UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- K/A
Amendment No. 1 to Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from__________________________ to_____________________
Commission file number 0-19137
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AIRFUND II International Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3057290
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(State or other jurisdiction of (IRS Employer Identification No.
incorporation or organization)
88 Broad St., Sixth Floor, Boston, MA 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
___________________________ _____________________________________________
Securities registered pursuant to Section 12(g) of the Act:
2,714,647 Units Representing Limited Partnership Interest
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
to the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
AIRFUND II International Limited Partnership
FORM 10- K/A
TABLE OF CONTENTS
Page
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PART I
Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 7
Item 3. Legal Proceedings................................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 7
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters...................... 8
Item 6. Selected Financial Data.......................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risks...................................... 18
Item 8. Financial Statements and Supplementary Data...................................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 43
PART III
Item 10. Directors and Executive Officers of the Partnership.............................................. 44
Item 11. Executive Compensation........................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 46
Item 13. Certain Relationships and Related Transactions................................................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 48
2
PART I
Item 1. Business.
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(a) General Development of Business
AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). The Partnership issued 2,714,647
units, representing assignments of limited partnership interests (the "Units"),
to 4,192 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The General
Partner is an affiliate of Equis Financial Group Limited Partnership (formerly
known as American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by 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", or the "Partnership Agreement").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one operating industry segment:
financial services. Historically, the Partnership has acquired used commercial
aircraft and leased the aircraft to creditworthy lessees on a full-payout or
operating lease basis. Full-payout leases are those in which aggregate
undiscounted noncancellable rents equal or exceed the acquisition cost of the
leased equipment. Operating leases are those in which the aggregate undiscounted
noncancellable rental payments are less than the acquisition cost of the leased
equipment. In the year ended December 31,2000, the Partnership also entered into
a sales-type lease, described in Note 2 to the financial statements included in
Item 8 herein. Industry segment data is not applicable.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 herein.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 9 to the financial statements, included in Item 8
herein, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $3,640,000 to a
newly formed real estate company, Echelon Residential Holdings LLC ("Echelon
Residential Holdings") to finance the acquisition of real estate assets by that
company. Echelon Residential Holdings, through a wholly owned subsidiary
("Echelon Residential LLC"), used the loan proceeds, along with the loan
proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an independent Florida-based real estate company.
Echelon Residential Holding's interest in Echelon Residential is pledged
pursuant to a pledge agreement to the partnerships as collateral for the loans.
(c) Narrative Description of Business
The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives were to acquire
and lease aircraft that would:
1. Generate quarterly cash distributions;
2. Preserve and protect invested capital; and
3. Maintain substantial residual value for ultimate sale of the aircraft.
The Partnership has the additional objective of providing certain federal
income tax benefits.
3
The initial Interim Closing date of the Offering of Units of the
Partnership was May 17, 1990. The initial purchase of aircraft and the
associated lease commitments occurred on May 18, 1990. Additional purchases of
aircraft (or proportionate interests in aircraft) occurred at each of five
subsequent Interim Closings, the last of which occurred on June 28, 1991, the
Final Closing. The Partnership's aircraft and the associated leases are
described in Note 3 to the financial statements included in Item 8, herein. The
Restated Agreement, as amended, provides that the Partnership will terminate no
later than December 31, 2005. However, the Partnership is a Nominal Defendant in
a Class Action Lawsuit, the outcome of which could significantly alter the
nature of the Partnership's organization and its future business operations.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is compensated for such services as provided for in the
Restated Agreement, as amended, described in Item 13, herein and Note 6 to the
financial statements included in Item 8, herein.
The Partnership's investment in commercial aircraft is, and will continue
to be, subject to various risks, including physical deterioration, technological
obsolescence, and credit quality and defaults by lessees. A principal business
risk of owning and leasing aircraft is the possibility that aggregate lease
revenues and aircraft sale proceeds will be insufficient to provide an
acceptable rate of return on invested capital after payment of all operating
expenses. Another risk is that the credit quality of the lease may deteriorate
after a lease is made. In addition, the leasing industry is very competitive.
The Partnership is subject to considerable competition when the aircraft are
re-leased or sold at the expiration of current lease terms. The Partnership must
compete with lease programs offered directly by manufacturers and other
equipment leasing companies, many of which have greater resources, including
lease programs organized and managed similarly to the Partnership, and including
other EFG- sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
In addition, default by a lessee under a lease may cause aircraft to be returned
to the Partnership at a time when the General Partner or the Manager is unable
to arrange for the re-lease or sale of such aircraft. This could result in the
loss of a material portion of anticipated revenues. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
All of the Partnership's aircraft currently operate in international
markets. All rents due under the leases of these aircraft are denominated in
U.S. dollars. However, the operation of the aircraft in international markets
exposes the Partnership to certain political, credit and economic risks.
Regulatory requirements of other countries governing aircraft registration,
maintenance, liability of lessors and other matters may apply. Political
instability, changes in national policy, competitive pressures, fuel shortages,
recessions and other political and economic events adversely affecting world or
regional trading markets or a particular foreign lessee could also create the
risk that a foreign lessee would be unable to perform its obligations to the
Partnership. The recognition in foreign courts of judgments obtained in United
States courts may be difficult or impossible to obtain and foreign procedural
rules may otherwise delay such recognition. It may be difficult for the
Partnership to obtain possession of aircraft used outside the United States in
the event of default by the lessee or to enforce its rights under the related
lease. Moreover, foreign jurisdictions may confiscate or expropriate aircraft
without paying adequate compensation.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG's ability to sell
and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The General Partner will determine when each aircraft should be sold and
the terms of such sale based upon numerous factors with a view toward achieving
the investment objectives of the Partnership. The General Partner is authorized
to sell the aircraft prior to the expiration of the initial lease terms and
intends to monitor and evaluate the market for resale of the aircraft to
determine whether an aircraft should remain in the Partnership's portfolio or be
sold. As an alternative to sale, the Partnership may enter re-lease agreements
when considered advantageous by the General Partner and the Manager.
4
The loan made by the Partnership to Echelon Residential Holdings is, and
will continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon Residential
Holdings could have a material adverse effect on the future cash flow and
operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to an
officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager of Echelon Residential Holdings.
The officer made a $185,465 equity investment in Echelon Residential Holdings.
His return on his equity investment is restricted to the same rate of return as
the partnerships realize on their loans. There is a risk that the court may
object to the general partner's action in structuring the loan in this way since
the officer may be deemed an affiliate and the loans in violation of the
prohibition against loans to affiliates and the court's statement in its order
permitting New Investments that all other provisions of the Partnership
Agreements governing the investment objectives and policies of the Partnership
shall remain in full force and effect. The court may require the partnerships to
restructure or divest the loan.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on
the capital structure and business activities of companies registered
thereunder. The Partnership has active business operations in the financial
services industry, including equipment leasing and the loan to Echelon
Residential Holdings. The Partnership does not intend to engage in investment
activities in a manner or to an extent that would require the Partnership to
register as an investment company under the 1940 Act. However, it is possible
that the Partnership may unintentionally engage in an activity or activities
that may be construed to fall within the scope of the 1940 Act. The General
Partner is engaged in discussions with the staff of the Securities and Exchange
Commission ("SEC") regarding whether or not the Partnership may be an
inadvertent investment company as a consequence of the above-referenced loan.
The General Partner has consulted counsel and believes that the Partnership is
not an investment company. If the Partnership were determined to be an
unregistered investment company, its business would be adversely affected. The
1940 Act, among other things, prohibits an unregistered investment company from
offering securities for sale or engaging in any business in interstate commerce
and, consequently, leases and contracts entered into by partnerships that are
unregistered investment companies may be voidable. If necessary, the Partnership
intends to avoid being deemed an investment company by means that may include
disposing or acquiring certain assets that it might not otherwise dispose or
acquire.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC staff
asserts that the notes evidencing the loans to Echelon Residential Holdings are
investment securities and the ownership of the notes by said partnerships cause
them to be investment companies and that, in the case of American Income
Partners V-A Limited Partnership and V-B Limited Partnership, they may have
become investment companies when they received the Semele Group Inc. ("Semele")
securities as part of the compensation for the sale of a vessel to Semele in
1997. The general partners have consulted with counsel who specializes in the
1940 Act and, based on counsel's advice, do not believe that the Designated
Partnerships are investment companies.
5
The letter also stated that the Division is considering whether to commence
an enforcement action with respect to this matter. Noting that the parties to
the Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the surrounding circumstances and
after an in-depth analysis of the applicable law, if asked, counsel would be
willing to issue an opinion of the firm that none of the partnerships is an
investment company under the 1940 Act. The Defendants stated their belief that
the proposed settlement is still viable and in the best interests of the parties
and that final approval should be pursued. The Defendants advised the court that
they believe that if the court were to address the issue of whether or not the
1940 Act applies to the partnerships and the proposed consolidation, it could
remove the major obstacle to the settlement being finally consummated. The
Defendants also requested that the court schedule a hearing to address on a
preliminary basis the objection to the proposed settlement raised in the SEC
staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since the
SEC has yet to complete its review of the proxy, the Plaintiffs do not believe
that the litigation should continue to be stayed so that the SEC may continue
its regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion.
Apart from the language of the order, the Court has not stated what action
it might order if the SEC's review were not completed by May 15, 2001. If the
Court were to decline to continue the date for the Final Approval Settlement
Hearing and there is no settlement alternative offered by the parties that meets
the Court's approval, the Court may direct that the parties resume the
litigation and abandon the proposed settlement and consolidation.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is
incorporated by reference to Note 2 to the financial statements included in Item
8. Refer to Item 14(a)(3) for lease agreements filed with the Securities and
Exchange Commission.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
6
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 for the sole purpose
of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
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Incorporated herein by reference to Note 3 to the financial statements in
Item 8.
Item 3. Legal Proceedings.
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Incorporated herein by reference to Note 9 to the financial statements in
Item 8.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
7
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
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Matters.
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(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 2000, there were 3,923 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Historically, the amount of cash distributions to be paid to the Partners
has been determined on a quarterly basis (see detail below). The Partnership did
not declare distributions in any of the years ended December 31, 2000, 1999 and
1998.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 9 to the financial statements included in Item 8, herein. 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 has continued to suspend the
payment of quarterly cash distributions pending final resolution of the Class
Action Lawsuit. Accordingly, future cash distributions are not expected to be
paid until the Class Action Lawsuit is settled or adjudicated.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
In particular, the Partnership must contemplate the potential liquidity
risks associated with its investment in commercial jet aircraft. The management
and remarketing of aircraft can involve, among other things, significant costs
and lengthy remarketing initiatives. Although the Partnership's lessees are
required to maintain the aircraft during the period of lease contract, repair,
maintenance, and/or refurbishment costs at lease expiration can be substantial.
For example, an aircraft that is returned to the Partnership meeting minimum
airworthiness standards, such as flight hours or engine cycles, nonetheless may
require heavy maintenance in order to bring its engines, airframe and other
hardware up to standards that will permit its prospective use in commercial air
transportation.
At December 31, 2000, the Partnership's equipment portfolio included
ownership interests in three commercial jet aircraft, one of which is a Boeing
737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003.The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
8
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i) (a) for a period of two years from Final Closing,
Cash From Sales or Refinancings, which the General Partner at its sole
discretion reinvests in additional aircraft, provided, however, that Cash From
Sales or Refinancings will be reinvested in additional aircraft only if
Partnership revenues are sufficient to make distributions to the Recognized
Owners in the amount of the income tax, if any, due from a Recognized Owner in
the 33% combined federal and state income tax bracket as a result of such sale
or refinancing of aircraft, and (b) amounts realized from any loss or
destruction of any aircraft which the General Partner reinvests in replacement
aircraft to be leased under the original lease of the lost or destroyed
aircraft, and (ii) any accrued and unpaid Equipment Management Fees and, after
Payout, any accrued and unpaid Subordinated Remarketing Fees.
"Cash From Sales or Refinancings" means cash received by the Partnership
from Sale or Refinancing transactions, as (i) reduced by (a) all debts and
liabilities of the Partnership required to be paid as a result of Sale or
Refinancing transactions, whether or not then due and payable (including any
liabilities on aircraft sold which are not assumed by the buyer and any
remarketing fees required to be paid to persons not affiliated with the General
Partner, but not including any Subordinated Remarketing Fees required to be
paid) and (b) any reserves for working capital and contingent liabilities funded
from such cash to the extent deemed reasonable by the General Partner and (ii)
increased by any portion of such reserves deemed by the General Partner not to
be required for Partnership operations. In the event the Partnership accepts a
note in connection with any Sale or Refinancing transaction, all payments
subsequently received in cash by the Partnership with respect to such note shall
be included in Cash From Sales or Refinancings, regardless of the treatment of
such payments by the Partnership for tax or accounting purposes. If the
Partnership receives purchase money obligations in payment for aircraft sold,
which are secured by liens on such aircraft, the amount of such obligations
shall not be included in Cash From Sales or Refinancings until the obligations
are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made as follows:
Prior to Payout, (i) Distributable Cash From Operations will be distributed 95%
to the Recognized Owners and 5% to the General Partner and (ii) Distributable
Cash From Sales or Refinancings shall be distributed 99% to the Recognized
Owners and 1% to the General Partner. After Payout, (i) all Distributions will
be distributed 99% to the General Partner and 1% to the Recognized Owners until
the General Partner has received an amount equal to 5% of all Distributions made
by the Partnership and (ii) thereafter, all Distributions will be made 90% to
the Recognized Owners and 10% to the General Partner.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 10% (compounded quarterly and calculated beginning with the last day
of the month of the Partnership's Closing Date) on their aggregate unreturned
capital contributions. For purposes of this definition, capital contributions
shall be deemed to have been returned only to the extent that distributions of
cash to the Recognized Owners exceed the amount required to satisfy the
cumulative annual return of 10% (compounded quarterly) on the Recognized Owners'
aggregate unreturned capital contributions, such calculation to be based on the
aggregate unreturned capital contributions outstanding on the first day of each
fiscal quarter.
9
Item 6. Selected Financial Data.
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The following data should be read in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements included in Item 8 herein.
For each of the years in the five year period ended December 31, 2000:
Summary of
Operations 2000 1999 1998 1997 1996
- ----------------------------------------- ----------- ----------- ------------ ------------ ----------
Operating and sales-type lease revenue... $ 556,906 $ 1,841,170 $ 3,130,704 $ 3,224,618 $ 4,706,774
Interest Income......................... $ 202,930 $ 267,788 $ 158,844 $ 110,635 $ 265,820
Net income (loss)........................ $ 176,226 $ 1,892,009 $ (1,208,085) $ (1,762,752) $ (3,649,940)
Per Unit:
Net income (loss)................... $ 0.06 $ 0.66 $ (0.42) $ (0.62) $ (1.28)
Cash distributions declared......... $ -- $ -- $ -- $ -- $ 2.25
Financial Position
------------------
Total assets............................. $ 9,250,375 $ 9,112,479 $ 8,076,569 $ 9,765,106 $ 13,163,812
Total long-term obligations.............. $ 906,869 $ 981,775 $ 1,896,665 $ 2,677,520 $ 3,419,785
Partners' capital........................ $ 7,700,277 $ 7,524,051 $ 5,632,042 $ 6,840,127 $ 8,602,879
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- -------------
Year ended December 31, 2000 compared
to the year ended December 31, 1999 and the year
ended December 31, 1999
compared to the year ended December 31, 1998
Certain statements in this Form 10-K of the Partnership that are not
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and are subject to a
variety of risks and uncertainties. There are a number of factors that could
cause actual results to differ materially from those expressed in any
forward-looking statements made herein. These factors include, but are not
limited to, the outcome of the Class Action Lawsuit described in Note 9 to the
financial statements included in Item 8 herein, the remarketing of the
Partnership's equipment, and the performance of the Partnership's non-equipment
assets.
Overview
- --------
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft, which were leased by major carriers, engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. Currently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft, or sold. At December 31, 2000, the Partnership's equipment
portfolio included proportionate ownership interests in three aircraft and two
aircraft engines. In addition, in 2000 the Partnership entered into a
conditional sales agreement related to its interest in an aircraft. Presently,
the
10
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 9 to the financial statements included
in Item 8 herein. Pursuant to the Restated Agreement, as amended, the
Partnership is scheduled to be dissolved by December 31, 2005.
The 1940 Act places restrictions on the capital structure and business
activities of companies registered thereunder. The Partnership has active
business operations in the financial services industry, including equipment
leasing and the loan to Echelon Residential Holdings. The Partnership does not
intend to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. The General Partner has consulted counsel and believes
that the Partnership is not an investment company. If the Partnership were
determined to be an unregistered investment company, its business would be
adversely affected. The 1940 Act, among other things, prohibits an unregistered
investment company from offering securities for sale or engaging in any business
in interstate commerce and, consequently, leases and contracts entered into by
partnerships that are unregistered investment companies may be voidable. If
necessary, the Partnership intends to avoid being deemed an investment company
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC staff
asserts that the notes evidencing the loans to Echelon Residential Holdings are
investment securities and the ownership of the notes by said partnerships cause
them to be investment companies and that, in the case of American Income
Partners V-A Limited Partnership and V-B Limited Partnership, they may have
become investment companies when they received the Semele Group Inc. ("Semele")
securities as part of the compensation for the sale of a vessel to Semele in
1997. The general partners have consulted with counsel who specializes in the
1940 Act and, based on counsel's advice, do not believe that the Designated
Partnerships are investment companies.
The letter also stated that the Division is considering whether to commence
an enforcement action with respect to this matter. Noting that the parties to
the Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to Designated Partnerships, the 1940 Act does not prohibit going forward
with the proposed settlement, as that transaction is merely incidental to a
dissolution of the Partnerships and therefore is not subject to the prohibitions
of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the
11
surrounding circumstances and after an in-depth analysis of the applicable law,
if asked, counsel would be willing to issue an opinion of the firm that none of
the partnerships is an investment company under the 1940 Act. The Defendants
stated their belief that the proposed settlement is still viable and in the best
interests of the parties and that final approval should be pursued. The
Defendants advised the court that they believe that if the court were to address
the issue of whether or not the 1940 Act applies to the partnerships and the
proposed consolidation, it could remove the major obstacle to the settlement
being finally consummated. The Defendants also requested that the court schedule
a hearing to address on a preliminary basis the objection to the proposed
settlement raised in the SEC staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since the
SEC has yet to complete its review of the proxy, the Plaintiffs do not believe
that the litigation should continue to be stayed so that the SEC may continue
its regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion.
Apart from the language of the order, the Court has not stated what action
it might order if the SEC's review were not completed by May 15, 2001. If the
Court were to decline to continue the date for the Final Approval Settlement
Hearing and there is no settlement alternative offered by the parties that meets
the Court's approval, the Court may direct that the parties resume the
litigation and abandon the proposed settlement and consolidation.
Results of Operations
- ---------------------
For the year ended December 31, 2000, the Partnership recognized operating
lease revenue of $554,415 compared to $1,841,170 and $3,130,704 for the years
ended December 31, 1999 and 1998, respectively. The decrease in lease revenue
from 1999 to 2000 resulted primarily from the expiration of lease terms related
to the Partnership's interest in three Boeing 737-2H4 aircraft and a McDonnell
Douglas MD-82 aircraft, as discussed below, and the sales of the Partnership's
Boeing 727-208 ADV aircraft and its Boeing 727-251 ADV aircraft in April 1999
and May 2000, respectively. The decrease in lease revenue from 1998 to 1999
resulted primarily to the non-payment of rents by the lessee of the
Partnership's Lockheed L-1011-100 aircraft and the lessee's subsequent
liquidation (see below), the non-payment of rents by the lessee of the
Partnership's Boeing 727-251 ADV aircraft (see below) and the sale of the Boeing
727-208 ADV aircraft and the Partnership's interest in a Lockheed L-1011-50
aircraft in April 1998. The amount of operating lease revenues in the near term
will increase due to the re-lease of both the McDonnell Douglas MD-82 aircraft
and one of the Boeing 737-2H4 aircraft in September 2000. Subsequently,
operating lease revenue is expected to decline due to lease term expiration and
aircraft sales. See discussion below related to the Partnership's sales-type
lease revenue for the year ended December 31, 2000.
The Partnership's equipment portfolio included assets in which the
Partnership holds a proportionate ownership interest. The remaining interests
are owned by an affiliated equipment leasing program sponsored by Equis
Financial Group Limited Partnership ("EFG"). The Partnership and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership held a proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold, resulting in $255,645 of proceeds and a net gain, for
financial statement purposes, of $43,102. In September 2000, a second Boeing
737-2H4 aircraft was re-leased, with a lease term expiring in September 2003.
Under the terms of this re-lease agreement, the Partnership will receive rents
of approximately $350,000 over the term of the lease. The Partnership entered
into a conditional sales agreement to sell its interest in the remaining Boeing
737-2H4 aircraft as described below.
The lease term associated with a McDonnell Douglas MD-82 aircraft, in which
the Partnership holds an ownership interest, expired in January 2000. The
aircraft was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V.,
with a lease term expiring in September 2004. Under the terms of this re-lease
agreement, the Partnership will receive rents of approximately $1,176,358 over
the term of the lease. The remaining McDonnell
Douglas MD-82 aircraft, in which the Partnership owns an ownership interest, is
currently on lease to Finnair OY through April 2001.
Interest income for the year ended December 31, 2000 was $202,930 compared to
$267,788 and $158,844 for the years ended December 31, 1999 and 1998,
respectively. Interest income is typically generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments. The
amount of future interest income is expected to fluctuate as a result of
changing interest rates and the amount of cash available for investment, among
other factors. On March 8, 2000, the Partnership utilized $3,640,000 of
available cash for a loan to Echelon Residential Holdings. The loan is presented
in the accompanying financial statements in accordance with the guidance set
forth in the Third Notice to Practitioners by the American Institute of
Certified Public Accountants in February 1986 entitled "ADC Arrangements", and
therefore the Partnership does not recognize interest income related to this
loan. (See further discussion included in Note 4 to the financial statements
included in Item 8 herein).
Other income for the year ended December 31, 2000 reflects the receipt of
$245,977 of unused aircraft maintenance reserves related to a sold aircraft and
$55,000 for the sale of certain aircraft records.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft. The title to the aircraft
transfers to Royal Aviation Inc., at the expiration of the lease term. The sale
of the aircraft has been recorded by the Partnership as a sales-type lease, with
a lease term expiring in January 2002. For the year ended December 31, 2000,
the Partnership recorded a net gain on sale of equipment, for financial
statement purposes, of $91,471 for the Partnership's proportional interest in
the aircraft and recognized sales-type lease revenue of $2,491.
The Partnership's Boeing 727-251 ADV aircraft was damaged in an on-ground
accident in October 1998 while being leased on a month-to-month basis by
Transmeridian Airlines, Inc. ("Transmeridian"). In September 1999, Transmeridian
ceased paying rent with respect to this aircraft. See Note 9 to the accompanying
financial statements for details regarding legal action undertaken by the
Partnership related to this situation. In May 2000, the Partnership sold the
Boeing 727-251 ADV aircraft to a third party for proceeds of $750,000. This
aircraft was fully depreciated at the time of sale resulting in a net gain, for
financial statement purposes, of $750,000 for the year ended December 31, 2000.
The Partnership recognized lease revenue of $70,000, $560,000, and $876,667
related to this aircraft during the years ended December 31, 2000, 1999 and
1998, respectively.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc. ("ATA"), to the lessee for net
proceeds of $3,109,500. The aircraft was fully depreciated at the time of sale,
resulting in a net gain, for financial statement purposes, of $3,109,500. The
Partnership recognized lease revenue of approximately $246,000 and $762,000
related to this aircraft for the year ended December 31, 1999 and 1998,
respectively.
In August 1998, Classic Airways Limited ("Classic") ceased paying rent with
respect to the Partnership's Lockheed L-1011-100 jet aircraft. In October 1998,
Classic filed for receivership in the United Kingdom ("UK") and was placed in
liquidation (see further discussion below). The Partnership earned lease
revenue in the amount of approximately $320,000 related to this aircraft during
the year ended December 31, 1998.
On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Lockheed L-1011-50 aircraft to
the lessee for net proceeds of $553,699. The Partnership's interest in the
aircraft had a net book value of $426,434 at the time of sale, resulting in the
recognition of a net gain on sale, for financial statement purposes, of
$127,265.
It cannot be determined whether future sales of aircraft will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of aircraft being sold and their marketability at
the time of sale. In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.
The ultimate realization of residual value for any aircraft will be dependent
upon many factors, including EFG's ability to sell and re-lease the aircraft.
Changes in market conditions, industry trends, technological advances, and other
events could converge to enhance or detract from asset values at any given time.
EFG attempts to monitor these changes and the airline industry in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each aircraft.
13
The total economic value realized for each aircraft is comprised of all
primary lease term revenue generated from that aircraft, together with its
residual value. The latter consists of cash proceeds realized upon the
aircraft's sale in addition to all other cash receipts obtained from renting the
aircraft on a re-lease, renewal or month-to-month basis. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
Interest expense was $103,919, $120,701 and $200,679 for the years ended
December 31, 2000, 1999 and 1998, respectively. Interest expense in near term
will increase as a result of the Partnership's debt refinancing in February
2001. (See Note 11 to the financial statements included in Item 8.)
Subsequently, interest expense will decline as the principal balance of notes
payable is reduced through the application of rent receipts to outstanding debt.
See additional discussion below regarding the refinancing of the debt in 2001.
Management fees of $29,913, 92,059, and 156,535 for the years ended December
31, 2000, 1999 and 1998, respectively. Management fees are based on 5% of gross
lease revenue generated by operating leases and 2% of gross lease revenue
generated by full payout leases.
Operating expenses were $1,061,428, $2,059,346 and $1,815,947 for the years
ended December 31, 2000, 1999 and 1998, respectively. In 2000 and 1999, the
Partnership accrued approximately $149,000 and $201,000, respectively, for the
reconfiguration costs and completion of a D-Check incurred to facilitate the
remarketing of the McDonnell Douglas MD-82 aircraft released in September 2000.
In 2000, the Partnership also accrued approximately $201,000 for a required D-
check for a second McDonnell Douglas MD-82 aircraft. In addition, the
Partnership incurred legal fees in connection with the lease-related litigation
described in Note 9 to the financial statements included in Item 8. Operating
expenses in the year ended December 31, 1999 include engine leasing costs of
$984,000 incurred related to the aircraft leased to Transmeridian and legal
costs related to the Partnership's ongoing litigation. In addition, the
operating expenses in 1998 also included legal costs incurred in connection with
legal proceedings related to Northwest Airlines, Inc. and Classic. Operating
expenses in 2000, 1999 and 1998 also included approximately $41,000, $50,000 and
$332,000, respectively, related to the Class Action Lawsuit described in Note 9
to the financial statements included in Item 8. Other operating expenses consist
principally of professional service costs, such as audit and legal fees, as well
as insurance, printing, distribution and other remarketing expenses.
Depreciation expense was $297,611, $1,054,343, and $2,451,737 for the years
ended December 31, 2000, 1999, and 1998, respectively.
For the year ended December 31, 2000, the Partnership's share of losses in
Echelon Residential Holdings was $276,289. This loss is reflected on the
Statement of Operations as "Partnership's share of unconsolidated real estate
venture's loss." See further discussion below.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from aircraft rental transactions.
Accordingly, the Partnership's principal source of cash from operations is the
collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated a net cash outflow of
$182,996 in 2000 and net cash inflows of $99,270 and $1,550,424 in 1999 and
1998, respectively. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Partnership remarket its aircraft. The Partnership, however, may continue to
incur significant costs to facilitate the successful remarketing of its aircraft
in the future. Ultimately, the Partnership will dispose of all aircraft under
lease. This will occur principally through sale transactions whereby each
aircraft will be sold to the existing lessee or to a third party. Generally,
this will occur upon expiration of each aircraft's primary or renewal/re-lease
term. The amount of future interest income is expected to fluctuate as a result
of changing interest rates and the level of cash available for investment, among
other factors.
Cash realized from aircraft disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. For the year ended
December 31, 2000, the Partnership realized net cash proceeds of $1,005,645
related to its Boeing 737-2H4 and 727-251 ADV aircraft. In 1999, the
Partnership received sales proceeds of $3,109,500 related to its Boeing 727-208
ADV aircraft formerly leased to ATA. During the year ended December 31, 1998,
the Partnership sold its interest in a Lockheed L-1011-50 aircraft and realized
net cash proceeds of $553,699. Future inflows of cash from aircraft disposals
will vary in timing and amount and will be influenced by many factors including,
but not limited to, the frequency and timing of lease expirations, the type of
aircraft being sold, their condition and age, and future market conditions.
14
At December 31, 2000, the Partnership was due aggregate future minimum lease
payments of $1,727,838 from contractual operating and sales-type lease
agreements (see Notes 2 and 5 to the financial statements included in Item 8), a
portion of which will be used to amortize the principal balance of notes payable
of $906,869 (see Note 7 to the financial statements included in Item 8). At the
expiration of the individual lease terms underlying the Partnership's future
minimum lease payments, the Partnership will sell its aircraft or enter re-lease
or renewal agreements when considered advantageous by the General Partner and
EFG. Such future remarketing activities will result in the realization of
additional cash inflows in the form of sale proceeds or rents from renewals and
re-leases, the timing and extent of which cannot be predicted with certainty.
This is because the timing and extent of remarketing events often is dependent
upon the needs and interests of the existing lessees. Some lessees may choose to
renew their lease contracts, while others may elect to return the aircraft. In
the latter instances, the aircraft could be re-leased to another lessee or sold
to a third party.
In August 1998, a lessee of the Partnership, Classic, ceased paying rent to
the Partnership with respect to a Lockheed L-1011-100 Aircraft (the "Aircraft")
and the Partnership terminated the lease. Classic then filed for receivership
in the United Kingdom ("UK") and was placed in liquidation. Prior to its
liquidation, Classic had incurred and failed to pay significant airport ground
fees to BAA plc, Eurocontrol, and CAA (collectively, the "Airport Authorities").
Classic's failure to pay such charges resulted in detention of the Aircraft by
BAA plc. The total of ground fees and expenses asserted by the Airport
Authorities, which continued to accrue after the detention began, exceeded
$1,500,000 at November 30, 1999. Prior to that date, the General Partner had
attempted to reach a negotiated settlement with the Airport Authorities so that
the Aircraft could be returned to the Partnership. Those negotiations were
unsuccessful and the General Partner determined that the amount of fees owed to
the Airport Authorities was in excess of the Aircraft's value and, therefore, it
would not be in the Partnership's best interests to pay these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the aircraft
to satisfy the unpaid charges and, on December 8, 1999, the Aircraft was sold at
auction. It is believed that the sale price was insufficient to satisfy the
aggregate fees owed to the Airport Authorities. Accordingly, the Partnership
will not realize any portion of the sale proceeds obtained by BAA plc nor any
future residual value from the Aircraft. Notwithstanding the foregoing, the
Partnership held the Aircraft's records, which were sold for $55,000 in 2000. In
addition, the Partnership retains two engines that had been removed from the
Aircraft for maintenance prior to Classic's liquidation. The General Partner is
attempting to remarket these engines. At the date of Classic's liquidation, the
Partnership had accrued $160,000 of rental income which had not been collected
from Classic and all of which was written off as uncollectible in the third
quarter of 1998. The Aircraft, including the two engines that were removed for
maintenance, had been fully depreciated prior to the auction by BAA plc.
Subsequent to the auction, the Aircraft (except for the two engines) was written
off by the Partnership.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 9 to the financial statements included in Item 8, the
court permitted the Partnership to invest in any new investment, including but
not limited to new equipment or other business activities, subject to certain
limitations. On March 8, 2000, the Partnership loaned $3,640,000 to a newly
formed real estate company, Echelon Residential Holdings to finance the
acquisition of real estate assets by that company. Echelon Residential Holdings,
through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan
proceeds, along with the loan proceeds from similar loans by ten affiliated
partnerships representing $32 million in the aggregate, to acquire various real
estate assets from Echelon International Corporation, an independent Florida-
based real estate company. Echelon Residential Holding's interest in Echelon
Residential LLC is pledged pursuant to a pledge agreement to the partnerships as
collateral for the loans. The loan has a term of 30 months, maturing on
September 8, 2002, and an annual interest rate of 14% for the first 24 months
and 18% for the final six months. Interest accrues and compounds monthly and is
payable at maturity.
As discussed in Note 4 to the Partnership's financial statements
included in Item 8 herein, the loan is considered to be an investment
in a real estate venture for accounting purposes. In accordance with the
provisions of Statement of Position No. 78-9, "Accounting for Investments in
Real Estate Ventures", the Partnership reports its share of income or loss of
Echelon Residential Holdings under the equity method of accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property
15
values, the sale of properties, interest rates, real estate taxes, other
operating expenses, the supply and demand for properties involved, zoning and
environmental laws and regulations, rent control laws and other governmental
rules. A default by Echelon Residential Holdings could have a material adverse
effect on the future cash flow and operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to
an officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager of Echelon Residential Holdings.
The officer made a $185,465 equity investment in Echelon Residential Holdings.
His return on his equity investment is restricted to the same rate of return as
the partnerships realize on their loans. There is a risk that the court may
object to the general partner's action to the General Partner's action in
structuring the loan in this way since the officer may be deemed an affiliate
and the loans in violation of the prohibition against loans to affiliates and
the court's statement in its order permitting New Investments that all other
provisions of the Partnership Agreements governing the investment objectives and
policies of the Partnership shall remain in full force and effect. The court
may require the partnerships to restructure or divest the loan.
The Partnership obtained long-term financing in connection with certain
aircraft. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities in the
Partnership's Statement of Cash Flows. The corresponding note agreements are
recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization periods (which
generally coincides with the lease terms). As rental payments are collected, a
portion of all of the rental payments is used to repay associated indebtedness.
In the near term, the amount of cash used to repay debt obligations will
increase due to the refinancing discussed below. Subsequently the amount of
cash used will decline as the principal balance of notes payable is reduced
through the collection and application of rents.
In February 2000, the Partnership and certain affiliated investment programs
(collectively, the "Programs") refinanced the indebtedness, which matured in
January 2000 associated with a McDonnell Douglas MD-82 aircraft re-leased in
September 2000. In addition to refinancing the existing indebtedness of
$3,370,000, the Programs received additional debt proceeds of $1,350,000
required to perform a D-Check on the aircraft. The Partnership received $201,247
from such proceeds. The note had a fluctuating interest rate based on LIBOR plus
a margin with interest payments due monthly. The Partnership's aggregate share
of the refinanced and new indebtedness was $701,062, which matured in August
2000. The Partnership paid interest-only on the debt throughout 2000. In
February 2001, the Programs refinanced the outstanding indebtedness and accrued
interest related to this aircraft. In addition to refinancing the Programs'
total existing indebtedness and accrued interest of $4,758,845, the Programs
received additional debt proceeds of $3,400,177. The Partnership's aggregate
share of the refinanced and new indebtedness was $1,211,860 including $706,831
used to repay the existing indebtedness on the refinanced aircraft. The
Partnership used a portion of its share of the additional proceeds of $505,028
to repay the outstanding balance of the indebtedness and accrued interest
related to the aircraft on lease to Finnair OY of $130,852 and certain aircraft
reconfiguration costs that the Partnership had accrued at December 31, 2000.
The new indebtedness bears a fixed interest rate of 7.65%, principal is
amortized monthly and the Partnership has a balloon payment obligation at the
expiration of the lease term of $404,138 in September 2004.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight
16
hours or engine cycles, nonetheless may require heavy maintenance in order to
bring its engines, airframe and other hardware up to standards that will permit
its prospective use in commercial air transportation.
At December 31, 2000, the Partnership's equipment portfolio included ownership
interests in three commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003.The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 8 to the financial statements included in Item 8). For instance,
selling commissions and organization and offering costs pertaining to
syndication of the Partnership's limited partnership units are not deductible
for federal income tax purposes, but are recorded as a reduction of partners'
capital for financial reporting purposes. Therefore, such differences are
permanent differences between capital accounts for financial reporting and
federal income tax purposes. Other differences between the bases of capital
accounts for federal income tax and financial reporting purposes occur due to
timing differences consisting of the cumulative difference between income or
loss for tax purposes and financial statement income or loss. The principal
components of the cumulative difference between financial statement income or
loss and tax income or loss result from different depreciation policies for book
and tax purposes and different treatments for book and tax purposes related to
the real estate venture.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 2000. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 2000, the General Partner had a positive tax capital account
balance.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described in
Note 9 to the accompanying financial statements included in Item 8 herein. 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. In addition, the General Partner will
continue to suspend the payment of quarterly cash distributions pending final
resolution of the Class Action Lawsuit. Accordingly, future cash distributions
are not expected to be paid until the Class Action Lawsuit is adjudicated.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
- ----------------------------------------------------------------------
The Partnership's financial statements include financial instruments that
are exposed to interest rate risks.
The Partnership's exposure to market risk for changes in interest rates at
December 31, 2000 related primarily to the Partnership's note payable for which
the interest rate is based on the London Interbank Offering Rate ("LIBOR").
However, subsequent to December 31, 2000, the Partnership refinanced its
variable rate note payable with instruments bearing a fixed rate of interest.
The fair market value of fixed interest rate debt may be adversely impacted due
to a decrease in interest rates. The effect of a 100 bases point increase in the
interest rate on this note payable would not have a material effect on the
Partnership's financial statements.
The Partnership's acquisition, development and construction loan to Echelon
Residential Holdings matures on September 8, 2002 and earns interest at a fixed
annual rate of 14% for the first 24 months and a fixed annual rate of 18% for
the last 6 months of the loan. Investments earning a fixed rate of interest may
have their fair market
17
value adversely impacted due to a rise in interest rates. The effect of interest
rate fluctuations on the Partnership in 2000 was not material.
18
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
Financial Statements:
Report of Independent Auditors.................................................20
Statement of Financial Position
at December 31, 2000 and 1999..................................................21
Statement of Operations
for the years ended December 31, 2000, 1999 and 1998...........................22
Statement of Changes in Partners' Capital
for the years ended December 31, 2000, 1999 and 1998...........................23
Statement of Cash Flows
for the years ended December 31, 2000, 1999 and 1998...........................24
Notes to the Financial Statements..............................................25
19
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of AIRFUND II
International Limited Partnership, as of December 31, 2000 and 1999, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of Echelon Residential
Holdings LLC, (a limited liability company to which the Partnership has loaned
$3,640,000), have been audited by other auditors whose report has been furnished
to us; insofar as our opinion on the financial statements relates to data
included for Echelon Residential Holdings LLC, it is based solely on their
report.
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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AIRFUND II International Limited Partnership at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Tampa, Florida
March 30, 2001,
except for the last 7 paragraphs of Note 11, as to which the date is
May 15, 2001
20
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 2000 and 1999
2000 1999
----------------- -----------------
ASSETS
Cash and cash equivalents..................................... $ 2,827,385 $ 5,719,642
Rents receivable.............................................. 116,820 --
Accounts receivable - affiliate............................... 33,452 1,476
Other assets ................................................. 24,508 31,742
Investment in real estate venture............................. 3,363,711 --
Net investment in sales-type lease............................ 240,330 --
Equipment at cost, net of accumulated
depreciation of $8,152,945 and $18,449,875
at December 31, 2000 and 1999, respectively............... 2,644,169 3,359,619
----------------- -----------------
Total assets.......................................... $ 9,250,375 $ 9,112,479
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Notes payable................................................. $ 906,869 $ 981,775
Accrued interest.............................................. 7,161 13,356
Accrued liabilities........................................... 591,617 463,324
Accrued liabilities - affiliate............................... 17,207 78,593
Deferred rental income........................................ 27,244 51,380
----------------- -----------------
Total liabilities..................................... 1,550,098 1,588,428
----------------- -----------------
Partners' capital (deficit):
General Partner........................................... (2,610,443) (2,619,254)
Limited Partnership Interests (2,714,647 Units;
initial purchase price of $25 each)...................... 10,310,720 10,143,305
----------------- -----------------
Total partners' capital............................... 7,700,277 7,524,051
----------------- -----------------
Total liabilities and partners' capital............... $ 9,250,375 $ 9,112,479
================= =================
The accompanying notes are an integral part of these financial statements.
21
AIRFUND II International Limited Partnership
STATEMENT OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------- ---------------- ----------------
Income:
Operating lease revenue...................... $ 554,415 $ 1,841,170 $ 3,130,704
Sales-type lease revenue..................... 2,491 -- --
Interest income.............................. 202,930 267,788 158,844
Other income................................. 300,977 -- --
Gain on sale of equipment.................... 884,573 3,109,500 127,265
---------------- ---------------- ----------------
Total income............................. 1,945,386 5,218,458 3,416,813
---------------- ---------------- ----------------
Expenses:
Depreciation................................. 297,611 1,054,343 2,451,737
Interest expense............................. 103,919 120,701 200,679
Equipment management fees - 29,913 92,059 156,535
affiliate...............................
Operating expenses - affiliate............... 1,061,428 2,059,346 1,815,947
Partnership's share of unconsolidated
real estate venture's loss............... 276,289 -- --
---------------- ---------------- ----------------
Total expenses........................... 1,769,160 3,326,449 4,624,898
---------------- ---------------- ----------------
Net income (loss)................................. $ 176,226 $ 1,892,009 $ (1,208,085)
================ ================ ================
Net income (loss)
per limited partnership unit................. $ 0.06 $ 0.66 $ (0.42)
================ ================ ================
The accompanying notes are an integral part of these financial statements.
22
AIRFUND II International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 2000, 1999 and 1998
General
Partner Recognized Owners
------------------------
Amount Units Amount Total
----------- --------- -----------
Balance at December 31, 1997............ $(2,653,450) 2,714,647 $ 9,493,577 $ 6,840,127
Net loss - 1998..................... (60,404) -- (1,147,681) (1,208,085)
----------- --------- ----------- ----------
Balance at December 31, 1998............ (2,713,854) 2,714,647 8,345,896 5,632,042
Net income - 1999................... 94,600 -- 1,797,409 1,892,009
----------- --------- ----------- -----------
Balance at December 31, 1999............ (2,619,254) 2,714,647 10,143,305 7,524,051
Net income - 2000.................. 8,811 -- 167,415 176,226
----------- --------- ----------- -----------
Balance at December 31, 2000............ $(2,610,443) 2,714,647 $10,310,720 $ 7,700,277
=========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
23
AIRFUND II International Limited Partnership
STATEMENT OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------- ---------------- ----------------
Cash flows provided by (used in) operating activities:
Net income (loss).............................................. $ 176,226 $ 1,892,009 $ (1,208,085)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation.............................................. 297,611 1,054,343 2,451,737
Sales-type lease revenue.................................. (2,491) -- --
Gain on sale of equipment................................. (884,573) (3,109,500) (127,265)
Partnership's share of unconsolidated
real estate venture's loss............................. 276,289 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable....................................... (116,820) 39,933 25,187
Accounts receivable - affiliate........................ (31,976) 69,702 234,181
Other assets........................................... 7,234 93,992 (125,734)
Collections on net investment in sales-type lease...... 58,928 -- --
Increase (decrease) in:
Accrued interest....................................... (6,195) (11,770) (4,492)
Accrued liabilities.................................... 128,293 4,839 450,235
Accrued liabilities - affiliate........................ (61,386) 62,339 (26,270)
Deferred rental income................................. (24,136) 3,383 (119,070)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities... (182,996) 99,270 1,550,424
---------------- ---------------- ----------------
Cash flows provided by (used in) investing activities:
Proceeds from equipment sales............................. 1,005,645 3,109,500 553,699
Investment in real estate venture......................... (3,640,000) -- --
---------------- ---------------- ----------------
Net cash (used in) provided by investing activities... (2,634,355) 3,109,500 553,699
---------------- ---------------- ----------------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable............................... 201,247 -- --
Principal payments - notes payable........................ (276,153) (914,890) (780,855)
---------------- ---------------- ----------------
Net cash used in financing activities................. (74,906) (914,890) (780,855)
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents........... (2,892,257) 2,293,880 1,323,268
Cash and cash equivalents at beginning of year................. 5,719,642 3,425,762 2,102,494
---------------- ---------------- ----------------
Cash and cash equivalents at end of year....................... $ 2,827,385 $ 5,719,642 $ 3,425,762
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 110,114 $ 132,471 $ 205,171
================ ================ ================
Supplemental disclosure of non-cash financing activities:
Equipment sold on sales-type lease........................ $ 296,767 $ -- $ --
================ ================ ================
The accompanying notes are an integral part of these financial statements.
24
AIRFUND II International Limited Partnership
Notes to the Financial Statements
December 31, 2000
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.
25
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 6).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Cash
- ----
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in repurchase agreements with overnight maturities. Under the
terms of the agreements, title to the underlying securities passes to the
Partnership. The securities underlying the agreements are book entry securities.
At December 31, 2000, the Partnership had $2,710,280 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
Revenue Recognition
- -------------------
Effective January 1, 2000, the Partnership adopted the provisions of
Securities Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides
guidance for the recognition, presentation and disclosure of revenue in
financial statements. The adoption of SAB No. 101 had no impact on the
Partnership's financial statements.
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and EFG would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 9 regarding the Class Action Lawsuit. Future minimum
rents are $1,472,431 are due as follows:
26
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
For the year ending December 31, 2001.......... $ 491,543
2002.......... 412,079
2003.......... 372,749
2004.......... 196,060
--------------
Total......... $ 1,472,431
==============
Lease payments for the sales-type lease are due monthly and the related
revenue is recognized by a method which produces a constant periodic rate of
return on the outstanding investment in the lease. Future minimum lease payments
for the sales-type lease of $255,407 are due in the year ending December 31,
2001.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is as
follows:
2000 1999 1998
--------------- --------------- -----------
Finnair OY........................................... $ 346,949 $ 634,658 $ 639,923
Aerovias de Mexico S.A. de C.V....................... $ 92,311 $ -- $ --
Transmeridian Airlines, Inc.......................... $ 70,000 $ 560,000 $ 876,667
Southwest Airlines, Inc.............................. $ -- $ 380,699 $ 377,568
American Trans Air, Inc.............................. $ -- $ 245,533 $ 762,000
Classic Airways Limited.............................. $ -- $ -- $ 319,960
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
- ------------------
All aircraft were acquired from EFG or one of its Affiliates. Equipment
Cost means the actual cost paid by the Partnership to acquire the aircraft,
including acquisition fees. Equipment cost reflects the actual price paid for
the aircraft by EFG or the Affiliate plus all actual costs incurred by EFG or
the Affiliate while carrying the aircraft less the amount of all rents received
by EFG or the Affiliate prior to selling the aircraft.
Depreciation
- ------------
The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. Adjustments to reduce the net carrying value of equipment
are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value.
The ultimate realization of residual value for any type of aircraft is
dependent upon many factors, including EFG's ability to sell and re-lease
aircraft. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
27
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Remarketing and Maintenance Expenses
- ------------------------------------
The Partnership expenses storage and remarketing costs associated with
aircraft and other equipment under lease as incurred.
Generally, the costs of scheduled inspections and repairs and routine
maintenance for aircraft and other equipment under lease are the responsibility
of the lessee. For aircraft under lease, scheduled airframe inspections and
repairs, such as "D checks", are generally the responsibility of the lessee. In
certain situations, the Partnership may be responsible for reimbursing the
lessee for a portion of such costs paid by the lessee prior to the redelivery
date (i.e., the expiration of the lease term) or may be entitled to receive
additional payments from the lessee based on the terms and conditions set forth
in the lease arrangement which considers, among other things, the amount of time
remaining until the next scheduled maintenance event. The Partnership records
the amount payable or receivable, with a corresponding charge or credit to
operations.
Real Estate Loan
- ----------------
The Partnership accounts for the loan to a real estate company using the
guidance set forth in the Third Notice to Practitioners by the American
Institute of Certified Public Accountants ("AICPA") in February 1986 entitled
"ADC Arrangements" (the "Third Notice"). The Partnership has evaluated this loan
and has determined that real estate accounting is appropriate. This
determination affects the Partnership's balance sheet classification of the loan
and the recognition of revenues derived therefrom. The Third Notice was issued
to address those real estate acquisition, development and construction
arrangements where a lender has virtually the same risk and potential rewards as
those of owners or joint ventures. Emerging Issues Task Force ("EITF") 86-21,
"Application of the AICPA Notice to Practitioners regarding Acquisition,
Development and Construction Arrangements to Acquisition of an Operating
Property" expanded the applicability of the Third Notice to entities other than
financial institutions.
Based on the applicability of the Third Notice, EITF 86-21 and
consideration of the economic substance of the transaction, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of the real estate company under the equity method of accounting.
The Partnership took into consideration the following characteristics of
the loan in determining that the loan should be accounted for as an investment
in a real estate venture: (i) the Partnership and the 10 affiliated partnerships
who made the loans collectively have provided substantially all of the necessary
funds to acquire the underlying properties without taking title to such
properties, (ii) by virtue of a pledged security interest in the wholly owned
subsidiary of the borrower that holds title to the properties, the Partnership's
loan is secured only by the underlying properties, (iii) the borrower will only
repay the Partnership at maturity, including all interest accrued on the loan
through maturity, (iv) it is expected that the borrower can only repay the loan
through sales of undeveloped and developed property; and (v) the structure of
the loan (i.e. no payments due until maturity) makes it unlikely that the
property will be taken in foreclosure as a result of delinquency. See Note 4 for
additional discussion.
Net Investment in Sales-Type Lease
- ----------------------------------
For leases that qualify as sales-type leases, the Partnership recognizes
profit or loss at lease inception to the extent the fair value of the property
leased differs from the carrying value. For balance sheet purposes, the
aggregate lease payments receivable are recorded on the balance sheet net of
unearned income as net investment in sales-type lease. Unearned income is
recognized as sales-type lease revenue over the lease term using the interest
method.
28
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Impairment of Long-Lived Assets
- -------------------------------
The carrying value of long-lived assets, including equipment and the real
estate loan, will be reviewed for impairment whenever events or changes in
circumstances indicate that the recorded value cannot be recovered from
undiscounted future cash flows.
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 6).
Contingencies
- -------------
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is probable.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated and remains
pending (see Note 9). The Partnership's estimated exposure for costs anticipated
to be incurred in pursuing the settlement proposal is approximately $423,000
consisting principally of legal fees and other professional service costs. These
costs are expected to be incurred regardless of whether the proposed settlement
ultimately is effected and, therefore, the Partnership expensed approximately
$332,000 of these costs in 1998 following the Court's approval of the settlement
plan. The cost estimate is subject to change and is monitored by the General
Partner based upon the progress of the settlement proposal and other pertinent
information. As a result, the Partnership accrued and expensed additional
amounts of approximately $41,000 and $50,000 for such costs during 2000 and
1999, respectively. See notes 9 and 11 for additional discussions.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"). The Partnership does not intend
to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. The General Partner has consulted counsel and believes
that the Partnership is not an investment company. If the Partnership were
determined to be an unregistered investment company, its business would be
adversely affected. The 1940 Act, among other things, prohibits an unregistered
investment company from offering securities for sale or engaging in any business
in interstate commerce and, consequently, leases and contracts entered into by
partnerships that are unregistered investment companies may be voidable. If
necessary, the Partnership intends to avoid being deemed an investment company
by means that may include disposing or acquiring certain assets that it might
not otherwise dispose or acquire.
Allocation of Profits and Losses
- --------------------------------
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 8 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) Per Unit
- --------------------------
29
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Net income (loss) per unit is based on 2,714,647 Units outstanding during
each of the three years in the period ended December 31, 2000 and computed after
allocation of the General Partner's 5% share of net income (loss).
Provision for Income Taxes
- --------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their separate tax returns.
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at
December 31, 2000. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 2000 under contracted lease terms.
A remaining lease term equal to zero reflects equipment held for sale or re-
lease in the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ---------------------------------------------------------- ------------------ -------------------- -------------------
Two Rolls Royce aircraft engines.......................... 0 $ 6,000,000 Warehouse
One McDonnell Douglas MD-82 (Finnair)..................... 4 2,078,640 Foreign
One McDonnell Douglas MD-82
(Aerovias de Mexico S.A. de C.V).......................... 44 2,078,640 Foreign
One Boeing 737-2H4 (Air Slovakia)......................... 32 639,834 Foreign
--------------------
Total equipment cost.................................... 10,797,114
Accumulated depreciation................................ 8,152,945
--------------------
Equipment, net of accumulated depreciation $ 2,644,169
====================
The cost of each of the Partnership's aircraft represents proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
Certain of the Partnership's aircraft and the related lease payment streams
were used to secure the Partnership's term loans with third-party lenders. The
preceding summary includes leveraged equipment having an aggregate original cost
of approximately $4,157,000 and a net book value of approximately $2,446,000 at
December 31, 2000. (See Note 7).
The Partnership entered into a three-year release agreement with Air
Slovakia for its proportionate interest in a Boeing 737-2H4 aircraft, effective
September 2000. Under the terms of this agreement, the Partnership will receive
rents of approximately $350,000 over the term of the lease. The Partnership
entered into a four-year re-lease agreement with Aerovias de Mexico, S.A. de
C.V. for its proportionate interest in a McDonnell Douglas MD-82 aircraft,
effective September 2000. Under the terms of this agreement, the Partnership
will receive rents of approximately $1,176,000 over the term of the lease.
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
30
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the aircraft. At
December 31, 2000, all of the Partnership's aircraft were subject to contracted
lease agreements, except the Rolls Royce aircraft engines, which were
warehoused. The General Partner is attempting to remarket these engines.
NOTE 4 - INVESTMENT IN REAL ESTATE VENTURE
- ------------------------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships") collectively loaned $32 million to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate
company. Echelon Residential Holdings is owned by several investors, including
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities.
In the Class Action Lawsuit, there is a risk that the court may object to
the General Partner's action in structuring the loan in this way since the
officer may be deemed an affiliate and the loans in violation of the prohibition
against loans to affiliates and the court's statement in its order permitting
New Investments that all other provisions of the Partnership Agreements
governing the investment objectives and policies of the Partnership shall remain
in full force and effect. The court may require the partnerships to restructure
or divest the loan.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings, through a wholly-owned subsidiary (Echelon Residential
LLC), used the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida-based real estate company. The loan has a
term of 30 months, maturing on September 8, 2002, and an annual interest rate of
14% for the first 24 months and 18% for the final six months. Interest accrues
and compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings has pledged a security interest in all
of its right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral.
The loan is presented in accordance with the guidance for ADC Arrangements as
described in Note 2, Real Estate Loans, in the Partnership's financial
statements as of and for the year ended December 31, 2000. The loan is accounted
for as an investment in real estate venture and is presented net of the
Partnership's share of losses in Echelon Residential Holdings. The Partnership
is allocated its proportionate share of the unconsolidated real estate venture's
net loss, adjusted for interest on ADC arrangements based on the balance of its
ADC arrangements in relation to the real estate venture's total equity and notes
payable, including the ADC arrangements. For the period ended December 31, 2000,
the Partnership's share of losses in Echelon Residential Holdings was $276,289
and is reflected on the Statement of Operations as "Partnership's share of
unconsolidated real estate venture's loss."
The Partnership took into consideration the following characteristics of the
loan in determining that the loan should be accounted for as an investment in a
real estate venture: (i) the Partnership and the 10 affiliated partnerships who
made the loans collectively have provided substantially all of the necessary
funds to acquire the underlying properties without taking title to such
properties, (ii) by virtue of a pledged security interest in the wholly owned
subsidiary of the borrower that holds title to the properties, the Partnership's
loan is secured only by the underlying properties, (iii) the borrower will only
repay the Partnership at maturity, including all interest accrued on the loan
through maturity, (iv) it is expected that the borrower can only repay the loan
through sales of undeveloped and developed property; and (v) the structure of
the loan (i.e. no payments due until maturity) makes it unlikely that the
property will be taken in foreclosure as a result of delinquency.
The summarized financial information for Echelon Residential Holdings as of
December 31, 2000 and for the period March 8, 2000 (commencement of operations)
through December 31, 2000 is as follows:
Total assets................................ $ 68,580,891
Total liabilities........................... $ 70,183,162
31
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Minority interest........................... $ 2,257,367
Total deficit .............................. $ (3,859,638)
Total revenues.............................. $ 5,230,212
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture............................. $ 11,936,238
Net loss.................................. $ (6,706,026)
NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE
- -------------------------------------------
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft transfers to Royal
Aviation Inc., at the expiration of the lease term. The sale of the aircraft has
been recorded by the Partnership as a sales-type lease, with a lease term
expiring in January 2002. For the year ended December 31, 2000, the Partnership
recorded a net gain on sale of equipment, for financial statement purposes, of
$91,471 for the Partnership's proportional interest in the aircraft and
recognized sales-type lease revenue of $2,491. The net book value of equipment
sold on sales-type lease totaled $296,767, which was a non-cash transaction. The
components of the net investment in the sales-type lease are as follows:
Total minimum lease payments to be received............... $ 255,407
Less: Unearned income.................................... 15,077
---------
Total......................... $ 240,330
=========
NOTE 6 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 2000, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
32
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
2000 1999 1998
----------------- ------------------ -------------------
Equipment management fees..................... $ 29,913 $ 92,059 $ 156,535
Administrative charges........................ 72,967 71,699 53,676
Reimbursable operating expenses
due to third parties........................ 988,461 1,987,647 1,762,271
------------------- ------------------ -------------------
Total............. $ 1,091,341 $ 2,151,405 $ 1,972,482
=================== =================== ===================
As provided under the terms of the Management Agreement (Continued)nt, EFG
is compensated for its services to the Partnership. Such services include
acquisition and management of equipment. For acquisition services, EFG was
compensated by an amount equal to 3.07% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
5% of gross operating lease rental revenue and 2% of gross full payout lease
rental revenue received by the Partnership. Both acquisition and management fees
are subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 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, 2000, the Partnership was owed $33,452 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2001.
An affiliate of the General Partner owns Units in the Partnership as
follows:
------------------------------------------------------------------------
Number of Percent of Total
Affiliate Units Owned Outstanding Units
------------------------------------------------------------------------
Old North Capital Limited Partnership 40,000 1.47%
------------------------------------------------------------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele Group
Inc. ("Semele"). Gary D. Engle is Chairman and Chief Executive Officer of
Semele.
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 2000 consisted of two installment notes
payable to banks of $906,869. One installment note bears an interest rate of
8.225% and the other bears a fluctuating interest rate based on LIBOR
(approximately 6.7% at December 31, 2000) plus a margin. Both of the installment
notes are non-recourse and are collateralized by the equipment and assignment of
the related lease payments. The Partnership had a balloon payment obligation due
at the expiration of the lease term related to the aircraft leased to Finnair
OY. This indebtedness was due to mature in 2001. In addition, the Partnership
had a balloon payment obligation of $701,062, which matured in August 2000. The
Partnership paid interest-only on this debt through 2000 and in February 2001,
the Partnership and certain affiliated investment programs refinanced this
indebtedness and repaid the outstanding indebtedness related to the Finnair OY
aircraft. See Note 11, "Subsequent Event", regarding this refinancing.
33
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Management believes that the carrying amount of notes payable approximates
fair value at December 31, 2000 based on its experience and understanding of the
market for instruments with similar terms.
The annual maturities of the installment notes payable at December 31,
2000, reflecting the maturity of the notes in consideration of the February 2001
refinancing discussed in Note 11, "Subsequent Event", are as follows:
For the year ending December 31, 2001....... $ 109,728
2002....... 143,640
2003....... 143,640
2004....... 511,861
---------------
Total....... $ 906,869
==============
NOTE 8 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 2000, the General Partner had a positive tax capital account
balance.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
----------------- ------------------ ------------------
Net income (loss).............................. $ 176,226 $ 1,892,009 $ (1,208,085)
Financial statement depreciation in
excess of (less than) tax depreciation..... (56,850) 673,872 (713,082)
Deferred rental income....................... (24,136) 3,383 (119,070)
Interest income - real estate venture 444,512 -- --
Partnership's share of unconsolidated
real estate venture's loss................... 276,289 -- --
Other........................................ 318,871 64,000 362,435
----------------- ------------------ -----------------
Net income (loss) for federal income
tax reporting purposes..................... $ 1,134,912 $ 2,633,264 $ (1,677,802)
================= ================== ==================
The principal component of "Other" consists of the difference between the
tax gain or loss on aircraft disposals and the financial statement gain or loss
on aircraft disposals. It also includes reversal of certain maintenance
reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 2000 and 1999:
2000 1999
---------- ----------
Partners' capital........................ $ 7,700,277 $ 7,524,051
34
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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)........................... 21,568 (937,118)
------------------ ------------------
Partners' capital for federal income tax reporting purposes............ $ 14,807,085 $ 13,672,173
================== ===================
The cumulative difference between federal income tax and financial
statement income (loss) represents a timing difference.
NOTE 9 - LEGAL PROCEEDINGS
- --------------------------
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
--------------------------------------------------
Limited Partnership, et al., in the United States District Court for the
- --------------------------
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
----------------------------------
Financial Group Limited Partnership, et al., in the Superior Court of the
- ------------------------------------------
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit 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
35
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 commencing March 22,
1999, the Exchange Partnerships could collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believed to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations. The Second Amended Stipulation, among other
things, quantified the 40% limitation using a whole dollar amount of $32 million
in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively made a $32 million
loan as permitted by the Second Amended Stipulation approved by the Court. The
Partnership's portion of the aggregate loan is $3,640,000. The loan consists of
a term loan to Echelon Residential Holdings, a newly-formed real estate company
that is owned by several independent investors and, in his individual capacity,
James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates
of the General Partner made loans to Echelon Residential Holdings in their
individual capacities. Echelon Residential Holdings, through a wholly owned
subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an independent Florida-based real estate company. The
loan has a term of 30 months maturing on September 8, 2002 and bears interest at
the annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. Echelon Residential Holdings has pledged its membership interests in
Echelon Residential LLC to the Exchange Partnerships as collateral for the loan.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of the Exchange
Partnerships with the opportunity to object to the participation of their
partnership in the Consolidation. Assuming the proposed settlement is effected
according to present terms, the Partnership's share
36
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
of legal fees and expenses related to the Class Action Lawsuit and the
Consolidation is estimated to be approximately $423,000, of which approximately
$332,000 was accrued and expensed by the Partnership in 1998 and additional
amounts of approximately $41,000 and $50,000 was accrued and expensed in 2000
and 1999, respectively.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permitted the partners to transfer Units to family members or as
a result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
On March 12, 2001, after a status conference and hearing, the Court issued
an order that required the parties, no later than May 15, 2001, to advise the
Court on (a) whether the SEC has completed its review of the solicitation
statement and related materials submitted to the SEC in connection with the
proposed settlement, and (b) whether parties request the Court to schedule a
hearing for final approval of the proposed settlement or are withdrawing the
proposed settlement from judicial consideration and resuming the litigation of
the Plaintiffs' claims. The Court also directed the parties to use their best
efforts to assist the SEC so that its regulatory review may be completed on or
before May 15, 2001. The Court continued the Final Approval Settlement Hearing
until a date to be scheduled in July 2001 after receipt from the parties of a
request to schedule a hearing. There are a number of issues to be resolved with
the staff of the SEC before the staff's review of the solicitation materials is
completed. See note 11 for update of status of proceedings.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions as
described below:
First action involving Transmeridian Airlines
- ---------------------------------------------
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines (the
"Plaintiff") filed an action in the 61st Judicial District Court of Harris
County, Texas (the "Court") entitled Prime Air, Inc. d/b/a Transmeridian
-----------------------------------
Airlines v. Investors Asset Holding Corp. ("IAHC"), as Trustee for Airfund II
- -----------------------------------------------------------------------------
International Limited Partnership, PLM International ("PLM"), and NavCom
- ------------------------------------------------------------------------
Aviation, Inc. (collectively, the "Defendants"). In that action, the Plaintiff
- -------------
claimed damages of more than $3 million for alleged breach of contract, fraud,
civil conspiracy, tortious interference of business relations, negligent
misrepresentation, negligence and gross negligence, and punitive damages against
the Defendants in connection with Transmeridian's lease of a Boeing 727-251 ADV
jet aircraft from the Partnership. On November 7, 1996, PLM removed the action
to United States District Court for the Southern District of Texas. On February
14, 1997, the Defendants answered the Plaintiff's Complaint denying the
allegations made therein and asserting various defenses.
On July 31, 1998, the Court granted IAHC's motion to strike Plaintiff's
fraud and negligent misrepresentation claims due to failure to plead with
particularity. Extensive discovery was conducted on the merits of Plaintiff's
claims. The Plaintiff, at one point, provided an expert report seeking
approximately $30 million in damages. The Plaintiff later provided a revised
expert report claiming actual damages of approximately $8.5 million and
Plaintiff continued to seek punitive damages and both pre-judgment and
post-judgment interest. On March 18, 1999, the Court entered summary judgment in
favor of IAHC and PLM on all remaining claims. The Plaintiff subsequently filed
a motion to alter or amend the judgment, or in the alternative, to certify the
Court's Order for Interlocutory Appeal. On April 30, 1999, the Court declined to
alter or amend its judgment and entered final judgment in favor of IAHC and PLM
on all remaining claims. The Plaintiff appealed to the United States Court of
Appeals for the 5/th/ Circuit. The Court of Appeals denied Transmeridian's
appeal, affirmed the District Court's judgement in IAHC's favor, and
subsequently denied Transmeridian's request for rehearing. Transmeridian has not
sought further
37
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
review of the District Court's judgment. There have been, however, subsequent
proceedings in the District Court on IAHC's request for the assessment of costs
in the amount of approximately $35,000.
In connection with this litigation, the Partnership has incurred
substantial legal fees, exceeding $1 million. An action seeking recovery of
these costs was filed on behalf of the Partnership in November 1999. See
"Indemnity action against Transmeridian Airlines and Apple Vacations" described
below.
Second action involving Transmeridian Airlines
- ----------------------------------------------
On November 9, 1998, Investors Asset Holding Corp., as Trustee for the
Partnership (the "Plaintiff"), filed an action in Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract. The action
subsequently was removed to United States District Court for the District of
Massachusetts. The Plaintiff filed an Amended Complaint asserting claims for
breaches of contract and covenant of good faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
In October 1998, an aircraft leased by Transmeridian (being the same
aircraft in the above-referenced "First action involving Transmeridian
Airlines") was damaged in an on-ground accident at the Caracas, Venezuela
airport. The cost to repair the aircraft was estimated to be at least $350,000.
In addition, the Partnership had to lease two substitute engines at a cost of
$82,000 per month. During the year ended December 31, 1999, the Partnership
incurred total engine lease costs of $984,000. This was partially offset by
lease rents paid by Transmeridian of $560,000 during the same period. However,
as of September 11, 1999, Transmeridian ceased paying rent on this aircraft. The
Plaintiff alleges that Transmeridian, among other things, has impeded the
Partnership's ability to terminate the two engine lease contracts between the
Partnership and a third party. The Plaintiff intends to pursue insurance
coverage and also to enforce written guarantees issued by Apple Vacations that
absolutely and unconditionally guarantee Transmeridian's performance under the
lease and is seeking recovery of all costs, lost revenue and monetary damages in
connection with this matter. On September 22, 2000, Transmeridian file a
petition for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code
in the Bankruptcy Court for the Northern District of Georgia in Atlanta (the
"Bankruptcy Court"). This filling automatically stayed all pending litigation
against Transmeridian, including this action. The bankruptcy filings indicate
Transmeridian has at least $24 million in debt. In January 2001, Transmeridian
filed a reorganization plan and disclosure statement indicating that little if
any money will be available for distribution to unsecured creditors like the
Plaintiff. Moreover, Transmeridian's bankruptcy counsel has indicated recently
that he intends to file an adversary proceeding in the bankruptcy court seeking
the turn over to Transmeridian the proceeds of certain insurance policies (in
the amount of approximately $800,000) that insured the Plaintiffs' aircraft
against damage. Plaintiffs contend that all or most of these insurance proceeds
should be paid to them and intend to contest vigorously any effort to cause
these insurance proceeds to be paid to Transmeridian. Plaintiffs' counsel has
recently initiated discussions with Transmeridian's counsel concerning
settlement of the claims against Transmeridian and the dispute over the
insurance proceeds. No assurances can be given that a settlement will be
reached.
On March 2, 2001, Plaintiffs' counsel filed a motion in the Bankruptcy
Court asking the Court to lift the automatic stay of this Massachusetts
proceeding so that it may proceed to final judgment. The Bankruptcy Court has
scheduled a hearing on this motion for April 10, 2001. Transmeridian's
bankruptcy counsel has indicated that he is considering asking the court to move
this Massachusetts action to Georgia and consolidate it with the bankruptcy
proceeding. The General Partner cannot predict the outcome of its motion for
relief from stay or Transmeridian's efforts to transfer venue of the
Massachusetts action. Notwithstanding the Transmeridian bankruptcy, the General
Partner plans to vigorously pursue enforcement of the written guarantees issued
by Apple Vacations; however, it is too early to predict the Plaintiff's
likelihood of success.
Indemnity action against Transmeridian Airlines and Apple Vacations
- -------------------------------------------------------------------
38
AIRFUND II International Limited Partnership
Notes to Financial Statements
(Continued)
On November 12, 1999, Investors Asset Holding Corp. ("IAHC"), as trustee
for the Partnership, filed an action against Transmeridian Airlines (f/k/a Prime
Air, Inc.) and Atkinson & Mullen Travel, Inc. (d/b/a Apple Vacations) under
Civil Action No. H-99-3804 in the United States District Court for the Southern
District of Texas, Houston Division, seeking recovery of attorneys' fees and
related costs incurred in defending the action described above under the heading
"First action involving Transmeridian Airlines." The present suit seeks recovery
of expenses pursuant to the indemnification provisions of the lease agreement
under which Transmeridian leased the Boeing 727-251 aircraft. Currently, the
amount being sought is over $1 million. On September 1, 2000, IHAC filed with
the Court a motion for partial summary judgment, seeking judgment on liability
(i.e. that Transmeridian and Apple Vacations are liable under the lease
agreements and guarantees). IHAC also filed a motion for leave to join in this
litigation an affiliate of Apple's, Apple Vacations, West, inc., which also gave
written guarantees of Transmeridian's performance under the lease agreements. On
September 22, 2000, however, Transmeridian filed a petition for bankruptcy
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court
for the Northern District of Georgia in Atlanta (the "Bankruptcy Court"). See
"Second action involving Transmeridian Airlines" above. On January 10, 2001, the
Bankruptcy Court granted IHAC's motion for relief from the automatic stay so
that this litigation may be pursued through to final judgment. Transmeridian's
counsel in this action then filed a motion to withdraw its appearance on behalf
of Transmeridian. The U.S. District Court allowed that motion on March 6, 2001,
and gave Transmeridian 60 days in which to secure replacement counsel. Within 20
days of the entry of replacement counsel, Transmeridian is required to file its
opposition to IHAC's motion for partial summary judgment. The U.S. District
Court also allowed IHAC's motion to join Apple Vacations, West, Inc. as a
defendant in this action.
The Plaintiffs' counsel has recently initiated discussions with
Transmeridian's counsel concerning settlement of the claims against
Transmeridian. No assurances can be given that a settlement will be reached. The
General Partner cannot predict the outcome of this suit.
Action involving Northwest Airlines, Inc.
- ----------------------------------------
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance and return obligations under its Lease
Agreements with the Plaintiffs and seeks declaratory judgment concerning
Northwest's obligations and monetary damages. Northwest filed an Answer to the
Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to
Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United
States Magistrate Judge recommended entry of partial summary judgment in favor
of the Plaintiffs. Northwest appealed this decision. On April 15, 1999, the
United States District Court Judge adopted the Magistrate Judge's recommendation
and entered partial summary judgment in favor of the Plaintiffs on their claims
for declaratory judgment. The parties then undertook a second phase of
discovery, focused on damages. This second phase of damages is scheduled to
conclude in April 2001 with the completion of depositions of the parties'
experts. In February 2001, the District Court also denied summary judgment on
certain of the Plaintiffs' other claims, including their tort claims for
conversion. If no settlement is reached, the Plaintiffs will proceed to trial
for an assessment of damages. No firm trial date has been established at this
time; however, if a trial should become necessary, it is not expected to occur
before June 2001. The General Partner believes that the Plaintiff's claims
ultimately will prevail and that the Partnership's financial position will not
be adversely affected by the outcome of this action.
NOTE 10 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999:
Three Months Ended
----------------------------------------------------
March 31, June 30, September 30, December 31, Total
-------- ------- ------------ ----------- -----
39
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
2000
----
Total operating and sales-
type lease revenue............ $ 109,420 $ 148,602 $ 106,446 $ 192,438 $ 556,906
Net (loss) income............... (4,476) 920,669 (402,587) (337,380) 176,226
Net income (loss) per
limited partnership unit..... -- 0.32 (0.14) (0.12) 0.06
1999
----
Total lease revenue............ $ 708,129 482,218 393,846 256,977 $ 1,841,170
Net (loss) income................ (111,725) $ 2,915,743 $ (142,229) $ (769,780) 1,892,009
Net (loss) income per
limited partnership unit....... (0.04) 1.02 (0.05) (0.27) 0.66
The Partnership's net income in the three months ended June 30, 2000 is
primarily the result of the sale of a Boeing 727-251 ADV aircraft, which
resulted in a net gain, for financial statement purposes, of $750,000.
The Partnership's net income in the three months ended June 30, 1999 is
primarily the result of the sale of a Boeing 727-251 ADV aircraft, which
resulted in a net gain, for financial statement purposes, of $3,109,500.
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
In February 2001, the Partnership and certain affiliated investment
programs (collectively "the Programs") refinanced the outstanding indebtedness
and accrued interest related to an aircraft on lease to Aerovias de Mexico, S.A.
de C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $1,211,860 including $706,831 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $505,028 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft on lease to
Finnair OY of $130,852 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed
interest rate of 7.65%, principal is amortized monthly and the Partnership has a
balloon payment obligation at the expiration of the lease term of $404,138 in
September 2004.
On May 11, 2001, the general partners of the Partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company, among other things, to offer, sell, purchase, or acquire any
security or engage in any business in interstate commerce. Accordingly, Section
7 would prohibit any partnership that is an unregistered investment company from
engaging in any business in interstate commerce, except transactions that are
merely incidental to its dissolution. The SEC staff asked that the general
partners advise them within the next 30 days as to what steps the Designated
Partnerships will take to address their status under the 1940 Act. The SEC staff
asserts that the notes evidencing the loans to Echelon Residential Holdings are
investment securities and the ownership of the notes by said partnerships cause
them to be investment companies and that, in the case of American Income
Partners V-A Limited Partnership and V-B Limited Partnership, they may have
become investment companies when they received the Semele securities as part of
the compensation for the sale of a vessel to Semele in 1997. The general
partners have consulted with counsel who specializes in the 1940 Act and, based
on counsel's advise, do not believe that the Designated Partnerships are
investment companies.
40
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
The letter also stated that the Division is considering whether to commence
enforcement action with respect to this matter. Noting that the parties to the
Class Action Lawsuit were scheduled to appear before the court in the near
future to consider a proposed settlement, and that the SEC staff believed that
its views, as expressed in the letter, would be relevant to the specific matters
that will be considered by the court at the hearing, the SEC staff submitted the
letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants'
Status Report pursuant to the court's March 12, 2001 Order. Defendants reported
that, notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement. In this regard, the Defendants also have
maintained, on the advice of special 1940 Act counsel that, even if the 1940 Act
applies to the Designated Partnerships, the 1940 Act does not prohibit going
forward with the proposed settlement, as that transaction is merely incidental
to a dissolution of the Partnerships and therefore is not subject to the
prohibitions of Section 7 of the 1940 Act.
The Defendants also referred to the SEC staff's letter of May 10, 2001
asserting that certain of the partnerships are investment companies and to
special 1940 Act counsel's submissions to the SEC staff setting forth the
reasons why the 1940 Act does not apply to the Designated Partnerships, noting
that counsel had informed the staff of the Division of Investment Management
that, based upon counsel's understanding of the surrounding circumstances and
after an in-depth analysis of the applicable law, if asked, counsel would be
willing to issue an opinion of the firm that none of the partnerships is an
investment company under the 1940 Act. The Defendants stated their belief that
the proposed settlement is still viable and in the best interests of the parties
and that final approval should be pursued. The Defendants advised the court that
they believe that if the court were to address the issue of whether or not the
1940 Act applies to the partnerships and the proposed consolidation, it could
remove the major obstacle to the settlement being finally consummated. The
Defendants also requested that the court schedule a hearing to address on a
preliminary basis the objection to the proposed settlement raised in the staff's
May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court
on May 15, 2001 in which they reported that the SEC review has not been
concluded and that they notified the Defendants that they would not agree to
continue to stay the further prosecution of the litigation in favor of the
settlement and that they intend to seek court approval to immediately resume
active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated
in the Report that the "[p]laintiffs continue to believe that the settlement is
in the best interests of the Operating Partnership Sub-class. However, since the
SEC has yet to complete its review of the proxy, the Plaintiffs do not believe
that the litigation should continue to be stayed so that the SEC may continue
its regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion.
Apart from the language of the order, the Court has not stated what action
it might order if the SEC's review were not completed by May 15, 2001. If the
Court were to decline to continue the date for the Final Approval Settlement
Hearing and there is no settlement alternative offered by the parties that meets
the Court's approval, the Court may direct that the parties resume the
litigation and abandon the proposed settlement and consolidation.
Accordingly, 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
41
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
42
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
43
PART III
Item 10. Directors and Executive Officers of the Partnership.
- --------------------------------------------------------------
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of
this report, AFG Aircraft Management Corporation is the sole General Partner of
the Partnership. Under the Restated Agreement, as amended, the General Partner
is solely responsible for the operation of the Partnership's properties. The
Recognized Owners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 2001 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13)
- ---------------------------------------------------------------------
Name Title Age Term
- ------------------------------------ --------------------------------------------- ------- ---------------
Geoffrey A. MacDonald Chairman of EFG Until a
and President and a Director successor
of the General Partner 52 is duly
elected
and
Gary D. Engle President and Chief Executive qualified
Officer of EFG and a Director
of the General Partner 52
Michael J. Butterfield Executive Vice President and Chief
Operating Officer of EFG and Treasurer
of the General Partner 41
Gail D. Ofgant Senior Vice President, Lease Operations
of EFG and Senior Vice President
of the General Partner 35
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners,
Directors or Executive Officers.
(e) Business Experience
Mr. MacDonald, age 52, is Chairman of EFG and has been President of the
General Partner since 1988 and a Director of the General Partner since 1988. Mr.
McDonald was a co-founder of EFG's predecessor, American Finance Group, which
was established in 1980. Mr. MacDonald is a member of the Board of Managers of
Echelon Development Holdings LLC and President of American Finance Group
Securities Corporation. Prior to co-founding American Finance Group, Mr.
MacDonald held various positions in the equipment leasing industry and the
ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds an
M.B.A. from Boston College and a B.A. degree from the University of
Massachusetts (Amherst).
Mr. Engle, age 52, is President and Chief Executive Officer of EFG, sole
shareholder and Director of its general partner, Equis Corporation, and a Vice
President and Director of several of EFG's subsidiaries and affiliates. Mr.
Engle has been a Director of the General Partner since 1991 and is President of
AFG Realty Corporation. Mr. Engle is also Chairman and Chief Executive Officer
of Semele Group Inc. ("Semele") and a member of the Board of Managers of Echelon
Development Holdings LLC. Mr. Engle controls the general partners of Atlantic
Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Mr. Engle joined EFG in 1990 as an Executive Vice President
and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle co-
founded Cobb Partners Development, Inc., a real estate and mortgage banking
company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr.
Engle was Senior Vice President and Chief Financial Officer of Arvida Disney
Company, a large-scale community development organization owned by Walt Disney
Company. Prior to 1980, Mr. Engle served in various management consulting and
institutional brokerage
44
capacities. Mr. Engle has an M.B.A. degree from Harvard University and a B.S.
degree from the University of Massachusetts (Amherst).
Mr. Butterfield, age 41, is Executive Vice President and Chief Operating
Officer of EFG and has served as Vice President and Treasurer of the General
Partner since 1996. Mr. Butterfield also serves as Vice President and Treasurer
of subsidiaries and affiliates of EFG. Mr. Butterfield is also Chief Financial
Officer of Semele and Vice President, Finance and Clerk of Equis/Echelon
Management Corporation, the manager of Echelon Residential LLC. Mr. Butterfield
joined EFG in June 1992 and became a Vice President in 1996 and Executive Vice
President and Chief Operating Officer in 2000. Prior to joining EFG, Mr.
Butterfield was an audit manager with Ernst & Young LLP, which he joined in
1987. Mr. Butterfield was also employed in public accounting and industry
positions in New Zealand and London (UK) prior to coming to the United States in
1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.)
professional qualification in New Zealand and has completed his C.P.A.
requirements in the United States. Mr. Butterfield holds a Bachelor of Commerce
degree from the University of Otago, Dunedin, New Zealand.
Ms. Ofgant, age 35, is Senior Vice President, Lease Operations of EFG and
has served as Senior Vice President of the General Partner since 1998. Ms.
Ofgant also serves as Senior Vice President for certain of EFG's affiliates. Ms.
Ofgant is Senior Vice President and Assistant Clerk of Equis/Echelon Management
Corporation, the manager of Echelon Residential LLC. Ms. Ofgant joined EFG in
July 1989 and held various positions with the company before becoming Senior
Vice President in 1998. From 1987 to 1989, Ms. Ofgant was employed by Security
Pacific National Trust Company. Ms. Ofgant holds a B.S. degree from Providence
College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
Not applicable.
Item 11. Executive Compensation.
- --------------------------------
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no plan
at the present time to make any partners or employees of the General Partner or
its Affiliates employees of the Partnership. The Partnership has not paid and
does not propose to pay any options, warrants or rights to the officers or
employees of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to Section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the Manager for such
services is included in Item 13 herein, and in Note 6 to the financial
statements included in Item 8, herein.
(d) Stock Options and Stock Appreciation Rights.
Not applicable.
(e) Long-Term Incentive Plan Awards Table.
Not applicable.
(f) Defined Benefit or Actuarial Plan Disclosure.
45
Not applicable.
(g) Compensation of Directors
None.
(h) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner
or its Affiliates which results or may result from their resignation, retirement
or any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
By virtue of its organization as a limited partnership, the Partnership has
outstanding no securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of
the assets of the Partnership (except in the orderly liquidation of
the Partnership upon its termination and dissolution).
No person or group is known by the General Partner to own beneficially more
than 5% of the Partnership's 2,714,647 outstanding Units as of March 15, 2001.
The ownership and organization of EFG is described in Item 1 of this
report.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2000 1999 1998
------------------ ------------------ ------------------
Equipment management fees........................... $ 29,913 $ 92,059 $ 156,535
Administrative charges.............................. 72,967 71,699 53,676
Reimbursable operating expenses
due to third parties........................... 988,461 1,987,647 1,762,271
------------------ ------------------ ------------------
Total..... $ 1,091,341 $ 2,151,405 $ 1,972,482
================== ================== ==================
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to
46
the Partnership. Reimbursable operating expenses due to third parties represent
costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at
actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 2
to the financial statements included in Item 8, herein.
All rents and proceeds from the sale of aircraft are paid directly to EFG
or to a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At
December 31, 2000, the Partnership was owed $33,452 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2001.
In 1990, EFG assigned its equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
An affiliate of the General Partner owns Units in the Partnership as
follows:
-----------------------------------------------------------------------------------------
Number of Percent of Total
Affiliate Units Owned Outstanding Units
-----------------------------------------------------------------------------------------
Old North Capital Limited Partnership 40,000 1.47%
-----------------------------------------------------------------------------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and CEO of Semele.
The discussions of the loan to Echelon Residential Holdings in Items 1(b)
and 1(c) above are incorporated herein by reference.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
Not applicable.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a) Documents filed as part of this report:
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K/A,
as set forth in Item 601 of Regulation S-K, are not
applicable.
A list of exhibits filed or incorporated by reference
is as follows:
Exhibit
Number
-----------
2.1 Plaintiffs' and Defendants' Joint Motion to Modify
Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice
of, and Hearing on, the Proposed Settlement was filed
in the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 1998 as Exhibit 2.1 and is
incorporated herein by reference.
2.2 Plaintiffs' and Defendants' Joint Memorandum in Support
of Joint Motion to Modify Order Preliminarily Approving
Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the
Proposed Settlement was filed in the Registrant's
Annual Report on Form 10-K/A for the year ended
December 31, 1998 as Exhibit 2.2 and is incorporated
herein by reference.
2.3 Order Preliminarily Approving Settlement, Conditionally
Certifying Settlement Class and Providing for Notice
of, and Hearing on, the Proposed Settlement (August 20,
1998) was filed in the Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 1998 as
Exhibit 2.3 and is incorporated herein by reference.
2.4 Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement
(March 22, 1999) was filed in the Registrant's Annual
Report on Form 10-K/A for the year ended December 31,
1998 as Exhibit 2.4 and is incorporated herein by
reference.
2.5 Plaintiffs' and Defendants' Joint Memorandum in Support
of Joint Motion to Further Modify Order Preliminarily
Approving Settlement, Conditionally Certifying
Settlement Class and Providing for Notice of, and
Hearing on, the Proposed Settlement was filed in the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 as Exhibit 2.5 and is
incorporated herein by reference.
2.6 Second Modified Order Preliminarily Approving
Settlement, Conditionally Certifying Settlement Class
and Providing for Notice of, and Hearing on, the
Proposed Settlement (March 5, 2000) was filed in the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 as Exhibit 2.6 and is
incorporated herein by reference.
Exhibit
Number
------
48
2.7 Proposed Order Granting Joint Motion to Continue Final
Approval Settlement Hearing (March 13, 2001) was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 and is incorporated herein by reference.
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus, which was
included in Registration Statement on Form S-1 (No. 33-25334)
and is incorporated herein by reference.
10.1 Promissory Note in the principal amount of $3,640,000 dated
March 8, 2000 between the Registrant, as lender, and Echelon
Residential Holdings LLC, as borrower, was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 10.1 and is incorporated herein
by reference.
10.2 Pledge Agreement dated March 8, 2000 between Echelon
Residential Holdings LLC (Pledgor) and American Income
Partners V-A Limited Partnership, as Agent for itself and the
Registrant, was filed in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999 as Exhibit 10.2
and is incorporated herein by reference.
99(a) Lease agreement with American Trans Air, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 as Exhibit 99 (f) and is incorporated herein
by reference.
99(b) Lease agreement with Southwest Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 as Exhibit 99 (f) and is incorporated herein
by reference.
99(c) Lease agreement with Southwest Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 as Exhibit 99 (g) and is incorporated herein
by reference.
99(d) Lease agreement with Southwest Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 as Exhibit 99 (h) and is incorporated herein
by reference.
99(e) Lease agreement with Finnair OY was filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 as Exhibit 99 (i) and is incorporated herein by
reference.
99(f) Lease agreement with Finnair OY was filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 as Exhibit 99 (j) and is incorporated herein by
reference.
99(g) Lease agreement with Transmeridian Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 as Exhibit 99 (k) and is incorporated herein
by reference.
99(h) Lease agreement with Classic Airways Limited was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 as Exhibit 99 (k) and is incorporated herein
by reference.
99(i) Lease agreement with Aerovias de Mexico S.A. de C.V. was filed
in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and is incorporated herein by
reference.
Exhibit
Number
------
49
99(j) Aircraft Conditional Sale Agreement with Royal Aviation Inc.
was filed in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000 and is incorporated herein by
reference.
99(k) Lease agreement with Air Slovakia BWJ, Ltd was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 and is incorporated herein by reference.
(b) Reports on Form 8-K
None.
(c) Other Exhibits
None.
(c) Financial Statement Schedules:
Consolidated Financial Statements for Echelon Residential Holdings LLC as
of December 31, 2000 and for the Period March 8, 2000 (Date of Inception)
through December 31, 2000 and Independent Auditors' Report
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
--------------------------------- -----------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman of EFG and President and Chief Executive
President and a Director of the Officer of EFG and a
General Partner Director of the General Partner
(Principal Executive Officer)
Date: May 30, 2001 Date: May 30, 2001
------------------------------- ---------------------------
By: /s/ Michael J. Butterfield
---------------------------------
Michael J. Butterfield
Executive Vice President and Chief
Operating Officer of EFG and Treasurer
of the General Partner
(Principal Financial and Accounting Officer)
Date: May 30, 2001
----------------
51
SCHEDULE 14(d)
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
AND FOR THE PERIOD MARCH 8, 2000 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2000
AND INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Members of
Echelon Residential Holdings LLC:
We have audited the accompanying consolidated balance sheet of Echelon
Residential Holdings LLC, a Delaware limited liability company ("the Company")
as of December 31, 2000 and the related consolidated statement of operations,
members' equity (deficiency) and cash flows for the period March 8, 2000 (date
of inception) through December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the period March
8, 2000 (date of inception) through December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
March 23, 2001
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
- -------------------------------------------------------------------------------
ASSETS
REAL ESTATE - Net (Notes 1 and 2) $ 61,092,202
CASH AND CASH EQUIVALENTS (Note 1) 3,789,198
RESTRICTED CASH (Note 1) 8,703
RESTRICTED INVESTMENTS (Note 1) 2,155,160
ACCOUNTS RECEIVABLE - Affiliates (Note 7) 115,521
PREPAID EXPENSES AND OTHER LONG-TERM ASSETS 69,417
CORPORATE EQUIPMENT - Net of accumulated depreciation of $57,733 286,784
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE (Note 3) 1,063,906
------------
TOTAL ASSETS $ 68,580,891
============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable $ 10,984
Contractor payable 1,752,830
Accounts payable - Affiliates (Note 7) 114,180
Accrued expenses 797,832
Retainage payable 1,125,865
Security deposits 8,625
Interest payable 4,385,805
Construction loans (Note 4) 26,837,740
Other long-term liabilities 109,411
Notes payable (Note 5) 35,039,890
------------
Total liabilities 70,183,162
COMMITMENTS & CONTINGENCIES (Notes 4 and 9)
MINORITY INTEREST (Note 6) 2,257,367
MEMBERS' EQUITY (DEFICIENCY) (Note 1) (3,859,638)
------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 68,580,891
============
See notes to consolidated financial statements
- 2 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
SALES AND REVENUES:
Real estate operations:
Rental revenues $ 230,834
Management fees 695,162
Developer fees 985,141
Sale of development property 3,104,532
Investment income 191,543
Other income 23,000
------------
Total sales and revenues 5,230,212
------------
EXPENSES:
Rental and other operations 558,561
Cost of development property sold 3,317,880
Write-down of land held for development or sale 635,437
Depreciation expense 148,861
Interest expense on long-term debt - net of amounts
capitalized of $606,990 4,460,345
General and administrative expenses 2,937,514
------------
Total expenses 12,058,598
------------
EQUITY IN LOSS OF UNCONSOLIDATED JOINT VENTURE (148,023)
MINORITY INTEREST 270,383
------------
NET LOSS $ (6,706,026)
============
See notes to consolidated financial statements.
- 3 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (6,706,026)
Adjustment to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation 148,861
Loss on sale of development property 213,348
Minority interest (270,383)
Equity in loss of unconsolidated joint venture 148,023
Write-down of land held for development or sale 635,437
Changes in working capital:
Accounts payable, accrued expenses and other liabilities (4,343,190)
Interest payable 4,385,805
Other working capital changes 311,588
------------
Net cash used in operating activities (5,476,537)
------------
CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Increase in restricted cash and restricted investments (2,163,863)
Net proceeds from sale of development property 3,104,532
Payments related to construction in progress (29,601,108)
------------
Net cash used in investing activities (28,660,439)
------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of notes payable 6,244,000
Repayment of notes payable (5,474,000)
Proceeds from construction loans 26,585,765
Members' capital contributions 2,651,162
------------
Net cash provided by financing activities 30,006,927
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,130,049)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,919,247
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,789,198
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 681,530
============
See notes to consolidated financial statements.
- 4 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY (DEFICIENCY)
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
INITIAL PARTICIPATING
MEMBERS MEMBERS TOTAL
----------- ------------- -----------
BALANCE AT MARCH 8, 2000 $ 195,226 $ -- $ 195,226
Members' capital contributions -- 2,651,162 2,651,162
Net loss (5,600,020) (1,106,006) (6,706,026)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 $(5,404,794) $ 1,545,156 $(3,859,638)
=========== =========== ===========
See notes to consolidated financial statements.
- 5 -
ECHELON RESIDENTIAL HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND - On March 7, 2000, EIN Acquisition Corporation ("EIN
Acquisition") closed on a Tender Offer ("Tender Offer") for all of the
outstanding shares of Echelon International Corporation ("Echelon") for a
cash price of $34.00 per share. Immediately after the close of the Tender
Offer, EIN Acquisition merged into Echelon (the "Merger"), with Echelon
being the surviving entity.
In conjunction with the Tender Offer, Echelon had entered into various
contracts to sell or convey various real estate assets and investments in
two real estate joint ventures to third parties. Subsequent to the Merger
on March 8, 2000, Echelon closed on existing contracts to sell or convey
its real estate assets and investments in two real estate joint ventures.
Specific real estate assets and investments in two real estate joint
ventures were sold to Echelon Residential LLC ("Echelon Residential"), a
wholly owned limited liability subsidiary of Echelon Residential Holdings
LLC ("Echelon Residential Holdings" or the "Company"). Echelon Residential
will own, manage, and develop or sell these purchased multi-family
residential properties.
The acquisition of the assets by Echelon Residential was accounted for as
an asset purchase under Accounting Principles Board Opinion No. 16 ("APB
No. 16"). In accordance with APB No. 16, Echelon Residential allocated the
total purchase price to the assets acquired and liabilities assumed based
on the estimated fair market values at the date of acquisition. Since the
purchase price of the business was less than the fair market value of the
net assets acquired, the credit excess was allocated on a pro-rata basis
to the real estate, corporate equipment and the investment in an
unconsolidated joint venture. There are no contingencies or other matters
that could materially affect the allocation of the purchase cost. The
results of operations of the acquired real estate assets and investments
in two real estate joint ventures are included in the consolidated results
of Echelon Residential Holdings from the acquisition date.
The Company's summarized consolidated balance sheet, reflecting the above
acquisition of assets, as of March 8, 2000 is as follows:
ASSETS:
Real estate $34,164,672
Cash and cash equivalents 7,919,247
Investment in unconsolidated joint venture 1,211,929
Other assets 832,417
-----------
Total assets $44,128,265
===========
LIABILITIES AND MEMBERS' EQUITY:
Accounts payable and other liabilities $ 6,883,424
Construction loans 251,975
Notes payable 34,269,890
-----------
Total liabilities 41,405,289
Minority interest 2,527,750
Members' equity 195,226
-----------
Total liabilities and members' equity $44,128,265
===========
The Company's fiscal year end is December 31.
- 6 -
DESCRIPTION OF BUSINESS - Echelon Residential Holdings was formed on
February 29, 2000, under the laws of the state of Delaware and operates in
one industry segment: owning, leasing, developing, and managing real
estate. There were no activities of Echelon Residential Holdings from
February 29, 2000 through March 8, 2000. The Company is governed by its
Amended and Restated Limited Liability Company Agreement ("the Agreement")
dated June 23, 2000. At March 8, 2000, members' equity included capital
contributions from the initial members of the Company, James A. Coyne and
Charles E. Cobb, Jr. ("Initial Members"), who made collective capital
contributions of $195,226. On June 23, 2000, the participating members,
Darryl A. LeClair and Susan G. Johnson ("Participating Members") made
capital contributions totaling $2,651,162. The collective Participating
Members' capital contributions are comprised of Participating A Capital of
$2,591,093, Participating B Capital of $45,052 and additional capital
contributions of $15,017.
Subsequent to the initial capital contributions above, the Agreement was
executed and includes a provision whereby the members have no further
obligation to contribute additional amounts of capital to the Company. If
the Company requires additional funds, the Board of Managers is to notify
the members. Each member has the right to contribute a pro rata share of
such additional funds, based on the relative equity contributions made by
each member. In addition, the liability of the members of the Company is
limited to the members' total capital contributions.
In accordance with the Agreement, the Participating Members earn a
cumulative compounding annual return on their unreturned capital (as
defined), at a per annum rate equal to 14% for Participating A capital and
15% for Participating B capital, commencing on June 23, 2000. Preferred
returns will be paid to the Participating Members in accordance with the
terms of the Agreement. Payout of preferred returns (if any) is contingent
upon the cumulative performance of the Company. See Note 9 - COMMITMENTS
AND CONTINGENCIES.
Per the Agreement, the Company is to distribute its cash flow (if any)
periodically, but not less frequently than quarterly. The losses and
profits of the Company are generally allocated to the members as follows:
a) losses are generally allocable 77.9% to members other than
Participating Members and 22.1% to Participating Members, and
b) profits are generally allocated the same way except for a
priority income allocation to the Participating Members to
cover priority cash distributions made on their Participating
Capital.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Echelon Residential Holdings, its
wholly owned subsidiary and a 60% interest in a joint venture. All
intercompany balances have been eliminated. Investments for which the
Company has a 20% to 50% ownership interest are accounted for using the
equity method.
The Company has recorded a minority interest in the Company's consolidated
financial statements to reflect the ownership of its partner in the joint
venture.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates. Significant estimates include the
recoverability of real estate held for sale.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, demand deposits, and short-term investments with original maturities
of three months or less.
- 7 -
RESTRICTED CASH - Restricted cash represents security deposits at
multi-family residential communities held in separate noninterest-bearing
depository accounts.
RESTRICTED INVESTMENTS - Restricted investments represent certificates of
deposit with maturities greater than three months. These investments are
held by financial institutions that require such deposits in support of
standby letters of credit.
REAL ESTATE - Real estate additions are recorded at cost. Interest and
real estate taxes incurred during construction periods are capitalized and
depreciated on the same basis as the related assets. Costs directly
related to the acquisition, development or improvement of real estate, and
certain indirect development costs have also been capitalized.
Depreciation is calculated on a straight-line basis over the estimated
lives of the assets as follows:
ESTIMATED
USEFUL LIVES
Buildings 35 years
Furniture, fixtures, and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets,
including property and equipment, will be reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value cannot
be recovered from undiscounted future cash flows.
REVENUE RECOGNITION - The Company recognizes revenue on the sale of real
estate properties when title has passed to the buyer and all contingencies
have been removed. Rental revenues, management fees and developer fees are
recognized when earned.
INCOME TAXES - Under the provisions of the Internal Revenue Code and
applicable state laws, the Company is not directly subject to income
taxes; the results of its operations are included in the tax returns of
its members.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company adopted SFAS No. 133 effective January 1, 2001. There was no
impact on the Company's financial position, results of operations or
liquidity resulting from the adoption of SFAS No. 133.
Effective March 8, 2000 (date of inception), the Company adopted the
provisions of Securities Exchange Commission Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB
No. 101 provides guidance for the recognition, presentation and disclosure
of revenue in financial statements. The adoption of SAB No. 101 had no
impact on the Company's financial statements.
- 8 -
RECLASSIFICATIONS - Certain amounts previously reported in the March 8,
2000 consolidated balance sheet have been reclassified to conform to the
December 31, 2000 presentation.
2. REAL ESTATE - NET
As of December 31, 2000, real estate consists of the following:
Land and land improvements held for development or sale $ 15,676,581
------------
Real estate under development:
Land and land improvements 8,302,770
Construction in progress 14,694,874
------------
22,997,644
------------
Income producing real estate:
Land and land improvements 2,303,890
Buildings and improvements 19,720,463
Equipment and other 484,752
Accumulated depreciation (91,128)
------------
22,417,977
------------
$ 61,092,202
============
For the period March 8, 2000 (date of inception) through December 31,
2000, the Company recorded a write-down of land held for development or
sale of $635,437 in the consolidated statement of operations. Land held
for development or sale was determined to have been impaired because the
estimated cash flows are less than the carrying value of the two parcels
of land. The estimated fair value of these two parcels of land was based
on letters of intent from third-party purchasers, dated October 2000 and
December 2000, to purchase the two parcels of land.
As of December 31, 2000, the Company's land and land improvements held for
development or sale includes five parcels of improved and unimproved land
for the development of multi-family residential communities. The land is
located in urban areas in Memphis, Tennessee; Dallas, Texas; Denver,
Colorado and Colorado Springs, Colorado.
As of December 31, 2000, real estate under development includes the
following three multi-family residential communities:
CONSTRUCTION ACTUAL/ESTIMATED
RENTABLE LAND COMMENCEMENT DATE FIRST UNITS
PROJECT NAME LOCATION UNITS ACREAGE DATE AVAILABLE
------------ ----------- -------- ------- ------------ ----------------
ECHELON AT THE BALLPARK Memphis, TN 385 5 Q1 2000 Q1 2001
ECHELON AT LAKESIDE Plano, TX 181 12 Q3 1999 Q3 2000
ECHELON AT UPTOWN Orlando, FL 244 3 Q2 2001 Q2 2002
As discussed in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE
PARTNERSHIP, ECHELON AT LAKESIDE commenced operations during the period
March 8, 2000 (date of inception) through December 31, 2000 and portions
of the project remained under construction as of December 31, 2000.
As of December 31, 2000, real estate includes $606,990 of interest
capitalized during the period March 8, 2000 (date of inception) through
December 31, 2000.
- 9 -
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In July 1999, Fannie Mae's American Communities Fund agreed to invest with
a wholly owned subsidiary of Echelon in the development of ECHELON AT
CHENEY PLACE, a 303-unit multi-family residential community currently
under construction in downtown Orlando, Florida. Echelon's 20% interest in
the joint venture was purchased by Echelon Residential, in conjunction
with the real estate assets purchased as discussed in Note 1, SUMMARY OF
BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES. The Company accounts for its
investment in the joint venture under the equity method. Concurrent with
the execution of the joint venture agreement with Fannie Mae's American
Communities Fund, the joint venture executed an agreement with Wachovia
Bank, N.A. for a $21,500,000 loan to fund the construction of ECHELON AT
CHENEY PLACE. The loan is guaranteed by Echelon Residential.
Construction of ECHELON AT CHENEY PLACE began in late July 1999 and
construction continued on portions of the project through December 31,
2000. For the period March 8, 2000 (date of inception) through December
31, 2000, the Company recorded its share of losses for ECHELON AT CHENEY
PLACE, from the initial operations of the project, as a reduction of the
investment in unconsolidated joint venture. As of December 31, 2000, total
capital expenditures and construction loan draws for the project were
$24,834,193 and $18,408,921, respectively. Through December 31, 2000, the
Company's capital contributions to the joint venture totaled $1,386,000.
The total of net losses and purchase price adjustment allocated to the
investment in unconsolidated joint venture is $322,094.
4. CONSTRUCTION LOANS
As of December 31, 2000, the Company's construction loans outstanding are
as follows:
Bank of America $ 17,614,845
First Union National Bank of Florida 9,222,895
------------
$ 26,837,740
============
The Company has a $20,000,000 construction loan with Bank of America to
fund the construction of ECHELON AT LAKESIDE. The loan is guaranteed by
Echelon Residential. The interest rate is LIBOR plus 1.85% (8.4875% as of
December 31, 2000), and the loan matures in September 2002. As of December
31, 2000, the Company has made $17,614,845 of construction draws on this
loan. See further discussion of the development of ECHELON AT LAKESIDE
included in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP.
Accrued interest on the Bank of America construction loan is $125,685 as
of December 31, 2000.
The Company has a $26,075,000 construction loan with First Union National
Bank of Florida to fund the construction of ECHELON AT THE BALLPARK, a
385-unit multi-family residential community currently under construction
in downtown Memphis, Tennessee. The loan is guaranteed by Echelon
Residential. The interest rate is LIBOR plus 1.65% (8.2125% as of December
31, 2000) with monthly interest payments required through the term of the
loan, which expires on June 2002. As of December 31, 2000, the Company has
made construction draws of $9,222,895. Accrued interest on the First Union
National Bank construction loan is $8,258 as of December 31, 2000.
The Company's significant financial covenants include minimum net worth
and liquidity requirements. As of December 31, 2000, the Company was in
compliance with all financial covenants contained in its debt agreements.
In the opinion of management, the carrying value of the Company's
construction loans approximates their fair value based on management's
estimates for similar issues, giving consideration to quality,
- 10 -
interest rates, maturity and other significant characteristics. Although
management is not aware of any factors that would significantly affect the
estimated fair value of the construction loans, the amounts have not been
comprehensively revalued for purposes of these consolidated financial
statements since December 31, 2000 and current estimates of fair value may
differ significantly.
See Note 10, SUBSEQUENT EVENT, for discussion of a construction loan
executed for the construction of ECHELON AT UPTOWN, in February 2001.
5. NOTES PAYABLE
As of December 31, 2000, notes payable outstanding are as follows:
American Income Partners V-A Limited Partnership $ 2,160,000
American Income Partners V-B Limited Partnership 5,700,000
American Income Partners V-C Limited Partnership 2,390,000
American Income Partners V-D Limited Partnership 2,730,000
American Income Fund I-A, a Massachusetts Limited Partnership 1,650,000
American Income Fund I-B, a Massachusetts Limited Partnership 1,310,000
American Income Fund I-C, a Massachusetts Limited Partnership 2,780,000
American Income Fund I-D, a Massachusetts Limited Partnership 3,050,000
American Income Fund I-E, a Massachusetts Limited Partnership 4,790,000
AIRFUND International Limited Partnership 1,800,000
AIRFUND II International Limited Partnership 3,640,000
-----------
Subtotal 32,000,000
Series A Note 1,684,211
Series B Notes 585,679
Note payable - Echelon Development Holdings LLC 770,000
-----------
$35,039,890
===========
On March 8, 2000, the Company executed $32,000,000 in notes payable with
11 partnerships. The Company contributed the proceeds from the notes
payable to Echelon Residential to acquire various real estate assets from
Echelon, as discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES. These partnerships are managed by their general
partners who have engaged Equis Financial Group ("EFG") as the
partnerships' manager. Mr. James A. Coyne is Executive Vice President of
EFG and is an equity investor in the Company. Mr. Coyne, in his individual
capacity, is the only equity investor in the Company related to EFG. These
notes payable have a term of 30 months, maturing on September 8, 2002, and
an annual interest rate of 14% for the first 24 months and 18% for the
final six months. No principal payments are required prior to the
scheduled maturity. Interest accrues and compounds monthly and is payable
at maturity. Accrued interest on these notes is $3,907,798 as of December
31, 2000. The Company has assigned and pledged a security interest in all
of its rights, title, and interest in its membership interests in Echelon
Residential to the 11 partnerships as collateral.
On March 8, 2000, the Company executed a Series A Note with Cobb Partners
Limited. The Series A Note has a term of 30 months, maturing on September
8, 2002, and an annual interest rate of 14% for the first 24 months and
18% for the final six months. No principal payments are required prior to
the scheduled maturity. Accrued interest on the Series A Note is $205,674
as of December 31, 2000. Interest accrues and compounds monthly and is
payable at maturity. The Company also executed
- 11 -
Series B Notes with several individuals, who are employees or investors of
EFG. The Series B Notes have an annual interest rate of 15% and mature on
June 30, 2004. No principal payments are required prior to the scheduled
maturity. Interest accrues and compounds monthly and is payable at
maturity. The Series B Notes are subordinated to the $32,000,000 notes
payable and the Series A Note. Accrued interest on the Series B Notes is
$76,920 as of December 31, 2000.
On December 29, 2000, the Company executed a $770,000 note payable to
Echelon Development Holdings LLC ("Echelon Development Holdings"). The
note payable has a term of 24 months, maturing on December 29, 2002, and
an annual interest rate of 10%. Interest accrues and compounds daily and
is payable on December 31st of each year the note payable is outstanding.
The Company repaid the note, plus interest of $6,751, on January 30, 2001.
In the opinion of management, the carrying value of the Company's notes
payable approximates the fair value based on management's estimates for
similar issues, giving consideration to quality, interest rates, maturity
and other significant characteristics.
6. INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP
In September 1999, a wholly owned subsidiary of Echelon entered into a
joint venture agreement with Turner Heritage Investments, Ltd. ("Turner")
for the development of ECHELON AT LAKESIDE, a 181-unit multi-family
residential community currently under construction in Plano, Texas, which
is near Dallas. Echelon's 60% interest in the joint venture was purchased
by Echelon Residential, in conjunction with the transaction discussed in
Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES.
Construction of ECHELON AT LAKESIDE began in October 1999 and continued on
portions of the project through December 31, 2000. As of December 31,
2000, total capital expenditures for the project were $23,927,413.
Through December 31, 2000, the Company's capital contributions totaled
$2,592,000 and Turner contributed land valued at $2,592,000 to the joint
venture. The Company's interest represents a controlling interest, and
accordingly, for financial reporting purposes, the assets, liabilities,
retained deficit, and current period results of operations of the joint
venture for the period March 8, 2000 (date of inception) through December
31, 2000, are included in the Company's consolidated financial statements,
and Turner's partnership interest in the joint venture has been recorded
as a minority interest. See further discussion of debt financing for
ECHELON AT LAKESIDE included in Note 4, CONSTRUCTION LOANS.
7. RELATED PARTY TRANSACTIONS
In conjunction with the purchase of Echelon's interest in the joint
venture formed for the development of ECHELON AT LAKESIDE, Echelon
Residential also assumed the development agreement, an asset management
agreement and a property management and leasing agreement with Lakeside
Baywater Enterprises Limited Partnership, the joint venture partnership.
In accordance with the development agreement, Echelon Residential has been
engaged as the developer for ECHELON AT LAKESIDE and receives a
development fee, payable in arrears, in monthly installments of $44,371.
In accordance with the asset management agreement, Echelon Residential
receives a monthly asset management fee, computed in arrears, equal to 1%
of the ECHELON AT LAKESIDE monthly gross income. Under the terms of the
property management and leasing agreement, Echelon Residential also
receives a monthly management fee, computed in arrears, equal to 4% of the
ECHELON AT LAKESIDE monthly gross income.
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For the period March 8, 2000 (date of inception) through December 31,
2000, Echelon Residential recognized $388,212 in development, asset
management, and property management revenues from ECHELON AT LAKESIDE.
In conjunction with the purchase of Echelon's interest in the joint
venture formed for the development of ECHELON AT CHENEY PLACE, Echelon
Residential also assumed agreements which include the payment of a
development fee, a property management and leasing agreement and an
incentive management fee with Cheney Place LLC, the joint venture
partnership. In accordance with these agreements, Echelon Residential has
been engaged as the developer for ECHELON AT CHENEY PLACE and receives a
monthly development fee equal to 5% of the hard construction costs
incurred during the month. Echelon Residential is also the property
manager and leasing agent for the property and will receive a monthly
management fee, computed in arrears, equal to $7,500 per month for two
months prior to the opening of the clubhouse. For the next nine months
thereafter, Echelon Residential will receive the greater of a) 3% of the
effective monthly gross income or b) 3% of the effective monthly gross
income that would be collected if 75% of ECHELON AT CHENEY PLACE were
occupied at rents equaling the average pro forma base rent. Thereafter,
the monthly management fee will be calculated as 3% of the effective
monthly gross income of ECHELON AT CHENEY PLACE. The incentive management
fee is equal to 2% of ECHELON AT CHENEY PLACE'S effective gross income, as
defined. For the period March 8, 2000 (date of inception) through December
31, 2000, Echelon Residential recognized $392,695 in development, property
management and incentive management fee revenues from ECHELON AT CHENEY
PLACE.
Echelon Property Management LLC, a wholly owned subsidiary of Echelon
Residential, has contracted to manage several operating multi-family
residential communities currently leased by Echelon Commercial LLC
("Echelon Commercial"), a wholly owned limited liability subsidiary of
Echelon Development LLC. Echelon Development LLC is a wholly owned limited
liability subsidiary of Echelon Development Holdings LLC. Several of the
equity investors in Echelon Residential Holdings are also equity investors
in Echelon Development Holdings LLC. For the period March 8, 2000 (date of
inception) through December 31, 2000, Echelon Residential recognized
$587,908 in property management revenues from the management of
multi-family properties leased by Echelon Commercial.
As of December 31, 2000, the Company had accounts receivable balances of
$51,880 due from Echelon Commercial LLC, $19,455 due from ECHELON AT
CHENEY PLACE and $44,186 from other related parties. These amounts were
repaid by the end of February 2001.
8. RETIREMENT PLAN
Echelon Residential is the sponsor of the Echelon 401(k) Savings Plan
("Savings Plan") under Section 401(k) of the Internal Revenue Service Code
(the "Code"), to which participants may contribute a percentage of their
pay up to limits established by the Code. The Company may make
discretionary contributions to the Savings Plan. The Company did not
contribute to the Savings Plan during the period March 8, 2000 (date of
inception) through December 31, 2000. As of January 1, 2001, the Company
initiated an option in the Savings Plan to include a mandatory matching
contribution from the Company.
9. COMMITMENTS AND CONTINGENCIES
As of December 31, 2000, two multi-family residential communities were
under construction and had remaining commitments of $12,985,656 with
construction contractors.
On December 29, 2000, the Company executed a $5,000,000 revolving
promissory note with Echelon Development Holdings. The revolving
promissory note has a term of 24 months, maturing on December 29, 2002,
and an annual interest rate of 10%. Interest accrues and compounds daily
and is
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payable on December 31st of each year the note is outstanding. As of
December 31, 2000, there were no amounts outstanding on the revolving
promissory note.
As discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES, the Company maintains preferred return accounts for the
Participating Members. As of December 31, 2000, the preferred return
balances for Participating A and B Capital were $198,597 and $3,709,
respectively. These amounts have not been paid and therefore, have not
been reflected as a reduction of Participating A and B Capital in the
December 31, 2000 consolidated financial statements.
The joint venture formed for the development of ECHELON AT LAKESIDE
maintains preferred return accounts for the limited partners, Echelon LP,
a wholly owned limited liability subsidiary of Echelon Residential, and
Turner. The payment of any preferred returns to Echelon LP would be
eliminated upon consolidation. As of December 31, 2000, the preferred
return balance for Turner was $312,669. This amount has not been paid and
therefore, has not been reflected as a reduction of member's equity in the
December 31, 2000 consolidated financial statements.
10. SUBSEQUENT EVENT
In February 2001, the Company closed on a $18,600,000 loan from SouthTrust
Bank for the construction financing of ECHELON AT UPTOWN, a 244-unit
multi-family residential community to be developed in downtown Orlando,
Florida. The interest rate is LIBOR plus 1.75% with monthly interest
payments required over the 36-month initial term of the loan. The loan is
guaranteed by Echelon Residential and construction is expected to commence
in the second quarter of 2001.
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11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
period March 8, 2000 (date of inception) through December 31, 2000:
PERIOD THREE MONTHS ENDED
MARCH 8 - ----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
---------- ------------ ------------- ------------- ------------
Total revenues............ $ 147,078 $ 758,673 $ 659,867 $ 3,664,594 $ 5,230,212
Net loss.................. $(328,623) $(1,359,326) $(1,855,757) $(3,162,320) $(6,706,026)
******
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