Exhibit 13
AIRFUND II International Limited Partnership
Annual Report to the Partners, December 31, 1999
AIRFUND II 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 3-8
FINANCIAL STATEMENTS:
Report of Independent Auditors 9
Statement of Financial Position
at December 31, 1999 and 1998 10
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 11
Statement of Changes in Partners' Capital
for the years ended December 31, 1999, 1998 and 1997 12
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 13
Notes to the Financial Statements 14-27
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 28
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 29
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 30
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 years in the five year period ended December 31, 1999:
Summary of
Operations 1999 1998 1997 1996 1995
- -------------------- ---------- ----------- ----------- ----------- -----------
Lease revenue $1,841,170 $ 3,130,704 $ 3,224,618 $ 4,706,774 $ 6,585,836
Net income (loss) $1,892,009 $(1,208,085) $(1,762,752) $(3,649,940) $(5,286,053)
Per Unit:
Net income (loss) $ 0.66 $ (0.42) $ (0.62) $ (1.28) $ (1.85)
Cash distributions $ -- $ -- $ -- $ 2.25 $ 1.75
Financial Position
- ------------------
Total assets $9,112,479 $ 8,076,569 $ 9,765,106 $13,163,812 $21,432,133
Total long-term
obligations $ 981,775 $ 1,896,665 $ 2,677,520 $ 3,419,785 $ 1,432,396
Partners' capital $7,524,051 $ 5,632,042 $ 6,840,127 $ 8,602,879 $18,637,361
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 II International
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of factors that could cause actual results to
differ materially from those expressed in any forward-looking statements made
herein. These factors include, but are not limited to, the outcome of the Class
Action Lawsuit described in Note 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. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. Subsequently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft, or sold. In addition, see below for discussion related to the
detention and subsequent loss of one of the Partnership's aircraft in the United
Kingdom. At December 31, 1999, the Partnership owned one aircraft, two aircraft
engines and proportionate interests in five additional aircraft. In addition,
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, 2005.
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 the year ended December 31, 1999, the Partnership recognized lease
revenue of $1,841,170 compared to $3,130,704 and $3,224,618 for the years ended
December 31, 1998 and 1997, respectively. The decrease in lease revenue from
1998 to 1999 was due primarily to the non-payment of rents by the lessee of the
Partnership's Lockheed L-1011-100 aircraft and that lessee's subsequent
liquidation (see below), the non-payment of rents by the lessee of the
Partnership's Boeing 727-251 ADV aircraft (see below) and the sale of its Boeing
727-208 ADV aircraft and its interest in a Lockheed L-1011-50 aircraft in April
1999 and April 1998, respectively. The decrease in the Partnership's lease
revenue from 1997 to 1998 was due primarily to the sale of the Partnership's
interest in the Lockheed L-1011-50 aircraft and a scheduled reduction in the
lease rent payable under the lease agreement related to the Partnership's Boeing
727-251 ADV aircraft. Such decrease was partially offset by an increase in lease
revenue recognized related to the Partnership's Lockheed L-1011-100 aircraft
(see below). In the future, the Partnership's aggregate lease revenue is
expected to decline due to the expiration of the lease terms related to the
Partnership's remaining aircraft and the ultimate sale of those aircraft.
3
The leases related to the three Boeing 737-2H4 aircraft, in which the
Partnership holds proportionate interests, expired on December 31, 1999 and
collectively provided lease revenue of $94,392 per quarter to the Partnership.
The three 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 and April 2001 and each
generates lease revenue of approximately $80,000 per quarter to the Partnership.
The Partnership's Boeing 727-251 ADV aircraft was damaged in an on-ground
accident in October 1998 while being leased on a month-to-month basis by
Transmeridian Airlines, Inc. ("Transmeridian"). This lease had been generating
lease revenue of $70,000 per month to the Partnership. In September 1999,
Transmeridian ceased paying rent with respect to this aircraft. See discussion
below and Notes 7 and 8 to the accompanying financial statements for details
regarding legal action undertaken by the Partnership related to this situation
and the remarketing of this aircraft in 2000. The Partnership recognized lease
revenue of $560,000, $876,667 and $971,500 related to this aircraft during the
years ended December 31, 1999, 1998 and 1997, respectively.
In August 1998, Classic Airways Limited ("Classic") ceased paying rent with
respect to the Partnership's Lockheed L-1011-100 jet aircraft. In October 1998,
Classic filed for receivership in the United Kingdom ("UK") and was placed in
liquidation (see further discussion below). The Partnership earned lease revenue
in the amount of approximately $320,000 and $145,000 related to this aircraft
during the years ended December 31, 1998 and 1997, respectively.
At December 31, 1999, the Partnership held proportionate ownership
interests 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.
Interest income for the year ended December 31, 1999 was $267,788 compared
to $158,844 and $110,635 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.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc. ("ATA"), to the lessee for net
proceeds of $3,109,500. The aircraft was fully depreciated at the time of sale,
resulting in a net gain, for financial statement purposes, of $3,109,500. The
Partnership recognized lease revenue of approximately $246,000, $762,000 and
$770,000 related to this aircraft for the year ended December 31, 1999, 1998 and
1997, respectively.
In April 1998, the Partnership sold its proportionate interest in a
Lockheed L-1011-50 aircraft to Aer Lease Limited ("Aer Lease") for net proceeds
of $553,699. The Partnership's interest in the aircraft had a net book value of
$426,434 at the time of disposal, resulting in a net gain for financial
statement purposes, of $127,265. The Partnership recognized aggregate lease
revenue of approximately $155,000 related to this aircraft during the years
ended December 31, 1998 and 1997, respectively.
The ultimate realization of residual value for any aircraft will be
dependent upon many factors, including EFG's ability to sell and re-lease the
aircraft. Changes in market conditions, industry trends, technological advances,
and other events could converge to enhance or detract from asset values at any
given time. EFG attempts to monitor these changes and the airline industry in
order to identify opportunities which may be advantageous to the Partnership and
which will maximize total cash returns for each aircraft.
The total economic value realized for each aircraft is comprised of all
primary lease term revenue generated from that aircraft, together with its
residual value. The latter consists of cash proceeds realized upon the
aircraft's sale in addition to all other cash receipts obtained from renting the
aircraft on a re-lease, renewal or month-to-month basis. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
4
Interest expense was $120,701 or 6.6% of lease revenue in 1999 compared to
$200,679 or 6.4% of lease revenue in 1998 and $268,916 or 8.3% of lease revenue
in 1997. Interest expense in future periods will continue to decline as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt. See additional discussion below regarding the
refinancing of certain indebtedness in 2000.
Management fees were 5% of lease revenue during 1999, 1998 and 1997 and
will not change as a percentage of lease revenue in future periods.
Operating expenses were $2,059,346, $1,815,947 and $1,290,508 for the years
ended December 31, 1999, 1998 and 1997, respectively. Operating expenses in the
year ended December 31, 1999 include engine leasing costs of $984,000 incurred
related to the aircraft leased to Transmeridian and legal costs related to the
Partnership's ongoing litigation (refer to Note 7 to the accompanying financial
statements). In addition, during 1999, the Partnership accrued approximately
$201,000 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 the year ended December 31, 1998, the
Partnership incurred or accrued approximately $332,000 for such expenses related
to the Class Action Lawsuit. In addition, the increase in operating expenses
from 1997 to 1998 also resulted from legal costs incurred in connection with
legal proceedings related to Northwest Airlines, Inc. and Classic (refer to Note
7 to the financial statements). In 1997, the Partnership's operating expenses
included significant heavy maintenance expenses incurred to facilitate the
remarketing of certain of its aircraft. Other operating expenses consist
principally of professional service costs, such as audit and other legal fees,
as well as insurance, printing, distribution and other remarketing expenses.
Depreciation was $1,054,343, $2,451,737 and $3,377,350 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 $3,640,000 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.)
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 $99,270, $1,550,424
and $496,997 in 1999, 1998 and 1997, respectively. Future renewal, re-lease and
aircraft sales activities will continue to cause a decline in the Partnership's
lease revenues and corresponding sources of operating cash. The Partnership has
also expended substantial funds in the years ended December 31, 1999, 1998 and
1997 related to legal costs, aircraft refurbishment and remarketing expenses and
engine lease costs. 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 costs to facilitate the successful remarketing of its aircraft in the
future. Ultimately, the Partnership will dispose of all aircraft under lease.
This will occur principally through sale transactions whereby each aircraft will
be sold to the existing lessee or to a third party. Generally, this will occur
upon expiration of each aircraft's primary or renewal/re-lease term.
Cash realized from aircraft disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. In 1999, the
Partnership received sales proceeds of $3,109,500 related to its Boeing 727-208
ADV aircraft formerly leased to ATA. During the year ended December 31, 1998,
the Partnership sold its interest in a Lockheed L-1011-50 aircraft and realized
net cash proceeds of $553,699. There were no aircraft sales during 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 type of aircraft being sold, their condition
and age, and future market conditions.
5
At December 31, 1999, the Partnership was due aggregate future minimum
lease payments of $397,318 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 $981,775 (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 aircraft 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's Boeing 727-251 ADV aircraft formerly leased by
Transmeridian is currently being stored at a repair facility in Louisiana. In
March 2000, the Partnership accepted an offer to sell this aircraft to a third
party for $750,000 (see Note 8 to the financial statements). This sale, which is
subject to certain conditions, is expected to close in the second quarter of
2000.
In August 1998, a lessee of the Partnership, Classic, ceased paying rent
to the Partnership with respect to a Lockheed L-1011-100 Aircraft (the
"Aircraft") and the Partnership terminated the lease. Classic then filed for
receivership in the United Kingdom ("UK") and was placed in liquidation.
Prior to its liquidation, Classic had incurred and failed to pay significant
airport ground fees to BAA plc, Eurocontrol, and CAA (collectively, the
"Airport Authorities"). Classic's failure to pay such charges resulted in
detention of the Aircraft by BAA plc. The total of ground fees and expenses
asserted by the Airport Authorities, which continued to accrue after the
detention began, exceeded $1,500,000 at November 30, 1999. Prior to that
date, the General Partner had attempted to reach a negotiated settlement with
the Airport Authorities so that the Aircraft could be returned to the
Partnership. Those negotiations were unsuccessful and the General Partner
determined that the amount of fees owed to the Airport Authorities was in
excess of the Aircraft's value and, therefore, it would not be in the
Partnership's best interests to pay these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the
aircraft to satisfy the unpaid charges and, on December 8, 1999, the Aircraft
was sold at auction. It is believed that the sale price was insufficient to
satisfy the aggregate fees owed to the Airport Authorities. Accordingly, the
Partnership will not realize any portion of the sale proceeds obtained by BAA
plc nor any future residual value from the Aircraft. Notwithstanding the
foregoing, the Partnership continues to hold the Aircraft's records, which may
have some value independent of the value of the Aircraft, as well as two engines
that had been removed from the Aircraft for maintenance prior to Classic's
liquidation. The value of these items is being evaluated presently. At the date
of Classic's liquidation, the Partnership had accrued $160,000 of rental income
which had not been collected from Classic and all of which was written off as
uncollectible in the third quarter of 1998. The Aircraft, including the two
engines that were removed for maintenance, had been fully depreciated prior to
the auction by BAA plc. Subsequent to the auction, the Aircraft (except for the
two engines) was written off by the Partnership.
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.
The debt related to the Southwest Aircraft was fully amortized during 1999.
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.
6
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 $499,815 and $133,261 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 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 six commercial jet aircraft (and two
aircraft engines). 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. A
fourth aircraft, a Boeing 727 aircraft formerly leased to Transmeridian, is
being stored at a repair facility in Louisiana. Each of these 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 727 and
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.
7
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.
8
REPORT OF INDEPENDENT AUDITORS
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of
AIRFUND II International Limited Partnership, as of December 31, 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 II 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 20, 2000
9
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 5,719,642 $ 3,425,762
Rents receivable -- 39,933
Accounts receivable - affiliate 1,476 71,178
Other assets 31,742 125,734
Equipment at cost, net of accumulated
depreciation of $18,449,875 and
$40,968,380 at December 31, 1999
and 1998, respectively 3,359,619 4,413,962
------------- -------------
Total assets $ 9,112,479 $ 8,076,569
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 981,775 $ 1,896,665
Accrued interest 13,356 25,126
Accrued liabilities 463,324 458,485
Accrued liabilities - affiliate 78,593 16,254
Deferred rental income 51,380 47,997
------------- -------------
Total liabilities 1,588,428 2,444,527
------------- -------------
Partners' capital (deficit):
General Partner (2,619,254) (2,713,854)
Limited Partnership Interests
(2,714,647 Units; initial purchase
price of $25 each) 10,143,305 8,345,896
------------- -------------
Total partners' capital 7,524,051 5,632,042
------------- -------------
Total liabilities and partners' capital $ 9,112,479 $ 8,076,569
============= =============
The accompanying notes are an integral part of
these financial statements.
10
AIRFUND II International Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Income:
Lease revenue $ 1,841,170 $ 3,130,704 $ 3,224,618
Interest income 267,788 158,844 110,635
Gain on sale of equipment 3,109,500 127,265 --
------------ ------------ ------------
Total income 5,218,458 3,416,813 3,335,253
------------ ------------ ------------
Expenses:
Depreciation 1,054,343 2,451,737 3,377,350
Interest expense 120,701 200,679 268,916
Equipment management fees -
affiliate 92,059 156,535 161,231
Operating expenses -
affiliate 2,059,346 1,815,947 1,290,508
------------ ------------ ------------
Total expenses 3,326,449 4,624,898 5,098,005
------------ ------------ ------------
Net income (loss) $ 1,892,009 $ (1,208,085) $ (1,762,752)
============ ============ ============
Net income (loss)
per limited partnership unit $ 0.66 $ (0.42) $ (0.62)
============ ============ ============
The accompanying notes are an integral part of
these financial statements.
11
AIRFUND II 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 $ (2,565,312) 2,714,647 $ 11,168,191 $ 8,602,879)
Net loss - 1997 (88,138) -- (1,674,614) (1,762,752
------------ ------------ ------------ ------------
Balance at December 31, 1997 (2,653,450) 2,714,647 9,493,577 6,840,127
Net loss - 1998 (60,404) -- (1,147,681) (1,208,085)
------------ ------------ ------------ ------------
Balance at December 31, 1998 (2,713,854) 2,714,647 8,345,896 5,632,042
Net income - 1999 94,600 -- 1,797,409 1,892,009
------------ ------------ ------------ ------------
Balance at December 31, 1999 $ (2,619,254) 2,714,647 $ 10,143,305 $ 7,524,051
============ ============ ============ ============
The accompanying notes are an integral part of
these financial statements.
12
AIRFUND II International Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from (used in) operating activities:
Net income (loss) $ 1,892,009 $(1,208,085) $(1,762,752)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 1,054,343 2,451,737 3,377,350
Gain on sale of equipment (3,109,500) (127,265) --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 39,933 25,187 (65,120)
Accounts receivable - affiliate 69,702 234,181 (158,792)
Other assets 93,992 (125,734) --
Increase (decrease) in:
Accrued interest (11,770) (4,492) (6,311)
Accrued liabilities 4,839 450,235 (533,284)
Accrued liabilities - affiliate 62,339 (26,270) (446,494)
Deferred rental income 3,383 (119,070) 92,400
----------- ----------- -----------
Net cash from operating activities 99,270 1,550,424 496,997
----------- ----------- -----------
Cash flow from investing activities:
Proceeds from equipment sales 3,109,500 553,699 --
----------- ----------- -----------
Net cash from investing activities 3,109,500 553,699 --
----------- ----------- -----------
Cash flow used in financing activities:
Principal payments - notes payable (914,890) (780,855) (742,265)
----------- ----------- -----------
Net cash used in financing activities (914,890) (780,855) (742,265)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 2,293,880 1,323,268 (245,268)
Cash and cash equivalents at beginning of year 3,425,762 2,102,494 2,347,762
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,719,642 $ 3,425,762 $ 2,102,494
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 132,471 $ 205,171 $ 275,227
=========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
13
AIRFUND II International Limited Partnership
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). The Partnership issued 2,714,647
units, representing assignments of limited partnership interests (the "Units"),
to 4,192 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The General
Partner is an affiliate of Equis Financial Group Limited Partnership (formerly
known as American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by AF/AIP Programs Limited
Partnership. EFG and a wholly owned affiliate are the 99% limited partners and
AFG Programs, Inc., a Massachusetts corporation that is wholly-owned by Geoffrey
A. MacDonald, is the 1% general partner. The General Partner is not required to
make any other capital contributions to the Partnership except as may be
required under the Uniform Act and Section 6.1(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").
EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.
On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.
14
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Recognized
Closing Date Units Issued Purchase Price Owners
------------ ------------ -------------- ------
May 17, 1990 1,725,100 $ 43,127,500 2,600
August 2, 1990 317,986 7,949,650 494
October 1, 1990 159,510 3,987,750 251
December 27, 1990 246,845 6,171,125 398
February 15, 1991 112,796 2,819,900 173
June 28, 1991 152,410 3,810,250 276
---------- ------------ ----------
Totals 2,714,647 $ 67,866,175 4,192
========== ============ ==========
Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% to the General Partner.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 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 $5,605,151 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, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and EFG would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 7 regarding the Class Action Lawsuit. Future minimum
rents are $397,318 are due as follows:
15
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
For the year ending December 31, 2000 $ 317,854
2001 79,464
-----------
Total $ 397,318
===========
In December 1998, the Partnership and certain affiliated investment
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 future
minimum lease payments contracted to be received by the Partnership (see 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) $ 634,658 $ 639,923 $ 639,752
Transmeridian Airlines, Inc.
(One Boeing 727-251 ADV) $ 560,000 $ 876,667 $ 971,500
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 380,699 $ 377,568 $ 377,568
American Trans Air, Inc.
(One Boeing 727-208 ADV) $ 245,533 $ 762,000 $ 770,467
Classic Airways Limited
(One Lockheed L-1011-100) $ -- $ 319,960 $ --
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All aircraft were acquired from EFG or one of its Affiliates. Equipment
Cost means the actual cost paid by the Partnership to acquire the aircraft,
including acquisition fees. Equipment cost reflects the actual price paid for
the aircraft by EFG or the Affiliate plus all actual costs incurred by EFG or
the Affiliate while carrying the aircraft less, (a) for all aircraft other than
the Boeing 727-208 ADV aircraft, the amount of all rents received by EFG or the
Affiliate prior to selling the aircraft or, (b) with respect to the Boeing
727-208 ADV aircraft, rents received from the date of the commencement of the
lease of the aircraft until the date of the sale to the Partnership.
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
16
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
at the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. Adjustments to reduce the net carrying value of equipment
are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value.
The ultimate realization of residual value for any type of aircraft is
dependent upon many factors, including EFG's ability to sell and re-lease
aircraft. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
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 $382,000
consisting principally of legal fees and other professional service costs. These
costs are expected to be incurred regardless of whether the proposed settlement
ultimately is effected and, therefore, the Partnership accrued approximately
$332,000 of these costs in 1998 following the Court's approval of the settlement
plan. The cost estimate is subject to change and is monitored by the General
Partner based upon the progress of the 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 2,714,647
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 applicable share of cash distributions (see Note 1 for
additional information).
17
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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
-------------- -------- ------- --------
One Boeing 727-251 ADV 0 $ 9,732,714 LA
Two Rolls Royce aircraft engines 0 6,000,000 Foreign
Two McDonnell-Douglas MD-82 (Finnair) 1-16 4,157,280 Foreign
Three Boeing 737-2H4 0 1,919,500 TX
------------
Total equipment cost 21,809,494
Accumulated depreciation (18,449,875)
------------
Equipment, net of accumulated depreciation $ 3,359,619
============
The costs of the two McDonnell-Douglas MD-82 aircraft and the three Boeing
737-2H4 aircraft represent proportionate ownership interests. The remaining
interests are owned by other affiliated partnerships sponsored by EFG. All
partnerships individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the aircraft.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary includes
leveraged equipment having an original cost of approximately $4,157,000 and a
net book value of approximately $2,679,000 at December 31, 1999 (see Note 5).
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 $1,920,000 and a net book value of
approximately $681,000 at December 31, 1999. In addition, the Partnership's
Boeing 727-251 ADV aircraft and two Rolls Royce aircraft engines previously
leased to Classic Airways Limited by virtue of its lease of the Lockheed
L-1011-100 aircraft (see Note 7) were also held for sale or re-lease. The Boeing
727-251 ADV aircraft and the aircraft engines were fully depreciated at December
31, 1999 and had an original cost of approximately $9,733,000 and $6,000,000,
respectively. See Note 8 regarding the remarketing of the Boeing 727-251 ADV
aircraft in 2000.
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.
18
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 will recognize 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 $ 92,059 $ 156,535 $ 161,231
Administrative charges 71,699 53,676 50,304
Reimbursable operating expenses
due to third parties 1,987,647 1,762,271 1,240,204
------------ ------------ ------------
Total $ 2,151,405 $ 1,972,482 $ 1,451,739
============ ============ ============
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's 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 $1,476 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2000.
19
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 40,000 1.47%
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnerships 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 $981,775. 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. All of the notes were originated
in connection with the Finnair Aircraft. The Partnership has balloon payment
obligations at the expiration of the renewal lease terms related to the aircraft
on lease to Finnair OY of $499,815 and $133,261. This indebtedness matures in
January 2000 and April 2001, respectively. (See Note 8 regarding the refinancing
of the indebtedness that matured in January 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 $ 775,968
2001 205,807
---------
Total $ 981,775
=========
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). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1999, the General Partner had a positive tax capital account
balance.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999, 1998 and 1997:
20
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
1999 1998 1997
------------ ------------ ------------
Net income (loss) $ 1,892,009 $(1,208,085) $(1,762,752)
Financial statement
depreciation in excess
of (less than) tax
depreciation 673,872 (713,082) (2,136,596)
Deferred rental income 3,383 (119,070) 92,400
Other 64,000 362,435 (998,111)
----------- ----------- -----------
Net income (loss) for federal
income tax reporting
purposes $ 2,633,264 $(1,677,802) $(4,805,059)
=========== =========== ===========
The principal component of "Other" consists of the difference between the
tax gain or loss on aircraft disposals and the financial statement gain or loss
on aircraft disposals. It also includes reversal of certain maintenance
reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999 and 1998:
1999 1998
------------ ------------
Partners' capital $ 7,524,051 $ 5,632,042
Add back selling commissions and organization
and offering costs 7,085,240 7,085,240
Cumulative difference between federal income
tax and financial statement income (loss) (937,118) (1,678,373)
------------ ------------
Partners' capital for federal income tax
reporting purposes $ 13,672,173 $ 11,038,909
============ ============
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 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
21
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 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
22
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 $3,640,000. 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 $382,000, of which approximately $332,000 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.
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
23
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions as
described below:
First action involving Transmeridian Airlines
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines (the
"Plaintiff") filed an action in the 61st Judicial District Court of Harris
County, Texas (the "Court") entitled Prime Air, Inc. d/b/a Transmeridian
Airlines v. Investors Asset Holding Corp. ("IAHC"), as Trustee for Airfund II
International Limited Partnership, PLM International ("PLM"), and NavCom
Aviation, Inc. (collectively, the "Defendants"). In that action, the Plaintiff
claimed damages of more than $3 million for alleged breach of contract, fraud,
civil conspiracy, tortious interference of business relations, negligent
misrepresentation, negligence and gross negligence, and punitive damages against
the Defendants in connection with Transmeridian's lease of a Boeing 727-251 ADV
jet aircraft from the Partnership. On November 7, 1996, PLM removed the action
to United States District Court for the Southern District of Texas. On February
14, 1997, the Defendants answered the Plaintiff's Complaint denying the
allegations made therein and asserting various defenses.
On July 31, 1998, the Court granted IAHC's motion to strike Plaintiff's
fraud and negligent misrepresentation claims due to failure to plead with
particularity. Extensive discovery was conducted on the merits of Plaintiff's
claims. The Plaintiff, at one point, provided an expert report seeking
approximately $30 million in damages. The Plaintiff later provided a revised
expert report claiming actual damages of approximately $8.5 million and
Plaintiff continued to seek punitive damages and both pre-judgment and
post-judgment interest. On March 18, 1999, the Court entered summary judgment in
favor of IAHC and PLM on all remaining claims. The Plaintiff subsequently filed
a motion to alter or amend the judgment, or in the alternative, to certify the
Court's Order for Interlocutory Appeal. On April 30, 1999, the Court declined to
alter or amend its judgment and entered final judgment in favor of IAHC and PLM
on all remaining claims. The Plaintiff appealed to the United States Court of
Appeals for the 5th Circuit. (Response briefs by IAHC and PLM were filed on
October 29, 1999.) The General Partner believes that the Plaintiff's claims are
without merit and will continue to defend this action vigorously. While there is
no certainty as to the outcome of this litigation, the General Partner, in
consultation with counsel, believes that there is a reasonable basis to believe
that the summary judgments already granted will be upheld under appeal and that
the Partnership, therefore, will not be adversely affected by the outcome of
this litigation. However, the Partnership has incurred and continues to incur
attorneys' fees and related defense costs with respect to this litigation that
aggregate approximately $1 million since the inception of this litigation in
1996. An action seeking recovery of these costs was filed on behalf of the
Partnership in November 1999. See "Indemnity action against Transmeridian
Airlines and Apple Vacations" described below.
Second action involving Transmeridian Airlines
On November 9, 1998, Investors Asset Holding Corp., as Trustee for the
Partnership (the "Plaintiff"), filed an action in Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract. The action
subsequently was removed to United States District Court for the District of
Massachusetts. The Plaintiff
24
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
has filed an Amended Complaint asserting claims for breaches of contract and
covenant of good faith and fair dealing against Transmeridian and breach of
guaranty against Apple Vacations.
In October 1998, an aircraft leased by Transmeridian (being the same
aircraft in the above-referenced "First action involving Transmeridian
Airlines") was damaged in an on-ground accident at the Caracas, Venezuela
airport. The aircraft currently is being stored at a repair facility in
Louisiana. The cost to repair the aircraft is estimated to be at least $350,000.
In addition, the Partnership has had to lease two substitute engines at a cost
of $82,000 per month. During the year ended December 31, 1999, the Partnership
incurred total engine lease costs of $984,000. This was partially offset by
lease rents paid by Transmeridian of $560,000 during the same period. However,
as of September 11, 1999, Transmeridian ceased paying rent on this aircraft. The
Plaintiff alleges that Transmeridian, among other things, has impeded the
Partnership's ability to terminate the two engine lease contracts between the
Partnership and a third party. The Plaintiff intends to pursue insurance
coverage and also to enforce written guarantees issued by Apple Vacations that
absolutely and unconditionally guarantee Transmeridian's performance under the
lease and is seeking recovery of all costs, lost revenue and monetary damages in
connection with this matter. Discovery is ongoing and a trial date has been
tentatively scheduled for January 15, 2001. The General Partner plans to
vigorously pursue this action; however, it is too early to predict the
Plaintiff's likelihood of success. See Note 8 - Aircraft Sale - regarding the
remarketing of this aircraft.
Indemnity action against Transmeridian Airlines and Apple Vacations
On November 12, 1999, Investors Asset Holding Corp. ("IAHC"), as trustee
for Airfund II International Limited Partnership, filed an action against
Transmeridian Airlines (f/k/a Prime Air, Inc.) and Atkinson & Mullen Travel,
Inc. (d/b/a Apple Vacations) under Civil Action No. H-99-3804 in the United
States District Court for the Southern District of Texas, Houston Division,
seeking recovery of attorneys' fees and related costs incurred in defending the
action described above under the heading "First action involving Transmeridian
Airlines." The present suit seeks recovery of expenses pursuant to the
indemnification provisions of the lease agreement under which Transmeridian
leased the Boeing 727-251 aircraft. Currently, the amount being sought is
approximately $970,000, plus attorneys' fees. The latter is expected to increase
due to the fact that attorneys' fees and defense costs continue to be incurred
due to Transmeridian's appeal of the summary judgment granted by the Court in
favor of IAHC and PLM (described under "First action involving Transmeridian
Airlines" above). Discovery with respect to this indemnity suit has not yet
commenced. The General Partner cannot predict the outcome of this suit; however,
it is optimistic that a favorable result can be achieved.
Action involving Northwest Airlines, Inc.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in favor of the
Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United
States District Court Judge adopted the Magistrate Judge's recommendation and
entered partial summary judgment in favor of the Plaintiffs on their claims for
declaratory judgment. The Plaintiffs have made a demand upon Northwest for
settlement. If no settlement is reached, the Plaintiffs will proceed to trial
for an assessment of damages. No firm trial date has been established at this
time; however, if a trial should become necessary, it is not expected to occur
before November 2000. The General Partner believes that the Plaintiff's claims
ultimately will prevail and that the Partnership's financial position will not
be adversely affected by the outcome of this action.
25
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Action involving Classic Airways Limited
In August 1998, a lessee of the Partnership, Classic Airways Limited
("Classic"), ceased paying rent to the Partnership with respect to a Lockheed
L-1011-100 Aircraft (the "Aircraft") and the Partnership terminated the lease.
Classic then filed for receivership in the United Kingdom ("UK") and was placed
in liquidation. Prior to its liquidation, Classic had incurred and failed to pay
significant airport ground fees to BAA plc, Eurocontrol, and CAA (collectively,
the "Airport Authorities"). Classic's failure to pay such charges resulted in
detention of the Aircraft by BAA plc. The total of ground fees and expenses
asserted by the Airport Authorities, which continued to accrue after the
detention began, exceeded $1,500,000 at November 30, 1999. Prior to that date,
the General Partner had attempted to reach a negotiated settlement with the
Airport Authorities so that the Aircraft could be returned to the Partnership.
Those negotiations were unsuccessful and the General Partner determined that the
amount of fees owed to the Airport Authorities was in excess of the Aircraft's
value and, therefore, it would not be in the Partnership's best interests to pay
these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the
aircraft to satisfy the unpaid charges and, on December 8, 1999, the Aircraft
was sold at auction. It is believed that the sale price was insufficient to
satisfy the aggregate fees owed to the Airport Authorities. Accordingly, the
Partnership will not realize any portion of the sale proceeds obtained by BAA
plc nor any future residual value from the Aircraft. Notwithstanding the
foregoing, the Partnership continues to hold the Aircraft's records, which may
have some value independent of the value of the Aircraft, as well as two engines
that had been removed from the Aircraft for maintenance prior to Classic's
liquidation. The value of these items is being evaluated presently. At the date
of Classic's liquidation, the Partnership had accrued $160,000 of rental income
which had not been collected from Classic and all of which was written off as
uncollectible in the third quarter of 1998. The Aircraft, including the two
engines that were removed for maintenance, had been fully depreciated prior to
the auction by BAA plc. Subsequent to the auction, the Aircraft (except for the
two engines) was written off by the Partnership.
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 McDonnell Douglas 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 $701,062
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.
Aircraft Sale
On March 20, 2000, the Partnership accepted an offer from a third party to
purchase its Boeing 727-251 ADV aircraft for $750,000. The sale of the aircraft,
which is subject to certain conditions, is expected to close in the second
quarter of 2000. The aircraft had a cost of $9,732,714 and was fully depreciated
at December 31, 1999.
26
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 $3,640,000. 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.
27
ADDITIONAL FINANCIAL INFORMATION
AIRFUND II 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 cash excess (deficiency) associated with the
aircraft dispositions which occurred in the years ended December 31, 1999 and
1998. No aircraft were disposed of during the year ended December 31, 1997.
1999 1998
----------- -----------
Rents earned prior to disposal of aircraft $25,196,334 $ 4,150,170
Sale proceeds realized upon disposition of aircraft 3,109,500 553,699
----------- -----------
Total cash generated from rents and aircraft sale proceeds 28,305,834 4,703,869
Original acquisition cost of aircraft disposed 23,572,848 5,248,872
----------- -----------
Excess (deficiency) of total cash generated to cost of
aircraft disposed $ 4,732,986 $ (545,003)
=========== ===========
28
AIRFUND II 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 income (loss) $(1,217,491) $ 3,109,500 $ 1,892,009
Add:
Depreciation 1,054,343 -- 1,054,343
Management fees 92,059 -- 92,059
Less:
Principal repayment of notes payable (868,839) (46,051) (914,890)
----------- ----------- -----------
Cash from (used in) operations, sales
and refinancings (939,928) 3,063,449 2,123,521
Less:
Management fees (92,059) -- (92,059)
----------- ----------- -----------
Distributable cash from (used in)
operations, sales and refinancings (1,031,987) 3,063,449 2,031,462
Other sources and uses of cash:
Cash at beginning of year 769,569 2,656,193 3,425,762
Net change in receivables and accruals 262,418 -- 262,418
----------- ----------- -----------
Cash at end of year $ -- $ 5,719,642 $ 5,719,642
=========== =========== ===========
29
AIRFUND II 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 $1,989,052
30