UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period endedJune 30, 2002
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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. 0-18368
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
-----------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1050 Waltham Street, Suite 310, Lexington, MA 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 676-0009
-------------------
88 Broad Street, Boston, MA 02110
- ----------------------------------------
(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_____
-----
2
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: Page
----
Item 1. Financial Statements
Statement of Financial Position
at June 30, 2002 and December 31, 2001 3
Statement of Operations
for the three and six months ended June 30, 2002 and 2001 4
Statement of Cash Flows
for the six months ended June 30, 2002 and 2001 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION:
Item 1 - 6 18
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
June 30, December 31,
2002 2001
ASSETS
Cash and cash equivalents $ 3,353,896 $ 3,584,719
Rents receivable, net of allowance of $162,788 and $145,424
at June 30, 2002 and December 31, 2001, respectively 118,015 201,157
Accounts receivable - affiliate 54,953 1,561
Other assets 24,334 4,827
Interest receivable - loan, net of allowance of
$13,226 and $292,140 at June 30, 2002 and
December 31, 2001, respectively - -
Loan receivable, net of allowance of $157,500
at June 30, 2002 and December 31, 2001 1,642,500 1,642,500
Net investment in sales-type lease - 58,785
Equipment at cost, net of accumulated depreciation
of $10,253,084 and $8,017,971 at June 30, 2002
and December 31, 2001, respectively 5,627,978 7,863,091
------------ --------------
Total assets $10,821,676 $ 13,356,640
============ ==============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,078,782 $ 3,438,473
Accrued interest 18,319 21,407
Accrued liabilities 400,945 1,324,983
Accrued liabilities - affiliate 28,440 40,974
------------ --------------
Total liabilities 3,526,486 4,825,837
------------ --------------
Partners' capital (deficit):
General Partner (1,334,237) (1,272,456)
Limited Partnership interests
(3,040,000 Units; initial purchase price of $25 each) 8,629,427 9,803,259
------------ --------------
Total partners' capital 7,295,190 8,530,803
------------ --------------
Total liabilities and partners' capital $10,821,676 $ 13,356,640
============ ==============
The accompanying notes are an integral part of these financial statements.
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
INCOME
Operating lease revenue $ 369,280 $ 427,289 $ 654,634 $ 1,029,951
Sales-type lease revenue - 11,097 - 22,193
Interest income 13,956 34,426 29,419 55,430
Interest income - loan - - - 71,548
------------ ------------ ------------ ------------
Total income 383,236 472,812 684,053 1,179,122
EXPENSES
Depreciation 216,328 216,328 432,656 432,656
Write-down of equipment 1,305,263 957,000 1,305,263 957,000
Interest expense 60,040 105,498 124,004 163,078
Equipment management fees - affiliate 18,464 35,443 38,483 71,032
Bad debt expense - - 76,149 -
Operating expenses - affiliate 129,652 171,005 222,025 317,466
Recovery of bad debt expense from loan receivable (278,914) - (278,914) -
Write-down of impaired loan and interest receivable - 449,640 - 449,640
------------ ------------ ------------ ------------
Total expenses 1,450,833 1,934,914 1,919,666 2,390,872
------------ ------------ ------------ ------------
Net loss $(1,067,597) $(1,462,102) $(1,235,613) $(1,211,750)
------------ ------------ ------------ ------------
Net loss per limited partnership unit $ (0.33) $ (0.46) $ (0.39) $ (0.38)
------------ ------------ ------------ ------------
Cash distributions declared
per limited partnership unit $ - $ - $ - $ -
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
.. ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(1,235,613) $(1,211,750)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 432,656 432,656
Write-down of equipment 1,305,263 957,000
Bad debt expense 76,149 -
Sales-type lease revenue - (22,193)
Write-down of impaired loan and interest receivable - 449,640
Recovery of bad debt expense from loan receivable (278,914) -
Changes in assets and liabilities:
Rents receivable 65,778 289,505
Accounts receivable - other - 112,339
Accounts receivable - affiliate (53,392) (343,305)
Other assets (19,507) (33,798)
Interest receivable - loan 278,914 (71,548)
Collections on net investment in sales-type lease - 390,691
Accrued interest (3,088) 1,210
Accrued liabilities (426,844) 157,207
Accrued liabilities - affiliate (12,534) 8,948
Deferred rental income - (40,268)
-------------- --------------
Net cash provided by operating activities 128,868 1,076,334
-------------- --------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable - 1,671,867
Principal payments - notes payable (359,691) (891,842)
-------------- --------------
Net cash provided by (used in) financing activities (359,691) 780,025
-------------- --------------
Net increase (decrease) in cash and cash equivalents (230,823) 1,856,359
Cash and cash equivalents at beginning of period 3,584,719 1,446,237
-------------- --------------
Cash and cash equivalents at end of period $3,353,896 $3,302,596
============== ==============
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $127,092 $161,868
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
In February 2001, the Partnership refinanced certain indebtedness and accrued
interest in the amount of $2,339,924.
The accompanying notes are an integral part of these financial statements.
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- -----------------------------------
The financial statements 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 financial statements and related footnotes presented in the 2001 Annual
Report (Form 10-K) of AIRFUND International Limited Partnership (the
"Partnership"). Except as disclosed herein, there has been no material change
to the information presented in the footnotes to the 2001 Annual Report included
in Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 2002 and December 31, 2001 and results of operations for
the three and six month periods ended June 30, 2002 and 2001 have been made and
are reflected.
NOTE 2 - REVENUE RECOGNITION
- --------------------------------
Rents are payable to the Partnership monthly and 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, wholly owned by Equis Financial Group Limited Partnership
("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.
Future minimum rents for operating leases of $2,109,393 are due as follows:
For the year ending June 30, 2003 $ 973,566
2004 973,566
2005 162,261
----------
.. Total $2,109,393
==========
See Note 9 - "Subsequent Events" for further discussion.
NOTE 3 - EQUIPMENT
- ---------------------
The following is a summary of equipment owned by the Partnership at June 30,
2002. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 2002 under contracted lease terms. A Remaining
Lease Term equal to zero reflects equipment held for sale or re-lease.
.. Remaining
.. Lease Term Equipment
Equipment Type (Months) at Cost
- ---------------------------------------------- ----------- -------------
One McDonnell Douglas MD-82 0 $ 6,881,219
One McDonnell Douglas MD-82
(Aerovias de Mexico, S.A. de C.V.) 26 6,881,219
One Boeing 737-2H4 (Air Slovakia) 2 2,118,624
-------------
Total equipment cost - 15,881,062
Accumulated depreciation - (10,253,084)
-------------
Equipment, net of accumulated depreciation - $ 5,627,978
=============
The cost of each of the Partnership's aircraft represents a proportionate
ownership interest. 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 original cost of
approximately $6,881,000 and a net book value of approximately $3,122,000 at
June 30, 2002.
The Partnership entered into a three-year lease agreement with Air Slovakia BWJ
Ltd. for its proportionate interest in a Boeing 737-2H4 aircraft, effective
September 2000. In accordance with a lease amendment executed in January 2002,
the lease term was revised and the lease terminated in August 2002, with the
title to the aircraft transferring to Air Slovakia.
The summary above includes aircraft held for re-lease or sale with an original
proportionate cost of approximately $6,881,000 and a net book value of
approximately $2,213,000, which represents the McDonnell Douglas MD-82 aircraft
returned in April 2001. The General Partner is actively seeking the sale or
re-lease of this aircraft.
The Partnership accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" which was issued in August
2001. SFAS No. 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the net book value of
the assets may not be recoverable from undiscounted future cash flows. During
the three months ended June 30, 2002, the Partnership recorded a write-down of
equipment, representing an impairment to the carrying value of the Partnership's
interest in two McDonnell Douglas MD-82 aircraft and a Boeing 737 aircraft. The
resulting charge of $1,305,263 was based on a comparison of estimated fair value
and carrying value of the Partnership's interest in the aircraft. The estimate
of the fair value was based on (i) a current offer to purchase one of the
McDonnell Douglas MD-82 aircraft, (ii) indications of interest from potential
purchasers of the second McDonnell Douglas MD-82 aircraft, (iii) the sale of the
Boeing 737 aircraft subsequent to June 30, 2002, and (iv) EFG's assessment of
prevailing market conditions for similar aircraft. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft. The
events of September 11, 2001, along with a recession in the United States have
continued to adversely affect the market demand for both new and used commercial
aircraft.
NOTE 4 - LOAN RECEIVABLE
- ----------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
''Partnerships'') collectively loaned $32 million to Echelon Residential
Holdings LLC ("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 $1,800,000. 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 6 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. Echelon Residential Holdings
has no material business interests other than those connected with the real
estate properties owned by Echelon Residential LLC.
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 $157,500, 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 $292,140 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
During the second quarter of 2002, the Partnership received $278,914 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $278,914 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt expense
from loan receivable" in the Statement of Operations. At June 30, 2002, the
General Partner believes that the net carrying value of the loan receivable is
appropriate.
The summarized unaudited financial information for Echelon Residential Holdings
as of and for the six month periods ended June 30, 2002 and 2001 is as follows:
2002 2001
------------- ------------
Total assets $ 94,423,115 $79,159,776
Total liabilities $107,902,966 $85,455,528
Minority interest $ 1,108,573 $ 1,782,982
Total deficit $(14,588,424) $(8,078,734)
Total revenues $ 1,430,874 $ 1,705,679
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 4,061,173 $ 5,924,774
Net loss $ (2,630,299) $(4,219,095)
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- --------------------------------------------------
The Partnership's net investment in a sales-type lease was 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 was to transfer to
Royal Aviation Inc. at the expiration of the lease term in January 2002. For
the three and six month periods ended June 30, 2001, the Partnership recognized
sales-type lease revenue of $11,097 and $22,193, respectively, from this lease.
In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a
result, has defaulted on this conditional sales agreement. The General Partner
is continuing to negotiate for the return of the aircraft. As of June 30, 2002,
the Partnership has written-down the remaining balance of the Partnership's
investment in the sales-type lease. The write-down was based on the comparison
of the net estimated fair value of the Partnership's interest in the aircraft
and the Partnership's net investment in the sales-type lease. The write-down
recorded in the six months ended June 30, 2002 was $58,785.
NOTE 6 - 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 six month periods ended June 30, 2002
and 2001, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2002 2001
-------- --------
Equipment management fees $ 38,483 $ 71,032
Administrative charges 54,866 26,178
Reimbursable operating expenses
due to third parties 167,159 291,288
-------- --------
Total $260,508 $388,498
======== ========
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 June 30, 2002, the Partnership was owed $54,953 by EFG for such funds. The
funds were remitted to the Partnership in July 2002.
The discussion of the loan to Echelon Residential Holdings in Note 4 above is
incorporated herein by reference.
NOTE 7 - NOTE PAYABLE
- -------------------------
The Partnership has a note payable outstanding at June 30, 2002 in the amount of
$3,078,782. 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
$1,337,875 in September 2004.
Management believes that the carrying amount of the note payable approximates
fair value at June 30, 2002 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 June 30, 2003 $ 772,212
2004 825,664
2005 1,480,906
----------
.. Total $3,078,782
==========
NOTE 8 - LEGAL PROCEEDINGS
- ------------------------------
Action involving Rosenblum, et al.
- --------------------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2001, the Partnership is a Nominal Defendant along with
ten affiliated partnerships (collectively, the "Partnerships") in a Class Action
Lawsuit, Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership,
-----------------------------------------------------------------------
et al.
- -------
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, EFG has agreed to buy the loans made by the 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 of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement. See further discussion of the Revised Settlement in
Note 9 - Subsequent Events.
NOTE 9 - SUBSEQUENT EVENTS
- ------------------------------
As of August 9, 2002, the Partnership has transferred its proportionate
ownership aircraft interests (except for the McDonnell Douglas MD-82 aircraft
currently leased to Aerovias de Mexico, S.A. de C.V, referred to hereinafter as
the Retained Aircraft), remaining cash and non-cash assets to the AIRFUND
International Limited Partnership Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Partnership is currently negotiating the sale of the Retained Aircraft. The
Liquidating Trust is in the process of selling the transferred aircraft, in
which the Partnership has a proportionate ownership interest and distributing
the Partnership's cash, net of reserves for known and contingent liabilities, in
accordance with the terms of the Revised Settlement.
See Note 3 "Equipment" for further description of the Partnership's aircraft
assets.
- ------
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
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 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 remarketing of the
Partnership's aircraft and the performance and liquidation of the Partnership's
non-aircraft assets.
The Defendant's and Plaintiff's Counsel reached agreement on a Revised
Stipulation of Settlement (the "Revised Settlement"). As part of the Revised
Settlement, Equis Financial Group Limited Partnership ("EFG") has agreed to buy
the loans made by the Partnerships to Echelon Residential Holdings LLC ("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 of
September 8, 2002. The Revised Settlement also provides for the liquidation of
the Partnerships' assets, a cash distribution and the dissolution of the
Partnerships including the liquidation and dissolution of this Partnership. On
March 1, 2002, after a hearing on the parties' joint motion for preliminary
approval of the Revised Settlement, the Court issued an order preliminarily
approving the Revised Settlement and providing for the mailing of notice to the
Partnership's Sub-Class of a hearing on June 7, 2002 on whether the settlement
should be finally approved. After the hearing the Court issued its Order and
Final Judgment, dated June 12, 2002 and recorded on the Court docket on June 18,
2002, approving the settlement on the terms and conditions set forth in the
Revised Settlement and finding that the settlement is fair, reasonable and
adequate and directing implementation of its terms and provisions with respect
to the Partnerships and the Partnerships' Sub-class. The 30 day appeal period
expired on July 18, 2002. The Partnership has commenced implementing the terms
of the Revised Settlement.
As of August 9, 2002, the Partnership has transferred its proportionate
ownership aircraft interests (except for the McDonnell Douglas MD-82 aircraft
currently leased to Aerovias de Mexico, S.A. de C.V, referred to hereinafter as
the Retained Aircraft), remaining cash and non-cash assets to the AIRFUND
International Limited Partnership Liquidating Trust ("Liquidating Trust"), of
which Wilmington Trust Company is Trustee. The Partnership will be dissolved.
The Partnership is currently negotiating the sale of the Retained Aircraft. The
Liquidating Trust is in the process of selling the transferred aircraft, in
which the Partnership has a proportionate ownership interest and distributing
the Partnership's cash, net of reserves for known and contingent liabilities, in
accordance with the terms of the Revised Settlement.
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 unintentionally may have engaged in an activity or activities that
may be construed to fall within the scope of the 1940 Act. The General Partner
has been engaged in discussions with the staff of the Securities and Exchange
Commission 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.
Critical Accounting Policies and Estimates
- ----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the General Partner to make
estimates and assumptions that affect the amounts reported in the financial
statements. On a regular basis, the General Partner reviews these estimates and
assumptions including those related to revenue recognition, asset lives and
depreciation, allowance for doubtful accounts, allowance for loan loss,
impairment of long-lived assets and contingencies. These estimates are based on
the General Partner's historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The General
Partner believes, however, that the estimates, including those for the
above-listed items, are reasonable.
The General Partner believes the following critical accounting policies, among
others, are subject to significant judgments and estimates used in the
preparation of these financial statements:
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 Partnership's leases are accounted for as operating
leases and are noncancellable. Rents received prior to their due dates are
deferred. 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.
Asset lives and depreciation method: The Partnership's primary business involves
- ------------------------------------
the purchase and subsequent lease of long-lived equipment. The Partnership's
depreciation policy is intended to allocate the cost of equipment over the
period during which it produces economic benefit. The principal period of
economic benefit is considered to correspond to each asset's primary lease term,
which generally represents the period of greatest revenue potential for each
asset. Accordingly, to the extent that an asset is held on primary lease term,
the Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset on a straight-line basis over
such term. For purposes of this policy, estimated residual values represent
estimates of equipment values at the date of the primary lease expiration. To
the extent that an asset is held beyond its primary lease term, the Partnership
continues to depreciate the remaining net book value of the asset on a
straight-line basis over the asset's remaining economic life.
Allowance for doubtful accounts: The Partnership maintains allowances for
- -----------------------------------
doubtful accounts for estimated losses resulting from the inability of the
- -----
lessees to make the lease payments required under the contracted lease
- -----
agreements. These estimates are primarily based on the amount of time that has
- -----
elapsed since the related payments were due as well as specific knowledge
related to the ability of the lessees to make the required payments. If the
financial condition of the Partnership's lessees were to deteriorate, additional
allowances could be required that would increase expenses. Conversely, if the
financial condition of the lessees were to improve or if legal remedies to
collect past due amounts were successful, the allowance for doubtful accounts
could be reduced, thereby decreasing expenses.
Allowance for loan losses: 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 General Partner
of the amount necessary to maintain the allowance for loan losses at a level
adequate to absorb probable losses.
Impairment of long-lived assets: On a regular basis, the General Partner
- -----------------------------------
reviews the net carrying value of equipment to determine whether it can be
- ------
recovered from undiscounted future cash flows. 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. Inherent in
the Partnership's estimate of net realizable values are assumptions regarding
estimated future cash flows. If these assumptions or estimates change in the
future, the Partnership could be required to record impairment charges for these
assets.
Contingencies and litigation: The Partnership is subject to legal proceedings
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involving ordinary and routine claims related to its business. The ultimate
legal and financial liability with respect to such matters cannot be estimated
with certainty and requires the use of estimates in recording liabilities for
potential litigation settlements. Estimates for losses from litigation are made
after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, the
Partnership may be required to adjust amounts recorded in its financial
statements.
Results of Operations
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For the three and six month periods ended June 30, 2002, the Partnership
recognized operating lease revenue of $369,280 and $654,634, respectively,
compared to $427,289 and $1,029,951, respectively, for the same periods in 2001.
The decrease in operating lease revenue from 2001 to 2002 resulted from lease
term expirations. In the future, operating lease revenue is expected to decline
due to lease term expirations and aircraft sales.
The Boeing 737-2H4 aircraft, in which the Partnership holds an ownership
interest, was re-leased in September 2000 to Air Slovakia BWJ Ltd., with a lease
term expiring in September 2003. In accordance with a lease amendment executed
in January 2002, the lease term was revised and the lease terminated in August
2002, with the title to the aircraft transferring to Air Slovakia. The
Partnership recognized operating lease revenue of $135,656 and $195,345 for the
six months ended June 30, 2002 and 2001, respectively, related to its interest
in this aircraft. In August 2002, the lease terminated and the title of the
aircraft transferred to Air Slovakia in accordance with the amended lease.
A McDonnell Douglas MD-82 aircraft, in which the Partnership holds an ownership
interest, 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
operating lease revenue of $486,783 related to this aircraft during each of the
six months ended June 30, 2002 and 2001.
A second McDonnell Douglas MD-82 aircraft, in which the Partnership holds a
proportionate interest, was leased to Finnair OY though April 2001. In April
2001, the lessee returned the aircraft, which the General Partner is attempting
to remarket. The Partnership recognized operating lease revenue of $526,119
related to this aircraft during the six months ended June 30, 2001.
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 was to transfer to Royal
Aviation Inc., at the expiration of the lease term in January 2002. In the
fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result,
has defaulted on the conditional sales agreement. The General Partner is
continuing to negotiate for the return of the aircraft. As of June 30, 2002,
the Partnership has written-down the remaining balance of the Partnership's
investment in the sales-type lease. The write-down was based on the comparison
of estimated fair value of the Partnership's interest in the aircraft and the
Partnership's net investment in the sales-type lease. The write-down recorded
during the six months ended June 30, 2002 was $58,785. For the three and six
months ended June 30, 2001, the Partnership recognized sales-type lease revenue
of $11,097 and $22,193, respectively.
The Partnership's aircraft interests represent proportionate ownership
interests. The remaining interests are owned by an affiliated equipment leasing
program sponsored by 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 and six month periods ended June 30, 2002 was
$13,956 and $29,419, respectively, compared to $34,426 and $126,978,
respectively, for the same periods in 2001. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments and interest earned on the loan receivable
from Echelon Residential Holdings.
Interest income included $71,548 during the six months ended June 30, 2001,
earned on the loan receivable from Echelon Residential Holdings. The
Partnership ceased accruing interest on this loan, effective April 1, 2001. See
further discussion below.
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 asset on a re-lease, renewal or month-to-month basis. The
Partnership classifies such residual rental payments as lease revenue.
Consequently, the amount of any future gain or loss reported in the financial
statements may not necessarily be indicative of the total residual value the
Partnership achieved from leasing the aircraft.
For the three and six month periods ended June 30, 2002, the Partnership
incurred interest expense of $60,040 and $124,004, respectively, compared to
$105,498 and $163,078, respectively for the same periods in 2001. In the
future, 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 $18,464 and $38,483, respectively, for the three and six
months ended June 30, 2002 compared to $35,443 and $71,032, respectively, for
the same periods in 2001. Management fees are based on 5% of gross lease
revenue generated by leases and 2% of gross revenue generated by full payout
leases.
Bad debt expense was $76,149 during the six months ended June 30, 2002 including
the write-down of the remaining balance of the Partnership's investment in the
sales-type lease. The write-down was based on the comparison of estimated fair
value of the Partnership's interest in the aircraft and the Partnership's net
investment in the sales-type lease.
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 $157,500, 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 $292,140 recorded on the loan
receivable from inception through March 31, 2001 and ceased accruing interest on
its loan receivable from Echelon Residential Holdings, effective April 1, 2001.
During the second quarter of 2002, the Partnership received $278,914 from
Echelon Residential Holdings for interest due on the loan. As a result, the
Partnership reversed $278,914 of the allowance recorded against the accrued
interest receivable balance, which is reflected as "Recovery of bad debt expense
from loan receivable" in the Statement of Operations.
Operating expenses were $129,652 and $222,025, respectively, for the three and
six month periods ended June 30, 2002, compared to $171,005 and $317,466,
respectively, for the same periods in 2001. In 2001, operating expenses
included approximately $59,000 related to the Class Action Lawsuit. Other
operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as printing, distribution
and other remarketing expenses. In certain cases, equipment storage or repairs
and maintenance costs may be incurred in connection with equipment being
remarketed.
Depreciation expense was $216,328 and $432,656, respectively, for the three and
six month periods ended June 30, 2002 and 2001.
During the three months ended June 30, 2002, the Partnership recorded a
write-down of equipment, representing an impairment to the carrying value of the
Partnership's interest in two McDonnell Douglas MD-82 aircraft and a Boeing 737
aircraft. The resulting charge of $1,305,263 was based on a comparison of
estimated fair value and carrying value of the Partnership's interests in the
aircraft. The estimate of the fair value was based on (i) a current offer to
purchase one of the McDonnell Douglas MD-82 aircraft, (ii) indications of
interest from potential purchasers of the second McDonnell Douglas MD-82
aircraft, (iii) the sale of the Boeing 737 aircraft subsequent to June 30, 2002,
and (iv) EFG's assessment of prevailing market conditions for similar aircraft.
Aircraft condition, age, passenger capacity, distance capability, fuel
efficiency, and other factors influence market demand and market values for
passenger jet aircraft. The events of September 11, 2001, along with a
recession in the United States have continued to adversely affect the market
demand for both new and used commercial aircraft.
During the three months ended June 30, 2001, the Partnership also recorded a
write-down of equipment, representing an impairment to the carrying value of the
Partnership's interest in a McDonnell Douglas MD-82 aircraft returned in April
2001 and currently off lease. The resulting charge of $957,000 was based on a
comparison of estimated fair value and carrying value of the Partnership's
interest in the aircraft. The estimate of the fair value was based on (i)
information provided by a third-party aircraft broker and (ii) EFG's assessment
of prevailing market conditions for similar aircraft.
Liquidity and Capital Resources and Discussion of Cash Flows
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The Partnership by its nature is a limited life entity. See previous discussion
regarding the Partnership's dissolution. The Partnership's principal operating
activities derive from aircraft rental transactions. Accordingly, the
Partnership's principal source of cash from operations is generally 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 net cash inflows of
$128,868 and $1,076,334 for the six months ended June 30, 2002 and 2001,
respectively. The decrease in net cash inflows from 2001 to 2002 reflects the
reduction in the Partnership's operating lease revenue and collections from the
sales-type lease offset by the receipt of interest from Echelon Residential
Holdings in 2002.
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. The Partnership periodically
evaluates the collectibility of the loan's contractual principal and interest
and the existence of loan impairment indicators.
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 $157,500, 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 $292,140 recorded on the loan
receivable through March 31, 2001 and ceased accruing interest on its loan
receivable from Echelon Residential Holdings, effective April 1, 2001. During
the quarter ended June 30, 2002, the Partnership received a partial payment of
the interest due on this loan as discussed above.
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 structuring the loan this way may
be in violation of the prohibition against loans to affiliates in the
Partnership Agreements.
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
addition, the Partnership has a balloon payment obligation as discussed below.
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 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 $4,011,791 including $2,339,924 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $1,671,867 to repay the outstanding balance
of the indebtedness and accrued interest related to another aircraft of $433,178
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 $1,337,875 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, the Partnership
has retained funds in connection with the Class Action Lawsuit.
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 June 30, 2002, 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. In August 2002, the title to this Boeing 737 aircraft was
transferred to Air Slovakia BWJ, Ltd. in accordance with the terms of the
amended lease agreement. The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. The lease term associated with one of
the McDonnell Douglas MD-82 aircraft expired in 2001 and the aircraft is
currently off lease.
Recent changes in the economic condition of the airline industry have adversely
affected the demand for and market values for commercial jet aircraft. These
changes could adversely affect the operations of the Partnership and the
residual value of its commercial jet aircraft. Currently, one of the McDonnell
Douglas MD-82 commercial jet aircraft in which the Partnership has a
proportionate ownership interest is subject to a contracted lease agreement and
the other McDonnell Douglas MD-82 aircraft was returned to the General Partner
upon its lease expiration in April 2001. The General Partner is attempting to
remarket this aircraft. The remaining aircraft was leased to Air Slovakia BWJ
Ltd. as discussed above.
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.
Cash distributions when paid to the Recognized Owners generally consist of both
a return of and a return on capital. Cash distributions do not represent and
are not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
primarily dependent upon the proceeds realized from the liquidation of the
Partnership's remaining assets offset by the associated costs of such
liquidation and dissolution of the Partnership.
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).
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.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at June 30, 2002. 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, 2001, the
General Partner had a positive tax capital account balance.
As of August 9, 2002, the Partnership has transferred its proportionate
ownership aircraft interests (except for the McDonnell Douglas MD-82 aircraft
currently leased to Aerovias de Mexico, S.A. de C.V), remaining cash and
non-cash assets to the AIRFUND International Limited Partnership Liquidating
Trust ("Liquidating Trust"), of which Wilmington Trust Company is Trustee. The
Partnership will be dissolved. The Partnership is currently negotiating the
sale of the Retained Aircraft. The Liquidating Trust is in the process of
selling the transferred aircraft, in which the Partnership has a proportionate
ownership interest and distributing the Partnership's cash, net of reserves for
known and contingent liabilities, in accordance with the terms of the Revised
Settlement.
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 June 30, 2002, which bears a
fixed interest rate of 7.65% and amortizes monthly through September 2004. 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 during the six months ended June 30, 2002 was not material.
The Partnership's loan to Echelon Residential Holdings matures on September 8,
2002 and currently has a stated fixed annual rate of 18% with interest due at
maturity (see discussion above). 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 for the six
months ended June 30, 2002 was not material.
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
. Response:
. Refer to Note 8 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:
Exhibit 2.13 Amendment to Subsection 2.2 (f) of the Revised Stipulation of
Settlement dated January 29, 2002
Exhibit 2.14 Plan of Liquidation and Dissolution dated July 18, 2002
Exhibit 2.15 Account Agency Agreement between Equis Financial Group Limited
Partnership and Wilmington Trust Company, dated April 11, 2002
Exhibit 2.16 Liquidating Trust Agreement between the Partnership and
Wilmington Trust Company dated July 18, 2002
Exhibit 99.1 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Item 6(b). Reports on Form 8-K
Response :
Form 8-K dated July 18, 2002 to include the Court approved settlement of the
Class Action Lawsuit.
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 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: August 19, 2002
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