UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-19137
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
--------------------------------------------
(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
-------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
-----
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 and its Form 10-Q for the quarter ended March
31, 2001 (the "March 31, 2001 Form 10-Q") 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 and the March 31, 2001 Form 10-Q, 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 each of
the quarters ended March 31, 2001 and 2000, respectively. 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 periods ended
March 31, 2001 and March 31, 2000, the Partnership's share of losses in Echelon
Residential Holdings was $74,703 and $3,562, respectively, 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 2000 Form 10-K and the March 31, 2001 Form
10-Q, 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 $74,703 and $3,562, respectively, previously
recorded during the quarters ended March 31, 2001 and March 31, 2000, and
recognized interest income of $144,686 and $33,973, respectively. These
adjustments resulted in a decrease in the net loss for the quarters ended March
31, 2001 and 2001, respectively, of $219,389 and $37,535 or $0.07 and $0.01,
respectively, per limited partnership unit. As a result, the accompanying
financial statements for the quarters ended March 31, 2001 and 2000 and the
Partnership's Statement of Financial Position as of 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 Quarter Ended
March 31, 2001
As
Previously As
Statement of Operations Reported Restated
------------ ------------
Income
Operating lease revenue $ 155,995 $ 155,995
Sales-type lease revenue 3,351 3,351
Interest income 30,121 30,121
Interest income - loan receivable - 144,686
------------ ------------
Total income 189,467 334,153
------------ ------------
Expenses
Depreciation 65,346 65,346
Interest expense 17,393 17,393
Equipment management fees - affiliate 10,750 10,750
Operating expenses - affiliate 141,432 141,432
Partnership's share of unconsolidated
real estate venture's loss 74,703 -
------------ ------------
Total expenses 309,624 234,921
------------ ------------
Net (loss) income $ (120,157) $ 99,232
============ ============
Net (loss) income per limited partnership unit $ (0.04) $ 0.03
============ ============
Balance Sheet Data:
Total assets $ 9,262,522 $10,204,286
============ ============
Total liabilities $ 1,682,402 $ 1,682,402
Partners' capital (deficit)
General Partner (2,616,451) (2,569,363)
Limited Partnership Interests 10,196,571 11,091,247
------------ ------------
Total partners' capital $ 7,580,120 $ 8,521,884
============ ============
As of and for the Quarter Ended
March 31, 2000
As
Previously As
Statement of Operations Reported Restated
------------ ------------
Income
Operating lease revenue $ 109,420 $ 109,420
Interest income 66,936 66,936
Interest income - loan receivable - 33,973
Other income 55,000 55,000
------------ ------------
Total income 231,356 265,329
------------ ------------
Expenses
Depreciation 79,837 79,837
Interest expense 30,685 30,685
Equipment management fees - affiliate 5,471 5,471
Operating expenses - affiliate 116,277 116,277
Partnership's share of unconsolidated
real estate venture's loss 3,562 -
------------ ------------
Total expenses 235,832 232,270
------------ ------------
Net (loss) income $ (4,476) $ 33,059
============ ============
Net (loss) income per limited partnership unit $ (0.00) $ 0.01
============ ============
Balance Sheet Data:
Total assets $ 8,981,588 $ 9,019,123
============ ============
Total liabilities $ 1,462,013 $ 1,462,013
Partners' capital (deficit)
General Partner (2,619,478) (2,617,602)
Limited Partnership Interests 10,139,053 10,174,712
------------ ------------
Total partners' capital $ 7,519,575 $ 7,557,110
============ ============
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements (Restated)
Statement of Financial Position
at March 31, 2001 and December 31, 2000 3
Statement of Operations
for the three months ended March 31, 2001 and 2000 4
Statement of Changes in Partners' Capital
for the three months ended March 31, 2001 5
Statement of Cash Flows
for the three months ended March 31, 2001 and 2000 6
Notes to the Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION:
Item 1 - 6 24
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
March 31, December 31,
. 2001 2000
ASSETS Restated Restated
. (See Note 1) (See Note 1)
------------- --------------
Cash and cash equivalents $ 3,091,241 $ 2,827,385
Rents receivable - 116,820
Accounts receivable - affiliate 70,169 33,452
Other assets 48,595 24,508
Interest receivable - loan 590,772 446,086
Loan receivable 3,640,000 3,640,000
Net investment in sales-type lease 184,686 240,330
Equipment at cost, net of accumulated depreciation
of $8,218,291 and $8,152,945 at March 31, 2001
and December 31, 2000, respectively 2,578,823 2,644,169
------------- --------------
Total assets $ 10,204,286 $ 9,972,750
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 1,191,557 $ 906,869
Accrued interest 118 7,161
Accrued liabilities 413,515 591,617
Accrued liabilities - affiliate 25,120 17,207
Deferred rental income 52,092 27,244
------------- --------------
Total liabilities 1,682,402 1,550,098
------------- --------------
Partners' capital (deficit):
General Partner (2,569,363) (2,574,324)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 11,091,247 10,996,976
------------- --------------
Total partners' capital 8,521,884 8,422,652
------------- --------------
Total liabilities and partners' capital $ 10,204,286 $ 9,972,750
============= ==============
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
. 2001 2000
. Restated Restated
------------- -------------
INCOME (See Note 1) (See Note 1)
Operating lease revenue $ 155,995 $ 109,420
Sales-type lease revenue 3,351 -
Interest income 30,121 66,936
Interest income - loan receivable 144,686 33,973
Other income - 55,000
------------- -------------
Total income 334,153 265,329
------------- -------------
EXPENSES
Depreciation 65,346 79,837
Interest expense 17,393 30,685
Equipment management fees - affiliate 10,750 5,471
Operating expenses - affiliate 141,432 116,277
------------- -------------
Total expenses 234,921 232,270
------------- -------------
Net income $ 99,232 $ 33,059
============= =============
Net income per limited partnership unit $ 0.03 $ 0.01
============= =============
Cash distributions declared
per limited partnership unit $ -- $ --
============= =============
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
. 2001 2000
. Restated Restated
------------- -------------
. (See Note 1) (See Note 1)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 99,232 $ 33,059
Adjustments to reconcile net income net
cash used in operating activities:
Depreciation 65,346 79,837
Sales-type lease revenue (3,351) -
Changes in assets and liabilities:
Rents receivable 116,820 -
Accounts receivable - affiliate (36,717) (53,543)
Other assets (24,087) 31,742
Interest receivable - loan (144,686) (33,973)
Collections on net investment in sales-type lease 58,995 -
Accrued interest (7,043) (4,099)
Accrued liabilities (178,102) (235,767)
Accrued liabilities - affiliate 7,913 (1,730)
Deferred rental income 24,848 (26,636)
------------- -------------
Net cash used in operating activities (20,832) (211,110)
------------- -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Issuance of loan receivable - (3,640,000)
------------- -------------
Net cash used in investing activities - (3,640,000)
------------- -------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 505,028 201,247
Principal payments - notes payable (220,340) (59,430)
------------- -------------
Net cash provided by financing activities 284,688 141,817
------------- -------------
Net increase (decrease) in cash and cash equivalents 263,856 (3,709,293)
Cash and cash equivalents at beginning of period 2,827,385 5,719,642
------------- -------------
Cash and cash equivalents at end of period $ 3,091,241 $ 2,010,349
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 24,436 $ 34,784
============= =============
See Note 9 to the financial statements regarding the refinancing of the
Partnership's notes payable in February 2001.
The accompanying notes are an integral part of these financial statements.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
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 and its Form 10-Q for the quarter ended March
31, 2001 (the "March 31, 2001 Form 10-Q") 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 and the March 31, 2001 Form 10-Q, 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 each of
the quarters ended March 31, 2001 and 2000, respectively. 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 periods ended
March 31, 2001 and March 31, 2000, the Partnership's share of losses in Echelon
Residential Holdings was $74,703 and $3,562, respectively, 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 2000 Form 10-K and the March 31, 2001 Form
10-Q, 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 $74,703 and $3,562, respectively, previously
recorded during the quarters ended March 31, 2001 and March 31, 2000, and
recognized interest income of $144,686 and $33,973, respectively. These
adjustments resulted in a decrease in the net loss for the quarters ended March
31, 2001 and 2001, respectively, of $219,389 and $37,535 or $0.07 and $0.01,
respectively, per limited partnership unit. As a result, the accompanying
financial statements for the quarters ended March 31, 2001 and 2000 and the
Partnership's Statement of Financial Position as of December 31, 2000 have been
restated from the amounts previously reported.
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 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements, as restated, presented herein are prepared in
conformity with generally accepted accounting principles and the instructions
for preparing Form 10-Q under Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission and are unaudited. As such, these financial statements do
not include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the Partnership's 2000 Annual Report included in
Form 10-KA Amendment No. 2. Except as disclosed herein, there has been no
material change to the information presented in the footnotes to the 2000 Annual
Report included in Form 10-KA Amendment No. 2.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2001 and December 31, 2000 and results of operations for
the three month periods ended March 31, 2001 and 2000 have been made and are
reflected.
NOTE 3 - CASH
- ----------------
At March 31, 2001, the Partnership had $2,842,755 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
NOTE 4 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The majority
of 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 for operating leases of $1,289,947 are due as follows:
For the year ending March 31, 2002 $ 412,079
2003 412,079
2004 343,252
2005 122,537
----------
. Total $1,289,947
==========
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 $196,412 are due through the date of the lease expiration in
January 2002.
NOTE 5 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at March 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2001 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
- -------------------------------------------- ---------- ------------
Two Rolls Royce aircraft engines 0 $ 6,000,000
One McDonnell-Douglas MD-82 (Finnair) 1 2,078,640
One McDonnell-Douglas MD-82
(Aerovias de Mexico S.A. de C.V.) 41 2,078,640
One Boeing 737-2H4 (Air Slovakia) 29 639,834
------------
Total equipment cost . 10,797,114
Accumulated depreciation . (8,218,291)
------------
Equipment, net of accumulated depreciation . $ 2,578,823
============
The costs of each of the Partnership's aircraft represent 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.
One of the Partnership's aircraft and the related lease payment streams secures
the Partnership's loan with a third-party lender (see Note 9). The preceding
summary includes leveraged equipment having an original cost of approximately
$2,079,000 and a net book value of approximately $1,194,000 at March 31, 2001.
At March 31, 2001, all of the Partnership's aircraft were subject to contracted
leases, however, the Rolls Royce aircraft engines were warehoused. In April
2001, the lease with Finnair OY related to a McDonnell-Douglas MD-82 aircraft
expired and the aircraft was returned to the General Partner. The General
Partner is attempting to remarket this aircraft and the Rolls Royce aircraft
engines.
NOTE 6 - 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.
The Partnership's original loan was $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. 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
March 31, 2001 and for the quarter ended March 31, 2001 is as follows:
(Unaudited)
Total assets $72,861,183
Total liabilities $76,780,082
Minority interest $ 1,906,448
Total deficit $(5,825,347)
Total revenues $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture. . . . . . . . . . . . $ 3,096,648
Net loss $(2,033,209)
See Note 11, Subsequent Event, for discussion of an impairment recorded by the
Partnership of the loan receivable and related interest receivable during the
second quarter of 2001.
NOTE 7 - 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 quarter ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,351 from this lease. At March 31,
2001, the components of the net investment in the sales-type lease are as
follows:
Total minimum lease payments to be received $196,412
Less: Unearned income 11,726
--------
Total $184,686
========
Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.
NOTE 8 - 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 the three month periods ended March 31,
2001 and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- --------
Equipment management fees $ 10,750 $ 5,471
Administrative charges 13,965 11,248
Reimbursable operating expenses
due to third parties 127,467 105,029
-------- --------
Total $152,182 $121,748
======== ========
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 March 31, 2001, the Partnership was owed $70,169 by EFG for such funds. These
funds were remitted to the Partnership in April 2001.
The discussion of the loan to Echelon Residential Holdings in Note 6 above is
incorporated by reference.
NOTE 9 - NOTE PAYABLE
- -------------------------
The Partnership has one note payable outstanding at March 31, 2001 in the amount
of $1,191,557. This installment note is non-recourse and is collateralized by
Partnership's interest in an aircraft leased to Aerovias de Mexico, S. A. de
C.V. and assignment of the related lease payments. This 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.
In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the 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 then on lease to
Finnair OY of $130,852 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000.
Management believes that the carrying amount of the note payable approximates
fair value at March 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the note payable are as follows:
For the year ending March 31, 2002 $ 210,082
2003 226,733
2004 244,699
2005 510,043
----------
. Total $1,191,557
==========
NOTE 10 - LEGAL PROCEEDINGS
- -------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K/A
Amendment No. 2 for the year ended December 31, 2000, 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.
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.
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 Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase 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 letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a proposed
settlement, and that the SEC staff's views, as expressed in the letter, are
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 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, counsel is 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.
NOTE 11 - SUBSEQUENT EVENT
- ------------------------------
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.
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.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q/A
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- ---------------
Certain statements in this quarterly report of AIRFUND II International Limited
Partnership (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 accompanying financial statements,
the remarketing of the Partnership's aircraft and the performance of the
Partnership's non-aircraft assets.
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 LLC ("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. 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. If the Partnership were determined to
be an unregistered investment company, its business would be adversely affected.
The General Partner has determined to take action to avoid the Partnership being
deemed an investment company by 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 to offer or sell or purchase 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 letter also stated that the Division is considering
enforcement action with respect to this matter. Noting that the parties to the
Class Action Lawsuit are scheduled to appear before the court in the near future
to consider a proposed settlement, and that the SEC staff's views, as expressed
in the letter, are 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 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, counsel is 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 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. See Note 8 to the financial statements for additional
discussion.
The loan receivable from Echelon Residential Holdings 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.
Subsequent to the issuance of the 2000 Form 10-K and the March 31, 2001 Form
10-Q, 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 $74,703 and $3,562, respectively, previously
recorded during the quarters ended March 31, 2001 and March 31, 2000, and
recognized interest income of $144,686 and $33,973, respectively. These
adjustments resulted in a decrease in the net loss for the quarters ended March
31, 2001 and 2001, respectively, of $219,389 and $37,535 or $0.07 and $0.01,
respectively, per limited partnership unit. As a result, the accompanying
financial statements for the quarters ended March 31, 2001 and 2000 and the
Partnership's Statement of Financial Position as of December 31, 2000 have been
restated from the amounts previously reported.
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.
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.
Three months ended March 31, 2001 compared to the three months ended March 31,
- --------------------------------------------------------------------------------
2000
- ----
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. Subsequently, all of the aircraft in the Partnership's original
portfolio have been re-leased, renewed, exchanged for other aircraft, or sold.
At March 31, 2001, the Partnership's equipment portfolio included proportionate
ownership interests in three aircraft, all of which were on lease at that date,
and two aircraft engines which were warehoused. 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 accompanying financial statements.) Pursuant to the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended"), the Partnership is scheduled to be dissolved by December 31, 2005.
Results of Operations
- -----------------------
For the three months ended March 31, 2001, the Partnership recognized operating
lease revenue of $155,995 compared to $109,420 for the same period in 2000. The
increase in operating lease revenue from 2000 to 2001 resulted from the re-lease
of certain of the Partnership's aircraft, as discussed below. In the future,
operating lease revenue is expected to decline due to lease term expirations and
aircraft sales.
The lease term associated with the Boeing 737-2H4, in which the Partnership
holds an ownership interest, expired in December 1999. The aircraft was
re-leased in September 2000 to Air Slovakia BWJ, Ltd., with a lease term
expiring in September 2003. The Partnership recognized operating lease revenue
of $29,498 for the quarter ended March 31, 2001.
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. The Partnership recognized lease revenue of
$73,522 and $29,074 related to this aircraft during the three months ended March
31, 2001 and 2000, respectively.
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. This aircraft had been
stored in the warehouse from January 2000 through the date of the conditional
sale 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 three months ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,351.
The Partnership's aircraft interests represent proportionate ownership
interests. In such cases, 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 aircraft.
Interest income for the three months ended March 31, 2001 was $144,686 compared
to $33,973 for the same period in 2000. Interest income is typically generated
from temporary investment of rental receipts and equipment sale proceeds in
short-term instruments and interest earned on the loans receivable from Echelon
Residential Holdings and Semele. The amount of future interest income is
expected to fluctuate as a result of changing interest rates and the amount of
cash available for investment, among other factors.
Interest income included $144,686 and $33,973, respectively, for the three
months ended March 31, 2001 and 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.
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.
Subsequent to the issuance of the 2000 Form 10-K and the March 31, 2001 Form
10-Q, 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 $74,703 and $3,562, respectively, previously
recorded during the quarters ended March 31, 2001 and March 31, 2000, and
recognized interest income of $144,686 and $33,973, respectively. These
adjustments resulted in a decrease in the net loss for the quarters ended March
31, 2001 and 2001, respectively, of $219,389 and $37,535 or $0.07 and $0.01,
respectively, per limited partnership unit. As a result, the accompanying
financial statements for the quarters ended March 31, 2001 and 2000 and the
Partnership's Statement of Financial Position as of December 31, 2000 have been
restated from the amounts previously reported.
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.
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.
The ultimate realization of residual value for the Partnership's aircraft will
be dependent upon many factors, including EFG's ability to sell and re-lease the
aircraft. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from aircraft values at
any given time. EFG attempts to monitor these changes and the airline industry
in general 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 upon final disposition of 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 any future gain or loss reported in the financial
statements will not necessarily be indicative of the total residual value the
Partnership achieved from leasing the aircraft.
For the three months ended March 31, 2001 and 2000, the Partnership incurred
interest expense of $17,393 and $30,685, respectively. Interest expense in the
near term will increase as a result of the Partnership's debt refinancing in
February 2001, as described below. Subsequently, interest expense will decline
as the principal balance of the note payable is reduced through the application
of rent receipts to the outstanding debt.
Management fees were $10,750 and $5,471, respectively, during the periods ended
March 31, 2001 and 2000. Management fees are based on 5% of gross lease revenue
generated by leases and 2% of gross revenue generated by full payout leases.
Operating expenses were $141,432 and $116,277 for the three months ended March
31, 2001 and 2000, respectively. In 2001, operating expenses included
approximately $27,000 related to the Class Action Lawsuit discussed in Note 10
to the financial statements herein. Other operating expenses consist
principally of administrative charges, professional service costs, such as audit
and other legal fees, as well as insurance, printing, distribution and
remarketing expenses. In certain cases, equipment storage or repairs and
maintenance costs may be incurred in connection with equipment being remarketed.
Depreciation expense was $65,346 for the three months ended March 31, 2001
compared to $79,837 for the same period in 2000.
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
provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated a net cash
outflow of $20,832 and $211,110 for the three months ended March 31, 2001 and
2000, respectively. 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 are due in full at maturity on September
8, 2002. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Partnership remarkets 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.
At March 31, 2001, the Partnership was due aggregate future minimum lease
payments of $1,486,359 from contractual operating and sales-type lease
agreements (see Note 4 to the financial statements), a portion of which will be
used to amortize the principal balance of notes payable of $1,191,557 (see Note
9 to the financial statements). At the expiration of the individual lease term
underlying the Partnership's future minimum lease payments, the Partnership will
sell the aircraft or enter into a re-lease or renewal agreement when considered
by advantageous by the General Partner or EFG. In addition, the General Partner
and EFG are currently attempting to remarket the McDonnell-Douglas MD-82
aircraft and the two aircraft engines that are currently off lease. Such
remarketing activities will result in the realization of additional cash inflows
in the form of sale proceeds or rents from renewals or 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 connection with a preliminary settlement agreement for a Class Action Lawsuit
described in Note 10 to the financial statements, 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.
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.
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.
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 accompanying
Statement of Cash Flows. The Partnership's outstanding loan agreement is
recourse only to the specific aircraft financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
coincides with the lease term). As rental payments are collected, a portion or
all of the rental payment is used to repay associated indebtedness. In the near
term, the amount of cash used to repay the debt obligation will increase due to
the refinancing discussed below. Subsequently, the amount of cash used will
decline as the principal balance of the note payable is reduced through the
collection and application of rents.
In February 2001, the Partnership's and certain affiliated investment programs
collectively, (the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the 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 then 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.
In the three months ended March 31, 2000, the Partnership refinanced the
indebtedness associated with the same aircraft and in addition to refinancing
the existing indebtedness, received additional debt proceeds of $201,247.
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 March 31, 2001, 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. In April 2001 upon its
lease expiration, Finnair OY returned a McDonnell Douglas MD-82 aircraft which
the General Partner is attempting to remarket.
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 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 presented in the Partnership's 2000
Annual Report). 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 component of the cumulative difference between financial statement
income or loss and tax income or loss results from different depreciation
policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at March 31, 2001. 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.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described in
Note 10 to the accompanying financial statements. 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 settled or
adjudicated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership has one note payable outstanding at March 31, 2001, which bears
a fixed interest rate of 7.65%. The fair market value of fixed interest rate
debt may be adversely impacted due to a decrease in interest rates. The effect
of interest rate fluctuations on the Partnership in the quarter ended March 31,
2001 was not material.
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. The effect of interest rate fluctuations on the Partnership in
the quarter ended March 31, 2001 was not material.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 9 to the financial statements herein.
Item 2. Changes in Securities
. Response: None
Item 3. Defaults upon Senior Securities
. Response: None
Item 4. Submission of Matters to a Vote of Security Holders
. Response: None
Item 5. Other Information
. Response: None
Item 6(a). Exhibits
. Response: None
Item 6(b). Reports on Form 8-K
. Response: None
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
----------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: November 13, 2001
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