorded at
cost and accounted for under the equity method of accounting. Under the
equity method of accounting, the carrying amount of the Company's
investment is (i) increased to reflect the Company's share of income of the
investee and (ii) reduced to reflect the Company's share of losses of and
cash distributions from the investee. For the nine months ended September
30, 1999, the Company would have recognized income of $709,152 from its
investment in Equis II Corporation. For the year ended December 31, 1998,
the Company would have recognized a net loss of $1,022,576 from its
investment in Equis II Corporation.
2. To record the Company's purchase of the Special Beneficiary interests.
The Special Beneficiary interests were recorded using the equity method of
accounting and represent an 8.25% carried interest in the Trusts. The
carrying balance of this investment will be reduced by the amount of future
cash distributions received from the Trusts. Those receipts will be used to
amortize the Company's purchase price indebtedness for this asset. (The
debt obligation is non-recourse to the extent that future cash receipts are
insufficient to amortize the entire debt obligation.) For the nine months
ended September 30, 1999, the Trusts declared cash distributions payable to
the Special Beneficiary of $784,509. For the year ended December 31, 1998,
the Trusts declared cash distributions payable to the Special Beneficiary
of $1,118,001. These amounts would have reduced the Company's investment
balance in the Special Beneficiary interests when received.
40
<PAGE>
SEMELE GROUP INC.
FORM 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED).
EXHIBITS FILED HEREWITH PURSUANT TO ITEM 601 OF REGULATION S-K.
EXHIBIT
NUMBER
2. Stock Purchase Agreement dated December 16, 1999 between (i) Gary
D. Engle, James A. Coyne and four trusts for the benefit of Mr.
Engle's children and (ii) Semele Group Inc.
--------------------------------------
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 hereunto duly authorized.
SEMELE GROUP INC.
(Registrant)
By: /S/ JAMES A. COYNE Date: JANUARY 06, 2000
----------------------- ----------------
James A. Coyne
President and Chief Operating
Officer and a Director
41
<PAGE>
EXHIBIT 2.0
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made as of December 16, 1999, by and between (i) Gary
D. Engle; James A. Coyne; Wayne Ellis Engle, Trustee, Staci Albury Trust u/i/t
dated July 21, 1998; Wayne Ellis Engle, Trustee, Kristen Engle Trust u/i/t dated
July 21, 1998; Wayne Ellis Engle, Trustee, Sydney Peyton Engle Trust u/i/t dated
July 21, 1998; and Wayne Ellis Engle, Trustee, Zoe P. Engle Trust u/i/t dated
July 21, 1998 (each a "Seller" and collectively the "Sellers"); and (ii) Semele
Group Inc., a Delaware corporation (the "Buyer");
W I T N E S S E T H:
WHEREAS, the Sellers are the owners of all the issued and outstanding
shares of capital stock of Equis II Corporation, a Delaware corporation (the
"Company");
WHEREAS, the Sellers desire to sell to the Buyer, and the Buyer desires
to purchase from the Sellers, 85 percent of such shares upon the terms and
subject to the conditions set forth herein;
WHEREAS, the Buyer has received from Josephthal & Co. Inc. a "fairness
opinion" with respect to the fairness to the Buyer from a financial point of
view of this acquisition and a related acquisition by the Buyer from Equis
Financial Group Limited Partnership of the entire Special Beneficiary Interest
in four Delaware business trusts, which opinion is acceptable to the Special
Committee of the Board of Directors of the Buyer consisting of the Buyer's
independent directors;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1. PURCHASE AND SALE OF SHARES. At the Closing, as defined in Section
1.3 hereof, the Sellers shall sell, assign, transfer and deliver to the Buyer,
and the Buyer shall purchase, acquire and accept from the Sellers, the number of
shares of Voting Common Stock and Non-Voting Common Stock, each $.01 par value,
of the Company set forth opposite their respective names on EXHIBIT A-1 under
the heading "Number of Shares to be Sold" (collectively, the "Shares"). The
Shares comprise 85 percent of the shares of Voting and Non-Voting Common Stock
of the Company owned by each Seller. At the Closing, the Buyer and the Sellers
will enter into an agreement giving the Buyer a call right to purchase from the
Sellers, and giving the Sellers a put right to sell to the Buyer, the 15 percent
of the shares of Voting and Non-Voting Common Stock of the Company not being
sold to the Buyer hereunder. The purchase price for such 15 percent will be
510,000 shares of the Common Stock, $.10 par value, of the Buyer. Such rights to
purchase and sell will only be exercisable, however, if the stockholders of the
Buyer approve of such payment in shares of Common Stock of the Buyer. If
stockholder approval is not obtained, the purchase and sale rights will
terminate.
1.2. PURCHASE PRICE; DELIVERY OF SHARES. In consideration of the sale
of the Shares to the Buyer, subject to the terms and conditions provided herein,
the Buyer shall pay to the Sellers a total purchase price of $19,586,000 (the
"Purchase Price"). The Purchase Price shall be paid at the Closing by the Buyer
to the Sellers by delivery of Promissory Notes of the Buyer (the "Notes"), each
in the form of EXHIBIT B-1 as to $14,600,000, in the form of EXHIBIT B-2 as to
$3,085,000 and in the form of EXHIBIT B-3 as to $1,901,000, payable to the
Sellers in the principal amounts shown on EXHIBIT A-2. The Buyer acknowledges
that the Shares are currently subject to a pledge executed by the Sellers
securing indebtedness of the Company totalling approximately $19.5 million at
September 30, 1999. The Buyer agrees that it will secure its obligations under
the Notes by a pledge of the Shares to the Sellers pursuant to a Security
Agreement and Collateral Agency Agreement in the form of EXHIBIT C hereto, which
pledge shall be junior only to the currently existing pledge and which pledge
shall be a first priority pledge as soon as such consent of existing
indebtedness has been repaid and such currently existing pledge has been
released. At the Closing, each Seller shall deliver to the Buyer the certificate
or certificates representing the Shares being sold by such Seller accompanied by
a stock power duly endorsed in blank by such Seller and otherwise in form
reasonably acceptable to the Buyer. Gary D. Engle and James A Coyne agree that,
effective as of the Closing the Buyer shall also cancel the option dated
42
<PAGE>
December 30, 1997, held by Gary D. Engle to purchase 40,000 shares of Common
Stock of the Buyer and the option dated December 30, 1997, held by James A.
Coyne to purchase 40,000 shares of Common Stock of the Buyer (together, the
"Options").
1.3. CLOSING. The closing of the transaction provided for in this
Agreement (the "Closing") shall take place at the offices of Nixon Peabody LLP,
101 Federal Street, Boston, Massachusetts, at 10:00 a.m. on December 22, 1999,
or such other date as may be mutually agreed upon in writing by the parties (the
"Closing Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Sellers jointly and severally represent and warrant to the Buyer as
follows:
2.1. OWNERSHIP OF SHARES.
(a) Each Seller has good and marketable title to the Shares to
be sold to the Buyer by him pursuant to this Agreement, free and clear of all
restrictions, liens, charges, encumbrances, options and adverse claims or rights
whatsoever except as set forth on SCHEDULE 2.1. Except as set forth on SCHEDULE
2.1, there are no voting trusts, proxies or other arrangements or understandings
to which any Seller is a party with respect to the Shares. EXHIBIT A-1 sets
forth a true and correct listing of (i) all shares of Voting and Non-Voting
Common Stock of the Company owned by each Seller and (ii) the Shares to be sold
to the Buyer by each Seller hereunder.
(b) Each Seller has the full right, power and authority to
enter into this Agreement and to transfer, convey and sell to the Buyer the
Shares to be sold by him pursuant to this Agreement and, upon consummation of
the purchase contemplated by this Agreement, the Buyer will acquire from each
Seller good and marketable title to such Shares, free and clear of all
restrictions, liens, charges, encumbrances, options and adverse claims or rights
whatsoever except as set forth on SCHEDULE 2.1. This Agreement constitutes the
valid and binding obligation of each Seller enforceable in accordance with its
terms.
(c) No Seller is a party to, subject to or bound by any
agreement or any judgment, order, writ, prohibition, injunction or decree of any
court or other governmental body that would prevent the execution or delivery of
this Agreement by him or the transfer, conveyance and sale of the Shares to be
sold by him to the Buyer pursuant to this Agreement.
2.2. ORGANIZATION, GOOD STANDING AND AUTHORITY OF THE COMPANY. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the requisite power and
authority to own its properties and assets and to carry on its business as it is
now being conducted. The Company is duly qualified to do business and is in good
standing as a foreign corporation in the Commonwealth of Massachusetts.
2.3. CHARTER DOCUMENTS OF THE COMPANY. The Sellers have provided the
Buyer with true, accurate and complete copies of the Certificate of
Incorporation and By-Laws of the Company. Such Certificate of Incorporation and
By-Laws are in full force and effect. The Company is not in default under or in
violation of any provision of its Certificate of Incorporation or By-Laws. The
minute and stock record book of the Company (which has been made available for
inspection by the Buyer and its representatives) is true and complete in all
material respects.
2.4. NO COMPANY DEFAULT; NO CONFLICT WITH OTHER INSTRUMENTS. The
Company is not in default under or in violation of any material agreement or
other instrument or contract to which it is a party or by which it or any of its
properties or assets is bound or any judgment, decree, order, statute, rule or
regulation to which it is subject or by which it or any of its properties or
assets is bound. The execution, delivery and performance of this Agreement by
the Sellers and the consummation of the transactions contemplated hereby do not
and will not constitute a default under any of the terms, conditions or
provisions of (i) the Certificate of Incorporation or By-Laws of the Company or
(ii) any material agreement or other instrument or contract or any judgment,
decree, order, statute, rule or regulation to which the Company is a party or
subject or result in the creation of any lien, charge or encumbrance on any of
the properties or assets of the Company or the Shares.
43
<PAGE>
2.5. CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company consists of 500 shares of Voting Common Stock, $.01 par value, and 2,500
shares of Non-Voting Common Stock, $.01 par value. All such shares are issued
and outstanding. The Shares are duly authorized, validly issued, fully paid and
nonassessable. There are no outstanding options, convertible securities,
warrants, rights agreements, restrictions, contracts, calls or commitments of
any character which entitle any person to acquire from the Company or otherwise
relate to the issuance by the Company of any shares of capital stock of the
Company or, except as set forth in SCHEDULE 2.1, which restrict or otherwise
relate to or provide for the transfer of any of such shares. Except as set forth
on SCHEDULE 2.1, there are no voting trusts, proxies or other arrangements or
understandings to which the Company or a Seller is a party with respect to the
voting of the Shares.
2.6. SUBSIDIARIES, OTHER INTERESTS, ETC., OF THE COMPANY. The Company
has one subsidiary, AFG ASIT Corporation ("AFG ASIT"). AFG ASIT is a corporation
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and has the requisite power and authority to own
its properties and assets and to carry on its business as it is now being
conducted. AFG ASIT is the Managing Trustee of four Delaware business trusts,
AFG Investment Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG
Investment Trust D (collectively the "Trusts"), each of which is a reporting
company under the Securities Exchange Act of 1934 (the "'34 Act"). The
authorized capital stock of AFG ASIT consists of 30,000 shares of Common Stock,
$.01 par value, of which 1,000 shares are issued and outstanding and owned by
the Company (the "AFG ASIT Shares"). The AFG ASIT Shares are duly authorized,
validly issued, fully paid and nonassessable. There are no outstanding options,
convertible securities, warrants, rights agreements, restrictions, contracts,
calls or commitments of any character which entitle any person to acquire from
AFG ASIT or otherwise relate to the issuance by AFG ASIT of any shares of
capital stock of AFG ASIT or, except as set forth on SCHEDULE 2.6, which
restrict or otherwise relate to or provide for the transfer of any of such
shares. Except for the Voting Trust Agreement dated December 16, 1999, between
the Company and Gary D. Engle, as Trustee, and except as set forth on SCHEDULE
2.6, there are no voting trusts, proxies or other arrangements or understandings
to which AFG ASIT or the Company is a party with respect to the voting of the
AFG ASIT Shares. The Company also owns an aggregate of 7,980,139 Class B
Subordinated Beneficiary Interests in the Trusts, as shown on SCHEDULE 2.6 (the
"Class B Interests"). AFG ASIT as Managing Trustee has the powers, duties,
rights, obligations and economic interests set forth in the Second Amended and
Restated Declaration of Trust, as amended to date, of each of the Trusts (each a
"Declaration of Trust" and collectively the "Declarations of Trust"). The
Company, as record and beneficial owner of the Class B Interests, is entitled to
all rights with respect to the Class B Interests set forth in the Declaration of
Trust of each of the Trusts, including the rights to distributions and
allocations set forth therein. Except as provided in the Declaration of Trust of
each of the Trusts and except as set forth on SCHEDULE 2.6, there are no
agreements, restrictions, contracts, calls or commitments which restrict or
otherwise relate to or provide for the transfer of any of the Class B Interests.
Except for the Voting Trust Agreement dated December 16, 1999, between the
Company and Gary D. Engle, as Trustee, and except as set forth on SCHEDULE 2.6,
there are no voting trusts, proxies or other arrangements or understandings to
which the Company is a party with respect to the voting of the Class B
Interests. The Company has good and marketable title to the AFG ASIT Shares and
the Class B Interests, free and clear of all restrictions, liens, charges,
encumbrances, options and adverse claims or rights whatsoever except as set
forth on SCHEDULE 2.6. The Company does not own, directly or indirectly, any
capital stock or other equity or ownership interest in any other corporation,
partnership, association, trust, joint venture or other entity.
2.7. ORGANIZATIONAL DOCUMENTS OF AFG ASIT, TRUSTS. The Sellers have
provided the Buyer with true, accurate and complete copies of the Articles of
Organization and By-Laws of AFG ASIT and with the Declaration of Trust of each
of the Trusts, all as amended to date. Such Articles of Organization, By-Laws
and Declarations of Trust are in full force and effect. AFG ASIT is not in
violation of any provision of its Articles of Organization or By-Laws or of the
Declaration of Trust of any of the Trusts. None of the Trusts is in violation of
its Declaration of Trust. The minute and stock record books of AFG ASIT (which
have been made available for inspection by the Buyer and its representatives)
are true and complete in all material respects.
2.8. NO AFG ASIT DEFAULT; NO CONFLICT WITH OTHER INSTRUMENTS. AFG ASIT
is not in default under or in violation of any material agreement or other
instrument or contract to which it is a party or by which it or any of its
properties or assets is bound or any judgment, decree, order, statute, rule or
regulation to which it is subject or by which it or any of its properties or
assets is bound. The execution, delivery and performance of this Agreement by
the Sellers and the consummation of the transactions contemplated hereby do not
and will not constitute a default under any of the terms, conditions or
provisions of (i) the Articles of Organization or By-Laws of AFG ASIT or the
Declarations of Trust of the Trusts or (ii) any material agreement or other
instrument or contract or any judgment, decree, order, statute rule or
regulation to which AFG ASIT is a party or subject or result in the creation of
any lien, charge or encumbrance on any of the properties or assets of AFG ASIT.
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2.9. SEC FILINGS. The Managing Trustee on behalf of the Trusts has
filed all forms, reports and documents required to be filed by them with the
Securities and Exchange Commission (the "SEC") since December 31, 1995 (the "SEC
Reports"). The SEC Reports, including all SEC Reports filed after the date
hereof and prior to the Closing, (i) were or will be prepared in accordance with
the Securities Act of 1933 (the "'33 Act") and the '34 Act, as the case may be,
and the rules and regulations thereunder and (ii) did not at the time they were
filed, or will not at the time they are filed, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. The Sellers have provided the Buyer with true, accurate
and complete copies of the Annual Report on Form 10-K for the year ended
December 31, 1998, and the Quarterly Report on Form 10-Q for the periods ended
June 30 and September 30, 1999, filed with the SEC under the '34 Act by each of
the Trusts and (ii) the Prospectus dated June 10, 1997, of each of the Trusts
relating to the offering by such Trust under the '33 Act of the Class B
Subordinated Interests of which the Class B Interests are a part.
2.10. FINANCIAL STATEMENTS; ABSENCE OF UNDISCLOSED LIABILITIES. The
Sellers have delivered to the Buyer a copy of the audited consolidated balance
sheet of the Company as of December 31, 1998, and the related consolidated
statement of operations, consolidated statement of changes in stockholders'
equity and consolidated statement of cash flows and the notes thereto for the
period then ended and the unaudited consolidated balance sheet of the Company as
of September 30, 1999 (the September 1999 balance sheet is hereinafter referred
to as the "Balance Sheet"). All such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as otherwise indicated in the
notes to such financial statements and, in the case of the Balance Sheet,
subject to year end adjustments) and fairly present the financial condition and
results of operations of the Company as, at and for the periods indicated.
Except as set forth on SCHEDULE 2.10 or incurred in connection with the
transactions contemplated hereby, the Company is not subject to any liability
other than (i) liabilities reflected, reserved against or otherwise disclosed in
the Balance Sheet and (ii) liabilities arising since the date of the Balance
Sheet in the ordinary course of business consistent (in amount and kind) with
past practice which do not, individually or in the aggregate, materially
adversely affect the business, assets, liabilities, condition (financial or
otherwise), results of operations or prospects of the Company.
2.11. OTHER PERSONAL PROPERTY. Except as described in SECTION 2.6,
neither the Company nor AFG ASIT has any personal property.
2.12. REAL PROPERTY. Neither the Company nor AFG ASIT currently owns
or leases nor has the Company or AFG ASIT ever owned or leased any real property
or interests in real property.
2.13. NO MATERIAL ADVERSE CHANGE. Except as set forth on SCHEDULE 2.13
since the date of the Balance Sheet there has not been any material adverse
change in, relating to or affecting the business, assets, condition (financial
or otherwise), results of operations or prospects of the Company, and no facts
are known which may reasonably be expected to give rise to any such material
change.
2.14. TAXES. All taxes have been properly paid or accrued and all tax
returns currently required to be filed have been properly filed with respect to
the Company and all of its operations, income, profits and assets in accordance
with the requirements of the applicable laws of all federal, state, local and
foreign jurisdictions. No waivers of the statute of limitations are in effect
with respect to federal or state income taxes payable by or on behalf of the
Company. Except as set forth on SCHEDULE 2.14, none of the federal or state
income tax returns filed by the Company with respect to its last six fiscal
years have been examined by the Internal Revenue Service (the "IRS") or any
similar state, local or foreign tax authority, and none of the periods during
which any assessment may be made by the IRS or any similar state, local or
foreign tax authority has been extended.
2.15. CONTRACTS, COMMITMENTS, ETC. Except as set forth in SCHEDULE 2.15
and except for the Declarations of Trust of each of the Trusts, neither the
Company nor AFG ASIT is, as of the date of this Agreement, a party to or bound
by any contracts or agreements with third parties.
2.16. COMPLIANCE WITH LAWS. The Company and AFG ASIT are in compliance
with all applicable federal, state and local laws, rules, regulations and
ordinances.
2.17. LITIGATION. Except as described in SCHEDULE 2.17, no action,
suit, arbitration, mediation, investigation or proceeding is pending or, to the
knowledge of the Sellers, threatened before any court, administrative agency or
tribunal which affects or involves the Company, AFG ASIT or any of the Sellers
or any of their respective rights or properties or which seeks
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to prevent or challenge the transactions contemplated hereby. There is no
existing state of facts, circumstances or contemplated events that is likely to
give rise to an action, proceeding or investigation against the Company or AFG
ASIT.
2.18. ENVIRONMENTAL PROTECTION.
(a) The Company and AFG ASIT have complied in all material
respects with all federal and state environmental, health and safety laws, codes
and ordinances and all rules, regulations and ecological standards promulgated
thereunder ("Environmental Laws").
(b) There is no pending or, to the knowledge of the Sellers,
threatened civil, criminal or administrative action, demand, hearing, notice of
violation, notice or demand letter that affects or applies to the Company or AFG
ASIT, or their respective businesses, properties or assets, relating in any way
to any Environmental Laws or any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved thereunder.
2.19. DIVIDENDS AND DISTRIBUTIONS TO THE SELLERS. Except as described
in SCHEDULE 2.19, the Company has never declared or paid any dividends or made
any other distributions to any holder of its outstanding capital stock or
redeemed any shares of its capital stock.
2.20. INSURANCE. The Company and AFG ASIT are named insureds on
policies of insurance purchased and maintained by an affiliate of the Company
providing coverage to the Company and AFG ASIT of such types and in such amounts
as are legally required or are otherwise appropriate for their respective
businesses. Each such policy of insurance is legal, valid, binding, enforceable
and in full force and effect. Following the consummation of the transaction
contemplated hereby, neither the Company nor AFG ASIT will be covered by any of
such policies. There is no default with respect to any provision contained in
any such policy, nor has the Company or AFG ASIT failed to give any notice or
present any claim under any such policy in due and timely fashion. None of the
Trusts is a named insured on policies of insurance, but each lessee of equipment
owned by any of the Trusts is required to insure the leased equipment under the
terms if its equipment lease.
2.21. REQUIRED CONSENTS AND APPROVALS. Except as set forth on SCHEDULE
2.21, the execution and delivery of this Agreement by the Sellers does not, and
the performance of this Agreement by the Sellers will not, require any consent,
approval, order, authorization, registration, qualification or designation from
any governmental authority or pursuant to any agreement or other instrument by
which the Sellers, the Company or AFG ASIT or any of their respective properties
is bound.
2.22. EMPLOYEE BENEFITS. Neither the Company nor AFG ASIT now has, or
has ever had, any employees. Neither the Company nor AFG ASIT has ever made, or
had any obligation to make, any contributions to any employee benefit plan
within the meaning of Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended. Neither the Company nor AFG ASIT has any liability with
respect to any such employee benefit plan maintained by an affiliate.
2.23. LICENSES AND PERMITS. The Company, AFG ASIT and the Trusts have
each obtained all licenses, permits and other approvals required from federal,
state or local authorities, if any, in order for them to conduct their
respective businesses as currently conducted.
2.24. NO BROKER. No broker, finder or investment banker is entitled to
any brokerage, finders or other fee or commission in connection with the
transaction contemplated by this Agreement based upon arrangements made by or on
behalf of the Company, AFG ASIT or the Sellers.
2.25. DISCLOSURE. The representations and warranties contained in this
Article II (including the schedules required to be delivered by the Sellers to
the Buyer pursuant to this Agreement) and any certificate or other instrument
furnished or to be furnished by the Sellers to the Buyer hereunder do not
contain and will not contain any untrue statement of a material fact or omit to
state any fact necessary in order to make the statements and information
contained in this Article II not misleading. There is no material fact relating
to the Company or AFG ASIT or their respective assets, properties or businesses
which may materially adversely affect the same which has not been disclosed in
writing in this Agreement to the Buyer.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to each of the Sellers as follows:
3.1. ORGANIZATION, GOOD STANDING AND AUTHORITY OF THE BUYER. The Buyer
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite power and authority to own,
lease and operate all its properties and assets and to carry on its business as
it is now being conducted.
3.2. AUTHORIZATION. The Buyer has full corporate power and authority to
enter into this Agreement and the other transactions contemplated hereby and to
carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Buyer and, except for the
approval of the stockholders of the Buyer to the issuance of the shares of
Common Stock of the Buyer contemplated to be issued to the Sellers no other
corporate proceedings or actions on the part of the Buyer are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement constitutes a valid and binding obligation of the Buyer enforceable in
accordance with its terms.
3.3. NO BROKER. Except for Josephthal & Co. Inc. in connection with
its "fairness opinion," no broker, finder or investment banker is entitled to
any brokerage, finders or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Buyer.
ARTICLE IV
COVENANTS OF SELLERS
The Sellers will comply with the following covenants during the period
between the date hereof and the earlier of the date on which the Buyer purchases
15 percent of the Company not being purchased by the Buyer hereunder or the put
and call agreement relating to the purchase of such 15 percent expires:
4.1. ACCESS. The Sellers shall give the Buyer and its counsel,
accountants and other representatives full access, at reasonable times on
reasonable notice, throughout the period prior to the Closing Date, to all of
the properties, assets, books and records of the Company or relating thereto and
the Sellers shall furnish to the Buyer during such period all information
concerning the Company and its affairs as the Buyer may reasonably request.
4.2. MAINTENANCE OF EXISTENCE AND GOOD STANDING. The Sellers shall
cause the Company, AFG ASIT and the Trusts to maintain their respective
existences as corporations or business trusts, as applicable, in good standing
under the laws of the State of Delaware and the Commonwealth of Massachusetts,
as applicable, and under the laws of any other jurisdiction in which they are
qualified to do business as foreign corporations or entities.
4.3. CONDUCT OF BUSINESS IN ORDINARY COURSE. The Sellers shall cause
the Company, AFG ASIT and the Trusts to conduct their respective businesses only
in the ordinary course, unless the Sellers shall obtain the written consent of
the Buyer to any act or transaction by the Company, AFG ASIT or any of the
Trusts or on behalf of any of them which is not in the ordinary course of its
business.
4.4. PRESERVATION OF ORGANIZATION. The Sellers shall cause the Company,
AFG ASIT and the Trusts to preserve their respective business organizations, and
use their best efforts to preserve their business relations and to retain the
services of their present officers.
4.5. PRESERVATION OF PROPERTIES. The Sellers shall cause the Company,
AFG ASIT and the Trusts to maintain and preserve the properties owned or used by
them in their respective businesses.
4.6. PERFORMANCE OF CONTRACTS. The Sellers shall cause the Company,
AFG ASIT and the Trusts to fulfill their respective contractual obligations in
all material respects.
4.7. TAXES AND SIMILAR CHARGES. The Sellers shall cause the Company,
AFG ASIT and the Trusts to punctually pay and discharge all taxes, assessments
and governmental charges lawfully imposed upon them or any of their respective
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properties or those properties used by them in their respective businesses or
upon the income and profits thereof and to file all tax returns required to be
filed by them.
4.8. COMPLIANCE WITH LAWS. The Sellers shall cause the Company, AFG
ASIT and the Trusts to comply in all material respects with all laws,
governmental regulations, rules and ordinances, and judicial orders, judgments,
decrees and similar determinations to which they and their respective properties
are subject.
4.9. INSURANCE. The Sellers shall cause the Company and AFG ASIT to
continue as named insureds on the insurance policies referred to in Section
2.21, and shall cause such policies to be continued in full force and effect or
be replaced with other policies providing substantially equivalent or greater
coverage.
4.10. NOTICE OF BREACH, LITIGATION, ETC. The Sellers will promptly give
written notice to the Buyer of (i) the occurrence of any event or the failure of
any event to occur which results or will result in a breach of or a failure to
comply with any representation, warranty, covenant, condition or agreement by
the Sellers contained herein or (ii) the commencement of any litigation,
proceeding, investigation or inquiry seeking to enjoin or prevent the
consummation of the transactions contemplated by this Agreement or to obtain
damages or other relief by reason of such consummation.
4.11. CONSENTS FROM THIRD PARTIES. The Sellers will use their best
efforts to obtain the consent of any party necessary to approve the transactions
contemplated hereby.
4.12. SATISFACTION OF REPRESENTATIONS AND CONDITIONS. The Sellers will
use their best efforts to take all actions necessary to render all
representations and warranties made by them herein accurate on and as of the
Closing Date in all material respects and to satisfy each covenant or condition
to be performed or satisfied by them on or before the Closing Date.
4.13. AMENDMENT OF ARTICLES OR BY-LAWS. The Sellers will not amend nor
permit to be amended the Certificate of Incorporation of the Company, the
Articles of Organization of AFG ASIT or the By-Laws of either of them or the
Declaration of Trust of any of the Trusts or make any change in the authorized
or issued capital stock of either the Company or AFG ASIT or the beneficiary
interests of any of the Trusts without the written consent of the Buyer.
4.14. PUBLIC ANNOUNCEMENTS. The Sellers will not make or permit to be
made any public announcement or disclosure concerning the transactions
contemplated hereby without the written consent of the Buyer.
ARTICLE V
COVENANTS OF THE BUYER
The Buyer covenants as follows with respect to the period between the
date hereof and the Closing Date:
5.1. CONSENTS FROM THIRD PARTIES. The Buyer will use its best efforts
to obtain the consent of any party, including its stockholders and any
governmental authority, necessary to approve the transactions contemplated
hereby.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLERS
The obligation of the Sellers to sell and deliver the Shares is subject
to the satisfaction (or waiver by the Sellers) on or prior to the Closing Date
of the following conditions:
6.1. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of the Buyer contained in this Agreement shall be true and correct on
and as of the Closing Date as if such representations and warranties were made
on and as of that date.
6.2. COMPLIANCE WITH AGREEMENT. The Buyer shall have performed and
complied in all material respects with all its obligations and covenants under
this Agreement to be performed or complied with by it prior to the Closing Date.
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6.3. CONSENTS. The consent of every party necessary to approve the
transactions contemplated hereby shall have been obtained.
6.4. NO LITIGATION. At the Closing Date, no litigation, proceeding,
investigation or inquiry shall be pending or threatened seeking to enjoin or
prevent the consummation of the transactions contemplated by this Agreement or
to obtain damages or other relief by reason of such consummation.
6.5. PUT/CALL AGREEMENT. The Buyer and the Sellers shall have executed
and delivered an agreement in the form of EXHIBIT D hereto giving the Buyer a
call right to purchase from the Sellers, and giving the Sellers a put right to
sell to the Buyer, the 15 percent of the Voting and Non-Voting Common Stock of
the Company not being sold to the Buyer hereunder.
6.6. REGISTRATION RIGHTS AGREEMENT. The Buyer and the Sellers shall
have executed and delivered a registration rights agreement in the form of
EXHIBIT E hereto.
6.7. OPINION OF COUNSEL. The Sellers shall have received from Shefsky &
Froelich Ltd., counsel to the Special Committee of the Board of Directors of the
Buyer, an opinion as of the Closing Date in form and substance reasonably
acceptable to counsel to the Sellers as to certain tax matters.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE BUYER
The obligation of the Buyer to purchase and pay for the Shares is
subject to the satisfaction (or waiver by the Buyer, provided, however, that the
Buyer cannot waive obtaining the consent of its stockholders) on or prior to the
Closing Date of the following conditions:
7.1. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of the Sellers contained in this Agreement shall be true and correct
on and as of the Closing Date as if such representations and warranties were
made on and as of that date.
7.2. COMPLIANCE WITH AGREEMENT. The Sellers shall have performed and
complied in all material respects with all their obligations and covenants under
this Agreement to be performed or complied with prior to the Closing Date.
7.3. SELLERS' CERTIFICATE. The Buyer shall have received a Certificate
dated as of the Closing Date executed by each of the Sellers to the effect that
the representations and warranties of the Sellers contained in this Agreement
are true and correct on and as of that date and that the Sellers have performed
or complied with all their obligations and covenants to be performed or complied
with by them prior to the Closing Date.
7.4. CONSENTS. The consent of every party necessary to approve the
transactions contemplated hereby shall have been obtained.
7.5. NO LITIGATION. At the Closing Date, no litigation, proceeding,
investigation or inquiry shall be pending or threatened seeking to enjoin or
prevent the consummation of the transactions contemplated by this Agreement or
to obtain damages or other relief by reason of such consummation.
7.6. DUE DILIGENCE REVIEW. The Buyer and its representatives shall have
conducted a due diligence review of the Company and in the Buyer's sole
discretion, the Buyer shall be satisfied on the basis of such review that Buyer
should proceed with the transactions contemplated hereby.
7.7. PUT/CALL AGREEMENT. The Buyer and the Sellers shall have executed
and delivered an agreement in the form of EXHIBIT D hereto giving the Buyer a
call right to purchase from the Sellers, and giving the Sellers a put right to
sell to the Buyer, the 15 percent of the Voting and Non-Voting Common Stock of
the Company not being sold to the Buyer hereunder.
7.8. OPTIONS. The Options shall have been canceled with the consent
of Gary D. Engle and James A. Coyne.
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7.9. OPINION OF COUNSEL. The Buyer shall have received from Nixon
Peabody LLP, counsel to the Sellers, an opinion as of the Closing Date in form
and substance reasonably acceptable to counsel to the Special Committee of the
Board of Directors of the Buyer as to ownership of the shares and certain
corporate and trust matters.
ARTICLE VIII
INDEMNIFICATION; SET OFF
8.1. INDEMNIFICATION BY THE SELLERS. The Sellers, jointly and
severally, shall indemnify and hold harmless the Buyer, its officers, directors,
controlling persons and affiliates (including, without limitation, the Company)
from and against any loss, liability, claim, damage (including, incidental and
consequential damages), expense (including reasonable legal fees and costs), or
diminution in value arising, directly or indirectly, from or in connection with
any (i) breach or inaccuracy of any of the representations or warranties made by
the Sellers in this Agreement, (ii) breach of any covenant or agreement of the
Sellers contained in this Agreement, and (iii) any and all costs and expenses
(including but not limited to legal costs and expenses) incurred by the Buyer in
connection with the enforcement of its rights hereunder. The representations and
warranties of the Sellers contained in this Agreement or any Schedules hereto,
other than the Special Warranties as defined below, shall survive until the
18-month anniversary of the Closing Date and thereafter shall terminate and be
of no further force or effect, except as to matters as to which the Buyer has
given notice to the Sellers of the basis for indemnification during such
18-month period.
For purposes of this Agreement, the Special Warranties shall be the
representations and warranties of the Sellers contained in (i) Section 2.1
hereof regarding the Shares and (ii) Section 2.14 hereof regarding certain tax
matters. The Special Warranties shall survive indefinitely. This Section 8.1 may
not be amended without the approval of a majority of the independent directors
of the Buyer.
8.2. INDEMNIFICATION BY THE BUYER. The Buyer shall indemnify and hold
harmless the Sellers from and against any and all loss, liability, claim,
damage, expense (including reasonable legal fees and costs), or diminution in
value arising, directly or indirectly, from or in connection with any (i) breach
or inaccuracy of any of the representations or warranties made by the Buyer in
this Agreement and (ii) breach of any covenant or agreement of the Buyer
contained in this Agreement.
8.3. PROCEDURE FOR INDEMNIFICATION - THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under
Section 8.1 or 8.2 hereof of notice of the commencement of any claim, demand,
action or proceeding ("Proceeding") against it, such indemnified party will, if
a claim is to be made against an indemnifying party under such Section, give
notice to indemnifying party of the commencement of such claim, but the failure
to notify the indemnifying party will not relieve the indemnifying party of any
liability that it may have to any indemnified party, except to the extent that
the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
(b) If any Proceeding referred to in Section 8.3(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless the
indemnifying party fails to provide reasonable assurance to the indemnified
party of its financial capacity to defend such Proceeding and provide
indemnification with respect to such Proceeding), to assume the defense of such
Proceeding with counsel satisfactory to the indemnified party and, after notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified party under this
Article IV for any fees of other counsel or any other expenses with respect to
the defense of such Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such Proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the defense
of a Proceeding, (i) it will be conclusively established for purposes of this
Agreement that the claims made in that Proceeding are within the scope of and
subject to indemnification and (ii) no compromise or settlement of such claims
may be effected by the indemnifying party without the indemnified party's
written consent. If notice is given to an indemnifying party of the commencement
of any Proceeding and the indemnifying party does not, within ten days after the
indemnified party's notice is given, give notice to the indemnified party of its
election to assume the defense of such Proceeding, the indemnifying party will
be bound by any determination made in such Proceeding
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or any compromise or settlement effected by the indemnified party.
8.4. BUYER'S RIGHT OF OFFSET. In addition to other remedies available
to the Buyer at law or in equity, the Buyer shall have the right to offset any
and all sums due from the Sellers to the Buyer pursuant to Section 8.1 hereof
against future payments due from the Buyer to the Sellers under the Notes. As an
absolute condition precedent, at least ten days prior to any such offset, the
Buyer shall provide the Sellers with a written notice describing in reasonable
detail the basis for such offset.
ARTICLE IX
RIGHT TO PROCEED, WAIVER, MODIFICATION AND TERMINATION
9.1. RIGHT TO PROCEED. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Article VII has not been
satisfied at the Closing, the Buyer shall have the right to proceed with the
transactions contemplated hereby; if any of the conditions specified in Article
VI hereof has not been satisfied at the Closing, the Sellers shall have the
right to proceed with the transactions contemplated hereby.
9.2. TERMINATION AND ABANDONMENT. This Agreement may be terminated
and the transactions hereby provided for may be abandoned:
(a) by mutual consent of the Buyer and the Sellers;
(b) by the Buyer if any of the conditions provided for in
Article VII of this Agreement has not been satisfied on or before the Closing
Date or in the reasonable judgment of the Buyer will not be satisfied at any
time prior to the Closing Date and has not been waived by the Buyer;
(c) by the Sellers if any of the conditions provided for in
Article VI has not been satisfied on or before the Closing Date or in the
reasonable judgment of the Sellers will not be satisfied at any time prior to
the Closing Date and has not been waived by the Sellers; and
(d) by of the Buyer or by the Sellers if the Closing shall not
have occurred by March 31, 2000; PROVIDED, HOWEVER, that the party terminating
this Agreement in accordance with Sections 9.2(b), (c) or (d) has satisfied or
is ready, willing and able to satisfy all of its conditions to Closing and is
not then in breach of any of its obligations hereunder.
ARTICLE X
OTHER PROVISIONS
10.1. GOVERNING LAW AND JURISDICTION. This Agreement and the rights and
obligations of the parties hereunder shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts without regard to
choice or conflict of law principles. The parties hereby submit to the
jurisdiction of the courts of The Commonwealth of Massachusetts and the United
States District Court for the Eastern District of Massachusetts in any action or
proceeding arising out of or relating to this Agreement. The parties hereby
waive any objection they may have to venue to any such action or proceeding and
to the defense of an inconvenient forum with respect thereto. Each party
consents to service of process in the manner provided for notices herein.
10.2. NOTICES. Unless otherwise provided herein, all notices required
or permitted by the terms hereof shall be in writing. Any written notice shall
become effective when received. All notices and other communications hereunder
shall be deemed to have been duly received if hand delivered or mailed, by
certified or registered mail, return receipt requested, postage prepaid or by
overnight delivery service to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section):
If to the Sellers:
Gary D. Engle
Equis Financial Group Limited Partnership
88 Broad Street
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Boston, MA 02110
with a copy to:
Nixon Peabody LLP
101 Federal Street
Boston, Massachusetts 02110-1832
Attn: Joan Barkhorn Hass
and, if to the Buyer:
Semele Group Inc.
One Canterbury Green, 8th Floor
Stamford, CT 06901
Attn: James A. Coyne
with a copy to:
Shefsky & Froelich Ltd.
444 North Michigan Avenue
Chicago, IL 60611
Attn: Michael J. Choate
10.3. AMENDMENT AND ALTERATION. No amendment or alteration of the terms
of this Agreement shall be valid or binding unless made in writing signed by the
appropriate parties to this Agreement specifically referring to this Agreement.
10.4. BINDING AGREEMENT/ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, permitted assigns and legal
representatives, PROVIDED, HOWEVER, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of each of the other parties.
10.5. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
10.6. INTEGRATION. This Agreement represents the entire agreement among
the parties hereto with respect to the subject matter hereof and supersedes any
prior agreements, negotiations, discussions or understandings with respect to
the subject matter hereof.
IN WITNESS WHEREOF, the Buyer has caused this Agreement to be executed
by its duly authorized representative and the Sellers have executed this
Agreement, under seal, as of the date first set forth above.
THE SELLERS: SEMELE GROUP INC.
/s/ Gary D. Engle By: /s/ Gary M. Romano
- ------------------------------- ---------------------------
Gary D. Engle Gary M. Romano, Chief Financial
Officer
/s/ James A. Coyne
- -------------------------------
James A. Coyne
/s/ Wayne E. Engle
- -------------------------------
Wayne Ellis Engle, Trustee, Staci
Albury Trust u/i/t dated July 21, 1998
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/s/ Wayne E. Engle
- -------------------------------
Wayne Ellis Engle, Trustee, Kristen
Engle Trust u/i/t dated July 21, 1998
/s/ Wayne E. Engle
- -------------------------------
Wayne Ellis Engle, Trustee, Sydney
Peyton Engle Trust u/i/t dated July 21, 1998
/s/ Wayne E. Engle
- -------------------------------
Wayne Ellis Engle, Trustee, Zoe P.
Engle Trust u/i/t dated July 21, 1998
53
<PAGE>
EXHIBIT A-1
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Name Owned to be Sold
---- ----- ----------
Voting Non-voting Voting Non-voting
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Gary D. Engle 450 1,240 382 1,054
James A. Coyne 50 960 42 816
Wayne Ellis Engle, Trustee, Staci Albury Trust None 75 None 64
u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Kristen Engle Trust None 75 None 64
u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Sydney Peyton Engle None 75 None 64
Trust u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Zoe P. Engle Trust None 75 None 64
---- -- ---- --
u/i/t dated July 21, 1998
TOTALS 500 2,500 424 2,126
</TABLE>
54
<PAGE>
EXHIBIT A-2
<TABLE>
<CAPTION>
PURCHASE PRICE
--------------
NAME
----
Note B-1 Note B-2 Note B-3
-------- -------- --------
<S> <C> <C> <C>
Gary D. Engle $8,224,667 $1,737,883 $1,070,897
James A. Coyne 4,915,333 1,038,617 640,003
Wayne Ellis Engle, Trustee, Staci Albury Trust 365,000 77,125 47,525
u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Kristen Engle Trust 365,000 77,125 47,525
u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Sydney Peyton 365,000 77,125 47,525
Engle Trust u/i/t dated July 21, 1998
Wayne Ellis Engle, Trustee, Zoe P. Engle Trust 365,000 77,125 47,525
u/i/t dated July 21, 1998 -------- ------------- ------------
TOTALS $14,600,000 $3,085,000 $1,901,000
</TABLE>
