AIRFUND International Limited Partnership
Annual Report to the Partners, December 31, 1999
AIRFUND International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
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SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1999 and 1998 8
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1999, 1998 and 1997 10
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 11
Notes to the Financial Statements 12-21
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 22
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 23
Schedule of Costs Reimbursed to the General
Partner and its Affiliates as Required by
Section 10.4 of the Amended and Restated
Agreement and Certificate of Limited Partnership 24
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1999:
Summary of
Operations 1999 1998 1997 1996 1995
- --------------------------- ------------ ------------ ------------ ------------ ------------
Lease revenue $ 3,362,568 $ 3,604,643 $ 3,858,270 $ 4,346,218 $ 4,588,609
Net income (loss) $ (88,675) $ 431,323 $ 49,656 $ 4,360,899 $ (2,283,720)
Per Unit:
Net income (loss) $ (0.03) $ 0.13 $ 0.02 $ 1.36 $ (0.71)
Cash distributions $ -- $ -- $ -- $ 1.56 $ 1.00
Financial Position
- ------------------
Total assets $ 15,392,027 $ 17,906,024 $ 19,864,413 $ 23,700,585 $ 16,888,606
Total long-term obligations $ 3,250,113 $ 6,279,100 $ 8,864,307 $ 11,321,769 $ 4,742,968
Partners' capital $ 10,986,946 $ 11,075,621 $ 10,644,298 $ 10,594,642 $ 11,233,743
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to the year ended
December 31, 1998 and the year ended December 31, 1998
compared to the year ended December 31, 1997
Certain statements in this annual 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 outcome of the Class
Action Lawsuit described in Note 7 to the accompanying financial statements and
the remarketing of the Partnership's equipment.
Overview
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. Upon its inception in 1989, the Partnership
purchased three used commercial jet aircraft and a proportionate interest in a
fourth aircraft, which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenues pursuant to
primary-term lease agreements. In 1991, one of the Partnership's original
aircraft was sold to a third party and a portion of the sale proceeds was
reinvested in a proportionate interest in another aircraft. Subsequently, all of
the aircraft in the Partnership's original portfolio have been re-leased,
renewed, exchanged for other aircraft, or sold. At December 31, 1999, the
Partnership owned a proportionate interest in five 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 7 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, 2004.
Year 2000 Issue
The Partnership uses information systems provided by Equis Financial Group
Limited Partnership ("EFG") and has no information systems of its own. EFG
completed all Year 2000 readiness work prior to December 31, 1999 and did not
experience any significant problems. Additionally, EFG is not aware of any
outside customer or vendor that experienced a Year 2000 issue that would have a
material effect on the Partnership's results of operations, liquidity, or
financial position. However, EFG has no means of ensuring that all customers,
vendors and third-party servicers have conformed to Year 2000 standards. The
effect of this risk to the Partnership is not determinable.
Results of Operations
For year ended December 31, 1999, the Partnership recognized lease revenue
of $3,362,568 compared to $3,604,643 and $3,858,270 for the years ended December
31, 1998 and 1997, respectively. The decrease in lease revenue from 1997 to 1999
is primarily the result of the sale in April 1998 of the Partnership's interest
in a Lockheed L-1011-50 aircraft. The Partnership recognized aggregate lease
revenue related to the Lockheed L-1011-50 aircraft of $236,004 and $489,609 in
1998 and 1997, respectively. In the future, the Partnership's aggregate lease
revenue is expected to decline due to aircraft sales and the expiration of the
lease terms related to the Partnership's remaining aircraft.
The leases related to the three Boeing 737-2H4 aircraft in which the
Partnership holds a proportionate interest expired on December 31, 1999 and
collectively provided lease revenue of $312,552 per quarter to the Partnership.
The three Boeing 737-2H4 aircraft are current being stored in a warehouse while
the General Partner attempts to remarket these aircraft (see additional
discussion below). The two McDonnell-Douglas MD-82 aircraft, in which the
Partnership holds a proportionate interest, are currently on lease to Finnair OY
(the "Finnair Aircraft"). These leases, which were renewed upon the expiration
of the primary lease terms in April 1999, expire in January 2000
3
and April 2001 and generate lease revenue of $264,804 and $263,060 per quarter
to the Partnership, respectively (see further discussion below).
At December 31, 1999, the Partnership held a proportionate ownership
interest in the Southwest Aircraft and the Finnair Aircraft (see Note 3 to the
accompanying financial statements). 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.
On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Lockheed L-1011-50 aircraft,
formerly leased to Aer Lease Limited ("Aer Lease"), to the lessee for net
proceeds of $846,300. The Partnership's interest in the aircraft had a net book
value of $658,282 at the time of sale, resulting in the recognition of a net
gain on sale, for financial statement purposes, of $188,018.
The ultimate realization of residual value for aircraft is 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 asset values at any given
time. EFG attempts to monitor these changes and the airline industry in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each aircraft.
The total economic value realized for each aircraft is comprised of all
primary lease term revenue generated from that aircraft, together with its
residual value. The latter consists of cash proceeds realized upon the
aircraft's sale in addition to all other cash receipts obtained from renting the
aircraft on a re-lease, renewal or month-to-month basis. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
Interest income for the year ended December 31, 1999 was $161,232 compared
to $165,479 and $130,552 for the years ended December 31, 1998 and 1997,
respectively. Interest income is typically generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
The Partnership incurred interest expense of $399,589, $664,418 and
$890,289 during the years ended December 31, 1999, 1998 and 1997, respectively.
Interest expense resulted from financing obtained from third-party lenders in
connection with the acquisition of the Southwest Aircraft and the Finnair
Aircraft. Interest expense declines as the principal balance of notes payable is
reduced through the application of rent receipts to outstanding debt. See
additional discussion below regarding the refinancing of certain of the debt in
2000.
Management fees were 5% of lease revenue in each of the years ended
December 31, 1999, 1998, and 1997 and will not change as a percentage of lease
revenue in future periods.
Operating expenses were $989,886, $529,807 and $353,976 for the years
ended December 31, 1999, 1998 and 1997, respectively. During 1999, the
Partnership accrued approximately $663,800 for the completion of a D-Check
incurred to facilitate the remarketing of the Finnair Aircraft having a lease
agreement which expired in January 2000 (see Note 8 to the accompanying
financial statements). Operating expenses in 1999 also include approximately
$50,000 accrued for certain legal and Consolidation expenses related to the
Class Action Lawsuit described in Note 7 to the financial statements. During
1998, the Partnership incurred or accrued approximately $337,000 for such
expenses related to the Class Action Lawsuit. Other operating expenses consist
principally of professional service costs, such as audit and legal fees, as well
as insurance, printing, distribution and remarketing expenses. Depreciation
expense was $2,054,872, $2,152,360, and $2,501,988 for the years ended December
31, 1999, 1998 and 1997, respectively.
Liquidity and Capital Resources and Discussion of Cash Flows
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 7 to the accompanying financial statements, the
Partnership is permitted to invest in new equipment or other business
activities, subject to certain limitations. On March 8, 2000, the Partnership
invested $1,800,000 in a debt instrument that matures in September 2002. (See
Notes 7 and 8 to the accompanying financial statements for additional
information concerning this transaction.)
4
The Partnership by its nature is a limited life entity. As an aircraft
equipment leasing program, 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 net cash inflows of $2,669,158,
$2,608,602, and $2,001,652 in the years ended December 31, 1999, 1998 and 1997,
respectively. 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, will continue to
incur increased 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 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.
Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. During year ended
December 31, 1998, the Partnership realized proceeds of $846,300 from the sale
of its interest in the Lockheed L-1011-50 aircraft. There were no aircraft sales
in 1999 or 1997. Future inflows of cash from aircraft disposals will vary in
timing and amount and will be influenced by many factors including, but not
limited to, the frequency and timing of lease expirations, the aircraft's
condition and age, and future market conditions.
At December 31, 1999, the Partnership was due aggregate future minimum
lease payments of $1,315,298 from contractual lease agreements (see Note 2 to
the financial statements), a portion of which will be used to amortize the
principal balance of notes payable of $3,250,113 (see Note 5 to the financial
statements). At the expiration of the individual lease terms underlying the
Partnership's future minimum lease payments, the Partnership will sell its
aircraft or enter re-lease or renewal agreements when considered advantageous by
the General Partner and EFG. Such future remarketing activities will result in
the realization of additional cash inflows in the form of sale proceeds or rents
from renewals and re-leases, the timing and extent of which cannot be predicted
with certainty. This is because the timing and extent of remarketing events
often is dependent upon the needs and interests of the existing lessees. Some
lessees may choose to renew their lease contracts, while others may elect to
return the aircraft. In the latter instances, the aircraft could be re-leased to
another lessee or sold to a third party. Accordingly, as the terms of the
currently existing contractual lease agreements expire, the cash flows of the
Partnership will become less predictable. In addition, the Partnership will need
cash outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses.
The Partnership obtained long-term financing in connection with the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, they are used to repay principal and interest.
In December 1998, the Partnership and certain affiliated investment
programs owning interests in two McDonnell Douglas MD-82 aircraft (collectively,
the "Programs") entered into lease extension agreements with Finnair OY. The
lease extensions, effective upon the expiration of the existing primary lease
terms on April 28, 1999, extended the leases for nine months and two years,
respectively. All of the future minimum lease payments contracted to be received
by the Partnership (see above) result from these lease extensions.
On April 29, 1999, the Programs entered into agreements with a third-party
lender to extend the maturity dates of the Programs' indebtedness related to the
Finnair Aircraft. Consistent with the extension terms of the lease agreements
related to the Finnair Aircraft discussed above, the maturity dates of the
indebtedness were extended to January 2000 and April 2001, respectively. The
Partnership has balloon payment obligations of $1,654,607 and $441,154 related
to this indebtedness that is due on the respective maturity dates. In February
2000, the Programs refinanced the indebtedness maturing in January 2000 (see
Note 8 to the financial statements).
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. Liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining
5
aircraft portfolio consists of fewer revenue-producing assets that are available
to cover prospective cash disbursements. Insufficient liquidity could inhibit
the Partnership's ability to sustain its operations or maximize the realization
of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other
things, significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation. At December 31, 1999, the
Partnership had ownership interests in five commercial jet aircraft. Three of
the aircraft are Boeing 737 aircraft formerly leased to Southwest Airlines, Inc.
The lease agreements for each of these aircraft expired on December 31, 1999 and
Southwest elected to return the aircraft. The aircraft are Stage 2 aircraft,
meaning that they are prohibited from operating in the United States after
December 31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3
noise regulations promulgated by the Federal Aviation Administration. The cost
to hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2
million. At this time, the General Partner is attempting to remarket these
assets without further capital investment by either re-leasing the aircraft to a
user outside of the United States or selling the aircraft as they are without
retro-fitting the aircraft to conform to Stage 3 standards. The remaining two
aircraft in the Partnership's portfolio already are Stage 3 compliant. One of
these aircraft had a lease term that expired in January 2000 and is being held
in storage pending the outcome of ongoing remarketing efforts. The other
aircraft has a lease term expiring in April 2001.
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 6 to the financial statements). 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 December 31, 1999. 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, 1999, the General Partner had a positive tax capital account
balance.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 7 to the accompanying financial statements. The proposed settlement to
that lawsuit, if effected, will materially change the future organizational
structure and business interests of the Partnership, as well as its cash
distribution policies. The General Partner believes that it will be in the
Partnership's best interests to continue to suspend the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is adjudicated.
6
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of AIRFUND International Limited Partnership:
We have audited the accompanying statements of financial position of
AIRFUND International Limited Partnership, as of December 31, 1999 and 1998, and
the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND International
Limited Partnership at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 2000
7
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 3,180,907 $ 3,540,736
Rents receivable -- 104,184
Accounts receivable - affiliate 4,888 --
Equipment at cost, net of accumulated
depreciation of $7,912,079 and
$5,857,207 at December 31, 1999 and
1998, respectively 12,206,232 14,261,104
------------ ------------
Total assets $ 15,392,027 $ 17,906,024
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,250,113 $ 6,279,100
Accrued interest 44,209 83,223
Accrued liabilities 922,069 288,500
Accrued liabilities - affiliate 18,602 20,698
Deferred rental income 170,088 158,882
------------ ------------
Total liabilities 4,405,081 6,830,403
------------ ------------
Partners' capital (deficit):
General Partner (1,149,649) (1,145,215)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 12,136,595 12,220,836
------------ ------------
Total partners' capital 10,986,946 11,075,621
------------ ------------
Total liabilities and partners'
capital $ 15,392,027 $ 17,906,024
============ ============
The accompanying notes are an integral part of
these financial statements
8
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Income:
Lease revenue $ 3,362,568 $ 3,604,643 $ 3,858,270
Interest income 161,232 165,479 130,552
Gain on sale of equipment -- 188,018 --
------------ ------------ ------------
Total income 3,523,800 3,958,140 3,988,822
------------ ------------ ------------
Expenses:
Depreciation 2,054,872 2,152,360 2,501,988
Interest expense 399,589 664,418 890,289
Equipment management fees - affiliate 168,128 180,232 192,913
Operating expenses - affiliate 989,886 529,807 353,976
------------ ------------ ------------
Total expenses 3,612,475 3,526,817 3,939,166
------------ ------------ ------------
Net income (loss) $ (88,675) $ 431,323 $ 49,656
============ ============ ============
Net income (loss)
per limited partnership unit $ (0.03) $ 0.13 $ 0.02
============ ============ ============
The accompanying notes are an integral part of
these financial statements
9
AIRFUND International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1999, 1998 and 1997
General Recognized Owners
Partner ---------------------------
Amount Units Amount Total
------------ ------------ ------------ ------------
Balance at December 31, 1996 $ (1,169,264) 3,040,000 $ 11,763,906 $ 10,594,642
Net income - 1997 2,483 -- 47,173 49,656
------------ ------------ ------------ ------------
Balance at December 31, 1997 (1,166,781) 3,040,000 11,811,079 10,644,298
Net income - 1998 21,566 -- 409,757 431,323
------------ ------------ ------------ ------------
Balance at December 31, 1998 (1,145,215) 3,040,000 12,220,836 11,075,621
Net loss - 1999 (4,434) -- (84,241) (88,675)
------------ ------------ ------------ ------------
Balance at December 31, 1999 $ (1,149,649) 3,040,000 $ 12,136,595 $ 10,986,946
============ ============ ============ ============
The accompanying notes are an integral part of
these financial statements
10
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows (used in) from operating activities:
Net income (loss) $ (88,675) $ 431,323 $ 49,656
Adjustments to reconcile net income (loss)
To net cash from operating activities:
Depreciation 2,054,872 2,152,360 2,501,988
Gain on sale of equipment -- (188,018) --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 104,184 (104,184) --
Accounts receivable - affiliate (4,888) 121,626 (121,626)
Increase (decrease) in:
Accrued interest (39,014) (14,829) (20,888)
Accrued liabilities 633,569 280,250 (434,150)
Accrued liabilities - affiliate (2,096) (15,521) (27,711)
Deferred rental income 11,206 (54,405) 54,383
------------ ------------ ------------
Net cash from operating activities 2,669,158 2,608,602 2,001,652
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from equipment sales -- 846,300 --
------------ ------------ ------------
Net cash from investing activities -- 846,300 --
------------ ------------ ------------
Cash flows used in financing activities:
Principal payments - notes payable (3,028,987) (2,585,207) (2,457,462)
Distributions paid -- -- (1,000,000)
------------ ------------ ------------
Net cash used in financing activities (3,028,987) (2,585,207) (3,457,462)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (359,829) 869,695 (1,455,810)
Cash and cash equivalents at beginning of year 3,540,736 2,671,041 4,126,851
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,180,907 $ 3,540,736 $ 2,671,041
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 438,603 $ 679,247 $ 911,177
============ ============ ============
The accompanying notes are an integral part of these financial statements.
11
AIRFUND International Limited Partnership
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
AIRFUND International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on January 31, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). On July 26, 1989, the Partnership
issued 3,040,000 units representing assignments of limited partnership interests
(the "Units") to 4,147 investors. Unitholders and Limited Partners (other than
the Initial Limited Partner) are collectively referred to as Recognized Owners.
The General Partner is an affiliate of Equis Financial Group Limited Partnership
(formerly known as American Finance Group), a Massachusetts limited partnership
("EFG"). The common stock of the General Partner is owned by AF/AIP Programs
Limited Partnership, of which EFG and a wholly-owned affiliate are the 99%
limited partners and AFG Programs, Inc., a Massachusetts corporation which is
wholly-owned by Geoffrey A. MacDonald, is the 1% general partner. The capital
contribution of the General Partner, in consideration of its general partner
interests, was $1,000. The General Partner is not required to make any other
capital contributions except as may be required under the Uniform Act and
Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended").
EFG is a Massachusetts partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other direct-participation equipment leasing programs sponsored or
co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group", and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.
Significant operations commenced on July 27, 1989 when the Partnership
made its initial equipment purchase. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Recognized Owners and 5% to the
General Partner for the life of the Partnership.
12
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in repurchase agreements with overnight maturities. Under the
terms of the agreements, title to the underlying securities passes to the
Partnership. The securities underlying the agreements are book entry securities.
At December 31, 1999, the Partnership had $3,066,971 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
Revenue Recognition
Rents are payable to the Partnership monthly or quarterly and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. See also Note 7 regarding the
Class Action Lawsuit. Future minimum rents of $1,315,298 are due as follows:
For the year ending December 31, 2000 $ 1,052,238
2001 263,060
-----------
Total $ 1,315,298
===========
In December 1998, the Partnership and the other affiliated leasing
programs owning interests in two McDonnell Douglas MD-82 aircraft entered into
lease extension agreements with Finnair OY. The lease extensions, effective upon
the expiration of the existing primary lease terms on April 28, 1999, extended
the leases for nine months and two years, respectively. All of the Partnership's
future minimum rents summarized above result from these lease extensions.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is as
follows:
1999 1998 1997
------------ ------------ ------------
Finnair OY
(Two McDonnell Douglas MD-82) $ 2,101,991 $ 2,118,431 $ 2,118,453
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 1,260,577 $ 1,250,208 $ 1,250,208
Aer Lease Limited
(One Lockheed L-1011-50) $ -- $ -- $ 489,609
13
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All aircraft were acquired from EFG or one of its Affiliates. Equipment
Cost means the actual cost paid by the Partnership to acquire the aircraft,
including acquisition fees. Equipment Cost reflect the actual price paid for the
aircraft by EFG or the Affiliate plus all actual costs incurred by EFG or the
Affiliate while carrying the aircraft less, for the Lockheed L-1011-50 aircraft,
the amount of all interim rents received by EFG or the Affiliate prior to
selling the aircraft.
Depreciation
The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of each aircraft to determine whether it exceeds
estimated net realizable value. Adjustments to reduce the net carrying value of
aircraft are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).
Contingencies
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is likely to be
incurred.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated and remains
pending (See Note 7). The Partnership's estimated exposure for costs anticipated
to be incurred in pursuing the settlement proposal is approximately $387,000
consisting principally of
14
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
legal fees and other professional service costs. These costs are expected to be
incurred regardless of whether the proposed settlement ultimately is effected
and, therefore, the Partnership accrued approximately $337,000 of these costs in
1998 following the Court's approval of the settlement plan. The cost estimate is
subject to change and is monitored by the General Partner based upon the
progress of the settlement proposal and other pertinent information. As a
result, the Partnership accrued and expensed an additional $50,000 for such
costs during 1999.
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) and Cash Distributions Per Unit
Net income (loss) and cash distributions per Unit are based on 3,040,000
Units outstanding during each of the three years in the period ended December
31, 1999 and computed after allocation of the General Partner's 5% share of net
income (loss) and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1999. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1999 under contracted lease terms.
In the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.
Remaining
Lease
Term Equipment
Equipment Type (Months) at Cost Location
- ---------------------------------------------- ----------- ------------ ---------
Two McDonnell-Douglas MD-82 (Finn air) 1-16 $ 13,762,438 Foreign
Three Boeing 737-2H4 0 6,355,873 TX
------------
Total equipment cost 20,118,311
Accumulated depreciation (7,912,079)
------------
Equipment, net of accumulated depreciation $ 12,206,232
============
The cost of each of the Partnership's aircraft represents proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
15
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
The two McDonnell-Douglas MD-82 and related lease payment streams were
used to secure term loans with third-party lenders (see Note 5). The related
aircraft had an original cost of approximately $13,762,000 and a net book value
of approximately $9,950,000 at December 31, 1999.
At December 31, 1999, the three Boeing 737-2H4 jet aircraft, in which the
Partnership holds ownership interests, were held for sale or re-lease. The
aircraft had a cost of approximately $6,356,000 and a net book value of
approximately $2,255,000 at December 31, 1999.
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the aircraft upon the
expiration of the primary lease terms.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1999, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1999 1998 1997
------------ ------------ ------------
Equipment management fees $ 168,128 $ 180,232 $ 192,913
Administrative charges 70,081 53,004 49,788
Reimbursable operating expenses
due to third parties 919,805 476,803 304,188
------------ ------------ ------------
Total $ 1,158,014 $ 710,039 $ 546,889
============ ============ ============
As provided under the terms of the Management Agreement, EFG is
compensated for its services to the Partnership. Such services include
acquisition and management of equipment. For acquisition services, EFG was
compensated by an amount equal to 1.6% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
5% of gross operating lease rental revenues and 2% of gross full payout lease
rental revenues received by the Partnership. Both acquisition and management
fees are subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of the Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the
16
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Partnership. Reimbursable operating expenses due to third parties represent
costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at
actual cost.
All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.
All rents and the proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1999, the Partnership was owed $4,888 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2000.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
----------------------------------------------------------------
Number of Percent of Total
Affiliate Units Owned Outstanding Units
----------------------------------------------------------------
Old North Capital Limited
Partnership 205,040 6.74%
----------------------------------------------------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of installment notes payable
to banks of $3,250,113. All of the installment notes are non-recourse, with
interest rates ranging between 8.09% and 8.65% and are collateralized by the
equipment and assignment of the related lease payments. The Partnership has
balloon payment obligations at the expiration of the renewal lease terms related
to the aircraft on lease to Finnair OY of $1,654,607 and $441,154. This
indebtedness matures in January 2000 and April 2001, respectively. (See Note 8
regarding the refinancing of the January 2000 balloon payment in February 2000).
The carrying amount of notes payable approximates fair value at December 31,
1999.
The annual maturities of the installment notes payable are as follows:
For the year ending December 31, 2000 $ 2,568,795
2001 681,318
-----------
Total $ 3,250,113
============
NOTE 6 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). The
allocation of net income or loss for financial statement purposes differs from
the net income or loss allocation requirements for income tax and Dissolution
Event purposes, as delineated in the Restated Agreement,
17
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
as amended. For income tax purposes, the Partnership allocates net income or net
loss in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account. At December 31, 1999, the General Partner had a positive tax
capital account balance.
The following is a reconciliation between net income reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999, 1998 and 1997:
1999 1998 1997
--------------- --------------- --------------
Net income (loss) $ (88,675) $ 431,323 $ 49,656
Financial statement depreciation in excess
of (less than) tax depreciation 795,190 (487,526) (551,768)
Deferred rental income 11,206 (54,405) 54,383
Other 68,000 (760,951) (424,651)
--------------- --------------- --------------
Net income (loss) for federal income
tax reporting purposes $ 785,721 $ (871,559) $ (872,380)
=============== =============== ==============
The principal component of "Other" consists of the difference between the
tax and financial statement gain or loss on aircraft disposals. It also includes
reversal of certain maintenance reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999 and 1998:
1999 1998
------------------ ------------------
Partners' capital $ 10,986,946 $ 11,075,621
Add back selling commissions and organization
and offering costs 7,975,000 7,975,000
Cumulative difference between federal income tax
and financial statement income (loss) (5,876,008) (6,750,404)
------------------ ------------------
Partners' capital for federal income tax reporting purposes $ 13,085,938 $ 12,300,217
================== ==================
The cumulative difference between federal income tax and financial
statement income (loss) represents a timing difference.
NOTE 7- LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
Limited Partnership, et al., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of
18
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative
action, captioned Leonard Rosenblum, et al. v. Equis Financial Group Limited
Partnership, et al., in the Superior Court of the Commonwealth of Massachusetts
on behalf of the Nominal Defendants against the Defendants. Both actions are
referred to herein collectively as the "Class Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 12, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided the
Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
In February 2000, counsel for the Plaintiffs and the Defendants entered
into a second amended stipulation of settlement (the "Second Amended
Stipulation") which modified certain of the settlement terms contained in the
Amended Stipulation. The Second Amended Stipulation was preliminarily approved
by the Court by its "Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000
Order"). Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold a fairness hearing that
will be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff sub-class
members will receive a Notice of Settlement and other information pertinent to
the settlement of their claims that will be mailed to them in advance of the
fairness hearing.
The settlement of the second sub-class is premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate principally as a finance company and would use
its best efforts to list its shares on the NASDAQ National Market or another
national exchange or market as soon after the Consolidation as Newco deems that
market conditions and its business operations are suitable for listing its
shares and Newco has satisfied all necessary regulatory and listing
requirements. The potential benefits and risks of the Consolidation will be
presented in a Solicitation Statement that will be mailed to all of the partners
of the Exchange Partnerships as soon as the associated regulatory review process
is completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was
19
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
filed with the Securities and Exchange Commission on August 24, 1998 and remains
pending. Class members will be notified of the actual fairness hearing date when
it is confirmed.
One of the principal objectives of the Consolidation is to create a
company that would have the potential to generate more value for the benefit of
existing limited partners than other alternatives, including continuing the
Partnership's customary business operations until all of its assets are disposed
in the ordinary course of business. To facilitate the realization of this
objective, the Amended Stipulation provided, among other things, that commencing
March 22, 1999, the Exchange Partnerships could collectively invest up to 40% of
the total aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively invested $32
million as permitted by the Second Amended Stipulation approved by the Court.
The Partnership's portion of the aggregate investment is $1,800,000. The
investment consists of a term loan to Echelon Residential Holdings LLC, a
newly-formed real estate development company that will be owned by several
investors, including James A. Coyne, Executive Vice President of EFG. Mr.
Coyne, in his individual capacity, is the only investor in Echelon
Residential Holdings LLC who is related to EFG. The loan proceeds were used
by Echelon Residential Holdings LLC in the formation of a subsidiary, Echelon
Residential LLC, that in turn acquired various real estate assets from
Echelon International Corporation, a Florida based real estate company. The
loan has a term of 30 months maturing on September 7, 2002 and bears interest
at the annual rate of 14% for the first 24 months and 18% for the final six
months of the term. Interest accrues and compounds monthly but is not payable
until maturity. Echelon Residential Holdings LLC 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.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of the Exchange
Partnerships with the opportunity to object to the participation of their
partnership in the Consolidation. Assuming the proposed settlement is effected
according to present terms, the Partnership's share of legal fees and expenses
related to the Class Action Lawsuit and the Consolidation is estimated to be
approximately $387,000, of which approximately $337,000 was accrued and expensed
by the Partnership in 1998 and approximately $50,000 was accrued and expensed in
1999.
While the Court's August 20 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothecating, or otherwise disposing of any Units
pending the Court's final determination of whether the settlement should be
approved, the March 22 Order permitted the partners to transfer Units to family
members or as a result of the divorce, disability or death of the partner. No
other transfers are permitted pending the Court's final determination of whether
the settlement should be approved. The provision of the August 20 Order which
enjoined the General Partners of the Exchange Partnerships from, among other
things, recording any transfers not in accordance with the Court's order remains
effective.
20
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the Consolidation,
then that partnership will be excluded from the Consolidation. Notwithstanding
the extent of delays experienced thus far in achieving a final settlement of the
Class Action Lawsuit with respect to the Exchange Partnerships, the General
Partner and its affiliates, in consultation with counsel, continue to feel that
there is a reasonable basis to believe that a final settlement of the sub-class
involving the Exchange Partnerships ultimately will be achieved. 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 8 - SUBSEQUENT EVENTS
Refinancing of Indebtedness
In February 2000, the Partnership and certain affiliated investment
programs (collectively, the "Programs") refinanced the indebtedness maturing in
January 2000 associated with the MD-82 aircraft previously leased to Finnair OY.
The Programs received debt proceeds of $4,720,000 in aggregate, consisting of
$3,370,000 to refinance the existing indebtedness and an additional $1,350,000
required to perform a D-Check on the aircraft. The note bears a fluctuating
interest rate based on LIBOR plus a margin with interest payments due monthly.
The Partnership's share of the indebtedness is $2,320,824 which is due at
maturity on August 9, 2000. The aircraft was returned in January 2000 upon its
lease term expiration and is currently being stored in a warehouse while it is
being remarketed.
Other
On March 8, 2000, the Exchange Partnerships (see Note 7) collectively
loaned $32 million to Echelon Residential Holdings LLC, a newly-formed real
estate development company that will be owned by several investors, including
James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his individual
capacity, is the only investor in Echelon Residential Holdings LLC who is
related to EFG.
The Partnership's participation in the loan is $1,800,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC),
used the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has
a term of 30 months maturing on September 7, 2002 and bears interest at the
annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. In connection with the transaction, Echelon Residential Holdings
LLC 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.
21
ADDITIONAL FINANCIAL INFORMATION
AIRFUND International Limited Partnership
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1999, 1998 and 1997
The Partnership classifies all rents from leasing aircraft as lease revenue.
Upon expiration of the primary lease terms, aircraft may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the aircraft,
in addition to any month-to-month revenue, represent the total residual value
realized for each aircraft. Therefore, the financial statement gain or loss,
which reflects the difference between the net book value of the aircraft at the
time of sale or disposition and the proceeds realized upon sale or disposition
may not reflect the aggregate residual proceeds realized by the Partnership for
such aircraft.
The following is a summary of the cash deficiency associated with the
aircraft disposition which occurred in the year ended December 31, 1998. There
were no aircraft disposals during the years ended December 31, 1999 or 1997.
1998
---------------
Rents earned prior to disposal of the aircraft $ 6,064,972
Sale proceeds realized upon disposition of the aircraft 846,300
---------------
Total cash generated from rents and aircraft sale proceeds 6,911,272
Original acquisition cost of the aircraft disposed 7,877,224
---------------
Deficiency of total cash generated
to the cost of the aircraft disposed $ (965,952)
===============
22
AIRFUND International Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1999
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
Net loss $ (88,675) $ -- $ (88,675)
Add:
Depreciation 2,054,872 -- 2,054,872
Management fees 168,128 -- 168,128
Less:
Principal repayment of notes payable (3,028,987) -- (3,028,987)
------------------ ------------------ ------------------
Cash used in operations, sales
and refinancings (894,662) -- (894,662)
Less:
Management fees (168,128) -- (168,128)
------------------ ------------------ ------------------
Distributable cash used in operations,
sales and refinancings (1,062,790) -- (1,062,790)
Other sources of cash:
Cash at beginning of year 1,630,123 1,910,613 3,540,736
Net change in receivable and accruals 702,961 -- 702,961
------------------ ------------------ ------------------
Cash at end of year $ 1,270,294 $ 1,910,613 $ 3,180,907
================== ================== ==================
23
AIRFUND International Limited Partnership
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1999
For the year ended December 31, 1999, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 358,608
24