UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- K/A
Amendment No. 2 to Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-19137
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AIRFUND II International Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3057290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
2,714,647 Units Representing Limited Partnership Interest
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
to the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
EXPLANATORY NOTE
After AIRFUND II International Limited Partnership ("the Partnership")
filed its Annual Report on Form 10-K/A Amendment No. 1 to Form 10-K (the "2000
10-K") for the year ended December 31, 2000 with the United States Securities
and Exchange Commission ("SEC"), the Partnership determined that the accounting
treatment for the loan receivable from Echelon Residential Holdings LLC
("Echelon Residential Holdings") required revision, as explained below.
As reported in the 2000 10-K, on March 8, 2000, the Partnership and 10
affiliated partnerships (the ''Exchange Partnerships'') collectively loaned $32
million to Echelon Residential Holdings, a newly formed real estate company.
The Partnership's loan to Echelon Residential Holdings is $3,640,000. Echelon
Residential Holdings, through a wholly owned subsidiary (Echelon Residential
LLC), used the loan proceeds to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company. The
loan has a term of 30 months, maturing on September 8, 2002 and an annual
interest rate of 14% for the first 24 months and 18% for the final six months.
Interest accrues and compounds monthly and is payable at maturity. In connection
with the transaction, Echelon Residential Holdings has pledged a security
interest in all of its right, title and interest in and to its membership
interests in Echelon Residential LLC to the Exchange Partnerships as collateral.
The loan receivable was previously accounted for and reported in accordance
with the guidance for Acquisition, Development and Construction Arrangements
("ADC arrangements") in the Partnership's financial statements as of and for the
year December 31, 2000. The loan was presented as an investment in a real
estate venture and was presented net of the Partnership's share of losses in
Echelon Residential Holdings. The Partnership was allocated its proportionate
share of the unconsolidated real estate venture's net loss, excluding the
interest expense on the loan, based on the balance of its loan receivable in
relation to the real estate venture's total equity and notes payable, including
the ADC arrangements. For the period ended December 31, 2000, the Partnership's
share of losses in Echelon Residential Holdings was $276,289 and was reflected
on the Statement of Operations as ''Partnership's share of unconsolidated real
estate venture's loss''.
Subsequent to the issuance of the Partnership's financial statements for
the year ended December 31, 2000, the Partnership determined that the loan
receivable should be accounted for consistent with its legal form and the
Partnership should recognize the interest income, as calculated per the
contractual terms of the loan agreement to the extent such interest income was
evaluated as likely to be collected. The loan receivable and related interest
should be evaluated for impairment under Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan".
Accordingly, the Partnership reversed the proportionate share of
losses in Echelon Residential Holdings of $276,289 previously recorded and
recognized interest income of $446,086, resulting in a decrease in the net loss
for the year ended December 31, 2000 of $722,375, or $0.25 per limited
partnership unit. As a result, the accompanying financial statements for the
year ended December 31, 2000 have been restated from the amounts previously
reported. In addition, during the second quarter of 2001 the General Partner
determined that recoverability of the loan receivable had been impaired and at
June 30, 2001 recorded an impairment of $318,500, reflecting the General
Partner's current assessment of the amount of loss that is likely to be incurred
by the Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $590,772 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
A summary of the significant effects of the restatement is as follows:
As of and for the Year Ended
December 31, 2000:
As
Previously As
Statement of Operations Reported Restated
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Income:
Operating lease revenue $ 554,415 $ 554,415
Sales-type lease revenue 2,491 2,491
Interest income 202,930 202,930
Interest income - loan receivable - 446,086
Gain on sale of equipment 884,573 884,573
Other income 300,977 300,977
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Total income 1,945,386 2,391,472
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Expenses:
Depreciation 297,611 297,611
Interest expense 103,919 103,919
Equipment management fees - affiliate 29,913 29,913
Operating expenses - affiliate 1,061,428 1,061,428
Partnership's share of unconsolidated
real estate venture's loss 276,289 -
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Total expenses 1,769,160 1,492,871
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Net income $ 176,226 $ 898,601
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Net income per limited partnership unit $ 0.06 $ 0.31
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Balance Sheet Data:
Total assets $ 9,250,375 $ 9,972,750
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Total liabilities $ 1,550,098 $ 1,550,098
Partners' capital (deficit)
General Partner (2,610,443) (2,574,324)
Limited Partnership Interests 10,310,720 10,996,976
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Total partners' capital $ 7,700,277 $ 8,422,652
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10- K/A
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Partnership 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 48
PART I
Item 1. Business.
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(a) General Development of Business
AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). The Partnership issued 2,714,647
units, representing assignments of limited partnership interests (the "Units"),
to 4,192 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The General
Partner is an affiliate of Equis Financial Group Limited Partnership (formerly
known as American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by EFG. The General Partner is
not required to make any other capital contributions to the Partnership except
as may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended", or the "Partnership Agreement").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one operating industry segment:
financial services. Historically, the Partnership has acquired used commercial
aircraft and leased the aircraft to creditworthy lessees on a full-payout or
operating lease basis. Full-payout leases are those in which aggregate
undiscounted noncancellable rents equal or exceed the acquisition cost of the
leased equipment. Operating leases are those in which the aggregate
undiscounted noncancellable rental payments are less than the acquisition cost
of the leased equipment. In the year ended December 31,2000, the Partnership
also entered into a sales-type lease, described in Note 3 to the financial
statements included in Item 8 herein. Industry segment data is not applicable.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 herein.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 10 to the financial statements, included in Item 8
herein, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $3,640,000 to a
newly formed real estate company, Echelon Residential Holdings LLC ("Echelon
Residential Holdings") to finance the acquisition of real estate assets by that
company. Echelon Residential Holdings, through a wholly owned subsidiary
(Echelon Residential LLC), used the loan proceeds, along with the loan proceeds
from similar loans by ten affiliated partnerships representing $32 million in
the aggregate, to acquire various real estate assets from Echelon International
Corporation, an unrelated Florida-based real estate company. Echelon
Residential Holding's interest in Echelon Residential is pledged pursuant to a
pledge agreement to the partnerships as collateral for the loans.
(c) Narrative Description of Business
The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives were to acquire
and lease aircraft that would:
1. Generate quarterly cash distributions;
2. Preserve and protect invested capital; and
3. Maintain substantial residual value for ultimate sale of the aircraft.
The Partnership has the additional objective of providing certain federal
income tax benefits.
The initial Interim Closing date of the Offering of Units of the
Partnership was May 17, 1990. The initial purchase of aircraft and the
associated lease commitments occurred on May 18, 1990. Additional purchases of
aircraft (or proportionate interests in aircraft) occurred at each of five
subsequent Interim Closings, the last of which occurred on June 28, 1991, the
Final Closing. The Partnership's aircraft and the associated leases are
described in Note 4 to the financial statements included in Item 8, herein. The
Restated Agreement, as amended, provides that the Partnership will terminate no
later than December 31, 2005. However, the Partnership is a Nominal Defendant in
a Class Action Lawsuit, the outcome of which could significantly alter the
nature of the Partnership's organization and its future business operations.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is compensated for such services as provided for in the
Restated Agreement, as amended, described in Item 13, herein and Note 7 to the
financial statements included in Item 8, herein.
The Partnership's investment in commercial aircraft is, and will continue
to be, subject to various risks, including physical deterioration, technological
obsolescence, and credit quality and defaults by lessees. A principal business
risk of owning and leasing aircraft is the possibility that aggregate lease
revenues and aircraft sale proceeds will be insufficient to provide an
acceptable rate of return on invested capital after payment of all operating
expenses. Another risk is that the credit quality of the lease may deteriorate
after a lease is made. In addition, the leasing industry is very competitive.
The Partnership is subject to considerable competition when the aircraft are
re-leased or sold at the expiration of current lease terms. The Partnership
must compete with lease programs offered directly by manufacturers and other
equipment leasing companies, many of which have greater resources, including
lease programs organized and managed similarly to the Partnership, and including
other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
The terrorist attacks on September 11, 2001 and the commencement of hostilities
thereafter may adversely affect the Partnership's ability to re-lease or sell
equipment. In addition, default by a lessee under a lease may cause aircraft to
be returned to the Partnership at a time when the General Partner or the Manager
is unable to arrange for the re-lease or sale of such aircraft. This could
result in the loss of a material portion of anticipated revenues. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors influence market demand and market values for passenger jet
aircraft.
All of the Partnership's aircraft currently operate in international
markets. All rents due under the leases of these aircraft are denominated in
U.S. dollars. However, the operation of the aircraft in international markets
exposes the Partnership to certain political, credit and economic risks.
Regulatory requirements of other countries governing aircraft registration,
maintenance, liability of lessors and other matters may apply. Political
instability, changes in national policy, competitive pressures, fuel shortages,
recessions and other political and economic events adversely affecting world or
regional trading markets or a particular foreign lessee could also create the
risk that a foreign lessee would be unable to perform its obligations to the
Partnership. The recognition in foreign courts of judgments obtained in United
States courts may be difficult or impossible to obtain and foreign procedural
rules may otherwise delay such recognition. It may be difficult for the
Partnership to obtain possession of aircraft used outside the United States in
the event of default by the lessee or to enforce its rights under the related
lease. Moreover, foreign jurisdictions may confiscate or expropriate aircraft
without paying adequate compensation.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG's ability to sell
and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The General Partner will determine when each aircraft should be sold and
the terms of such sale based upon numerous factors with a view toward achieving
the investment objectives of the Partnership. The General Partner is authorized
to sell the aircraft prior to the expiration of the initial lease terms and
intends to monitor and evaluate the market for resale of the aircraft to
determine whether an aircraft should remain in the Partnership's portfolio or be
sold. As an alternative to sale, the Partnership may enter re-lease agreements
when considered advantageous by the General Partner and the Manager.
The loan made by the Partnership to Echelon Residential Holdings is, and
will continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to
an officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager of Echelon Residential Holdings.
The officer made a $185,465 equity investment in Echelon Residential Holdings.
His return on his equity investment is restricted to the same rate of return as
the partnerships realize on their loans. There is a risk that the court may
object to the general partner's action in structuring the loan in this way since
the officer may be deemed an affiliate and the loans in violation of the
prohibition against loans to affiliates and the court's statement in its order
permitting New Investments that all other provisions of the Partnership
Agreements governing the investment objectives and policies of the Partnership
shall remain in full force and effect. The court may require the partnerships
to restructure or divest the loan.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on
the capital structure and business activities of companies registered
thereunder. The Partnership has active business operations in the financial
services industry, including equipment leasing and the loan to Echelon
Residential Holdings. The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the 1940 Act. The General
Partner is engaged in discussions with the staff of the Securities and Exchange
Commission ("SEC") regarding whether or not the Partnership may be an
inadvertent investment company as a consequence of the above-referenced loan. If
the Partnership were determined to be an unregistered investment company, its
business would be adversely affected.The 1940 Act, among other things, prohibits
an unregistered investment company from offering securities for sale or engaging
in any business in interstate commerce and, consequently, leases and contracts
entered into by partnerships that are unregistered investment companies may be
voidable. The General Partner has consulted counsel and believes that the
Partnership is not an investment company. The General Partner has determined to
take action to resolve the Partnership's status under the 1940 Act by means that
may include disposing or acquiring certain assets that it might not otherwise
dispose or acquire.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC
staff asserts that the notes evidencing the loans to Echelon Residential
Holdings are investment securities and the ownership of the notes by said
partnerships cause them to be investment companies and that, in the case of
American Income Partners V-A Limited Partnership and V-B Limited Partnership,
they may have become investment companies when they received the Semele Group
Inc. ("Semele") securities as part of the compensation for the sale of a vessel
to Semele in 1997. The general partners have consulted with counsel who
specializes in the 1940 Act and, based on counsel's advice, do not believe that
the Designated Partnerships are investment companies.
The letter also stated that the Division is considering whether to commence
an enforcement action with respect to this matter. Noting that the parties to
the Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the surrounding circumstances and
after an in-depth analysis of the applicable law, if asked, counsel would be
willing to issue an opinion of the firm that none of the partnerships is an
investment company under the 1940 Act. The Defendants stated their belief that
the proposed settlement is still viable and in the best interests of the parties
and that final approval should be pursued. The Defendants advised the court
that they believe that if the court were to address the issue of whether or not
the 1940 Act applies to the partnerships and the proposed consolidation, it
could remove the major obstacle to the settlement being finally consummated.
The Defendants also requested that the court schedule a hearing to address on a
preliminary basis the objection to the proposed settlement raised in the SEC
staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since
the SEC has yet to complete its review of the proxy, the Plaintiffs do not
believe that the litigation should continue to be stayed so that the SEC may
continue its regulatory review for an indefinite period of time." Plaintiffs
requested a pre-trial conference to schedule filing of Plaintiffs' motion for
class certification on or before May 29, 2001 and resumption of merits discovery
and discovery related to the class certification motion. Subsequently, after
the May 31, 2001 status conference, on June 4, 2001 the court ordered a March 4,
2002 trial date and referred the case to mediation and to discovery before a
magistrate judge.
Subsequently, after the May 31, 2001 status conference, on June 4, 2001 the
court ordered a March 4, 2002 trial date and referred the case to mediation and
to discovery before a magistrate judge. The Defendants and Plaintiffs' Counsel
have continued to negotiate toward a settlement and have reached agreement as to
its principal business terms. As part of the settlement terms, EFG has agreed
to buy the loans made by the Partnerships to Echelon Residential
Holdings for an aggregate $32 million plus interest at 7.5% per annum, if they
are not repaid prior to or at their maturity date. Upon completion of a
stipulation of settlement, the parties will submit the settlement to the court
for approval.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is
incorporated by reference to Note 3 to the financial statements included in Item
8. Refer to Item 14(a)(3) for lease agreements filed with the Securities and
Exchange Commission.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 for the sole purpose
of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Not applicable.
Item 2. Properties.
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Incorporated herein by reference to Note 4 to the financial statements in
Item 8.
Item 3. Legal Proceedings.
- -----------------------------
Incorporated herein by reference to Note 10 to the financial statements in
Item 8.
Item 4. Submission of Matters to a Vote of Security Holders.
- ----------------------------------------------------------------------
None.
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
- --------------------------------------------------------------------------------
Matters.
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(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 2000, there were 3,923 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Historically, the amount of cash distributions to be paid to the Partners
has been determined on a quarterly basis (see detail below). The Partnership
did not declare distributions in any of the years ended December 31, 2000, 1999
and 1998.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 10 to the financial statements included in Item 8, herein. The General
Partner has continued to suspend the payment of quarterly cash distributions
pending final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
settled or adjudicated.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
In particular, the Partnership must contemplate the potential liquidity
risks associated with its investment in commercial jet aircraft. The management
and remarketing of aircraft can involve, among other things, significant costs
and lengthy remarketing initiatives. Although the Partnership's lessees are
required to maintain the aircraft during the period of lease contract, repair,
maintenance, and/or refurbishment costs at lease expiration can be substantial.
For example, an aircraft that is returned to the Partnership meeting minimum
airworthiness standards, such as flight hours or engine cycles, nonetheless may
require heavy maintenance in order to bring its engines, airframe and other
hardware up to standards that will permit its prospective use in commercial air
transportation.
At December 31, 2000, the Partnership's equipment portfolio included
ownership interests in three commercial jet aircraft, one of which is a Boeing
737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003.The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i) (a) for a period of two years from Final Closing,
Cash From Sales or Refinancings, which the General Partner at its sole
discretion reinvests in additional aircraft, provided, however, that Cash From
Sales or Refinancings will be reinvested in additional aircraft only if
Partnership revenues are sufficient to make distributions to the Recognized
Owners in the amount of the income tax, if any, due from a Recognized Owner in
the 33% combined federal and state income tax bracket as a result of such sale
or refinancing of aircraft, and (b) amounts realized from any loss or
destruction of any aircraft which the General Partner reinvests in replacement
aircraft to be leased under the original lease of the lost or destroyed
aircraft, and (ii) any accrued and unpaid Equipment Management Fees and, after
Payout, any accrued and unpaid Subordinated Remarketing Fees.
"Cash From Sales or Refinancings" means cash received by the Partnership
from Sale or Refinancing transactions, as (i) reduced by (a) all debts and
liabilities of the Partnership required to be paid as a result of Sale or
Refinancing transactions, whether or not then due and payable (including any
liabilities on aircraft sold which are not assumed by the buyer and any
remarketing fees required to be paid to persons not affiliated with the General
Partner, but not including any Subordinated Remarketing Fees required to be
paid) and (b) any reserves for working capital and contingent liabilities funded
from such cash to the extent deemed reasonable by the General Partner and (ii)
increased by any portion of such reserves deemed by the General Partner not to
be required for Partnership operations. In the event the Partnership accepts a
note in connection with any Sale or Refinancing transaction, all payments
subsequently received in cash by the Partnership with respect to such note shall
be included in Cash From Sales or Refinancings, regardless of the treatment of
such payments by the Partnership for tax or accounting purposes. If the
Partnership receives purchase money obligations in payment for aircraft sold,
which are secured by liens on such aircraft, the amount of such obligations
shall not be included in Cash From Sales or Refinancings until the obligations
are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made as follows:
Prior to Payout, (i) Distributable Cash From Operations will be distributed 95%
to the Recognized Owners and 5% to the General Partner and (ii) Distributable
Cash From Sales or Refinancings shall be distributed 99% to the Recognized
Owners and 1% to the General Partner. After Payout, (i) all Distributions will
be distributed 99% to the General Partner and 1% to the Recognized Owners until
the General Partner has received an amount equal to 5% of all Distributions made
by the Partnership and (ii) thereafter, all Distributions will be made 90% to
the Recognized Owners and 10% to the General Partner.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 10% (compounded quarterly and calculated beginning with the last day
of the month of the Partnership's Closing Date) on their aggregate unreturned
capital contributions. For purposes of this definition, capital contributions
shall be deemed to have been returned only to the extent that distributions of
cash to the Recognized Owners exceed the amount required to satisfy the
cumulative annual return of 10% (compounded quarterly) on the Recognized Owners'
aggregate unreturned capital contributions, such calculation to be based on the
aggregate unreturned capital contributions outstanding on the first day of each
fiscal quarter.
- ------
Item 6. Selected Financial Data.
- ------------------------------------
The following data should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included in Item 8 herein.
For each of the years in the five year period ended December 31, 2000:
Summary of
Operations 2000 1999 1998 1997 1996
- --------------------------------------- ------------- ---------- ------------ ------------ ------------
. Restated (1)
Operating and sales-type lease revenue. $ 556,906 $1,841,170 $ 3,130,704 $ 3,224,618 $ 4,706,774
Interest Income . . . . . . . . . . . . $ 649,016 $ 267,788 $ 158,844 $ 110,635 $ 265,820
Net income (loss) . . . . . . . . . . . $ 898,601 $1,892,009 $(1,208,085) $(1,762,752) $(3,649,940)
Per Unit:
Net income (loss). . . . . . . . . . . $ 0.31 $ 0.66 $ (0.42) $ (0.62) $ (1.28)
Cash distributions declared. . . . . . $ -- $ -- $ -- $ -- $ 2.25
Financial Position
- ---------------------------------------
Total assets. . . . . . . . . . . . . . $ 9,972,750 $9,112,479 $ 8,076,569 $ 9,765,106 $13,163,812
Total long-term obligations . . . . . . $ 906,869 $ 981,775 $ 1,896,665 $ 2,677,520 $ 3,419,785
Partners' capital . . . . . . . . . . . $ 8,422,652 $7,524,051 $ 5,632,042 $ 6,840,127 $ 8,602,879
(1) See Note 1 to the financial statements, included in Item 8 herein, regarding
the restatement of the Partnership's 2000 financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Year ended December 31, 2000 compared to the year
ended December 31, 1999 and the year ended December 31, 1999
compared to the year ended December 31, 1998
Subsequent to the issuance of the Partnership's financial statements as of
and for the year ended December 31, 2000, the Partnership revised its method of
accounting for the loan receivable from Echelon Residential Holdings. As a
result, the financial statements as of and for the year ended December 31, 2000
have been restated from amounts previously reported. The effects of the
restatement are presented in Note 1 to the financial statements, included in
Item 8 and have been reflected herein. The following should be read in
conjunction with the restated Financial Statements, including notes thereto.
The following discussion compares the restated financial condition and results
of operations for the year ended December 31, 2000 to the year ended December
31, 1999 and the year ended December 31, 1999 to the year ended December 31,
1998.
Certain statements in this Form 10-K/A Amendment No. 2 of the Partnership
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are subject
to a variety of risks and uncertainties. There are a number of factors that
could cause actual results to differ materially from those expressed in any
forward-looking statements made herein. These factors include, but are not
limited to, the outcome of the Class Action Lawsuit described in Note 10 to the
financial statements included in Item 8 herein, the remarketing of the
Partnership's equipment, and the performance of the Partnership's non-equipment
assets.
Overview
- --------
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft, which were leased by major carriers, engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. Currently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft, or sold. At December 31, 2000, the Partnership's equipment
portfolio included proportionate ownership interests in three aircraft and two
aircraft engines. In addition, in 2000 the Partnership entered into a
conditional sales agreement related to its interest in an aircraft. Presently,
the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations. See Note 10 to the financial statements
included in Item 8 herein. Pursuant to the Restated Agreement, as amended, the
Partnership is scheduled to be dissolved by December 31, 2005.
The 1940 Act places restrictions on the capital structure and business
activities of companies registered thereunder. The Partnership has active
business operations in the financial services industry, including equipment
leasing and the loan to Echelon Residential Holdings. The Partnership does not
intend to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
SEC regarding whether or not the Partnership may be an inadvertent investment
company as a consequence of the above-referenced loan. If the Partnership were
determined to be an unregistered investment company, its business would be
adversely affected.The 1940 Act, among other things, prohibits an unregistered
investment company from offering securities for sale or engaging in any business
in interstate commerce and, consequently, leases and contracts entered into by
partnerships that are unregistered investment companies may be voidable. The
General Partner has consulted counsel and believes that the Partnership is not
an investment company. The General Partner has determined to take action to
resolve the Partnership's status under the 1940 Act by means that may include
disposing or acquiring certain assets that it might not otherwise dispose or
acquire.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC
staff asserts that the notes evidencing the loans to Echelon Residential
Holdings are investment securities and the ownership of the notes by said
partnerships cause them to be investment companies and that, in the case of
American Income Partners V-A Limited Partnership and V-B Limited Partnership,
they may have become investment companies when they received the Semele Group
Inc. ("Semele") securities as part of the compensation for the sale of a vessel
to Semele in 1997. The general partners have consulted with counsel who
specializes in the 1940 Act and, based on counsel's advice, do not believe that
the Designated Partnerships are investment companies.
The letter also stated that the Division is considering whether to commence
an enforcement action with respect to this matter. Noting that the parties to
the Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to Designated Partnerships, the 1940 Act does not prohibit going forward
with the proposed settlement, as that transaction is merely incidental to a
dissolution of the Partnerships and therefore is not subject to the prohibitions
of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the surrounding circumstances and
after an in-depth analysis of the applicable law, if asked, counsel would be
willing to issue an opinion of the firm that none of the partnerships is an
investment company under the 1940 Act. The Defendants stated their belief that
the proposed settlement is still viable and in the best interests of the parties
and that final approval should be pursued. The Defendants advised the court
that they believe that if the court were to address the issue of whether or not
the 1940 Act applies to the partnerships and the proposed consolidation, it
could remove the major obstacle to the settlement being finally consummated.
The Defendants also requested that the court schedule a hearing to address on a
preliminary basis the objection to the proposed settlement raised in the SEC
staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since
the SEC has yet to complete its review of the proxy, the Plaintiffs do not
believe that the litigation should continue to be stayed so that the SEC may
continue its regulatory review for an indefinite period of time." Plaintiffs
requested a pre-trial conference to schedule filing of Plaintiffs' motion for
class certification on or before May 29, 2001 and resumption of merits discovery
and discovery related to the class certification motion. Subsequently, after
the May 31, 2001 status conference, on June 4, 2001 the court ordered a March 4,
2002 trial date and referred the case to mediation and to discovery before a
magistrate judge. The Defendants and Plaintiffs' Counsel have continued to
negotiate toward a settlement and have reached agreement as to its principal
business terms. As part of the settlement terms, EFG has agreed to buy the
loans made by the Partnerships to Echelon Residential Holdings for an
aggregate $32 million plus interest at 7.5% per annum, if they are not repaid
prior to or at their maturity date. Upon completion of a stipulation of
settlement, the parties will submit the settlement to the court for approval.
Results of Operations
- -----------------------
For the year ended December 31, 2000, the Partnership recognized operating
lease revenue of $554,415 compared to $1,841,170 and $3,130,704 for the years
ended December 31, 1999 and 1998, respectively. The decrease in lease revenue
from 1999 to 2000 resulted primarily from the expiration of lease terms related
to the Partnership's interest in three Boeing 737-2H4 aircraft and a McDonnell
Douglas MD-82 aircraft, as discussed below, and the sales of the Partnership's
Boeing 727-208 ADV aircraft and its Boeing 727-251 ADV aircraft in April 1999
and May 2000, respectively. The decrease in lease revenue from 1998 to 1999
resulted primarily to the non-payment of rents by the lessee of the
Partnership's Lockheed L-1011-100 aircraft and the lessee's subsequent
liquidation (see below), the non-payment of rents by the lessee of the
Partnership's Boeing 727-251 ADV aircraft (see below) and the sale of the Boeing
727-208 ADV aircraft and the Partnership's interest in a Lockheed L-1011-50
aircraft in April 1998. The amount of operating lease revenues in the near term
will increase due to the re-lease of both the McDonnell Douglas MD-82 aircraft
and one of the Boeing 737-2H4 aircraft in September 2000. Subsequently,
operating lease revenue is expected to decline due to lease term expiration and
aircraft sales. See discussion below related to the Partnership's sales-type
lease revenue for the year ended December 31, 2000.
The Partnership's equipment portfolio included assets in which the
Partnership holds a proportionate ownership interest. The remaining interests
are owned by an affiliated equipment leasing program sponsored by Equis
Financial Group Limited Partnership ("EFG"). The Partnership and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership held a proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold, resulting in $255,645 of proceeds and a net gain, for
financial statement purposes, of $43,102. In September 2000, a second Boeing
737-2H4 aircraft was re-leased, with a lease term expiring in September 2003.
Under the terms of this re-lease agreement, the Partnership will receive rents
of approximately $350,000 over the term of the lease. The Partnership entered
into a conditional sales agreement to sell its interest in the remaining Boeing
737-2H4 aircraft as described below.
The lease term associated with a McDonnell Douglas MD-82 aircraft, in which
the Partnership holds an ownership interest, expired in January 2000. The
aircraft was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V.,
with a lease term expiring in September 2004. Under the terms of this re-lease
agreement, the Partnership will receive rents of approximately $1,176,358 over
the term of the lease. The remaining McDonnell Douglas MD-82 aircraft, in which
the Partnership owns an ownership interest, is currently on lease to Finnair OY
through April 2001.
Interest income for the year ended December 31, 2000 was $649,016 compared
to $267,788 and $158,844 for the years ended December 31, 1999 and 1998,
respectively. Interest income is typically generated from temporary investments
of rental receipts, equipment sale proceeds in short-term instruments and
interest earned on the loan receivable from Echelon Residential Holdings. The
amount of future interest income from the short-term instruments is expected to
fluctuate as a result of changing interest rates and the amount of cash
available for investment, among other factors.
Interest income also included $446,086 for the year ended December 31, 2000
earned on the loan receivable from Echelon Residential Holdings. On March 8,
2000, the Partnership utilized $3,640,000 of available cash for the loan to
Echelon Residential Holdings. The entire principal and all accrued interest
on the loan is due at the loan's maturity on September 8, 2002. (See further
discussion included in Note 5 to the financial statements included in Item 8
herein).
The loan receivable was previously accounted for and reported in accordance
with the guidance for Acquisition, Development and Construction Arrangements
("ADC arrangements") in the Partnership's financial statements as of and for the
year December 31, 2000. The loan was presented as an investment in a real
estate venture and was presented net of the Partnership's share of losses in
Echelon Residential Holdings. The Partnership was allocated its proportionate
share of the unconsolidated real estate venture's net loss, excluding the
interest expense on the loan, based on the balance of its loan receivable in
relation to the real estate venture's total equity and notes payable, including
the ADC arrangements. For the period ended December 31, 2000, the Partnership's
share of losses in Echelon Residential Holdings was $163,952 and was reflected
on the Statement of Operations as ''Partnership's share of unconsolidated real
estate venture's loss''.
Subsequent to the issuance of the Partnership's financial statements for
the year ended December 31, 2000, the Partnership determined that the loan
receivable should be accounted for consistent with its legal form and the
Partnership should recognize the interest income, as calculated per the
contractual terms of the loan agreement to the extent such interest income was
evaluated as likely to be collected. The loan receivable and related interest
income should be evaluated for impairment under Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan".
Accordingly, the Partnership reversed the proportionate share of losses in
Echelon Residential Holdings of $163,952 previously recorded and recognized
interest income of $264,711, resulting in a decrease in the net loss for the
year ended December 31, 2000 of $428,663, or $0.30 per limited partnership unit.
As a result, the accompanying financial statements for the year ended December
31, 2000 have been restated from the amounts previously reported. In addition,
during the second quarter of 2001 the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $189,000, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $350,569 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
Other income for the year ended December 31, 2000 reflects the receipt of
$245,977 of unused aircraft maintenance reserves related to a sold aircraft and
$55,000 for the sale of certain aircraft records.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft. The title to the aircraft
transfers to Royal Aviation Inc., at the expiration of the lease term. The sale
of the aircraft has been recorded by the Partnership as a sales-type lease, with
a lease term expiring in January 2002. For the year ended December 31, 2000,
the Partnership recorded a net gain on sale of equipment, for financial
statement purposes, of $91,471 for the Partnership's proportional interest in
the aircraft and recognized sales-type lease revenue of $2,491.
The Partnership's Boeing 727-251 ADV aircraft was damaged in an on-ground
accident in October 1998 while being leased on a month-to-month basis by
Transmeridian Airlines, Inc. ("Transmeridian"). In September 1999, Transmeridian
ceased paying rent with respect to this aircraft. See Note 10 to the
accompanying financial statements for details regarding legal action undertaken
by the Partnership related to this situation. In May 2000, the Partnership sold
the Boeing 727-251 ADV aircraft to a third party for proceeds of $750,000. This
aircraft was fully depreciated at the time of sale resulting in a net gain, for
financial statement purposes, of $750,000 for the year ended December 31, 2000.
The Partnership recognized lease revenue of $70,000, $560,000, and $876,667
related to this aircraft during the years ended December 31, 2000, 1999 and
1998, respectively.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc. ("ATA"), to the lessee for net
proceeds of $3,109,500. The aircraft was fully depreciated at the time of sale,
resulting in a net gain, for financial statement purposes, of $3,109,500. The
Partnership recognized lease revenue of approximately $246,000 and $762,000
related to this aircraft for the year ended December 31, 1999 and 1998,
respectively.
In August 1998, Classic Airways Limited ("Classic") ceased paying rent with
respect to the Partnership's Lockheed L-1011-100 jet aircraft. In October 1998,
Classic filed for receivership in the United Kingdom ("UK") and was placed in
liquidation (see further discussion below). The Partnership earned lease
revenue in the amount of approximately $320,000 related to this aircraft during
the year ended December 31, 1998.
On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Lockheed L-1011-50 aircraft to
the lessee for net proceeds of $553,699. The Partnership's interest in the
aircraft had a net book value of $426,434 at the time of sale, resulting in the
recognition of a net gain on sale, for financial statement purposes, of
$127,265.
It cannot be determined whether future sales of aircraft will result
in a net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of aircraft being sold and their
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any aircraft will be
dependent upon many factors, including EFG's ability to sell and re-lease the
aircraft. Changes in market conditions, industry trends, technological
advances, and other events could converge to enhance or detract from asset
values at any given time. EFG attempts to monitor these changes and the airline
industry in order to identify opportunities which may be advantageous to the
Partnership and which will maximize total cash returns for each aircraft.
The total economic value realized for each aircraft is comprised of all
primary lease term revenue generated from that aircraft, together with its
residual value. The latter consists of cash proceeds realized upon the
aircraft's sale in addition to all other cash receipts obtained from renting the
aircraft on a re-lease, renewal or month-to-month basis. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
Interest expense was $103,919, $120,701 and $200,679 for the years ended
December 31, 2000, 1999 and 1998, respectively. Interest expense in near term
will increase as a result of the Partnership's debt refinancing in February
2001. (See Note 12 to the financial statements included in Item 8.)
Subsequently, interest expense will decline as the principal balance of notes
payable is reduced through the application of rent receipts to outstanding debt.
See additional discussion below regarding the refinancing of the debt in 2001.
Management fees of $29,913, 92,059, and 156,535 for the years ended
December 31, 2000, 1999 and 1998, respectively. Management fees are based on 5%
of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Operating expenses were $1,061,428, $2,059,346 and $1,815,947 for the years
ended December 31, 2000, 1999 and 1998, respectively. In 2000 and 1999, the
Partnership accrued approximately $149,000 and $201,000, respectively, for the
reconfiguration costs and completion of a D-Check incurred to facilitate the
remarketing of the McDonnell Douglas MD-82 aircraft released in September 2000.
In 2000, the Partnership also accrued approximately $201,000 for a required
D-check for a second McDonnell Douglas MD-82 aircraft. In addition, the
Partnership incurred legal fees in connection with the lease-related litigation
described in Note 10 to the financial statements included in Item 8. Operating
expenses in the year ended December 31, 1999 include engine leasing costs of
$984,000 incurred related to the aircraft leased to Transmeridian and legal
costs related to the Partnership's ongoing litigation. In addition, the
operating expenses in 1998 also included legal costs incurred in connection with
legal proceedings related to Northwest Airlines, Inc. and Classic. Operating
expenses in 2000, 1999 and 1998 also included approximately $41,000, $50,000 and
$332,000, respectively, related to the Class Action Lawsuit described in Note 10
to the financial statements included in Item 8. Other operating expenses consist
principally of professional service costs, such as audit and legal fees, as well
as insurance, printing, distribution and other remarketing expenses.
Depreciation expense was $297,611, $1,054,343, and $2,451,737 for the years
ended December 31, 2000, 1999, and 1998, respectively.
Liquidity and Capital Resources and Discussion of Cash Flows
- --------------------------------------------------------------------
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from aircraft rental transactions.
Accordingly, the Partnership's principal source of cash from operations is the
collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated a net cash outflow of
$182,996 in 2000 and net cash inflows of $99,270 and $1,550,424 in 1999 and
1998, respectively. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Partnership remarket its aircraft. The Partnership, however, may continue to
incur significant costs to facilitate the successful remarketing of its aircraft
in the future. Ultimately, the Partnership will dispose of all aircraft under
lease. This will occur principally through sale transactions whereby each
aircraft will be sold to the existing lessee or to a third party. Generally,
this will occur upon expiration of each aircraft's primary or renewal/re-lease
term. The amount of future cash from interest income is expected to fluctuate
as a result of changing interest rates and the level of cash available for
investment, among other factors. The loan to Echelon Residential Holdings and
accrued interest thereon is due in full at maturity on September 8, 2002.
Cash realized from aircraft disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. For the year
ended December 31, 2000, the Partnership realized net cash proceeds of
$1,005,645 related to its Boeing 737-2H4 and 727-251 ADV aircraft. In 1999, the
Partnership received sales proceeds of $3,109,500 related to its Boeing 727-208
ADV aircraft formerly leased to ATA. During the year ended December 31, 1998,
the Partnership sold its interest in a Lockheed L-1011-50 aircraft and realized
net cash proceeds of $553,699. Future inflows of cash from aircraft disposals
will vary in timing and amount and will be influenced by many factors including,
but not limited to, the frequency and timing of lease expirations, the type of
aircraft being sold, their condition and age, and future market conditions.
At December 31, 2000, the Partnership was due aggregate future minimum
lease payments of $1,727,838 from contractual operating and sales-type lease
agreements (see Notes 2 and 5 to the financial statements included in Item 8), a
portion of which will be used to amortize the principal balance of notes payable
of $906,869 (see Note 8 to the financial statements included in Item 8). At the
expiration of the individual lease terms underlying the Partnership's future
minimum lease payments, the Partnership will sell its aircraft or enter re-lease
or renewal agreements when considered advantageous by the General Partner and
EFG. Such future remarketing activities will result in the realization of
additional cash inflows in the form of sale proceeds or rents from renewals and
re-leases, the timing and extent of which cannot be predicted with certainty.
This is because the timing and extent of remarketing events often is dependent
upon the needs and interests of the existing lessees. Some lessees may choose
to renew their lease contracts, while others may elect to return the aircraft.
In the latter instances, the aircraft could be re-leased to another lessee or
sold to a third party.
In August 1998, a lessee of the Partnership, Classic, ceased paying rent to
the Partnership with respect to a Lockheed L-1011-100 Aircraft (the "Aircraft")
and the Partnership terminated the lease. Classic then filed for receivership
in the United Kingdom ("UK") and was placed in liquidation. Prior to its
liquidation, Classic had incurred and failed to pay significant airport ground
fees to BAA plc, Eurocontrol, and CAA (collectively, the "Airport Authorities").
Classic's failure to pay such charges resulted in detention of the Aircraft by
BAA plc. The total of ground fees and expenses asserted by the Airport
Authorities, which continued to accrue after the detention began, exceeded
$1,500,000 at November 30, 1999. Prior to that date, the General Partner had
attempted to reach a negotiated settlement with the Airport Authorities so that
the Aircraft could be returned to the Partnership. Those negotiations were
unsuccessful and the General Partner determined that the amount of fees owed to
the Airport Authorities was in excess of the Aircraft's value and, therefore, it
would not be in the Partnership's best interests to pay these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the
aircraft to satisfy the unpaid charges and, on December 8, 1999, the Aircraft
was sold at auction. It is believed that the sale price was insufficient to
satisfy the aggregate fees owed to the Airport Authorities. Accordingly, the
Partnership will not realize any portion of the sale proceeds obtained by BAA
plc nor any future residual value from the Aircraft. Notwithstanding the
foregoing, the Partnership held the Aircraft's records, which were sold for
$55,000 in 2000. In addition, the Partnership retains two engines that had been
removed from the Aircraft for maintenance prior to Classic's liquidation. The
General Partner is attempting to remarket these engines. At the date of
Classic's liquidation, the Partnership had accrued $160,000 of rental income
which had not been collected from Classic and all of which was written off as
uncollectible in the third quarter of 1998. The Aircraft, including the two
engines that were removed for maintenance, had been fully depreciated prior to
the auction by BAA plc. Subsequent to the auction, the Aircraft (except for the
two engines) was written off by the Partnership.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 10 to the financial statements included in Item 8, the
court permitted the Partnership to invest in any new investment, including but
not limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $3,640,000 to a newly
formed real estate company, Echelon Residential Holdings to finance the
acquisition of real estate assets by that company. Echelon Residential
Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the
loan proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an unrelated Florida-based
real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity.
The loan made by the Partnership to Echelon Residential Holdings is, and
will continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon
Residential Holdings could have a material adverse effect on the future cash
flow and operating results of the Partnership. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to
an officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager of Echelon Residential Holdings.
The officer made a $185,465 equity investment in Echelon Residential Holdings.
His return on his equity investment is restricted to the same rate of return as
the partnerships realize on their loans. There is a risk that the court may
object to the General Partner's action in structuring the loan in this way since
the officer may be deemed an affiliate and the loans in violation of the
prohibition against loans to affiliates and the court's statement in its order
permitting New Investments that all other provisions of the Partnership
Agreements governing the investment objectives and policies of the Partnership
shall remain in full force and effect. The court may require the partnerships
to restructure or divest the loan.
The Partnership obtained long-term financing in connection with certain
aircraft. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities in the
Partnership's Statement of Cash Flows. The corresponding note agreements are
recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization periods (which
generally coincides with the lease terms). As rental payments are collected, a
portion of all of the rental payments is used to repay associated indebtedness.
In the near term, the amount of cash used to repay debt obligations will
increase due to the refinancing discussed below. Subsequently the amount of
cash used will decline as the principal balance of notes payable is reduced
through the collection and application of rents.
In February 2000, the Partnership and certain affiliated investment
programs (collectively, the ''Programs'') refinanced the indebtedness, which
matured in January 2000 associated with a McDonnell Douglas MD-82 aircraft
re-leased in September 2000. In addition to refinancing the existing
indebtedness of $3,370,000, the Programs received additional debt proceeds of
$1,350,000 required to perform a D-Check on the aircraft. The Partnership
received $201,247 from such proceeds. The note had a fluctuating interest rate
based on LIBOR plus a margin with interest payments due monthly. The
Partnership's aggregate share of the refinanced and new indebtedness was
$701,062, which matured in August 2000. The Partnership paid interest-only on
the debt throughout 2000. In February 2001, the Programs refinanced the
outstanding indebtedness and accrued interest related to this aircraft. In
addition to refinancing the Programs' total existing indebtedness and accrued
interest of $4,758,845, the Programs received additional debt proceeds of
$3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $1,211,860 including $706,831 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $505,028 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft on lease to
Finnair OY of $130,852 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a
fixed interest rate of 7.65%, principal is amortized monthly and the Partnership
has a balloon payment obligation at the expiration of the lease term of $404,138
in September 2004.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation.
At December 31, 2000, the Partnership's equipment portfolio included
ownership interests in three commercial jet aircraft, one of which is a Boeing
737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003.The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 9 to the financial statements included in Item 8). For instance,
selling commissions and organization and offering costs pertaining to
syndication of the Partnership's limited partnership units are not deductible
for federal income tax purposes, but are recorded as a reduction of partners'
capital for financial reporting purposes. Therefore, such differences are
permanent differences between capital accounts for financial reporting and
federal income tax purposes. Other differences between the bases of capital
accounts for federal income tax and financial reporting purposes occur due to
timing differences consisting of the cumulative difference between income or
loss for tax purposes and financial statement income or loss. The principal
components of the cumulative difference between financial statement income or
loss and tax income or loss result from different depreciation policies for book
and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 2000. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
The outcome of the Class Action Lawsuit described in Note 10 to the
financial statements included in Item 8 herein will be the principal factor in
determining the future of the Partnership's operations. In addition, the
General Partner will continue to suspend the payment of quarterly cash
distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is adjudicated.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
- -----------------------------------------------------------------------------
The Partnership's financial statements include financial instruments that
are exposed to interest rate risks.
The Partnership's exposure to market risk for changes in interest rates at
December 31, 2000 related primarily to the Partnership's note payable for which
the interest rate is based on the London Interbank Offering Rate ("LIBOR").
However, subsequent to December 31, 2000, the Partnership refinanced its
variable rate note payable with instruments bearing a fixed rate of interest.
The fair market value of fixed interest rate debt may be adversely impacted due
to a decrease in interest rates. The effect of a 100 bases point increase in
the interest rate on this note payable would not have a material effect on the
Partnership's financial statements.
The Partnership's loan to Echelon Residential Holdings matures on September
8, 2002 and earns interest at a fixed annual rate of 14% for the first 24 months
and a fixed annual rate of 18% for the last 6 months of the loan, with interest
due at maturity. Investments earning a fixed rate of interest may have their
fair market value adversely impacted due to a rise in interest rates. The
effect of interest rate fluctuations on the Partnership in 2000 was not
material.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------------
Financial Statements (Restated):
Report of Independent Auditors . . . . . . . . . . . 20
Statement of Financial Position
at December 31, 2000 and 1999. . . . . . . . . . . . 21
Statement of Operations
for the years ended December 31, 2000, 1999 and 1998 22
Statement of Changes in Partners' Capital
for the years ended December 31, 2000, 1999 and 1998 23
Statement of Cash Flows
for the years ended December 31, 2000, 1999 and 1998 24
Notes to the Financial Statements. . . . . . . . . . 25
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of AIRFUND II
International Limited Partnership, as of December 31, 2000 and 1999, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 AIRFUND II International
Limited Partnership at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements for the year ended December 31, 2000 have
been restated as discussed in Note 1.
/S/ ERNST & YOUNG LLP
Tampa, Florida
March 30, 2001,
except for Note 1 and the last 7 paragraphs of Note 12, as to which the date is
November 7, 2001
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2000 AND 1999
. 2000 1999
------------- ------------
. Restated
. (See Note 1)
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . $ 2,827,385 $ 5,719,642
Rents receivable . . . . . . . . . . . . . . . . . . 116,820 --
Accounts receivable - affiliate. . . . . . . . . . . 33,452 1,476
Other assets . . . . . . . . . . . . . . . . . . . . 24,508 31,742
Interest receivable - loan receivable. . . . . . . . 446,086 --
Loan receivable. . . . . . . . . . . . . . . . . . . 3,640,000 --
Net investment in sales-type lease . . . . . . . . . 240,330 --
Equipment at cost, net of accumulated
depreciation of $8,152,945 and $18,449,875
at December 31, 2000 and 1999, respectively. . . 2,644,169 3,359,619
------------- ------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 9,972,750 $ 9,112,479
============= ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable. . . . . . . . . . . . . . . . . . . . $ 906,869 $ 981,775
Accrued interest . . . . . . . . . . . . . . . . . . 7,161 13,356
Accrued liabilities. . . . . . . . . . . . . . . . . 591,617 463,324
Accrued liabilities - affiliate. . . . . . . . . . . 17,207 78,593
Deferred rental income . . . . . . . . . . . . . . . 27,244 51,380
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . 1,550,098 1,588,428
------------- ------------
Partners' capital (deficit):
General Partner. . . . . . . . . . . . . . . . . (2,574,324) (2,619,254)
Limited Partnership Interests (2,714,647 Units;
initial purchase price of $25 each) . . . . . . 10,996,976 10,143,305
------------- ------------
Total partners' capital . . . . . . . . . . . . . . 8,422,652 7,524,051
------------- ------------
Total liabilities and partners' capital . . . . . . $ 9,972,750 $ 9,112,479
============= ============
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
. 2000 1999 1998
------------- ---------- ------------
. Restated
. (See Note 1)
Income:
Operating lease revenue. . . . . . $ 554,415 $1,841,170 $ 3,130,704
Sales-type lease revenue . . . . . 2,491 -- --
Interest income. . . . . . . . . . 202,930 267,788 158,844
Interest income - loan receivable. 446,086 -- --
Other income . . . . . . . . . . . 300,977 -- --
Gain on sale of equipment. . . . . 884,573 3,109,500 127,265
------------- ---------- ------------
Total income . . . . . . . . . . . 2,391,472 5,218,458 3,416,813
------------- ---------- ------------
Expenses:
Depreciation . . . . . . . . . . . 297,611 1,054,343 2,451,737
Interest expense . . . . . . . . . 103,919 120,701 200,679
Equipment management fees -
affiliate . . . . . . . . 29,913 92,059 156,535
Operating expenses - affiliate . . 1,061,428 2,059,346 1,815,947
------------- ---------- ------------
Total expenses . . . . . . . . . 1,492,871 3,326,449 4,624,898
------------- ---------- ------------
Net income (loss) $ 898,601 $1,892,009 $(1,208,085)
============= ========== ============
Net income (loss)
per limited partnership unit $ 0.31 $ 0.66 $ (0.42)
============= ========== ============
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
. General
. Partner Recognized Owners
. Amount Units Amount Total
------------ ----------------- ------------ ------------
Balance at December 31, 1997. . . . . . $(2,653,450) 2,714,647 $ 9,493,577 $ 6,840,127
Net loss - 1998 . . . . . . . . . . (60,404) -- (1,147,681) (1,208,085)
------------ ----------------- ------------ ------------
Balance at December 31, 1998. . . . . . (2,713,854) 2,714,647 8,345,896 5,632,042
Net income - 1999 . . . . . . . . . 94,600 -- 1,797,409 1,892,009
------------ ----------------- ------------ ------------
Balance at December 31, 1999. . . . . . (2,619,254) 2,714,647 10,143,305 7,524,051
Net income - 2000 (restated) . . . 44,930 -- 853,671 898,601
------------ ----------------- ------------ ------------
Balance at December 31, 2000 (restated) $(2,574,324) 2,714,647 $10,996,976 $ 8,422,652
============ ================= ============ ============
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
. 2000 1999 1998
------------- ----------------- ---------------
. Restated
. (See Note 1)
Cash flows provided by (used in) operating activities:
Net income (loss) $ 898,601 $ 1,892,009 $ (1,208,085)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 297,611 1,054,343 2,451,737
Sales-type lease revenue . . . . . . . . . . . . . . . . . (2,491) -- --
Gain on sale of equipment. . . . . . . . . . . . . . . . . (884,573) (3,109,500) (127,265)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable . . . . . . . . . . . . . . . . . . . . (116,820) 39,933 25,187
Accounts receivable - affiliate. . . . . . . . . . . . . (31,976) 69,702 234,181
Other assets . . . . . . . . . . . . . . . . . . . . . . 7,234 93,992 (125,734)
Interest receivable - loan receivable. . . . . . . . (446,086) -- --
Collections on net investment in sales-type lease. . . . 58,928 -- --
Increase (decrease) in:
Accrued interest . . . . . . . . . . . . . . . . . . . . (6,195) (11,770) (4,492)
Accrued liabilities. . . . . . . . . . . . . . . . . . . 128,293 4,839 450,235
Accrued liabilities - affiliate. . . . . . . . . . . . . (61,386) 62,339 (26,270)
Deferred rental income . . . . . . . . . . . . . . . . . (24,136) 3,383 (119,070)
------------- ----------------- ---------------
Net cash (used in) provided by operating activities. . . . (182,996) 99,270 1,550,424
------------- ----------------- ---------------
Cash flows provided by (used in) investing activities:
Proceeds from equipment sales. . . . . . . . . . . . . . . 1,005,645 3,109,500 553,699
Issuance of loan receivable. . . . . . . . . . . . . . . . (3,640,000) -- --
------------- ----------------- ---------------
Net cash (used in) provided by investing activities. . . (2,634,355) 3,109,500 553,699
------------- ----------------- ---------------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable. . . . . . . . . . . . . . . . 201,247 -- --
Principal payments - notes payable . . . . . . . . . . . . (276,153) (914,890) (780,855)
------------- ----------------- ---------------
Net cash used in financing activities. . . . . . . . . . (74,906) (914,890) (780,855)
------------- ----------------- ---------------
Net (decrease) increase in cash and cash equivalents (2,892,257) 2,293,880 1,323,268
Cash and cash equivalents at beginning of year 5,719,642 3,425,762 2,102,494
------------- ----------------- ---------------
Cash and cash equivalents at end of year $ 2,827,385 $ 5,719,642 $ 3,425,762
============= ================= ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 110,114 $ 132,471 $ 205,171
============= ================= ===============
Supplemental disclosure of non-cash financing activities:
Equipment sold on sales-type lease $ 296,767 $ -- $ --
============= ================= ===============
The accompanying notes are an integral part of these financial statements.
46
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
- --------------------------------------------------
After AIRFUND II International Limited Partnership ("the Partnership")
filed its Annual Report on Form 10-K/A Amendment No. 1 to Form 10-K (the "2000
10-K") for the year ended December 31, 2000 with the United States Securities
and Exchange Commission ("SEC"), the Partnership determined that the accounting
treatment for the loan receivable from Echelon Residential Holdings LLC
("Echelon Residential Holdings") required revision, as explained below.
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''Exchange Partnerships'') collectively loaned $32 million to Echelon
Residential Holdings, a newly formed real estate company.
The Partnership's loan to Echelon Residential Holdings is $3,640,000.
Echelon Residential Holdings, through a wholly owned subsidiary (Echelon
Residential LLC), used the loan proceeds to acquire various real estate assets
from Echelon International Corporation, a Florida-based real estate company. The
loan has a term of 30 months, maturing on September 8, 2002 and an annual
interest rate of 14% for the first 24 months and 18% for the final six months.
Interest accrues and compounds monthly and is payable at maturity. In connection
with the transaction, Echelon Residential Holdings has pledged a security
interest in all of its right, title and interest in and to its membership
interests in Echelon Residential LLC to the Partnerships as collateral.
The loan receivable was previously accounted for and reported in accordance with
the guidance for Acquisition, Development and Construction Arrangements ("ADC
arrangements") in the Partnership's financial statements as of and for the year
December 31, 2000. The loan was presented as an investment in a real estate
venture and was presented net of the Partnership's share of losses in Echelon
Residential Holdings. The Partnership was allocated its proportionate share of
the unconsolidated real estate venture's net loss, excluding the interest
expense on the loan, based on the balance of its loan receivable in relation to
the real estate venture's total equity and notes payable, including the ADC
arrangements. For the period ended December 31, 2000, the Partnership's share
of losses in Echelon Residential Holdings was $276,289 and was reflected on the
Statement of Operations as ''Partnership's share of unconsolidated real estate
venture's loss''.
Subsequent to the issuance of the Partnership's financial statements for
the year ended December 31, 2000, the Partnership determined that the loan
receivable and related interest should be accounted for consistent with its
legal form and the Partnership should recognize the interest income, as
calculated per the contractual terms of the loan agreement to the extent such
interest income was evaluated as likely to be collected. The loan receivable
and related interest should be evaluated for impairment under Statement of
Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment
of a Loan".
Accordingly, the Partnership reversed the proportionate share of losses in
Echelon Residential Holdings of $276,289 previously recorded and recognized
interest income of $446,086, resulting in a decrease in the net loss for the
year ended December 31, 2000 of $722,375, or $0.25 per limited partnership unit.
As a result, the accompanying financial statements for the year ended December
31, 2000 have been restated from the amounts previously reported. In addition,
during the second quarter of 2001 the General Partner determined that
recoverability of the loan receivable had been impaired and at June 30, 2001
recorded an impairment of $318,500, reflecting the General Partner's current
assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest of $590,772 recorded on the loan
receivable through March 31, 2001 and has ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001.
NOTE 2 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------------
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on July 20,
1989 for the purpose of acquiring and leasing to third parties a specified
portfolio of used commercial aircraft. Partners' capital initially consisted of
contributions of $1,000 from the General Partner (AFG Aircraft Management
Corporation, a Massachusetts corporation) and $100 from the Initial Limited
Partner (AFG Assignor Corporation, a Massachusetts corporation). The
Partnership issued 2,714,647 units, representing assignments of limited
partnership interests (the "Units"), to 4,192 investors. Unitholders and
Limited Partners (other than the Initial Limited Partner) are collectively
referred to as Recognized Owners. The General Partner is an affiliate of Equis
Financial Group Limited Partnership (formerly known as American Finance Group),
a Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by EFG. The General Partner is not required to make any other
capital contributions to the Partnership except as may be required under the
Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and
Certificate of Limited Partnership (the "Restated Agreement, as amended").
EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.
On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.
. . . Recognized
Closing Date Units Issued Purchase Price Owners
- ------------------- ------------ --------------- ----------
May 17, 1990. . . . 1,725,100 $ 43,127,500 2,600
August 2, 1990. . . 317,986 7,949,650 494
October 1, 1990 . . 159,510 3,987,750 251
December 27, 1990 . 246,845 6,171,125 398
February 15, 1991 . 112,796 2,819,900 173
June 28, 1991 . . . 152,410 3,810,250 276
------------ --------------- ----------
Totals. . . . . . 2,714,647 $ 67,866,175 4,192
============ =============== ==========
Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% to the General Partner.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 7).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Cash
- ----
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in repurchase agreements with overnight maturities. Under
the terms of the agreements, title to the underlying securities passes to the
Partnership. The securities underlying the agreements are book entry
securities. At December 31, 2000, the Partnership had $2,710,280 invested in
federal agency discount notes, repurchase agreements secured by U.S. Treasury
Bills or interests in U.S. Government securities, or other highly liquid
overnight investments.
Revenue Recognition
- --------------------
Effective January 1, 2000, the Partnership adopted the provisions of
Securities Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides
guidance for the recognition, presentation and disclosure of revenue in
financial statements. The adoption of SAB No. 101 had no impact on the
Partnership's financial statements.
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected
to prevent the orderly wind-up of the Partnership's business activities as the
General Partner and EFG would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 10 regarding the Class Action Lawsuit. Future
minimum rents are $1,472,431 are due as follows:
For the year ending December 31, 2001 $ 491,543
2002 412,079
2003 372,749
2004 196,060
----------
. Total $1,472,431
==========
Lease payments for the sales-type lease are due monthly and the related
revenue is recognized by a method which produces a constant periodic rate of
return on the outstanding investment in the lease. Future minimum lease
payments for the sales-type lease of $255,407 are due in the year ending
December 31, 2001.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is as
follows:
2000 1999 1998
-------- -------- --------
Finnair OY. . . . . . . . . . . $346,949 $634,658 $639,923
Aerovias de Mexico S.A. de C.V. $ 92,311 $ -- $ --
Transmeridian Airlines, Inc.. . $ 70,000 $560,000 $876,667
Southwest Airlines, Inc.. . . . $ -- $380,699 $377,568
American Trans Air, Inc.. . . . $ -- $245,533 $762,000
Classic Airways Limited . . . . $ -- $ -- $319,960
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.
Equipment on Lease
- --------------------
All aircraft were acquired from EFG or one of its Affiliates. Equipment
Cost means the actual cost paid by the Partnership to acquire the aircraft,
including acquisition fees. Equipment cost reflects the actual price paid for
the aircraft by EFG or the Affiliate plus all actual costs incurred by EFG or
the Affiliate while carrying the aircraft less the amount of all rents received
by EFG or the Affiliate prior to selling the aircraft.
Depreciation
- ------------
The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that
an aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. 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.
The ultimate realization of residual value for any type of aircraft is
dependent upon many factors, including EFG's ability to sell and re-lease
aircraft. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Remarketing and Maintenance Expenses
- ---------------------------------------
The Partnership expenses storage and remarketing costs associated with
aircraft and other equipment under lease as incurred.
Generally, the costs of scheduled inspections and repairs and routine
maintenance for aircraft and other equipment under lease are the responsibility
of the lessee. For aircraft under lease, scheduled airframe inspections and
repairs, such as "D checks", are generally the responsibility of the lessee. In
certain situations, the Partnership may be responsible for reimbursing the
lessee for a portion of such costs paid by the lessee prior to the redelivery
date (i.e., the expiration of the lease term) or may be entitled to receive
additional payments from the lessee based on the terms and conditions set forth
in the lease arrangement which considers, among other things, the amount of time
remaining until the next scheduled maintenance event. The Partnership records
the amount payable or receivable, with a corresponding charge or credit to
operations.
Allowance for Loan Losses
- ----------------------------
In accordance with Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), the
Partnership periodically evaluates the collectibility of its loan's contractual
principal and interest and the existence of loan impairment indicators,
including contemporaneous economic conditions, situations which could affect the
borrower's ability to repay its obligation, the estimated value of the
underlying collateral, and other relevant factors. Real estate values are
discounted using a present value methodology over the period between the
financial reporting date and the estimated disposition date of each property. A
loan is considered to be impaired when, based on current information and events,
it is probable that the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement, which includes both
principal and interest. A provision for loan losses is charged to earnings
based on the judgment of the Partnership's management of the amount necessary to
maintain the allowance for loan losses at a level adequate to absorb probable
losses.
Net Investment in Sales-Type Lease
- --------------------------------------
For leases that qualify as sales-type leases, the Partnership recognizes
profit or loss at lease inception to the extent the fair value of the property
leased differs from the carrying value. For balance sheet purposes, the
aggregate lease payments receivable are recorded on the balance sheet net of
unearned income as net investment in sales-type lease. Unearned income is
recognized as sales-type lease revenue over the lease term using the interest
method.
Impairment of Long-Lived Assets
- ----------------------------------
The carrying value of long-lived assets, including equipment and the real
estate loan, will be reviewed for impairment whenever events or changes in
circumstances indicate that the recorded value cannot be recovered from
undiscounted future cash flows.
Accrued Liabilities - Affiliate
- ----------------------------------
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 7).
Contingencies
- -------------
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is probable.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated. After a status
conference, on June 4, 2001 the court set a trial date of March 4, 2002 and
referred the case to mediation and to a magistrate judge (See Note 10). The
Defendant's and Plaintiff's Counsel have continued to negotiate toward a
settlement and have reached agreement as to its principal business terms. As
part of the settlement, EFG has agreed to buy the loans made by the Exchange
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date. Upon completion of a stipulation of settlement, the
parties will submit the settlement to the court for approval. The Partnership's
estimated exposure for costs anticipated to be incurred in pursuing the
settlement proposal is approximately $423,000 consisting principally of legal
fees and other professional service costs. These costs are expected to be
incurred regardless of whether the proposed settlement ultimately is effected
and, therefore, the Partnership expensed approximately $332,000 of these costs
in 1998 following the Court's approval of the settlement plan. The cost
estimate is subject to change and is monitored by the General Partner based upon
the progress of the litigation and other pertinent information. As a result,
the Partnership accrued and expensed additional amounts of approximately $41,000
and $50,000 for such costs during 2000 and 1999, respectively. See notes 9 and
11 for additional discussions.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on
the capital structure and business activities of companies registered
thereunder. The Partnership has active business operations in the financial
services industry, including equipment leasing, the loan to Echelon Residential
Holdings and its ownership of securities of Semele. The Partnership does not
intend to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. If the Partnership were determined to be an unregistered
investment company, its business would be adversely affected.The 1940 Act, among
other things, prohibits an unregistered investment company from offering
securities for sale or engaging in any business in interstate commerce and,
consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. The General Partner has
consulted counsel and believes that the Partnership is not an investment
company. The General Partner has determined to take action to resolve the
Partnership's status under the 1940 Act by means that may include disposing or
acquiring certain assets that it might not otherwise dispose or acquire.
Allocation of Profits and Losses
- ------------------------------------
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 9 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) Per Unit
- ------------------------------
Net income (loss) per unit is based on 2,714,647 Units outstanding during
each of the three years in the period ended December 31, 2000 and computed after
allocation of the General Partner's 5% share of net income (loss).
Provision for Income Taxes
- -----------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their separate tax returns.
NOTE 4 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at
December 31, 2000. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 2000 under contracted lease terms.
A remaining lease term equal to zero reflects equipment held for sale or
re-lease in the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
. Remaining
. Lease Term Equipment
Equipment Type (Months) at Cost Location
- ---------------------------------------------- ----------- ----------- ---------
Two Rolls Royce aircraft engines 0 $ 6,000,000 Warehouse
One McDonnell Douglas MD-82 (Finnair) 4 2,078,640 Foreign
One McDonnell Douglas MD-82
(Aerovias de Mexico S.A. de C.V) 44 2,078,640 Foreign
One Boeing 737-2H4 (Air Slovakia) 32 639,834 Foreign
-----------
Total equipment cost. . . . . . . . . . . . - 10,797,114
Accumulated depreciation . - 8,152,945
-----------
Equipment, net of accumulated depreciation - $ 2,644,169
===========
The cost of each of the Partnership's aircraft represents proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
Certain of the Partnership's aircraft and the related lease payment streams
were used to secure the Partnership's term loans with third-party lenders. The
preceding summary includes leveraged equipment having an aggregate original cost
of approximately $4,157,000 and a net book value of approximately $2,446,000 at
December 31, 2000. (See Note 8).
The Partnership entered into a three-year release agreement with Air
Slovakia for its proportionate interest in a Boeing 737-2H4 aircraft, effective
September 2000. Under the terms of this agreement, the Partnership will receive
rents of approximately $350,000 over the term of the lease. The Partnership
entered into a four-year re-lease agreement with Aerovias de Mexico, S.A. de
C.V. for its proportionate interest in a McDonnell Douglas MD-82 aircraft,
effective September 2000. Under the terms of this agreement, the Partnership
will receive rents of approximately $1,176,000 over the term of the lease.
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the aircraft. At
December 31, 2000, all of the Partnership's aircraft were subject to contracted
lease agreements, except the Rolls Royce aircraft engines, which were
warehoused. The General Partner is attempting to remarket these engines.
NOTE 5 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''Exchange Partnerships'') collectively loaned $32 million to Echelon
Residential Holdings, a newly formed real estate company. Echelon Residential
Holdings is owned by several investors, including James A. Coyne, Executive Vice
President of EFG. In addition, certain affiliates of the General Partner made
loans to Echelon Residential Holdings in their individual capacities. Echelon
Residential Holdings, through its wholly-owned subsidiary (Echelon Residential
LLC), used the loan proceeds, along with the loan proceeds from the other
Exchange Partnerships, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company.
In the Class Action Lawsuit, there is a risk that the court may object to the
General Partner's action in structuring the loan in this way since the EFG
officer may be deemed an affiliate and the loans in violation of the prohibition
against loans to affiliates and the court's statement in its order permitting
New Investments that all other provisions of the Partnership Agreements
governing the investment objectives and policies of the Partnership shall remain
in full force and effect. The court may require the partnerships to restructure
or divest the loan.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings, through a wholly-owned subsidiary (Echelon Residential
LLC), used the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida-based real estate company. The loan has a
term of 30 months, maturing on September 8, 2002, and an annual interest rate of
14% for the first 24 months and 18% for the final six months. Interest accrues
and compounds monthly and is payable at maturity. During the year ended
December 31, 2000, the Partnership recognized $446,086 of interest income
related to this loan. In connection with the transaction, Echelon Residential
Holdings has pledged a security interest in all of its right, title and interest
in and to its membership interests in Echelon Residential LLC to the Exchange
Partnerships as collateral. Echelon Residential Holdings has no material
business interests other than those connected with the real estate properties
owned by Echelon Residential LLC.
The summarized financial information for Echelon Residential Holdings as of
December 31, 2000 and for the period March 8, 2000 (commencement of operations)
through December 31, 2000 is as follows:
Total assets .. . . . . . . . . . . . $68,580,891
Total liabilities . . . . . . . . . . $70,183,162
Minority interest . . . . . . . . . . $ 2,257,367
Total deficit .. . . . . . . . . . . $(3,859,638)
Total revenues .. . . . . . . . . . . $ 5,230,212
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture. . . . . . . . . . . . $11,936,238
Net loss .. . . . . . . . . . . . . . $(6,706,026)
See Note 12, Subsequent Events, for discussion of an impairment recorded by
the Partnership of the loan receivable and related interest receivable during
the second quarter of 2001.
NOTE 6 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft transfers to Royal
Aviation Inc., at the expiration of the lease term. The sale of the aircraft
has been recorded by the Partnership as a sales-type lease, with a lease term
expiring in January 2002. For the year ended December 31, 2000, the Partnership
recorded a net gain on sale of equipment, for financial statement purposes, of
$91,471 for the Partnership's proportional interest in the aircraft and
recognized sales-type lease revenue of $2,491. The net book value of equipment
sold on sales-type lease totaled $296,767, which was a non-cash transaction.
The components of the net investment in the sales-type lease are as follows:
Total minimum lease payments to be received $255,407
Less: Unearned income. . . . . . . . . . . 15,077
--------
Total $240,330
========
NOTE 7 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 2000, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
2000 1999 1998
---------- ---------- ----------
Equipment management fees . . . $ 29,913 $ 92,059 $ 156,535
Administrative charges. . . . . 72,967 71,699 53,676
Reimbursable operating expenses
due to third parties . . . . . 988,461 1,987,647 1,762,271
---------- ---------- ----------
Total. . . . . . . . . . . . . $1,091,341 $2,151,405 $1,972,482
========== ========== ==========
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject
to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 3,
Equipment on Lease.
All rents and the proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 2000, the Partnership was owed $33,452 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2001.
An affiliate of the General Partner owns Units in the Partnership as
follows:
Number of Percent of Total
Affiliate Units Owned Outstanding Units
Old North Capital Limited Partnership 40,000 1.47%
- ------------------------------------- ----------- ------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele Group
Inc. ("Semele"). Gary D. Engle is Chairman and Chief Executive Officer of
Semele.
NOTE 8 - NOTES PAYABLE
- --------------------------
Notes payable at December 31, 2000 consisted of two installment notes
payable to banks of $906,869. One installment note bears an interest rate of
8.225% and the other bears a fluctuating interest rate based on LIBOR
(approximately 6.7% at December 31, 2000) plus a margin. Both of the installment
notes are non-recourse and are collateralized by the equipment and assignment of
the related lease payments. The Partnership had a balloon payment obligation
due at the expiration of the lease term related to the aircraft leased to
Finnair OY. This indebtedness was due to mature in 2001. In addition, the
Partnership had a balloon payment obligation of $701,062, which matured in
August 2000. The Partnership paid interest-only on this debt through 2000 and in
February 2001, the Partnership and certain affiliated investment programs
refinanced this indebtedness and repaid the outstanding indebtedness related to
the Finnair OY aircraft. See Note 12, "Subsequent Event", regarding this
refinancing.
Management believes that the carrying amount of notes payable approximates
fair value at December 31, 2000 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the installment notes payable at December 31,
2000, reflecting the maturity of the notes in consideration of the February 2001
refinancing discussed in Note 12, "Subsequent Event", are as follows:
For the year ending December 31, 2001 $109,728
2002 143,640
2003 143,640
2004 511,861
--------
. Total $906,869
========
NOTE 9 - INCOME TAXES
- -------------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net
income or loss in accordance with such agreement. The Restated Agreement, as
amended, requires that upon dissolution of the Partnership, the General Partner
will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
----------- ---------- ------------
Net income (loss) . . . . . . . . . . . . . $ 898,601 $1,892,009 $(1,208,085)
Financial statement depreciation in
excess of (less than) tax depreciation (56,850) 673,872 (713,082)
Deferred rental income. . . . . . . . . . (24,136) 3,383 (119,070)
Other . . . . . . . . . . . . . . . . . . 318,871 64,000 362,435
----------- ---------- ------------
Net income (loss) for federal income
tax reporting purposes. . . . . . . . . $1,136,486 $2,633,264 $(1,677,802)
=========== ========== ============
The principal component of "Other" consists of the difference between the
- --------------------------------------------------------------------------------
tax gain or loss on aircraft disposals and the financial statement gain or loss
- --------------------------------------------------------------------------------
on aircraft disposals. It also includes reversal of certain maintenance
- --------------------------------------------------------------------------------
reserves.
- ---------
The following is a reconciliation between partners' capital reported for
- --------------------------------------------------------------------------------
financial statement and federal income tax reporting purposes for the years
- --------------------------------------------------------------------------------
ended December 31, 2000 and 1999:
- --------------------------------------
2000 1999
----------- ------------
Partners' capital. . . . . . . . . . . . . . . . . . . . . . $ 7,700,277 $ 7,524,051
Add back selling commissions and organization
and offering costs. . . . . . . . . . . . . . . . . . . . . 7,085,240 7,085,240
Cumulative difference between federal income tax
and financial statement income (loss) . . . . . . . . . . . 23,142 (937,118)
----------- ------------
Partners' capital for federal income tax reporting purposes. $14,808,659 $13,672,173
=========== ============
The cumulative difference between federal income tax and financial
- -------------------------------------------------------------------------------
statement income (loss) represents a timing difference.
- -------------------------------------------------------------
NOTE 10 - LEGAL PROCEEDINGS
- -------------------------------
In January 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
- ----
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
- ----
of its affiliates, including the General Partner, 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 was intended to be achieved and which, among other
things, was at the time expected to reduce the burdens and expenses attendant to
continuing litigation. The Stipulation of Settlement 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 12, 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 12, 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 March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided
the Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remained pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
In February 2000, counsel for the Plaintiffs and the Defendants entered
into a second amended stipulation of settlement (the "Second Amended
Stipulation") which modified certain of the settlement terms contained in the
Amended Stipulation. The Second Amended Stipulation was preliminarily approved
by the Court by its "Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000
Order"). Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold a fairness hearing that
will be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff sub-class
members will receive a Notice of Settlement and other information pertinent to
the settlement of their claims that will be mailed to them in advance of the
fairness hearing.
The settlement of the second sub-class was premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate principally as a finance company and would
use its best efforts to list its shares on the NASDAQ National Market or another
national exchange or market as soon after the Consolidation as Newco deems that
market conditions and its business operations are suitable for listing its
shares and Newco has satisfied all necessary regulatory and listing
requirements. The potential benefits and risks of the Consolidation were to be
presented in a Solicitation Statement that would be mailed to all of the
partners of the Exchange Partnerships as soon as the associated regulatory
review process was completed and at least 60 days prior to the fairness hearing.
A preliminary Solicitation Statement was filed with the Securities and Exchange
Commission on August 24, 1998.
One of the principal objectives of the Consolidation was to create a
company that would have the potential to generate more value for the benefit of
existing limited partners than other alternatives, including continuing the
Partnership's customary business operations until all of its assets are disposed
in the ordinary course of business. To facilitate the realization of this
objective, the Amended Stipulation provided, among other things, that commencing
March 22, 1999, the Exchange Partnerships could collectively invest up to 40% of
the total aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively made a $32 million
loan as permitted by the Second Amended Stipulation approved by the Court. The
Partnership's portion of the aggregate loan is $3,640,000. The loan consists of
a term loan to Echelon Residential Holdings, a newly-formed real estate company
that is owned by several independent investors and, in his individual capacity,
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities. Echelon Residential Holdings, through a wholly owned
subsidiary (Echelon Residential LLC), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an unrelated Florida-based real estate company. The
loan has a term of 30 months maturing on September 8, 2002 and bears interest at
the annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. Echelon Residential Holdings has pledged its membership interests in
Echelon Residential LLC to the Exchange Partnerships as collateral for the loan.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of the Exchange
Partnerships with the opportunity to object to the participation of their
partnership in the Consolidation. Assuming the proposed settlement were
effected according to its terms, the Partnership's share of legal fees and
expenses related to the Class Action Lawsuit and the Consolidation was estimated
to be approximately $423,000, of which approximately $332,000 was accrued and
expensed by the Partnership in 1998 and additional amounts of approximately
$41,000 and $50,000 was accrued and expensed in 2000 and 1999, respectively.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permitted the partners to transfer Units to family members or as
a result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
On March 12, 2001, after a status conference and hearing, the Court issued
an order that required the parties, no later than May 15, 2001, to advise the
Court on (a) whether the SEC has completed its review of the solicitation
statement and related materials submitted to the SEC in connection with the
proposed settlement, and (b) whether parties request the Court to schedule a
hearing for final approval of the proposed settlement or are withdrawing the
proposed settlement from judicial consideration and resuming the litigation of
the Plaintiffs' claims. The Court also directed the parties to use their best
efforts to assist the SEC so that its regulatory review may be completed on or
before May 15, 2001. The Court continued the Final Approval Settlement Hearing
until a date to be scheduled in July 2001 after receipt from the parties of a
request to schedule a hearing. Subsequently, after the parties had responded to
the court's order and had participated in a status conference on May 31, 2001,
the court issued an order on June 4, 2001 setting a trial date of March 4, 2002,
referring the case to mediation and referring discovery to a magistrate judge.
The Defendant's and Plaintiff's Counsel have continued to negotiate toward a
settlement and have reached agreement as to its principal business terms. As
part of the settlement, EFG has agreed to buy the loans made by the Exchange
Partnerships to Echelon Residential Holdings for an aggregate of $32 million
plus interest at 7.5% per annum, if they are not repaid prior to or at their
scheduled maturity date. Upon completion of a stipulation of settlement, the
parties will submit the settlement to the court for approval. See Note 12,
Subsequent Events, for an update of the status of proceedings.
In addition to the foregoing, the Partnership is a party 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 as
described below:
First action involving Transmeridian Airlines
- -------------------------------------------------
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines (the
"Plaintiff") filed an action in the 61st Judicial District Court of Harris
County, Texas (the "Court") entitled Prime Air, Inc. d/b/a Transmeridian
--------------------------------------
Airlines v. Investors Asset Holding Corp. ("IAHC"), as Trustee for Airfund II
-------------------------------------------------------------------------
International Limited Partnership, PLM International ("PLM"), and NavCom
-----------------------------------------------------------------------------
Aviation, Inc. (collectively, the "Defendants"). In that action, the Plaintiff
------------
claimed damages of more than $3 million for alleged breach of contract, fraud,
civil conspiracy, tortious interference of business relations, negligent
misrepresentation, negligence and gross negligence, and punitive damages against
the Defendants in connection with Transmeridian's lease of a Boeing 727-251 ADV
jet aircraft from the Partnership. On November 7, 1996, PLM removed the action
to United States District Court for the Southern District of Texas. On February
14, 1997, the Defendants answered the Plaintiff's Complaint denying the
allegations made therein and asserting various defenses.
On July 31, 1998, the Court granted IAHC's motion to strike Plaintiff's
fraud and negligent misrepresentation claims due to failure to plead with
particularity. Extensive discovery was conducted on the merits of Plaintiff's
claims. The Plaintiff, at one point, provided an expert report seeking
approximately $30 million in damages. The Plaintiff later provided a revised
expert report claiming actual damages of approximately $8.5 million and
Plaintiff continued to seek punitive damages and both pre-judgment and
post-judgment interest. On March 18, 1999, the Court entered summary judgment
in favor of IAHC and PLM on all remaining claims. The Plaintiff subsequently
filed a motion to alter or amend the judgment, or in the alternative, to certify
the Court's Order for Interlocutory Appeal. On April 30, 1999, the Court
declined to alter or amend its judgment and entered final judgment in favor of
IAHC and PLM on all remaining claims. The Plaintiff appealed to the United
States Court of Appeals for the 5th Circuit. The Court of Appeals denied
Transmeridian's appeal, affirmed the District Court's judgement in IAHC's favor,
and subsequently denied Transmeridian's request for rehearing. Transmeridian
has not sought further review of the District Court's judgment. There have
been, however, subsequent proceedings in the District Court on IAHC's request
for the assessment of costs in the amount of approximately $35,000.
In connection with this litigation, the Partnership has incurred
substantial legal fees, exceeding $1 million. An action seeking recovery of
these costs was filed on behalf of the Partnership in November 1999. See
"Indemnity action against Transmeridian Airlines and Apple Vacations" described
below.
Second action involving Transmeridian Airlines
- --------------------------------------------------
On November 9, 1998, Investors Asset Holding Corp., as Trustee for the
Partnership (the "Plaintiff"), filed an action in Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract. The action
subsequently was removed to United States District Court for the District of
Massachusetts. The Plaintiff filed an Amended Complaint asserting claims for
breaches of contract and covenant of good faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
In October 1998, an aircraft leased by Transmeridian (being the same
aircraft in the above-referenced "First action involving Transmeridian
Airlines") was damaged in an on-ground accident at the Caracas, Venezuela
airport. The cost to repair the aircraft was estimated to be at least $350,000.
In addition, the Partnership had to lease two substitute engines at a cost of
$82,000 per month. During the year ended December 31, 1999, the Partnership
incurred total engine lease costs of $984,000. This was partially offset by
lease rents paid by Transmeridian of $560,000 during the same period. However,
as of September 11, 1999, Transmeridian ceased paying rent on this aircraft.
The Plaintiff alleges that Transmeridian, among other things, has impeded the
Partnership's ability to terminate the two engine lease contracts between the
Partnership and a third party. The Plaintiff intends to pursue insurance
coverage and also to enforce written guarantees issued by Apple Vacations that
absolutely and unconditionally guarantee Transmeridian's performance under the
lease and is seeking recovery of all costs, lost revenue and monetary damages in
connection with this matter. On September 22, 2000, Transmeridian file a
petition for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code
in the Bankruptcy Court for the Northern District of Georgia in Atlanta (the
"Bankruptcy Court"). This filling automatically stayed all pending litigation
against Transmeridian, including this action. The bankruptcy filings indicate
Transmeridian has at least $24 million in debt. In January 2001, Transmeridian
filed a reorganization plan and disclosure statement indicating that little if
any money will be available for distribution to unsecured creditors like the
Plaintiff. Moreover, Transmeridian's bankruptcy counsel has indicated recently
that he intends to file an adversary proceeding in the bankruptcy court seeking
the turn over to Transmeridian the proceeds of certain insurance policies (in
the amount of approximately $800,000) that insured the Plaintiffs' aircraft
against damage. Plaintiffs contend that all or most of these insurance proceeds
should be paid to them and intend to contest vigorously any effort to cause
these insurance proceeds to be paid to Transmeridian. Plaintiffs' counsel has
recently initiated discussions with Transmeridian's counsel concerning
settlement of the claims against Transmeridian and the dispute over the
insurance proceeds. No assurances can be given that a settlement will be
reached.
On March 2, 2001, Plaintiffs' counsel filed a motion in the Bankruptcy
Court asking the Court to lift the automatic stay of this Massachusetts
proceeding so that it may proceed to final judgment. The Bankruptcy Court has
scheduled a hearing on this motion for April 10, 2001. Transmeridian's
bankruptcy counsel has indicated that he is considering asking the court to move
this Massachusetts action to Georgia and consolidate it with the bankruptcy
proceeding. The General Partner cannot predict the outcome of its motion for
relief from stay or Transmeridian's efforts to transfer venue of the
Massachusetts action. Notwithstanding the Transmeridian bankruptcy, the General
Partner plans to vigorously pursue enforcement of the written guarantees issued
by Apple Vacations; however, it is too early to predict the Plaintiff's
likelihood of success.
Indemnity action against Transmeridian Airlines and Apple Vacations
- --------------------------------------------------------------------------
On November 12, 1999, Investors Asset Holding Corp. ("IAHC"), as trustee
for the Partnership, filed an action against Transmeridian Airlines (f/k/a Prime
Air, Inc.) and Atkinson & Mullen Travel, Inc. (d/b/a Apple Vacations) under
Civil Action No. H-99-3804 in the United States District Court for the Southern
District of Texas, Houston Division, seeking recovery of attorneys' fees and
related costs incurred in defending the action described above under the heading
"First action involving Transmeridian Airlines." The present suit seeks
recovery of expenses pursuant to the indemnification provisions of the lease
agreement under which Transmeridian leased the Boeing 727-251 aircraft.
Currently, the amount being sought is over $1 million. On September 1, 2000,
IHAC filed with the Court a motion for partial summary judgment, seeking
judgment on liability (i.e. that Transmeridian and Apple Vacations are liable
under the lease agreements and guarantees). IHAC also filed a motion for leave
to join in this litigation an affiliate of Apple's, Apple Vacations, West, inc.,
which also gave written guarantees of Transmeridian's performance under the
lease agreements. On September 22, 2000, however, Transmeridian filed a
petition for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code
in the Bankruptcy Court for the Northern District of Georgia in Atlanta (the
"Bankruptcy Court"). See "Second action involving Transmeridian Airlines"
above. On January 10, 2001, the Bankruptcy Court granted IHAC's motion for
relief from the automatic stay so that this litigation may be pursued through to
final judgment. Transmeridian's counsel in this action then filed a motion to
withdraw its appearance on behalf of Transmeridian. The U.S. District Court
allowed that motion on March 6, 2001, and gave Transmeridian 60 days in which to
secure replacement counsel. Within 20 days of the entry of replacement counsel,
Transmeridian is required to file its opposition to IHAC's motion for partial
summary judgment. The U.S. District Court also allowed IHAC's motion to join
Apple Vacations, West, Inc. as a defendant in this action.
The Plaintiffs' counsel has recently initiated discussions with
Transmeridian's counsel concerning settlement of the claims against
Transmeridian. No assurances can be given that a settlement will be reached.
The General Partner cannot predict the outcome of this suit.
Action involving Northwest Airlines, Inc.
- ---------------------------------------------
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance and return obligations under its Lease
Agreements with the Plaintiffs and seeks declaratory judgment concerning
Northwest's obligations and monetary damages. Northwest filed an Answer to the
Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to
Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United
States Magistrate Judge recommended entry of partial summary judgment in favor
of the Plaintiffs. Northwest appealed this decision. On April 15, 1999, the
United States District Court Judge adopted the Magistrate Judge's recommendation
and entered partial summary judgment in favor of the Plaintiffs on their claims
for declaratory judgment. The parties then undertook a second phase of
discovery, focused on damages. This second phase of damages is scheduled to
conclude in April 2001 with the completion of depositions of the parties'
experts. In February 2001, the District Court also denied summary judgment on
certain of the Plaintiffs' other claims, including their tort claims for
conversion. If no settlement is reached, the Plaintiffs will proceed to trial
for an assessment of damages. No firm trial date has been established at this
time; however, if a trial should become necessary, it is not expected to occur
before June 2001. The General Partner believes that the Plaintiff's claims
ultimately will prevail and that the Partnership's financial position will not
be adversely affected by the outcome of this action.
NOTE 11 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999:
Three Months Ended
March 31, June 30, September 30, December 31, Total
----------- ---------- --------------- -------------- ----------
2000
-----------
(As Restated)
Total operating and sales-type lease revenue. $ 109,420 $ 148,602 $ 106,446 $ 192,438 $ 556,906
Net (loss) income . . . . . . . . . . . . . . 33,059 1,072,002 (205,791) (669) 898,601
Net income (loss) per
limited partnership unit. . . . . . . . . . 0.01 0.37 (0.07) (0.00) 0.31
2000
-----------
(As Previously Reported)
Total operating and sales-type lease revenue. $ 109,420 $ 148,602 $ 106,446 $ 192,438 $ 556,906
Net (loss) income . . . . . . . . . . . . . . (4,476) 920,669 (402,587) (337,380) 176,226
Net income (loss) per
limited partnership unit. . . . . . . . . . -- 0.32 (0.14) (0.12) 0.06
1999
-----------
Total lease revenue $ 708,129 482,218 393,846 256,977 $1,841,170
Net (loss) income . . . . . . . . . . . . . . (111,725) $2,915,743 $ (142,229) $ (769,780) 1,892,009
Net (loss) income per
limited partnership unit. . . . . . . . . . (0.04) 1.02 (0.05) (0.27) 0.66
The Partnership's net income in the three months ended June 30, 2000 is
primarily the result of the sale of a Boeing 727-251 ADV aircraft, which
resulted in a net gain, for financial statement purposes, of $750,000.
The Partnership's net income in the three months ended June 30, 1999 is
primarily the result of the sale of a Boeing 727-251 ADV aircraft, which
resulted in a net gain, for financial statement purposes, of $3,109,500.
NOTE 12 - SUBSEQUENT EVENTS
- -------------------------------
Debt Refinancing
- -----------------
In February 2001, the Partnership and certain affiliated investment
programs (collectively "the Programs") refinanced the outstanding indebtedness
and accrued interest related to an aircraft on lease to Aerovias de Mexico, S.A.
de C.V. In addition to refinancing the Programs' total existing indebtedness
and accrued interest of $4,758,845, the Programs received additional debt
proceeds of $3,400,177. The Partnership's aggregate share of the refinanced and
new indebtedness was $1,211,860 including $706,831 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $505,028 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft on lease to
Finnair OY of $130,852 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a
fixed interest rate of 7.65%, principal is amortized monthly and the Partnership
has a balloon payment obligation at the expiration of the lease term of $404,138
in September 2004.
Legal Proceedings
- ------------------
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase, or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC
staff asserts that the notes evidencing the loans to Echelon Residential
Holdings are investment securities and the ownership of the notes by said
partnerships cause them to be investment companies and that, in the case of
American Income Partners V-A Limited Partnership and V-B Limited Partnership,
they may have become investment companies when they received the Semele
securities as part of the compensation for the sale of a vessel to Semele in
1997. The general partners have consulted with counsel who specializes in the
1940 Act and, based on counsel's advice, do not believe that the Designated
Partnerships are investment companies.
The letter also stated that the Division is considering whether to commence
enforcement action with respect to this matter. Noting that the parties to the
Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the surrounding circumstances and
after an in-depth analysis of the applicable law, if asked, counsel would be
willing to issue an opinion of the firm that none of the partnerships is an
investment company under the 1940 Act. The Defendants stated their belief that
the proposed settlement is still viable and in the best interests of the parties
and that final approval should be pursued. The Defendants advised the court
that they believe that if the court were to address the issue of whether or not
the 1940 Act applies to the partnerships and the proposed consolidation, it
could remove the major obstacle to the settlement being finally consummated.
The Defendants also requested that the court schedule a hearing to address on a
preliminary basis the objection to the proposed settlement raised in the staff's
May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since
the SEC has yet to complete its review of the proxy, the Plaintiffs do not
believe that the litigation should continue to be stayed so that the SEC may
continue its regulatory review for an indefinite period of time." Plaintiffs
requested a pre-trial conference to schedule filing of Plaintiffs' motion for
class certification on or before May 29, 2001 and resumption of merits discovery
and discovery related to the class certification motion. Subsequently, after a
status conference on May 31, 2001, the court issued an order on June 4, 2001
setting a trial date of March 4, 2002, referred the case to mediation and
referred discovery to a magistrate judge. The Defendant's and Plaintiff's
Counsel have continued to negotiate toward a settlement and have reached
agreement as to its principal business terms. As part of the settlement, EFG
has agreed to buy the loans made by the Exchange Partnerships to Echelon
Residential Holdings for an aggregate of $32 million plus interest at 7.5% per
annum, if they are not repaid prior to or at their scheduled maturity date.
Upon completion of a stipulation of settlement, the parties will submit the
settlement to the court for approval.
There can be no assurance that a settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
However, in the absence of a final settlement approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
Impairment of Loan Receivable
- --------------------------------
The General Partner has determined that recoverability of the Partnership's
loan receivable from Echelon Residential Holdings, including accrued interest,
became impaired during the second quarter of 2001. As a result, the Partnership
recorded an impairment of $318,500 at June 30, 2001, reflecting the General
Partner's assessment of the amount of loss that is likely to be incurred by the
Partnership. In addition to the write-down recorded at June 30, 2001, the
Partnership reserved all accrued interest recorded on the loan through March 31,
2001, or $590,772, and has ceased the accrual of future interest, effective
April 1, 2001. The write-down was precipitated principally by a slowing U.S.
economy and its effects on the real estate development industry. The economic
outlook for the properties that existed when the loan was funded has
deteriorated and inhibited the ability of Echelon Residential Holdings'
management to secure low-cost sources of development capital, including but not
limited to joint-venture or equity partners. In response to these developments
and lower risk tolerances in the credit markets, the management of Echelon
Residential Holdings decided in the second quarter of 2001 to concentrate its
prospective development activities within the southeastern United States and,
therefore, to dispose of development sites located elsewhere. In May 2001,
Echelon Residential Holdings closed its Texas-based development office; and
since the beginning of 2001, the company has sold three of nine properties (two
in July 2001 and one in October 2001). As of November 2001, one additional
property is under contract to be sold, subject to due diligence that remains
pending. As a result of these developments, the General Partner does not believe
that Echelon Residential Holdings will realize the profit levels originally
believed to be achievable from either selling these properties as a group or
developing all of them as multi-family residential communities.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ----------------------
None.
PART III
Item 10. Directors and Executive Officers of the Partnership.
- ---------------------------------------------------------------------
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of
this report, AFG Aircraft Management Corporation is the sole General Partner of
the Partnership. Under the Restated Agreement, as amended, the General Partner
is solely responsible for the operation of the Partnership's properties. The
Recognized Owners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 2001 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13)
- -------------------------------------------------------------------------------
Name Title Age Term
- ---------------------- --------------------------------------- --- ---------
Geoffrey A. MacDonald Chairman of EFG and President . Until a
. and a Director of the General Partner 52 successor
. . . is duly
Gary D. Engle President and Chief Executive . elected
. Officer of EFG and a . and
. Director of the General Partner 52 qualified
Michael J. Butterfield Executive Vice President and Chief
. Operating Officer of EFG and
. Treasurer of the General Partner 41
Gail D. Ofgant Senior Vice President, Lease Operations
. of EFG and Senior Vice President of
. the General Partner 35
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners,
Directors or Executive Officers.
(e) Business Experience
Mr. MacDonald, age 52, is Chairman of EFG and has been President of the
General Partner since 1988 and a Director of the General Partner since 1988.
Mr. McDonald was a co-founder of EFG's predecessor, American Finance Group,
which was established in 1980. Mr. MacDonald is a member of the Board of
Managers of Echelon Development Holdings LLC and President of American Finance
Group Securities Corporation. Prior to co-founding American Finance Group, Mr.
MacDonald held various positions in the equipment leasing industry and the
ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds
an M.B.A. from Boston College and a B.A. degree from the University of
Massachusetts (Amherst).
Mr. Engle, age 52, is President and Chief Executive Officer of EFG, sole
shareholder and Director of its general partner, Equis Corporation, and a Vice
President and Director of several of EFG's subsidiaries and affiliates. Mr.
Engle has been a Director of the General Partner since 1991 and is President of
AFG Realty Corporation. Mr. Engle is also Chairman and Chief Executive Officer
of Semele Group Inc. ("Semele") and a member of the Board of Managers of Echelon
Development Holdings LLC. Mr. Engle controls the general partners of Atlantic
Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Mr. Engle joined EFG in 1990 as an Executive Vice President
and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle
co-founded Cobb Partners Development, Inc., a real estate and mortgage banking
company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr.
Engle was Senior Vice President and Chief Financial Officer of Arvida Disney
Company, a large-scale community development organization owned by Walt Disney
Company. Prior to 1980, Mr. Engle served in various management consulting and
institutional brokerage capacities. Mr. Engle has an M.B.A. degree from Harvard
University and a B.S. degree from the University of Massachusetts (Amherst).
Mr. Butterfield, age 41, is Executive Vice President and Chief Operating
Officer of EFG and has served as Vice President and Treasurer of the General
Partner since 1996. Mr. Butterfield also serves as Vice President and Treasurer
of subsidiaries and affiliates of EFG. Mr. Butterfield is also Chief Financial
Officer of Semele and Vice President, Finance and Clerk of Equis/Echelon
Management Corporation, the manager of Echelon Residential LLC. Mr. Butterfield
joined EFG in June 1992 and became a Vice President in 1996 and Executive Vice
President and Chief Operating Officer in 2000. Prior to joining EFG, Mr.
Butterfield was an audit manager with Ernst & Young LLP, which he joined in
1987. Mr. Butterfield was also employed in public accounting and industry
positions in New Zealand and London (UK) prior to coming to the United States in
1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.)
professional qualification in New Zealand and has completed his C.P.A.
requirements in the United States. Mr. Butterfield holds a Bachelor of Commerce
degree from the University of Otago, Dunedin, New Zealand.
Ms. Ofgant, age 35, is Senior Vice President, Lease Operations of EFG and
has served as Senior Vice President of the General Partner since 1998. Ms.
Ofgant also serves as Senior Vice President for certain of EFG's affiliates.
Ms. Ofgant is Senior Vice President and Assistant Clerk of Equis/Echelon
Management Corporation, the manager of Echelon Residential LLC. Ms. Ofgant
joined EFG in July 1989 and held various positions with the company before
becoming Senior Vice President in 1998. From 1987 to 1989, Ms. Ofgant was
employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S.
degree from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
Not applicable.
Item 11. Executive Compensation.
- -----------------------------------
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no
plan at the present time to make any partners or employees of the General
Partner or its Affiliates employees of the Partnership. The Partnership has not
paid and does not propose to pay any options, warrants or rights to the officers
or employees of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to Section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the Manager for such
services is included in Item 13 herein, and in Note 7 to the financial
statements included in Item 8, herein.
(d) Stock Options and Stock Appreciation Rights.
Not applicable.
(e) Long-Term Incentive Plan Awards Table.
Not applicable.
(f) Defined Benefit or Actuarial Plan Disclosure.
Not applicable.
(g) Compensation of Directors
None.
(h) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner
or its Affiliates which results or may result from their resignation, retirement
or any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- --------------------------------------------------------------------------------
By virtue of its organization as a limited partnership, the Partnership has
outstanding no securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of the
assets of the Partnership (except in the orderly liquidation of the Partnership
upon its termination and dissolution).
No person or group is known by the General Partner to own beneficially more
than 5% of the Partnership's 2,714,647 outstanding Units as of March 15, 2001.
The ownership and organization of EFG is described in Item 1 of this
report.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------------
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2000 1999 1998
---------- ---------- ----------
Equipment management fees $ 29,913 $ 92,059 $ 156,535
Administrative charges 72,967 71,699 53,676
Reimbursable operating expenses
due to third parties 988,461 1,987,647 1,762,271
---------- ---------- ----------
Total $1,091,341 $2,151,405 $1,972,482
========== ========== ==========
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 3
to the financial statements included in Item 8, herein.
All rents and proceeds from the sale of aircraft are paid directly to EFG
or to a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At
December 31, 2000, the Partnership was owed $33,452 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2001.
In 1990, EFG assigned its equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
An affiliate of the General Partner owns Units in the Partnership as
follows:
Number of Percent of Total
Affiliate Units Owned Outstanding Units
Old North Capital Limited Partnership 40,000 1.47%
- ------------------------------------- ----------- ------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and CEO of Semele.
The discussions of the loan to Echelon Residential Holdings in Items 1(b)
and 1(c) above are incorporated herein by reference.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Documents filed as part of this report:
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K/A, as set forth
in Item 601 of Regulation S-K, are not applicable.
A list of exhibits filed or incorporated by reference is as follows:
Exhibit
Number
----------
2.1 Plaintiffs' and Defendants' Joint Motion to Modify Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the Proposed Settlement was filed
in the Registrant's Annual Report on Form 10-K/A for the year ended December 31,
1998 as Exhibit 2.1 and is incorporated herein by reference.
2.2 Plaintiffs' and Defendants' Joint Memorandum in Support
of Joint Motion to Modify Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report
on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.2 and is
incorporated herein by reference.
2.3 Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice of, and Hearing on, the
Proposed Settlement (August 20, 1998) was filed in the Registrant's Annual
Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.3 and is
incorporated herein by reference.
2.4 Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 22, 1999) was filed in the
Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998
as Exhibit 2.4 and is incorporated herein by reference.
2.5 Plaintiffs' and Defendants' Joint Memorandum in Support of
Joint Motion to Further Modify Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999 as Exhibit 2.5 and is
incorporated herein by reference.
2.6 Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement (March 5, 2000) was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 2.6 and is incorporated herein by reference.
2.7 Proposed Order Granting Joint Motion to Continue Final
Approval Settlement Hearing (March 13, 2001) was filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000 and is
incorporated herein by reference.
2.8 Order Setting Trial Date and Discovery Deadlines,
Referring Case to Mediation and Referring Discovery to United States Magistrate
Judge (June 4, 2001).
Exhibit
Number
------
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus, which was included in
Registration Statement on Form S-1 (No. 33-25334) and is incorporated herein by
reference.
10.1 Promissory Note in the principal amount of $3,640,000 dated
March 8, 2000 between the Registrant, as lender, and Echelon Residential
Holdings LLC, as borrower, was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999 as Exhibit 10.1 and is incorporated
herein by reference.
10.2 Pledge Agreement dated March 8, 2000 between Echelon
Residential Holdings LLC (Pledgor) and American Income Partners V-A Limited
Partnership, as Agent for itself and the Registrant, was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 10.2 and is incorporated herein by reference.
99(a) Lease agreement with American Trans Air, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996
as Exhibit 99 (f) and is incorporated herein by reference.
99(b) Lease agreement with Southwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
as Exhibit 99 (f) and is incorporated herein by reference.
99(c) Lease agreement with Southwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
as Exhibit 99 (g) and is incorporated herein by reference.
99(d) Lease agreement with Southwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
as Exhibit 99 (h) and is incorporated herein by reference.
99(e) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as
Exhibit 99 (i) and is incorporated herein by reference.
99(f) Lease agreement with Finnair OY was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as
Exhibit 99 (j) and is incorporated herein by reference.
99(g) Lease agreement with Transmeridian Airlines, Inc. was filed
in the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997 as Exhibit 99 (k) and is incorporated herein by reference.
99(h) Lease agreement with Classic Airways Limited was filed in
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
as Exhibit 99 (k) and is incorporated herein by reference.
99(i) Lease agreement with Aerovias de Mexico S.A. de C.V. was
filed in the Registrant's Annual Report on Form 10-K for the year ended December
31, 2000 and is incorporated herein by reference.
Exhibit
Number
------
99(j) Aircraft Conditional Sale Agreement with Royal Aviation Inc.
was filed in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 and is incorporated herein by reference.
99(k) Lease agreement with Air Slovakia BWJ, Ltd was filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and
is incorporated herein by reference.
(b) Reports on Form 8-K
None.
(c) Other Exhibits
None.
(c) Financial Statement Schedules:
Consolidated Financial Statements for Echelon Residential Holdings LLC
as of December 31, 2000 and
for the Period March 8, 2000 (Date of Inception) through December 31, 2000
and Independent Auditors'
Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
- -------------------------------------------- --------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman of EFG and President and Chief Executive
President and a Director of the Officer of EFG and a
General Partner Director of the General Partner
. (Principal Executive Officer)
Date: November 13, 2001 Date: November 13, 2001
- -------------------------------------------- --------------------------------
By: /s/ Michael J. Butterfield
- --------------------------------------------
Michael J. Butterfield
Executive Vice President and Chief
Operating Officer of EFG and Treasurer
of the General Partner
(Principal Financial and Accounting Officer)
Date: November 13, 2001
- --------------------------------------------
SCHEDULE 14(D)
ECHELON RESIDENTIAL HOLDINGS LLC
Consolidated Financial Statements
as of December 31, 2000
and for the Period March 8, 2000 (Date of Inception)
through December 31, 2000
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Members of
Echelon Residential Holdings LLC:
We have audited the accompanying consolidated balance sheet of Echelon
Residential Holdings LLC, a Delaware limited liability company ("the Company")
as of December 31, 2000 and the related consolidated statement of operations,
members' equity (deficiency) and cash flows for the period March 8, 2000 (date
of inception) through December 31, 2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the period March
8, 2000 (date of inception) through December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Tampa, Florida
March 23, 2001
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
REAL ESTATE - Net (Notes 1 and 2) $61,092,202
CASH AND CASH EQUIVALENTS (Note 1) 3,789,198
RESTRICTED CASH (Note 1) 8,703
RESTRICTED INVESTMENTS (Note 2) 2,155,160
ACCOUNTS RECEIVABLE - Affiliates (Note 7) 115,521
PREPAID EXPENSES AND OTHER LONG-TERM ASSETS 69,417
CORPORATE EQUIPMENT - Net of accumulated depreciation of $57,733 286,784
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE (Note 3) 1,063,906
------------
TOTAL ASSETS $68,580,891
============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable $ 10,984
Contractor payable 1,752,830
Accounts payable - Affiliates (Note 7) 114,180
Accrued expenses 797,832
Retainage payable 1,125,865
Security deposits 8,625
Interest payable 4,385,805
Construction loans (Note 4) 26,837,740
Other long-term liabilities 109,411
Notes payable (Note 5) 35,039,890
------------
Total liabilities 70,183,162
COMMITMENTS AND CONTINGENCIES (Notes 4 and 9)
MINORITY INTEREST (Note 6) 2,257,367
MEMBERS' EQUITY (DEFICIENCY) (Note 1) (3,859,638)
------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $68,580,891
============
See notes to consolidated financial statements.
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
SALES AND REVENUES:
Real estate operations:
Rental revenues $ 230,834
Management fees 695,162
Developer fees 985,141
Sale of development property 3,104,532
Investment income 191,543
Other Income 23,000
------------
Total sales and revenues 5,230,212
------------
EXPENSES:
Rental and other operations 558,561
Cost of development property sold 3,317,880
Write-down of land held for development or sale 635,437
Depreciation expense 148,861
Interest expense on long-term debt - net of amounts
capitalized of $606,990 4,460,345
General and administrative expenses 2,937,514
------------
Total expenses 12,058,598
------------
EQUITY IN LOSS OF UNCONSOLIDATED JOINT VENTURE (148,023)
MINORITY INTEREST 270,383
------------
NET LOSS $(6,706,026)
============
See notes to consolidated financial statements.
- ------
ECHELON RESIDENTIAL HOLDINGS LLC
- -----------------------------------
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIENCY)
- ------------------------------------------------------------
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- ----------------------------------------------------------------------------
INITIAL PARTICIPATING
MEMBERS MEMBERS TOTAL
BALANCE AT MARCH 8, 2000 $ 195,226 $ - $ 195,226
Members' capital contributions - 2,651,162 2,651,162
Net loss (5,600,020) (1,106,006) (6,706,026)
------------ --------------- ------------
BALANCE AT DECEMBER 31, 2000 $(5,404,794) $ 1,545,156 $(3,859,638)
============ =============== ============
See notes to consolidated financial statements.
- ------
ECHELON RESIDENTIAL HOLDINGS LLC
- -----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- ----------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (6,706,026)
Adjustment to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation 148,861
Loss on sale of development property 213,348
Minority interest (270,383)
Equity in loss of unconsolidated joint venture 148,023
Write-down of land held for development or sale 635,437
Changes in working capital:
Accounts payable, accrued expenses and other liabilities (4,343,190)
Interest payable 4,385,805
Other working capital changes 311,588
-------------
Net cash used in operating activities (5,476,537)
-------------
CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Increase in restricted cash and restricted investments (2,163,863)
Net proceeds from sale of development property 3,104,532
Payments related to construction in progress (29,601,108)
-------------
Net cash used in investing activities (28,660,439)
-------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of notes payable 6,244,000
Repayment of notes payable (5,474,000)
Proceeds from construction loans 26,585,765
Members' capital contributions 2,651,162
-------------
Net cash provided by financing activities 30,006,927
-------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,130,049)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,919,247
-------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,789,198
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 681,530
=============
See notes to consolidated financial statements.
- ------
ECHELON RESIDENTIAL HOLDINGS LLC
- -----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND - On March 7, 2000, EIN Acquisition Corporation ("EIN Acquisition")
closed on a Tender Offer ("Tender Offer") for all of the outstanding shares of
Echelon International Corporation ("Echelon") for a cash price of $34.00 per
share. Immediately after the close of the Tender Offer, EIN Acquisition merged
into Echelon (the "Merger"), with Echelon being the surviving entity.
In conjunction with the Tender Offer, Echelon had entered into various contracts
to sell or convey various real estate assets and investments in two real estate
joint ventures to third parties. Subsequent to the Merger on March 8, 2000,
Echelon closed on existing contracts to sell or convey its real estate assets
and investments in two real estate joint ventures. Specific real estate assets
and investments in two real estate joint ventures were sold to Echelon
Residential LLC ("Echelon Residential"), a wholly owned limited liability
subsidiary of Echelon Residential Holdings LLC ("Echelon Residential Holdings"
or the "Company"). Echelon Residential will own, manage, and develop or sell
these purchased multi-family residential properties.
The acquisition of the assets by Echelon Residential was accounted for as an
asset purchase under Accounting Principles Board Opinion No. 16 ("APB No. 16").
In accordance with APB No. 16, Echelon Residential allocated the total purchase
price to the assets acquired and liabilities assumed based on the estimated fair
market values at the date of acquisition. Since the purchase price of the
business was less than the fair market value of the net assets acquired, the
credit excess was allocated on a pro-rata basis to the real estate, corporate
equipment and the investment in an unconsolidated joint venture. There are no
contingencies or other matters that could materially affect the allocation of
the purchase cost. The results of operations of the acquired real estate assets
and investments in two real estate joint ventures are included in the
consolidated results of Echelon Residential Holdings from the acquisition date.
The Company's summarized consolidated balance sheet, reflecting the above
acquisition of assets, as of March 8, 2000 is as follows:
Assets:
Real estate $34,164,672
Cash and cash equivalents 7,919,247
Investment in unconsolidated joint venture 1,211,929
Other assets 832,417
-----------
Total assets $44,128,265
===========
Liabilities and Members' Equity:
Accounts payable and other liabilities $ 6,883,424
Construction loans 251,975
Notes payable 34,269,890
-----------
Total liabilities 41,405,289
Minority interest 2,527,750
Members' equity 195,226
-----------
Total liabilities and members' equity $44,128,265
===========
The Company's fiscal year end is December 31.
DESCRIPTION OF BUSINESS - Echelon Residential Holdings was formed on February
29, 2000, under the laws of the state of Delaware and operates in one industry
segment: owning, leasing, developing, and managing real estate. There were no
activities of Echelon Residential Holdings from February 29, 2000 through March
8, 2000. The Company is governed by its Amended and Restated Limited Liability
Company Agreement ("the Agreement") dated June 23, 2000. At March 8, 2000,
members' equity included capital contributions from the initial members of the
Company, James A. Coyne and Charles E. Cobb, Jr. ("Initial Members"), who made
collective capital contributions of $195,226. On June 23, 2000, the
participating members, Darryl A. LeClair and Susan G. Johnson ("Participating
Members") made capital contributions totaling $2,651,162. The collective
Participating Members' capital contributions are comprised of Participating A
Capital of $2,591,093, Participating B Capital of $45,052 and additional capital
contributions of $15,017.
Subsequent to the initial capital contributions above, the Agreement was
executed and includes a provision whereby the members have no further obligation
to contribute additional amounts of capital to the Company. If the Company
requires additional funds, the Board of Managers is to notify the members. Each
member has the right to contribute a pro rata share of such additional funds,
based on the relative equity contributions made by each member. In addition,
the liability of the members of the Company is limited to the members' total
capital contributions.
In accordance with the Agreement, the Participating Members earn a cumulative
compounding annual return on their unreturned capital (as defined), at a per
annum rate equal to 14% for Participating A capital and 15% for Participating B
capital, commencing on June 23, 2000. Preferred returns will be paid to the
Participating Members in accordance with the terms of the Agreement. Payout of
preferred returns (if any) is contingent upon the cumulative performance of the
Company. See Note 9 - Commitments and Contingencies.
Per the Agreement, the Company is to distribute its cash flow (if any)
periodically, but not less frequently than quarterly. The losses and profits of
the Company are generally allocated to the members as follows:
a) losses are generally allocable 77.9% to members other than Participating
Members and 22.1% to Participating Members, and
b) profits are generally allocated the same way except for a priority income
allocation to the Participating Members to cover priority cash distributions
made on their Participating Capital.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Echelon Residential Holdings, its wholly owned
subsidiary and a 60% interest in a joint venture. All intercompany balances
have been eliminated. Investments for which the Company has a 20% to 50%
ownership interest are accounted for using the equity method.
The Company has recorded a minority interest in the Company's consolidated
financial statements to reflect the ownership of its partner in the joint
venture.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the amounts of revenues and expenses
during the reported period. Actual
results could differ from those estimates. Significant estimates include the
recoverability of real estate held for sale.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
demand deposits, and short-term investments with original maturities of three
months or less.
RESTRICTED CASH - Restricted cash represents security deposits at multi-family
residential communities held in separate noninterest-bearing depository
accounts.
RESTRICTED INVESTMENTS - Restricted investments represents certificates of
deposit with maturities greater than three months. These investments are held
by financial institutions that require such deposits in support of standby
letters of credit.
REAL ESTATE - Real estate additions are recorded at cost. Interest and real
estate taxes incurred during construction periods are capitalized and
depreciated on the same basis as the related assets. Costs directly related to
the acquisition, development or improvement of real estate, and certain indirect
development costs have also been capitalized. Depreciation is calculated on a
straight-line basis over the estimated lives of the assets as follows:
ESTIMATED
USEFUL LIVES
Buildings 35 years
Furniture, fixtures, and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets,
including property and equipment, will be reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value cannot be
recovered from undiscounted future cash flows.
REVENUE RECOGNITION - The Company recognizes revenue on the sale of real estate
properties when title has passed to the buyer and all contingencies have been
removed. Rental revenues, management fees, and developer fees are recognized
when earned.
INCOME TAXES - Under the provisions of the Internal Revenue Code and applicable
state laws, the Company is not directly subject to income taxes; the results of
its operations are included in the tax returns of its members.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and hedging activities. Under
SFAS No. 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company adopted SFAS No. 133
effective January 1, 2001. There was no impact on the Company's financial
position, results of operations or liquidity resulting from the adoption of SFAS
No. 133.
Effective March 8, 2000 (date of inception), the Company adopted the provisions
of Securities and Exchange Commission Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements ("SAB No. 101"). SAB No. 101 provides
guidance for the recognition, presentation, and disclosure of revenue in
financial statements. The adoption of SAB No. 101 had no impact on the
Company's financial statements.
RECLASSIFICATIONS - Certain amounts previously reported in the March 8, 2000
consolidated balance sheet have been reclassified to conform to the December 31,
2000 presentation.
2. REAL ESTATE - NET
As of December 31, 2000, real estate consists of the following:
Land and land improvements held for development or sale $15,676,581
------------
Real estate under development:
Land and land improvements 8,302,770
Construction in progress 14,694,874
------------
22,997,644
------------
Income producing real estate:
Land and land improvements 2,303,890
Buildings and improvements 19,720,463
Equipment and other 484,752
Accumulated depreciation (91,128)
------------
22,417,977
------------
$61,092,202
============
For the period March 8, 2000 (date of inception) through December 31, 2000, the
Company recorded a write-down of land held for development or sale of $635,437
in the consolidated statement of operations. Land held for development or sale
was determined to have been impaired because the estimated cash flows are less
than the carrying value of the two parcels of land. The estimated fair value of
these two parcels of land was based on letters of intent from third-party
purchasers, dated October 2000 and December 2000, to purchase the two parcels of
land.
As of December 31, 2000, the Company's land and land improvements held for
development or sale includes five parcels of improved and unimproved land for
the development of multi-family residential communities. The land is located in
urban areas in Memphis, Tennessee; Dallas, Texas; Denver, Colorado; and Colorado
Springs, Colorado.
As of December 31, 2000, real estate under development includes the following
three multi-family residential communities:
. . . CONSTRUCTION ACTUAL/ESTIMATED
. RENTABLE LAND COMMENCEMENT DATE FIRST UNITS
PROJECT NAME LOCATION UNITS ACREAGE DATE AVAILABLE
- ----------------------- ----------- -------- ------- ------------ ----------------
ECHELON AT THE BALLPARK Memphis, TN 385 5 Q1 2000 Q1 2001
ECHELON AT LAKESIDE Plano, TX 181 12 Q3 1999 Q3 2000
ECHELON AT UPTOWN Orlando, FL 244 3 Q2 2001 Q2 2002
As discussed in Note 6, Investment in Consolidated Joint Venture Partnership,
ECHELON AT LAKESIDE commenced operations during the period March 8, 2000 (date
of inception) through December 1, 2000 and portions of the project remained
under construction as of December 31, 2000.
As of December 31, 2000, real estate includes $606,990 of interest capitalized
during the period March 8, 2000 (date of inception) through December 31, 2000.
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In July 1999, Fannie Mae's American Communities Fund agreed to invest with a
wholly owned subsidiary of Echelon in the development of ECHELON AT CHENEY
PLACE, a 303-unit multi-family residential community currently under
construction in downtown Orlando, Florida. Echelon's 20% interest in the joint
venture was purchased by Echelon Residential, in conjunction with the real
estate assets purchased as discussed in Note 1, Summary of Business and
Significant Accounting Policies. The Company accounts for its investment in the
joint venture under the equity method. Concurrent with the execution of the
joint venture agreement with Fannie Mae's American Communities Fund, the joint
venture executed an agreement with Wachovia Bank, N.A. for a $21,500,000 loan to
fund the construction of ECHELON AT CHENEY PLACE. The loan is guaranteed by
Echelon Residential.
Construction of ECHELON AT CHENEY PLACE began in late July 1999 and construction
continued on portions of the project through December 31, 2000. For the period
March 8, 2000 (date of inception) through December 31, 2000, the Company
recorded its share of losses for ECHELON AT CHENEY PLACE, from the initial
operations of the project, as a reduction of the investment in unconsolidated
joint venture. As of December 31, 2000, total capital expenditures and
construction loan draws for the project were $24,834,193 and $18,408,921,
respectively. Through December 31, 2000, the Company's capital contributions to
the joint venture totaled $1,386,000. The total of net losses and purchase
price adjustment allocated to the investment in unconsolidated joint venture is
$322,094.
4. CONSTRUCTION LOANS
As of December 31, 2000, the Company's construction loans outstanding are as
follows:
Bank of America $17,614,845
First Union National Bank of Florida 9,222,895
-----------
. $26,837,740
===========
The Company has a $20,000,000 construction loan with Bank of America to fund the
construction of ECHELON AT LAKESIDE. The loan is guaranteed by Echelon
Residential. The interest rate is LIBOR plus 1.85% (8.4875% as of December 31,
2000), and the loan matures in September 2002. As of December 31, 2000, the
Company has made $17,614,845 of construction draws on this loan. See further
discussion of the development of ECHELON AT LAKESIDE included in Note 6,
Investment in Consolidated Joint Venture Partnership. Accrued interest on the
Bank of America construction loan is $125,685 as of December 31, 2000.
The Company has a $26,075,000 construction loan with First Union National Bank
of Florida to fund the construction of ECHELON AT THE BALLPARK, a 385-unit
multi-family residential community currently under construction in downtown
Memphis, Tennessee. The loan is guaranteed by Echelon Residential. The
interest rate is LIBOR plus 1.65% (8.2125% as of December 31, 2000) with monthly
interest payments required through the term of the loan, which expires on June
2002. As of December 31, 2000, the Company has made construction draws of
$9,222,895. Accrued interest on the First Union National Bank construction loan
is $8,258 as of December 31, 2000.
The Company's significant financial covenants include minimum net worth and
liquidity requirements. As of December 31, 2000, the Company was in compliance
with all financial covenants contained in its debt agreements.
In the opinion of management, the carrying value of the Company's construction
loans approximate their fair value based on management's estimates for similar
issues, giving consideration to quality, interest rates, maturity and other
significant characteristics. Although management is not aware of any factors
that would significantly affect the estimated fair value of the construction
loans, the amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since December 31, 2000 and current estimates
of fair value may differ significantly.
See Note 10, Subsequent Event, for discussion of a construction loan executed
for the construction of ECHELON AT UPTOWN, in February 2001.
5. NOTES PAYABLE
As of December 31, 2000, notes payable outstanding are as follows:
American Income Partners V-A Limited Partnership $ 2,160,000
American Income Partners V-B Limited Partnership 5,700,000
American Income Partners V-C Limited Partnership 2,390,000
American Income Partners V-D Limited Partnership 2,730,000
American Income Fund I-A, a Massachusetts Limited Partnership 1,650,000
American Income Fund I-B, a Massachusetts Limited Partnership 1,310,000
American Income Fund I-C, a Massachusetts Limited Partnership 2,780,000
American Income Fund I-D, a Massachusetts Limited Partnership 3,050,000
American Income Fund I-E, a Massachusetts Limited Partnership 4,790,000
AIRFUND International Limited Partnership 1,800,000
AIRFUND II International Limited Partnership 3,640,000
-----------
Subtotal 32,000,000
Series A Note 1,684,211
Series B Notes 585,679
Note payable - Echelon Development Holdings LLC 770,000
-----------
$35,039,890
===========
On March 8, 2000, the Company executed $32,000,000 in notes payable with 11
partnerships. The Company contributed the proceeds from the notes payable to
Echelon Residential to acquire various real estate assets from Echelon, as
discussed in Note 1, Summary of Business and Significant Accounting Policies.
These partnerships are managed by their general partners who have engaged Equis
Financial Group ("EFG") as the partnerships' manager. Mr. James A. Coyne is
Executive Vice President of EFG and is an equity investor in the Company. Mr.
Coyne, in his individual capacity, is the only equity investor in the Company
related to EFG. These notes payable have a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final sixmonths. No principal payments are required prior to the
scheduled maturity. Interest accrues and compounds monthly and is payable at
maturity. Accrued interest on these notes is $3,907,798 as of December 31, 2000.
The Company has assigned and pledged a security interest in all of its rights,
title, and interest in its membership interests in Echelon Residential to the 11
partnerships as collateral.
On March 8, 2000, the Company executed a Series A Note with Cobb Partners
Limited. The Series A Note has a term of 30 months, maturing on September 8,
2002, and an annual interest rate of 14% for the first 24 months and 18% for the
final six months. No principal payments are required prior to the scheduled
maturity. Accrued interest on the Series A Note is $205,674 as of December 31,
2000. Interest accrues and compounds monthly and is payable at maturity. The
Company also executed Series B Notes with several individuals, who are employees
or investors of EFG. The Series B Notes have an annual interest rate of 15% and
mature on June 30, 2004. No principal payments are required prior to the
scheduled maturity. Interest accrues and compounds monthly and is payable at
maturity. The Series B Notes are subordinated to the $32,000,000 notes payable
and the Series A Note. Accrued interest on the Series B Notes is $76,920 as of
December 31, 2000.
On December 29, 2000, the Company executed a $770,000 note payable to Echelon
Development Holdings LLC ("Echelon Development Holdings"). The note payable has
a term of 24 months, maturing on December 29, 2002, and an annual interest rate
of 10%. Interest accrues and compounds daily and is payable on December 31st of
each year the note payable is outstanding. The Company repaid the note, plus
interest of $6,751, on January 30, 2001.
In the opinion of management, the carrying value of the Company's notes payable
approximates the fair value based on management's estimates for similar issues,
giving consideration to quality, interest rates, maturity and other significant
characteristics.
6. INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP
In September 1999, Echelon entered into a joint venture agreement with Turner
Heritage Investments, Ltd. ("Turner") for the development of ECHELON AT
LAKESIDE, a 181-unit multi-family residential community currently under
construction in Plano, Texas, which is near Dallas. Echelon's 60% interest in
the joint venture was purchased by Echelon Residential, in conjunction with the
transaction discussed in Note 1, Summary of Business and Significant Accounting
Policies. Construction of ECHELON AT LAKESIDE began in October 1999 and
continued on portions of the project through December 31, 2000. As of December
31, 2000, total capital expenditures for the project were $23,927,413.
Through December 31, 2000, the Company has made capital contributions of
$2,592,000 and Turner has contributed land valued at $2,592,000 to the joint
venture. The Company's interest represents a controlling interest, and
accordingly, for financial reporting purposes, the assets, liabilities, retained
deficit, and current period results of operations of the joint venture for the
period March 8, 2000 (date of inception) through December 31, 2000, are included
in the Company's consolidated financial statements and Turner's partnership
interest in the joint venture has been recorded as a minority interest. See
further discussion of debt financing for ECHELON AT LAKESIDE included in Note 4,
Construction Loans.
7. RELATED PARTY TRANSACTIONS
In conjunction with the purchase of Echelon's interest in the joint venture
formed for the development of ECHELON AT LAKESIDE, Echelon Residential also
assumed the development agreement, an asset management agreement and a property
management and leasing agreement with Lakeside Baywater Enterprises Limited
Partnership, the joint venture partnership. In accordance with the development
agreement, Echelon Residential has been engaged as the developer for ECHELON AT
LAKESIDE and receives a development fee, payable in arrears, in monthly
installments of $44,371. In accordance with the asset management agreement,
Echelon Residential receives a monthly asset management fee, computed in
arrears, equal to 1% of the ECHELON AT LAKESIDE monthly gross income. Under the
terms of the property management and leasing agreement, Echelon Residential also
receives a monthly management fee, computed in arrears, equal to 4% of the
ECHELON AT LAKESIDE monthly gross income.
For the period March 8, 2000 (date of inception) through December 31, 2000,
Echelon Residential recognized $388,212 in development, asset management, and
property management revenues from ECHELON AT LAKESIDE.
In conjunction with the purchase of Echelon's interest in the joint venture
formed for the development of ECHELON AT CHENEY PLACE, Echelon Residential also
assumed agreements which include the payment of a development fee, a property
management and leasing agreement and an incentive management fee with Cheney
Place LLC, the joint venture partnership. In accordance with these agreements,
Echelon Residential has been engaged as the developer for ECHELON AT CHENEY
PLACE and receives a monthly development fee equal to 5% of the hard
construction costs incurred during the month. Echelon Residential is also the
property manager and leasing agent for the property and will receive a monthly
management fee, computed in arrears, equal to $7,500 per month for two months
prior to the opening of the clubhouse. For the next nine months thereafter,
Echelon Residential will receive the greater of a) 3% of the effective monthly
gross income or b) 3% of the effective monthly gross income that would be
collected if 75% of ECHELON AT CHENEY PLACE were occupied at rents equaling the
average pro forma base rent. Thereafter, the monthly management fee will be
calculated as 3% of the effective monthly gross income of ECHELON AT CHENEY
PLACE. The incentive management fee is equal to 2% of ECHELON AT CHENEY PLACE'S
effective gross income, as defined. For the period March 8, 2000 (date of
inception) through December 31, 2000, Echelon Residential recognized $392,695 in
development, property management and incentive management fee revenues from
ECHELON AT CHENEY PLACE.
Echelon Property Management LLC, a wholly owned subsidiary of Echelon
Residential, has contracted to manage several operating multi-family residential
communities currently leased by Echelon Commercial LLC ("Echelon Commercial"), a
wholly owned limited liability subsidiary of Echelon Development Holdings.
Several of the equity investors in Echelon Residential Holdings are also equity
investors in Echelon Development Holdings. For the period March 8, 2000 (date
of inception) through December 31, 2000, Echelon Residential recognized $587,908
in property management revenues from the management of multi-family properties
leased by Echelon Commercial.
As of December 31, 2000, the Company had accounts receivable balances of $51,880
due from Echelon Commercial LLC, $19,455 due from ECHELON AT CHENEY PLACE and
$44,186 from other related parties. These amounts were repaid by the end of
February 2001.
8. RETIREMENT PLAN
Echelon Residential is the sponsor of the Echelon 401(k) Savings Plan ("Savings
Plan") under Section 401(k) of the Internal Revenue Service Code (the "Code"),
to which participants may contribute a percentage of their discretionary
contributions to the Savings Plan. The Company did not contribute to the
Savings Plan during the period March 8, 2000 (date of inception) through
December 31, 2000. As of January 1, 2001, the Company initiated an option in
the Savings Plan to include a mandatory matching contribution from the Company.
9. COMMITMENTS AND CONTINGENCIES
As of December 31, 2000, two multi-family residential communities were under
construction and had remaining commitments of $12,985,656 with construction
contractors.
On December 29, 2000, the Company executed a $5,000,000 revolving promissory
note with Echelon Development Holdings. The revolving promissory note has a term
of 24 months, maturing on December 29, 2002, and an annual interest rate of 10%.
Interest accrues and compounds daily and is payable on December 31st of each
year the note is outstanding. As of December 31, 2000, there were no amounts
outstanding on the revolving promissory note.
As discussed in Note 1, Summary of Business and Significant Accounting Policies,
the Company maintains preferred return accounts for the Participating Members.
As of December 31, 2000, the preferred return balances for Participating A and B
Capital were $198,597 and $3,709, respectively.
These amounts have not been paid and therefore, have not been reflected as a
reduction of Participating A and B Capital in the December 31, 2000 consolidated
financial statements.
The joint venture formed for the development of ECHELON AT LAKESIDE maintains
preferred return accounts for the limited partners, Echelon LP, a wholly owned
limited liability subsidiary of Echelon Residential, and Turner. The payment of
any preferred returns to Echelon LP would be eliminated upon consolidation. As
of December 31, 2000, the preferred return balance for Turner was $312,069.
This amount has not been paid and, therefore, has not been reflected as a
reduction of member's equity in the December 31, 2000 consolidated financial
statements.
10. SUBSEQUENT EVENT
In February 2001, the Company closed on a $18,600,000 loan from SouthTrust Bank
for the construction financing of ECHELON AT UPTOWN, a 244-unit multi-family
residential community to be developed in downtown Orlando, Florida. The
interest rate is LIBOR plus 1.75% with monthly interest payments required over
the 36-month initial term of the loan. The loan is guaranteed by Echelon
Residential and construction is expected to commence in the second quarter of
2001.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the period
March 8, 2000 (date of inception) through December 31, 2000:
PERIOD THREE MONTHS ENDED
MARCH 8 - . . .
--------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
Total revenues $ 147,078 $ 758,673 $ 659,867 $ 3,664,594 $ 5,230,212
Net loss $ (328,623) $ (1,359,326) $ (1,855,757) $ (3,162,320) $(6,706,026)
12. MANAGEMENT'S BUSINESS PLAN (UNAUDITED)
As of the fourth quarter of 2001, the Company's management is pursuing three
principal business strategies to maximize the value of the Company's real estate
assets, including the continued development of the Company's real estate
portfolio, retaining other joint venture equity partners for real estate
projects and selling of certain real estate assets.
In addition, as part of a litigation settlement unrelated to the Company that
must be approved by the court, EFG has agreed in principle to buy the notes
payable from the 11 partnerships for an aggregate of $32,000,000 plus interest
at 7.5% per annum, if they are not repaid prior to or at the scheduled maturity
date. If the litigation settlement is approved, the interest rate on the notes
payable would be retroactively adjusted to 7.5% simple interest as of March 8,
2000. EFG has also agreed in principle to forbear any foreclosure action
against the Company and will evaluate the characterization of the notes payable,
which may include converting the notes payable to long-term debt or equity. See
Note 5, Notes Payable.
******